<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
REGISTRATION NO. 0-25507
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
IPARTY CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 13-401 2236
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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41 EAST 11TH STREET, 11TH FLOOR
NEW YORK, NEW YORK 10003
(212) 331-1225
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
Securities to be registered under Section 12 (b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- --------------------------------------- ---------------------------------------
Common Stock, par value $0.001 OTC Bulletin Board
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<PAGE>
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Some of the statements contained in or incorporated by reference in this
Form 10-SB discuss the Company's plans and strategies for its business or state
other forward-looking statements, as this term is defined in the Private
Securities Litigation Reform Act. The words "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and similar expressions are intended
to identify these forward-looking statements, but are not the exclusive means of
identifying them. The Company assumes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. These forward-looking statements reflect the current views
of the Company's management; however, various risks, uncertainties and
contingencies could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements, including, without limitation, the following: the success or failure
of the Company's efforts to implement its business strategy, the Company's
ability to market and brand successfully its on-line party planning concept,
changes in the fulfillment partners and other on-line affiliates, changes in
consumer demand, changes in general economic conditions, changes in technology,
the rate of acceptance of the Internet as a marketing and commercial vehicle,
and competition in the Internet party supply and planning business.
ITEM 1. DESCRIPTION OF BUSINESS.
iParty Corp., a Delaware corporation (the "Company"), is a development
stage company that intends to become the premier brand in the on-line party
industry and the leading resource on the Internet for consumers seeking party
goods, party services, party planning advice and information, and personalized
video greetings called "StarGreetings" from celebrities. The Company's web site,
www.iparty.com (the "Site"), was initially launched in February 1999.
From children's birthday parties to weddings, from Super Bowl parties to
Halloween, the Company intends to make it easy and convenient for the party
giving consumer to select themes, make comprehensive plans, and purchase all of
the goods and services for a successful event. The Company's operational goal is
to provide a simple, seamless transaction process for the consumer. When the
consumer comes to the Site, the consumer will be able to select a theme, fill a
virtual shopping basket with goods and services, and pay for everything at one
time at the check-out screen. Once the order has been placed, the consumer will
be notified of the order's status via e-mail. The consumer will also be able to
dial the Company's toll-free number, 1-800-4iParty, to talk to a customer
service representative who is knowledgeable about the Company's products.
Although the consumer will interact only with the Company, the actual
fulfillment will come from a network of strategic partners, vendors, or
subcontractors. These strategic partners will ship direct to the consumer.
Typically, the strategic partners will be catalog companies and/or established
direct marketing merchants.
In furtherance of this strategy, on July 8, 1999 the Company entered into a
product fulfillment agreement with Taymark, one of the largest direct marketer's
of party supplies in the United States. Pursuant to the agreement, the Company
will utilize Taymark's inventory and fulfillment services to deliver merchandise
ordered on the Site, or through a toll-free telephone number, directly to
consumers. Taymark will purchase the Company's inventory and, in addition, the
Company will integrate Taymark's inventory into the Site's store-front. Taymark
will provide Company customers with customer service through a toll-free
telephone number.
The initial term of the agreement runs through December 31, 2002 and it may
be renewed by the Company under certain circumstances. The agreement contains
certain restrictions on competition by Taymark. Nothing in the agreement
prohibits the Company fulfilling orders placed on the Site directly or through
third-parties.
The Company has engaged OrderTrust to process credit card payments,
authorizations and settlements for orders placed on the Site. Under this
agreement, the Company pays OrderTrust a transaction fee of $0.90 for each order
processed by OrderTrust, and has agreed to pay a minimum monthly fee of $5,000
in the
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event that the per-order transaction fees do not reach such amount. In addition,
the Company paid OrderTrust a one time set-up fee of $50,000. This agreement
runs through December 21, 2000. In July of 1999 the Company replaced OrderTrust
by bringing the credit card processing segment of the credit card transaction
process in-house and engaging Authorize.net Corporation for credit card
authorization and settlement purposes. The Company pays Authorize.Net
Corporation a fee of $0.10 per transaction.
The Company currently has 16 employees.
THE HISTORY OF THE COMPANY
The Company was previously known as WSI Acquisitions, Inc. and was
incorporated under the laws of the State of Texas. On June 30, 1998, in order to
change domicile, WSI Acquisitions, Inc. merged with WSI Acquisitions, Corp., a
Delaware corporation, with WSI Acquistions Corp. being the surviving entity.
Neither WSI Acquisitions Corp. nor WSI Acquisitions, Inc. had operations prior
to the merger with iParty Corp.
On July 2, 1998, iParty Corp., a Delaware corporation, which was a
wholly-owned subsidiary of iParty LLC, a Delaware limited liability company,
merged into WSI Acquisitions Corp. and WSI Acquisitions Corp. changed its name
to iParty Corp. iParty LLC, which was created on December 11, 1997, commenced
operations in January 1998 to launch an Internet- based merchant of party goods
and services. Shares of the Company's common stock are currently trading on the
OTC Bulletin Board under the symbol "IPTY." See "Recent Sale of Unregistered
Securities." As a result of the merger, iParty LLC became the majority
shareholder of the Company.
DESIGN AND CONTENT OF THE COMPANY WEB SITE
The initial design, construction, operation and maintenance of the Site
was, in large part, out-sourced to the Company's three operating partners,
iVillage, Fry MultiMedia ("Fry"), and Ordertrust. The Site was initially
launched in February 1999. Over the following two months, the Site was further
developed by iParty's internal staff, Ordertrust and Snowmass Technologies. The
re-developed Site was launched in April 1999. On August 5, 1999, the Company
entered into a fixed fee agreement with Rare Medium, Inc. to develop a new
visual identity, additional functionality and a new technical infrastructure to
better support the scalability of the Site. The fixed fee for the services
provided is $465,000. The re-developed site was launched in October 1999. The
Company's goal in designing the Site was, and continues to be, to allow the
consumer to easily navigate the Site and to be able to pay for everything
ordered in one payment transaction without ever having to leave the Site.
Currently, the Site contains two (2) key features: the PartyMarket and
PartyTalk. PartyMarket resembles a mall of shops devoted entirely to the goods
and services that relate to the party theme chosen by the consumer. The
PartyMarket's themed channels include birthday, milestone, seasonal, basic and
costumes. Within each channel, the consumer can select a specific party, such as
anniversaries or weddings in the milestone channel or New Year's Eve in the
seasonal channel. Once the consumer has selected a theme, she will be able to
order party goods, favors, gift wrap, cards and invitations for direct shipment.
As the consumer selects products, they are added to the shopping basket, and
when the consumer is finished shopping, the transaction is completed at a simple
check-out screen.
Party Talk is a continuation of the PartyMarket. It carries news, articles
and features, and will soon carry gossip from the party circuit. The content is
directed at our target consumers: mothers, and party-givers. Articles will
include topics such as Tips & Trends, the Craft Corner, the Safety Zone and
Party Tips.
Once fully developed, which is expected to be by the end of the second
quarter of 2000, the Site will offer the Party Planner and the Party Resource.
The Party Planner will be a resource for party related advice, tips and party
planning information. Once a consumer has selected a theme and party, the party
planner icon will be displayed. By clicking on the Party Planner icon, the
consumer will arrive at the Party Planning page. The Party Planner page will be
a "road map" that provides specific tips and ideas for the consumers selected
party. The information will include location ideas, activities, decoration tips,
and helpful cues as to what products to look for in each of the PartyMarket
shops. The Party Resource will be a directory for party related services
including entertainers (orchestras, bands, clowns, magicians, pony rides);
caterers; bakers; rental firms (tents, furniture, equipment); and facilities
operators (skating rinks, pools, bowling alleys). These
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local partners will be classified advertisers in the party resource directory.
Consumers will be able to enter their zip code, and select from a list of
service providers.
The Company also has a wholly-owned subsidiary, StarGreetings, Inc., a
Delaware corporation. StarGreetings, Inc. intends to offer a personalized video
greeting (called a "StarGreeting") from a celebrity who will talk about the
special occasion, such as a birthday, anniversary, etc. StarGreetings plans to
offer greetings from celebrities from entertainment, music, fashion, politics
and animation.
Each greeting will last between 60 and 120 seconds and will be downloaded
from the Site. The party giver will then play it back on the computer monitor at
the appropriate time during the party. When a consumer wants to order a
StarGreeting, he or she will click on the StarGreetings icon in the Site and
then click on the celebrity of choice. The customer will then select one of
several greetings, personalize the greeting with a text message, and submit the
order. The StarGreeting's system will then combine the selected greeting with
the text message and deliver it.
As of December 1, 1999, the Company has entered into exclusive StarGreeting
contracts with ten (10) celebrities. The Company will continue to attempt to
sign up additional celebrities if demand for the StarGreetings product warrants.
The agreements are substantially similar and consist of three compensation
components: (i) a flat fee; (ii) a commission upon the sale of each greeting (a
portion of which is payable to the charity of the celebrities choice); and
(iii) an option to purchase Common Stock. The terms of the agreements range from
one to three years.
The technology underlying the StarGreetings system is licensed to
StarGreetings, Inc. through August 15, 2018. The Company pays a 2.5% royalty on
the gross revenues received in connection with each greeting.
DEVELOPMENT COSTS.
Since inception, the Company has spent approximately $1,000,000 on
construction of the Site and $100,000 on development of StarGreetings video
software. The Company expects to invest a minimum of $1,000,000 on construction
and further development of the Site in the next twelve months.
COMPETITION.
The Company is aware of a few direct competitors to its PartyMarket
concept, including eparties.com, birthdayexpress.com and greatentertaining.com.
There are also a variety of other types of party resources on the Internet,
including party planners, directories and search engines. Additional competitors
exist in individual categories, such as Hallmark and American Greetings for
cards and invitations; Party City and The Big Party Corporation in the retail
party-goods supply businesses; and FTD in the flower arena.
Party City and The Big Party Corporation have locations throughout the
United States. Mr. Perisano, the Chief Executive Officer and a Director of the
Company, is a co-founder and a director of and consultant to The Big Party
Corporation. While Mr. Perisano remains a director of and consultant to The Big
Party Corporation, he is not involved in its day-to-day operations and has
permission from its board of directors to engage in e-commerce within the party
industry.
Although barriers to entry are minimal, as new competitors can launch new
sites at a relatively low cost, the Company believes that in order to be
competitive, the costs can be significant for the development of a robust site,
the hiring of human resources with industry knowledge and the marketing costs
associated with the building of a widely-recognized brand.
The Company is unaware of competitors to the StarGreetings concept.
However, the Company does recognize the potential that, despite the intended
patent protection for the StarGreetings concept, others may see a market and try
to compete and develop their own celebrity greeting offering. The Company
believes that by being first, by protecting its proprietary rights and by
locking celebrities into exclusive agreements, the Company will be able to
maintain a competitive advantage.
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SALES AND MARKETING.
The Company intends to pursue several avenues relating to sales and
marketing in the next year of operations. The Company intends to utilize both
on-line and off-line affiliations for brand building. The Company is currently
weighing affiliations with portals and service providers because of their
strength in the Company's target customer bases. The Company has formed a
strategic marketing relationship with iVillage Inc., a leading online women's
network and one of the most demographically targeted online communities on the
World Wide Web, that includes a 5-month banner campaign and key placement in the
iVillage shopping and editorial sections. This relationship began on June 1,
1999. The Company will pay a total of $80,000 under this agreement.
On September 29, 1999, the Company entered into an agreement with
Kirshenbaum Bond & Partners ("Kirshenbaum") to create a marketing communications
program, including public relations. Kirshenbaum will create and execute an
integrated print and Internet marketing campaign. Pursuant to the terms of the
agreement, the Company will pay Kirshenbaum a fee of $85,000 per month, and
certain commissions on advertising they place. Commencing July 31, 2000, the
agreement may be terminated on 90 days written notice. The payments will be made
out of the Company's cash balance.
On September 27, 1999, the Company entered into two separate agreements
with America Online, Inc. ("AOL"): a Shopping Channel Promotion Agreement, and
an Advertising Purchase Agreement. Pursuant to the terms of the Shopping Channel
Promotion Agreement, the Company is to occupy Featured Branding Position on the
front page of AOL's Kid's, Toys & Babies Commerce Center. The position will
feature a direct link to the Site. The Company will also occupy a Gold Position
in AOL's Tabletop & Entertainment Commerce Center. The term of the agreement is
ten months. The Company will pay AOL $454,000 in connection with this agreement
in three equal installments on October 1, 1999, January 1, 2000 and April 1,
2000, respectively. The term of the Advertising Purchase Agreement is twelve
months and includes banner advertising on AOL, AOL.com, Compuserve and Netscape.
The Company will pay AOL $822,000 in connection with this agreement in equal
monthly installments beginning on October 1, 1999. The payments will be made out
of the Company's cash balance.
On August 11, 1999, the Company entered into an 18 month agreement with
LinkShare Corporation to provide services, using LinkShare's proprietary
software, to facilitate establishing links between the Company and tracking
sales through such affiliates. The Company paid LinkShare a one-time fee of
$5,000 and will pay commissions of 2.0%-2.5% for sales completed through the
system.
PATENTS AND TRADEMARKS.
The proprietary technology underlying the StarGreetings system is licensed
to StarGreetings for 20 years pursuant to a License Agreement dated August 15,
1998, by and between StarGreetings and Star Greetings, LLC, a Delaware limited
liability company (the "Licensor"). See "Certain Relationships and Related
Transactions."
StarGreetings: A provisional patent application for the Company's
StarGreetings "athlete/celebrity" video greeting concept was filed with the U.S.
Patent and Trademark Office on November 20, 1998 in the name of Mr. Byron Hero,
a former director and the former Chief Executive Officer of the Company and a
principal shareholder of the Company. Mr. Hero has agreed to assign the patent,
if issued, to StarGreetings LLC which will assign the patent to StarGreetings,
Inc. The Company anticipates that a non-provisional application relating to the
StarGreeting concept will be filed by November 20, 1999.
The Company has applied for the trademarks "iParty", "iParty.com" and
"StarGreetings". The applications for the trademarks "iParty" and "iParty.com"
were filed with the U.S. Patent and Trademark Office on April 29, 1999. The
application for the trademark "StarGreetings" was filed with the U.S. Patent and
Trademark Office on August 17, 1999.
The Company owns the following URLs:
o iParty.com
o iLiquor.com
o iLiquors.com
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o iBakers.com
o iInvite.com
o Superstargreetings.com
o Partygram.com
o iPartygram.com
o Partygram.net
o iPartygram.net
o Yofiesta.com
o Yofiesta.net
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such Year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
State Of Readiness
The Company has made an assessment of the Year 2000 readiness of its
operating, financial and administrative systems, including the hardware and
software that support its systems. The Company's assessment plan consisted of:
o quality assurance testing of its internally developed proprietary
software;
o contacting third-party vendors and licensors of material
hardware, software and services that are both directly and
indirectly related to the delivery of the Company's services to
its users;
o contacting vendors of third-party systems;
o assessing repair or replacement requirements;
o implementing repair or replacement;
o implementation of the plan; and
o creating of contingency plans in the event of Year 2000 failures.
The Company performed a Year 2000 simulation on its systems during the
third quarter of 1999 to test system readiness. All of the Company's systems
were designed subsequent to January 1, 1999, well after the year 2000 compliance
problem was identified. Accordingly, all of the systems the Company has
developed use four digits to identify the year rather than two digits. Based on
the simulation, the Company believes that each of its material systems is Year
2000 compliant. The Company will, if necessary, revise its internally developed
proprietary software as necessary to improve its Year 2000 compliance. Many
vendors of material hardware and software components of the Company's systems
have indicated that the products the Company's use are currently Year 2000
compliant. The Company has required vendors of its other material hardware and
software components to provide assurances of their Year 2000 compliance. This
process has been completed and the Company does not believe that its systems
will need to be revised or replaced.
Costs To Date
The Company has not incurred any material expenditures in connection with
identifying, evaluating or addressing Year 2000 compliance issues. Most of its
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, the Company
does not possess the information necessary to estimate the potential costs of
revisions to its systems should such revisions be required or the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although the Company does not anticipate that such expenses will
be material, such expenses, if higher than anticipated, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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ITEM 2. PLAN OF OPERATION.
GENERAL.
The Company launched the Site in February 1999. To date, the Company has
only generated de minimus revenues and expects to begin to generate revenues by
the end of 1999. There can be no assurance that the Company will ever generate
substantial revenues. In August and September of 1999 the Company sold an
aggregate of $22.9 million of convertible preferred stock and redeemable common
stock purchase warrants in private offerings. The financings included the
conversion of the Company's $2.0 million of outstanding senior debt. Net
proceeds to the Company from the financings was approximately $21.3 million
(including the conversion of the $2.0 million in debt and interest thereon). The
Company believes, based on currently proposed plans and assumptions relating to
its operations, that the net proceeds from the financings and related accrued
interest, together with anticipated revenues from operations, will be sufficient
to fund the Company's operations and working capital requirements for at least
12 months. In the event that the Company's plans or assumptions change or prove
inaccurate (due to unanticipated expenses, increased competition, unfavorable
economic conditions, or other unforeseen circumstances) the Company could be
required to seek additional financing sooner than currently expected. There can
be no assurance that such additional funding will be available to the Company,
or if available, that the terms of such additional financing will be acceptable
to the Company.
The Company expects its initial revenues to be derived from several
sources, but as with most e-commerce businesses, especially a development stage
company such as the Company, risks of operations are inherent and are largely
dependent on the economy and levels of consumer demand. The Company expects that
its initial revenues will be derived from retail sales to consumers of party
related goods. The Company anticipates that future revenues may be derived from
(i) commissions or royalties paid by strategic partners for orders received
through the Company; (ii) sales of StarGreetings personalized messages; and
(iii) advertising on the Site's pages, particularly the content features such as
the Party Planner and PartyTalk.
The Company expects to hire between ten and fifteen additional employees in
the next six months as the needs of the Company may require to sustain growth,
and to remain competitive and creative.
Net sales for the nine months ended September 30, 1999, include the selling
price of party goods sold by the Company, net of returns, as well as outbound
shipping and handling charges. Net sales for the nine months ended
September 30, 1999, were approximately $4,300.
Gross profit/loss is calculated as net sales less the cost of sales, which
consists of the cost of merchandise sold to customers and inbound and outbound
shipping and handling costs. For the nine months ended September 30, 1999, the
gross loss was approximately $1,000. This loss was due to high fulfillment costs
incurred with the Company's former fulfillment partner. The fulfillment costs
incurred with the Company's new fulfillment partner, Taymark, will be lower,
which the Company believes will result in increased gross profit margins in
the future. Taymark began fulfilling orders placed on the Company's website on
October 1, 1999.
Marketing and sales expenses consist primarily of advertising, public
relations and promotional expenditures, and all related payroll and related
expenses for personnel engaged in marketing and selling activities. Marketing
and sales expenses for the nine months ended September 30, 1999, were
approximately $878,000. The Company intends to pursue a marketing campaign and
will incur significant incremental costs in the future.
Operating and development expenses consist principally of payroll and
related expenses for product development, editorial, systems and operations
personnel and consultants, and systems infrastructure. Operating and development
expenses for the nine months ended September 30, 1999, were approximately
$893,000. The Company believes that continued investment in product development
is critical to attaining its strategic objectives. In addition to ongoing
investments in its website and infrastructure, the Company intends to increase
investments in product and services.
General and administrative ("G&A") expenses consist of payroll and related
expenses for executive, finance and adminstrative personnel, professional fees
and other general corporate expenses. G&A expenses for the nine months ended
September 30, 1998 and 1999, were approximately $424,000 and $1,529,000,
respectively. Increases in G&A costs are largely attributable to increased
payroll-related and infrastructure
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costs associated with the Company's expansion efforts, legal and other
professional fees, and recruiting costs. The Company expects G&A costs to
continue to increase commensurate with its expansion plans.
The Company incurred approximately $366,000 for the nine months ended
September 30, 1999, in losses resulting from abandonment of assets. This loss
was due to a write-off of website development costs incurred during 1998 and
1999. It was determined that the costs, which had been capitalized as property
and equipment, were abandoned when the Company selected new vendors for support
of its website, necessitating the creation of a new website and integration
components. During the nine months ended September 30, 1999, the Company
incurred approximately $695,000 in website development costs in efforts to
enhance the website. These costs have been capitalized in accordance with
generally accepted accounting principals.
The Company incurred $1,140,565 for the nine months ended September 30,
1999 in stock based compensation expenses. The stock based compensation expenses
resulted from stock options granted to an employee and two consultants
($148,494) and stock options granted to celebrities who provided services to
StarGreetings ($612,440) and warrants granted to the Company's fulfillment
partner, Taymark ($379,631).
Interest income on cash and cash equivalents for the nine months ended
September 30, 1998 and 1999, was approximately $5,400 and $43,000, respectively.
The increase in income was due to higher balances resulting from the Company's
financing activities, principally the private placement of Series B and C
Preferred Stock completed in September 1999. Interest expense for the nine
months ended September 30, 1999, was approximately $56,000. This expense
consists primarily of interest on the 10% Senior Secured Convertible Promissory
Notes issued in April 1999. In connection with the private placement of
Series B and C Preferred Stock, these Notes were converted to equity.
THE SITE.
The Company is launching the Site in two stages, as follows:
First Stage. Currently, the Site contains the PartyMarket and PartyTalk. In
this first stage, the Company offers party related products, costumes, music and
editorial content. On-site shopping is currently limited to party goods, favors,
gift wrap, cards and invitations. During this stage Taymark is responsible for
consumer fulfillment and customer service.
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Second Stage. By the end of the first quarter of 2000, the Company expects
to expand the PartyMarket offering to include cakes, gifts, flowers, food and
beverages. During the first and second quarter of 2000, the Company expects to
continue to introduce additional features to the Site, such as the Party
Planner, the Party Resource, Gift Registry, Party Workbook, Party Web Page,
Photo Gallery, Birthday Club, interactive party planning tools and an Invitation
Channel.
ACQUISITIONS.
The Company operates in an un-branded business arena which has many small
players. As a result, the Company is considering consolidating the field through
acquisitions of other entities. Any determination to make an acquisition will be
based upon a variety of factors, including, without limitation, the purchase
price and other financial terms of the transaction, the business prospects, and
the extent to which any acquisition would enhance the Company's prospects. The
Company is not currently engaged in identifying any potential acquisition and
has no plans, agreement, understanding, or arrangement with respect to any
acquisition.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases office space at 41 East 11th Street, 11th Floor, New
York, NY 10003 from TechSpace LLC. The lease commenced November 1, 1998 for an
initial term of three (3) months, which expired on February 28, 1999. On March
1, 1999 the lease automatically renewed for a three month period, upon the same
terms and conditions. The Company entered into a new lease on May 1, 1999 which
expired on August 1, 1999. The Company has extended the term of the lease and
leased additional space in the facility. The total monthly rent is $9,700 with
an additional variable monthly service fee of an average of $2,500 depending on
office equipment usage. Management believes that such space is adequate for its
immediate needs. This property is used by the Company for office space and the
Company believes that this space is adequately covered by its insurance.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 1, 1999, (i) by each
person who is known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) by each of the Company's directors, (iii) by each
named executive officer listed on the Executive Compensation table in Item 6 and
(iv) by all executive officers and directors as a group. Except as indicated in
the footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable. As of December 1, 1999, there were
11,005,691 shares of Common Stock issued and outstanding. In addition, as of
December 1, 1999, there were 1,000,000 shares of Series A Preferred Stock issued
and outstanding (which are immediately convertible into 1,000,000 shares of
Common Stock), 1,044,593 shares of Series B Preferred Stock issued and
outstanding (which are immediately convertible into 10,445,930 shares of Common
Stock) and 100,000 shares of Series C Preferred Stock issued and outstanding
(which are immediately convertible into 1,000,000 shares of Common Stock).
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
- --------------------------------------------------------------------------------- -------------- ----------
<S> <C> <C>
Sal Perisano..................................................................... 75,000(3) *
Maureen Broughton Murrah......................................................... 250,000(4) 2.22%
Robert H. Lessin ................................................................ 7,348,268(5)(7) 59.48%
c/o WIT Capital
826 Broadway, 6th Floor
New York, NY 10003
James McCann .................................................................... 699,600(6) 6.36%
1-800 Flowers
1000 Stewart Avenue
Westbury, NY 11590
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<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
- --------------------------------------------------------------------------------- ---------- ------
<S> <C> <C>
iParty LLC ...................................................................... 6,000,000(7) 54.5%
c/o Robert H. Lessin
826 Broadway, 6th Floor
New York, NY 10003
Ajmal Khan ...................................................................... 565,000(8) 4.89%
The Verus Group, Suite 2000
1177 West Hastings Street
Vancouver, British Columbia
Canada V6E 2K3
Stuart G. Moldaw ................................................................ 125,000(9) 1.12%
700 Airport Boulevard
Burlingame, California 94010
Byron Hero ...................................................................... 700,000(10) 6.3%
420 East 54th Street
New York, New York 10022
Roccia Partners, L.P. ........................................................... 1,796,000(11) 14.03%
826 Broadway
New York, NY 10003
Boston Millennia Partners, LP ................................................... 1,000,000(12) 8.33%
30 Rowes Wharf
Suite 330
Boston, MA 02110
Hampton Associates Limited ...................................................... 703,362(13) 6.0%
1702 Dina House
Ruttonjee Centre
11 Duddell Street
Central Hong Kong
All officers and directors ...................................................... 8,113,268 62.44%
as a group (4 persons)
</TABLE>
- ------------------
* Less than one percent (1%).
(1) Unless otherwise indicated, all addresses are c/o iParty Corp., 41 East
11th Street., 11th Floor, New York, New York 10003.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities and Exchange Act of 1934, as amended (the "Exchange
Act"), and unless otherwise indicated, represents shares for which the
beneficial owner has sole voting and investment power. The percentage of
class is calculated in accordance with Rule 13d-3.
(3) Includes 75,000 shares which may be acquired upon the exercise of presently
exercisable options issued pursuant to the Company's 1998 Incentive and
Nonqualified Stock Option Plan (the "Plan")(50,000 options in connection
with his consulting agreement with the Company and 25,000 options in
connection with his role as Director of the Company. See "Executive
Compensation.")
(4) Includes 250,000 shares of Common Stock which may be acquired upon the
exercise of presently exercisable options issued pursuant to the Plan.
(5) Includes (i) 6,000,000 shares of Common Stock owned by iParty LLC, in which
Mr. Lessin is a member and the manager and a 78.34% owner; (ii) 75,000
shares of Common Stock which may be acquired upon the exercise of presently
exercisable options issued pursuant to the Plan, (iii) 273,268
(Footnotes continued on next page)
9
<PAGE>
(Footnotes continued from previous page)
shares of Common Stock which may be acquired upon the exercise of presently
exercisable warrants, and (iv) 1,000,000 shares of Common Stock which may
be acquired upon the conversion of 100,000 shares of presently convertible
Series B Convertible Preferred Stock.
(6) Includes 699,000 shares of Common Stock owned by iParty LLC, in which
Mr. McCann is a member and a 11.66% owner. Such shares represent his
ownership interest in iParty LLC.
(7) iParty LLC is a Delaware limited liability company and a 54.5% shareholder
of the Company. Mr. Lessin is the manager and 78.334% owner of iParty LLC.
(8) Includes 75,000 shares of Common Stock which may be acquired upon the
exercise of presently exercisable options issued pursuant to the Plan, and
25,000 shares of Common Stock held by Verus Capital Corp., of which
Mr. Khan is the sole stockholder. Also includes presently exercisable
options, held by Verus Capital Corp., to purchase 225,000 and 240,000
shares of Series A Preferred Stock from Henslowe Trading Limited and
Ruffino Developments Limited, respectively.
(9) Includes 100,000 shares of Common Stock which may be acquired upon the
conversion of 10,000 shares of presently convertible Series B Convertible
Preferred Stock and 25,000 shares of Common Stock which may be acquired
upon the exercise of presently exercisable options issued pursuant to the
plan.
(10) Includes 600,000 shares of Common Stock owned by iParty LLC, in which
Mr. Hero is a member and a 10% owner, such shares represent Mr. Hero's
membership interest in iParty LLC. Also includes 100,000 shares which may
be acquired by the exercise of presently exercisable options issued
pursuant to the Plan.
(11) Includes 1,796,000 shares of Common Stock which may be acquired upon the
conversion of 179,600 shares of presently convertible Series B Convertible
Preferred Stock.
(12) Includes 1,000,000 shares of Common Stock which may be acquired upon the
conversion of 100,000 shares of presently convertible Series C Convertible
Preferred Stock.
(13) Includes 448,420 shares of Common Stock which may be acquired upon the
conversion of 44,842 shares of presently convertible Series B Convertible
Preferred Stock and 254,942 shares of Common Stock which may be acquired
upon the exercise of presently exercisable warrants.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND PROMOTERS.
The following sets forth, are the names of the Company's directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Sal Perisano.................................... 48 Chief Executive Officer, Director
Patrick Farrell................................. 31 Senior Vice President, Chief Financial
Officer
Ajmal Khan...................................... 37 Director
Robert H. Lessin................................ 44 Director
Stuart G. Moldaw................................ 72 Director
</TABLE>
The Company has no nominating committee. The Company has an audit committee
consisting of Messrs. Khan and Moldaw, and a compensation committee consisting
of Messrs. Kahn and Perisano. The Company also has an executive committee
consisting of Messrs. Perisano, Lessin and Moldaw. The Company currently does
not carry any key-man life insurance on any of its officers.
Set forth below is biographical information about the Directors and
Executive Officers of the Company.
Sal Perisano has been a Director of the Company since October 1998 and the
Chief Executive Officer since April 15, 1999. In December 1992, Mr. Perisano
co-founded The Big Party Corporation, a retail chain of 51 party supply stores,
headquartered in West Roxbury, Massachusetts. Mr. Perisano served as President
and Chairman of The Big Party Corporation from 1992 to January 1999.
Mr. Perisano currently serves as a director of and a consultant to The Big Party
Corporation. In 1981, he co-founded Videosmith, which became
10
<PAGE>
Boston's dominant video retailer. In 1989 Videosmith was sold to a publicly
traded company called Xtravision PLC, which owned 250 stores throughout the U.K.
and Ireland. Mr. Perisano stayed on as director and was later named Chief
Executive of the parent company, which was subsequently acquired by Blockbuster
Video. Mr. Perisano holds a B.A. from Boston College and an M.A. from Harvard
University.
Patrick Farrell has been Senior Vice President and the Chief Financial
Officer of the Company since April 1999. From 1996 until joining the Company,
Mr. Farrell was Director, Financial Planning & Analysis and Controller for N2K
Inc. where he recently helped negotiate that company's merger with CDnow. Prior
to N2K, he served as Controller at EMI Music Group/Angel Records and as Manager
of Finance and Accounting at Polygram/DefJam Recordings, Inc. He began his
professional career at Arthur Andersen & Co., where he was an Audit Senior when
he left in 1994. Mr. Farrell holds an M.B.A. from New York University and
graduated with honors in Accounting from Temple University and is a Certified
Public Accountant.
Ajmal Khan has been a Director of the Company since July 1998. Mr. Khan is
founder and President of the Verus Capital Corp. ("Verus"), a diversified
investment group. Mr. Khan founded Venus and has been its President since 1987.
Verus is involved in the ownership of hotels; venture capital financing;
corporate acquisitions; and several joint ventures entailing name brand
franchising and licensing. Mr. Khan also has a joint venture interest in
Barakaat Holdings Ltd., a sports marketing company. Since October, 1998 he has
also served as a Director of Advanced Bodymetrics, Inc., a publicly traded
high-tech company dedicated to developing sports wristwatches that are able to
monitor and display various functions of the human body. Mr. Khan is also a
director of Wattage Monitor, Inc., a provider of electricity and power.
Robert H. Lessin has been a Director of the Company since July 1998.
Mr. Lessin has been Chairman and Chief Executive of Wit Capital Corp., an
on-line broker-dealer, since April 1998. From 1993 until 1997, Mr. Lessin was
Vice Chairman of Salomon Smith Barney, where he served as Head of its Investment
Banking Division. Mr. Lessin also serves on the Board of Directors of CBS
MarketWatch.com, a financial and news provider on the Internet.
Stuart G. Moldaw has been a director of the Company since October 1999. Mr.
Moldaw has been Chairman of Gymboree Corporation, a speciality retailer of
apparel and accessories for children, since 1994. From 1980 through February
1990 Mr. Moldaw served as a general partner of U.S. Venture Partners and he
currently serves as a special venture partner of such entity. Mr. Moldaw also
serves as a director and Chairman Emeritus of Ross Stores, Inc., an off-price
retailer of apparel and home accessories.
ITEM 6. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION.
Pursuant to the Plan, each non-employee director will be granted, on the
effective date of the commencement of his term as director, options to purchase
25,000 shares of Common Stock. In addition, each director who is not an
executive officer of the Company is to be granted, on an annual basis on the
last trading date in August of each year, commencing August 1998, options to
acquire 25,000 shares of Common Stock, at an exercise price equal to the fair
market value of the underlying common stock on the date of grant.
11
<PAGE>
SUMMARY EXECUTIVE OFFICER COMPENSATION TABLE.
The following summarizes the aggregate cash compensation paid during 1998
(see footnotes below) to the Company's Chief Executive Officer and any officer
who is expected to earn more than $100,000 in salary and bonus pursuant to their
contracts. Currently, options have been granted to management as indicated
below.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OTHER ANNUAL SECURITIES UNDERLYING
POSITION 1998 SALARY COMPENSATION OPTIONS/SAR'S
- ---------------------------------------------------------------- ----------- ------------ ---------------------
<S> <C> <C> <C>
Byron Hero ..................................................... $ 250,000(2) $ 12,000(3) 300,000(7)
Former Chief Executive Officer(1)
Maureen Broughton Murrah(4) .................................... $ 150,000(5) 300,000(6)
Former President
</TABLE>
- ------------------
(1) Mr. Hero resigned as Chief Executive Officer of the Company on April 14,
1999. Mr. Hero did not receive any severance payment in connection with such
resignation.
(2) Represents annualized salary. Mr. Hero did not begin his employment with the
Company until July 7, 1998.
(3) Represents maximum annual car allowance.
(4) Ms. Broughton Murrah resigned as President of the Company effective
November 15, 1999. She will not receive any severance payment in connection
with such resignation.
(5) Represents annualized salary. Ms. Murrah did not begin her employment with
the Company until July 6, 1998.
(6) Represents options with respect to 250,000 shares currently vested, and
options with respect to 50,000 shares of Common Stock scheduled to vest on
January 6, 2000.
(7) Represents options with respect to 300,000 shares of Common Stock vested on
January 15, 1999, and are exercisable at $2.50 per share.
EMPLOYMENT AND CONSULTING AGREEMENTS.
The Company and Mr. Perisano, a director of the Company, entered into a
consulting agreement for the services of Mr. Perisano and his wife, Dorice
Dionne. The consulting period terminates on December 31, 1999. Pursuant to this
agreement, Mr. Perisano was entitled to options to purchase 25,000 shares of
Common Stock, at the price on the date of grant ($1.43), and additional options
to purchase 25,000 shares of Common Stock in the event their consulting hours
exceed 100. Their consulting hours exceeded 100 on January 19, 1999.
Consequently, Mr. Perisano was granted options to purchase 25,000 shares of
Common Stock at an exercise price of $5.38 per share, the price of the Common
Stock on such date.
The Company and Mr. Perisano have entered into an employment agreement
which provides for him to act as Chief Executive Officer of the Company for a
term expiring on March 30, 2002 and devote substantially his full working time
and attention to the Company provided that he may continue fulfill his duties
and obligations to The Big Party Corporation as a consultant and a member of its
board of directors. The agreement provides for an initial annual salary of
$150,000, which amount will be increased to $250,000 commencing January 1, 2000
plus a discretionary bonus to be determined by the Board of Directors. As
described in the agreement, on March 30, 1999 Mr. Perisano was granted options
to purchase an aggregate of 337,500 shares of Common Stock pursuant to the Plan
with an exercise price equal to the fair market value of the Common Stock on the
date of grant ($3.75). Such options shall vest as follows: provided that
Mr. Perisano remains continuously employed by the Company, options with respect
to 112,500 shares of Common Stock shall vest on 30th day of March of each of the
years 2000, 2001, and 2002, respectively. As further described in the agreement,
on August 26, 1999 Mr. Perisano was granted options to purchase an aggregate of
434,730 shares of Common Stock pursuant to the Plan. Such options shall vest as
follows: provided that Mr. Perisano remains continuously employed by the
Company, options with respect to 114,910 shares of Common Stock shall vest on
the 26th day of August of each of the years 2000, 2001, and
12
<PAGE>
2002, respectively. The agreement provides that if Mr. Perisano is terminated
without cause, or resigns for "good reason" he will be entitled to receive his
then current salary for a period of nine months. The agreement contains certain
restrictions on competition.
The Company and Mr. Farrell entered in an employment agreement, dated
March 12, 1999 which provides for Mr. Farrell to serve as Chief Financial
Officer of the Company for a term which expires on December 31, 2000. The
agreement provides for an initial base salary of $115,000 per year. In
connection with the Agreement Mr. Farrell was granted options to purchase an
aggregate of 115,000 shares of Common Stock pursuant to the Plan. So long as
Mr. Farrell remains continuously employed by the Company, options with respect
to 50,000 shares shall vest on August 1, 1999 and options with respect to the
remaining 65,000 shares shall vest on February 1, 2000. If the employment
agreement is terminated by the Company without cause, Mr. Farrell is entitled to
receive his full then current base salary for a period of three months from the
date of termination and half of his then current base salary for a period of
three months thereafter.
The Company and Mr. Moldaw, a director of the Company, entered into a
Consulting Agreement, dated September 7, 1999. The agreement has a term of three
years but may be terminated by either party upon 90 days' written notice.
Pursuant to the terms of agreement, Mr. Moldaw was granted options to purchase
100,000 shares of Common Stock with an exercise price of $2.00 per share. Such
options vest as follows: provided that Mr. Moldaw is still providing consulting
services to the Company, options with respect to 33,334 shares of Common Stock
shall vest on September 6, 2000 and options with respect to an additional 33,333
shares of Common Stock shall vest on each of September 6, 2001 and 2002,
respectively.
The Company and Mr. Byron Hero, the former Chief Executive Officer and a
former Director of the Company, entered into a consulting agreement dated April
14, 1999. In connection with the consulting agreement, the employment agreement,
dated July 7, 1998 between the Company and Mr. Hero (the "Prior Agreement") was
terminated and Mr. Hero resigned as Chief Executive Officer and a Director of
the Company. Mr. Hero did not receive any severance payment in connection with
his resignation as Chief Executive Officer of the Company. Pursuant to the terms
of the consulting agreement, Mr. Hero shall serve as non-executive Chairman of
StarGreeting, Inc., a wholly-owned subsidiary of the Company, until April 14,
2000. During the term of the agreement, Mr. Hero shall receive a fee (the "Fee")
of $20,833.33 per month. If Mr. Hero is terminated for any reason during the
first six months of the term(other than for a violation of the agreement's
prohibition on competition) then Mr. Hero shall be entitled to receive the Fee
for the remainder of such initial six month period. In the event Mr. Hero is
terminated other than For Cause after such initial six month period, Mr. Hero
shall be entitled to six months Fee, payable in six equal monthly installments.
The agreement contains certain prohibitions on competition. Pursuant to terms of
the Prior Agreement, Mr. Hero was granted options to purchase an aggregate of
300,000 shares of Common Stock Pursuant to Plan. Such options remain in effect.
Options to purchase 50,000 shares have vested, and provided that Mr. Hero
remains engaged by the Company on the following dates, options to acquire 50,000
shares shall vest on each such date: July 15, 1999, January 15, 2000, July 15,
2000, January 15, 2001, July 15, 2001.
The Company and Ms. Murrah entered into an employment agreement, dated
July 6, 1998 and expiring on July 6, 2001. The agreement provides that she will
act as President of the Company, devote substantially her full working time and
attention to the Company, and provides for an annual salary of $150,000, plus a
discretionary bonus to be determined by the Board of Directors. In addition,
Ms. Murrah will be granted stock options to purchase an aggregate of 300,000
shares of Common Stock pursuant to the Plan which vest as follows: options with
respect to 250,000 shares of Common Stock are currently vested, and provided
that Ms. Murrah remains continuously employed by the Company, options with
respect to 50,000 shares of Common Stock shall vest on January 6, 2000. If the
employment agreement is terminated by the Company without cause, Ms. Murrah is
entitled to receive an amount equal to any unpaid out-of-pocket necessary
expenses as contemplated under the employment agreement and one-half of the
amortized annual amount of the base salary then in effect. The employment
agreement also provides for a one year non-compete following the termination of
Ms. Murrah's employment. Effective November 15, 1999, Ms. Murrah resigned as
President of the Company. She will not receive any severance payment in
connection with such resignation.
13
<PAGE>
STOCK OPTION PLAN
In July 1998, the Company's Board of Directors adopted the Incentive and
Nonqualified Stock Option Plan (the "Plan"), under which there are currently
4,000,000 shares of Common Stock reserved for issuance. The Plan provides for
the award of options, which may either be incentive stock options ("ISOs")
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options ("NQOs") which are not subject to
special tax treatment under the Code. The Plan is administered by the Board or a
committee appointed by the Board (the "Administrator"). Officers, directors, key
employees of, and consultants to, the Company or any parent or subsidiary
corporation selected by the Administrator are eligible to receive options under
the plan. Subject to certain restrictions, the Administrator is authorized to
designate the number of shares to be covered by each award, the terms of the
award, the dates on which and the rates at which options or other awards may be
exercised, the method of payment and other terms.
The exercise price for ISOs cannot be less than the fair market value of
the stock subject to the option on the grant date (110% of such fair market
value in the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an option to
the extent it was exercisable on the date of termination for a period of time
after termination. Generally, awards must be exercised by cash payment to the
Company of the exercise price. However, the Administrator may allow a
participant to pay all or a portion of the exercise price by means of stock.
In the event of any change in the outstanding shares of Common Stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend
or similar change in the corporate structure, the Administrator shall make an
appropriate adjustment in the aggregate number of shares available under the
Plan and in the number of shares and price per share subject to outstanding
options. In the event that the Company is reorganized, consolidated, or merged
with another corporation, or if all or substantially all of the assets of the
Company are sold or exchanged, the holder of the option is entitled to receive
upon the exercise of his or her option, the same number and kind of shares of
stock as he or she would have been entitled to receive upon the happening of any
such corporate event as if he had exercised such option and had been immediately
prior to such event, the holder of the number of shares covered by such option.
The Administrator may, at any time, modify, amend or terminate the Plan as
is necessary to maintain compliance with applicable statutes, rules or
regulations; provided, however, that the Administrator may condition the
effectiveness of any such amendment on the receipt of stockholder approval as
may be required by applicable statute, rule or regulation. In addition, the Plan
may be terminated by the Board of Directors as it shall determine in its sole
discretion, in the absence of stockholder approval; provided, however, that any
such termination will not adversely alter or impair any option awarded under the
Plan prior to such termination without the consent of the holder thereof.
Directors who are not executive officers of the Company are entitled to
options to acquire 25,000 shares of Common Stock at the beginning of their term
as director. In addition, non-executive officer directors are entitled to
options to acquire 25,000 shares of Common Stock annually, on the last trading
day in August, at an exercise price equal to the fair market value of the stock
on the date of grant. These options vest on the date of the grant. The secretary
of the Company is entitled to receive the same option compensation as directors
who are not executive officers of the Company.
In addition to those options granted to the Company's non-executive officer
directors under the Plan, the following paragraph summarizes the options that
have been granted pursuant to the Plan to the Company's Executive Officers.
14
<PAGE>
Pursuant to his consulting agreement, Mr. Perisano was granted options to
acquire 50,000 shares of Common Stock, at an exercise price equal to the fair
market value on the date of grant. In addition, he was granted options to
purchase 25,000 shares of Common Stock, at an exercise price equal to the fair
market value on the date of grant, upon his election as a Director. These
options are currently exercisable. In addition, in connection with his
appointment as Chief Executive Officer of the Company on March 30, 1999,
Mr. Perisano was granted options to purchase an aggregate of 337,500 shares of
Common Stock with an exercise price equal to $3.75 per share. In addition, on
August 26, 1999 Mr. Perisano was granted options to purchase an additional
434,730 shares of Common Stock at an exercise price of $2.00 per share. These
options vest as provided in his employment agreement described above. Pursuant
to her employment agreement, Ms. Murrah was granted options to acquire an
aggregate of 300,000 shares of Common Stock at an exercise price of $2.50. These
options will vest according to the schedule set forth in her employment
agreement, described above. Pursuant to his employment agreement, Mr. Farrell
was granted options to acquire an aggregate of 115,000 shares of Common Stock at
an exercise price of $3.63 per share. In addition, on October 11, 1999
Mr. Farrell was granted options to purchase an additional 75,000 shares of
Common Stock at an exercise price of $3.81 per share. These options vest in
equal installments over three years. These options will vest according to the
schedule set forth in his employment agreement, described above. Mr. Hero was
granted options to acquire an aggregate of 300,000 shares of Common Stock at an
exercise price of $2.50. These options will vest according to the schedule set
forth in his consulting agreement, described above.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
STARGREETINGS LICENSE
Star Greetings, Inc. a wholly owned subsidiary of the Company (the
"Licensee") licenses the StarGreetings concept (the "StarGreetings Concept")
from StarGreetings, LLC (the "Licensor"). Mr. Hero, a former director and the
former Chief Executive Officer of the Company, is a member and the manager of
the Licensor, and is the creator of the StarGreetings concept. Pursuant to a
license agreement dated as of August 15, 1998, by and between the Licensor and
the Licensee (the "License Agreement"), the Licensee was granted exclusive,
perpetual and worldwide rights to use the StarGreetings Concept for a twenty
(20) year term, expiring August 15, 2016.
Pursuant to the License Agreement, the Licensee will be permitted to sell
StarGreetings for general audiences (excluding adult content versions) on its
two current URLs located on the world wide web at "Stargreetings.com" and
"iParty.com."
In exchange for the license for use of the StarGreetings Concept, the
Licensee has agreed to pay the Licensor 2 1/2% (the "Royalty") of the gross
revenues received by the Licensee from the sale of StarGreetings. The Royalty is
to be paid to Licensor within fifteen days after the end of each fiscal quarter.
The License Agreement terminates in the event of a change of control in the
Licensee or a change of control in the Company, the parent of the Licensee. For
purposes of the License Agreement, the term change in control includes any
merger or consolidation in which the Licensee is not the surviving entity, and a
sale of more than 49% of the assets or stock of the Licensee to a third party or
a change of control of the Company, the Licensee's parent.
FINDER'S FEE AGREEMENT WITH FORMER DIRECTOR
iParty LLC and Mr. Hero, entered into an agreement prior to Mr. Hero
becoming a Director or officer of the Company in April 1998, which calls for him
to receive a finder's fee in the amount of 5% of the first $2,000,000 in equity
raised from any party introduced by him (the "Finder's Fee Agreement"). The
Company has assumed the obligations of iParty LLC under the Finder's Fee
Agreement. In connection with the Finder's Fee Agreement, $2,000,000 was raised.
As a result, the Company paid Mr. Hero $100,000. Mr. Hero is not a registered
broker-dealer.
15
<PAGE>
FUNDING AGREEMENT WITH CERTAIN DIRECTORS
The Company entered into a Funding Agreement, dated as of March 31, 1999
and amended as of April 14, 1999, with Mr. Ajmal Khan and Mr. Robert H. Lessin,
Directors of the Company (the "Funding Agreement"). Pursuant to the terms of the
Funding Agreement each of Mr. Kahn (or his designees) and Mr. Lessin advanced
certain funds to the Company. In connection with each such funding, the funding
party received a 10% Senior Secured Promissory Note for the amount funded and
warrants to purchase such number of shares of Common Stock equal to the amount
funded divided by the closing bid price of the Common Stock on the date of each
such funding. $2,000,000 was funded pursuant to the Funding Agreement and
warrants to purchase 528,210 shares of Common Stock were issued at a
weighted-average exercise price of $3.79.
EMPLOYMENT AGREEMENT WITH SPOUSE OF DIRECTOR AND EXECUTIVE OFFICER
The Company has entered into an Employment Agreement with Dorice Dionne,
the wife of Sal Perisano, the Chief Executive Officer and a Director the
Company. The agreement provides that she will act as Senior Vice
President--Merchandising for a term expiring on March 30, 2002 and devote
substantially her full working time and attention to the Company provided that
she may continue to fulfill her duties and obligations to The Big Party
Corporation as a consultant. The agreement provides for an initial annual salary
of $100,000, which amount will be increased to $125,000 commencing January 1,
2000, plus a discretionary bonus to be determined by the Board of Directors. As
described in the agreement, on March 30, 1999 she was granted options to
purchase an aggregate of 337,500 shares of Common Stock pursuant to the Plan
with an exercise price equal to the fair market value of the Common Stock on the
date of grant ($3.75 per share). Such options shall vest as follows: provided
that she remains continuously employed by the Company, options with respect to
112,500 shares of Common Stock shall vest on the 30th day of March of each of
the years 2000, 2001, and 2002, respectively. The agreement provides that if she
is terminated without cause, she will be entitled to receive her then current
salary for a period of six months. The Agreement contains certain customary
restrictions on competition.
ITEM 8. DESCRIPTION OF SECURITIES.
COMMON STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of an aggregate of 50,000,000 shares of Common Stock, par value $.001 per share.
As of December 1, 1999, there were 11,005,691 shares of Common Stock issued and
outstanding. As of December 1, 1999, the number of holders of the Company's
Commoon Stock was at least 94. Each holder of record of Common Stock is entitled
to one vote for each share held on all matters promptly submitted to the
stockholders for their vote. Holders of outstanding shares of Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors out of legally available funds. The Company has not paid a dividend
and it is not anticipated that any cash dividends will be paid in the
foreseeable future. The Board of Directors initially may follow a policy of
retaining earnings, if any, to finance the future growth of the Company.
Accordingly, future cash dividends, if any, will depend on the Company's need
for working capital and its financial condition at the time. Shares of Common
Stock are not redeemable, carry no preemptive rights, or other rights to
subscribe for additional shares of Common Stock in the event of an offering. All
outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of an aggregate of 10,000,000 preferred shares, par value $.001 per share (the
"Preferred Shares"). The Board of Directors is authorized from time to time to
issue the Preferred Shares as Preferred Shares of any series and in connection
with the creation of each such series, to fix by resolution or resolutions
providing for the issue of shares thereof, the number of shares of such series,
the designations, powers and preferences and rights and the qualifications,
limitations and restrictions of such series to the full extent now or hereafter
permitted by the laws of the State of Delaware. At present, the Company's Board
of Directors has designated the following
16
<PAGE>
classes of Preferred Shares: (i) 1,000,000 shares as Series A Convertible
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), all
of which are currently issued and outstanding; (ii) 1,150,000 shares as
Series B Convertible Preferred Stock, par value $.001 per share (the "Series B
Preferred Stock"), 1,044,953 shares of which are currently issued and
outstanding; and (iii) 100,000 shares as Series C Convertible Preferred Stock,
par value $.001 per share (the "Series C Preferred Stock"), all of which are
currently issued and outstanding.
Series A Preferred Stock
Rank. The Series A Preferred Stock ranks junior to any classes of stock
designated by the Company as "Senior Securities," prior to all of the Company's
Common Stock and any class or series of capital stock of the Company created
thereafter not specifically ranking by its terms senior to, or on parity with,
the Series A Preferred Stock, and on parity with the Series B and Series C
Preferred Stock, as to distribution of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary.
Dividends. The Series A Preferred Stock bears no dividend.
Conversion. Subject to certain adjustments, each share of Series A
Preferred Stock is convertible at any time, and from time to time, into one
fully-paid and non-assessable share of Common Stock.
Anti-Dilution Provisions. If the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend or other similar event, the
conversion rate is to be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the conversion rate is to be
proportionately increased. In addition, if, prior to the conversion of all the
Series A Preferred Stock, there is any merger, consolidation, exchange of
shares, recapitalization, reorganization or other similar event, as a result of
which shares of Common Stock of the Company are to be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Company or another entity, that the holders of then
outstanding shares of Series A Preferred Stock would have the right to receive
upon conversion of Series A Preferred Stock, upon the basis and upon the terms
and conditions specified in the certificate of designation and in lieu of the
shares of Common Stock immediately issuable upon conversion, such stock,
securities and/or other assets which the holders would have been entitled to
receive in such transaction had the Series A Preferred Stock been converted
immediately prior to such transaction.
Voting Rights. Except as required under the General Corporation Law of
Delaware, the holders of Series A Preferred Stock have no voting rights;
provided however, that the consent of 66% of the shares of Series A Preferred
Stock then outstanding is required before the Company can take certain actions
which adversely affect the rights, preferences or privileges of the Series A
Preferred Stock.
Series B Preferred Stock
Rank. The Series B Preferred Stock ranks junior to any classes of stock
designated by the Company as "Senior Securities," prior to all of the Company's
Common Stock and any class or series of capital stock of the Company created
thereafter not specifically ranking by its terms senior to, or on parity with,
the Series B Preferred Stock, and on parity with the Series A and Series C
Preferred Stock, as to distribution of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary.
Dividends. The Series B Preferred Stock bears no dividend provided that
the holders will be entitled to dividends ratably with any payment to holders of
Common Stock if declared by the Board of Directors.
Conversion. Subject to certain adjustments, each share of Series B
Preferred Stock is convertible at any time, and from time to time, at the option
of the holder thereof, into a number of shares of Common Stock equal to the
quotient derived by dividing (i) $20.00 by (ii) the conversion price in effect
at the time of the conversion (the "Series B Conversion Price"). The initial
conversion price is $2.00, reflecting an initial conversion rate of 10 shares of
Common Stock for each share of Series B Preferred Stock (the "Series B
Conversion Rate"). In addition, the Series B Preferred Stock will automatically
convert into Common Stock, at the conversion rate then in effect, in the event
that the Company consummates a secondary public offering of its Common Stock
resulting in gross proceeds to the Company of at least $10,000,000.
17
<PAGE>
Anti-Dilution Provisions. Subject to certain exceptions (including the
exercise of currently outstanding options or warrants, the exercise of future
options issued under the Plan, and the conversion of the Series A Preferred
Stock), if the Company issues Common Stock at a price less than the Series B
Conversion Price then in effect or the then current market price of the Common
Stock, then the Series B Conversion Rate will be adjusted on a weighted-average
formula basis. In addition, if the number of outstanding shares of Common Stock
is increased by a stock split, stock dividend or other similar event, the Series
B Conversion Rate is to be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Series B Conversion Rate
is to be proportionately increased. In addition, if, prior to the conversion of
all the Series B Preferred Stock, there is any merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event, as a result
of which shares of Common Stock of the Company are to be changed into the same
or a different number of shares of the same or another class or classes of stock
or securities of the Company or another entity, that the holders of then
outstanding shares of Series B Preferred Stock would have the right to receive
upon conversion of Series B referred Stock, upon the basis and upon the terms
and conditions specified in the certificate of designation and in lieu of the
shares of Common Stock immediately issuable upon conversion, such stock,
securities and/or other assets which the holders would have been entitled to
receive in such transaction had the Series B referred Stock been converted
immediately prior to such transaction.
Voting Rights. The Series B Preferred Stock will vote together as a single
class with the Holders of Common Stock, with each share of Series B Preferred
Stock being entitled to cast a number of votes equal to the number of shares of
Common Stock into which each share is then convertible (initially 10). In
addition, consent of 50% of the shares of Series B Preferred Stock then
outstanding is required before the Company can take certain actions which
adversely affect the rights preferences or privileges of the Series B Preferred
Stock.
Series C Preferred Stock
Rank. The Series C Preferred Stock ranks junior to any classes of stock
designated by the Company as "Senior Securities," prior to all of the Company's
Common Stock and any class or series of capital stock of the Company created
thereafter not specifically ranking by its terms senior to, or on parity with,
the Series C Preferred Stock, and on parity with the Series A and Series B
Preferred Stock, as to distribution of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary.
Dividends. The Series C Preferred Stock bears no dividend provided that
the holders will be entitled to dividends ratably with any payment to holders of
Common Stock if declared by the Board of Directors.
Conversion. Subject to certain adjustments, each share of Series C
Preferred Stock is convertible at any time, and from time to time, at the option
of the holder thereof, into a number of shares of Common Stock equal to the
quotient derived by dividing (i) $20.00 by (ii) the conversion price in effect
at the time of the conversion (the "Series C Conversion Price"). The initial
conversion price is $2.00, reflecting an initial conversion rate of 10 shares of
Common Stock for each share of Series C Preferred Stock (the "Series C
Conversion Rate"). In addition, the Series C Preferred Stock will automatically
convert into Common Stock, at the conversion rate then in effect, in the event
that the Company consummates a secondary public offering of it Common Stock
resulting in gross proceeds to the Company of at least $10,000,000.
Anti-Dilution Provisions. Subject to certain exceptions (including the
exercise of currently outstanding options or warrants, the exercise of future
options issued under the Plan, and the conversion of the Series A or Series B
Preferred Stock), if the Company issues Common Stock at a price less than the
Series C Conversion Price then in effect or the then current market price of the
Common Stock, then the Series C Conversion Rate will be adjusted on a
weighted-average formula basis. In addition, if the number of outstanding shares
of Common Stock is increased by a stock split, stock dividend or other similar
event, the Series C Conversion Rate is to be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Series C Conversion Rte
is to be proportionately increased. In addition, if, prior to the conversion of
all the Series C Preferred Stock, there is any merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event, as a result
of which shares of Common Stock of the Company are to be changed into the same
or a different number of shares of the same or another class or classes of stock
or
18
<PAGE>
securities of the Company or another entity, that the holders of then
outstanding shares Series C Preferred Stock would have the right to receive upon
conversion of Series C Preferred Stock, upon the basis and upon the terms and
conditions specified in the certificate of designation and in lieu of the shares
of Common Stock immediately issuable upon conversion, such stock, securities
and/or other assets which the holders would have been entitled to receive in
such transaction had the Series C Preferred Stock been converted immediately
prior to such transaction.
Voting Rights. The Series C Preferred Stock will vote together as a single
class with the Holders of Common Stock, with each share of Series C Preferred
Stock being entitled to cast a number of votes equal to the number of shares of
Common Stock into which each share is then convertible (initially 10). In
addition, so long as 50% of the initially issued shares of Series C Preferred
Stock remain outstanding, the holders of the Series C Preferred Stock, voting as
a class, shall have the right to elect one director of the Company. In addition,
consent of 50% of the shares of Series C Preferred Stock then outstanding is
required before the Company can take certain actions which adversely affect the
rights, preferences or privileges of the Series C Preferred Stock.
19
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market listed
on the NASDAQ OTC Bulletin Board under the symbol "IPTY."
The following table sets forth the range of high and low bid quotations for
the Company's Common Stock for each of the quarter of the fiscal year ended
December 31, 1998 and for the first three quarters of the fiscal year ending
December 31, 1999. The Common Stock commenced trading on the OTC Bulletin Board
under the name iParty Corp, symbol "IPTY" in July 1998. Prior to that time, from
February 1998, until July 1998, the Company's stock was quoted on the OTC
Bulletin Board under the name of WSI Acquisitions, Inc., symbol "WSIA." There is
no available information with respect to the common stock of WSI Acquisitions,
Inc. for the time period before February 12, 1998. Accordingly quotations for
the 1997 fiscal year have not been provided. The quotations represent
inter-dealer prices without retail markup, mark down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ----------------------------------------------------------------------- ------- --------
<S> <C> <C>
Third Quarter--1999.................................................... $3.9325 $2.625
Second Quarter--1999................................................... 5.00 2.4375
First Quarter--1999.................................................... 6.6875 3.125
Fourth Quarter--1998................................................... 3.375 1.065
Third Quarter--1998.................................................... 3.375 0.05
Second Quarter--1998................................................... 0.06 0.03125
First Quarter--1998.................................................... 0.0625 0.01
</TABLE>
The Company has never paid any cash dividends nor does it intend, at this
time, to make cash distributions to its shareholders in the near future. As of
December 1, 1999 the number of holders of the Company's Common Stock was at
least 94.
ITEM 2. LEGAL PROCEEDINGS.
The Company is not currently a party to any material litigation.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company has not changed its accountants since the merger, and there are
no disagreements with the Company's accountants concerning accounting and
financial disclosure.
ITEM 4. RECENT SALE OF UNREGISTERED SECURITIES.
During the past three fiscal years the Company has issued securities
pursuant to exemptions to registration under the Securities Act of 1933, as
amended (the "Securities Act").
The Company issued an aggregate of 4,585,000 shares of Common Stock and
warrants to purchase an aggregate of 1,000,000 shares of Series A Preferred
Stock to certain off-shore holding companies, for $997,197.43 in cash. The
Company did not use an underwriter. This sale was exempt from registration
pursuant to Section 3(b) of the Securities Act and Rule 504 promulgated
thereunder, which provides an exemption for limited offers and sales of
securities not exceeding an annual aggregate amount of $1 million (the
"Rule 504 Sale"). The Rule 504 Sale was a condition to the merger of iParty Corp
and WSI, pursuant to which WSI changed its name to iParty Corp. The Rule 504
Sale was conducted in three issues, one at $.01 per share, a second issue at
$1.00 per share which also included the Warrants, and a third at $1.00 per share
without the Warrants, as set forth in the tables below.
20
<PAGE>
On June 25, 1998, the Company sold, in the first issue, an aggregate of
3,624,043 shares of Common Stock, at a purchase price of $.01 per share, to the
following entities, in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER OF TOTAL
NAME OF PURCHASER SHARES PURCHASED PURCHASE PRICE
- ---------------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Fletcher Investments Limited.......................................... 370,000 $ 3,700
Sandown Limited....................................................... 345,000 $ 3,450
Seaborne Limited...................................................... 330,000 $ 3,300
Stamford Securities Limited........................................... 365,000 $ 3,650
Hampton Associates.................................................... 360,000 $ 3,600
Intention Group Limited............................................... 320,000 $ 3,200
Stackridge Associates Limited......................................... 375,000 $ 3,750
Hoffman Finance Limited............................................... 380,000 $ 3,800
Apostle Associates Limited............................................ 379,043 $ 3,790.43
Clanstar International Limited........................................ 300,000 $ 3,000
Intrepid International Corp........................................... 100,000 $ 1,000
Total:................................................................ 3,624,043 $36,240.43
</TABLE>
On June 26, 1998, the Company sold, in the second issue, an aggregate of
80,000 shares of Common Stock and warrants to purchase an aggregate of 1,000,000
shares of Series A Preferred Stock, at $1.00 per share (the "Series A
Warrants"), to the following entities, in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES AND TOTAL PURCHASE
NAME OF PURCHASER WARRANTS PURCHASED PRICE
- ------------------------------------------------ ------------------------------------------------ --------------
<S> <C> <C>
Ruffino Developments Limited 40,000 shares of common $ 40,000
stock and Warrants to
purchase 556,500 shares of
Series A Preferred Stock
Henslowe Trading Limited 40,000 shares of common $ 40,000
stock and Warrants to
purchase 443,500 shares of
Series A Preferred Stock
TOTAL: 80,000 shares of Common $ 80,000
Stock, and Warrants to
purchase 1,000,000 shares of
Series A Preferred Stock
</TABLE>
The Series A Warrants issued to each of Henslowe and Ruffino were
exercisable from December 28, 1998 through June 30, 1999, after which they
expire. All such warrants have been exercised into the 1,000,000 shares of
Series A Preferred Stock which are currently outstanding.
Also, on June 26, 1998, the Company sold, in the third issue, an aggregate
of 880,957 shares of Common Stock at a purchase price of $1.00 per share, to the
following entities, in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL PURCHASE
NAME OF PURCHASER PURCHASED PRICE
- ---------------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Stackridge Associates Limited......................................... 140,000 $140,000
Hoffman Finance Limited............................................... 140,957 $140,957
Altis Limited......................................................... 600,000 $600,000
TOTAL:................................................................ 880,957 $880,957
</TABLE>
In August and September of 1999 the Company issued an aggregate of
approximately 522,475 units (the "Units") to certain "accredited investors" (as
such term is defined under Regulation D promulgated under the Securities Act).
Each Unit was composed of two (2) shares of Series B Convertible Preferred Stock
and ten (10) Common Stock Purchase Warrants; accordingly, the Company issued an
aggregate of approximately
21
<PAGE>
1,044,950 shares of Series B Preferred Stock and 5,224,750 Common Stock
Warrants. Each share of Series B Preferred Stock is convertible at any time into
ten (10) shares of Common Stock at an initial conversion price of $2.00 per
share. Each Common Stock Warrant is convertible into one share of Common Stock
at an exercise price of $2.00 per share. The Units were offered at a price of
$40.00 per Unit, in cash, provided that approximately 50,000 Units were issued
in exchange for the conversion of approximately $2,000,000 of outstanding Senior
Notes of the Company. Commonwealth Associates, L.P. acted as Placement Agent in
connection with the sale of the Units. In connection therewith, Commonwealth
Associates, L.P. received approximately $1,250,000 (for commissions, structuring
fees, and expenses) and warrants to purchase approximately 779,929 shares of
Common Stock at an exercise price of $2.00 per share. The sale of the Units was
exempt from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder which generally provides an exemption for
certain private sales of securities.
The first closing of the sale of Units was held on August 26, 1999
addition, sales of Units were held on September 9, 1998 and September 10, 1999.
On September 10, 1999 the Company issued an aggregate of 100,000 shares of
Series C Preferred Stock and 500,000 Common Stock Warrant to Boston Millennia
Partners, L.P., and an affiliated entity, both are "accredited investors" (as
such term is defined under Regulation D promulgated under the Securities Act)
for $2,000,000 in cash. Each share of Series C Preferred Stock is convertible at
any time into ten (10) shares of Common Stock at an initial conversion price of
$2.00 per share. Each Common Stock Warrant is convertible into one share of
Common Stock at an exercise price of $2.00 per share. Commonwealth Associates,
L.P. acted as Placement Agent in connection with the sale of the Units. In
connection therewith, Commonwealth Associates, L.P. received approximately
$160,000 (for commissions, structuring fees, and expenses) and warrants to
purchase approximately 150,000 shares of Common Stock at an exercise price of
$2.00 per share. The sale of the securities was exempt from registration
pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder which generally provides an exemption for certain private sales of
securities.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Limitation of Liability and Indemnification Matters
The Company's certificate of incorporation and by-laws provide that the
Company shall indemnify all directors and officers of the Company to the fullest
extent permitted by the Delaware General Corporation Law. Under such provisions,
any director or officer, who in his capacity as such is made or threatened to be
made, party to any suit or proceeding, shall be indemnified if it is determined
that such director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and persons controlling the Company pursuant to
the foregoing provision, or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
22
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements
Independent auditors' report............................................................................. F-1
Balance sheet as of December 31, 1998 and September 30, 1999............................................. F-2
Statement of operations for the three month periods ended September 30, 1998 and 1999,
the nine month periods ended September 30, 1998 and 1999 and for the year ended December 31, 1998..... F-3
Statement of cash flows for the nine month period ended September 30, 1998 and 1999 and for the year
ended December 31, 1998............................................................................... F-4
Statement of changes in stockholders' equity for the year ended December 31, 1998 and nine
month period ended September 30, 1999................................................................. F-5
Notes to financial statements......................................................................... F-6
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders iParty Corp.
New York, New York
We have audited the accompanying consolidated balance sheet of iParty Corp.
and subsidiary (a development stage company) as of December 31, 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of iParty Corp.
and subsidiary as of December 31, 1998, and the consolidated results of their
operations, and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 26, 1999
F-1
<PAGE>
IPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $18,856,768 $ 346,751
Cash, restricted.................................................................. 50,109 50,000
Inventory......................................................................... -- --
Due from officers................................................................. 11,365 34,021
Prepaid expenses and other........................................................ 210,569 60,277
----------- ----------
Total current assets........................................................... 19,128,811 491,049
Property and equipment, net....................................................... 842,109 341,441
Other assets...................................................................... 46,651 9,670
----------- ----------
Total assets........................................................................ $20,017,572 $ 842,160
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................. $ 1,099,264 $ 297,508
Notes payable..................................................................... -- 250,000
----------- ----------
Total current liabilities...................................................... 1,099,264 547,508
Commitments and contingencies....................................................... -- --
Stockholders' Equity:
Preferred stock--$.001 par value; 10,000,000 shares authorized; Series A
preferred stock--1,000,000 authorized; 1,000,000 and 0 shares issued and
outstanding, respectively...................................................... 1,000 --
Series B preferred stock--1,150,000 authorized; 1,044,950 and 0 shares issued and
outstanding, respectively...................................................... 1,045 --
Series C preferred stock--100,000 authorized; 100,000 and 0 shares issued and
outstanding, respectively...................................................... 100 --
Common stock--$.001 par value; 50,000,000 shares authorized; 11,005,691 shares
issued and outstanding......................................................... 11,006 11,006
Additional paid in capital........................................................ 24,588,797 1,146,044
Deficit accumulated during the development stage.................................. (5,683,641) (862,398)
----------- ----------
Total stockholders' equity..................................................... 18,918,307 294,652
----------- ----------
Total liabilities and stockholders' equity.......................................... $20,017,572 $ 842,160
----------- ----------
----------- ----------
</TABLE>
See notes to financial statements
F-2
<PAGE>
IPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, SEPTEMBER 30, ENDED
---------------------------- ---------------------------- DECEMBER 31,
1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $ 4,257 $ -- $ 4,257 $ --
Cost of sales........................ -- 5,107 -- 5,107 --
------------- ------------- ------------- ------------- -----------
Gross profit......................... -- (851) -- (851) --
Operating costs:
Marketing and sales................ -- 632,442 -- 878,372 --
Operating and development.......... -- 399,143 -- 893,465 --
General and administrative......... 326,767 725,653 424,020 1,528,614 849,998
Loss resulting from abandonment of
assets (Note B[10])............. -- 92,924 -- 366,213 --
Stock-based compensation
(Note E[6] H[2])................ -- 911,162 -- 1,140,565 23,089
------------- ------------- ------------- ------------- -----------
Net loss before interest and
provision for income taxes......... (326,767) (2,762,175) (424,020) (4,808,080) (873,087)
Interest income.................... 4,974 41,141 5,374 42,688 11,090
Interest expense................... -- (31,432) -- (55,850) (401)
------------- ------------- ------------- ------------- -----------
Net loss before income taxes......... (321,793) (2,752,467) (418,646) (4,821,243) (862,398)
Provision for income taxes......... -- -- -- -- --
------------- ------------- ------------- ------------- -----------
Net loss............................. $ (321,793) $ (2,752,467) $ (418,646) $ (4,821,243) $ (862,398)
============= ============= ============= ============= ===========
Loss per share:
Basic and diluted.................. $ (0.03) $ (0.25) $ (.04) $ (0.44) $ (0.08)
============= ============= ============= ============= ===========
Weighted Average Shares Outstanding:
Basic and diluted.................. 11,005,691 11,005,691 10,364,733 11,005,691 10,525,213
============= ============= ============= ============= ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
IPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, ENDED
------------------------------- DECEMBER 31,
1998 1999 1998
------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $(418,646) $ (4,821,243) $ (862,398)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 4,955 286,464 12,364
Loss resulting from abandonment of assets..................... -- 366,213 0
Stock-based compensation...................................... -- 1,140,565 23,089
Decrease (increase) in:
Inventory................................................... -- -- --
Other current assets........................................ (81,666) (150,292) (60,277)
Other assets................................................ -- (36,981) (9,670)
Increase (decrease) in:
Accounts payable and accrued expenses....................... 242,288 857,606 297,508
--------- ------------ -----------
Net cash used in operating activities....................... (253,069) (2,357,668) (599,384)
--------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net of disposals............. (67,705) (457,811) (76,874)
Equipment and software development, net of disposals............. (109,696) (695,533) (276,931)
Advances to officer.............................................. -- 22,656 (34,021)
Increase in restricted cash...................................... -- (109) (50,000)
--------- ------------ -----------
Net cash used in investing activities....................... (177,402) (1,130,798) (437,826)
--------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................................... -- 2,000,000 250,000
Capital contributions on initial capitalization.................. -- -- 246,961
Proceeds from sale of stock, net................................. 860,706 21,593,191 997,197
Costs of sale of stock........................................... -- (1,594,708) (110,197)
--------- ------------ -----------
Net cash provided by investing activities................... 860,706 21,998,483 1,383,961
--------- ------------ -----------
Net increase in cash and cash equivalents.......................... 430,235 18,510,017 346,751
Cash and cash equivalents, beginning of period..................... -- 346,751 --
--------- ------------ -----------
Cash and cash equivalents, ending of period........................ $ 430,235 $ 18,856,768 $ 346,751
--------- ------------ -----------
--------- ------------ -----------
Cash expended for:
Interest expense................................................. $ -- $ -- $ --
--------- ------------ -----------
--------- ------------ -----------
Income taxes..................................................... $ -- $ -- $ --
--------- ------------ -----------
--------- ------------ -----------
Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to Series A preferred stock (Note
G[1])......................................................... $ -- $ 250,000 $ --
--------- ------------ -----------
--------- ------------ -----------
Conversion of notes payable and accrued interest to Series B
preferred stock (Note G[2])................................... $ -- $ 2,055,850 $ --
--------- ------------ -----------
--------- ------------ -----------
</TABLE>
See notes to financial statements
F-4
<PAGE>
IPARTY CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIENCY)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
PREFERRED COMMON PAID-IN DEVELOPMENT
# OF SHARES STOCK # OF SHARES STOCK CAPITAL STAGE
----------- --------- ------------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock at $.04 per
share on March 12, 1998............... -- $ -- 6,000,000 $ 6,000 $ 240,961 $ --
Outstanding common stock of WSI prior to
merger on July 2, 1998................ -- -- 420,691 421 (421) --
Issuance of common stock at $.01 per
share on July 2, 1998................. -- -- 3,624,043 3,624 32,616 --
Issuance of common stock and warrants at
$1.00 per share on July 2, 1998....... -- -- 960,957 961 849,799 --
Accrual of pro rata portion of value of
options granted in September 1998 and
January 1999 under consultant
agreement with outside director....... -- -- -- -- 23,089 --
Net loss................................ -- -- -- -- -- (862,398)
--------- ------- ---------- ------- ----------- -----------
Balance December 31, 1998................. -- -- 11,005,691 11,006 1,146,044 (862,398)
Issuance of preferred stock upon
exercise of warrants, including
conversion of notes payable (Note
F[1])................................. 1,000,000 1,000 -- -- 949,000 --
Issuance of preferred stock and warrants
at $2.00 per share during September
1999, net of issuance costs of
$1,545,640 (Note F[2])................ 1,144,950 1,145 -- -- 21,353,189 --
Accrual of pro rata portion of value of
options granted under consulting
agreements with outside director and
others (Note E[6] H[2])............... -- -- -- -- 1,140,565 --
Net loss................................ -- -- -- -- -- (4,821,243)
--------- ------- ---------- ------- ----------- -----------
Balance September 30, 1999 (unaudited).... 2,144,950 $ 2,145 $11,005,691 $11,006 $24,588,797 $(5,683,641)
--------- ------- ---------- ------- ----------- -----------
--------- ------- ---------- ------- ----------- -----------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock at $.04 per
share on March 12, 1998............... $ 246,961
Outstanding common stock of WSI prior to
merger on July 2, 1998................ 0
Issuance of common stock at $.01 per
share on July 2, 1998................. 36,240
Issuance of common stock and warrants at
$1.00 per share on July 2, 1998....... 850,760
Accrual of pro rata portion of value of
options granted in September 1998 and
January 1999 under consultant
agreement with outside director....... 23,089
Net loss................................ (862,398)
-----------
Balance December 31, 1998................. 294,652
Issuance of preferred stock upon
exercise of warrants, including
conversion of notes payable (Note
F[1])................................. 950,000
Issuance of preferred stock and warrants
at $2.00 per share during September
1999, net of issuance costs of
$1,545,640 (Note F[2])................ 21,354,334
Accrual of pro rata portion of value of
options granted under consulting
agreements with outside director and
others (Note E[6] H[2])............... 1,140,565
Net loss................................ (4,821,243)
-----------
Balance September 30, 1999 (unaudited).... $18,918,307
-----------
-----------
</TABLE>
See notes to financial statements
F-5
<PAGE>
IPARTY CORP. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE A--THE COMPANY
iParty LLC, which was created on December 11, 1997 to launch an
Internet-based merchant of party goods and services, commenced operations in
January 1998. On March 12, 1998, iParty Corp. was organized as a wholly owned
subsidiary of iParty LLC and the net assets and operations of iParty LLC were
transferred to iParty Corp. On April 9, 1998, StarGreetings, Inc. ("Star") was
incorporated as a wholly owned subsidiary of iParty Corp. to develop and operate
a personalized celebrity greeting service.
Effective July 2, 1998, iParty Corp. ("iParty" or the "Company") merged
into WSI Acquisition Corp. ("WSI"), an inactive company. The merger was
consummated through an exchange of shares that resulted in iParty LLC receiving
6,000,000 common shares or 54.5% of the outstanding shares of WSI. In connection
with the merger and as a condition thereof, WSI sold, in two private placements,
an aggregate of 4,585,000 shares of common stock of which 3,624,043 shares were
sold for $.01 per share and 960,957 shares, together with warrants to purchase
1,000,000 shares of Series A preferred stock, were sold for $1.00 per share or
aggregate proceeds of $997,197 before related expenses. The merger has been
treated as a re-capitalization for accounting purposes and iParty's historic
capital accounts were retroactively adjusted to reflect the 6,000,000 shares
issued by WSI in the transaction. In addition, as WSI had no assets before the
merger and the private placements, the 420,691 outstanding common shares of WSI
have been recorded at par value with a corresponding charge to additional
paid-in capital. The statement of operations reflects the operations of iParty
from the commencement of its operations from March 12, 1998 and also reflects
the operations of iParty LLC, the predecessor company, from January 1998 through
March 12, 1998. In connection with the merger, WSI changed its name to iParty
Corp.
The Company is in the development stage and its efforts are devoted to
developing the Internet resources to provide consumers a comprehensive website
where they can seek party planning advice and information and locate and
contract for party goods and services. The Company intends on entering into
contracts with local and national merchants who can provide such goods and
services.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
[1] Basis of presentation:
Nine months ended September 30, 1998 and 1999. The unaudited interim
financial statements for the nine months ended September 30, 1998 and 1999
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and, in the
opinion of the Company, reflect all adjustments (consisting only of normal
recurring adjustments) and disclosure which are necessary for a fair
presentation. The results of operations for the nine months ended are not
necessarily indicative of the results for the full year.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of all significant
intercompany transactions and balances.
[3] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-6
<PAGE>
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
[4] Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. At December 31, 1998 and September 30, 1999, the
Company maintains its cash deposits in accounts which are in excess of Federal
Deposit Insurance Corporation limits by $126,199 and $18,756,768, respectively.
At December 31, 1998 and September 30, 1999, the Company maintains a cash
deposit of $50,000 and $50,109, respectively, in the form of a certificate of
deposit which serves as the collateral for a corporate Visa credit account.
[5] Financial instruments:
The carrying amounts for the Company's cash and cash equivalents,
restricted cash, accounts payable and notes payable approximate fair value.
[6] Inventory:
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
[7] Per share data:
Basic and diluted loss per share is based on the weighted average number of
outstanding shares of common stock and excludes the effect of stock options and
warrants. In computing the weighted average number of shares outstanding, the
3,624,043 shares issued for $.01 per share and the 420,691 outstanding shares of
WSI prior to the merger were treated as if they were outstanding for the entire
year of 1998.
[8] Stock-based compensation:
The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option incentive plan. As such,
compensation expense would be recorded on the date of grant if the current
market price of the underlying stock exceeded the exercise price of the option.
The following table shows the amounts of stock-based compensation that
would have been recorded under the following income statement categories had
stock-based compensation not been separately stated in the Statement of
Operations:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
---------------- ------------------ DECEMBER 31,
1998 1999 1998 1999 1999
---- -------- ---- ---------- -------------
<S> <C> <C> <C> <C> <C>
Sales and Marketing....................................... $0 $466,823 $0 $ 612,440 $ 0
Operating and development................................. $0 $386,175 $0 $ 389,631 $ 0
General and administration................................ $0 $ 58,164 $0 $ 138,494 $ 23,089
-- -------- -- ---------- -----------
Total..................................................... $0 $911,162 $0 $1,140,565 $ 23,089
-- -------- -- ---------- -----------
-- -------- -- ---------- -----------
</TABLE>
[9] Property and equipment:
Property and equipment are stated at cost less accumulated depreciation
which is provided on the straight-line method over the estimated useful lives of
the assets.
[10] Software costs:
In accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", issued in March 1998
and adopted by the Company, external direct costs of materials and services
incurred in connection with developing or obtaining internal use software were
F-7
<PAGE>
capitalized. Such costs will be amortized using the straight-line method over an
estimated useful life of 3 years beginning when the software is ready for its
intended use or over its known useful life, whichever is shorter. For the nine
months ended September 30, 1999, the Company wrote off $366,213 of previously
capitalized software costs when the Company selected new vendors for support of
its website, necessitating the creation of a new website and integrating
components. With the creation of the new website, the software previously
capitalized was abandoned.
[11] Income taxes:
The Company accounts for income taxes using the liability method. Deferred
income taxes are measured by applying enacted statutory rates to net operating
loss carryforwards and to the differences between the financial reporting and
tax bases of assets and liabilities. Deferred tax assets are reduced, if
necessary, by a valuation allowance for any tax benefits which are not expected
to be realized.
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1998 1999
----------------- -----------------
<S> <C> <C>
Computer, office equipment and furniture and fixtures...................... $ 76,874 $ 505,423
Website and related software............................................... $ 276,931 $ 537,245
$ 353,805 $ 1,042,668
Less accumulated depreciation and amortization............................. $ (12,364) $ (200,559)
--------- -----------
Total...................................................................... $ 341,441 $ 842,109
--------- -----------
--------- -----------
</TABLE>
NOTE D--INCOME TAXES
The reconciliation of income tax benefit computed at the federal statutory
tax rate to the income tax benefit in the consolidated statement of operations
is as follows for the year ended December 31, 1998 and the nine months ended
September 30, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1998 1999
----------------- -----------------
<S> <C> <C>
Income tax benefit computed at the federal statutory
income tax rate of 35%................................................... $(301,839) $(1,687,435)
Increase resulting from state and local taxes, net of federal benefit...... $ (97,434) $ (544,706)
Valuation allowance provided............................................... $ 399,273 $ 2,232,141
--------- -----------
Income tax benefit in statement of operations.............................. $ 0 $ 0
--------- -----------
--------- -----------
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1998 and September 30, 1999 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1998 1999
----------------- -----------------
<S> <C> <C>
Net operating loss carryforward............................................ $ 399,273 $ 2,631,414
Less valuation allowance................................................... $ 399,273 $ 2,631,414
--------- -----------
Net deferred tax asset..................................................... $ 0 $ 0
--------- -----------
--------- -----------
</TABLE>
As of December 31, 1998 and September 30, 1999, the Company has estimated
net operating loss carryforwards of $862,398 and $5,683,641, respectively, which
expire in 2018 and 2019. The Company has recorded a deferred tax asset offset by
a valuation allowance as the Company has not determined that it is more likely
than not that the available net operating loss carryforward will be utilized in
the future.
F-8
<PAGE>
NOTE E--COMMITMENTS
[1] Leases:
The Company leases facilities and equipment under several month-to-month
and three month operating leases. The Company's rental expense under operating
leases for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 amounted to $27,983 and $67,593, respectively.
[2] Concentrations:
The Company has contracted with four companies to develop the web sites for
its services. Failure to perform by any one of these three parties would have a
material negative impact upon the Company's operations. At September 30, 1999,
the four companies had completed the services as outlined in the above mentioned
contracts (see Note E[10]).
[3] Finder's fee arrangement:
The Company and its former Chief Executive Officer ("former CEO") had
entered into an agreement prior to such individual becoming the former CEO,
which calls for the former CEO to receive a finder's fee in the amount of 5% of
the first $2,000,000 in equity raised from any party introduced by the former
CEO. In connection with this agreement, as of September 30, 1999, approximately
$2,000,000 has been raised. As a result, $50,000 has been paid to the former CEO
during each of 1998 and 1999.
[4] License agreement:
Star entered into an agreement with Star Greetings, LLC, as the creator of
the StarGreetings concept ("Star Concept"), to license the exclusive use of the
Star Concept on the web sites of the Company and Star. The agreement calls for a
royalty of 2 1/2% of revenues derived from the Star Concept, payable quarterly.
Star Greetings, LLC is owned, in part, by the Company's former CEO. No amounts
were payable to StarGreetings, LLC under the agreement for the year ended
December 31, 1998 and for the nine months ended September 30, 1999.
[5] StarGreetings agreements:
The Company has entered into several agreements with celebrities to secure
their services with Star. The agreements are substantially the same and consist
of three separate compensation components. The first component is a
participation fee (and any related expenses). The second component is a
commission payable to the celebrity and to a charity of their choice upon the
sale of each StarGreeting. The third component is an option to purchase stock in
the Company (see Note H[2]). As of December 31, 1998, no such agreements had
been entered into by the Company. As of September 30, 1999, the Company has
entered into ten such agreements with terms ranging from one year to three
years.
[6] Consulting agreement:
The Company entered into a consulting agreement with one of its outside
directors. The agreement is in effect from September 15, 1998 through
December 31, 1999. Compensation under the agreement consists of options to
purchase 50,000 shares of the Company's common stock, of which 25,000 options
were granted on September 15, 1998 and 25,000 options were granted on
January 20, 1999 when the consultant's time on behalf of the Company exceeded
100 hours. For the period ended December 31, 1998, the Company charged $23,089
of the value of the options granted ($102,250) to expense. On April 1, 1999, the
consulting agreement was terminated and the remaining $79,161 value of the
options granted was charged to expense on March 31, 1999.
On September 7, 1999, the Company entered into a three year consulting
agreement with one of its outside directors. Compensation under the agreement
consists of options to purchase 100,000 shares of the Company's common stock
with an exercise price of $2.00. The options vest ratably over three years
provided that the director is still providing consulting services to the Company
on those dates. The fair market value of
F-9
<PAGE>
the Company's stock on the grant date was $3.94. The value of the options
granted using the Black-Scholes option-pricing model ($344,208) will be expensed
over the term of the consulting agreement. For the nine months ended
September 30, 1999, the Company charged $9,284 of the value of the options
granted to expense.
[7] Employment agreements:
The Company has entered into employment agreements with several of its
executives. The agreements expire from December 31, 1999 through March 30, 2002
and provide for annual salaries aggregating $1,295,000. In addition, the
executives were granted options (see Note H[1]) to purchase an aggregate of
2,404,730 shares of the Company's common stock, which vest in various increments
provided the executives remain continuously employed by the Company. In addition
to base salary, the agreements provide that the executives may receive an annual
performance bonus at the discretion of the Compensation Committee of the Board
of Directors. The agreements also have termination clauses which call for
severance payments ranging up to one year's salary.
The employment agreement with the Company's Chief Executive Officer ("CEO")
provided that in the event that, prior to December 31, 1999, the Company
completed one or more equity financing, the CEO shall be granted additional
options under the Plan (the "Additional Options") equal to 5% of the number of
shares of common stock into which the securities issued in any such equity
financing(s) may convert; provided, however, that such Additional Options will
only be granted with respect to securities issued in connection with up to the
first $5,000,000 raised in such equity financing(s). It is anticipated that the
strike price of such Additional Options shall be the lower of (i) the conversion
price (into Common Stock) of the securities issued in the equity financing
triggering such grant, or (ii) the fair market value of the common stock on the
date of grant (which date shall be the date of the closing of the equity
financing triggering such grant). On August 26, 1999, the Company granted
434,730 options to purchase common stock with a strike price of $2.00 to the
CEO. The fair market value of the common stock on the date of grant was $3.38.
The compensation expense for the options granted ($597,754) will be expensed
ratably over the term of the CEO's employment agreement which ends March 30,
2002. For the nine months ended September 30, 1999, the Company charged $49,813
of the value at the options to expense.
[8] Transaction agreement:
On January 8, 1999, the Company entered into a two-year agreement with a
service provider to process financial transactions in connection with its
websites. The agreement, as amended, calls for a one-time set-up fee of $50,000,
and a transaction fee of $0.90 per transaction with a minimum monthly
transaction fee of $5,000 for February 1999, $7,500 for March 1999 and $5,000
for April 1999 and thereafter.
[9] Advertising agreement:
On January 12, 1999, the Company entered into an advertising agreement for
the period June 1, 1999 through November 30, 1999, to solicit advertising of its
website on another website. The agreement, as amended, calls for the Company to
pay setup and related fees of $20,000 and a transaction fee of $80,000.
On September 27, 1999, the Company entered into two agreements with America
Online, Inc., a Shopping Channel Promotion Agreement and an Advertising Purchase
Agreement to provide promotions on the AOL website totaling $1,276,481. The
agreements went into effect on October 1, 1999 and have terms of 10 and 12
months, respectively.
[10] Website development agreement:
On August 5, 1999, the Company entered into a fixed fee agreement with Rare
Medium Inc. to develop a new website, including the development of a new visual
identity, additional functionality and a new technical infrastructure to better
support the scalability of the Company's website. The fixed fee for the services
provided is $465,000.
F-10
<PAGE>
[11] Fulfillment agreement:
On July 8, 1999, the Company entered into a product fulfillment agreement
with Taymark, one of the nation's largest direct marketers' of party supplies.
Under the agreement, the Company will utilize Taymark's inventory and
fulfillment services to deliver merchandise ordered on the site, or directly
through a toll-free telephone number, directly to consumers. Taymark will
purchase the Company's inventory as of September 30, 1999 at cost, up to
$100,000. The initial term of the agreement runs through December 21, 2002. The
agreement contains certain restrictions on competition by Taymark. As additional
consideration for services provided by Taymark, the Company issued to Taymark
warrants to purchase 3,000,000 shares of common stock at an exercise price of
$3.75. For the nine months ended September 30, 1999, the Company charged
$379,262 of the value of the warrants granted ($5,309,662) to expense.
[12] Affiliate program agreement:
On August 11, 1999, the Company entered into an agreement with LinkShare
Corporation to provide services, using LinkShare's proprietary software, to
facilitate establishing links between the Company and affiliates and tracking
sales through those affiliates. The initial term of the agreement is eighteen
months. For the licensing of the LinkShare software, the Company will pay a
one-time license fee of $5,000 and 2.0% -2.5% of each sale completed through the
Company's affiliate program.
[13] Advertising and public relations agency agreements:
On September 29, 1999, the Company entered into an agreement with
Kirshenbaum Bond & Partners ("Kirshenbaum") to create a marketing communications
program during the period from July 1, 1999 through June 30, 2000. The annual
fee payable to Kirshenbaum is $1,026,000 to be paid in 12 monthly installments.
In addition to the annual fee, the Company will pay a 15% commission on internet
advertising and a 4% commission on TV and radio advertising placed through
Kirshenbaum. For the nine months ended September 30, 1999, the Company charged
$218,250 of this fee and $0 in commission to expense.
NOTE F--STOCKHOLDERS' EQUITY
[1] Series A preferred stock:
On June 30, 1998, the Company's Board of Directors designated 1,000,000
shares of the Company's authorized 10,000,000 shares of preferred stock as
Series A preferred stock. Such shares have a par value of $.001, an original
issue price per share of $1.00, bear no dividends, have a liquidation preference
senior to the Company's common stock and are convertible, on a one to one basis,
as adjusted, into shares of the Company's common stock. As of December 31, 1998
and September 30, 1999, there were 0 and 1,000,000 shares of Series A preferred
stock outstanding, respectively.
[2] Series B and C preferred stock:
On September 10, 1999, the Company completed a private placement of
Series B Convertible Preferred Stock and redeemable common stock purchase
warrants, raising net proceeds of $20,899,000. The financing was comprised of
1,044,950 shares of Series B Preferred Stock convertible into an aggregate of
10,449,500 shares of common stock and the issuance of warrants to purchase an
additional 5,224,750 shares of common stock at an exercise price of $2.00 per
share. In addition, the Company sold Series C Convertible Preferred Stock and
redeemable common stock purchase warrants. The financing was comprised of
100,000 shares of Series C Preferred Stock convertible into 1,000,000 shares of
common stock and the issuance of warrants to purchase an additional 500,000
shares of common stock at an exercise price of $2.00 per share, raising net
proceeds of $2,000,000. The placement agent in these financings received fees of
approximately $1,329,000 and warrants to purchase 929,929 shares of common stock
at an exercise price of $2.00 per share. The financing included the conversion
of $2,000,000 of the Company's outstanding 10% Senior Convertible Notes and
$55,850 of accrued interest into 102,792 shares of Series B Preferred Stock.
F-11
<PAGE>
[3] Warrants:
In connection with the sale of common stock, the Company issued warrants to
two shareholders, which, if exercised in full, entitles the holders to purchase
an aggregate of 1,000,000 shares of Series A preferred stock at $1.00 per share.
Such warrants cannot be exercised earlier than six months from the date of issue
(July 2, 1998), and must be exercised by June 30, 1999. As of December 31, 1998
and September 30, 1999, warrants to purchase 0 and 1,000,000 shares of Series A
preferred stock, respectively, had been exercised.
NOTE G--NOTES PAYABLE
[1] Note payable:
During December 1998, the Company borrowed $125,000 from each of two
shareholders, which is payable in 90 days, at an interest rate of 6.5% per
annum. Such shareholders are holders of warrants to purchase Series A
convertible preferred stock. In connection with such borrowing, the shareholders
may request payment in the form of application of the principal amount against
the exercise price of an appropriate number of warrants. As of December 31,
1998, the Company had accrued $401 of interest in relation to these notes.
On January 20, 1999, the shareholders exercised warrants to purchase
250,000 Series A preferred shares and applied the $250,000 outstanding principal
amount of the notes in payment of the exercise price of the warrants.
[2] Funding agreement:
The Company entered into a Funding Agreement, dated as of March 31, 1999
and amended as of April 14, 1999, with two of its directors. Pursuant to the
terms of the Funding Agreement each director will advance certain funds to the
Company totaling $2,000,000. In connection with each such funding, the funding
party will receive a 10% Senior Secured Promissory Note for the amount funded
and warrants to purchase such number of shares of Common Stock equal to the
amount funded divided by the closing bid price of the Common Stock on the date
of each such funding. The exercise price for these warrants range from $2.81 to
$5.13 per share. As of September 30, 1999, $2,000,000 has been advanced to the
company and warrants to purchase 528,210 shares of common stock have been
issued. For the nine months ended September 30, 1999, interest expense of
$55,850 had been accrued. On September 10, 1999, the note holders converted the
$2,000,000 outstanding balance and the $55,850 of accrued interest into
Series B Preferred Stock (see Note F[2]).
NOTE H--STOCK OPTION PLAN
On July 14, 1998, the Company adopted the 1998 Incentive and Nonqualified
Stock Option Plan (the "98 Plan") under which options to acquire 2,500,000
shares of common stock may be granted to officers, directors, key employees and
consultants. The exercise price for incentive options cannot be less than the
fair market value of the stock on the grant date and the exercise price of
nonqualified options is fixed by the plan administrator. Options to purchase the
Company's common stock under the 98 Plan have been granted to employees,
directors and consultants of the Company at fair market value at the date of
grant. Generally, the options become exercisable over periods ranging from
immediately to four years and expire ten years from the date of grant. On August
24, 1999, the Company increased the number of options available under the 1998
Incentive and Nonqualified Stock Option Plan to 4,000,000 shares.
F-12
<PAGE>
A summary of the status of the Company's stock options outstanding as of
December 31, 1998 and September 30, 1999 and changes during the year ended
December 31, 1998 and the nine months ended September 30, 1999 are as follows:
[1] Employee and director stock options:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period................................ 0 $ 0 1,025,000 $ 2.19
Stock options:
Granted......................................................... 1,025,000 $ 2.19 2,195,730 $ 3.48
Expired/Forfeited............................................... 0 $ 0 150,000 $ 2.67
--------- ------ --------- ------
Outstanding at end of period...................................... 1,025,000 $ 2.19 3,070,730 $ 3.08
--------- ------ --------- ------
--------- ------ --------- ------
Exercisable at end of period...................................... 450,000 $ 2.31 1,109,000 $ 3.00
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
The effect of applying Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") on the year ended
December 31, 1998 and the nine months ended September 30, 1999 pro forma net
loss as stated below is not necessarily representative of the effects on
reported net loss for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years. The weighted average fair value of the options granted during 1998
have been estimated at $1.69 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility of 100%, a risk-free interest rate of 4.92% to 5.72%, and an
expected life of five years from date of vesting. The weighted average fair
value of the options granted during the nine months ended September 30, 1999
have been estimated at $2.98 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility of 100%, a risk-free interest rate of 5.38% to 6.44%, and an
expected life of five years from date of vesting. Had compensation cost for the
Company's stock option plan been determined based upon the fair value at the
grant date for awards under the plan consistent with the methodology prescribed
under SFAS 123, the Company's net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Net loss--as reported...................................................... $ (862,398) $ (4,821,243)
----------- ------------
----------- ------------
--pro forma........................................................ $(1,358,706) $ (6,264,079)
----------- ------------
----------- ------------
Net loss per share--as reported............................................ $ (.08) $ (.44)
----------- ------------
----------- ------------
--pro forma.............................................. $ (.13) $ (.60)
----------- ------------
----------- ------------
</TABLE>
[2] STARGREETINGS STOCK OPTIONS:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------ WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------ ----------------
<S> <C> <C>
Stock options:
Granted................................................................... 180,000 $ 1.81
Exercised................................................................. 0 $ 0
-------- ------
Outstanding at end of period................................................ 180,000 $ 1.81
-------- ------
-------- ------
Exercisable at end of period................................................ 180,000 $ 1.81
-------- ------
-------- ------
</TABLE>
The weighted average fair value of the options granted during 1999 have
been estimated at $3.40 per share on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no dividend yield,
volatility of 100%, a risk-free interest rate of 5.38% to 5.81%, and an expected
life of three
F-13
<PAGE>
years from date of vesting. The Company issued options to acquire 180,000 shares
of common stock at exercise prices of $1.00 and $3.50 per share in connection
with StarGreetings agreements. The options were valued at $612,440, in
accordance with applying Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (See Note H) and are amortized over
the life of the contract. For the period ended December 31, 1998 and the nine
months ended September 30, 1999, the Company charged $0 and $236,261 of the
value of the options granted to expense. On September 30, 1999, the Company
modified its plans regarding the Star Concept and as a result, wrote-off the
unamortized balance of previously capitalized software costs in the amount of
$89,917 and unamortized balance of the value of the options granted in the
amount of $376,179.
F-14
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS AND ITEM 2. DESCRIPTION OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- -------- ---------------------------------------------------------------------------------- -------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of WSI Acquisitions Corp., and Certificate Previously Filed
of Merger by iParty Corp. into WSI Acquisition Corp.
3.2 By-Laws of WSI Acquisitions Corp. Previously Filed
4 Certificate of Designation of Series A Preferred Stock of WSI Acquisitions, Corp. Previously Filed
4.1 Certificate of Designation of Series B Convertible Preferred Stock of the Company Previously Filed
4.2 Certificate of Designation of Series C Convertible Preferred Stock of the Company. Previously Filed
4.3 Warrant Agreement between the Company, Continental Stock Transfer and Trust Previously Filed
Company and Commonwealth Associates, LP.
4.4 Warrant Agreement between the Company, Continental Stock Transfer and Trust Previously Filed
Company and Commonwealth Associates, LP.
10.1 Merger Agreement by and between iParty Corp. and WSI Acquisitions Corp. Previously Filed
10.2 1998 Incentive and Non-Qualified Stock Option Plan Previously Filed
10.3 Fry MultiMedia Web Site Development Agreement Previously Filed
10.4 iVillage Web Site Development Service Agreement Previously Filed
10.5 Order Trust Agreement by and between the Company and Order Trust. Previously Filed
10.6 Consulting Agreement of Byron Hero Previously Filed
10.7 Employment Agreement of Maureen Broughton Murrah Previously Filed
10.8 Employment Agreement of Patrick Farrell Previously Filed
10.9 Employment Agreement by and between the Company and Sal Perisano Previously Filed
10.10 StarGreetings License Agreement Previously Filed
10.11 Service Agreement between the Company and TechSpace LLC (as amended) Previously Filed
10.12 Consulting Agreement of Sal Perisano Previously Filed
10.13 Finder's Fee Agreement between iParty LLC and Byron Hero Previously Filed
10.14 Form of "StarGreeting" Agreement with Celebrities Previously Filed
10.15 Funding Agreement between the Company, Robert H. Lessin and Ajmal Khan Previously Filed
10.16 Fulfillment Agreement between the Company and Taymark Previously Filed
10.17 Agreement between the Company and Rare Medium, Inc. Previously Filed
10.18 Agreement between the Company and LinkShare Corporation Previously Filed
10.19 Agreement between the Company and America Online, Inc. Filed Herewith*
10.20 Agreement between the Company and Kirshenbaum Bond Partners Previously Filed
10.21 Consulting Agreement between the Company and Stuart Moldaw Previously Filed
21 Subsidiaries of the Company Previously Filed
27.1 Financial Data Schedule Previously Filed
</TABLE>
- ------------------
* Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately filed with
the Securities and Exchange Commission.
24
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities and Exchange Act of 1934,
the registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
iPARTY CORP.
By: /s / SAL PERISANO
------------------------------------
Name: Sal Perisano
Title: Chief Executive Officer
December 10, 1999
25
<PAGE>
[LOGO]
AMERICA
ONLINE
AMERICA ONLINE, INC.
NETWORK SHOPPING - WEB LINK ORDER FORM
MERCHANT TO FILL IN ALL INFORMATION. (PLEASE PRINT)
Legal Name of Merchant: iParty
--------------------------------------------------------
Trade Name of Merchant (if different):
-----------------------------------------
Merchant Business Contact: Sal Perisano
-----------------------------------------------------
Address: 41 East 11th Street, 11th Floor, New York, NY 10003
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Phone: 212/699-3751
-------------------------------------------------------------------------
Fax: 212/331-1207
---------------------------------------------------------------------------
Email: [email protected]
-------------------------------------------------------------------------
Name of Technical Contact:
-----------------------------------------------------
Phone:
-------------------------------------------------------------------------
Email:
-------------------------------------------------------------------------
Customer Service Contact (AOL use):
--------------------------------------------
Customer Service Phone (customer use):
-----------------------------------------
Customer Service email (customer use):
-----------------------------------------
Customer Service address (customer use):
---------------------------------------
Is your web site built?
--------------------
Web Site URL:
------------------------------------------------------------------
This is the main URL that is used by the merchant site.
Silver Tenant Store Name:
------------------------------------------------------
Applicable to SILVER MERCHANTS ONLY. This is name for the store listing in the
Silver Tenant spot. Text should be the registered company trade/brandname. The
text must be 21 characters or less.
Customer Service URL:
----------------------------------------------------------
A site where customers can contact merchant with ordering questions etc.
(required).
Privacy Policy URL:
------------------------------------------------------------
Area on merchant web site where customers can read merchant's policies regarding
privacy and security (required).
Keywords:
----------------------------------------------------------------------
A keyword on AOL will bring any user directly to your website. The keyword
should be the registered company trade/brand name. The keyword must be 16
characters or less.
Search terms for AOL Shopping Channel Product Search Tool:
- --------------------------------------------------------------------------------
Up to a maximum of five, subject to AOL's approval, and only available to Anchor
or Gold Tenant Merchants
Information Contained on page 4 and pages 1 and 2 of Exhibit A has been
omitted based upon a request for confidential treatment. The omitted parties
have been separately filed with Securities of Exchange Commission.
<PAGE>
CONFIDENTIAL
SHOPPING CHANNEL PROMOTIONAL AGREEMENT
This Agreement, (the "Agreement") dated as of September __, 1999 (the
"Effective Date"), is made and entered into by and between America Online, Inc.
("AOL"), a Delaware corporation, with its principal offices at 22000 AOL Way,
Dulles, Virginia 20166 and iParty, ("MERCHANT") a __________________
corporation, with its principal offices at 41 East 11th Street (each a "Party"
and collectively the "Parties").
INTRODUCTION
AOL owns, operates and distributes the AOL Service, AOL.com, the CompuServe
Service and the Netscape Netcenter. MERCHANT wishes to secure a promotional
placement within the shopping channel of the AOL Service, AOL.com, the
CompuServe Service and the Netscape Netcenter (as specified in Exhibit A) (each
channel, a "Shopping Channel") which, when activated, will provide access to
MERCHANT's site on the World Wide Web or its area on the AOL Service or
CompuServe Service (as the case may be) (the "Merchant Site") where MERCHANT
offers content, products and/or services for sale. Terms not defined herein
shall be defined on the attached Exhibit B.
TERMS
1. MERCHANT PROGRAMMING. MERCHANT will make available through the Merchant
Site the certain products, content and/or services specified in Exhibit A
(the "Products") in accordance with the Standard Shopping Channel Terms
and Conditions set forth on Exhibit C.
2. PROMOTIONAL OBLIGATIONS.
2.1 AOL Promotion of MERCHANT. Commencing on a date set forth on Exhibit
A hereto, AOL will provide the promotion(s) set forth in Exhibit A
(the "Promotion"). Except to the extent expressly described in
Exhibit A, the specific form, placement, positioning, duration and
nature of the Promotion(s) will be as determined by AOL in its
reasonable discretion (consistent with the editorial composition of
the applicable screens) and the nature of the Promotion being
purchased by MERCHANT, as reflected in Exhibit A. The specific
content to be contained within the Promotions (including, without
limitation, within any advertising banners or contextual promotions)
will be determined by MERCHANT, subject to AOL's technical
limitations, the terms of this Agreement and AOL's then-applicable
policies relating to advertising and promotions. Each Promotion will
link only to the Merchant Site and will promote only Products listed
on Exhibit A. MERCHANT acknowledges that the sole obligation of AOL,
pursuant to this Agreement, is to display the Promotion(s) in the
Shopping Channel(s) in accordance with the terms and conditions
hereto.
2.2 MERCHANT Cross-Promotion.
A. Within each Merchant Site, MERCHANT shall include a
promotional banner ("AOL Promo") appearing on the first screen
of the Merchant Site, to promote such AOL products or services
as AOL may reasonably designate (for example, the America
Online(Registered) brand service, the CompuServe(Registered)
brand service, the AOL.com(Registered) site, the Netscape
Netcenter(Trademark) site, ICQ, the Digital City(Registered)
services or the AOL Instant Messenger(Trademark) service); AOL
will provide the creative content to be used in the AOL Promo
(including designation of links from such content to other
content pages). MERCHANT shall post (or update, as the case
may be) the creative content supplied by AOL (within the
spaces for the AOL Promo) within a commercially reasonable
period of time from its receipt of such content from AOL.
Without limiting any other reporting obligations of the
Parties contained herein, MERCHANT shall provide AOL with
monthly written reports specifying the number of Impressions
to the pages containing the AOL Promo during the prior month.
B. In MERCHANT's television, radio, print and "out of home"
(e.g., buses and billboards) advertisements and in any
publications, programs, features or other forms of media over
which MERCHANT exercises at least partial editorial control,
MERCHANT will include specific references or mentions (orally
where possible) of the availability of the Merchant's Site
through the America Online(Registered) brand service, which
are at least as prominent as any references that MERCHANT
makes to any other MERCHANT online or Internet site (by way of
site name, related company name, URL or otherwise). Without
limiting the generality of the foregoing, MERCHANT's listing
of the "URL" for any Merchant online site will be accompanied
by a reasonably prominent listing of the "keyword" term on the
AOL Service for Merchant's Site.
2
<PAGE>
3
<PAGE>
3. PAYMENTS; REPORTS.
3.1 Placement Fees. MERCHANT will pay AOL [** confidential treatment
requested**] for displaying the Promotion within the Shopping
Channel on the AOL Service, AOL.com, the CompuServe Service and the
Netscape Netcenter. The total amount of [** confidential treatment
requested**] will be payable in three equal installments, with the
first such payment to be made upon the Effective Date, the second
such payment to be made ninety (90) days from the earliest launch
date of the AOL Shopping Commerce Center(s) specified on Exhibit A
attached hereto and the last payment to be made ninety (90) days
from the second installment.. MERCHANT will be provided a credit
against any amounts already paid to AOL by MERCHANT for promotional
carriage under MERCHANT's existing agreement with AOL which overlap
promotional carriage provided for hereunder, if any, as established
by the launch date of the applicable AOL Shopping Commerce Center(s)
specified on Exhibit A attached hereto. MERCHANT agrees that, except
as specified herein, once the Promotion is installed, there will be
no refunds or proration of rates if MERCHANT elects to discontinue
display of the Promotion prior to expiration of the Term. Should AOL
fail to display the Promotion in accordance with the terms of this
Agreement due to MERCHANT's failure to comply with any requirement
of this Agreement, MERCHANT will remain liable for the full amount
indicated above.
3.2 Reports. AOL will provide MERCHANT with monthly usage information
related to the Promotion in substance and form reasonably determined
by AOL. MERCHANT may not distribute or disclose usage information to
any third party without AOL's prior written consent. MERCHANT will
provide AOL with monthly reports, in a form reasonably satisfactory
to AOL, which detail the number of daily items, orders and gross
sales through the Merchant Site on the AOL Service, AOL.com, the
CompuServe Service and the Netscape Netcenter (as applicable). AOL
acknowledges that such reports may constitute Confidential
Information under the Amendment, and will not disclose such
Confidential Information to third parties, except as part of
aggregate data from which the MERCHANT and the Merchant Site are not
identifiable.
4. TERM. Unless otherwise rightfully terminated pursuant to the terms and
conditions in the Exhibits attached hereto, this Agreement will terminate
ten (10) months from the latest launch date of the AOL Shopping Channel
Commerce Center(s) specified on Exhibit A attached hereto (the "Term").
5. EXISTING AGREEMENTS. To the extent that MERCHANT has any existing shopping
channel agreement(s) with AOL in effect as of the Effective Date such
agreements shall terminate on the date that the last promotion described
in the existing agreement is replaced with Promotion(s) described in this
Agreement.
6. PRESS RELEASES. Each Party will submit to the other Party, for its prior
written approval, which will not be unreasonably withheld or delayed, any
press release or any other public statement ("Press Release") regarding
the transactions contemplated hereunder. Notwithstanding the foregoing,
either Party may issue Press Releases and other disclosures as required by
law or as reasonably advised by legal counsel without the consent of the
other Party and in such event, the disclosing Party will provide at least
five (5) business days prior written notice of such disclosure. The
failure to obtain the prior written approval of the other Party will be
deemed a material breach of this Agreement. Because it would be difficult
to precisely ascertain the extent of the injury caused to the
non-breaching Party, in the event of such material breach, the
non-breaching party may elect to either (i) terminate this Agreement
immediately upon notice to the other Party, and the cure provision of
Section 12 on Exhibit D of this Agreement shall not apply, or (ii) as
liquidated damages, elect to modify the Impression commitment hereunder by
fifteen percent (15%) (either an increase in Impressions if AOL has
materially breached the Agreement or a decrease in Impressions if MERCHANT
has materially breached the Agreement).
7. GENERAL TERMS. The general legal terms and conditions set forth on Exhibit
D attached hereto are hereby made a part of this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the Effective Date.
AMERICA ONLINE, INC. iParty
By: By: /s/ Sal V. Perisano
------------------------------ ----------------------------------
Print Name: Print Name: Sal V. Perisano
---------------------- --------------------------
Title: Title: Chief Executive Officer
--------------------------- -------------------------------
Date: Date: Sept. 27, 1999
---------------------------- --------------------------------
Tax ID/EIN#:
------------
5
<PAGE>
EXHIBIT A
Description of Products:
The only categories of Products to be sold through the Merchant Site are as
listed below:
Product List: [MERCHANT to provide detailed, specific list; AOL sales person to
submit list for review by AOL Advertising Operations]
Impressions: Impressions for a Manufacturing Promotional Placement in Kids, Toys
& Babies
The screens on which the promotions appear on each of the AOL Service, AOL.com,
the CompuServe Service, the Netscape Netcenter and any other product or service
owned, operated, distributed or authorized to be distributed by or through AOL
or its affiliates worldwide through which such Party elects to offer the
Merchant Site (which may include, without limitation, Internet sites promoting
AOL products and services and any "offline" information browsing products of AOL
or its affiliates) will receive a minimum of [**confidential treatment
requested**] Impressions in the aggregate (the "Impressions Commitment"),
subject to the remainder of this paragraph. In the event there is (or will be in
AOL's reasonable judgment) a shortfall in Impressions as of the end of the
Initial Term (a "Shortfall"), AOL will provide MERCHANT, as its sole remedy,
with either: (i) advertising placements through reasonably comparable
advertising, (reasonably calculated to reach an audience substantially similar
to the audience targeted by the Impressions Commitment, as determined by AOL),
on AOL properties (determined by AOL) which have a total value, based on AOL's
then-current advertising rate card, equal to the value of the Shortfall
(determined by multiplying the percentage of Impressions that were not delivered
by the total, guaranteed payment provided for in Section 3 of the Agreement); or
(ii) a refund of a pro-rata portion of the fee allocable to the display of the
Promotion based on the number of Impressions not delivered.
Impressions: [**confidential treatment requested**] Impressions in the Gold
Position in the Tabletop & Entertainment Department
The screens on which the promotions appear on each of the AOL Service, AOL.com,
the CompuServe Service, the Netscape Netcenter and any other product or service
owned, operated, distributed or authorized to be distributed by or through AOL
or its affiliates worldwide through which such Party elects to offer the
Merchant Site (which may include, without limitation, Internet sites promoting
AOL products and services and any "offline" information browsing products of AOL
or its affiliates) will receive a minimum of [**confidential treatment
requested**] Impressions in the aggregate (the "Impressions Commitment"),
subject to the remainder of this paragraph. In the event there is (or will be in
AOL's reasonable judgment) a shortfall in Impressions as of the end of the
Initial Term (a "Shortfall"), AOL will provide MERCHANT, as its sole remedy,
with either: (i) advertising placements through reasonably comparable
advertising, (reasonably calculated to reach an audience substantially similar
to the audience targeted by the Impressions Commitment, as determined by AOL),
on AOL properties (determined by AOL) which have a total value, based on AOL's
then-current advertising rate card, equal to the value of the Shortfall
(determined by multiplying the percentage of Impressions that were not delivered
by the total, guaranteed payment provided for in Section 3 of the Agreement); or
(ii) a refund of a pro-rata portion of the fee allocable to the display of the
Promotion based on the number of Impressions not delivered.
<PAGE>
Description of Specific Promotion(s):
|_| Manufacturers Promotional Placement In the Kids, Toys & Babies Commerce
center
To commence on the launch date of October 1, 1999, specified below on the AOL
Service and [**confidential treatment requested**] months from the Launch Date,
MERCHANT will have a position in the Manufacturers Promotional Placement in the
Kids, Toys & Babies commerce center of the Shopping Channel on the AOL Service.
Commencing on the launch date of the corresponding commerce center (described
above) of the Shopping Channel on each of AOL.com, the CompuServe Service and
the Netscape Netcenter, MERCHANT will have a position in the Manufacturers
Promotional Placement as specified herein and such promotion shall terminate
[**confidential treatment requested**] months from the Launch Date. As an
Manufacturer Promotional Placement Partner in a department, MERCHANT will have
be entitled to the following:
Principal Exposure on the AOL Service, AOL.com, the CompuServe Service and the
Netscape Netcenter:
o Rotating 151W x 125H pixels promotional space with corporate brand or
logo, product offering graphic and product offering two-line text field on
the department front screen.
Additional Promotion on the AOL Service Shopping Channel:
o Product listing availability through the AOL Product Search, subject to
Merchant's participation and the terms and conditions set forth on Exhibit
C Section 3.
o Banner rotation on the AOL Product Search screen of the AOL Service. These
banner rotations will be divided proportionately among all shopping
channel merchants.
o Up to three (3) AOL Keywords(Trademark) for use from the AOL Service, for
registered MERCHANT trade name or trademark (subject to the other
provisions contained herein).
o Fifteen percent (15%) discount from the then-current rate card on
purchases of additional advertising banners or buttons on the AOL Service,
AOL.com, the CompuServe Service and the Netscape Netcenter, subject to
availability for the period requested (with such purchases to be made in
accordance with the then-applicable Standard Advertising Insertion Order
for the property in question). Sponsorships are not entitled to the
aforementioned discount.
o Eligibility to participate in the following AOL Shopping promotional
programs (the "Program Areas") subject to the terms and conditions set
forth on Exhibit C Section 3:
o Quick Gifts
o Standard Seasonal Catalogs or Special Event Merchandising
areas (e.g., Christmas Shop), subject to MERCHANT's
participation in AOL's Quick Checkout and AOL's Search Product
as described on Exhibit C Section 3.
o Premier-level Seasonal Catalogs or Special Event Merchandising
areas (e.g., Golf Outings), subject to MERCHANT's
participation in AOL's Quick Checkout and AOL's Search Product
as described on Exhibit C Section 3.
o Gift Reminder
o Newsletters
All additional Promotions on the AOL Service, AOL.com, the CompuServe Service,
the Netscape Netcenter or the AOL Network not specified herein will be
determined at AOL's reasonable discretion; provided that the additional,
standard Promotions to be provided to the MERCHANT within the Shopping areas on
the AOL Service, AOL.com, the CompuServe Service and the Netscape Netcenter will
be comparable in nature to the additional, standard Promotions provided to other
similarly situated MERCHANTs in the same category (i.e. Anchor Tenant, Gold
Tenant or Silver Tenant).
<PAGE>
|_| GOLD TENANT PROMOTION In the Home Commerce Center
To commence on the launch date of the AOL commerce center specified below on the
AOL Service (the "AOL Commerce Center Launch Date") and terminate
[**confidential treatment requested**] months from the AOL Commerce Center
Launch Date, MERCHANT will become a "Gold Tenant" in the Tabletop & Entertaining
department(s) of the Home commerce center of the Shopping Channel on the AOL
Service. Commencing on the launch date of the corresponding commerce center
(described above) of the Shopping Channel on each of AOL.com, the CompuServe
Service and the Netscape Netcenter, MERCHANT will become a Gold Tenant as
specified herein and such promotion shall terminate ten (10) months from the AOL
Commerce Center Launch Date. As a Gold Tenant in a department, MERCHANT will be
entitled to the following:
Principal Exposure on the AOL Service, AOL.com, the CompuServe Service, and the
Netscape Netcenter:
o One continuous (24/7)143 x 30 pixels button with corporate brand or logo
on the department front screen.
Additional Promotion on the AOL Service:
o Rotation with other Gold Tenants in the department on a promotional banner
with text and branded art promotion on the department front screen. These
banner rotations are reserved for the Gold Tenant Merchant's on the
department screen and will be divided proportionately among them.
o Product listing availability through the AOL Product Search, subject to
Merchant's participation and the terms and conditions set forth on Exhibit
C Section 3.
o Banner rotation on the AOL Product Search screen of the AOL Service. These
banner rotations will be divided proportionately among all shopping
channel merchants.
o Up to three (3) AOL Keywords(Trademark) for use from the AOL Service, for
registered MERCHANT trade name or trademark (subject to the other
provisions contained herein).
o Fifteen percent (15%) discount from the then-current rate card on
purchases of additional advertising banners or buttons on the AOL Service,
AOL.com, the CompuServe Service, and the Netscape Netcenter, subject to
availability for the period requested (with such purchases to be made in
accordance with the then-applicable Standard Advertising Insertion Order
for the property in question). Sponsorships are not entitled to the
aforementioned discount.
o Eligibility to participate in the following AOL Shopping promotional
programs (the "Program Areas") subject to the terms and conditions set
forth on Exhibit C Section 3:
o Quick Gifts
o Standard Seasonal Catalogs or Special Event Merchandising
areas (e.g., Christmas Shop), subject to MERCHANT's
participation in AOL's Quick Checkout and AOL's Search Product
as described on Exhibit C Section 3.
o Premier-level Seasonal Catalogs or Special Event Merchandising
areas (e.g., Golf Outings), subject to MERCHANT's
participation in AOL's Quick Checkout and AOL's Search Product
as described on Exhibit C Section 3.
o Gift Reminder
o Newsletters
All additional Promotions on the AOL Service, AOL.com, the CompuServe Service,
the Netscape Netcenter or the AOL Network not specified herein will be
determined at AOL's reasonable discretion; provided that the additional,
standard Promotions to be provided to the MERCHANT within the Shopping areas on
the AOL Service, AOL.com, the CompuServe Service and the Netscape Netcenter will
be comparable in nature to the additional, standard Promotions provided to other
similarly situated MERCHANTs in the same category (i.e. Anchor Tenant, Gold
Tenant or Silver Tenant).
<PAGE>
EXHIBIT B
Definitions
Additional Merchant Channel. Any other distribution channel (e.g., an
Interactive Service other than AOL) through which MERCHANT makes available an
offering comparable in nature to the Merchant Site.
AOL Member. Any authorized user of the AOL Service, including any sub-accounts
using the AOL Service under an authorized master account.
AOL Network. (i) The AOL Service and (ii) any other product or service owned,
operated, distributed or authorized to be distributed by or through AOL or its
Affiliates worldwide through which such party elects to offer the Merchant Site
(which may include, without limitation, AOL-related Internet sites, "offline"
information browsing products, international versions of the AOL brand service,
and CompuServe).
AOL Service. The standard narrow-band U.S. America Online(Registered) brand
commercial online service.
AOL User. Any user of the AOL Service, AOL.com, the CompuServe Service, the
Netscape Netcenter, or the AOL Network.
AOL.com. The standard narrow-band U.S. version of its primary website marketed
under the AOL.com(Registered) brand.
CompuServe Service. The standard narrow-band affiliate U.S.
CompuServe(Registered) brand commercial online service.
Content. Text, images, video, audio (including, without limitation, music used
in synchronism or timed relation with visual displays) and other data, Products,
advertisements, promotions, links, pointers and software, including any
modifications, upgrades, updates, enhancements and related documentation.
Impression. User exposure to the commerce center screens, department level
screens and any other promotional inventory screens (i.e. AOL Welcome Screen)
containing the applicable promotion or advertisement, as such exposure may be
reasonably determined and measured by AOL in accordance with its standard
methodologies and protocols.
Interactive Service. Means and refers to an entity offering one or more of the
following: (i) online or Internet connectivity services (e.g., an Internet
service provider); (ii) an interactive site or service featuring a broad
selection of aggregated third party interactive content or navigation thereto
(e.g., an online service or search and directory service) and/or marketing a
broad selection of products and/or services across numerous interactive commerce
categories (e.g., an online mall or other leading online commerce site); (iii) a
persistent desktop client; or (iv) communications software capable of serving as
the principal means through which a user creates, sends or receives electronic
mail or real time or "instant" online messages (whether by telephone, computer
or other means), including without limitation greeting cards.
Keyword Search Terms. The Keyword(Trademark) online search terms made available
on the AOL Service for use by AOL Members, combining AOL's Keyword(Trademark)
online search modifier with a term or phrase specifically related to MERCHANT
(and determined in accordance with the terms of this Agreement).
Merchant Interactive Site. Any site (other than the Merchant Site) which is
managed, maintained, owned or controlled by Merchant or its agents.
Netscape Netcenter. The standard narrow-band primary website of Netscape
Communications Corporation marketed under the "Netcenter(Trademark)" brand.
Promotional Materials. Any marketing, advertising or other promotional
materials, excluding Press Releases, related to this Agreement and/or
referencing the other Party and/or its trade names, trademarks and service
marks.
<PAGE>
EXHIBIT C
Standard Shopping Channel Terms & Conditions
1. Merchant Site. MERCHANT will work diligently to develop and implement the
Merchant Site, consisting of the specific Product(s) set forth in Exhibit A and
any additional Products agreed upon in writing by the Parties subsequent to the
Effective Date. Except as mutually agreed upon in writing by the Parties, the
Merchant Site will contain only categories of Products, Services and Content
that are directly related to the MERCHANT Products listed in Exhibit A. All
sales of Products through the Merchant Site will be conducted through a direct
sales format (e.g. no auctions or clubs), absent the mutual consent of the
Parties. MERCHANT will ensure that the Merchant Site does not in any respect
promote, advertise, market or distribute the products, services or content of
any other Interactive Service.
2. Management of Merchant Site. MERCHANT will manage, review, delete, edit,
create, update and otherwise manage all Content available on or through the
Merchant Site, in a timely and professional manner and in accordance with the
terms of this Agreement and AOL's applicable Terms of Service and Privacy Policy
(as set forth on the AOL Service). MERCHANT will ensure that the Merchant Site
is current, accurate and well-organized at all times. MERCHANT warrants that the
Merchant Site and any material contained therein: (i) will conform to AOL's
applicable Terms of Service and Privacy Policy; (ii) will not infringe on or
violate any copyright, trademark, U.S. patent or any other third party right,
including without limitation, any music performance or other music-related
rights; and (iii) will not contain any Product which violates any applicable law
or regulation, including those relating to contests, sweepstakes or similar
promotions. AOL will have no obligations with respect to the Products available
on or through the Merchant Site, including, but not limited to, any duty to
review or monitor any such Products; provided, however, that AOL reserves the
right to review and approve any additional Products and any third-party content,
products or services that MERCHANT makes or desires to make available through
the Merchant Site. Upon AOL's request, MERCHANT agrees to include within the
Merchant Site a product disclaimer (the specific form and substance to be
mutually agreed upon by the Parties) indicating that transactions are solely
between MERCHANT and the AOL Users who purchase products from MERCHANT. MERCHANT
will ensure that neither MERCHANT nor any content, product or service contained
within the Merchant Site, linked to the Promotion or otherwise relating the
Agreement shall (i) disparage AOL; (ii) promote a competitor of AOL; or (iii)
state or imply that AOL endorses MERCHANT's Products.
3. Optimization of Merchant Site. MERCHANT will take all reasonable steps
necessary to conform its promotion and sale of Products through the Merchant
Site to the then-existing commerce technologies made available to MERCHANT by
AOL. MERCHANT will be given an opportunity to implement, at MERCHANT's option,
AOL's "quick checkout" tool which allows AOL Users to enter payment and shipping
information which is then passed from AOL's centralized server unit to MERCHANT
for order fulfillment ("AOL Quick Checkout") and AOL's "product search" tool
technology which allows AOL Users to run a customized search among Merchant's
detailed inventory data ("AOL Product Search"); provided however that in the
event that MERCHANT declines participation in these programs then AOL reserves
the right to reduce or prohibit MERCHANT's participation in any other
incremental merchandising programs offered through the Shopping Channel.. At
Merchant's request, AOL will make all reasonable efforts to provide the tools
for the MERCHANT (i) to enable Merchant Site with the AOL Quick Checkout
technology and functionality and (ii) to allow integration of Merchant's
detailed inventory data into AOL's Search Product database. Collection, storage
and disclosure of AOL Quick Checkout information which MERCHANT provides to AOL,
will be subject to AOL's privacy policy and all confidentiality requirements
hereunder. To the extent that the Merchant Site offers AOL's Quick Checkout,
MERCHANT will ensure that the AOL Quick Checkout is of equal placement and
promotion prominence to other available payment options. AOL reserves the right
to review and test the Merchant Site from time to time to determine whether the
site is compatible with AOL's, CompuServe's and Netscape's then-available client
and host software and their corresponding networks. AOL will be entitled to
require reasonable changes to the content, features and/or functionality within
the Merchant Site to the extent such content, features or functionality will, in
AOL's good faith judgment, adversely affect operations of the AOL Network.
MERCHANT agrees to optimize operations of the Merchant Site consistent with
Exhibit E attached hereto.
4. Removal of Content. AOL will have the right to remove, or direct MERCHANT to
remove, any Content in the Merchant Site (including, without limitation, any
features, functionality or technology) which, as reasonably determined by AOL
(i) violates AOL's then-standard Terms of Service or Privacy Policy (as set
forth on the AOL Service), any other standard, written AOL policy generally
applicable to other Shopping Channel merchants or the terms of this Agreement,
(ii) is inconsistent in any manner with the terms of the Agreement or with the
Product description set forth in Exhibit A or (iii) is otherwise in conflict
with AOL's programming objectives or its existing contractual commitments to
third parties. In addition, in the event that AOL reasonably believes that
software, technology or other technical components of the Merchant Site will
materially affect AOL, CompuServe or Netscape or other operations, MERCHANT will
work in good faith with AOL to limit access to such components from the AOL
Service, AOL.com, the CompuServe Service and the Netscape Netcenter. MERCHANT
will take all commercially reasonable steps using MERCHANT's then-available
technology to block access by AOL Users to Content which AOL desires to remove
or have removed pursuant to any of the foregoing. In the event that MERCHANT
cannot, through such efforts, block access to the Content in question, then
MERCHANT will provide AOL prompt written notice of such fact no later than five
(5) days after AOL notifies MERCHANT of AOL's objection to such Content. AOL may
then, at its option, either (i) restrict access by AOL Users to the Content in
question using technology available to AOL or (ii) terminate all links,
promotions and advertisements for the Merchant Site until such time as the
Content in question is no longer displayed. MERCHANT will cooperate with AOL's
reasonable requests to the extent AOL elects to implement any of the foregoing
access restrictions.
5. Promotional Placement. MERCHANT acknowledges that the sole obligation of AOL,
pursuant to this Agreement, is to display the Promotion in the Shopping Channel
in accordance with the terms and conditions of the Agreement. The specific
positioning of the Promotion on any screen in the Shopping Channel shall be as
determined by AOL, consistent with the editorial composition of such screen and
the nature of the Promotion being purchased by MERCHANT, unless otherwise
mutually agreed upon by the Parties. AOL reserves the right to reject, cancel or
remove at any time the Promotion for any reason with fifteen (15) days prior
notice to MERCHANT, and AOL will refund to MERCHANT a pro-rata portion of the
fee allocable to the display of the Promotion based on the number of days that
the Promotion was displayed. Except for the pro-rata refund set forth in the
foregoing sentence, AOL will not be liable in any way for any rejection,
cancellation or removal of the Promotion. AOL reserves the right to redesign or
modify the organization, navigation, structure, "look and feel" and other
elements of the AOL Service, AOL.com, the CompuServe Service, the Netscape
Netcenter and the AOL Network, at its sole discretion at any time without prior
notice. MERCHANT acknowledges and agrees that AOL will own all right, title and
interest in and to the elements of graphics, design, organization, presentation,
layout, user interface, navigation and stylistic convention (including the
digital implementations thereof) which are generally associated with online
areas contained within the AOL Network. In the event such modifications
materially affect the placement of the Promotion, AOL will notify MERCHANT and
will work with MERCHANT to display the Promotion in a comparable location and
manner. If AOL and MERCHANT cannot reach agreement on a substitute placement,
MERCHANT will have the right to cancel the Promotion, upon sixty (60) days
advance written notice to AOL. In such case, MERCHANT will only be responsible
for the pro-rata portion of payments attributable
<PAGE>
to the period from the Effective Date through the end of the sixty (60) day
notice period and in--such event that any amounts have been prepaid to AOL by
Merchant, Merchant will receive a pro-rata refund of all amounts paid to AOL
which correspond to the number of days that the Promotion was not displayed.
MERCHANT may not resell, trade, exchange, barter or broker to any third party
any promotional or advertising space which is the subject of this Agreement
MERCHANT will not be entitled to any refund or proration for delays caused by
MERCHANT's failure to deliver to AOL any materials relating to the Promotion.
6. Product Offering. MERCHANT will ensure that the Merchant Site generally
includes all of the Products and other Content (including, without limitation,
any features, offers, contests, functionality or technology) that are then made
available by or on behalf of MERCHANT through any Additional MERCHANT Channel
unless prohibited by this Agreement.
7. Pricing and Terms. MERCHANT will ensure that: (i) the prices for Products in
the MERCHANT Site generally do not exceed the prices for the Products offered by
or on behalf of MERCHANT through any Additional MERCHANT Channel; and (ii) the
terms and conditions related to Products in the MERCHANT Site are generally no
less favorable in any respect to the terms and conditions for the Products
offered by or on behalf of MERCHANT through any Additional MERCHANT Channel.
8. Exclusive Offers. MERCHANT will generally promote through the Merchant Site
any special or promotional offers made available by or on behalf of MERCHANT
through any Additional MERCHANT Channel. In addition, MERCHANT shall promote
through the Merchant Site on a regular and consistent basis special offers
exclusively available to AOL Users (the "AOL Exclusive Offers"). MERCHANT shall,
at all times, feature at least one AOL Exclusive Offer for AOL Users (except as
otherwise mutually agreed upon by the Parties). The AOL Exclusive Offer made
available by MERCHANT shall provide a substantial member benefit to AOL Users,
either by virtue of a meaningful price discount, product enhancement, unique
service benefit or other special feature. MERCHANT will provide AOL with
reasonable prior notice of Exclusive Offers so that AOL can in its editorial
discretion, market the availability of such offers. At MERCHANT's option,
MERCHANT will work with AOL or its authorized agents to develop a customized AOL
rewards program, which shall be a promotional program or plan that is intended
to provide AOL users with rewards or benefits in exchange for, or on account of,
their past or continued loyalty to, or patronage or purchase of, the products or
services of Merchant or any third party. (e.g. a promotional program similar to
a "frequent flier" program), to be provided through AOL's "AOL Rewards" program,
accessible on the AOL Service at Keyword: "AOL Rewards." Merchant's
participation in such promotional rewards program is subject to AOL's approval
and may also require the payment of certain reasonable administration fees to
AOL or its authorized agents or contractors operating the program.
9. Customer Service. It is the sole responsibility of MERCHANT to provide
customer service to persons or entities purchasing Products through the AOL
Service, AOL.com, the CompuServe Service, the Netscape Netcenter or the AOL
Network ("Customers"). MERCHANT will bear full responsibility for all customer
service, including without limitation, order processing, billing, fulfillment,
shipment, collection and other customer service associated with any Products
offered, sold or licensed through each Merchant Site, and AOL will have no
obligations whatsoever with respect thereto. Merchant Site shall include clear
and conspicuous disclosure of its customer service policies and a phone number
and an email or street address at which customers may contact MERCHANT. MERCHANT
shall provide a name of a customer service contact for use by AOL and a
telephone number and email or street address to which AOL may forward or refer
customer inquiries or complaints relating to MERCHANT. MERCHANT will receive all
emails from Customers via a computer available to MERCHANT's customer service
staff and generally respond to such emails within one business day of receipt.
MERCHANT will be able to receive all orders electronically in addition to any
other methods which Merchant chooses to offer and generally process all orders
within one business day of receipt, provided Products ordered are not advance
order items. MERCHANT will ensure that all orders of Products are received,
processed, fulfilled and delivered on a timely and professional basis. MERCHANT
will offer AOL Users who purchase Products through such the Merchant Site a
money-back satisfaction guarantee. MERCHANT will bear all responsibility for
compliance with federal, state and local laws in the event that Products are out
of stock or are no longer available at the time an order is received. MERCHANT
will also comply with the requirements of any federal, state or local consumer
protection or disclosure law. Payment for Products will be collected by MERCHANT
directly from customers. MERCHANT's order fulfillment operation will be subject
to AOL's reasonable review.
10. Launch Dates. In the event that any terms contained herein relate to or
depend on the commercial launch date of the online area or other property
contemplated by this Agreement (the "Launch Date"), then it is the intention of
the Parties to record such Launch Date in a written instrument signed by both
Parties promptly following such Launch Date; provided that, in the absence of
such a written instrument, the Launch Date will be as reasonably determined by
AOL based on the information available to AOL. For each day beyond the Launch
Date that the actual commercial launch of the Merchant Site is delayed (e.g.,
due to MERCHANT or the Merchant Site not being ready), then AOL will be entitled
to reduce the Impressions Commitment pro rata and decrease the promotions it
provides to MERCHANT hereunder.
11. Merchant Certification Program. MERCHANT will participate in any generally
applicable "Certified Merchant" program operated by AOL or its authorized agents
or contractors. Such program may require merchant participants on an ongoing
basis to meet certain reasonable standards relating to provision of electronic
commerce through the AOL Service, AOL.com, the CompuServe Service and the
Netscape Netcenter and may also require the payment of certain reasonable
certification fees to AOL or its authorized agents or contractors operating the
program. At MERCHANT's option, MERCHANT may (i) participate in the
BizRate(Registered) Program, a service offered by Binary Compass Enterprises,
Inc. (BCE), which provides opt-in satisfaction surveys to Users who purchase
Products through such Merchant Site, or such other provider of such services as
AOL may designate or approve from time to time, and (ii) provide a link to
BizRate's then-current standard survey forms, or such other survey forms offered
by any other party that AOL may reasonably designate or approve from time to
time. To the extent MERCHANT participates in the BizRate(Registered) Program,
MERCHANT's participation shall be based upon a separate written agreement which
MERCHANT will enter into with BCE, or other such party reasonably designated or
approved by AOL. MERCHANT hereby authorizes BCE to provide to AOL any and all
reports provided to MERCHANT by BCE, or other third party providing such
services, and agrees to provide written notice of such authorization to BCE, or
such other third party.
12. Traffic Flow/Navigation. MERCHANT will take reasonable efforts to ensure
that AOL traffic is either kept within the Merchant Site or channeled back into
the AOL Network (e.g. hypertext links). The Parties will work together on
implementing mutually acceptable links from the Merchant Site back to the AOL
Network. In the event that AOL points to the Merchant Site or any other Merchant
Interactive Site or otherwise delivers traffic to such site hereunder. MERCHANT
will ensure that navigation back to the AOL Network from such site, whether
through a particular pointer or link, the "back" button on an Internet browser,
the closing of an active window, or any other return mechanism, shall not be
interrupted by MERCHANT through the use of any intermediate screen or other
device not specifically requested by the user, including without limitation
through the use of any html pop-up window or any other similar device. Rather,
such AOL traffic shall be pointed directly back to the AOL Network as designated
by AOL. AOL will be entitled to establish navigational icons, links, pointers
connecting the Merchant Site (or portions thereof) with other content areas on
or outside of the AOL Network. Additionally, in cases where an AOL User performs
a search for Merchant through any search or navigational tool or mechanism that
is accessible or available through the AOL Network (e.g., Promotions, Keyword
Search Terms, or any other similar promotions or navigational tools), AOL shall
have the right
<PAGE>
to direct such AOL User to the Merchant Site, or any other Merchant Interactive
Site determined by AOL in its reasonable discretion.
<PAGE>
EXHIBIT D
Standard Legal Terms & Conditions
1. Production and Technical Services. Unless expressly provided for elsewhere in
the Shopping Channel Promotional Agreement which has been executed by AOL and
MERCHANT (the "Promotional Agreement," and, collectively with these Standard
Legal Terms and Conditions, the "Agreement") Agreement, (i) AOL will have no
obligation to provide any creative, design, technical or production services to
MERCHANT and (ii) the nature and extent of any such services which AOL may
provide to MERCHANT will be as determined by AOL in its sole discretion. The
terms regarding any creative, design, technical or productions services provided
by AOL to MERCHANT will be as mutually agreed upon by the parties in a separate
written work order. With respect to any routine production, maintenance or
related services which AOL reasonably determines are necessary for AOL to
perform in order to support the proper functioning and integration of the
Merchant Site ("Routine Services"), MERCHANT will pay the then-standard fees
charged by AOL for such Routine Services.
2. AOL Accounts. To the extent MERCHANT has been granted any AOL, CompuServe or
Netscape accounts, MERCHANT will be responsible for the actions taken under or
through its accounts, which actions are subject to AOL's applicable Terms of
Service and for any surcharges, including, without limitation, all premium
charges, transaction charges, and any applicable communication surcharges
incurred by any account issued to MERCHANT. Upon the termination of this
Agreement, all such accounts, related screen names and any associated usage
credits or similar rights, will automatically terminate. AOL will have no
liability for loss of any data or content related to the proper termination of
any such account.
3. Taxes. MERCHANT will collect and pay and indemnify and hold AOL harmless
from, any sales, use, excise, import or export value added or similar tax or
duty not based on AOL's net income, including any penalties and interest, as
well as any costs associated with the collection or withholding thereof,
including attorneys' fees.
4. Promotional Materials. Each Party will submit to the other Party, for its
prior written approval, which shall not be unreasonably withheld or delayed, any
Promotional Materials; provided, however, that after the initial public
announcement of the business relationship between the Parties in accordance with
the approval and other requirements contained herein, either Party's subsequent
factual reference to the existence of a business relationship between AOL and
MERCHANT in Promotional Materials, including, without limitation, the
availability of the Merchant Site through the AOL Network, or use of screen
shots relating to the distribution under this Agreement (so long as the AOL
Network is clearly identified as the source of such screen shots) for
promotional purposes shall not require the approval of the other Party. Once
approved, the Promotional Materials may be used by a Party and its affiliates
for the purpose of promoting the distribution of the Merchant Site through the
AOL Network and reused for such purpose until such approval is withdrawn with
reasonable prior notice. MERCHANT will not (i) issue any press releases,
promotions or public statements concerning the existence or terms of the
Agreement or (ii) use, display or modify AOL's trademarks, tradenames or
servicemarks in any manner, absent AOL's express prior written approval.
Notwithstanding the foregoing, either Party may issue press releases and other
disclosures as required by law or as reasonably advised by legal counsel without
the consent of the other Party and in such event, prompt notice thereof will be
provided to the other Party.
5. Representations and Warranties. Each Party represents and warrants to the
other Party that: (i) such Party has the full corporate right, power and
authority to enter into the Agreement and to perform the acts required of it
hereunder; (ii) the execution of the Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a Party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, the Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in the Agreement.
6. License. MERCHANT hereby grants AOL a non-exclusive worldwide license to
market, license, distribute, reproduce, display, perform, transmit and promote
the Merchant Site and all content, products and services offered therein or
otherwise provided by MERCHANT in connection herewith (e.g., offline or online
promotional content, Promotions, etc.) through the AOL Network and through any
other product or service owned, operated, distributed or authorized to be
distributed by or through AOL or its affiliates worldwide through which such
Party elects to offer the Merchant Site (which may include, without limitation,
Internet sites promoting AOL products and services and any "offline" information
browsing products of AOL or its affiliates). AOL Users will have the right to
access and use the Merchant Site. Subject to such license, MERCHANT retains all
right, title to and interest in the Merchant Site. During the Term, AOL will
have the right to use MERCHANT's trademarks, trade names and service marks in
connection with performance of this Agreement, subject to any written guidelines
provided in writing to AOL. AOL hereby grants MERCHANT a non-exclusive worldwide
license to distribute, reproduce, display and transmit the AOL Promo as
described in Section 2.2 and any trademarks contained therein such AOL Promo,
solely in connection with MERCHANT's performance of its obligations pursuant to
this Agreement
7. Confidentiality. Each Party acknowledges that Confidential Information may be
disclosed to the other Party during the course of this Agreement. Each Party
agrees that it will take reasonable steps, at least substantially equivalent to
the steps it takes to protect its own proprietary information, during the term
of this Agreement, and for a period of three years following expiration or
termination of this Agreement, to prevent the duplication or disclosure of
Confidential Information of the other Party, other than by or to its employees
or agents who must have access to such Confidential Information to perform such
Party's obligations hereunder, who will each agree to comply with this
provision. "Confidential Information" means any information relating to or
disclosed in the course of the Agreement, which is or should be reasonably
understood to be confidential or proprietary to the disclosing Party, including,
but not limited to, the material terms of this Agreement, information about AOL
Users, technical processes and formulas, source codes, product designs, sales,
cost and other unpublished financial information, product and business plans,
projections, and marketing data. "Confidential Information" will not include
information (a) already lawfully known to or independently developed by the
receiving Party, (b) disclosed in published materials, (c) generally known to
the public, (d) lawfully obtained from any third party, or (e) required or
reasonably advised to be disclosed by law. MERCHANT shall not make, publish, or
otherwise communicate through the AOL Network any deleterious remarks concerning
AOL or it Affiliates, directors, officers, employees, or agents (including,
without limitation, AOL's business projects, business capabilities, performance
of duties and services, or financial position) which remarks are based on the
relationship established by this Agreement or information exchanged hereunder.
This section is not intended to limit good faith editorial statements made by
MERCHANT based upon publicly available information, or information developed by
MERCHANT independent of its relationship with AOL and its employees and agents.
8. Limitation of Liability; Disclaimer; Indemnification.
(a) Liability. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES
(EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES),
ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE OR INABILITY
<PAGE>
TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM, THE COMPUSERVE SERVICE, THE
NETSCAPE NETCENTER OR THE MERCHANT SITE, OR ARISING FROM ANY OTHER PROVISION OF
THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED
PROFITS OR LOST BUSINESS (COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT
EACH PARTY WILL REMAIN LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED
DAMAGES ARE CLAIMED BY A THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT
TO PARAGRAPH (C) BELOW. EXCEPT AS PROVIDED TO PARAGRAPH (C) BELOW, (I) LIABILITY
ARISING UNDER THIS AGREEMENT WILL BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE
DAMAGES, AND (II), THE MAXIMUM LIABILITY OF ONE PARTY TO THE OTHER PARTY FOR ANY
CLAIMS ARISING IN CONNECTION WITH THIS AGREEMENT WILL NOT EXCEED THE AGGREGATE
AMOUNT OF PAYMENT OBLIGATIONS OWED TO AOL BY MERCHANT IN THE YEAR IN WHICH THE
EVENT GIVING RISE TO LIABILITY OCCURS; PROVIDED THAT MERCHANT WILL REMAIN LIABLE
TO AOL FOR THE AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO AOL PURSUANT
TO THE AGREEMENT.
(b) No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THE AGREEMENT,
NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING AOL.COM, THE AOL
SERVICE OR NETWORK, THE COMPUSERVE SERVICE, THE NETSCAPE NETCENTER OR THE
MERCHANT SITE, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR
COURSE OF PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL
SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING (I) THE PROFITABILITY OF THE
MERCHANT SITE, (II) THE NUMBER OF PERSONS WHO WILL ACCESS OR "CLICK-THROUGH" THE
PROMOTION, (III) ANY BENEFIT MERCHANT MIGHT OBTAIN FROM INCLUDING THE PROMOTION
WITHIN THE AOL SERVICE OR NETWORK, AOL.COM, THE NETSCAPE NETCENTER, OR THE
COMPUSERVE SERVICE OR (IV) THE FUNCTIONALITY, PERFORMANCE OR OPERATION OF THE
AOL, COMPUSERVE OR NETSCAPE SERVICES WITH RESPECT TO THE PROMOTION.
(c) Indemnity. Either Party will defend, indemnify, save and hold harmless the
other Party and the officers, directors, agents, affiliates, distributors,
franchisees and employees of the other Party from any and all third party
claims, demands, liabilities, costs or expenses, including reasonable attorneys'
fees ("Liabilities"), resulting from the Indemnifying Party's material breach of
any duty, representation, or warranty of the Agreement, except where Liabilities
result from the gross negligence or knowing and willful misconduct of the other
Party.
(d) Claims. If a Party entitled to indemnification hereunder (the "Indemnified
Party") becomes aware of any matter it believes is indemnifiable hereunder
involving any claim, action, suit, investigation, arbitration or other
proceeding against the Indemnified Party by any third party (each an "Action"),
the Indemnified Party will give the other Party (the "Indemnifying Party")
prompt written notice of such Action. Such notice will (i) provide the basis on
which indemnification is being asserted and (ii) be accompanied by copies of all
relevant pleadings, demands, and other papers related to the Action and in the
possession of the Indemnified Party. The Indemnifying Party will have a period
of ten (10) days after delivery of such notice to respond. If the Indemnifying
Party elects to defend the Action or does not respond within the requisite ten
(10) day period, the Indemnifying Party will be obligated to defend the Action,
at its own expense, and by counsel reasonably satisfactory to the Indemnified
Party. The Indemnified Party will cooperate, at the expense of the Indemnifying
Party, with the Indemnifying Party and its counsel in the defense and the
Indemnified Party will have the right to participate fully, at its own expense,
in the defense of such Action. If the Indemnifying Party responds within the
required ten (10) day period and elects not to defend such Action, the
Indemnified Party will be free, without prejudice to any of the Indemnified
Party's rights hereunder, to compromise or defend (and control the defense of)
such Action. In such case, the Indemnifying Party will cooperate, at its own
expense, with the Indemnified Party and its counsel in the defense against such
Action and the Indemnifying Party will have the right to participate fully, at
its own expense, in the defense of such Action. Any compromise or settlement of
an Action will require the prior written consent of both Parties hereunder, such
consent not to be unreasonably withheld or delayed.
(e) Acknowledgment. AOL and MERCHANT each acknowledges that the provisions of
this Agreement were negotiated to reflect an informed, voluntary allocation
between them of all risks (both known and unknown) associated with the
transactions contemplated hereunder. The limitations and disclaimers related to
warranties and liability contained in the Agreement are intended to limit the
circumstances and extent of liability. The provisions in paragraphs (a) through
(d) above and this paragraph (e) will be enforceable independent of and
severable from any other enforceable or unenforceable provision of this
Agreement.
9. Solicitation of Subscribers.
(a) During the term of the Agreement and for a two year period thereafter,
MERCHANT will not use the AOL Network (including, without limitation, the e-mail
network contained therein) to solicit AOL Members or AOL Users on behalf of
another Interactive Service. MERCHANT will not send unsolicited, commercial
e-mail through or into AOL's products or services, absent a Prior Business
Relationship. For purposes of this Agreement, a "Prior Business Relationship"
will mean that the AOL User to whom commercial e-mail is being sent has
voluntarily either (i) engaged in a transaction with MERCHANT or (ii) provided
information to MERCHANT through a contest, registration, or other communication,
which included notice to the AOL User that the information provided could result
in commercial e-mail being sent to that AOL User by MERCHANT or its agents. More
generally, any commercial e-mail to be sent through or into AOL's products or
services shall be subject to AOL's then-standard restrictions on distribution of
bulk e-mail (e.g., related to the time and manner in which such e-mail can be
distributed through the AOL service in question) and the limitations set forth
in Exhibit C.
(b) MERCHANT shall ensure that its collection, use and disclosure of information
obtained from AOL Users under this Agreement ("User Information") complies with
(i) all applicable laws and regulations (ii) AOL's standard privacy policies,
available on the AOL Service at the keyword term "Privacy", and (iii) AOL's
applicable Terms of Service.
(c) MERCHANT will not disclose User Information to any third party in a manner
that Identifies AOL User as end users of an AOL product or service or use User
Information collected under this Agreement to market an Interactive Service
competitive with AOL; provided that the restrictions in this subsection (c)
shall not restrict MERCHANT's use of any information collected independently of
this Agreement.
10. AOL User Communications. To the extent MERCHANT is otherwise permitted to
send communications to AOL Users (in accordance with the other requirements
contained herein):, (i) any solicitations in such communications to purchase
products or services shall promote the Merchant Site available through the AOL
Network as the principal means through which to purchase any such products or
services; (ii) any direct links to specific offers within such communications
shall link to the Merchant Site; (iii) MERCHANT shall limit the subject matter
of such communications to those categories of products, services and/or content
which are specifically contemplated by this Agreement, and (iv) MERCHANT will
provide the recipient with a prominent and easy means to "opt-out" of receiving
any future commercial e-mail communications from Merchant. In addition, in any
communication to AOL Users or on the Merchant Site, MERCHANT will not encourage
AOL Users to take any action inconsistent with the scope and purpose of this
Agreement, including without limitation, the following actions: (a) using
interactive sites other than the Merchant Site; (b) bookmarking of other
interactive sites; (c) changing the default home page on the AOL browser, or (d)
using any interactive service other than the AOL, Netscape and CompuServe
Services.
11. Keyword(Trademark) Search Terms. Any Keyword Search Terms to be directed to
Merchant's Site shall be (i) subject to availability and (ii) limited to the
combination of the Keyword(Tradermark) search modifier combined
<PAGE>
with a registered trademark of MERCHANT. AOL reserves the right at any time to
revoke MERCHANT's use of any Keywords that are not registered trademarks of
MERCHANT. MERCHANT acknowledges that its utilization of a Keyword Search Term
will not create in it, nor will it represent it has, any right, title or
interest in or to such Keyword Search Term, other than the right, title and
interest MERCHANT holds in MERCHANT's registered trademark independent of the
Keyword Search Term. Without limiting the generality of the foregoing, MERCHANT
will not: (a) attempt to register or otherwise obtain trademark or copyright
protection in the Keyword Search Term; or (b) use the Keyword Search Term,
except for the purposes expressly required or permitted under this Agreement. To
the extent AOL allows AOL Users to "bookmark" the URL or other locator for the
Merchant Site, such bookmarks will be subject to AOL's control at all times.
Upon the termination of this Agreement, MERCHANT's rights to any Keywords and
bookmarking will terminate.
12. Miscellaneous. Neither Party will be liable for, or be considered in breach
of or default under the Agreement on account of, any delay or failure to perform
as required by the Agreement (except with respect to payment obligations) as a
result of any causes or conditions which are beyond such Party's reasonable
control and which such Party is unable to overcome by the exercise of reasonable
diligence. MERCHANT's rights, duties, and obligations under the Agreement are
not transferable. The Parties to the Agreement are independent contractors.
Neither Party is an agent, representative or partner of the other Party. Neither
Party will have any right, power or authority to enter into any agreement for or
on behalf of, or incur any obligation or liability of, or to otherwise bind, the
other Party. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of the Agreement or to exercise
any right under the Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect. Sections 3, 4, 7, 8, 9, 10, 11, and 12 of
these Standard Legal Terms and Conditions, will survive the completion,
expiration, termination or cancellation of the Promotional Agreement. Either
Party may terminate the Agreement at any time with written notice to the other
Party in the event of a material breach of the Agreement by the other Party,
which remains uncured after thirty days written notice thereof. Any notice,
approval, request, authorization, direction or other communication under this
Agreement will be given in writing and will be deemed to have been delivered and
given for all purposes (i) on the delivery date if delivered by electronic mail
on AOL's network or systems (to screenname "[email protected]" in the case of
AOL) or by confirmed facsimile; (ii) on the delivery date if delivered
personally to the Party to whom the same is directed; (iii) one business day
after deposit with a commercial overnight carrier, with written verification of
receipt; or (iv) five business days after the mailing date, whether or not
actually received, if sent by U.S. mail, return receipt requested, postage and
charges prepaid, or any other means of rapid mail delivery for which a receipt
is available. In the case of AOL, such notice will be provided to both the
Senior Vice President for Business Affairs (fax no. 703-265-1206) and the Deputy
General Counsel (fax no. 703-265-1105), each at the address of AOL set forth in
the first paragraph of this Agreement. In the case of MERCHANT, except as
otherwise specified herein, the notice address will be the address for MERCHANT
set forth in the first paragraph of this Agreement, with the other relevant
notice information, including the recipient for notice and, as applicable, such
recipient's fax number or AOL email address, to be as reasonably identified by
AOL. Except as otherwise specified herein, the Agreement sets forth the entire
agreement between MERCHANT and AOL, and supersedes any and all prior agreements
of AOL or MERCHANT with respect to the transactions set forth herein. No change,
amendment or modification of any provision of the Agreement will be valid unless
set forth in a written instrument signed by the Party subject to enforcement of
such amendment. MERCHANT will promptly inform AOL of any information related to
the Merchant Site which could reasonably lead to a claim, demand, or liability
of or against AOL and/or its affiliates by any third party. MERCHANT will not
assign this Agreement or any right, interest or benefit under this Agreement
without the prior written consent of AOL. Assumption of the Agreement by any
successor to MERCHANT (including, without limitation, by way of merger,
consolidation or sale of all or substantially all of MERCHANT's stock or assets)
will be subject to AOL's prior written approval. Subject to the foregoing, this
Agreement will be fully binding upon, inure to the benefit of and be enforceable
by the Parties hereto and their respective successors and assigns. Except where
otherwise specified herein, the rights and remedies granted to a Party under the
Agreement are cumulative and in addition to, and not in lieu of, any other
rights or remedies which the Party may possess at law or in equity. In the event
that any provision of the Agreement is held invalid by a court with jurisdiction
over the Parties to the Agreement, (i) such provision will be deemed to be
restated to reflect as nearly as possible the original intentions of the Parties
in accordance with applicable law and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
effect. The Agreement may be executed in counterparts, each of which will be
deemed an original and all of which together will constitute one and the same
document. The Agreement will be interpreted, construed and enforced in all
respects in accordance with the laws of the Commonwealth of Virginia, except for
its conflicts of laws principles. MERCHANT hereby irrevocably consents to the
exclusive jurisdiction of the courts of the Commonwealth of Virginia and the
federal courts therein in connection with any action arising under this
Agreement.
<PAGE>
EXHIBIT E
Operations
1. MERCHANT Site Infrastructure. MERCHANT will be responsible for all
communications, hosting and connectivity costs and expenses associated
with the MERCHANT Site. MERCHANT will provide all hardware, software,
telecommunications lines and other infrastructure necessary to meet
traffic demands on the MERCHANT Site from the AOL Network. MERCHANT will
design and implement the network between the AOL Service and MERCHANT Site
such that (i) no single component failure will have a materially adverse
impact on AOL Members seeking to reach the MERCHANT Site from the AOL
Network and (ii) no single line under material control by the Merchant
will run at more than 70% average utilization for a 5-minute peak in a
daily period. In this regard, MERCHANT will provide AOL, upon request,
with a detailed network diagram regarding the architecture and network
infrastructure supporting the MERCHANT Site. In the event that MERCHANT
elects to create a custom version of the MERCHANT Site in order to comply
with the terms of this Agreement, MERCHANT will bear responsibility for
all aspects of the implementation, management and cost of such customized
site.
2. Optimization; Speed. MERCHANT will use commercially reasonable efforts to
ensure that: (a) the functionality and features within the MERCHANT Site
are optimized for the client software then in use by AOL Members; and (b)
the MERCHANT Site is designed and populated in a manner that minimizes
delays when AOL Members attempt to access such site. At a minimum,
MERCHANT will ensure that the MERCHANT Site's data transfers initiate
within fewer than fifteen (15) seconds on average. Prior to commercial
launch of any material promotions described herein, MERCHANT will permit
AOL to conduct performance and load testing of the MERCHANT Site (in
person or through remote communications), with such commercial launch not
to commence until such time as AOL is reasonably satisfied with the
results of any such testing.
3. User Interface. MERCHANT will maintain a graphical user interface within
the MERCHANT Site that is competitive in all material respects with
interfaces of other similar sites based on similar form technology. AOL
reserves the right to review and approve the user interface and site
design prior to launch of the Promotions and to conduct focus group
testing to assess compliance with respect to such consultation and with
respect to MERCHANT's compliance with the preceding sentence.
4. Technical Problems. MERCHANT agrees to use commercially reasonable efforts
to address material technical problems (over which MERCHANT exercises
control) affecting use by AOL Members of the MERCHANT Site (a "MERCHANT
Technical Problem") promptly following notice thereof. In the event that
MERCHANT is unable to promptly resolve a MERCHANT Technical Problem
following notice thereof from AOL (including, without limitation,
infrastructure deficiencies producing user delays), AOL will have the
right to regulate the promotions it provides to MERCHANT hereunder until
such time as MERCHANT corrects the MERCHANT Technical Problem at issue.
5. Monitoring. MERCHANT will ensure that the performance and availability of
the MERCHANT Site is monitored on a continuous basis. MERCHANT will
provide AOL with contact information (including e-mail, phone, pager and
fax information, as applicable, for both during and after business hours)
for MERCHANT's principal business and technical representatives, for use
in cases when issues or problems arise with respect to the MERCHANT Site.
6. Security. MERCHANT will utilize Internet standard encryption technologies
(e.g., Secure Socket Layer -- SSL) to provide a secure environment for
conducting transactions and/or transferring private member information
(e.g. credit card numbers, banking/financial information, and member
address information) to and from the MERCHANT Site. MERCHANT will
facilitate periodic reviews of the MERCHANT Site by AOL in order to
evaluate the security risks of such site. MERCHANT will promptly remedy
any security risks or breaches of security as may be identified by AOL's
Operations Security team.
7. Technical Performance.
i. MERCHANT will design the MERCHANT Site to support the AOL-client
embedded versions of the Microsoft Internet Explorer 3.XX and 4.XX
browsers (Windows and Macintosh), the Netscape Browser 4.XX, and
make commercially reasonable efforts to support all other AOL
browsers listed at: "http://webmaster.info.aol.com/"
ii. To the extent MERCHANT creates customized pages on the MERCHANT Site
for AOL Members, Merchant will develop and employ a methodology to
detect AOL Members (e.g. examine the HTTP User-Agent field in order
to identify the "AOL Member-Agents" listed at:
http://webmaster.info.aol.com/").
iii. MERCHANT will periodically review the technical information made
available by AOL at http://webmaster.info.aol.com.
iv. MERCHANT will design its site to support HTTP 1.0 or later protocol
as defined in RFC 1945 and to adhere to AOL's parameters for
refreshing or preventing the caching of information in AOL's proxy
system outlined in the document provided at the following URL:
http://webmaster.info.aol.com. The Merchant is responsible for the
manipulation of these parameters in web based objects so as to allow
them to be cached or not cached as outlined in RFC 1945.
v. Prior to releasing material, new functionality or features through
the MERCHANT Site ("New Functionality"), MERCHANT will use
commercially reasonable efforts to: (i) test the New Functionality
to confirm its compatibility with AOL Service client software and
(ii) provide AOL with written notice of the New Functionality so
that AOL can perform tests of the New Functionality to confirm its
compatibility with the AOL Service client software. Should any new
material, new functionality or features through the Merchant Site be
released without notification to AOL, AOL will not be responsible
for any adverse member experience until such time that compatibility
tests can be
<PAGE>
performed and the new material, functionality or features qualified
for the AOL Service.
8. AOL Internet Services MERCHANT Support. AOL will provide MERCHANT with access
to the standard online resources, standards and guidelines documentation,
technical phone support, monitoring and after-hours assistance that AOL makes
generally available to similarly situated web-based partners. AOL support will
not, in any case, be involved with content creation on behalf of MERCHANT or
support for any technologies, databases, software or other applications which
are not supported by AOL or are related to in this Exhibit E. any MERCHANT area
other than the MERCHANT Site. Support to be provided by AOL is contingent on
MERCHANT providing to AOL demo account information (where applicable), a
detailed description of the MERCHANT Site's software, hardware and network
architecture and access to the MERCHANT Site for purposes of such performance
and the coordination of load testing as AOL elects to conduct. As described
elsewhere in this Agreement, MERCHANT is fully responsible for all aspects of
hosting and administration of the Merchant Site and must ensure that the site
satisfies the specified access and performance requirements as outlined
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