<PAGE>
As filed with the Securities and Exchange Commission on June 21, 1999
Registration No. 333-79487
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GARDEN.COM, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 5961 74-2765381
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction of Classification Code
incorporation or Number)
organization) Garden.com, Inc.
3301 Steck Avenue
Austin, Texas 78757
(512) 532-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Clifford A. Sharples
Garden.com, Inc.
President and Chief Executive Officer
3301 Steck Avenue
Austin, Texas 78757
(512) 532-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Martin J. Mclaughlin, Esq.
Benjamin G. Lombard, Esq.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
1000 North Water Street, Suite 2100
Milwaukee, Wisconsin 53202
(414) 298-1000
David C. Drummond, Esq. Carla S. Newell, Esq.
Paul R. Tobias, Esq. Brian K. Beard, Esq.
William B. Owens, Jr., Esq. Anthony M. Allen, Esq.
Robert E. Horton, Esq. James D. Robinett, Esq.
Wilson Sonsini Goodrich & Rosati Gunderson Dettmer Stough Villeneuve
Professional Corporation Franklin & Hachigian, LLP
8911 Capital of Texas Highway, 8911 Capital of Texas Highway, Suite 4240
Suite 3350 Austin, Texas 78759
Austin, Texas 78759 (512) 342-2300
(512) 338-5400 ----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, $0.01 par
value................. $57,500,000 $15,985
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</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+Underwriters may not confirm sales of these securities until the registration +
+statement filed with the Securities and Exchange Commission becomes +
+effective. This prospectus is not an offer to sell these securities and it is +
+not soliciting offers to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 21, 1999
PROSPECTUS
Shares
[Garden.com Logo]
Common Stock
This is an initial public offering of common stock by Garden.com, Inc. The
estimated initial public offering price will be between $ and $ per share.
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Prior to this offering, there has been no public market for the common
stock. Garden.com has applied to have the common stock approved for quotation
on the Nasdaq National Market under the symbol GDEN.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to Garden.com, Inc., before expenses................... $ $
</TABLE>
Garden.com, Inc. and certain selling stockholders have granted the
underwriters an option for a period of 30 days to purchase up to additional
shares of common stock.
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Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities nor passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Hambrecht & Quist
BancBoston Robertson Stephens
Thomas Weisel Partners LLC
, 1999
<PAGE>
[ART WORK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 7
Forward Looking Statements............................................ 20
Use of Proceeds....................................................... 21
Dividend Policy....................................................... 21
Preemptive Rights..................................................... 21
Capitalization........................................................ 22
Dilution.............................................................. 23
Selected Financial Data............................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 25
Business.............................................................. 34
Management............................................................ 48
Related Party Transactions............................................ 55
Principal Stockholders................................................ 57
Description of Capital Stock.......................................... 60
Shares Eligible for Future Sale....................................... 63
Underwriting.......................................................... 65
Legal Matters......................................................... 68
Experts............................................................... 68
Additional Garden.com Information..................................... 68
Index to Financial Statements......................................... F-1
</TABLE>
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We maintain World Wide Web sites at www.garden.com, www.virtualgarden.com
and www.hortmag.com. References in this document to our Web site refer to
garden.com, our flagship site, and references to our Web sites collectively
refer to garden.com, virtualgarden.com and hortmag.com.
Information contained on our Web sites does not constitute part of this
prospectus.
GARDEN.COM, VIRTUALGARDEN and GARDEN ESCAPE are trademarks of Garden.com.
All other brand names or trademarks appearing in the prospectus are the
property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements and
the notes to those statements, before making an investment decision.
Garden.com
Garden.com is a leading online destination integrating gardening and
gardening-related commerce, content and community. We currently operate three
gardening Web sites, garden.com, our flagship Web site, virtualgarden.com, and
hortmag.com, which enable us to deliver a new value proposition to gardening
consumers and suppliers. Through our Web sites, we provide consumers with an
intuitive, easy-to-use environment through which they can access a wide variety
of gardening information and resources, purchase a broad selection of products,
receive specific gardening advice and other personalized services and interact
with an online gardening community. We offer our suppliers a branding
opportunity, increased sales potential through an expanded customer base and
the ability to improve demand forecasting. By interacting with our customers
through our internally developed Web sites, and with our suppliers through our
sophisticated extranet, we provide consistent, high quality customer service
and streamlined distribution. We currently have over 550,000 members and we had
1.6 million visitors during the month of April, the high point of the gardening
season. With over 16,000 products from over 60 suppliers, we believe we offer
the world's largest line of quality gardening and gardening-related products,
available in one convenient location.
The Online Gardening Opportunity
Gardening is one of the most popular pastimes in the U.S. According to the
National Gardening Association (NGA), U.S. households spent $46.8 billion on
garden and lawn products and landscaping services in 1998, with $30.1 billion
spent on garden and lawn products alone. In addition, the NGA estimates that
more than 67 million households in the U.S. participated in home gardening in
1998, 97% of which purchased garden and lawn products, such as flowers,
vegetables, herbs, trees, tools and shrubs. We believe that gardening-related
products, such as furniture, ornaments, outdoor living accessories and garden-
inspired gifts, which are not included in these totals, also represent
significant market opportunities.
Gardening appeals to a broad cross-section of the U.S. population and is
becoming an increasingly popular activity among the baby boom generation and
women. Despite the growth in gardening and its attractive demographics, the
traditional gardening retail channels have not evolved to meet the changing
needs of gardening consumers and suppliers. Consumers face inconsistent and
narrow product selection, limited information and personalized service,
resources for their gardening needs. Compounding this problem, suppliers lack
an integrated distribution channel to effectively meet consumers' needs. Given
the limitations of the traditional gardening retail channel, and the increasing
functionality and acceptance of the Internet, the Internet has emerged as an
ideal medium to provide a one-stop destination for commerce, content and
information to serve the attractive gardening market.
Our Solution
Our online destination integrates gardening and gardening-related
commerce, content and community to provide consumers and suppliers with a
compelling new value proposition. We believe we offer attractive benefits to
consumers, including convenience, ease of use, personalization, avenues for
community and enhanced selection. Our sophisticated extranet offers suppliers a
streamlined distribution channel with access to an expanded customer base. The
key features of our solution include:
. a complete shopping destination, offering centrally located content, a
broad selection of high quality gardening products and convenient
purchasing opportunities, 24 hours a day, seven days a week;
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. personalized services to consumers based on individual preferences,
geographic location and level of gardening sophistication;
. a new distribution channel to deliver a new value proposition to
consumers and suppliers, providing consistent customer service and
streamlined distribution;
. a broad and deep product selection to our customers, with over 16,000
products such as live plants, shrubs, trees, bulbs, seeds, tools,
furniture and garden accessories;
. compelling content, delivered on an interactive basis, including daily
and weekly online features and that are hyperlinked to companion
product offerings and which provide gardeners with planting advice,
design ideas and introductions to gardening trends; and
. an online community to make gardening information readily available
and to give gardeners from around the world the opportunity to
communicate with each other and with authors and other experts.
Our Strategy
Key components of our strategy to become the leading online destination
for gardening-related commerce, content and community include:
. leveraging the unique attributes of the Internet and information
technology to provide gardeners with a new, compelling value
proposition;
. continuing to execute a virtual warehouse model to expand our
selection of high quality products and to provide suppliers with
additional branding opportunities, increased sales and improved demand
forecasting;
. building the Garden.com brand to make our name synonymous with the
delivery of high quality gardening and gardening-related products and
services; and
. capitalizing on our growing product and customer databases to enable
targeted product, service and promotional offerings.
Our principal offices are located at 3301 Steck Avenue, Austin, Texas,
78757 and our telephone number is (512) 532-4000.
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The Offering
Common stock offered by Garden.com.......... shares
Common stock to be outstanding after this shares
offering....................................
Use of proceeds............................. For general corporate purposes,
including operating expenses,
capital expenditures and working
capital.
Proposed Nasdaq National Market symbol...... GDEN
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Unless otherwise indicated, all information in this prospectus relating to
our outstanding capital stock, options and warrants is as of March 31, 1999,
assumes that the over-allotment option will not be exercised and reflects the
conversion of all preferred stock into common stock, which will occur upon the
consummation of this offering. Please see "Capitalization" for a more complete
discussion regarding our capital stock, options and warrants. The terms
"Garden.com," "we," "us" and "our" refer to Garden.com, Inc., a Delaware
corporation.
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The following summary financial data are derived from the financial
statements of Garden.com. The pro forma balance sheet data give effect to the
issuance of 3,957,633 shares of Series E Preferred Stock in April and May 1999
and the conversion of all outstanding shares of preferred stock into common
stock upon the consummation of this offering. The pro forma as adjusted balance
sheet data reflect our receipt of the net proceeds from the sale of the shares
of common stock, at an assumed initial public offering price of $ , after
deducting the estimated underwriting discounts and commissions and offering
expenses.
Summary Financial Data
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Period from Fiscal Year Ended Nine Months Ended
October 2, 1995 June 30, March 31,
(inception) to ---------------------- -----------------------
June 30, 1996 1997 1998 1998 1999
--------------- ---------- ---------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $ 8 $ 316 $ 1,339 $ 687 $ 2,509
Operating loss........ $ (687) $ (2,480) $ (4,804) $ (2,651) $ (11,132)
Net loss.............. $ (665) $ (2,440) $ (4,611) $ (2,515) $ (10,568)
Basic net loss per
share................ $ (0.95) $ (1.73) $ (3.20) $ (1.73) $ (8.17)
Shares used to compute
basic net loss per
share................ 702,064 1,411,644 1,440,585 1,450,000 1,292,959
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
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Pro Forma
Actual Pro Forma As Adjusted
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<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $2,282 $24,919 $
Working capital................................. 7,142 29,779
Total assets.................................... 10,520 33,157
Total liabilities and deferred revenue.......... 2,026 2,026
Total redeemable convertible preferred stock and
stockholders' deficit.......................... 8,494 31,131
</TABLE>
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could harm our business, operating results and financial
condition and could result in a complete loss of your investment.
Risks Related to Our Business
We have a history of significant losses and we expect to incur substantial net
losses in the future
We incurred net losses of $0.7 million in our inception period from
October 2, 1995 through June 30, 1996, $2.4 million in fiscal 1997, $4.6
million in fiscal 1998 and $10.6 million in the nine months ended March 31,
1999. As of March 31, 1999, we have incurred cumulative net losses of $18.3
million. We expect to experience operating losses and negative cash flow for
the foreseeable future. We anticipate our losses will increase significantly
from current levels because future revenues may not increase sufficiently to
offset additional costs and expenses related to brand development, marketing
and other promotional activities, content development and technology and
infrastructure development. To date, we have funded our operations from the
sale of equity securities and have not generated cash from operations. As a
result, we will need to generate significant revenues to achieve and maintain
profitability. Although our revenues have grown significantly in recent
quarters, we cannot be certain that we can sustain these growth rates or that
we will achieve sufficient revenues for profitability. If we do achieve
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future.
We have a limited operating history and expect to encounter risks and
difficulties frequently faced by early stage companies in rapidly evolving
markets
We have a limited operating history on which to base an evaluation of our
business and prospects. We were formed in December 1995, and we initiated our
online operations and first recognized revenues in March 1996. Accordingly, you
must consider our prospects in light of the risks, expenses and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets such as online commerce. In particular, the online market for gardening
and gardening-related products is new and rapidly developing. As is typical for
any new, rapidly developing market, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty and
risk. It is also difficult to predict the online gardening market's future
growth rate. The online gardening market may fail to develop, develop more
slowly than expected or become saturated with competitors, or our products may
not achieve or sustain market acceptance. To address these risks, we must,
among other things, maintain and expand our customer base, implement and
successfully execute our business and marketing strategy, continue to develop
and upgrade the technology and systems that we use to process customers' orders
and payments, improve our Web sites, provide superior customer service, respond
to competitive developments and attract, retain and motivate qualified
personnel. We cannot assure you that we will be successful in addressing these
risks, and our failure to do so could have a negative impact on our business,
operating results and financial condition.
Our dependence on the highly seasonal gardening industry will cause our
operating results to vary from quarter to quarter
Seasonal factors typically influence product availability and the timing
of product shipments, which may affect both product demand and the period of
revenue recognition and, in turn, influence our quarterly revenues and product
margins. For instance, we expect our revenues to be relatively higher in our
fourth fiscal quarter, which coincides with the spring gardening season, and
relatively lower in our first fiscal quarter, reflecting decreasing consumer
demand for garden products during the late summer. In addition, as is typical
for gardening retailers, our product mix generally varies by season. Due to
this variation in product
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mix offered during the year, our gross margin fluctuates on a quarterly basis
reflecting the sale of higher margin products during the holiday season, such
as gifts and decorating items, and the sale of lower margin products during the
spring season, such as live plants. Furthermore, we anticipate that operating
costs will typically increase in the third quarter of our fiscal year as
marketing expenses increase in anticipation of the spring planting season.
Due to our limited operating history, we believe it is difficult to
predict the seasonal pattern of our future revenues and operating costs and the
impact of such seasonality on our future operating results. If they become more
pronounced, seasonal revenue and cost patterns may strain our personnel and
fulfillment activities and could cause a shortfall in revenues as compared to
costs in a given period.
We expect our quarterly operating results to fluctuate, and if we fail to meet
the expectations of public market analysts and investors, the market price of
our common stock could decline
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which are outside our
control. As a result, we believe that quarterly comparisons of our operating
results are not necessarily meaningful and that investors should not rely on
the results of one quarter as an indication of our future performance. We
believe it is likely that, in the future, fluctuations in our quarterly
operating results will cause our results to fall below the expectations of
securities analysts and investors, which could cause the price of our common
stock to drop. Factors that may negatively affect our quarterly operating
results include:
. our ability to attract new visitors to our Web sites and convert them
into customers;
. frequency of repeat purchases by customers;
. our ability to attract and retain high quality suppliers;
. changes in inventory availability from suppliers;
. the announcement or introduction of new or enhanced sites, services
and products by us or our competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
and
. our ability to attract new personnel in a timely and effective manner.
Our quarterly gross margins also may be impacted by a number of different
factors, including the mix of online product revenues as compared to
advertising revenues, the mix of products sold and the mix of revenues derived
from purchases originating from our Web sites and the Web sites of our
distribution and advertising partners.
Our limited operating history and the rapidly evolving nature of our
industry make forecasting quarterly operating results difficult. Accordingly,
we base our expenses in large part on our operating plans and future revenue
projections. Most of our expenses are fixed in the short term, and we may not
be able to quickly reduce spending if our revenues are lower than we project.
Therefore, any significant shortfall in revenues would likely have an
immediate, negative impact on our business, operating results and financial
condition.
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Establishing the Garden.com brand quickly and cost-effectively is essential for
us to be successful
We believe that we must establish, maintain and enhance the Garden.com
brand to attract more customers to our Web sites and to generate revenues from
product sales and advertising. Brand recognition and customer loyalty will
become increasingly important as more companies with well-established brands in
online services or the gardening industry offer competing services on the
Internet. Development of the Garden.com brand will depend largely on our
success in providing a high quality online experience supported by a high level
of customer service, which cannot be assured. We expect that we will need to
increase substantially our spending on programs designed to create and maintain
strong brand loyalty among customers and we cannot be certain that our efforts
will be successful.
We expect significant increases in our operating expenses which could have a
negative impact on our operating results
We plan to increase our operating expenses substantially to develop our
Garden.com brand nationally, offer new gardening-related products and services,
enter into additional strategic relationships and further develop our
technology and transaction-processing systems. These expenses will be incurred
before we derive any revenues from this increased spending. If our revenues do
not increase proportionately with these expenses, our net losses will be
greater than expected.
Gardening consumers may not accept our online solution
To be successful, we must attract and retain a significant number of
consumers to our garden.com Web site at a reasonable cost. Any significant
shortfall in the number of transactions occurring over our Web site will
negatively affect our financial results. Conversion of customers from
traditional shopping methods to electronic shopping may not occur as rapidly as
we expect, if at all. Therefore, we may not achieve the critical mass of
customer traffic we believe is necessary to become successful. Specific factors
that could prevent widespread customer acceptance of our solution, and our
ability to grow revenues, include:
. customer concerns about the security of online transactions;
. customer concerns about buying live plants and other gardening
materials without first seeing them;
. pricing that may not meet customer expectations;
. customer resistance to shipping charges, which generally do not apply
to purchases from traditional retail outlets;
. difficulties in timely shipment of plants, flowers and other live
goods;
. shipment of damaged goods or wrong products from our suppliers;
. delivery time before customers receive Internet orders, unlike the
immediate receipt of products at traditional retail outlets; and
. difficulties in returning or exchanging orders.
We depend on the economic strength of the gardening industry and favorable
general economic conditions
We derive substantially all of our revenues directly or indirectly from
the gardening industry, and our future operating results depend on the economic
strength of this industry. Any significant downturn in the gardening industry
could seriously harm our business, operating results and financial condition.
Purchases of
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gardening and gardening-related products are typically discretionary for
consumers and may be harmed by negative trends in the general economy. In
addition, our business strategy relies on advertising by and agreements with
other Internet companies. Any significant deterioration in general economic
conditions that harms these companies could also have a negative impact on our
business, operating results and financial condition.
Our business relies on our ability to maintain relationships with our suppliers
to obtain sufficient quantities of quality merchandise on acceptable commercial
terms
Because we carry minimal inventory and rely largely on rapid fulfillment
from our suppliers, our business would be seriously harmed if we were unable to
develop and maintain relationships with suppliers that allow us to obtain
sufficient quantities of quality merchandise on acceptable commercial terms. We
purchase our products from more than 60 suppliers. Our contracts or
arrangements with suppliers do not guarantee the availability of merchandise,
establish guaranteed prices or provide for the continuation of particular
pricing practices. Although we have alternative sources of supply for certain
of the products we offer, we have not established alternative sources for all
our products. Our current suppliers may not continue to sell products to us on
current terms or at all, and we may not be able to establish new supply
relationships to ensure delivery of product in a timely and efficient manner or
on terms acceptable to us. In addition, our supply contracts typically do not
restrict a supplier from selling products to retailers other than online
retailers, which could limit our ability to supply the quantity of product
requested by our customers.
We depend on our third party suppliers to provide quality products directly to
our customers
Because our revenues depend on the number of customers who buy products
from us, the reliability and quality of our products are critical to our
operating results. We are heavily dependent on suppliers for assuring the
quality and health of the products shipped directly to our customers. The
failure of our suppliers to consistently provide high quality products could
result in lost revenues, delays in customer acceptance, damage to our
reputation and harm to our brand name. In addition, we do not currently
maintain insurance against any product defect losses and, accordingly, could be
subject to significant defense costs or damages in the event of a significant
product defect claim.
Weather and other acts of nature could affect the supply of and demand for our
products
Weather and other acts of nature outside of our control could negatively
impact our business, operating results and financial condition. Adverse
weather, such as frost, droughts, floods and other severe weather patterns, as
well as plant diseases and pests can reduce or eliminate the supply of live
products, which could lead to increased prices for available products. In
addition, adverse weather or other growing conditions could negatively impact
consumer demand for gardening and gardening-related products. For example, a
late spring can lead to delayed or poor spring growing conditions for our live
goods reducing product availability or inclement weather during the peak
gardening season in spring and early summer may depress gardening purchases.
We face significant competition from established traditional gardening
retailers, mail order catalogs, online retailers and others
We may be unable to compete successfully against current and future
competitors, and competitive pressures could have a negative impact on our
business, operating results and financial condition. Online commerce, and
specifically the online retail gardening market, is new and rapidly evolving,
and we expect competition to intensify in the future. Our competition includes
existing companies that have built or are trying to establish an online retail
presence, as well as new entrants trying to build a brand online. We currently
or potentially compete with a variety of other companies, including:
. local nurseries and gardening centers;
. home improvement superstores, such as Lowe's and Home Depot, and mass
merchant retailers, such as Wal-Mart;
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. established gardening mail order catalogs, including Foster &
Gallagher and Smith & Hawken;
. media groups with existing, well-defined brands in the home and garden
market, such as Martha Stewart Living; and
. multi-channel online retailers seeking to diversify their product
offerings, such as 1-800-FLOWERS and FTD.
We expect competition to increase as current competitors increase the
sophistication of their offerings and as new participants enter the market.
Many of our current and potential store-based, catalog and online competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do and could enter into strategic or commercial relationships with
larger, more established and well-financed companies. Many of our current and
potential competitors may be able to secure services and products from
suppliers on more favorable terms, devote greater resources to marketing and
promotional campaigns and devote substantially more resources to Web site and
systems development than we do. In addition, new technologies and the expansion
of existing technologies, such as price comparison programs that select
specific products from a variety of Web sites, may increase competitive
pressures on us. Increased competition may result in reduced operating margins,
as well as loss of market share and brand recognition.
We depend upon Federal Express to deliver our products on a timely and
consistent basis
Our supply and distribution system is dependent upon our relationship with
Federal Express. Federal Express ships 90% of our orders, and we do not
currently maintain a distribution relationship with any other carrier. Because
we do not have a written agreement with Federal Express, we cannot be sure that
our relationship will continue on terms favorable to us, if at all. If our
relationship with Federal Express is terminated or impaired or if Federal
Express is unable to deliver product for us, whether through labor shortage,
slow down or stoppage, deteriorating financial or business condition or for any
other reason, we would be required to use alternative carriers for the shipment
of products to our customers. We may be unable to engage an alternative carrier
on a timely basis or upon terms favorable to us. Changing carriers would likely
have a negative effect on our business, operating results and financial
condition. Potential adverse consequences include:
. reduced visibility into order status and package tracking;
. delays in order processing and product delivery;
. increased cost of delivery, resulting in reduced gross margins; and
. reduced shipment quality which may result in damaged products and
customer dissatisfaction.
We rely substantially on our relationships with America Online and other online
services, search engines and directories to drive traffic to our Web sites
We have relationships with America Online and other online services,
search engines and directories to provide content and advertising banners that
hyperlink to our Web sites. We rely on search engines, directories and other
navigational tools to direct traffic to our Web sites. We cannot be sure that
such relationships will be available to us in the future on acceptable
commercial terms, if at all. If we are unable to maintain satisfactory
relationships with these parties on acceptable commercial terms, or if our
competitors are better able to leverage such relationships, our business,
operating results and financial condition could be negatively affected. We may
not achieve sufficient online traffic or product purchases to realize
sufficient sales to compensate for our significant obligations to these
distribution and advertising partners. Failure to achieve sufficient traffic or
generate sufficient revenues from purchases originating from third-party Web
sites would likely have a negative effect on our business, revenues, operating
results and financial condition.
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Our performance depends on our ability to offer new and expanded products and
services
We plan to introduce new and expanded products and services and to enter
into new relationships with third parties in order to generate additional
revenues, attract more consumers and respond to competition. We may be unable
to offer such products or services in a cost-effective or timely manner.
Furthermore, any new product or service we launch that is not favorably
received by consumers could damage our reputation and brand name. Expansion of
our products or services in this manner would also require significant
additional expenses and development and may strain our management, financial
and operational resources. Our business, operating results and financial
condition could be seriously harmed if we are unable to generate revenues from
expanded services or products sufficient to offset their cost. Our success also
depends on our ability to accurately determine the products and features
required by customers and to design and implement offerings that meet these
requirements in a timely and efficient manner. We may be unsuccessful in
determining customer requirements, and our offerings may not adequately satisfy
current or future customer demands. Furthermore, even if we correctly forecast
customer demands, we may be unable to design and implement a Web site that
meets these demands.
We have experienced significant growth in our business in recent periods and
any inability to manage this growth and any future growth could harm our
business
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our management and resources. Any
failure to manage growth effectively could seriously harm our business and
operating results. We have grown from 81 employees on December 31, 1998 to 149
employees on May 24, 1999. We have also recently moved into new headquarters
and significantly expanded our operations. To be successful, we will need to
continue to implement management information systems and improve our operating,
administrative, financing and accounting systems and controls. We will also
need to train new employees and maintain close coordination among our
executive, accounting, finance, marketing, sales and operations organizations.
These processes are time consuming and expensive, will increase management
responsibilities and will divert management attention.
Our success depends substantially upon our ability to attract and retain key
employees
We are substantially dependent on the continued services and on the
performance of our senior management and certain other key personnel. The loss
of their services could seriously harm our business. We also depend on our
ability to identify, attract, hire, train, retain and motivate other highly
skilled technical, managerial, editorial, marketing and customer service
personnel. Competition for such personnel is intense, and we may be unable to
successfully attract, assimilate or retain sufficiently qualified personnel. In
particular, we may encounter difficulties in attracting and retaining a
sufficient number of qualified software developers for our online services and
transaction-processing systems. The failure to retain and attract necessary
technical, managerial, editorial, merchandising, marketing and customer service
personnel could negatively impact our business, operating results and financial
condition.
We may be unable to adequately protect or enforce our intellectual property
rights
Our success and competitive position depend on our internally developed
methods, technologies and systems, which we generally protect through a
combination of copyright, trademark and trade secrecy laws, confidentiality
agreements with employees and protective contractual provisions. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or services or to obtain and use our proprietary
information. In addition, others could independently develop substantially
equivalent intellectual property. If we do not effectively protect our
intellectual property, our business could suffer. Litigation may be necessary
to enforce our intellectual property rights, to protect our trade secrets and
to determine the validity and scope of the proprietary rights of others. Any
litigation could result in substantial costs and diversion of resources and
could seriously harm our business, operating results and financial condition.
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We rely on content and technologies licensed from third parties
We intend to continue to strategically license certain content for our Web
sites from third parties, including content that is integrated with internally
developed content and used on our Web sites to provide key services. These
third party content licenses may be unavailable to us on commercially
reasonable terms, and we may be unable to integrate third party content
successfully. Such content licenses may expose us to increased risks,
including:
. the risks associated with the assimilation of new content;
. the diversion of resources from the development of our content;
. the inability to generate revenues from new content sufficient to
offset associated acquisition costs; and
. the maintenance of uniform, appealing content.
The inability to obtain any of these licenses could result in delays in
site development or services until equivalent content can be identified,
licensed and integrated. Any such delays in site development or services could
negatively impact our business, operating results and financial condition.
We currently license from third parties certain technologies and
information incorporated into our Web sites. As we continue to introduce new
services that incorporate new technologies and information, we may be required
to license additional technology and information from others. We cannot assure
you that these third-party technology and information licenses will continue to
be available to us on commercially reasonable terms, if at all. Additionally,
we cannot assure you that the third parties from which we currently license our
technology and information will be able to defend their proprietary rights
successfully against claims of infringement. Any failure to obtain any of these
technology and information licenses could result in delays or reductions in the
introduction of new features, functions or services. It could also negatively
affect the performance of our existing services until equivalent technology or
information can be identified, obtained and integrated.
Protection of our domain names is uncertain
We currently hold various World Wide Web domain names, including
garden.com. The acquisition and maintenance of domain names generally is
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is subject to change. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our trademarks and other proprietary rights.
Our operating results depend on our internally developed Web sites, network
infrastructure and transaction-processing systems
The satisfactory performance, reliability and availability of our Web
sites, transaction-processing systems and network infrastructure are critical
to our operating results, as well as to our ability to attract and retain
customers and maintain adequate customer service levels. Any system
interruptions that result in the unavailability of our Web sites or reduced
performance of the transaction systems would reduce the volume of sales and the
attractiveness of our service offerings, which would seriously harm our
business, operating results and financial condition. We are currently upgrading
our system architecture to accommodate
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increased traffic and processing needs. We expect this process to be time
consuming and expensive and our upgrade may not be successful.
We use internally developed systems for our Web sites and substantially
all aspects of transaction processing, including customer profiling and order
verifications. We have experienced periodic systems interruptions due to server
failure, which we believe will continue to occur from time to time. If the
volume of traffic on our Web sites or the number of purchases made by customers
substantially increases, we will need to further expand and upgrade our
technology, transaction processing systems and network infrastructure. We have
experienced and expect to continue to experience temporary capacity constraints
due to sharply increased traffic during sales or other promotions, which cause
unanticipated system disruptions, slower response times, degradation in levels
of customer service, impaired quality and delays in reporting accurate
financial information.
Our transaction processing systems and network infrastructure may not be
able to accommodate increases in traffic in the future. We may be unable to
project accurately the rate or timing of traffic increases or successfully
upgrade our systems and infrastructure to accommodate future traffic levels on
our Web sites. In addition, we may be unable in a timely manner to effectively
upgrade and expand our transaction processing systems or to successfully
integrate any newly developed or purchased modules with our existing systems.
Any inability to do so could negatively impact our business, operating results
and financial condition.
Our computers and communications systems are vulnerable to damage or
interruption which may hinder our ability to deliver timely information or
execute online transactions
Our ability to successfully receive and fulfill orders and provide high
quality customer service depends on the efficient and uninterrupted operation
of our computer and communications hardware systems. Substantially all of our
computer and communications systems are located in three separate locations in
Austin, Texas. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-
ins and similar events. Despite our implementation of network security
measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and confirm
customer orders. The occurrence of any of the foregoing risks could negatively
impact our business, operating results and financial condition.
Our results could suffer if we are required to collect additional sales and
other taxes in the future
We do not currently collect sales or other similar taxes for shipments of
goods into states other than California, Iowa and Texas. However, one or more
states into which our products are sold may seek to impose sales tax collection
obligations. In addition, any presence in states outside California, Iowa and
Texas could subject shipments into such states to state sales taxes under
current or future laws. If one or more states successfully assert that we
should collect sales or other taxes on the sale of merchandise, our business,
operating results and financial condition could be negatively impacted.
If we expand our business internationally, our business would become
increasingly susceptible to numerous international business risks and
challenges
Although we have not had international sales revenue to date, we may
increase our international sales efforts. International sales are subject to
inherent risks and challenges, including:
. the need to develop new supplier relationships;
. unexpected changes in international regulatory requirements and
tariffs;
. difficulties in staffing and managing foreign operations;
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. longer payment cycles;
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any negative
effects on our international business could impact detrimentally our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into U.S. dollars may contribute
to fluctuations in our results of operations and fluctuating exchange rates
could cause reduced gross revenues and/or gross margins from dollar-denominated
international sales.
Future acquisitions could increase the risk of our business
We may broaden the scope and content of our Web sites by acquiring other
online services and businesses. Although none are currently contemplated, any
future acquisitions would expose us to increased risks, including:
. risks associated with the assimilation of new operations, Web sites
and personnel;
. the diversion of resources from our existing businesses, sites and
technologies;
. the inability to generate sufficient revenues from new sites to offset
associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and
policies; and
. the impairment of relationships with employees and customers as a
result of any integration of new management personnel.
We are subject to government regulations relating to the shipment of live
goods, fertilizers and other products
We are subject to federal, state and local laws and regulations relating
to the shipment of live goods, fertilizers and other products. For instance,
various federal, state and local authorities regulate the shipment of plants
and products across their borders, in an attempt to restrict the introduction
of harmful plants, pests and diseases. Additionally, products marketed or that
may be marketed as fertilizers or pesticides are subject to federal, state and
local laws and regulations. We currently rely on our suppliers to comply with
these laws and regulations. However, we are unable to verify that our suppliers
have complied or will comply with all such laws and regulations. We could be
fined or exposed to civil or criminal liability, and we could receive potential
negative publicity, if these requirements have not been fully met by our
suppliers or by us directly.
We may be adversely impacted by the Year 2000
We believe that our internal computer systems are Year 2000 compliant and
we do not anticipate that we will incur significant expenditures to ensure that
such systems will function properly with respect to dates in the Year 2000 and
beyond. However, the systems and software of third parties on which we rely,
including content providers, advertisers and affiliates may contain errors or
faults with respect to the Year 2000. For example, we depend on financial
institutions to process credit card transactions, on telecommunications vendors
to maintain our network and on Federal Express to deliver product to customers.
Known or unknown errors or defects that affect the operation of our software
and systems and those of third parties, including content providers,
advertisers and affiliates, could result in delay or loss of
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revenue, interruption of services, cancellation of customer contracts,
diversion of development resources, damage to our reputation, increased service
and warranty costs, and litigation costs. A more detailed description of our
Year 2000 compliance is in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
Risks Related to the Internet Industry
Our performance depends on the growth and acceptance of the Internet as a
medium for commerce
We cannot be sure that a sufficiently broad base of consumers will adopt,
and continue to use, the Internet and commercial online services as a medium
for commerce, particularly for purchases of gardening and gardening-related
products. Even if consumers adopt the Internet as a medium for commerce, we
cannot be sure that the necessary infrastructure will be in place to process
such transactions. Our long-term viability depends substantially upon the
widespread acceptance and the development of the Internet as an effective
medium for consumer commerce. Use of the Internet to effect retail transactions
is at an early stage of development. Convincing consumers to purchase
gardening-related products online may be particularly difficult because
consumers are accustomed to a high degree of human interaction in purchasing
gardening-related products.
Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty and few
proven services and products exist. The development of the Internet and
commercial online services into a viable commercial marketplace is subject to a
number of factors, including:
. continued growth in the number of users of such services;
. concerns about transaction security;
. continued development of the necessary technological infrastructure;
. development of enabling technologies;
. uncertain and increasing government regulation; and
. the development of complementary services and products.
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. In addition, the Internet or other online
services could lose their viability due to delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet or other online service activity, or due to increased governmental
regulation. Insufficient availability of telecommunications services to support
the Internet or other online services also could result in slower response
times and negatively impact use of the Internet and other online services
generally and us in particular. If the use of the Internet and other online
services fails to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services do not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace, our business, operating results and
financial condition will be negatively impacted.
Rapid technological change could render our Web sites and systems obsolete
If we are unable, for technical, legal, financial or other reasons, to
adapt in a timely manner in response to changing market conditions or customer
requirements, our business, operating results and
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financial condition could be harmed. The Internet and the online commerce
industry are characterized by rapid technological change, sudden changes in
user and customer requirements and preferences, frequent new product and
service introductions embodying new technologies and the emergence of new
industry standards and practices that could render our existing online sites
and proprietary technology and systems obsolete. The emerging nature of these
products and services and their rapid evolution will require that we
continually improve the performance, features and reliability of our online
services, particularly in response to competitive offerings. Our success will
depend, in part, on our ability:
. to enhance our existing services;
. to develop and license new services and technology that address the
increasingly sophisticated and varied needs of our prospective
customers; and
. to respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
The development of Web sites and other proprietary technology entails
significant technical and business risks and requires substantial expenditures
and lead time. We may be unable to use new technologies effectively or adapt
our Web sites, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards.
We are exposed to risks associated with online commerce security and credit
card fraud
Consumer concerns about the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as
customer credit card numbers, we rely on encryption and authentication
technology that we license from third parties. We cannot predict whether events
or developments will result in a compromise or breach of the algorithms we use
to protect customer transaction data. Furthermore, our servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We may need to expend significant additional capital and other
resources to protect against a security breach or to alleviate problems caused
by any breaches. Our business may be adversely affected if our security
measures do not prevent security breaches and we cannot assure that we can
prevent all security breaches.
To date, we have suffered minor losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders in each case. Under current credit card
practices, a merchant is liable for fraudulent credit card transactions where,
as is the case with the transactions we process, that merchant does not obtain
a cardholder's signature. A failure to adequately control fraudulent credit
card transactions could harm our business.
We could face liability for information retrieved from or transmitted through
our Web sites which could result in high litigation or insurance costs
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute. Claims have been successfully brought against
online services. In addition, we do not and cannot practically screen all of
the content generated by our users on the bulletin board system on our Web
sites, and we could be exposed to liability with respect to such content.
Although we carry general liability insurance, our insurance may not cover
claims of these types or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability, particularly liability that
is not covered by insurance or is in excess of insurance coverage, could
negatively impact our reputation and our business, operating results and
financial condition.
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Future government regulations of the Internet could increase our costs of
conducting business
New Internet legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Internet and online commerce, or the application of existing laws and
regulations to the Internet and online commerce could harm our business,
operating results and financial condition. We are subject to regulations
applicable to businesses generally and laws or regulations directly applicable
to communications over the Internet and access to online commerce. Although
there are currently few laws and regulations directly applicable to the
Internet and online retailing services, it is possible that a number of laws
and regulations may be adopted with respect to the Internet covering issues
such as user privacy, pricing, content, copyrights, distribution, antitrust,
taxation and characteristics and quality of products and services. For example,
the United States Congress recently enacted Internet laws regarding children's
privacy, copyrights, taxation and transmission of sexually explicit material
and the European Union recently enacted its own privacy regulations.
Furthermore, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations regarding Internet commerce and
communications may decrease the growth of the Internet or commercial online
services, which could, in turn, decrease the demand for our products and
services and increase our cost of doing business and have a negative impact on
our business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
For example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in online commerce, and new
state tax regulations may subject us to additional state sales and income
taxes. Additionally, German authorities have challenged major U.S. online
services for making certain content accessible in Germany. If we were alleged
to have violated federal, state or foreign, civil or criminal law, even if we
could successfully defend such claims, it could have a negative impact on our
business, operating results and financial condition.
Risks Related to the Securities Markets
No public market for our common stock currently exists and our stock price may
fluctuate after this offering
The market price for our common stock will vary from the initial public
offering price. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control, including:
. variations in quarterly operating results;
. changes in financial estimates by securities analysts;
. changes in market valuations of online commerce companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major supplier;
. additions or departures of key personnel;
. sales of common stock in the future; and
. fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet and online
commerce companies.
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Our business may be harmed by class action litigation due to stock price
volatility
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could negatively impact our business, operating
results and financial condition.
We may be unable to meet our future capital requirements
We expect the net proceeds from this offering, current cash balances, cash
equivalents and commercial credit facilities to meet our working capital and
capital expenditure needs for at least the next 12 months. After that time, we
may need to raise additional funds, and we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at all. Our capital
requirements depend upon several factors, including the rate of market
acceptance, our ability to expand our customer base, our level of expenditures
for marketing and sales, the cost of Web site upgrades and other factors. If
our capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. Further, if we issue
equity securities, stockholders may experience additional dilution or the new
equity securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise funds, if needed, on
acceptable terms, we may not be able to continue our operations, develop or
enhance our Web site, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could negatively
impact our business, operating results and financial condition.
Substantial sales of our common stock could cause our stock price to decline
After this offering, we will have shares of outstanding common stock.
Sales of a substantial number of shares of common stock after the offering
could cause the market price of our common stock to decline.
All the shares sold in this offering will be fully transferable. We
anticipate that our directors, officers and significant securityholders will
enter into lock-up agreements in connection with this offering generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the date of this prospectus without the prior written consent
of Hambrecht & Quist LLC. Taking into account the lock-up agreements, and
assuming Hambrecht & Quist LLC does not release stockholders from these
agreements, the number of shares that will be available for sale in the public
market is as follows:
. Beginning on the effective date of this prospectus, only the shares
sold in this offering will be immediately available for sale in the
public market.
. Beginning 90 days after the effective date, approximately shares
will be eligible for sale.
. Beginning 180 days after the effective date, approximately shares
will be eligible for sale.
. At various times thereafter upon the expiration of applicable holding
periods, shares will become eligible for sale.
See "Shares Eligible for Future Sale" for further discussion of these
issues.
Our existing stockholders will exercise significant control over Garden.com
On completion of this offering, executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately % of our
outstanding common stock. As a result, these stockholders
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will be able to exercise significant control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could delay or prevent someone from
acquiring or merging with us. See "Principal Stockholders."
The broad discretion we have in the use of proceeds of this offering may
increase the risk that we will not use them effectively or that we will use
them in ways with which you may not agree
The net proceeds of this offering will be added to our working capital and
will be available for general corporate purposes, including operating expenses
and capital expenditures. In addition, we may use a portion of the net proceeds
to acquire or invest in complementary businesses, technologies, services or
products. We cannot state with certainty particular uses for the net proceeds
from this offering. Our management will have broad discretion in the use of the
net proceeds. See "Use of Proceeds."
Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company
Certain provisions of our Restated Certificate of Incorporation and
Amended and Restated By-laws may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable. Such provisions include:
. authorizing the issuance of "blank check" preferred stock;
. providing for a classified board of directors with staggered, three-
year terms;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us. See "Description of Capital Stock--
Delaware Anti-Takeover Law and Our Restated Certificate of Incorporation and
Amended and Restated By-law Provisions."
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under "Risk Factors." Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of such statements. We are under no duty to
update any of the forward-looking statements after the date of this prospectus
to conform such statements to actual results.
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USE OF PROCEEDS
We will receive net proceeds of $ from the sale of shares of
common stock at an assumed initial public offering price of $ per share after
deducting underwriting discounts and commissions of $ and expenses of $ . We
will not receive any proceeds from the sale of common stock by the selling
stockholders.
The primary purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate future access to
public markets. We intend to use the proceeds for general corporate purposes,
including operating expenses, capital expenditures and working capital.
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complementary to our business, we have no current plans in
this regard. Pending use of the net proceeds for the above purposes, we intend
to invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.
PREEMPTIVE RIGHTS
Certain holders of our Series E Preferred Stock have a preemptive right to
purchase shares of common stock sold in this offering at the initial public
offering price. This preemptive right is limited to the right to purchase in
this offering up to 25% of that number of shares of common stock that would be
required to be sold to that Series E holder to maintain its pre-offering
percentage ownership. As of the date of this prospectus, such stockholders have
the right to purchase approximately of the shares to be issued in this
offering, assuming the over-allotment option will not be exercised. Shares
purchased by these stockholders under their preemptive rights will reduce the
number of shares available to new investors in this offering.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 on
an actual, pro forma and pro forma as adjusted basis. The "actual" column
reflects our capitalization as of March 31, 1999 on a historical basis, without
any adjustments to reflect subsequent events or anticipated events. The "pro
forma" column reflects our capitalization as of March 31, 1999 with adjustments
for the following:
. the filing of a Restated Certificate of Incorporation authorizing
50,000,000 shares of common stock and 5,000,000 shares of undesignated
preferred stock;
. the issuance in April and May 1999 of 3,957,633 shares of our Series E
Preferred Stock and a warrant to purchase 36,713 shares of our Series
E Preferred Stock for net proceeds of approximately $22,638 thousand;
and
. the automatic conversion of 14,546,780 shares of outstanding preferred
stock into common stock upon the closing of this offering.
The "pro forma as adjusted" column reflects our capitalization as of March
31, 1999 with the preceding "pro forma" adjustments plus:
. the receipt of the estimated net proceeds from our sale of shares
of common stock at an assumed initial public offering price of $ per
share.
None of the columns set forth below reflect the following:
. the exercise of options to purchase 1,379,000 shares of common stock
outstanding as of May 24, 1999, the exercise of warrants to purchase
730,587 shares of preferred stock outstanding as of May 24, 1999 and
1,332,450 shares of common stock reserved for issuance under our stock
plans.
The information shown in the table below is qualified by, and should be
read in conjunction with our more detailed financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------
Pro Forma As
Actual Pro Forma Adjusted
------- -------------- ------------
(in thousands)
--------------
<S> <C> <C> <C>
Current portion of long-term debt......... $ 151 $ 151 $
------- --------
Long-term debt, less current portion...... 40 40
Redeemable convertible preferred stock,
$0.01 par value; 12,107,158 shares
authorized, 10,589,147 issued and
outstanding actual; no shares authorized,
issued and outstanding pro forma and pro
forma as adjusted........................ 26,938 -- --
Warrants to purchase redeemable
convertible preferred stock.............. 24 24
Stockholders' equity:
Preferred Stock, $0.01 par value;
12,107,158 shares authorized, 10,589,147
shares issued and outstanding actual;
5,000,000 shares authorized, no shares
issued and outstanding pro forma and pro
forma as adjusted....................... -- -- --
Common Stock, $0.01 par value, 15,000,000
shares authorized, 1,414,800 issued and
outstanding actual; $0.01 par value
15,961,580 shares issued and outstanding
pro forma; shares issued and
outstanding pro forma as adjusted....... 14 160
Additional paid-in capital................ 785 50,216
Deferred compensation..................... (697) (697)
Accumulated deficit....................... (18,571) (18,571)
------- -------- ----
Total stockholders' deficit.............. (18,469) 31,108
------- -------- ----
Total capitalization.................... $ 8,684 $ 31,323 $
======= ======== ====
</TABLE>
22
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $ , or
approximately $ per share of common stock. Pro forma net tangible book value
per share represents the amount of our total assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the issuance of 3,957,633 shares of Series E Preferred Stock and the
conversion of all preferred stock into shares of common stock upon completion
of this offering. After giving effect to the sale of the shares of common
stock offered hereby at an assumed initial public offering price of $ per
share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses, the pro forma net tangible book value as of
March 31, 1999 would have been $ , or approximately $ per share. This
represents an immediate increase in pro forma net tangible book value of $ per
share to existing stockholders and an immediate dilution in net tangible book
value of $ per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of March 31,
1999............................................................ $
Increase in pro forma net tangible book value per share
attributable to
new investors...................................................
---
Pro forma net tangible book value per share after offering.........
----
Dilution in pro forma net tangible book value per share to new
investors......................................................... $
====
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1999,
the number of shares of common stock purchased from Garden.com, the total
consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- ---------------------- Price
Number Percent Amount Percent Per Share
-------- -------- ---------- ---------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New investors...........
-------- -------- ---------- ---------
Total................. % $ %
======== ======== ========== =========
</TABLE>
The foregoing discussion and tables assume no exercise of stock options or
warrants outstanding as of March 31, 1999. As of March 31, 1999, there were
outstanding options to purchase 902,750 shares of common stock at a weighted
average exercise price of $0.55 per share and 632,450 shares were reserved for
issuance under our stock plan. As of March 31, 1999, after giving effect to the
issuance of warrants to purchase 36,713 shares of Series E Preferred Stock,
there were outstanding warrants to purchase 730,587 shares of preferred stock
at a weighted average exercise price of $2.19 per share. The foregoing
discussion also excludes an additional 1,200,000 shares reserved for issuance
under stock plans amended or adopted in connection with this offering. To the
extent that any shares available for issuance upon exercise of outstanding
options or warrants or pursuant to our stock plans are issued, there will be
further dilution to new public investors. See "Management--Executive
Compensation" and "Description of Capital Stock."
23
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data for the period from
October 2, 1995 (inception) to June 30, 1996, for the fiscal years ended June
30, 1997 and 1998 and for the nine months ended March 31, 1999 and the balance
sheet data as of June 30, 1996, 1997 and 1998 and March 31, 1999 are derived
from our financial statements that have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the nine months ended March 31, 1998 are
derived from our unaudited financial statements that, in the opinion of
management, include all normal recurring adjustments necessary for a fair
presentation of our financial position and results of operations for the
unaudited interim periods. The statement of operations data for the interim
periods are not necessarily indicative of results that may be expected for any
other interim period or for the year as a whole. Actual results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Period from Fiscal Year Ended Nine Months Ended
October 2, 1995 June 30, March 31,
(inception) to -------------------- ---------------------
June 30, 1996 1997 1998 1998 1999
--------------- --------- --------- ----------- ---------
(unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Products.............. $ 8 $ 308 $ 1,283 $ 648 $ 2,314
Advertising........... -- 8 56 39 195
------- --------- --------- --------- ---------
Total revenues...... 8 316 1,339 687 2,509
------- --------- --------- --------- ---------
Cost of revenues:
Products.............. 5 242 1,086 530 2,019
Advertising........... -- 4 22 15 54
------- --------- --------- --------- ---------
Total cost of
revenues........... 5 246 1,108 545 2,073
------- --------- --------- --------- ---------
Gross profit........... 3 70 231 142 436
Operating expenses:
Marketing and sales... 189 927 2,330 982 7,065
Content and product
development.......... 161 858 1,213 828 2,166
General and
administrative....... 340 765 1,492 983 2,337
------- --------- --------- --------- ---------
Total operating
expenses........... 690 2,550 5,035 2,793 11,568
------- --------- --------- --------- ---------
Operating loss......... (687) (2,480) (4,804) (2,651) (11,132)
Other income and
expense............... 22 40 193 136 564
------- --------- --------- --------- ---------
Net loss............... $ (665) $ (2,440) $ (4,611) $ (2,515) $ (10,568)
======= ========= ========= ========= =========
Basic net loss per
share................. $ (0.95) $ (1.73) $ (3.20) $ (1.73) $ (8.17)
======= ========= ========= ========= =========
Shares used to compute
basic net loss per
share................. 702,064 1,411,644 1,440,585 1,450,000 1,292,959
======= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------- March 31,
1996 1997 1998 1999
---- ------ ------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $114 $4,948 $19,042 $ 2,282
Working capital................................ (10) 4,568 18,308 7,142
Total assets................................... 323 5,423 20,489 10,520
Total liabilities and deferred revenue......... 251 586 1,473 2,026
Total redeemable convertible preferred stock
and stockholders' deficit..................... 72 4,837 19,016 8,494
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Financial
Statements and the related notes. This discussion contains forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations and intentions. Our
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors," "Business" and
elsewhere in this prospectus. See "Forward Looking Statements."
Overview
We were formed in December 1995 as Garden Escape, Inc. as a result of a
merger with The Asbury Group, Inc., a Texas company formed in October 1995. We
began offering products for sale on our Web site in March 1996. For the period
from our inception on October 2, 1995 through March 1996, we had no sales and
our operating activities related primarily to developing our Web site and
computer infrastructure and establishing supplier relationships. Since
launching our Web site, we have continued these operating activities and have
also focused on building sales momentum, extending our product offerings,
establishing supplier and vendor relationships, promoting our brand and
establishing distribution and customer solutions operations. As a result, our
cost of sales and operating expenses have increased significantly. In February
1999, we changed the name of our company to Garden.com, Inc.
We derive our revenues primarily from product sales and shipping charges.
Revenues for products are recognized when the products are shipped to the
customer. Revenues are recorded net of product returns, promotional discounts
and coupons. Seasonal factors typically influence product availability and the
timing of product shipments, which may affect the period of revenue recognition
and, therefore, may influence our quarterly revenues and product margins. For
instance, we expect our revenues to be relatively higher in our fourth fiscal
quarter, which coincides with the spring gardening season, and relatively lower
in our first fiscal quarter, reflecting decreasing consumer demand for garden
products during the late summer. In addition, as is typical for gardening
retailers, our product mix generally varies by season. Due to this variation in
product mix offered during the year, our gross margin fluctuates on a quarterly
basis reflecting the sale of higher margin products during the holiday season,
such as gifts and decorating items, and the sale of lower margin products
during the spring season, such as live plants.
We also generate revenues through advertising on our Web sites.
Advertising revenues are derived principally from short-term advertising
contracts in which we typically guarantee a minimum number of impressions to be
delivered to users over a specified period of time for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed. Because advertising revenues are less seasonal than product
revenues, the higher gross margins associated with advertising revenue may have
a more pronounced effect on the total gross margin in periods when product
sales are lower.
Since inception, we have incurred significant losses and, as of March 31,
1999, had incurred cumulative net losses of $18.3 million. We expect to
experience operating losses and negative cash flow for the foreseeable future.
We anticipate our losses will increase significantly from current levels
because we expect to incur additional costs and expenses related to brand
development, marketing and other promotional activities, content development,
technology and infrastructure development and other capital expenditures. As a
result, we will need to generate significant revenues to achieve and maintain
profitability. Although our revenues have grown significantly in recent
quarters, we cannot be certain that we can sustain these growth rates or that
we will achieve sufficient revenues for profitability.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by
25
<PAGE>
companies in their early stage of development, particularly companies in new
and rapidly evolving markets such as online commerce. To address these risks,
we must, among other things, maintain and expand our customer base, implement
and successfully execute our business and marketing strategy, continue to
develop and upgrade the technology and systems that we use to process
customers' orders and payments, improve our Web site, provide superior customer
service, respond to competitive developments and attract, retain and motivate
qualified personnel. We cannot assure you that we will be successful in
addressing these risks, and our failure to do so could have a negative impact
on our business, operating results and financial condition.
Results of Operations
The following table sets forth the our results of operations expressed as
a percentage of total revenues. Our historical operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Percentage of Revenues
--------------------------------------------------
Fiscal Year
Period from Ended Nine Months
October 2, 1995 June 30, Ended March 31,
(inception) to --------------- ----------------
June 30, 1996 1997 1998 1998 1999
--------------- ------ ------ ----------- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Products................. 100% 97% 96% 94% 92%
Advertising.............. -- 3 4 6 8
------ ------ ------ ---- ----
Total Revenues.......... 100 100 100 100 100
------ ------ ------ ---- ----
Cost of revenues:
Products................. 63 77 81 77 80
Advertising.............. -- 1 2 2 3
------ ------ ------ ---- ----
Total cost of revenues.. 63 78 83 79 83
------ ------ ------ ---- ----
Gross profit.............. 37 22 17 21 17
Operating expenses:
Marketing and sales...... 2,363 293 174 143 282
Content and product
development............. 2,012 272 91 121 86
General and
administrative.......... 4,250 242 111 143 93
------ ------ ------ ---- ----
Total operating
expenses............... 8,625 807 376 407 461
------ ------ ------ ---- ----
Operating loss............ (8,588) (785) (359) (386) (444)
Other income and expense.. 275 13 15 20 23
------ ------ ------ ---- ----
Net loss.................. (8,313)% (772)% (344)% (366)% (421)%
====== ====== ====== ==== ====
</TABLE>
Comparison of Nine Months Ended March 31, 1998 and March 31, 1999
Revenues
Revenues consist of product revenues and advertising revenues. Revenues
increased 264% from $687,000 for the nine months ended March 31, 1998 to $2.5
million for the nine months ended March 31, 1999. The increase in revenues was
primarily attributable to an increase in product revenues and, to a lesser
extent, advertising revenues.
Products. Product revenues consist of product sales to customers and
charges to customers for shipping and are recorded net of product returns,
promotional discounts and coupons. Product revenues increased 255% from
$648,000, or 94% of revenues, for the nine months ended March 31, 1998 to $2.3
million, or 92% of revenues, for the nine months ended March 31, 1999. Product
revenues increased as a result of the significant growth of our customer base
and an increase in repeat purchases for our existing
26
<PAGE>
customers, which we believe were primarily influenced by increased marketing
activities, expanded product offerings and enhancements to the features and
functionality of our Web sites.
Advertising. Advertising revenues increased 400% from $39,000, or 6% of
revenues, for the nine months ended March 31, 1998 to $195,000, or 8% of
revenues, for the nine months ended March 31, 1999. Advertising revenues
increased due to an increase in the number of advertisers and number of
advertisements sold and, to a lesser extent, due to selling advertising
inventory more effectively through our internal advertising sales department
rather than through a third party agency. In October 1998, we created an
internal advertising sales department and, in February 1999, we discontinued
the use of a third party advertising agency.
Gross Profit
Gross profit consists of revenues minus cost of revenues. Cost of revenues
consists primarily of the cost of products sold to customers, shipping and
handling costs for product sales, and advertising sales commissions paid to
both a third party advertising agency and to our internal advertising sales
department. Gross profit increased from $142,000 for the nine months ended
March 31, 1998 to $436,000 for the nine months ended March 31, 1999. Gross
margin decreased from 21% of revenues for the nine months ended March 31, 1998
to 17% of revenues for the nine months ended March 31, 1999 due primarily to a
one-time promotional activity in the latter period designed to attract first-
time customers, which was partially offset by an increase in higher margin
advertising revenues.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, payroll and related expenses for
personnel engaged in marketing, customer solutions, advertising sales and
distribution activities and distribution expenses. Marketing and sales expenses
increased from $982,000, or 143% of revenues, for the nine months ended March
31, 1998 to $7.1 million, or 282% of revenues, for the nine months ended March
31, 1999. Marketing and sales expenses increased primarily due to the expansion
of our online and offline advertising to promote our brand and to acquire new
customers as well as hiring additional marketing, sales, and customer solutions
personnel. We intend to continue to pursue an aggressive branding and marketing
campaign and hire additional marketing and sales personnel and, therefore,
expect marketing and sales expenses to increase significantly in absolute
dollars in future periods. In addition, if our sales volume increases in future
periods, we will need to continue to expand our customer solutions and
distribution departments, which will result in increased marketing and sales
expenses.
Content and Product Development. Content and product development expenses
consist of payroll and related expenses for publishing content and design,
merchandising, Web site development, information technology personnel and
maintenance. Content and product development expenses increased from $828,000,
or 121% of revenues, for the nine months ended March 31, 1998 to $2.2 million,
or 86% of revenues, for the nine months ended March 31, 1999. Content and
product development expenses increased in absolute dollars primarily due to
increased personnel and associated costs related to enhancing the products and
features, editorial content and functionality of our Web sites and to
increasing the capacity of the systems that we use to process customers' orders
and payments. As a percentage of revenues, content and product development
expenses decreased due to the increase in revenues during the period. We
believe that continued investment in content and product development is
critical to attaining our strategic objectives and, as a result, expect content
and product development expenses to increase in absolute dollars.
General and Administrative. General and administrative expenses consist of
payroll and related expenses for general corporate functions, including
supplier operations support, finance, facilities expenses and deferred
compensation expense. General and administrative expenses increased from
$983,000, or 143% of revenues, for the nine months ended March 31, 1998 to $2.3
million, or 93% of revenues, for the nine
27
<PAGE>
months ended March 31, 1999. General and administrative expenses increased in
absolute dollars primarily due to increased personnel and associated expenses
necessary to support the growth of our operations. As a percentage of revenues,
general and administrative expenses decreased due to the increase in revenues
during the period. We expect general and administrative expenses to increase as
we expand our staff, incur additional costs related to supplier operations
support and facilities and incur costs related to being a public company.
In the nine months ended March 31, 1999, we recorded total deferred stock
compensation expense of $776,000 in connection with stock options granted
during the period. Such amount is amortized over the vesting periods of the
applicable options, and resulted in additional general and administrative
expenses of $79,000 for the nine months ended March 31, 1999. These amounts
represent the difference between the exercise price of stock option grants and
the deemed fair value of our common stock at the time of such grants.
Other Income
Other income consists of interest earned on cash and cash equivalents and
short-term investments offset by interest expense on borrowings. Other income
increased from $136,000 for the nine months ended March 31, 1998 to $564,000
for the nine months ended March 31, 1999 as a result of interest earned on the
net proceeds from our sale of preferred stock in June 1998.
Comparison of the Period from October 2, 1995 to June 30, 1996, our inception
period, and the Fiscal Years Ended June 30, 1997 and June 30, 1998
Revenues
Revenues were $8,000 for our inception period and increased from $316,000
in fiscal 1997 to $1.3 million in fiscal 1998, an increase of 311%. We began
offering products for sale on our Web site in March 1996.
Products. Product revenues were $8,000 for our inception period and
increased from $308,000, or 97% of revenues, in fiscal 1997 to $1.3 million, or
96% of revenues, in fiscal 1998, an increase of 322%. Product revenues
increased as a result of the growth of our customer base.
Advertising. We did not generate any advertising revenues for our
inception period. Advertising revenues increased 600%, from $8,000, or 3% of
revenues, in fiscal 1997 to $56,000, or 4% of revenues, in fiscal 1998.
Advertising revenues increased due to an increase in the number of advertisers
and number of advertisements sold.
Gross Profit
Gross profit was $3,000 for the inception period and increased to $70,000
for fiscal 1997 and to $231,000 for fiscal 1998. Gross margin decreased from
22% of revenues for fiscal 1997 to 17% of revenues for fiscal 1998, due
primarily to discounts associated with promotional activity in the latter
period.
Operating Expenses
Marketing and Sales. Marketing and sales expenses were $189,000 for the
inception period and increased from $927,000, or 293% of revenues, in fiscal
1997 to $2.3 million, or 174% of revenues, in fiscal 1998. As a percentage of
revenues, marketing and sales expenses decreased primarily due to increased
revenues during the latter period.
Content and Product Development. Content and product development expenses
were $161,000 for the inception period and increased from $858,000, or 272% of
revenues, in fiscal 1997 to $1.2 million, or
28
<PAGE>
91% of revenues, in fiscal 1998. As a percentage of revenues, content and
product development expenses decreased due primarily to increased revenues
during the latter period.
General and Administrative. General and administrative expenses were
$340,000 for the inception period and increased from $765,000, or 242% of
revenues, in fiscal 1997 to $1.5 million, or 111% of revenues, in fiscal 1998.
As a percentage of revenues, general and administrative expenses decreased due
to the increase in revenues during the latter period. The increase in general
and administrative expenses was primarily attributable to increased expenses
associated with hiring additional personnel necessary to support the growth of
our operations.
Other Income
Other income was $22,000 for the inception period, increased from $40,000
in fiscal 1997 and increased to $193,000 in fiscal 1998.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth selected unaudited statement of income data
for the five quarters ended March 31, 1999, both in dollar amounts and as a
percentage of revenues. This data should be read in conjunction with the
audited financial statements for the year ended June 30, 1998 and nine months
ended March 31, 1999 and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Products.................. $ 220 $ 636 $ 333 $ 1,125 $ 856
Advertising............... 10 16 25 87 83
------- ------- ------- ------- -------
Total revenues........... 230 652 358 1,212 939
------- ------- ------- ------- -------
Cost of revenues:
Products.................. 168 555 364 903 753
Advertising............... 4 8 13 32 8
------- ------- ------- ------- -------
Total cost of revenues... 172 563 377 935 761
------- ------- ------- ------- -------
Gross profit................ 58 89 (19) 277 178
Operating expenses:
Marketing and sales....... 380 1,347 2,133 1,246 3,686
Content and product
development.............. 321 386 640 603 923
General and
administrative........... 394 510 616 691 1,030
------- ------- ------- ------- -------
Total operating
expenses................ 1,095 2,243 3,389 2,540 5,639
------- ------- ------- ------- -------
Operating loss.............. (1,037) (2,154) (3,408) (2,263) (5,461)
Other income and expense.... 52 58 248 192 124
------- ------- ------- ------- -------
Net loss.................... $ (985) $(2,096) $(3,160) $(2,071) $(5,337)
======= ======= ======= ======= =======
<CAPTION>
Percentage of Total Revenues
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Products.................. 96% 98% 93% 93% 91%
Advertising............... 4 2 7 7 9
------- ------- ------- ------- -------
Total revenues........... 100 100 100 100 100
------- ------- ------- ------- -------
Cost of revenues:
Products.................. 73 85 102 75 80
Advertising............... 2 1 3 2 1
------- ------- ------- ------- -------
Total cost of revenues... 75 86 105 77 81
------- ------- ------- ------- -------
Gross profit................ 25 14 (5) 23 19
Operating expenses:
Marketing and sales....... 165 207 596 103 392
Content and product
development.............. 140 59 179 50 98
General and
administrative........... 171 78 172 57 110
------- ------- ------- ------- -------
Total operating
expenses................ 476 344 947 210 600
------- ------- ------- ------- -------
Operating loss.............. (451) (330) (952) (187) (581)
Other income and expense.... 23 9 69 16 13
------- ------- ------- ------- -------
Net loss.................... (428)% (321)% (883)% (171)% (568)%
======= ======= ======= ======= =======
</TABLE>
Revenues decreased during the quarter ended September 30, 1998 due to the
seasonal nature of the gardening industry and shipment of gardening products
and, to a lesser extent, due to a promotion designed to encourage first time
buyers with a coupon to be used on their first purchase. Revenues increased
during the quarter ended December 31, 1998 as a result of increased holiday
purchases and shipments. Revenues decreased during the quarter ended March 31,
1999 due to weather factors that caused the shipment of gardening products for
the spring gardening season to extend into the next quarter. We expect that our
revenues in the quarters ended March 31 and June 30 will continue to fluctuate
from year to year depending on weather and other seasonal factors affecting
spring gardening purchases spanning those two quarters.
30
<PAGE>
The decrease in our gross margin in the quarter ended June 30, 1998
reflects a relative increase in sales of lower margin live goods compared to
higher margin products. The negative gross margin in the quarter ended
September 30, 1998 reflects costs associated with the coupon promotion during
that quarter.
Marketing and sales expenses fluctuate quarter to quarter primarily due to
varying levels of spending for seasonal brand promotion and marketing
initiatives. We generally increase our marketing and sales expenses in the
first and more so in the third fiscal quarter in an effort to generate
relatively higher revenues in our second and fourth fiscal quarters. For
example, we increased our marketing and sales expenses in the quarters ended
September 30, 1998 and March 31, 1999 in anticipation of the holiday and spring
gardening seasons. Marketing and sales expenses as a percentage of revenue were
higher during the quarters ended September 30, 1998 and March 31, 1999 due to
relatively lower revenues.
Content and product development expenses increased during the quarters
ended September 30, 1998 and March 31, 1999, as a result of hiring additional
personnel to support the growth of our business. Content and product
development expenses were also higher as a percentage of revenue due to lower
revenues during these quarters.
General and administrative expenses have increased each quarter as a
result of hiring additional personnel to support the growth of our business.
General and administrative expenses increased during the quarter ended March
31, 1999 due to increases in personnel and related expenses, and to a lesser
extent, expenses associated with moving into our new corporate headquarters.
General and administrative expenses increased as a percentage of revenue in the
quarters ended September 30, 1998 and March 31, 1999 due to lower revenues
during these quarters.
Other income increased in the quarter ended September 30, 1998 due to
interest earned on the proceeds received from our sale of our preferred stock
in June 1998.
We expect to continue to experience significant fluctuations in our future
operating results due to the above factors, and others which may be outside our
control. As a result, we believe that quarterly comparisons of our operating
results are not necessarily meaningful and that investors should not rely on
the results of one quarter as an indication of our future performance. We
believe it is likely that, in the future, fluctuations in our quarterly
operating results may cause our results to fall below the expectations of
securities analysts and investors, which could cause the price of our common
stock to decline.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
placements of preferred stock and, to a lesser extent, from revenues generated
by operations. As of March 31, 1999, we had approximately $2.3 million in cash
and cash equivalents and $4.9 million in short-term investments.
Net cash used in operating activities increased from $2.4 million for the
nine months ended March 31, 1998 to $10.8 million for the nine months ended
March 31, 1999. The increase in net cash used in operating activities can be
substantially attributed to the increased net loss, net of adjustments for
increased non-cash charges.
Net cash used in investing activities increased from $188,000 for the nine
months ended March 31, 1998 to $5.8 million for the nine months ended March 31,
1999. The increase in net cash used in investing activities resulted primarily
from the purchase of securities for investment purposes and, to a lesser
extent, from the purchase of property and computer equipment.
Net cash provided by financing activities increased from $129,000 for the
nine months ended March 31, 1998 to $171,000 for the nine months ended March
31, 1999. Net cash used in and provided by financing activities resulted
primarily from the proceeds from payments and borrowings under our line of
credit.
31
<PAGE>
Our line of credit term note totals $400,000. At March 31, 1999, $191,000
was outstanding under this line of credit term note. The facility bears
interest at the bank's prime rate plus 1%. The assets purchased with the
proceeds from the line of credit secure the borrowings under this line of
credit.
We have experienced a substantial increase in our capital expenditures
since our inception, consistent with our growth in operations and staffing, and
we anticipate that this will continue for the foreseeable future. Additionally,
we continue to evaluate possible investments in businesses, products and
technologies, and plan to expand our marketing programs and conduct more
aggressive brand promotions. We currently expect that the net proceeds from
this offering, together with our existing available funds, will be sufficient
to meet our anticipated need for working capital and capital expenditures for
at least the next 12 months. We cannot be certain that the underlying assumed
levels of revenues and expenses will prove to be accurate. We may seek
additional funding through public or private financings or other arrangements
prior to such time. Adequate funds may not be available when needed or may not
be available on terms favorable to us. If funding is insufficient at any time
in the future, we may be unable to develop or enhance our products or services,
take advantage of business opportunities or respond to competitive pressures,
any of which could have a negative impact on our business, operating results
and financial condition.
Effect of Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," regarding operating segments. FAS No.
131 will require us to use the "management approach" in disclosing segment
information and establishes requirements to report entity-wide disclosures
about products and services, major customers, and material countries in which
the entity holds assets and reports revenues. FAS No. 131 requires limited
segment data on a quarterly basis. FAS No. 131 is effective for us during
fiscal 1999. We do not believe that the adoption of FAS No. 131 will have a
negative impact on our business, operating results and financial condition.
The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments, including derivative instruments embedded in other
contracts. Under SFAS No. 133, entities are required to carry all derivative
instruments on the balance sheet at fair value. The accounting for changes in
the fair value (i.e. gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, the reason for holding it. We must adopt SFAS No. 133 by October 1,
1999. We do not anticipate that SFAS No. 133 will have an impact on our
financial statements.
Year 2000 Compliance
The Year 2000 issue is the potential for system and processing failures of
date-related data and is the result of the computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
We may be affected by the Year 2000 issue related to non-compliant
information technology, or IT, systems or non-IT systems operated by us or by
third parties. We have not completed our assessment of our internal and
external (third-party) IT systems and non-IT systems. At this point in our
assessment, we believe we will require upgrades or patches from certain vendors
including Microsoft that have provided software that we have included in our
Web sites. We expect to receive their upgrades later in 1999. In addition, we
believe that we will be required to modify software on our Web site that we
developed. We intend to include these modifications in various upgrades to our
Web site throughout 1999. At this point in our assessment, we believe we will
become Year 2000 compliant shortly after receiving the necessary upgrades or
patches from certain vendors. We do not have a contingency plan. The costs
associated with
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remediating our non-compliant IT systems and non-IT systems have not been
material to date and we do not anticipate that such costs will be material in
the future, although we cannot assure you that such costs will not be material.
To the extent that our assessment is finalized without identifying any
material noncompliant IT systems operated by us or by third parties, the likely
worst case Year 2000 scenario is a systematic failure beyond our control, such
as a prolonged telecommunications or electrical failure. Such a failure could
prevent us from operating our business, prevent users from accessing our Web
sites, or change the behavior of advertising consumers or persons accessing our
Web sites. We believe that the primary business risks, in the event of such
failure, would include:
. lost advertising revenues;
. increased operating costs;
. loss of consumers or persons accessing our Web sites; and
. claims of mismanagement, misrepresentation or breach of contract.
Any of these risks would likely have a negative impact on our business,
operating results and financial condition.
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BUSINESS
Overview
Garden.com is a leading online destination integrating gardening and
gardening-related commerce, content and community. We currently operate three
gardening Web sites, garden.com, our flagship Web site, virtualgarden.com and
hortmag.com, which enable us to deliver a new value proposition to gardening
consumers and suppliers. Through our Web sites, we provide consumers with an
intuitive, easy-to-use environment through which they can access a wide variety
of gardening information and resources, purchase a broad selection of products,
receive specific gardening advice and other personalized services and interact
with an online gardening community. We offer our suppliers a branding
opportunity, increased sales potential through an expanded customer base and
the ability to improve demand forecasting. By interacting with our customers
through our internally developed Web sites, and with our suppliers through our
sophisticated extranet, we provide consistent, high quality customer service
and streamlined distribution. With over 16,000 products from over 60 suppliers,
we believe we offer the world's largest line of quality gardening and
gardening-related products, available in one convenient location.
The number of visitors to our Web sites and the level of our online sales
have grown rapidly over the last year. We estimate that the number of visitors
to our Web sites grew from 455,000 visitors in April 1998 to 1.6 million
visitors in April 1999. Our revenues have increased from $230,000 in the
quarter ended March 31, 1998 to $939,000 in the quarter ended March 31, 1999.
Industry Background
Gardening Industry
Traditional Home Gardening Market. Gardening is one of the most popular
pastimes in the U.S. According to the National Gardening Association (NGA),
U.S. households spent $46.8 billion on garden and lawn products and landscaping
services in 1998. In addition, the NGA estimates that more than 67 million
households in the U.S. participated in home gardening in 1998, 97% of which
purchased garden and lawn products, such as flowers, vegetables, herbs, trees,
tools and shrubs. Purchases of garden and lawn products in 1998 totaled $30.1
billion, a 13% increase from 1997. Moreover, the average gardening consumer's
annual spending increased from $342 in 1994 to $452 in 1998. In addition, we
believe that gardening-related products, such as furniture, ornaments, outdoor
living accessories and garden-inspired gifts, which are not included in these
totals, represent significant market opportunities.
Gardening Consumers. Gardening appeals to a broad cross-section of the
U.S. population and is an increasingly popular activity among the baby boom
generation, adults aged 35-53. As they move into their peak years in terms of
discretionary income and home ownership, the baby boomers are also spending
more time developing home-focused interests and hobbies, such as gardening and
cooking. In addition, we believe women, like baby boomers, are an important
component of the gardening market and, as consumers, influence 80% of all
household purchases according to the November 1997 issue of Advertising Age.
According to the NGA, gardeners typically purchase products from at least
two different points in the retail channel. We believe today's time constrained
gardener seeks the convenience of a single source for product information, high
quality product selections and advice on product care.
Traditional Retail Channel. The gardening industry's traditional retail
channel has numerous participants and is highly fragmented, with products
purchased from mail order catalogs, home improvement superstores and mass
merchant retailers and local nurseries and garden centers. The mail order
channel consists of more than 1,000 gardening and related product catalogs. We
believe that, while most mail order catalog companies offer high quality
products in specialized areas, the typically limited product offerings of these
catalogs require most mail order gardeners to shop from multiple catalogs
annually. Although home improvement superstores and mass merchant retailers
offer attractive pricing to home gardeners, they offer
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variable quality, narrow selection and limited information and advice related
to their product offerings. Local nurseries and garden centers often have
difficulty meeting gardeners' demands for breadth of product line,
accessibility, and price competitiveness. As a result, the traditional retail
channel fails to satisfy all of the customer's needs for product selection,
convenience, personalized service and advice and information.
Traditional Wholesale Distribution Channel. We believe the ability of the
traditional retail channel to satisfy consumers' demands is hampered by the
lack of an integrated supply chain between suppliers, retailers and consumers.
Currently, suppliers to the retail channel tend to be small, geographically
dispersed and limited in their ability to distribute to a broad retail base. In
addition, these small suppliers have fairly limited and unsophisticated
marketing and tracking systems which restrict their ability to make optimal
supply decisions to match the changing tastes of a broad customer base. These
supply limitations therefore inhibit retailers from offering the breadth and
depth of high quality products and services.
Growth of the Internet
The Internet has emerged as a global mass medium, enabling millions of
people to access and share information, build relationships online and conduct
business electronically. International Data Corporation (IDC) estimates that
there were 97 million Internet users worldwide at the end of 1998 and
anticipates that the number will increase to approximately 320 million users by
the end of 2002. As the Internet's functionality makes it an attractive
commercial medium by providing features and information that have been
historically unavailable through traditional channels, IDC estimates that the
total value of products and services sold over the Internet by retailers,
catalogers and online merchants will increase from approximately $26 billion in
1998 to approximately $268 billion by 2002. In addition, according to Forrester
Research, advertising spending on the Internet will increase from $1.5 billion
in 1998 to more than $10.9 billion in 2002.
Baby boomers and women represent attractive demographic groups for online
merchandisers and advertisers. According to The Industry Standard, baby boomers
represent 49% of all Internet users. At the same time, women are becoming
increasingly active users of the Internet. The percentage of female AOL
subscribers increased from 16% in 1994 to 51% in June 1998 and, according to
Jupiter Communications, women represented 45% of all Internet users as of
January 1998. Although women accounted for only 25% of online sales in 1996,
Jupiter Communications estimates that women will account for 47% of all online
sales by 2000. Thus, as both baby boomers and women continue to move to the
Internet for commercial purposes, we believe that there is a significant online
opportunity to sell products and information, while also allowing advertisers
to target these attractive demographic groups.
The Online Gardening Opportunity
Given the traditional structure and limitations of the gardening market,
we believe gardeners are currently under-served by the prevailing retail
channel and information sources available to them. They are often faced with
inconsistent and limited product selection, lack of information and the absence
of a centralized resource for their gardening needs. Moreover, consumers have
particular needs depending on several factors, such as interests, geography,
yard-specific conditions, time constraints and gardening expertise, that are
also inadequately served. In addition, the lack of an integrated supply chain
inhibits suppliers from meeting the particular needs of consumers.
The Internet has emerged as an ideal medium to provide a one-stop
destination for commerce, content and information related to the attractive
gardening market. According to a 1997 National Retail Federation study, 48% of
online shoppers consider themselves gardeners. The number of Internet consumers
is growing rapidly and includes baby boomers with relatively high discretionary
income and, increasingly, women with substantial influence over household
purchasing decisions. We believe that there is an opportunity to leverage
technology to offer consumers enhanced and deep product selection, customized
information and access to a community of fellow gardeners. For example, an
online gardening destination
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can capitalize on the customization capabilities of the Internet to offer its
customers proactive, personalized services, such as specific advice and
targeted product marketing. These services can be used to attract and retain
valuable long-term customers and promote repeat purchases.
The Internet also addresses the limitations of the traditional supply
channel in the gardening industry. To the supplier, online distribution
provides a new market for their products and the ability to combine their
product offerings with those of other suppliers to fulfill consumers' needs
more completely. Additionally, the information systems technology supporting
Internet and online commerce can be used to make operations more efficient,
increase the accuracy of forecasting and communicate with customers more
effectively. Finally, by aggregating consumers and suppliers in one location,
particularly online consumers with attractive demographics, such as baby
boomers and women, the online medium provides a highly effective promotional
vehicle.
The Garden.com Solution
Garden.com is a leading online destination integrating gardening and
gardening-related commerce, content and community. We provide consumers with an
intuitive, easy-to-use environment through which they can access a wide variety
of gardening information and resources, purchase a broad selection of products
and receive personalized services such as specific gardening advice and
interact with our online gardening community. With 550,000 members currently
and 1.6 million visitors during the month of April 1999, the high point of the
gardening season, we offer suppliers the opportunity to expand their customer
base, extend their presence and promote their brand nationally. Key features of
our solution include:
Convenient Shopping Experience. By offering compelling content, a broad
selection of high quality products and convenient purchasing opportunities, we
make gardening more approachable, accessible and enjoyable. We integrate our
interactive tools, editorial content and product offerings to inspire visitors
to garden and to quickly meet their product and information needs through our
shopping departments and in depth product database. We provide consumers the
ability to shop from home or work, 24 hours a day, seven days a week. We offer
consumers multiple opportunities throughout the year to seek information on
gardening and to make gardening purchases, and we deliver our products in a
timely manner. For example, plants arrive at the time they should be planted in
a given region. Lastly, we strive to achieve optimal customer satisfaction and
maximize customer loyalty by providing online customer service and a seven day
a week, toll free number.
Personalized Service. We believe our technology, combined with our
commitment to customer service, offers gardeners a greater level of
personalization than they would otherwise receive when interacting with retail
store clerks or direct mail customer service representatives. Our Web sites'
features are available to all visitors, from those who casually browse to those
who take advantage of our Web sites' personalization capabilities. We can
tailor our products and services to an individual's preferences, geographic
location and level of gardening expertise. Our customers can select plants and
products based on their own profiling information, save garden designs and
notes, create gift registries and gift reminders and access their complete
order history and current order status. Our detailed customer database allows
the narrowcasting of content, marketing programs and merchandise, based on a
customer's preferences, past purchasing history, geographic location and other
customer profile information.
New Distribution Channel. We believe that the Internet enables us to
deliver a new value proposition to consumers and suppliers. By interacting with
our customers through our internally developed Web sites and with our suppliers
through a sophisticated extranet, we provide consistent customer service and
streamlined distribution. In order to satisfy customer demand, we have created
what we believe is the largest integrated supply chain in the retail gardening
industry. Through our Web site, we provide consumers with complete visibility
into current and future product availability, order status and package
tracking. We continually work with our suppliers to forecast demand and to
ensure the necessary supply of products to support our growth. Additionally, we
can quickly adapt our product offerings to changing
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customer demand. Our extranet enables us to significantly control the quality
and cost of fulfilling our product orders and gives suppliers the ability to
update inventory, track perishable products and modify pricing.
Breadth and Depth of Product Selection. With over 16,000 products, we
believe we offer the world's largest line of quality gardening and gardening-
related products. Our product line includes live plants, shrubs, trees, bulbs,
seeds, organic fertilizers and pesticides, tools, furniture, garden ornaments,
clothing, garden accessories and a distinctive garden-inspired gift line. We
have selected top growers and manufacturers from around the world to provide
our customers with the highest quality and greatest variety of products. For
example, where a local nursery might carry one or two varieties of antique
roses, we offer approximately 200 varieties, and where a home improvement
superstore might offer 50 varieties of perennials, we offer over 2,000
varieties.
Compelling Content. We believe that we attract new and repeat customers by
creating compelling topical content. We deliver interactive, daily and weekly
online features, which are hyperlinked to companion product offerings and which
provide gardeners with planting advice, design ideas, introductions to trends
and entertaining stories. We maintain a large and growing library of gardening
photography which provides inspiration and a horticultural database which
allows consumers to research over 7,500 plants by attribute or keyword. In
order to expand our content offerings we have entered into agreements with
third parties, including Horticulture Magazine and Time/Life Plant
Encyclopedia.
Gardening Community. We have created a community for users to interact and
share interests, ideas and gardening information. We believe that this
environment makes gardening information accessible to a wide-range of gardeners
and allows the gardening community from around the world the opportunity to
communicate with each other, gardening experts and authors, friends and family,
Garden.com editors and the Garden Doctor. In addition, for those visitors
interested in additional information, virtualgarden.com's dig the net offers a
guide to other gardening Web sites, botanical gardens and plant societies, as
well as a calendar of events and other resources available to members of the
gardening community.
Strategy
Our objective is to be the leading online destination for gardening-
related commerce, content and community. Key components of our strategy are to:
Create a New Value Proposition to Home Gardeners. We seek to build
customer trust and loyalty by maintaining our focus as a valuable gardening
destination and by meeting and exceeding customer demands in all interactions.
We believe that by empowering gardeners to make informed decisions that yield
results, we create a sense of connection to our Web sites. The result is a
loyal customer base that will look to us to satisfy their gardening needs.
Execute a Virtual Warehouse Model. We plan to continue to employ a virtual
warehouse model based on strategic relationships with high quality product
suppliers. Through these relationships, we obtain exclusive online access to
high quality products. In return, we provide our suppliers with a branding
opportunity, increased sales through an expanded customer base and the ability
to improve demand forecasting. We believe that these relationships will help us
ensure product supply, minimize out of stock issues, lengthen the purchase
season and create substantial supplier switching costs.
Build the Garden.com Brand. We intend to make the Garden.com brand
synonymous with the delivery of high-quality gardening and gardening-related
products and services. We intend to capitalize on the lack of established
national brands in the gardening industry and plan to differentiate ourselves
based on our quality product and content offering. Our strategy is to
aggressively promote, advertise and increase our brand awareness through
excellent service and a variety of marketing and promotional techniques,
including:
. advertising on leading Web sites and in home and garden publications;
. engaging in targeted radio, television and other media campaigns;
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. developing cross-media partnerships and projects, such as Garden
Escape Magazine;
. conducting an ongoing public relations campaign;
. sponsoring key influencers and developing strategic business alliances
and partnerships such as our alliance with Scripps Howard Broadcasting
Company d/b/a Home & Garden Television (HGTV).
Capitalize on Our Growing Product and Customer Databases. We capitalize on
our growing horticulture and customer databases to enable targeted product,
service and promotional offerings. Our horticulture database includes thousands
of pages of original content and over 16,000 products with up to 50 attributes
per product. Our customer database is comprised of detailed customer
information, preferences and buying patterns. We believe that our databases
will enable us to tailor the marketing of our products and services to increase
conversion rates of visitors into customers and encourage repeat purchases. In
addition, we intend to use customer feedback and transactional history to
expand our existing offerings and to pursue additional revenue opportunities.
Maintain Technology Focus and Expertise. We intend to leverage our
scaleable commerce platform to enhance our service offerings and to take
advantage of the efficiencies of online retailing and our virtual warehouse
model. We are dedicated to maintaining our technology leadership in the online
distribution channel. To support this flexible and evolving platform, our core
development team is focused on building applications, authoring environments
and networks that are scaleable and easy to use, maintain and modify. We intend
to continue to develop more flexible merchandising and promotional systems, new
and enhanced application modules on our supplier extranet, intuitive interfaces
that enhance the overall customer experience and narrowcasting technologies to
further enhance the personalized experience of our customers.
Pursue Additional Revenue Opportunities. We intend to leverage our brand,
operating infrastructure and customer base to develop additional revenue
opportunities. For example, we believe significant incremental revenue
opportunities exist through:
. opening new departments on our Web site to expand into additional
gardening product categories;
. increasing product selection in our existing departments;
. adding more value-added services to further personalize the Garden.com
experience;
. pursuing advertising sales;
. exploring international market opportunities; and
. potentially acquiring complementary businesses, products or
technologies.
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The Garden.com Experience
We provide consumers with a complete online gardening destination
integrating gardening commerce, content and community. We believe we offer
attractive benefits to consumers, including convenience, ease-of-use,
personalization, enhanced product selection, depth of content and information
and avenues for community. Key features of the Garden.com experience include:
Shopping Departments and Utilities. We categorize our products into four
broad categories: plants, gardening-related products, gifts and plant
collections and garden designs.
. Plants. With over 9,000 perennials, herbs, bulbs, seeds, trees and
shrubs, we believe that we offer the largest selection of plants and
flowers available from a single source. We believe we offer consumers
a comprehensive selection of both traditional and specialty plants and
flowers.
. Gardening-Related Products. We offer an extensive selection of
gardening-related products including furniture, ornaments, tools,
books, organic pest and fertilizer solutions and gardening
accessories. We believe that our gardening-related products complement
our diverse plant product offerings, further establishing us as a
leading gardening retailer.
. Gifts. We offer a range of holiday, wedding, birthday and special
occasion gifts, including wreaths, cut flowers and bath and body
products. We have developed distinctive gift packaging to
differentiate our brand and to enhance the gift recipient's
experience. To stimulate interest in our gift products, we provide our
customers with a gift reminder service, where we automatically e-mail
them two weeks prior to important holidays, weddings, birthdays and
events, and a gift registry service.
. Plant Collections and Garden Designs. We offer over 500 preselected
combinations of plants and flowers, which we market through our Web
sites' editorial content. In addition, we sell complete garden kits
comprised of plant collections and complementary tools.
. Online Ordering. Visitors can place items into their shopping
"wheelbarrow" which can be saved from online session to online
session. Customers can make purchases via online secure credit card
transaction or via a toll-free number.
. Customer Solutions. Through the Customer Solutions Center, customers
gain full access to their order status, order history, frequently
asked questions and other customer services. In addition, Customer
Solutions provides general help and horticultural advice through
timely response to e-mail and a dedicated toll-free number.
Garden Design. We provide our users with the resources necessary to plan
their gardens, design garden plots and choose the appropriate plants for their
gardens. We offer the following specialized garden design features to our
users:
. Garden Planner. Garden Planner enables our users to graphically design
a garden plot, by dragging and dropping plants onto a grid. Once the
customer has completed the garden design, the customer can purchase
the plants used in the design. Using Garden Planner, customers can
further customize one of our garden designs to meet their needs and
preferences.
. Plant Finder. Members can use Plant Finder to search our proprietary
database of over 4,700 plants and flowers to get suggestions tailored
to a member's preferences, geographic location, and garden conditions.
Visitors can use a modified version of Plant Finder to create a
garden.
. Garden Designs and Collections / Design Portfolio. We have established
several predesigned garden plans to provide ideas, highlight many
facets of gardening and inspire creativity. Design
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Portfolio provides useful tips and information on garden design and
maintenance. Once a user has researched the garden designs, the user
can purchase the plants highlighted in our Design Portfolio.
Gardening Content. Our retailing strategy integrates content with product
merchandising, blending a publishing strategy with our retail efforts. To
pursue this strategy, we maintain five distinct test gardens where many of our
designs, products and how-to features are researched and photographed. Below
is a sampling of the content that we provide our users:
. Online Magazine. Created exclusively for online purposes, the magazine
section of garden.com includes weekly inspirational features, garden
ideas, practical tips, design advice and planting guides, which
incorporate the latest gardening trends. In addition, we provide more
targeted content focusing on topics such as weekend projects, kitchen
gardening, wildlife and famous gardens of the world. This content
serves as a merchandising platform to highlight various products and
gardening activities offered on our Web sites.
. Garden Escape Magazine. Sold throughout the United States in home
improvement superstores, local nurseries, garden centers and
newsstands, Garden Escape Magazine, our print publication, provides
informative and inspirational articles with links to corresponding
pages on our Web site that provide additional content, interactive
services, product buying guides and the opportunity to purchase
products. Many plants and products featured within Garden Escape
Magazine's articles are available for sale on our Web site. We believe
this editorial approach serves to simplify gardening and make high
quality gardening achievable by the ordinary gardener.
. Regional Gardening. For those seeking gardening advice specific to
their region, we offer specific ideas and planting advice from
Garden.com's nine regional gardening editors. In addition, our
Regional Gardening section highlights monthly to-do lists, activities
and native plants. Sales promotions and other gardening utilities are
tailored for each of the nine regions of the country designated by
Garden.com.
. Third Party Content. We have entered into agreements with third
parties in order to expand our content offerings. Such agreements
provide us with a cost-effective means of acquiring content and
provide our users with additional information. Our many resources
include the Time/Life Plant Encyclopedia, an online version of a
classic gardening reference set which covers approximately 3,000 types
of plants, trees, and shrubs; Barbara Barton's Gardening By Mail, a
database of mail order catalogs; the American Orchid Society's home
Web site about orchids; and seasonal features from the Royal
Horticulture Society in England.
. dig the net. A feature of virtualgarden.com, dig the net is a
directory of other gardening Web sites, botanical gardens and plant
societies as well as a calendar of events and other resources.
. Joint Venture with Horticulture Magazine. Launched in March 1998 as a
joint venture with Horticulture Magazine, www.hortmag.com uses our
development environment, backend applications, product database and
servers to showcase Horticulture Magazine's content, both from its
publication and from original content created exclusively for
Horticulture Magazine Online. This Web site targets expert gardeners
who subscribe monthly to Horticulture Magazine and provides them with
links to our products.
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Community. An important aspect of our strategy to become a leading online
gardening destination is to foster an online gardening community. We believe
that we have created an environment which makes gardening information
accessible to a wide-range of gardeners and facilitates discussion and exchange
between gardeners. In building a successful community of active members and
loyal customers, we use the following features:
. Chat Sessions. Through our newsgroups and chat rooms, members can
easily communicate with each other, authors and other gardening
experts. We also offer additional activities for our members such as
live chat sessions with gardening experts and online garden design
classes.
. Vertical Portal. In addition to providing useful applications and
content, virtualgarden.com serves as a directory to other quality
gardening Web sites and, thus, becomes a portal for the online
gardening community.
. Garden Doctor. Through Garden Doctor, we provide a network of
gardening experts dedicated to answering our users' questions. This
valuable resource offers personalized solutions to our users'
problems. In this way, we believe that we make gardening more
approachable and enjoyable to a wider range of consumers.
Advertising Sales
As we attract more consumers to our site and expand our internal
advertising sales department, we believe that our advertising sales will
increase. A variety of marketers, including eToys, GMC Trucks, Nestle's
Taster's Choice, Pacific Trail and Yahoo!, has advertised on either our Web
sites or Garden Escape Magazine. We intend to continue to explore promotional
and distribution arrangements that generally have longer terms and higher
dollar value than typical banner advertising deals to support brand marketing
objectives, including product awareness and introductions, online research and
editorial integration. Advertising sales accounted for approximately 8% of our
revenues in the nine months ended March 31, 1999.
Marketing and Promotion
Marketing and Promotion Strategy
Our marketing and promotion strategy is designed to:
. build brand recognition;
. increase consumer traffic to our Web site;
. add new customers;
. build strong customer loyalty;
. maximize repeat purchases; and
. develop incremental revenue opportunities.
Marketing and Promotion Channels. In order to implement our marketing and
promotion strategy, we have and will employ multiple channels, including:
. Traditional Advertising and Sponsorship. We engage in a program of
print, radio and television advertising to access our potential
customers. For example, we frequently advertise on HGTV, a cable
programming network wholly owned by The E.W. Scripps Company, which
has invested in Garden.com both through its subsidiary, Scripps
Ventures and through HGTV directly. In addition, we sponsor The
Perennial Gardner with Karen Strohbeen, a gardening television program
on public television.
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. Internet Advertising and Promotion. We place advertisements on various
high traffic aggregator Web sites and online services, including
America Online, AOL.com, CompuServ, MSN and Snap!. We also place
advertisements on targeted home and garden Web sites, including Better
Homes and Gardens' Web site, Condenet, GardenNet, Garden Web and
HomeArts. These advertisements usually take the form of banners that
we expect will encourage users to click through to a specific area of
our Web site. We also engage in promotional links such as the
MasterCard "Shop Smart" promotion, specific holiday promotions on
America Online and Yahoo!, the gift tab on Amazon.com and NetCentive's
Web-based incentives program.
. Direct Marketing. We are conducting an ongoing direct mail campaign
that distributes a variety of direct response pieces, including
catalogs and a monthly postcard which lists upcoming features and
promotions on our Web site. We send mailings to selected members and
third party lists.
. Customer Retention Efforts. Our customer retention efforts include our
one year, 110% guarantee on all products; Bloom Times, a monthly e-
mail newsletter distributed to our entire membership featuring
products, promotions, upcoming features and chat events; targeted e-
mail promotions, such as the first time buyer program, occasional
sales and holiday promotions; Shoppers' Preview, a service that sends
customized weekly e-mails about new products and promotions, tailored
to specific customer segments identified in the customer database; and
Secret Garden Club, a service that sends e-mails to preferred
customers notifying those customers of special offerings. Finally, we
purchase e-mail lists from third parties which we use in new customer
acquisition programs.
. The Virtual Garden Network. We are presently forming the Virtual
Garden Network, a group of selected gardening Web sites, including
gardenguides.com, gardens.com, Garden Launch Pad and
backyardgardener.com, that we expect will collectively offer their
advertising inventory for sale to lifestyle advertisers and to other
members of the network. We plan to aggregate the advertising that will
be sold to third parties and use the Virtual Garden Network for
internal Garden.com advertising. We believe the Virtual Garden Network
will provide us with an additional revenue source by allowing us to
share in the payments made by third party advertisers and will provide
a targeted base of consumers who are more likely to respond to
gardening-related advertisements.
. Public Relations. We have been featured on a variety of television
shows, radio programs, and in numerous articles.
Strategic Relationships
We continually seek to form strategic relationships to increase our access
to online customers, build brand recognition and expand our online presence. To
date, we have established the following relationships, among others, for
marketing, distribution and product enhancement:
HGTV. In May 1999, HGTV purchased 874,126 shares of our Series E Preferred
Stock. A portion of the shares were paid with an advertising credit which we
will use over the next 24 months to advertise on the HGTV network. In addition,
HGTV and Garden.com have entered into a strategic alliance to pursue mutually
beneficial opportunities to leverage each party's content, membership base and
expertise. We believe the HGTV alliance offers us the ability to target
promotions to a select group of prospective customers likely to have an
affinity for gardening.
Portal and ISPs. We have relationships with several major online portals
and Internet service providers to expand our online presence. For example, we
have entered into a strategic relationship with
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America Online under which we serve as an anchor merchant on AOL and CompuServe
and, under which we maintain an online gardening store within AOL.
PRIMEDIA. We have established a relationship with PRIMEDIA to expand our
content offering. Under this relationship, we have jointly developed
Horticulture Magazine Online which combines our Web site technology with the
content of Horticulture Magazine, one of the oldest and most prestigious
gardening publications in the U.S. In addition, we jointly produce Garden
Escape Magazine, which is sold throughout the United States in home improvement
superstores, local nurseries, garden centers and newsstands.
American Forests. We have established a relationship with American
Forests, the oldest non-profit organization in the U.S. dedicated to preserving
the world's forests. Through this relationship, we helped design and assist in
maintaining the American Forest Web site, promote and sell selected products
from their Famous and Historic Trees product line, participate in joint
marketing activities and offer promotions to our customers where a percentage
of their purchase is donated by Garden.com to American Forests' global re-leaf
projects around the world. We believe our sponsorship of these programs
emphasizes our interest in protecting the environment and furthers our broad
marketing objectives.
Supply Management
We combine over 60 supplier relationships and extranet technology to
"virtually integrate" the gardening supply chain to provide a broader product
selection to our customers than is currently available through any other
gardening retail channel. To address the highly fragmented supply base,
geographically dispersed suppliers and the perishability of live planting
material, we have assembled a virtual warehouse for our gardening and
gardening-related products.
Our suppliers benefit from our unique marketing channel without dedicating
resources to build an online presence. We have strategic mutually exclusive
online relationships with approximately 25 of our suppliers under which such
suppliers are our exclusive provider of a specific product line and we are the
exclusive online outlet for their products. For the nine months ended March 31,
1999, shipments from these 25 suppliers accounted for greater than 80% of our
total product revenue. However, in the event that our demand unexpectedly
exceeds the quantities our suppliers can provide, we are establishing
relationships with alternative suppliers that we believe can satisfy our demand
on reasonable terms. Finally, we negotiate pricing with suppliers using a
discount from the supplier's retail price to ensure that the relationship is
profitable for both the supplier and us.
To ensure that our automated supply network is efficient and scaleable, we
have built an extensive extranet that enables the efficient exchange of
information with our suppliers. Over 90% of product shipments are now processed
through our automated supply network as orders are placed online, automatically
downloaded to our suppliers for fulfillment and directly shipped to our
customers via Federal Express. By avoiding the expense and overhead of
traditional multi-tier distribution models that focus on centralized
distribution, we believe we have a competitive advantage over traditional
gardening retailers. While substantially all of our customer orders are
directly shipped from our suppliers, we maintain an inventory of specialty
gifts, promotional items and some high volume products in our Austin, Texas
warehouse.
We leverage information systems capabilities of Federal Express to link
Garden.com with our suppliers and customers. In conjunction with Federal
Express, we developed our proprietary extranet shipping module to virtually
integrate our supply chain. This system provides significant efficiencies by
automating the process for updating order status and offers the reliability of
Federal Express delivery.
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<PAGE>
Operations and Technology
Our Web sites are run off multiple front-end Web servers and an enterprise
database server. Our servers are located at a third-party network operating
center in Austin, Texas, which provides 24-hour systems support and
connectivity via high speed DS-3 and higher connections. We maintain two other
sets of servers in two different locations in Austin, Texas, to promote
redundancy from the primary servers. We have implemented scaleable Web site
management, search, customer interaction, transaction-processing and
fulfillment services and systems. These services and systems are based on a
combination of our own proprietary technologies and commercially available,
licensed technologies. Our Web site and extranet provide the amount of
customization, interactivity and performance required by online consumers and
suppliers. We use a set of applications for:
. accepting and validating customer orders;
. organizing, placing and managing orders with suppliers;
. notifying and updating customers of order status; and
. managing shipment of products to customers.
We incurred product development expenses of $417,000 in the fiscal year
ended June 30, 1998 and $441,000 in the nine months ended March 31, 1999. We
anticipate that we will continue to devote significant resources to product
development in the future as we add new features and functionality to our Web
site and extranet.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards and changing customer demands.
Accordingly, our future success will depend on our ability to adapt to rapidly
changing technologies, to adapt our services to evolving industry standards and
to continually improve the performance, features and reliability of our service
in response to competitive service and product offerings and evolving demands
of the marketplace. Our failure to adapt to such changes would have a negative
impact on our business, operating results and financial condition. In addition,
the widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures by us to modify or adapt our services or infrastructure which
could have a negative impact on our business, operating results and financial
condition.
To maintain our technological leadership in online commerce and garden
retail industries, we recently commenced a project to upgrade our system
architecture. In addition, as part of our continuing effort to refine our
automated supply network, we use our Austin, Texas warehouse to test
technological upgrades and enhancements to the network.
Competition
Internet and online commerce generally, and the online retail gardening
market specifically, are new, rapidly evolving and intensely competitive, and
we expect such competition to intensify in the future. We currently or
potentially compete with a variety of other companies, including:
. traditional local nurseries;
. home improvement superstores, such as Lowe's and Home Depot;
. established gardening mail-order catalogs, including Foster &
Gallagher and Smith & Hawken;
. media groups with existing, well-defined brands in the home and garden
market, such as Martha Stewart Living; and
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<PAGE>
. multi-channel online retailers seeking to diversify their product
offerings, such as 1-800-FLOWERS and FTD.
We believe that the following are principal competitive factors in our
market:
. convenience;
. quality;
. selection;
. customer service;
. information; and
. brand recognition.
We believe that any competitor which seeks to establish an Internet and
online commerce presence within the gardening industry will confront
significant challenges in cost effectively addressing secure transaction
processing, establishing an efficient supply and logistics system and
developing required software. While there can be no assurance that we will be
able to compete successfully against current and future competitors, we believe
our ability to compete favorably is enhanced by our sophisticated logistics and
supply management, our proprietary technology, our database and our strategic
supplier relationships.
Many of these current and potential competitors can devote substantially
more resources to Web site and systems development than we can. In addition,
larger, well-established and well-financed entities may acquire, invest in or
form joint ventures with our online competitors. Some of our competitors may be
able to secure products from suppliers on more favorable terms, fulfill
customer orders more efficiently and adopt more aggressive pricing or inventory
availability policies than we can. Finally, new technologies and the expansion
of existing technologies, such as price comparison programs that select
specific titles from a variety of Web sites, may direct customers to other
online gardening destinations. If we face increased competition, our operating
results may be negatively impacted.
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our suppliers and strategic partners in order to limit access
to and disclosure of our proprietary information. There can be no assurance
that these contractual arrangements or the other steps taken by us to protect
our intellectual property will prove sufficient to prevent misappropriation of
our technology or to deter independent third-party development of similar
technologies. We pursue the registration of our trademarks and service marks in
the U.S. and internationally. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are made available online. We have licensed in the past, and expect
that we may license in the future, certain of our proprietary rights, such as
trademark or copyrighted material, to third parties. While we attempt to ensure
that the quality of our brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of our proprietary rights or reputation, which could
have a material adverse effect on our business, results of operations and
financial condition. We also rely on certain technologies that we license from
third parties, including the suppliers of the operating systems and financial
and reporting system for our business. There can be no assurance that these
third-party technology licenses will continue to be available to us on
commercially reasonable terms. The loss of such technology could require us to
obtain substitute technology
45
<PAGE>
of lower quality or performance standards or at greater cost, which could
negatively impact our business, results of operations and financial condition.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties. There can be no assurance that third
parties will not claim infringement by us with respect to past, current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable
to us or at all. As a result, any such claim could have a material adverse
effect upon our business, results of operations and financial condition.
Government Regulation
We are not currently subject to direct federal, state or local regulation,
and laws or regulations applicable to access to or commerce on the Internet,
other than regulations applicable to businesses generally. However, due to the
increasing popularity and use of the Internet and other online services, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
The nature of such legislation and the manner in which it may be interpreted
and enforced cannot be fully determined and, therefore, such legislation could
subject us and/or our customers to potential liability, which in turn could
have an adverse effect on our business, results of operations and financial
condition. The adoption of any such laws or regulations might also decrease the
rate of growth of Internet use, which in turn could decrease the demand for our
service or increase the cost of doing business or in some other manner have a
material adverse effect on our business, results of operations and financial
condition. In addition, applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
information is collected from users and provided to third parties. Changes to
existing laws or the passage of new laws intended to address these issues,
including some recently proposed changes, could create uncertainty in the
marketplace that could reduce demand for our services or increase the cost of
doing business as a result of litigation costs or increased service delivery
costs, or could in some other manner have a material adverse effect on our
business, results of operations and financial condition. In addition, because
our services are accessible throughout the United States, other jurisdictions
may claim that we are required to qualify to do business as a foreign
corporation in a particular state. We are qualified to do business in
California, Iowa and Texas, and our failure to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, results of operations and financial condition.
In addition to regulations applicable to businesses generally, we are
regulated by federal, state and local governmental agencies with respect to the
shipment of plants and other live goods, fertilizers and pesticides. For
example, the California Department of Food and Agricultural restricts the
import of plants into California from those states or regions which may have
undesirable diseases, parasites or insects. We currently seek to rely upon our
suppliers to meet the various regulatory and other legal requirements
applicable to our business. However, we are unable to verify that they have in
the past, or will in the future,
46
<PAGE>
always do so, or that their actions are adequate or sufficient to satisfy all
governmental requirements that may be applicable to these sales. We would be
fined or exposed to civil or criminal liability, and we could receive potential
negative publicity, if these requirements have not been fully met by our
suppliers or by us directly.
There are, to our knowledge, currently no investigations, inquiries,
citations, fines, or allegations of violations or noncompliance pending by
government agencies or by third parties against us. It is possible that there
may be investigations or allegations in the future. The risk that any
noncompliance may be discovered in the future is currently unknown. Although
any potential impact on us for noncompliance cannot currently be established,
it could result in civil or criminal penalties, including monetary fines and
injunctions, for noncompliance and negative publicity, and have a material
adverse impact on our business, revenues, results of operations and financial
conditions.
Employees
As of May 24, 1999, we employed 149 people. Our future performance depends
in significant part upon the continued service of our key technical, sales and
senior management personnel. The loss of the services of one or more of our key
employees could negatively impact our business, operating results and financial
condition. Our future success also depends on our continuing ability to
attract, train and retain highly qualified personnel. Competition for such
personnel is intense, and we may not be able to retain our key personnel in the
future. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
Facilities
Our headquarters are located in Austin, Texas at 3301 Steck Avenue,
Austin, Texas 78757. We also maintain an office in Des Moines, Iowa, where our
publishing office is located and where we maintain five test gardens, where
products are grown, tested and evaluated for the main product line. We lease
all of our
facilities, with the Austin lease comprising approximately 27,000 square feet
of office and warehouse space and the Iowa lease comprising approximately 1,500
square feet of office space.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not a party to any legal proceeding.
47
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Garden.com as of May 24, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Clifford A Sharples..... 35 Chief Executive Officer, President and Director
James N. O'Neill........ 37 Chief Operating Officer and Director
Lisa W.A. Sharples...... 33 Chief Merchandising and Marketing Officer and Director
Andrew R. Martin........ 36 Chief Technology Officer
Douglas A. Jimerson..... 47 Vice President of Publishing and Editor-in-Chief
Jana D. Wilson.......... 34 Chief Financial Officer
John D. Thornton (1).... 34 Director
Donald J. Phillips (1).. 60 Director
Gerald R. Gallagher
(2).................... 58 Director
Douglas R. Stern (2).... 49 Director
Steven J. Dietz......... 35 Director
</TABLE>
- ------------------
(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.
Clifford A. Sharples founded Garden.com and has served as our Chief
Executive Officer, President and a Director since December 1995. Prior to
founding Garden.com, from May 1995 to August 1995, he served as Director of
Business Development for pcOrder.com, Inc., an online computer merchant. From
December 1994 to April 1995, Mr. Sharples worked as a consultant at Enterprise
Integration Technologies Corporation, a research and development company
specializing in electronic commerce over the Internet. From July 1993 to
December 1994, Mr. Sharples worked as a Senior Associate in the Technology
Advisory Services practice of Coopers & Lybrand Consulting. Mr. Sharples holds
a Masters in Management from the J.L. Kellogg Graduate School of Management and
a B.S. in Information Systems from Carnegie Mellon University. Clifford A.
Sharples is the husband of Lisa W.A. Sharples.
James N. O'Neill founded Garden.com and has served as our Chief Operating
Officer since April 1998, served as our Vice President of Operations and Chief
Financial Officer from December 1995 to August 1998 and has served as a
Director since December 1995. Prior to founding Garden.com, from May 1995 to
August 1995, Mr. O'Neill was employed as a marketing manager by Trilogy
Software, Inc., an enterprise software company. From June 1993 to May 1995, Mr.
O'Neill served as an internal consultant for top management at W.W. Grainger,
Inc., a nationwide distributor of maintenance, repair and operations products.
Mr. O'Neill holds a Masters in Management from the J.L. Kellogg Graduate School
of Management and a B.A. in Economics from the University of Wisconsin.
Lisa W.A. Sharples founded Garden.com and has served as our Chief
Merchandising and Marketing Officer since August 1998, served as our Vice
President of Marketing from December 1995 to August 1998 and has served as a
Director since December 1995. Prior to founding Garden.com, from May 1995 to
August 1995, she served as Director of Marketing for pcOrder.com, Inc., an
online computer merchant. From October 1993 to May 1995, Ms. Sharples was
employed at Silicon Graphics, Inc., a computer workstation company, as
marketing manager for the Channel Development Group. Ms. Sharples holds a
Masters in Management from the J.L. Kellogg Graduate School of Management and a
B.A. in Biochemistry from Bowdoin College. Lisa W.A. Sharples is the wife of
Clifford A. Sharples.
Andrew R. Martin, Ph.D. started with Garden.com in January 1996 and has
served as our Chief Technology Officer since March 1996. Prior to joining
Garden.com, from April 1994 to December 1995,
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<PAGE>
Dr. Martin was a chief programmer in the DCE Client/Server division of Trilogy
Software, Inc., an enterprise software company. From February 1990 to April
1994, Dr. Martin worked as a chief programmer for IBM in the Advanced Object
Technology Group. Dr. Martin holds seven software patents granted by the U.S.
Patent and Trademark Office. He holds a D.Phil. in Computer Science and a B.S.
in Computational Science with Honors (Class II, Division I) from the School of
Computer Studies, The University of Leeds.
Douglas A. Jimerson has served as our Vice President of Publishing and
Editor-in-Chief since April 1996. Prior to April 1996, Mr. Jimerson worked for
over 19 years with Meredith Corporation, most recently as Editor-in-Chief of
Home Garden, a national gardening publication, and prior to Home Garden, as
Executive Garden Editor of Better Homes and Gardens from 1977 to 1995. In
addition, Mr. Jimerson is the editor or author of 14 gardening books. Mr.
Jimerson holds a B.S. in Journalism and a B.S. in Fisheries and Wildlife
Management from Iowa State University.
Jana D. Wilson has served as our Chief Financial Officer since August 1998
and served as our Controller from February 1998 to August 1998. Prior to
joining Garden.com, from March 1994 to December 1997, Ms. Wilson served as
Controller of Gadzooks, Inc., a specialty retailer of apparel for teenagers.
From April 1993 to March 1994, Ms. Wilson was a senior auditor for Brinker
International, Inc., a national restaurant chain operator. From April 1991 to
July 1992, Ms. Wilson served as a senior analyst in financial planning for The
Gap, Inc., an international apparel retailer. From June 1987 to April 1991, Ms.
Wilson worked in the audit division of KPMG Peat Marwick, an international
accounting firm. Ms. Wilson is a certified public accountant and holds a B.B.A.
from Baylor University.
John D. Thornton has served as a Director of Garden.com since December
1995. Mr. Thornton is a general partner of Austin Ventures, a venture capital
investment firm, which he joined in 1991. Prior to joining Austin Ventures, Mr.
Thornton was a consultant with McKinsey & Co., a management consulting firm. He
currently serves on the Board of Directors of Vignette Corporation, a computer
software company. Mr. Thornton holds an M.B.A. from Stanford University
Graduate School of Business and a B.A. from Trinity University.
Donald J. Phillips has served as a Director of Garden.com since August
1996. Mr. Phillips is managing general partner of Phillips-Smith Specialty
Retail Group, a venture capital investment firm, which he co-founded in 1986.
Prior to founding Phillips-Smith Specialty Retail Group, Mr. Phillips was
President and Chief Executive Officer of Pearle Health Services, a retailer of
optical products. He currently serves on the Board of Directors of Cheap
Tickets, Inc., a discount merchant of airline tickets. Mr. Phillips holds an
M.B.A. from Harvard Business School and a B.B.A. from Western Michigan
University.
Gerald R. Gallagher has served as a Director of Garden.com since May 1997.
Mr. Gallagher is a general partner of Oak Investment Partners, which he joined
in 1987. Before joining Oak Investment Partners, a venture capital investment
firm, he was Vice Chairman of Dayton Hudson Corporation, a national retailer,
where, during a ten-year period, he served in both operating and staff
positions. He currently serves on the Board of Directors of P.F. Chang's China
Bistro Inc., a national retail restaurant chain. Mr. Gallagher holds an M.B.A.
from The University of Chicago and a B.S.E. from Princeton University.
Douglas R. Stern has served as a Director of Garden.com since May 1997.
Mr. Stern is the President and Chief Executive Officer of Scripps Ventures, the
venture capital operations of The E.W. Scripps Company, which he joined in June
1996. Mr. Stern is also President and Chief Executive Officer of United Media,
a licensing and newspaper syndication company that is also wholly owned by The
E.W. Scripps Company, which he joined in August 1993. Mr. Stern holds a Ph.D.
in Psychology from Temple University and a B.A. from the University of
Rochester.
Steven J. Dietz has served as a Director of Garden.com since June 1998.
Mr. Dietz is a principal of Global Retail Partners, L.P., a venture capital
investment firm, which he joined when it was established in
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1996. Prior to 1996, Mr. Dietz was an officer in the investment banking
division of the Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Dietz
holds a B.S. in Finance from the University of Colorado.
Board of Directors
Our Board of Directors consists of eight members. Currently, each director
is elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting of stockholders or until his or her
successor is duly elected and qualified. Our Restated Certificate of
Incorporation and our Amended and Restated By-laws provide, upon the completion
of this offering, that our Board of Directors will be divided into three
classes, Class I, Class II and Class III, with each class serving staggered
three year terms. The Class I directors, initially , and , will
stand for election or re-election at the 2000 annual meeting of stockholders.
The Class II directors, initially , and , will stand for election
or re-election at the 2001 annual meeting of stockholders. The Class III
directors, initially and , will stand for election or re-election at
the 2002 annual meeting of stockholders. Pursuant to our Amended and Restated
By-laws, our directors may only be removed for cause.
Committees of the Board of Directors
The Compensation Committee consists of Messrs. Phillips and Thornton. The
Compensation Committee reviews and approves the compensation and benefits for
our executive officers, administers our Amended and Restated 1996 Stock
Option/Stock Issuance Plan and our 1999 Employee Stock Purchase Plan and makes
recommendations to the Board of Directors regarding such matters.
The Audit Committee consists of Messrs. Gallagher and Stern. Among other
functions, the Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors, reviews
our balance sheet, statement of operations and cash flows and reviews and
evaluates our internal control functions.
Compensation Committee Interlocks and Insider Participation
None of Garden.com's executive officers serves on the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or Compensation Committee.
Director Compensation
Garden.com currently does not compensate any non-employee member of its
Board of Directors. Members of the Board of Directors will be eligible to
receive discretionary option grants and stock issuances under our Amended and
Restated 1996 Stock Option/Stock Issuance Plan. We plan to implement a program
under our Amended and Restated 1996 Stock Option/Stock Issuance Plan to provide
non-employee directors with automatic stock option grants of shares of
common stock upon their initial appointment and at each of our annual
stockholders' meetings.
Limitation of Liability and Indemnification Matters
Our Restated Certificate of Incorporation limits the liability of
directors to the full extent permitted by Delaware law. Delaware law provides
that a corporation's certificate of incorporation may contain a provision
eliminating or limiting the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors, except for
liability:
. for any breach of their duty of loyalty to the corporation or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
50
<PAGE>
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper
personal benefit.
Our Amended and Restated By-laws provide that we shall indemnify our
directors and executive officers and may indemnify our employees and agents to
the full extent permitted by Delaware law. We believe that indemnification
under our Amended and Restated By-laws covers at least negligence and gross
negligence on the part of indemnified parties. We have entered into agreements
to indemnify our directors and executive officers. These agreements, among
other things, indemnify our directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred
by them in any action or proceeding arising out of their services as a director
or officer. We believe that these agreements are necessary to attract and
retain qualified directors and officers. Prior to the consummation of this
offering, we will obtain an insurance policy covering directors and officers
for claims they may otherwise be required to pay or for which we are required
to indemnify them, subject to certain exclusions.
Executive Compensation
The following table sets forth certain information concerning the
compensation of Garden.com's Chief Executive Officer and its only executive
officer who earned more than $100,000 for the fiscal year ended June 30, 1998
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Positions Fiscal Year Salary Options Compensation ($)
- ---------------------------- ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Clifford A. Sharples ... 1998 $ 87,333 25,500 --
Chief Executive Officer
and President
Andrew R. Martin ....... 1998 115,500 25,500 --
Chief Technology
Officer
</TABLE>
Option Grants in Last Fiscal Year
The following table provides certain information regarding stock options
granted to our Named Executive Officers during the fiscal year ended June 30,
1998.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term (4)
----------------------------------------------- ----------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted Fiscal Year (1) Share (2) Date (3) 5% 10%
- ---- ---------- --------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Clifford A. Sharples.... 500 * $0.17 12/25/97 $ 53 $ 135
25,000 9.0% 0.17 01/01/08 2,673 6,773
Andrew R. Martin........ 500 * 0.17 12/25/97 53 135
25,000 9.0 0.17 01/01/08 2,673 6,773
</TABLE>
- ------------------
* Represents less than 1.0% of the options granted to employees in the fiscal
year ended June 30, 1998.
(1) Based on options to purchase 237,250 shares of Garden.com granted during
fiscal year ended June 30, 1998.
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<PAGE>
(2) All options were granted at the fair market value of the common stock on
the date of grant, as determined by the Board of Directors.
(3) Options may terminate before their expiration date if the optionee's status
as an employee or consultant is terminated or upon death.
(4) In accordance with the rules of the Securities and Exchange Commission,
shown are the gains or "option spreads" that would exist for the respective
options granted. These gains are based on the assumed rates of annual
compound stock appreciation of 5% and 10% from the date the option was
granted over the full option term. These assumed annual compound rates of
stock price appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent Garden.com's estimate or
projection of future stock prices.
Aggregated Fiscal Year-End Option Values
The following table provides summary information regarding options held by
our Named Executive Officers as of June 30, 1998. No options were exercised by
the Named Executive Officers during the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year-End Fiscal Year End (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Clifford A. Sharples........ 20,000 25,500 $ $
Andrew R. Martin............ 82,000 63,500
</TABLE>
- ------------------
(1) Calculated based on an assumed initial public offering price of $ per
share.
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
On March 1, 1996, we entered into an employment agreement with Andrew R.
Martin. This employment agreement may be terminated by either party for any
reason with 30 days' prior written notice and provides for a base salary of
$100,000 per year. The employment agreement also provides that Mr. Martin is
eligible to receive an annual cash bonus of $20,000 and other benefits as are
generally made available to Garden.com's executive-level employees. Pursuant to
the employment agreement, Mr. Martin has agreed not to compete with Garden.com
during employment and for a period of two years following termination of
employment and has agreed to maintain the confidentiality of Garden.com's
proprietary information and trade secrets.
Employee Benefit Plans
Amended and Restated 1996 Stock Option/Stock Issuance Plan. The 1996 Stock
Option/Stock Issuance Plan, or the 1996 Plan, was adopted by the Board of
Directors and approved by the stockholders in March 1996. A total of 1,700,000
shares of common stock has been reserved for issuance under the 1996 Plan. The
Board of Directors and the stockholders have approved an amendment to the 1996
Plan which, effective upon the date of this offering, increases the total
number of shares of common stock reserved under the plan to 2,500,000 shares,
together with an annual increase in the number of shares reserved thereunder
beginning on the first day of Garden.com, Inc's fiscal year (commencing July 1,
2000) in an amount equal to the lesser of (i) 1,200,000 shares, (ii) five
percent (5%) of the outstanding shares of our common stock on such date or
(iii) such lessor amount as determined by the Board of Directors. The 1996 Plan
provides for grants of incentive stock options to employees (including officers
and employee directors) and nonstatutory stock options and stock purchase
rights to employees and consultants (including
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nonemployee directors) of Garden.com. The purposes of the 1996 Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees and consultants
of Garden.com and to promote the success of our business. At the request of
the Board of Directors, the compensation committee administers the 1996 Plan
and determines the optionees and the terms of options granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof.
The term of options granted under the 1996 Plan is stated in the option
agreement. However, the term of an incentive stock option may not exceed ten
years and, in the case of an incentive stock option granted to an optionee
who, at the time of grant, owns stock representing more than 10% of
Garden.com's outstanding capital stock, the term of such option may not exceed
five years. Options granted under the 1996 Plan vest and become exercisable as
set forth in each option agreement.
With respect to any optionee who owns stock possessing more than 10% of
the voting rights of Garden.com's outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
aggregated with all other incentive stock options granted to such person,
would have an aggregate fair market value in excess of $100,000 becoming
exercisable in any calendar year. No employee may be granted, in any fiscal
year, options to purchase more than 500,000 shares or, in the case of an
employee's initial employment, 1,000,000 shares.
The 1996 Plan will terminate in March 2006, unless sooner terminated by
the Board of Directors.
As of May 24, 1999, 188,550 shares of common stock had been issued upon
the exercise of options granted under the 1996 Plan, options to purchase
1,379,000 shares of common stock at a weighted average exercise price of $2.34
per share were outstanding and, upon the completion of this offering, 932,450
shares will be available for future option grants under the 1996 Plan.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan,
or the Purchase Plan, was adopted by the Board of Directors and approved by
the stockholders in May 1999 in contemplation of, and to become effective
upon, the date of this offering. A total of 400,000 shares of common stock
have been reserved for issuance under the Purchase Plan, together with an
annual increase in the number of shares reserved thereunder beginning on the
first day of our fiscal year (commencing July 1, 2000) in an amount equal to
the lesser of (i) 400,000 shares, (ii) one and one-half percent (1.5%) of the
outstanding shares of our common stock on such date or (iii) a lesser amount
determined by the Board of Directors.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, is administered by the Board of Directors. Employees (including our
officers and employee directors but excluding five percent stockholders) are
eligible to participate if they are customarily employed for at least 20 hours
per week and for more than five months in any calendar year. The Purchase Plan
permits eligible employees to purchase common stock through payroll
deductions, which may not exceed $25,000 worth of stock in any calendar year.
The Purchase Plan will be implemented in a series of overlapping offering
periods, each to be of approximately 24 months duration. The initial offering
period under the Purchase Plan will begin on the effective date of this
offering and subsequent offering periods will begin on the first trading day
on or after January 1st and July 1st of each year. Each participant will be
granted an option on the first day of the offering period and such option will
be automatically exercised on the last date of each semi-annual period
throughout the offering period. If the fair market value of the common stock
on any purchase date is lower than such fair market value on the start date of
that offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
immediately
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following offering period. The purchase price of the common stock under the
Purchase Plan will be equal to 85% of the lesser of the fair market value per
share of common stock on the start date of the offering period or at the end
of the purchase period. Employees may end their participation in an offering
period at any time during that period and participation ends automatically on
termination of employment with us.
The Purchase Plan will terminate in May 2009, unless sooner terminated by
the Board of Directors.
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RELATED PARTY TRANSACTIONS
Preferred Stock Financings
The following table summarizes private placement transactions in which we
sold shares of preferred stock to our directors and 5% stockholders and persons
and entities associated with them. Each share of preferred stock converts into
one share of common stock upon the closing of this offering. The shares of
Series A Preferred Stock were sold at $1.00 per share, the shares of Series B
Preferred Stock were sold at $1.40 per share, the shares of Series C Preferred
Stock were sold at $1.74 per share, the shares of Series D Preferred Stock were
sold at $3.76 per share and the shares of Series E Preferred Stock were sold at
$5.72 per share.
<TABLE>
<CAPTION>
5% Stockholders and
Entities Affiliated with Series A Series B Series C Series D Series E
Directors Preferred Preferred Preferred Preferred Preferred
- ------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Austin Ventures......... 750,000 715,000 172,414(1) 124,577 53,779
Phillips-Smith Specialty
Retail Group III,
L.P. ................... -- 712,855 343,793(2) 66,639 35,023
Entities affiliated with
The E.W. Scripps
Company................. -- -- 2,068,966(3) 346,428 947,302
Entities affiliated with
Oak Investment
Partners................ -- -- 1,034,483(4) 332,788 41,642
Entities affiliated with
Global Retail Partners,
L.P..................... -- -- -- 2,000,000 --
Entities affiliated with
Pequot Capital
Management, Inc......... -- -- -- 1,523,936 48,265
Entities affiliated with
Attractor Ventures LLC.. -- -- -- -- 1,136,364
Entities affiliated with
Patricof
& Co. Ventures ......... -- -- -- -- 1,136,364
</TABLE>
- ------------------
(1) Includes warrants to purchase 28,736 shares exercisable at any time until
May 7, 2002 at an exercise price of $1.74 per share.
(2) Includes warrants to purchase 57,299 shares exercisable at any time until
May 7, 2002 at an exercise price of $1.74 per share.
(3) Includes warrants to purchase 344,828 shares exercisable at any time until
May 7, 2002 at an exercise price of $1.74 per share.
(4) Includes warrants to purchase 172,414 shares exercisable at any time until
May 7, 2002 at an exercise price of $1.74 per share.
Stockholders Agreement
Garden.com has entered into a Fourth Amended and Restated Stockholders
Agreement, dated as of April 13, 1999 (the "Stockholders Agreement"), with
Clifford A. Sharples, James N. O'Neill and Lisa W.A. Sharples, and each of the
holders of preferred stock. The Stockholders Agreement contains provisions with
respect to the election of directors of Garden.com, restrictions on the
transfer of shares of the Garden.com's capital stock and preemptive rights.
Each of these provisions will automatically terminate upon the completion of
this offering. The Stockholders Agreement also provides, subject to certain
limitations, the holders of Series E Preferred Stock with a limited preemptive
right in this offering to purchase up to 25% of that number of shares of common
stock that would be required to be sold to that Series E holder to maintain its
pre-offering percentage ownership.
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Transactions with The E.W. Scripps Company
The E.W. Scripps Company, through its wholly owned subsidiaries, Scripps
Ventures LLC and HGTV, is a 20.6% stockholder of Garden.com. Douglas R. Stern,
a director of Garden.com, is the President and Chief Executive Officer of
United Media, a newspaper syndication company and wholly-owned subsidiary of
The E.W. Scripps Company.
In April 1998, we launched our first television advertising campaign with
HGTV. In May 1999, HGTV purchased 874,126 shares of our Series E Preferred
Stock for a total purchase price of $5,000,000, or $5.72 per share.
Approximately $1,500,000 of the purchase price has been paid in the form of an
advertising credit, which we will use over the next 24 months to advertise on
HGTV. In addition, we have entered into a strategic alliance with HGTV to
pursue mutually beneficial opportunities to leverage each party's content,
subscriber/membership base and expertise.
Since March 1998, we have conducted a national marketing program with
United Media. In November 1998, we also entered into an agreement with
PRIMEDIA Special Interests Publication, Inc., a subsidiary of United Media,
regarding the publication of Garden Escape Magazine.
We made payments of approximately $75,000 to affiliates of The E.W.
Scripps Company during our fiscal year ended June 30, 1998 and payments of
approximately $311,000 in the nine months ended March 31, 1999.
Other Transactions
Kenneth Sharples, the brother of Clifford A. Sharples, our President,
Chief Executive Officer and Director, has provided legal services to
Garden.com. During our fiscal year ended June 30, 1998, we paid $27,522 for
these legal services. In addition, as of the date of this prospectus, we have
issued to Kenneth Sharples options to purchase a total of 8,000 shares of
common stock with a weighted average exercise price of $0.74 per share.
We maintain test gardens in Des Moines, Iowa on property owned by Douglas
A. Jimerson, our Vice President of Publishing and Editor-in-Chief. We pay for
the plants grown in the gardens and for the maintenance of the gardens. Other
than these maintenance expenses, we do not pay Mr. Jimerson rent for the use
of the gardens.
On February 27, 1996, we entered into a buy-sell agreement with Clifford
A. Sharples, James N. O'Neill, Lisa W.A. Sharples and Andrew R. Martin
pursuant to which Mr. Martin granted a right of first refusal in favor of Mr.
Sharples, Mr. O'Neill, Ms. Sharples and Garden.com in the event that Mr.
Martin attempts to transfer any of the 165,000 shares sold to Mr. Martin by
Mr. Sharples, Mr. O'Neill and Ms. Sharples. The buy-sell agreement terminates
upon completion of this offering.
We believe that all the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. Any future transactions, including loans, between us and our
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
We have entered into indemnification agreements with each of our
executive officers and directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of May 24, 1999, as adjusted to
reflect the sale of shares of common stock in this offering and conversion
of all outstanding shares of preferred stock into shares of common stock, by:
. each stockholder known by us to own beneficially more than 5% of the
common stock;
. each director;
. the Named Executive Officers, and
. all directors and executive officers as a group.
<TABLE>
<CAPTION>
Percent of Common Stock
Shares of Beneficially Owned
Common Stock -----------------------
Beneficially Before the After the
Name of Beneficial Owner Owned (1) Offering Offering (2)
- ------------------------ ------------ ---------- ------------
<S> <C> <C> <C>
Douglas R. Stern ........................ 3,362,696 20.6% %
Entities affiliated with The E.W.
Scripps Company (3)
Steven J. Dietz ......................... 2,000,000 12.5
Entities affiliated with Global Retail
Partners, L.P. (4)
John D. Thornton ........................ 1,815,770 11.3
Entities affiliated with Austin Ventures
(5)
Entities affiliated with Pequot Capital
Management,
Inc. (6)................................ 1,572,201 9.8
Gerald R. Gallagher (7).................. 1,408,913 8.7
Entities affiliated with Oak Investment
Partners
Donald J. Phillips....................... 1,158,310 7.2
Phillips-Smith Specialty Retail Group,
III, L.P. (8)
Entities affiliated with Patricof & Co. 1,136,364 7.1
Ventures (9)............................
Entities affiliated with Attractor LLC 1,136,364 7.1
(10)....................................
Clifford A. Sharples (11)................ 393,766 2.5
James N. O'Neill (12).................... 393,766 2.5
Lisa W.A. Sharples (13).................. 393,766 2.5
Andrew R. Martin (14).................... 272,850 1.7
All directors and executive officers as a 11,246,937 68.7
group (11 persons) (15).................
</TABLE>
- ------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Shares of common stock
subject to options that are currently exercisable or exercisable within 60
days of May 24, 1999 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Assumes that the underwriters' over-allotment option to purchase up to
shares from Garden.com and from the Selling Stockholders is not exercised.
(3) Represents (i) 2,488,570 shares held of record by Scripps Ventures, LLC,
including 344,828 shares issuable upon exercise of outstanding warrants and
(ii) 874,126 shares held of record by HGTV.
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<PAGE>
Mr. Stern disclaims beneficial ownership of these shares. The address for
Mr. Stern and each of these entities is 200 Madison Avenue, New York, New
York 10016.
(4) Represents (i) 1,282,293 shares held of record by Global Retail Partners,
L.P., (ii) 382,097 shares held of record by DLJ Diversified Partners, L.P.,
(iii) 141,899 shares held of record by DLJ Diversified Partners-A, L.P.,
(iv) 83,359 shares held of record by GRP Partners, L.P., (v) 88,283 shares
held of record by Global Retail Partners Funding, Inc., and (vi) 22,069
shares held of record by DLJ ESC II, L.P. Mr. Dietz has shared voting and
investment power over all of these shares, and he disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
such shares. The address for Mr. Dietz and each of these entities is 2121
Avenue of the Stars, Suite 3000, Los Angeles, California 90067.
(5) Represents (i) 586,112 shares held of record by Austin Ventures IV-A, L.P.,
including 9,276 shares issuable upon exercise of outstanding warrants, and
(ii) 1,229,658 shares held of record by Austin Ventures IV-B, L.P.,
including 19,460 shares issuable upon exercise of warrants. Mr. Thornton
has shared voting and investment power over all of these shares, and he
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in such shares. The address for Mr. Thornton and each of
these entities is 1300 Norwood Tower, 114 West Seventh Street, Austin,
Texas 78701.
(6) Represents (i) 1,395,514 shares held of record by Pequot Private Equity
Fund, LP, and (ii) 176,687 shares held of record by Pequot Offshore Private
Equity Fund, Inc. The address for each of these entities is 500 Nyala Farm
Road, Westport, Connecticut 06880.
(7) Represents (i) 1,374,396 shares held of record by Oak Investment Partners
VII, Limited Partnership, including 168,190 shares issuable upon exercise
of outstanding warrants, and (ii) 34,517 shares held of record by Oak VII
Affiliates Fund, Limited Partnership, including 4,224 shares issuable upon
exercise of outstanding warrants. Mr. Gallagher has shared voting and
investment power over all of these shares, and he disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
such shares. The address for Mr. Gallagher and each of these entities is
4550 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402.
(8) Includes 57,299 shares issuable upon exercise of outstanding warrants. Mr.
Phillips has sole voting and investment power over all of the shares held
by Phillips-Smith Specialty Retail Group III, L.P., and he disclaims
beneficial ownership except to the extent of his pecuniary interest in such
shares. The address for Mr. Phillips and Phillips-Smith Specialty Retail
Group III, L.P., is 5080 Spectrum Drive, Suite 805 West, Addison, Texas
75001.
(9) Represents (i) 932,727 shares held of record by APA Excelsior V, L.P., (ii)
192,308 shares held of record by The P/A Fund III, L.P. and (iii) 11,329
shares held of record by Patricof Private Investment Club II, L.P. The
address for each of these entities is 445 Park Avenue, 11th Floor, New
York, New York 10022.
(10) Represents (i) 995,258 shares held of record by Attractor LP, (ii) 66,130
shares held of record by Attractor Institutional LP, and (iii) 74,976
shares held of record by Attractor Ventures LLC. The address for each of
these entities is 1110 Burlingame Avenue, Suite 211, Burlingame,
California 94010.
(11) Includes (i) 6,496 shares held of record by trusts for the benefit of the
minor child of Mr. Sharples and Lisa W.A. Sharples, the spouse of Mr.
Sharples, over which Mr. Sharples has sole voting power, and (ii) 24,000
shares subject to stock options held by Mr. Sharples. Excludes (i) 363,270
shares held of record by Mr. Sharples' spouse, (ii) 24,000 shares subject
to stock options held by Mr. Sharples' spouse and (iii) 6,496 shares held
of record by trusts for the benefit of the minor child of Mr. Sharples and
his spouse over which Mr. Sharples' spouse has sole voting power. Mr.
Sharples disclaims beneficial ownership of all shares held in the trusts
for the benefit of his minor child. Mr. Sharples has granted the
Underwriters a 30-day option to purchase up to shares to cover over-
allotments, if any. If such option is exercised in full, following
completion of the offering, Mr. Sharples will beneficially own shares,
or % of Garden.com common stock.
(12) Includes (i) 24,100 shares subject to exercise of stock options and (ii)
19,084 shares held of record by members of Mr. O'Neill's family over which
Mr. O'Neill has sole voting power. Mr. O'Neill disclaims beneficial
ownership of the shares held by the members of his family. Mr. O'Neill has
granted the Underwriters a 30-day option to purchase up to shares to
cover over-allotments, if any. If such
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<PAGE>
option is exercised in full, following completion of the offering, Mr.
O'Neill will beneficially own shares, or % of Garden.com common stock.
(13) Includes (i) 6,496 shares held of record by trusts for the benefit of the
minor child of Ms. Sharples and Clifford A. Sharples, the spouse of Ms.
Sharples, over which Ms. Sharples has sole voting power, and (ii) 24,000
shares subject to stock options held by Ms. Sharples. Excludes (i) 363,270
shares held of record by Ms. Sharples' spouse, (ii) 24,000 shares subject
to stock options held by Ms. Sharples' spouse and (iii) 6,496 shares held
of record by trusts for the benefit of the minor child of Ms. Sharples and
her spouse over which Ms. Sharples' spouse has sole voting power. Ms.
Sharples disclaims beneficial ownership of all shares held in the trusts
for the benefit of her minor child. Ms. Sharples has granted the
Underwriters a 30-day option to purchase up to shares to cover over-
allotments, if any. If such option is exercised in full, following
completion of the offering, Ms. Sharples will beneficially own shares,
or % of Garden.com common stock.
(14) Includes (i) 9,250 shares subject to exercise of stock options and (ii)
6,992 shares held of record by a trust for the benefit of the minor
children of Mr. Martin over which Mr. Martin has sole voting power. Mr.
Martin disclaims beneficial ownership of all shares held in the trust for
the benefit of his minor children.
(15) Includes 128,450 shares subject to exercise of stock options and 258,449
shares issuable upon exercise of outstanding warrants.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
50,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value. The following description of our
capital stock does not purport to be complete and is subject to and qualified
in its entirety by our Restated Certificate of Incorporation and Amended and
Restated By-laws, which are included as exhibits to the registration statement
of which this prospectus forms a part, and by the provisions of applicable
Delaware law.
Common Stock
As of May 24, 1999, there were 15,985,330 shares of common stock
outstanding, held of record by approximately 51 stockholders, which reflects
the conversion of all outstanding shares of preferred stock into common stock.
In addition, as of May 24, 1999, there were 1,379,000 shares of common stock
subject to outstanding options. Upon completion of this offering, there will be
shares of common stock outstanding assuming no exercise of the underwriters'
over-allotment option, no exercise of outstanding warrants and no additional
exercise of outstanding options under our stock option plan.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive or conversion rights, other
subscription rights, or redemption or sinking fund provisions. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 14,546,780 shares of common stock and
automatically retired. Thereafter, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to designate the rights,
preferences, privileges and restrictions of each such series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock after the completion of this offering.
Warrants
As of May 24, 1999, there were outstanding warrants to purchase 730,587
shares of our preferred stock with a weighted average exercise price of $2.19
per share. These warrants to purchase preferred stock shall automatically
convert into warrants to purchase common stock upon completion of this
offering.
Registration Rights
The holders of 14,546,780 shares of preferred stock and 730,587 shares
subject to the exercise of warrants are entitled to have their shares
registered by us under the Securities Act pursuant to the terms of an agreement
between us and the holders of these registrable securities. Subject to
limitations specified in the agreement, these registration rights include the
following:
. The holders of at least 50% of the then outstanding registrable
securities issued upon conversion of the Series E Preferred Stock may
require, on one occasion beginning after the completion of
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<PAGE>
this offering, that we use our best efforts to register the
registrable securities of such holders for public resale.
. The holders of at least 66 2/3% of the then outstanding registrable
securities may require, on three occasions beginning on January 1,
2001, that we use our best efforts to register no less than 33 1/3% of
the then outstanding registrable securities for public resale.
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable
securities are entitled to include their shares of common stock in
such registration, subject to the ability of the underwriters to limit
the number of shares included in the offering in view of market
conditions.
. The holders of registrable securities with a fair market value of at
least $750,000 may require us on two occasions to register all or a
portion of their registrable securities on Form S-2 and on an
unlimited number of occasions to register all or a portion of their
registrable securities on Form S-3 when use of such forms becomes
available to us.
We will bear all registration expenses other than underwriting discounts
and commissions. All registration rights terminate at such time as the holder
is entitled to sell all of its registrable securities pursuant to Rule 144(k)
under the Securities Act.
Delaware Anti-Takeover Law and Our Restated Certificate of Incorporation and
Amended and Restated By-law Provisions
Provisions of Delaware law and our Restated Certificate of Incorporation
and Amended and Restated By-laws could make more difficult our acquisition by a
third party and the removal of our incumbent officers and directors. These
provisions, summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of Garden.com to first negotiate with us. We believe that the
benefits of increased protection of our ability to negotiate with the proponent
of an unfriendly or unsolicited acquisition proposal outweigh the disadvantages
of discouraging such proposals because, among other things, negotiation could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless:
. the Board of Directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, he or she owned at
least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding shares owned by persons who
are directors and also officers; or
. on or subsequent to such date the business combination is approved by
the Board of Directors and authorized at an annual or special meeting
of stockholders by the holders of at least 66 2/3% of our outstanding
voting stock which is not owned by the interested stockholder.
A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
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Our Restated Certificate of Incorporation and Amended and Restated By-laws
do not provide for the right of stockholders to act by written consent without
a meeting or for cumulative voting in the election of directors. In addition,
our Restated Certificate of Incorporation permits the Board of Directors to
issue preferred stock with voting or other rights without any stockholder
action. Our Restated Certificate of Incorporation and our Amended and Restated
By-laws provide, upon the completion of this offering, that our Board of
Directors will be divided into three classes, with each class serving staggered
three year terms. The classification of our Board of Directors could have the
effect of making it more difficult for a third party to acquire control of
Garden.com or discourage a third party from attempting to acquire control of
Garden.com. In addition, our Amended and Restated By-laws establish an advance
notice procedure for stockholder proposals to be brought before any meeting of
stockholders of Garden.com and for nominations by stockholders of candidates
for election as directors at any meeting of stockholders at which directors are
to be elected. These provisions, which require the vote of stockholders holding
at least a majority of the outstanding voting securities of Garden.com to
amend, may have the effect of deterring hostile takeovers or delaying changes
in our management.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is . The
transfer agent's address and telephone number is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could lower prevailing market prices. As described below, no shares currently
outstanding will be available for sale immediately after this offering because
of contractual restrictions on resale. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse could harm the
prevailing market price and impair our ability to raise equity capital in the
future.
Upon completion of the offering, we will have outstanding shares of
common stock. Of these shares, the shares sold in the offering, plus any
shares issued upon exercise of the underwriters' over-allotment option, will be
freely tradable without restriction under the Securities Act, unless purchased
by our "affiliates" as that term is defined in Rule 144 under the Securities
Act. In general, affiliates include officers, directors or 10% stockholders.
The remaining 15,985,330 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
We anticipate that our directors, officers and significant securityholders
will enter into lock-up agreements in connection with this offering generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the date of this prospectus without the prior written consent
of Hambrecht & Quist LLC. Taking into account the lock-up agreements, and
assuming Hambrecht & Quist LLC does not release stockholders from these
agreements, the number of shares that will be available for sale in the public
market under the provisions of Rule 144, 144(k) and 701 will be as follows:
. Beginning on the effective date of this prospectus, only the shares
sold in this offering will be immediately available for sale in the
public market.
. Beginning 90 days after the effective date, approximately shares
will be eligible for sale.
. Beginning 180 days after the effective date, approximately shares
will be eligible for sale.
. At various times thereafter upon the expiration of applicable holding
periods, shares will become eligible for sale.
In general, under Rule 144, after the expiration of the lock-up
agreements, a person who has beneficially owned restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding
which will equal approximately shares immediately after the
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale and who has beneficially
owned the
63
<PAGE>
shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701 permits our employees, officers, directors or consultants who
purchased shares pursuant to a written compensatory plan or contract to resell
such shares in reliance upon Rule 144 but without compliance with specific
restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under Rule 144 without complying with the holding period requirement and that
non-affiliates may sell such shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation or notice
provisions of Rule 144.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
the date hereof, the underwriters named below, through their representatives,
Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc. and Thomas Weisel
Partners LLC, have severally agreed to purchase, and we and the selling
stockholders have agreed to sell them, an aggregate of shares of common
stock. The number of shares of common stock that each underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC.............................................
BancBoston Robertson Stephens Inc. ...............................
Thomas Weisel Partners LLC........................................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in Garden.com's business and the receipt of
certain certificates, opinions and letters from Garden.com and the selling
stockholders, their counsel and the independent auditors. The nature of the
underwriters' obligation is such that they are committed to purchase all shares
of common stock offered hereby if any of the shares are purchased.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. The underwriters may allow, and such dealers may reallow a
concession not in excess of $ per share to other underwriters or certain
other dealers. After the initial public offering of the shares of common stock,
the offering price and other selling terms may be changed by the
representatives of the underwriters.
An electronic prospectus is available on the Web site maintained by
. The underwriters have agreed to allocate a limited number of shares to
for sale to its brokerage account holders.
Pursuant to the underwriting agreement, Garden.com and certain selling
stockholders have granted to the underwriters an option, exercisable no later
than 30 days after the date of this prospectus, to purchase up to an aggregate
of additional shares of common stock at the initial public offering price,
less underwriting discounts and commissions, set forth on the cover page
hereof. To the extent that the underwriters exercise this option, each
underwriter will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased
by it shown in the above table bears to the total number of shares of common
stock offered hereby.
At our request, the underwriters have reserved up to shares of common
stock to be sold in the offering and offered hereby for sale, at the public
offering price, to our directors, officers employees, business associates and
related persons. The number of shares of common stock available for sale to the
general public will be reduced to the extent such individuals purchase such
reserved shares. In addition, the underwriters have agreed that each holder of
our Series E Preferred Stock shall have the right to purchase up to 25% of that
number of shares of common stock that would be required to be sold to the
Series E holder to maintain its pre-offering percentage ownership. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby.
65
<PAGE>
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation
or modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
Garden.com and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
We anticipate that our directors, officers and our significant
stockholders will agree not to directly or indirectly, without the prior
written consent of Hambrecht & Quist LLC on behalf of the underwriters, whether
any such transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise, during the 180-day period
following the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock (whether any such shares or any such securities are then owned
by such person or are thereafter acquired directly from us); or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock.
We have also agreed that we will not, without the prior written consent of
Hambrecht & Quist LLC, offer or sell any shares of common stock, options or
warrants to acquire shares of our common stock or securities exchangeable for
or convertible into shares of common stock during the 180-day period following
the date of this prospectus. We may issue shares upon the exercise of options
granted prior to the date of this prospectus, and may grant additional options
under our stock option plans, providing that, without the prior written consent
of Hambrecht & Quist LLC, the additional options shall not be exercisable
during the 180-day period.
The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance of shares of our common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the
date of this prospectus which is described in the prospectus;
. transactions by any person other than Garden.com relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or
. issuance of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.
In our June 1998 Series D Preferred Stock private placement, Hambrecht &
Quist California purchased 79,787 shares of Series D Preferred Stock for
approximately $300,000, or $3.76 per share, and H&Q Garden Escape Investors, LP
purchased 186,170 shares of Series D Preferred Stock for approximately
$700,000, or $3.76 per share. Hambrecht & Quist California and H&Q Garden
Escape Investors, LP purchased these shares on the same terms as the other
investors in the private placement. As partial consideration for its services
as placement agent for the private placement, we issued a warrant, expiring on
December 31, 2002, to purchase 90,425 shares of Series D Preferred Stock at
$3.76 per share to Hambrecht & Quist LLC. In January 1999, Hambrecht & Quist
California transferred 29,596 shares of Series D
66
<PAGE>
Preferred Stock to Hambrecht & Quist Employee Venture Fund, L.P. Each of
Hambrecht & Quist California, H&Q Garden Escape Investors, LP and Hambrecht &
Quist Employee Venture Fund, L.P. is an affiliate of Hambrecht & Quist LLC.
In our April 1999 Series E Preferred Stock private placement, Hambrecht &
Quist California purchased 3,762 shares of Series E Preferred Stock for
$21,518.64, or $5.72 per share, and Hambrecht & Quist Employee Venture Fund,
L.P. II purchased 3,762 shares of Series E Preferred Stock for $21,518.64 or
$5.72 per share. Hambrecht & Quist California and Hambrecht & Quist Employee
Venture Fund, L.P. purchased these shares on the same terms as the other
investors in the private placement. As partial consideration for its services
as placement agent for the private placement, we issued Hambrecht & Quist LLC a
warrant, expiring on May 24, 2004, to purchase 36,713 shares of Series E
Preferred Stock at $5.72 per share to Hambrecht & Quist LLC. Hambrecht & Quist
Employee Venture Fund, L.P. II is an affiliate of Hambrecht & Quist LLC. In
addition, 1,880 shares of Series E Preferred Stock are beneficially owned by
other persons affiliated with Hambrecht & Quist LLC.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager of 35 filed public offerings of equity securities, of which 16 have
been completed, and has acted as a syndicate member in an additional 10 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Prior to the offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
determined by negotiation among Garden.com, the selling stockholders and the
representatives of the underwriters. Among the factors that will be considered
in determining the initial public offering price are prevailing market and
economic conditions, our revenues and earnings, market valuations of other
companies engaged in activities similar to us, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover of this preliminary prospectus is
subject to change as a result of market conditions or other factors.
67
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c., Milwaukee,
Wisconsin, and Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California and Austin, Texas. Certain legal matters will be passed upon
for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Austin, Texas. Certain entities affiliated with Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP are partners in one of our
stockholders, H&Q Garden Escape Investors, LP. As a result, the entities
affiliated with Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
maintain a beneficial interest in 13,298 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 1997 and 1998 and March 31, 1999, and for the period
from October 2, 1995 (inception) to June 30, 1996, each of the two years in the
period ended June 30, 1998, and the nine months in the period ended March 31,
1999, as set forth in their report. We've included our financial statements in
the prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
ADDITIONAL GARDEN.COM INFORMATION
We have filed a registration statement on Form S-1 with the SEC with
respect to the common stock sold in this offering. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the registration statement or the exhibits and
schedules which are part of the registration statement. For further information
with respect to Garden.com and the common stock sold in this offering, we refer
you to the registration statement and its exhibits and schedules. You may read
and copy any document we file at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from the SEC's Web site at
www.sec.gov.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Securities and Exchange
Act of 1934, as amended, and, accordingly, will file periodic reports, proxy
statements and other information with the SEC. Our periodic reports, proxy
statements and other information will be available for inspection and copying
at the SEC's public reference rooms and the SEC's Web site.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Garden.com, Inc. ----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Balance Sheets....................................................... F-3
Statements of Operations............................................. F-4
Statements of Changes in Redeemable Convertible Preferred Stock and
Stockholders' Deficit............................................... F-5
Statements of Cash Flows............................................. F-6
Notes to Financial Statements........................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Garden.com, Inc.
We have audited the accompanying balance sheets of Garden.com, Inc. (the
"Company") as of June 30, 1997 and 1998 and March 31, 1999 and the related
statements of operations, changes in redeemable convertible preferred stock and
stockholders' deficit and cash flows for the period from October 2, 1995
(inception) to June 30, 1996, each of the two years in the period ended June
30, 1998, and the nine months ended March 31, 1999. 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garden.com, Inc. at June
30, 1997 and 1998 and March 31, 1999 and the results of its operations and its
cash flows for the period from October 2, 1995 (inception) to June 30, 1996,
each of the two years in the period ended June 30, 1998, and the nine months
ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
May 25, 1999
Austin, Texas
F-2
<PAGE>
GARDEN.COM, INC.
<TABLE>
<CAPTION>
Pro Forma
Redeemable
Convertible
Preferred
Stock and
Stockholders'
June 30, Deficit at
------------------------ March 31, March 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 4,948,319 $19,042,218 $ 2,281,529
Investments............ -- -- 4,881,981
Prepaid advertising.... 3,922 378,065 768,974
Other prepaid expenses
and current assets.... 55,240 47,250 805,711
Inventory.............. 24,379 158,818 389,794
----------- ----------- ------------
Total current assets.. 5,031,860 19,626,351 9,127,989
Property and equipment:
Equipment.............. 27,487 54,262 110,335
Leasehold
improvements.......... 8,077 29,224 54,486
Computers and purchased
software.............. 460,214 829,338 1,617,567
Furniture and
fixtures.............. 10,327 15,064 40,343
----------- ----------- ------------
Total property and
equipment............ 506,105 927,888 1,822,731
Accumulated
depreciation........... (124,472) (328,176) (633,469)
----------- ----------- ------------
Property and
equipment, net....... 381,633 599,712 1,189,262
Other assets, net of
accumulated
amortization of $1,157,
$16,901 and $86,155 as
of June 30, 1997 and
1998 and March 31,
1999, respectively..... 9,357 262,489 202,650
----------- ----------- ------------
Total assets.......... $ 5,422,850 $20,488,552 $ 10,519,901
=========== =========== ============
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....... $ 235,608 $ 910,378 $ 978,470
Accrued expenses and
other liabilities..... 81,011 137,323 360,147
Unearned revenue....... 24,534 95,759 496,031
Current portion of
long-term debt........ 122,529 175,312 151,487
----------- ----------- ------------
Total current
liabilities.......... 463,682 1,318,772 1,986,135
Long-term debt, less
current portion........ 122,530 154,332 40,005
Commitments and
contingencies:
Redeemable convertible
preferred stock........ 7,878,832 26,975,496 26,938,227
Warrants to purchase
redeemable convertible
preferred stock........ 22,931 23,835 23,835 23,835
Stockholders' deficit:
Common Stock--$.01 par
value: 15,000,000
authorized, actual;
27,107,158 authorized,
pro forma; 1,450,000,
1,258,200, 1,414,800
and 12,003,947 shares
issued and outstanding
on June 30, 1997 and
1998 and on March 31,
1999, and on a pro
forma basis,
respectively.......... 14,500 12,582 14,148 120,039
Additional paid-in
capital............... 26,000 5,865 785,317 $ 27,617,653
Deferred stock
compensation.......... - - (696,984) (696,984)
Retained deficit....... (3,105,625) (8,002,330) (18,570,782) (18,570,782)
----------- ----------- ------------ ------------
Total stockholders'
deficit................ (3,065,125) (7,983,883) (18,468,301) 8,469,926
----------- ----------- ------------ ------------
Total liabilities and
stockholders' deficit.. $ 5,422,850 $20,488,552 $ 10,519,901 $ 8,493,761
=========== =========== ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Fiscal Year Ended Nine Months Ended
October 2, 1995 June 30, March 31,
(inception) to ------------------------ -------------------------
June 30, 1996 1997 1998 1998 1999
--------------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Products............... $ 8,099 $ 308,469 $ 1,283,114 $ 647,583 $ 2,314,573
Advertising............ -- 7,500 55,487 39,090 194,799
--------- ----------- ----------- ----------- ------------
Total revenues........ 8,099 315,969 1,338,601 686,673 2,509,372
--------- ----------- ----------- ----------- ------------
Cost of revenues:.......
Products............... 5,442 242,239 1,085,497 530,163 2,019,293
Advertising............ -- 3,750 21,852 14,462 53,578
--------- ----------- ----------- ----------- ------------
Total cost of
revenues............. 5,442 245,989 1,107,349 544,625 2,072,871
--------- ----------- ----------- ----------- ------------
Gross profit............ 2,657 69,980 231,252 142,048 436,501
--------- ----------- ----------- ----------- ------------
Operating expenses:
Marketing and sales.... 189,299 927,343 2,329,737 982,370 7,065,458
Content and product
development........... 160,788 858,388 1,213,235 827,450 2,166,640
General and
administrative........ 339,641 764,741 1,492,436 982,825 2,336,774
--------- ----------- ----------- ----------- ------------
Total operating
expenses............. 689,728 2,550,472 5,035,408 2,792,645 11,568,872
--------- ----------- ----------- ----------- ------------
Operating loss.......... (687,071) (2,480,492) (4,804,156) (2,650,597) (11,132,371)
Other income (expense):
Interest income........ 3,301 62,170 226,246 157,202 594,479
Interest expense....... (2,907) (22,126) (32,902) (21,542) (30,560)
Consulting income...... 21,500 -- -- -- --
--------- ----------- ----------- ----------- ------------
Net loss................ $(665,177) $(2,440,448) $(4,610,812) $(2,514,937) $(10,568,452)
========= =========== =========== =========== ============
Basic net loss per
share.................. $ (0.95) $ (1.73) $ (3.20) $ (1.73) $ (8.17)
========= =========== =========== =========== ============
Shares used in computing
basic net loss per
share.................. 1,292,959
============
Pro forma basic net loss
per share.............. $ (0.89)
============
Shares used in computing
pro forma basic net
loss per share......... 11,882,106
============
</TABLE>
See accompanying notes.
F-4
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Redeemable
Convertible
Redeemable Convertible Preferred
Preferred Stock Common Stock Additional Deferred Stock and
-------------------------------- -------------------- Paid-in Stock Retained Stockholders'
Shares Amount Warrants Shares Par Value Capital Compensation Deficit Deficit
---------- ----------- -------- --------- --------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capital
contribution... -- $ -- $ -- 300 $ 3 $ -- $ -- $ -- $ 3
Effect of merger
with the
Asbury Group.. -- -- -- 1,249,700 12,497 -- -- -- 12,497
Issuance of
Series A
Redeemable
Convertible
Preferred
Stock, net of
issuance costs
of $25,359..... 750,000 724,641 -- -- -- -- -- -- 724,641
Net loss........ -- -- -- -- -- -- -- (665,177) (665,177)
---------- ----------- ------- --------- ------- -------- --------- ------------ ------------
Balance at June
30, 1996........ 750,000 724,641 -- 1,250,000 12,500 -- -- (665,177) 71,964
Issuance of
Common Stock... -- -- -- 200,000 2,000 26,000 -- 28,000
Issuance of
Series B, C-1
and C-2
Redeemable
Convertible
Preferred
Stock, net of
issuance costs
of $75,877..... 4,447,241 7,154,191 -- -- -- -- -- -- 7,154,191
Issuance of
warrants to
purchase
603,449 shares
of Series C-1
Redeemable
Convertible
Preferred
Stock.......... -- -- 22,931 -- -- -- -- -- 22,931
Net loss........ -- -- -- -- -- -- -- (2,440,448) (2,440,448)
---------- ----------- ------- --------- ------- -------- --------- ------------ ------------
Balance at June
30, 1997........ 5,197,241 7,878,832 22,931 1,450,000 14,500 26,000 -- (3,105,625) 4,836,638
Issuance of
Series D
Redeemable
Convertible
Preferred Stock
and warrants,
net of issuance
costs of
$1,176,890..... 5,319,143 18,823,075 904 -- -- -- -- -- 18,823,979
Dividends
accrued for
Series A, B,
C-1 and C-2
Preferred
Stock.......... -- -- -- -- -- -- -- (285,893) (285,893)
Conversion of
cumulative
dividend to
Series D
Redeemable
Convertible
Preferred
Stock.......... 72,763 273,589 -- -- -- -- -- -- 273,589
Repurchase of
common stock... -- -- -- (200,000) (2,000) (26,000) -- -- (28,000)
Exercise of
stock options.. -- -- -- 8,200 82 5,865 -- -- 5,947
Net loss........ -- -- -- -- -- -- -- (4,610,812) (4,610,812)
---------- ----------- ------- --------- ------- -------- --------- ------------ ------------
Balance at June
30, 1998........ 10,589,147 26,975,496 23,835 1,258,200 12,582 5,865 -- (8,002,330) 19,015,448
Issuance costs
related to
Series D
Redeemable
Convertible
Preferred Stock
and warrants,.. -- (37,269) -- -- -- -- -- -- (37,269)
Deferred stock
compensation... -- -- -- -- -- 776,275 (696,984) -- 79,291
Exercise of
stock options.. -- -- -- 156,600 1,566 3,177 -- -- 4,743
Net loss........ -- -- -- -- -- -- -- (10,568,452) (10,568,452)
---------- ----------- ------- --------- ------- -------- --------- ------------ ------------
Balance at March
31, 1999........ 10,589,147 $26,938,227 $23,835 1,414,800 $14,148 $785,317 $(696,984) $(18,570,782) $ 8,493,761
========== =========== ======= ========= ======= ======== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Fiscal Year Ended Nine Months Ended March
October 2, 1995 June 30, 31,
(inception) to ------------------------ -------------------------
June 30, 1996 1997 1998 1998 1999
--------------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.............. $(665,177) $(2,440,448) $(4,610,812) $(2,514,937) $(10,568,452)
Adjustment to
reconcile net loss to
cash used in
operating activities:
Depreciation.......... 29,012 96,617 219,448 141,271 305,293
Amortization.......... -- -- -- 495 69,255
Amortization of
deferred stock
compensation......... -- -- -- -- 79,291
Common stock, issued
for services
received............. 11,050 -- -- -- --
Changes in operating
assets and
liabilities:
Prepaid advertising.. -- (3,922) (374,143) (92,007) (390,909)
Other prepaid
expenses and current
assets.............. (12,299) (50,973) 7,990 (39,675) (758,461)
Inventory............ -- (24,379) (134,439) (73,661) (230,976)
Other assets......... -- (2,482) (6,876) 7,200 --
Accounts payable..... 82,862 152,746 674,770 144,020 68,092
Accrued expenses and
other liabilities... 17,820 59,404 47,325 (39,603) 222,824
Unearned revenue..... -- 28,321 80,212 82,766 400,272
--------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (536,732) (2,185,116) (4,096,525) (2,384,131) (10,803,771)
--------- ----------- ----------- ----------- ------------
Investing activities;
Proceeds from sale of
investments.......... -- -- -- -- 6,859,738
Purchase of
investments.......... -- -- -- -- (11,741,719)
Purchase of property
and equipment........ (224,257) (280,398) (421,783) (187,549) (894,843)
Purchase of other
assets............... -- -- (262,000) -- (9,416)
--------- ----------- ----------- ----------- ------------
Net cash used in
investing
activities......... (224,257) (280,398) (683,783) (187,549) (5,786,240)
--------- ----------- ----------- ----------- ------------
Financing activities;
Proceeds from long-
term debt............ 150,059 95,000 200,028 200,028 --
Repayments of long-
term debt............ -- -- (115,443) (78,282) (138,152)
Proceeds from issuance
of common stock...... -- 28,000 -- -- --
Repurchase of common
stock................ -- -- (28,000) -- --
Proceeds from issuance
of Series A
Redeemable
Convertible Preferred
Stock, net of
issuance costs of
$25,359.............. 724,641 -- -- -- --
Proceeds from issuance
of Series B, C-1 and
C-2 Redeemable
Convertible Preferred
Stock and warrants,
net of issuance costs
of $75,877........... -- 7,177,122 -- 6,878 --
Proceeds from issuance
of Series D
Redeemable
Convertible Preferred
Stock and warrants,
net of issuance costs
of $1,176,890 in 1998
and $37,269 as of
March 31, 1999....... -- -- 18,823,979 -- (37,269)
Exercises of stock
options.............. -- -- 5,947 -- 4,743
Dividend paid on
Series A, B and C
Redeemable
Convertible Preferred
Stock................ -- -- (12,304) -- --
--------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 874,700 7,300,122 18,874,207 128,624 (170,678)
--------- ----------- ----------- ----------- ------------
Increase (decrease) in
cash and cash
equivalents........... 113,711 4,834,608 14,093,899 (2,443,056) (16,760,689)
Cash and cash
equivalents, beginning
of period............. -- 113,711 4,948,319 4,948,319 19,042,218
--------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period................ $ 113,711 $ 4,948,319 $19,042,218 $ 2,505,263 $ 2,281,529
========= =========== =========== =========== ============
Supplemental
disclosures:
Interest paid......... $ 2,516 $ 29,767 $ 30,649 $ 21,997 $ 33,267
========= =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization
The Company was originally incorporated in Texas on October 2, 1995 as The
Asbury Group, Inc. On November 30, 1995, The Asbury Group, Inc. incorporated a
wholly-owned subsidiary, Garden Escape, Inc., in Delaware. Effective
December 11, 1995, The Asbury Group, Inc. was merged into Garden Escape, Inc.
In February 1999, the Company changed its name to Garden.com, Inc. The Company
is a leading online destination integrating gardening and gardening-related
commerce, content and community. All of the Company's sales are conducted via
its Web sites, garden.com, virtualgarden.com and hortmag.com.
2. Significant Accounting Policies
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences could be material to the financial statements.
Revenue Recognition
Revenues for products and shipping charges are recognized when the
products are shipped to the customer. Revenues are recorded net of product
returns, promotional discounts and coupons. The Company records unearned
revenue for customer orders received and paid for that have not been shipped.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and marketable securities
with original maturities of three months or less. Cash and cash equivalents are
recorded at cost, which approximates fair value due to the short maturity of
these instruments.
Securities Available-For-Sale
Management determines the appropriate classification of debt and
marketable equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt and marketable equity
securities as of March 31, 1999 are classified as available-for-sale and are
reported at an amount that approximates fair market value as of March 31, 1999.
Inventory
Inventory, which consists of finished goods, is stated at the lower of
cost or market, with cost determined using the average cost method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is based on the useful lives of the
assets, generally three to seven years, computed using the straight-line
method. Amortization of leasehold improvements is computed on the straight-line
method over estimated useful lives or lease terms if shorter.
Other Assets
Other assets are recorded at cost and include a Web site and a licensing
agreement for related databases purchased during fiscal 1998. Amortization of
these assets is computed on the straight-line method over the four-year
estimated useful life for the Web site and the two-year term of the agreement
for the license.
F-7
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2.Significant Accounting Policies (continued)
Long-Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from
the use of the asset and its eventual disposition is less than its carrying
amount. No such impairment losses have been identified by the Company.
Advertising Costs
The cost of advertising is expensed as incurred. For the period from
October 2, 1995 (inception) to June 30, 1996, for the fiscal years ended June
30, 1997 and 1998 and for the nine months ended March 31, 1998 (unaudited) and
1999, the Company incurred advertising expenses of $24,000, $197,000,
$1,364,000, $321,342 and $5,733,832, respectively.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that
stock awards granted subsequent to January 1, 1995 be recognized as
compensation expense based on their fair value at the date of grant.
Alternatively, a company may use Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," and disclose pro forma income
amounts which would have resulted from recognizing such awards at their fair
value. The Company has elected to account for stock-based compensation expense
under APB No. 25 and make the required pro forma disclosures for compensation
(see Note 6).
Interim Financial Information
The financial information for the nine months ended March 31, 1998 are
unaudited but include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position, operating results and cash flows for the period.
Results for the nine months ended March 31, 1999 are not necessarily indicative
of the results for the entire year.
Net Loss Per Share
The Company follows the provisions of SFAS 128, "Earnings Per Share."
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Shares associated with stock options and the Redeemable
Convertible Preferred Stock are not included because they are antidilutive.
Segments
Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The adoption of SFAS
F-8
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2.Significant Accounting Policies (continued)
No. 131 did not have a significant effect on the disclosure of segment
information as the Company continues to consider its business activities as a
single segment.
Reclassifications
Certain amounts in previously issued financial statements have been
reclassified to conform to the fiscal 1999 presentation.
3.Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, March 31,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Line of credit term note payable to a bank
due October 14, 2000, payable in monthly
installments of $6,668 with interest at
the prime rate (7.75% at March 31, 1999)
plus 1%, collateralized by the assets of
the Company............................... $ -- $ 186,693 $ 120,016
Line of credit term note payable to a bank
due December 14, 1999, payable in monthly
installments of $7,942 with interest at
the prime rate (7.75% at March 31, 1999)
plus 1%, collateralized by the assets of
the Company............................... 245,059 142,951 71,476
--------- --------- ---------
Total long-term debt......................... 245,059 329,644 191,492
Less current portion......................... (122,529) (175,312) (151,487)
--------- --------- ---------
Long-term debt, net of current portion....... $ 122,530 $ 154,332 $ 40,005
========= ========= =========
</TABLE>
Long-term debt as of June 30, 1998 matures as follows:
<TABLE>
<CAPTION>
Fiscal year Maturities
----------- ----------
<S> <C>
1999........................................................... $175,312
2000........................................................... 127,662
2001........................................................... 26,670
--------
$329,644
========
</TABLE>
Long-term debt as of March 31, 1999 matures as follows:
<TABLE>
<CAPTION>
Twelve Months Ended Maturities
------------------- ----------
<S> <C>
March 31, 2000................................................. $151,487
March 31, 2001................................................. 40,005
--------
$191,492
========
</TABLE>
The Company has approximately $208,500 available under the two lines of
credit. As of June 30, 1997 and 1998 and as of March 31, 1999, all of the
Company's outstanding long-term debt had a variable interest rate, and
accordingly, the Company believes the carrying value of the long-term debt
approximates its fair value.
F-9
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4.Income Taxes
As of March 31, 1999, the Company had net operating loss carryforwards of
approximately $18,745,000 for federal tax reporting purposes. The net operating
loss carryforwards will begin to expire at various dates beginning in 2011, if
not utilized. In addition, as of March 31, 1999, the Company had federal
research and development tax credit carryforwards of approximately $58,000. The
research and development credit carryforwards will begin to expire at various
dates beginning in 2012, if not utilized.
Utilization of the net operating loss and tax credit carryforwards will be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and tax credits before
utilization.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciable assets....................... $ 668 $ -- $ --
Prepaid expenses and other............... -- -- 318,049
---------- ---------- ----------
Total deferred tax liabilities.......... 668 -- 318,049
---------- ---------- ----------
Deferred tax assets:
Depreciable assets....................... -- 23,658 68,531
Accrued liabilities and other............ 8,524 17,629 28,055
Tax carryforwards........................ 1,153,132 2,841,314 6,993,980
---------- ---------- ----------
Total deferred tax assets............... 1,161,656 2,882,601 7,090,566
---------- ---------- ----------
Net deferred tax assets................... 1,160,988 2,882,601 6,772,517
Valuation allowance for net deferred tax
assets................................... (1,160,988) (2,882,601) (6,772,517)
---------- ---------- ----------
Net deferred taxes........................ $ -- $ -- $ --
========== ========== ==========
</TABLE>
The Company has established a valuation allowance equal to the net
deferred tax asset due to uncertainties regarding the realization of deferred
tax assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $3,889,916 during the nine months ended
March 31, 1999.
The Company's provision (benefit) for income taxes differs from the
expected tax expense (benefit) amount computed by applying the statutory
federal income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
Period from Fiscal year ended Nine Months Ended
October 2, 1995 June 30, March 31,
(inception) to ------------------- -----------------
June 30, 1996 1997 1998 1998 1999
--------------- -------- -------- ----------- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal statutory rate.. (34.0)% (34.0)% (34.0)% (34.0)% (34.0)%
State taxes, net of
federal benefit........ (3.0) (3.0) (3.0) (3.0) (3.0)
Change in valuation
allowance.............. 37.0 38.0 37.0 37.0 37.0
Other................... (1.0) --
----- -------- -------- ----- -----
Effective tax rate...... 0.0% 0.0% 0.0% 0.0% 0.0%
===== ======== ======== ===== =====
</TABLE>
F-10
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5.Commitments
The Company leases its office facilities under an operating lease
agreement expiring in November 2000. Future minimum payments as of June 30,
1998, under this lease, are as follows:
<TABLE>
<CAPTION>
Operating
Fiscal Year Ended June 30, Leases
-------------------------- ---------
<S> <C>
1999............................................................ $ 99,300
2000............................................................ 99,300
2001............................................................ 41,375
--------
Total........................................................... $239,975
========
</TABLE>
Future minimum payments as of March 31, 1999, under this lease, are as follows:
<TABLE>
<S> <C>
2000............................................................. $154,080
2001............................................................. 140,580
2002............................................................. 140,580
--------
Total............................................................ $435,240
========
</TABLE>
Rent expense for the period from October 2, 1995 (inception) to June 30,
1996, the two fiscal years ended June 30, 1997 and 1998 and the nine months
ended March 31, 1998 (unaudited) and 1999 was $13,575, $42,810, $113,913,
$76,437 and $122,281, respectively.
F-11
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.Redeemable Convertible Preferred Stock and Stockholders' Deficit
Summary of Preferred Stock
The Company's redeemable convertible preferred stock has the following
characteristics at June 30, 1998, and March 31, 1999:
<TABLE>
<CAPTION>
Liquidation Conversion Redemption
Description Dividend Features Preferences Features Features Voting Rights
----------- -------------------- -------------------- ---------------------------- --------------- -----------------------
<C> <C> <C> <C> <C> <S>
Series A All cumulative $1.00 per share plus One for one subject to $1.00 per share One per converted share
dividend rights any declared and certain anti dilution of common stock
terminated upon unpaid dividends adjustments, as defined.
the Series D Also, automatically converts
issuance (none upon public offering
in arrears)
Series B All cumulative $1.40 per share plus One for one subject to $1.40 per share One per converted share
dividend rights any declared and certain anti dilution of common stock
terminated upon unpaid dividends adjustments, as
the Series D defined. Also,
issuance (none automatically converts
in arrears) upon public offering
Series C-1 All cumulative $1.74 per share plus One for one subject to $1.74 per share One per converted share
dividend rights any declared and certain anti dilution of common stock
terminated upon unpaid dividends adjustments, as
the Series D defined. Also,
issuance (none automatically converts
in arrears) upon public offering
Series C-2 All cumulative $1.74 per share plus One for one subject to $1.74 per share None
dividend rights any declared and certain anti dilution
terminated upon unpaid dividends adjustments, as
the Series D defined. Also,
issuance (none automatically converts
in arrears) upon public offering
Series D Per the Dividend $3.76 per share plus One for one subject to $3.76 per share One per converted share
Agreement dated any declared and certain anti dilution of common stock
June 2, 1998, all unpaid dividends adjustments, as
cumulative dividend defined. Also,
rights for Series A automatically converts
through C have upon public offering
been terminated at
the point of sale of
Series D stock
</TABLE>
All common and preferred shares of the Company are subject to certain
restrictions including transferability of the shares and voting requirements on
certain issues including the election of directors of the Company. Holders of
A, B, C-1 and D vote together as a single class with the common stock on all
matters of the Company.
Beginning on January 1, 1998, the Series A, B, C-1 and C-2 Redeemable
Convertible Preferred Stock accrued annual dividends equal to 8% of the
original purchase price paid per share. In connection with the Series D
financing, the stockholders elected to terminate their right to receive future
cumulative dividends. Through a noncash financing transaction, $285,893 of
accrued dividends, approximately $0.04 per share, were converted into 72,763
shares of Series D Preferred Stock based on the accrued amount through June 5,
1998. In addition, cash dividends of $12,304 were paid based on the accrued
amount from June 5, 1998 through June 11, 1998, the date of the Series D
issuance.
F-12
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.Redeemable Convertible Preferred Stock and Stockholders' Deficit (continued)
Each holder of Series A through D Preferred Stock may elect to require the
Company to redeem on or after the dates specified below, and in the amounts
specified below, any such shares which were purchased by the stockholder, net
of any shares previously redeemed, plus any accrued and unpaid dividends:
<TABLE>
<CAPTION>
Percentage of Shares
Mandatory Acquired Which May be
Redemption Date Redeemed Redemption Amount
--------------- --------------------- -----------------
<S> <C> <C>
December 31, 2004 50% $14,115,836
December 31, 2005 25 7,068,893
December 31, 2006 25 7,068,893
</TABLE>
The five series of preferred stock designated as of June 30, 1998, and
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Consideration
per Share
Shares Shares Issued Received in
Par Value Authorized and Outstanding Issuance
--------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Redeemable convertible pre-
ferred stock
Series A................. $0.01 750,000 750,000 $1.00 cash
Series B................. 0.01 1,430,000 1,430,000 1.40 cash
Series C-1............... 0.01 3,620,000 2,193,103 1.74 cash
Series C-2............... 0.01 824,138 824,138 1.74 cash
Series D................. 0.01 5,482,330 5,391,908 3.76 cash
---------- ----------
12,107,158 10,589,147
========== ==========
</TABLE>
Warrants
In connection with the issuance of the Series C-1 Redeemable Convertible
Preferred Stock, the Company also issued a warrant to purchase 603,449 shares
of Series C-1 Redeemable Convertible Preferred Stock at $1.74 per share to an
existing stockholder. The warrant is exercisable for a five-year period
beginning May 7, 1997. The Company has reserved 603,449 shares of Series C-1
Redeemable Convertible Preferred Stock for issuance upon conversion of the
warrant.
In connection with the issuance of the Series D Redeemable Convertible
Preferred Stock, the Company issued a warrant to purchase 90,425 shares of
Series D Redeemable Convertible Preferred Stock at $3.76 per share to the
placement agent as partial consideration for their services. The warrant
expires on December 31, 2002. The Company has reserved 90,425 shares of Series
D Redeemable Convertible Preferred Stock for issuance upon conversion of the
warrant.
Stock Options
The Company has a stock option plan whereby options for the purchase of
shares of the Company's common stock may be granted to its employees. During
1999, the maximum number of options that may be granted through the plan was
increased from 1,200,000 to 1,700,000. The Company has reserved 1,700,000
shares of common stock for issuance upon conversion of the options.
Pro forma information regarding net income (loss) per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock
F-13
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.Redeemable Convertible Preferred Stock and Stockholders' Deficit (continued)
options granted subsequent to June 30, 1995 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a minimum value option pricing model with the following weighted-
average assumptions for fiscal year 1998 and 1999: weighted-average risk free
interest rate was 5.5%, a dividend yield of 0%, a volatility factor of the
expected market price of the Company's common stock of near zero, and a
weighted-average expected life of the option of ten years.
Based upon the minimum value pricing model and assumptions used, the pro
forma net loss would not differ materially from the net loss as reported.
Because SFAS No. 123 is applicable only to options granted subsequent to
June 30, 1995, its pro forma effect will not be fully reflected until 2000.
The following represents a summary of the Company's stock option activity,
and related information:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price Per Exercise
Shares Share Price
--------- -------------- --------
<S> <C> <C> <C>
Outstanding at June 30, 1996................. 170,500 $ 0.01 to 0.01 $0.01
Granted.................................... 245,250 0.09 to 0.09 0.09
Exercised.................................. -- 0.01 to 0.01 --
Canceled................................... -- -- --
Outstanding at June 30, 1997................. 415,750 0.01 to 0.09 0.06
Granted.................................... 273,250 0.01 to 0.75 0.20
Exercised.................................. (8,200) 0.01 to 0.17 0.05
Canceled................................... (23,300) 0.01 to 0.17 0.10
-------- -------------- -----
Outstanding at June 30, 1998................. 662,500 0.01 to 0.75 0.12
Granted (at fair value).................... 204,750 0.75 to 0.75 0.75
Granted (below fair value)................. 206,500 0.75 to 3.00 1.38
Exercised.................................. (156,600) 0.01 to 0.17 0.03
Canceled................................... (14,400) 0.01 to 0.17 0.08
-------- -------------- -----
Outstanding at March 31, 1999................ 902,750 $0.01 to $3.00 $0.55
======== ============== =====
</TABLE>
The following table summarizes outstanding options at June 30, 1998 by
price range:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------------------- ------------------------
Range of Weighted- Weighted- Average Weighted-
Number of Exercise Average Remaining Contractual Number of Average
Options Price Exercise Price Life of Options in Years Options Exercise Price
- --------- ------------- -------------- ------------------------ --------- --------------
<S> <C> <C> <C> <C> <C>
256,000 $0.01 to 0.01 $0.01 7.9 78,500 $0.01
385,000 0.14 to 0.17 0.16 9.1 29,900 0.14
21,500 0.75 to 0.75 0.75 10.0 -- --
------- ------------- ----- ---- ------- -----
662,500 $0.01 to 0.75 $0.12 8.6 108,400 $0.05
======= ============= ===== ==== ======= =====
</TABLE>
F-14
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.Redeemable Convertible Preferred Stock and Stockholders' Deficit (continued)
The following table summarizes outstanding options at March 31, 1999 by
price range:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ----------------------------------------------------------------- ------------------------
Weighted- Weighted- Average Weighted-
Number of Range of Average Remaining Contractual Number of Average
Options Exercise Price Exercise Price Life of Options in Years Options Exercise Price
- --------- -------------- -------------- ------------------------ --------- --------------
<S> <C> <C> <C> <C> <C>
204,450 $0.01 to $0.01 $0.01 7.27 92,600 $0.01
28,450 0.14 to 0.14 0.14 7.71 3,500 0.14
240,350 0.17 to 0.17 0.17 8.75 29,750 0.17
371,500 0.75 to 0.75 0.75 9.55 -- --
58,000 3.00 to 3.00 3.00 9.95 -- --
------- -------------- ----- ---- ------- -----
902,750 $0.01 to $3.00 $0.55 8.79 125,850 $0.05
======= ============== ===== ==== ======= =====
</TABLE>
F-15
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7.Net Loss Per Share and Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's redeemable convertible preferred stock into shares
of the Company's common stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on the respective
original date of issuance for each series of redeemable convertible preferred
stock.
The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
Period from
October 2 1995
(inception) to Fiscal Year Ended Nine Months Ended
June 30, 1996 June 30, March 31,
-------------- ------------------------ -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss............... $(665,177) $(2,440,448) $(4,610,812) $(2,514,937) $(10,568,452)
Denominator:
Weighted average
shares................ 702,064 1,411,644 1,440,585 1,450,000 1,292,959
--------- ----------- ----------- ----------- ------------
Denominator for basic
calculation............ 702,064 1,411,644 1,440,585 1,450,000 1,292,959
Weighted average effect
of pro forma
securities:............
Series A Redeemable
Convertible Preferred
Stock................. 750,000 750,000 750,000 750,000 750,000
Series B Redeemable
Convertible Preferred
Stock................. -- 1,430,000 1,430,000 1,430,000 1,430,000
Series C-1 Redeemable
Convertible Preferred
Stock................. -- 2,193,103 2,193,103 2,193,103 2,193,103
Series C-2 Redeemable
Convertible Preferred
Stock................. -- 824,138 824,138 824,138 824,138
Series D Redeemable
Convertible Preferred
Stock................. -- -- 5,391,906 5,391,906 5,391,906
--------- ----------- ----------- ----------- ------------
Denominator for pro
forma calculation...... 1,452,064 6,608,885 12,029,732 12,039,147 11,882,106
========= =========== =========== =========== ============
Net loss per share:.....
Basic.................. $ (0.95) $ (1.73) $ (3.20) $ (1.73) $ (8.17)
========= =========== =========== =========== ============
Pro forma.............. $ (0.46) $ (0.37) $ (0.38) $ (0.21) $ (0.89)
========= =========== =========== =========== ============
</TABLE>
8.Related Parties
The Company paid $-0-, $18,640, $27,552, $26,409, and $25,000 for the
period from October 2, 1995 (inception) to June 30, 1996, the fiscal years
ended 1997 and 1998, and the nine months ended March 31, 1998 (unaudited) and
1999, respectively, for legal services to Kenneth Sharples, the brother of the
Company's President. These expenses were primarily for intellectual property
legal issues.
The Company is a founding member of Shop.Org, Inc., a California non-
profit trade organization of Internet retailers with a mission to enhance the
visibility and viability of consumer commerce on the Internet. The
CEO/President of the Company is also the Chairman of Shop.Org, Inc. The Company
paid $12,373 of expenses on behalf of Shop.Org, Inc. during the fiscal year
ended June 30, 1997, which was subsequently reimbursed during the fiscal year
ended June 30, 1998.
F-16
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company made payments of approximately $72,000 to affiliates of (a
stockholder) during our fiscal year ended June 30, 1998 and payments of
approximately $126,000 in the nine months ended March 31, 1999.
The Company maintain test gardens in Des Moines, Iowa on property owned by
Douglas A. Jimerson, our Vice President of Publishing and Editor-in-Chief. We
pay for the plants grown in the gardens and for the maintenance of the gardens.
Other than these maintenance expenses, we do not pay Mr. Jimerson rent for the
use of the gardens.
9.Deferred Compensation
The Company recorded deferred compensation for the nine months ended March
31, 1999 of $776,275. The amount recorded represents the difference between the
grant price and the deemed fair value of the Company's Common Stock for shares
subject to options granted. The amortization of deferred compensation will be
charged to operations over the vesting period of the options, which is
typically four years. Total amortization recognized was $79,291 for the nine
months ended March 31, 1999.
10.Subsequent Events
On April 13, 1999 and May 24, 1999, the Company issued a total of
3,957,633 shares of Series E Preferred Stock and warrants to purchase 36,713
shares of Series E Preferred Stock to various outside investors in
consideration for $22,637,661 in cash and advertising services to be rendered.
Approximately $1.5 million has been allocated to prepaid advertising to be used
50% in the first year and 50% in the second year as direct credits against
advertising charges. Terms of the advertising are to be negotiated separately.
The stock is convertible at any time to common stock on a one-for-one basis
subject to certain antidilution provisions. The stock is first redeemable on
December 31, 2002 at the option of the holders of a majority of all holders of
preferred stock. Upon such election, the Company will be obligated to redeem
the outstanding stock. In addition, the Series E Preferred Stock will
automatically convert to common stock upon a public stock offering.
On May 7, 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its Common Stock to the public. Upon
completion of the Company's initial public offering, the Series A, Series B
Series C, Series D and Series E Redeemable Convertible Preferred Stock will
convert into 14,546,780 shares of common stock. The unaudited pro forma
redeemable convertible preferred stock and stockholders' deficit at March 31,
1999 shown at F-3 reflects the assumed conversion of the redeemable convertible
preferred stock as of March 31, 1999.
The Board of Directors and the stockholders have approved an amendment to
the 1996 Plan which, effective upon the date of an initial public offering,
increases the total number of shares of common stock reserved for issuance
under the plan to 2,500,000 shares.
The 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors and approved by the stockholders in May 1999 in contemplation of, and
to become effective upon, the date of an initial public offering.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Shares
[Logo]
Common Stock
------------
PROSPECTUS
------------
Hambrecht & Quist
BancBoston Robertson Stephens
Thomas Weisel Partners LLC
------------
, 1999
------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 1999, all dealers that buy, sell or trade in the common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Garden.com in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 15,985
NASD filing fee.................................................. 6,250
Nasdaq National Market listing fee............................... 17,500
Printing and engraving costs..................................... 130,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 150,000
Blue Sky fees and expenses....................................... 10,000
Transfer Agent and Registrar fees................................ 10,000
Miscellaneous expenses........................................... 60,265
--------
Total........................................................ $750,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VII of Garden.com's Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of Garden.com's Amended and Restated By-laws provides for the
indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
Garden.com has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in
Garden.com's Amended and Restated By-laws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
The Delaware law permits and Article VI of the Amended and Restated By-
laws authorizes Garden.com to purchase and maintain insurance on behalf of any
director, officer, employee or agent of Garden.com against any liability
asserted against or incurred by them in such capacity or arising out of their
status as such whether or not Garden.com would have the power to indemnify such
director, officer, employee or agent against such liability under the
applicable provisions of the Delaware law, the Restated Certificate of
Incorporation or the Amended and Restated By-laws.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since May 24, 1996, Garden.com has sold and issued the following
securities:
(a) On August 12, 1996, Garden.com issued 1,430,000 shares of Series B
Preferred Stock to three accredited investors for aggregate consideration
of approximately $2,000,000. The issuance of the shares of Series B
Preferred Stock was made in a transaction exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D thereunder.
(b) On May 7, 1997 and May 15, 1997, Garden.com issued a total of
2,193,103 shares of Series C-1 Preferred Stock, 824,138 shares of Series C-
2 Preferred Stock and issued warrants to purchase 603,449 Series C
Preferred Stock to seven accredited investors for aggregate consideration
of approximately $5,250,000. The issuance of the shares of Series C
Preferred Stock and the Series C Preferred Stock warrants was made in a
transaction exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder. The Series C Preferred Stock warrants may be exercised at any
time until May 7, 2002 to purchase a total of 603,449 shares of Series C
Preferred Stock at an exercise price of $1.74 per share.
(c) On June 11, 1998, Garden.com issued 5,391,906 shares of Series D
Preferred Stock to 19 accredited investors for aggregate consideration of
approximately $20,274,000. Garden.com paid $797,000 in placement agent fees
and issued a warrant to purchase 90,425 shares of Series D Preferred Stock
to its placement agent. The issuance of the shares of Series D Preferred
Stock and the Series D Preferred Stock warrant was made in a transaction
exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act and Rule 506 of Regulation D thereunder. The
Series D Preferred Stock warrant may be exercised at any time until
December 31, 2002 to purchase a total of 90,425 shares of Series D
Preferred Stock at an exercise price of $3.76 per share.
(d) On April 13, 1999, Garden.com issued 3,083,507 shares of Series E
Preferred Stock to 24 accredited investors for aggregate consideration of
approximately $17,638,000, and on May 24, 1999, Garden.com issued 874,126
shares of Series E Preferred Stock to one accredited investor for aggregate
consideration of approximately $5,000,000. Garden.com paid $1,260,000 in
placement agent fees and issued a warrant to purchase 36,713 shares of
Series E Preferred Stock to its placement agent. The issuance of the shares
of Series E Preferred Stock and the Series E Preferred Stock warrant was
made in a transaction exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder. The Series E Preferred Stock warrant may be exercised at any
time until May 24, 2004 to purchase a total of 36,713 shares of Series E
Preferred Stock at an exercise price of $5.72 per share.
(e) Since inception, Garden.com has issued an aggregate of 1,606,750
options to purchase shares of its common stock to a number of our
employees, directors and consultants. Options to purchase 188,550 shares of
common stock have been exercised and options to purchase 39,200 shares of
common stock have been canceled. These options have been issued in
transactions exempt from registration under the Securities Act in reliance
upon Rule 701 promulgated under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1A** Restated Articles of Incorporation of the Registrant, as currently
in effect.
3.1B** Form of Restated Certificate of Incorporation of the Registrant to
be filed after the closing of the offering made under this
Registration Statement.
3.2A** By-laws of the Registrant, as currently in effect.
3.2B** Form of Amended and Restated by-laws of the Registrant to be in
effect after the closing of the offering made under this
Registration Statement.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.1* Specimen Common Stock Certificate.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2A** Amended and Restated 1996 Stock Option/Stock Issuance Plan.
10.2B** Form of Option Agreement under the Amended and Restated 1996
Stock Option/Stock Issuance Plan.
10.2C** Form of Restricted Stock Purchase Agreement under the Amended
and Restated 1996 Stock Option/Stock Issuance Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Fourth Amended and Restated Stockholders Agreement, dated as of
April 13, 1999, among the Registrant and the stockholders of the
Registrant listed on the signature page thereto.
10.5** Fourth Amended and Restated Registration Rights Agreement, dated
as of April 13, 1999, among the Registrant and the stockholders
of the Registrant listed on the signature page thereto.
10.6** Letter Agreement, dated May 24, 1999, between the Registrant and
Scripps Howard Broadcasting Company d/b/a Home & Garden
Television.
10.7+ Shopping Channel Promotional Agreement, dated as of October 2,
1998, between the Registrant and American Online, Inc.
10.8** License Agreement, dated as of April 13, 1998, between the
Registrant and Time Life Inc.
10.9** Client Service Agreement, dated July 1, 1997, between the
Registrant and Administaff Companies, Inc.
10.10** Sublease Agreement, dated as of February 24, 1999, between the
Registrant and Hart Graphics, Inc.
10.11A+** Letter of Agreement, dated January 12, 1997, between the
Registrant and Milaeger's Gardens.
10.11B+** Letter of Agreement, dated January 29, 1998, between the
Registrant and McClure and Zimmerman.
10.11C+** Letter of Agreement, dated July 16, 1997, between the Registrant
and Gardener's Supply Company.
10.12** Employment Agreement, dated as of March 1, 1996, between the
Registrant and Andrew R. Martin.
10.13** Buy-Sell Agreement, dated February 27, 1997, among the
Registrant, Clifford A. Sharples, James N. O'Neill, Lisa W.A.
Sharples and Andrew R. Martin.
23.1** Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2** Consent of Ernst & Young LLP, Independent Auditors.
24.1** Power of Attorney (see Page II-5)
27.1** Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment
+ Confidential treatment requested as to certain portions of this Exhibit.
** Previously filed
II-3
<PAGE>
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on the 21st day of June, 1999.
GARDEN.COM, INC.
/s/ Clifford A. Sharples
By: _________________________________
Clifford A. Sharples,
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Clifford A. Sharples and Jana D. Wilson
and each of them, his attorneys-in-fact, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ Clifford A. Sharples President, Chief Executive June 21, 1999
______________________________________ Officer (Principal
Clifford A. Sharples Executive Officer) and
Director
/s/ Jana D. Wilson* Chief Financial Officer June 21, 1999
______________________________________ (Principal Financial and
Jana D. Wilson Accounting Officer)
/s/ Steven J. Dietz* Director June 21, 1999
______________________________________
Steven J. Dietz
/s/ Gerald R. Gallagher* Director June 21, 1999
______________________________________
Gerald R. Gallagher
/s/ James N. O'Neill* Director June 21, 1999
______________________________________
James N. O'Neill
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
Signature Title Date
- -------------------------------------- -------------------------- -------------------
/s/ Donald J. Phillips* Director June 21, 1999
______________________________________
(Donald J. Phillips)
/s/ Lisa W.A. Sharples* Director June 21, 1999
______________________________________
(Lisa W.A. Sharples)
/s/ Douglas R. Stern* Director June 21, 1999
______________________________________
(Douglas R. Stern)
/s/ John D. Thornton* Director June 21, 1999
______________________________________
(John D. Thornton)
</TABLE>
/s/ Clifford A. Sharples
*By: _______________________
Clifford A. Sharples
Attorney-in-Fact
Pursuant to Power of Attorney
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1A** Restated Articles of Incorporation of the Registrant, as currently
in effect.
3.1B** Form of Restated Certificate of Incorporation of the Registrant to
be filed after the closing of the offering made under this
Registration Statement.
3.2A** By-laws of the Registrant, as currently in effect.
3.2B** Form of Amended and Restated by-laws of the Registrant to be in
effect after the closing of the offering made under this
Registration Statement.
4.1* Specimen Common Stock Certificate.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2A** Amended and Restated 1996 Stock Option/Stock Issuance Plan.
10.2B** Form of Option Agreement under the Amended and Restated 1996 Stock
Option/Stock Issuance Plan.
10.2C** Form of Restricted Stock Purchase Agreement under the Amended and
Restated 1996 Stock Option/Stock Issuance Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Fourth Amended and Restated Stockholders Agreement, dated as of
April 13, 1999, among the Registrant and the stockholders of the
Registrant listed on the signature page thereto.
10.5** Fourth Amended and Restated Registration Rights Agreement, dated as
of April 13, 1999, among the Registrant and the stockholders of the
Registrant listed on the signature page thereto.
10.6** Letter Agreement, dated May 24, 1999, between the Registrant and
Scripps Howard Broadcasting Company d/b/a Home & Garden Television.
10.7+ Shopping Channel Promotional Agreement, dated as of October 2, 1998,
between the Registrant and American Online, Inc.
10.8** License Agreement, dated as of April 13, 1998, between the
Registrant and Time Life Inc.
10.9** Client Service Agreement, dated July 1, 1997, between the Registrant
and Administaff Companies, Inc.
10.10** Sublease Agreement, dated as of February 24, 1999, between the
Registrant and Hart Graphics, Inc.
10.11A+** Letter of Agreement, dated January 12, 1997, between the Registrant
and Milaeger's Gardens.
10.11B+** Letter of Agreement, dated January 29, 1998, between the Registrant
and McClure and Zimmerman.
10.11C+** Letter of Agreement, dated July 16, 1997, between the Registrant and
Gardener's Supply Company.
10.12** Employment Agreement, dated as of March 1, 1996, between the
Registrant and Andrew R. Martin.
10.13** Buy-Sell Agreement, dated February 27, 1997, among the Registrant,
Clifford A. Sharples, James N. O'Neill, Lisa W.A. Sharples and
Andrew R. Martin.
23.1** Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2** Consent of Ernst & Young LLP, Independent Auditors.
24.1** Power of Attorney (see Page II-5)
27.1** Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment
+ Confidential treatment requested as to certain portions of this Exhibit.
** Previously filed
<PAGE>
Exhibit 10.7
CONFIDENTIAL
SHOPPING CHANNEL PROMOTIONAL AGREEMENT
--------------------------------------
This Agreement, dated as of [ * ] (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 Garden Escape, Inc. ("MERCHANT"), a Delaware corporation, with its
principal offices at 710 West 6th Street, Austin, Texas 78701 (each a "Party"
and collectively the "Parties").
INTRODUCTION
------------
AOL owns, operates and distributes the U.S. America Online(R) brand
commercial online service (the "AOL Service"), the U.S. version of its primary
website marketed under the AOL.com(R) brand ("AOL.com") and the affiliate U.S.
CompuServe(R) brand commercial online service (the "CompuServe Service").
MERCHANT wishes to secure a promotional placement (the "Promotion") within the
shopping channel of the AOL Service, AOL.com and the CompuServe Service (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 or CompuServe Services (as the case may be) (the "Merchant
Site") where MERCHANT offers content, products and/or services for sale.
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 B.
2. PROMOTIONAL OBLIGATIONS.
-----------------------
2.1 AOL Promotion of MERCHANT. Commencing on a date to be mutually agreed
-------------------------
upon promptly following execution hereof, AOL will provide the
Promotion(s) set forth in Exhibit A. 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 and in any
placement fee specified in Section 3 below). 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 in the category directly
relating to the Shopping Channel department for which the Promotion is
being purchased by MERCHANT. MERCHANT acknowledges that the sole
obligation of AOL is to display the Promotion(s) in the Shopping
Channel(s) in accordance with the terms and conditions hereto.
3. PAYMENTS; REPORTS.
-----------------
3.1 Placement Fees. MERCHANT will pay AOL [ * ] for displaying the
--------------
Promotion on the AOL Service, AOL.com and the CompuServe Service. The
total amount of [ * ] will be payable in equal [ * ] installments,
with the first such payment to be made upon the Effective Date and
subsequent [ * ] payments to be made on the first day of each
subsequent [ * ]. 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
priori 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.
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
3.2 Other In addition to the fees described in Section 3.1, upon
-----
execution of this Agreement, MERCHANT will pay AOL an additional fee
of [ * ], which shall be in lieu of all payments due to AOL by
MERCHANT for the promotions and advertising placements provided by AOL
pursuant to the following agreements by and between the Parties: the
Marketplace Advertising Agreement dated as of April 1, 1997, as
modified by the First and Second Addenda to such agreement dated as of
September 1, 1997 and October 16, 1997, respectively; the Advertising
Agreement dated as of June 13, 1997; the Insertion Order Agreement
dated September 29, 1997 (underlying the [ * ] invoice previously sent
by AOL to MERCHANT); and the Insertion Order Agreement dated October
13, 1997 (underlying to the [ * ] invoice previously sent by AOL to
MERCHANT).
3.3 Reports. AOL will provide MERCHANT with monthly usage information
-------
related to the Promotion in substance and form determined by AOL.
MERCHANT may not distribute or disclose usage information to any third
party without AOL's prior written consent. AOL makes no guarantees
regarding the accuracy, reliability or completeness of any usage
information provided to MERCHANT. MERCHANT will provide AOL with
monthly reports, in a form reasonably satisfactory to AOL, which
include the total number of (i)gross monthly items purchased (ii)
gross monthly orders placed and (iii) gross monthly sales revenues
generated, through the Merchant Site from purchases originating
through the AOL Service, AOL.com and the CompuServe Service (as
applicable). AOL may not distribute or disclose such information to
any third party without MERCHANT's prior written consent
4. TERM. Unless otherwise rightfully terminated pursuant to the terms hereto,
----
the term of this Agreement will be for a period of [ * ] commencing on the
[ * ] (the "Term").
5. GENERAL TERMS. The general legal terms and conditions set forth on Exhibit
-------------
C attached hereto are hereby made a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the Effective Date.
AMERICA ONLINE, INC. GARDEN ESCAPE, INC.
By: /s/ Steven L. Keenan By: /s/ Clifford A. Sharples
----------------------------- --------------------------------
Print Name: Steven L. Keenan Print Name: Clifford A. Sharples
--------------------- ------------------------
Title: Vice President, Marketing Title: CEO and President
& Operations -----------------------------
--------------------------
Date: 10-7-90 Date: 10-2-98
--------------------------- -----------------------------
Tax ID/EIN#: 74-2765381
-----------------------
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT A
---------
Description of Products:
- ------------------------
[ * ]
Product List.
- ------------
[ * ]
Product Restrictions. [ * ]
- ---------------------
Impressions:
- ------------
[ * ]. For purposes of this Agreement, "Impression" shall mean user exposure to
the department level 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.
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
Description of Specific Promotion(s):
- ------------------------------------
Please check the box next to the Promotion(s) that MERCHANT is purchasing.
[_] ANCHOR PROMOTION
MERCHANT will become an "Anchor" in the Home, Kitchen and Garden department(s)
of the Shopping Channel on the AOL Service, AOL.com and the CompuServe Service.
As an Anchor in a department, MERCHANT will be entitled to the following:
Principal Exposure on the AOL Service, AOL.com and the CompuServe Service:
[ * ]
Additional Promotion on the AOL Service Shopping Channel:
[ * ]
Eligibility to participate in the following AOL Shopping promotional
programs (the "Program Areas"):
[ * ]
All additional Promotions on AOL.com and the CompuServe Service not specified
herein will be determined at AOL's reasonable and sole discretion; provided that
the additional, standard Promotions to be provided to the MERCHANT within the
Shopping areas on AOL.com and the CompuServe Service will be comparable in
nature to the additional, standard Promotions provided to other similarly
situated MERCHANTs in the same category (i.e. Anchor, Tenant or More Stores).
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT B
Standard Shopping Channel Terms & Conditions
--------------------------------------------
1. Merchant Site. MERCHANT will work diligently to develop and implement the
- ------------------
Merchant Site. consisting, in part, of the specific categories of Product(s) set
forth in Exhibit E to the Shopping Channel Promotional Agreement which has been
executed by AOL and MERCHANT (the "Promotional Agreement," and, collectively
with these Standard Shopping Channel Terms and Conditions, the "Agreement") and
any additional categories of 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 Products that are directly
related to the categories of MERCHANT Products listed in Exhibit E and Merchant
C&S reasonably related to gardening and outdoor living: provided that AOL's
agreement with respect to any additional Products or Merchant C&S shall not be
unreasonably withheld or delayed. All sales of Products through the Merchant
Site will be conducted through a direct sales format, 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 Provider.
2. Management of Merchant Site. MERCHANT will manage, review, delete, edit,
- --------------------------------
create, update and otherwise manage all Products 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). To the extent that Merchant Site includes
AOL's Quick Checkout (as defined in Section 3 of Exhibit B) MERCHANT will ensure
that the AOL Quick Checkout is of equal placement and promotion prominence to
other available payment options. 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 Product categories (in addition to
those listed in Exhibit E) 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 reasonable steps to
- ----------------------------------
conform its promotion and sale of Products through the Merchant Site directly
accessible from the AOL Service to then-existing, mutually agreed upon commerce
technologies. One tool which AOL intends to make available for use by MERCHANT
is 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"). MERCHANT shall have the
right to determine whether or not to incorporate AOL Quick Checkout into the
Merchant Site in its discretion; provided that, MERCHANT acknowledges that: (i)
AOL may subsequently deem incorporation of Quick Checkout as a requirement for a
merchant's qualification as an AOL "Certified Merchant"; and (ii) if, in such
case, MERCHANT opts to forego incorporation of Quick Checkout, MERCHANT would
not be entitled to further designation as an AOL "Certified Merchant." 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 and CompuServe'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 any screen or form created using (a) AOL's proprietary form
technology (a "Rainman Area") or (b) HTML-based World Wide Web form (or any
other forms created using a technology other than AOL's proprietary form
technology) ("Web Forms") to the extent such Rainman Area or Web Forms will, in
AOL's good faith judgment, adversely affect operations of the AOL Service,
AOL.com and the CompuServe Service. MERCHANT agrees to optimize operations of
the Merchant Site consistent With Exhibit D attached hereto.
4. Removal of Content. AOL will have the right to remove, or direct MERCHANT
- -----------------------
to remove, any content, materials or information (collectively, "Content") in
the Merchant Site (including, without limitation, any features,
<PAGE>
EXHIBIT B
Standard Shopping Channel Terms & Conditions
--------------------------------------------
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 or the terms of this Agreement.
(ii) is inconsistent in any manner with the terms of the Agreement or with the
description of Product categories set forth in Exhibit E 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 or CompuServe or other operations, MERCHANT will
work in good faith with AOL to limit access to such components from the AOL
Service, AOL.com and the CompuServe Service. 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
arty 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. In the event
that AOL takes action pursuant to this Section 4 of Exhibit B to block, remove
or restrict access to a substantial and material component of Content in the
Merchant Site, then MERCHANT shall have the right to [ * ]. For the purposes of
this Section, a "substantial and material component of Content in the Merchant
Site" shall mean any Product, service, or Content which is directly related to
the Product categories set forth in Exhibit E (or any component of such
Products, services or Content), excluding any Product, service, or Content (or
component thereof) which in AOL's reasonable discretion is deemed obscene,
offensive, defamatory, illegal, incompatible with AOL's technical requirements,
or in contravention of AOL's then standard Terms of Service or advertising
policies.
5. Promotional Placement. MERCHANT acknowledges that the sole obligation of
- --------------------------
AOL 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 MERCRANT. [ * ]. AOL reserves the right to
redesign or modify the organization, navigation, structure, "look and feel" and
other elements of the AOL Service, AOL.com and the CompuServe Service, at its;
sole discretion at any time without prior notice. 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 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 MERCHANTs failure to deliver to AOL any materials relating to
the Promotion.
6. Product Offering. Subject to the limitations imposed by AOL with respect
- ---------------------
to MERCHANT's offering of Products hereunder contained elsewhere in this
Agreement, 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.
7. Principal and Terms. Subject to the limitations imposed by AOL with
- ------------------------
respect to MERCHANTs offering of Products hereunder contained elsewhere in this
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT B
Standard Shopping Channel Terms & Conditions
--------------------------------------------
Agreement, 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. For purpose
of this Agreement, Additional MERCHANT Channel means 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.
8. Special Offers. MERCHANT will promote a reasonable number (as determined
- -------------------
by MERCHANT) of special offers through the Merchant Site (e.g., offers enabling
AOL Users to purchase specified Product(s) at a substantial discount from prices
offered by MERCHANT through other sales channels, free gift to AOL Users upon
the purchase of Product(s), the availability of Product(s) prior to their
availability through other sales channels, and AOL-branded reward or frequent
purchaser points to AOL Users for the purchase of Product(s)) (the "Special
Offers"). MERCHANT will provide AOL with reasonable prior notice of Special
Offers so that AOL can market the availability of such Special Offers in the
manner AOL deems appropriate in its editorial discretion.
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 or the CompuServe Service ("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 will receive all entails 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 receive all orders electronically
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. 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 and the CompuServe Service
and may also require the payment of certain reasonable certification fees to AOL
or its authorized agents or contractors operating the program. MERCHANT agrees
to (i) participate in the BizRate 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. 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.
<PAGE>
EXHIBIT C
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.
2. AOL Accounts. To the extent MERCHANT has been granted any AOL 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 was the collection or withholding thereof,
including attorneys' fees.
4. Promotional Materials/Press Releases. Each Party will submit to the other
- -----------------------------------------
Party, for its prior written approval, which will not be unreasonably withheld
or delayed, any marketing, advertising, and all other promotional materials
related to the Merchant Site and/or referencing the other Party and/or its trade
names, trademarks, and service marks; provided, however, that a Party shall not
require the approval of the other Parry n connection with use of screen shots of
the Merchant Site (as distributed through the AOL Service, AOL.com or CompuServe
Service) for promotional purposes. MERCHANT will not issue any press releases,
promotions or public statements concerning the terms of the Agreement, absent
AOL's express prior written approval. Notwithstanding the foregoing, (a) 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 and (b)
following the earlier of the (x) the initial public announcement of the business
relationship between the Parties in accordance with the approval and other
requirements contained herein and (y) the commercial launch of MERCHANT's
Promotions provided for hereunder, either Party's subsequent factual reference
to the existence of a business relationship between the Parties will not require
the approval of 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 [ * ] license to 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 Service, AOL.com and the CompuServe Service 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), Users of the AOL Service, AOL.com and the
CompuServe Service (as applicable) ("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 (the "Merchant Marks") subject to any written
guidelines provided in writing to AOL. MERCHANT will not use, display or modify
AOL's trademarks, tradenames or
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT C
Standard Legal Terms & Conditions
---------------------------------
servicemarks in any manner, absent AOL's express prior written approval;
provided that, to the extent AOL has provided such approval for a use by
MERCHANT of an AOL trademark, tradename or servicemark (an "AOL Mark". and, with
the "Merchant Marks," the "Marks"), MERCHANT will be entitled to use such AOL
Mark in strict accordance with (i) the conditions and limitations of the
applicable AOL approval and (ii) any written guidelines providing in writing to
MERCHANT. AOL shall be deemed to have approved use of an AOL Mark to be used by
MERCHANT in connection with a "Back to AOL" button to appear on the Merchant
Site, provided AOL subsequently agrees in writing with MERCHANT on the AOL Mark
to be used by Merchant and approves in writing the special creative execution
using such AOL Mark. In addition, the following terms shall apply to any use by
a Party of the Marks of the other Party to the extent otherwise permitted above:
Such use (i) shall not create a unitary composite mark involving a Mark of the
other Party without the prior written approval of such other Party; and (ii)
shall include display of symbols and notices clearly and sufficiently indicating
the trademark status and ownership of the other Party's Marks in accordance with
applicable trademark law and practice. Each Party agrees that all use of the
other Party's Marks hereunder will inure to the benefit, and be on behalf, of
the other Party. Each Party acknowledges that its utilization of the other
Party's Marks will not create in it any right, title, or interest in or to such
Marks other than the licenses expressly granted herein. Each Party agrees that
the nature and quality of its products and services supplied in connection with
the other Party's Marks will conform to quality standards set by the other
Party. Each Party agrees to supply the other Party, upon request, with a
reasonable number of samples of any Materials publicly disseminated by such
Party which utilize the other Party's Marks.
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 loans,
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.
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
TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM, THE COMPUSERVE SERVICE 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),
AOL WILL NOT BE LIABLE TO MERCHANT UNDER THE AGREEMENT FOR MORE THAN THE AMOUNTS
THEN PAID TO AOL BY MERCHANT HEREUNDER.
(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 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
<PAGE>
EXHIBIT C
Standard Legal Terms & Conditions
---------------------------------
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, AOL.COM OR THE
COMPUSERVE SERVICE OR (iv) THE FUNCTIONALITY, PERFORMANCE OR OPERATION OF THE
AOL OR COMPUSERVE 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 patty (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 Patty 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 eight 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) 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-mall 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).
(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 and (ii) AOL's standard
privacy policies, available on the AOL Service at the keyword term "Privacy".
(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 [ * ] 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. For
the purpose of this Agreement, the term [ * ] shall mean and refer to an entity
offering one or more of the following, [ * ]
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
creates, sends and receives electronic mail or real time online messages.
10. AOL User Communications. To the extent MERCHANT sends any form of
- ----------------------------
communications to AOL Users, MERCHANT will promote the Merchant Site as the
location at which to purchase Products (as compared to any more general or other
site or location). 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, [ * ]
11. Navigation Tools. The Keyword online search terms made available on the
- ---------------------
AOL service for use by AOL Members, combining AOL's Keyword online search
modifier with a term or phrase specifically related to MERCHANT (and determined
in accordance with the terms of this Agreement), any Keyword(TM) Search terms to
be directed to Merchant's Site shall be (i) subject to availability and (ii)
limited to the combination of the Keyword(TM) search modifier combined with a
registered trademark of MERCHANT. AOL reserves the right at any time to revoke
MERCHANT's use of any Keyword(TM) 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 aid interest
MERCHANT holds in MERCHANTs 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. For purposes of this Agreement, "Keyword Search
Terms" shall mean the Keyword online search terms made available on the AOL
Service for use by AOL Members, combining AOL's Keyword online search modifier
with a term or phrase specifically related to MERCHANT (and determined in
accordance with the terms of this Agreement).
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, 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. [ * ]) and the Deputy
General Counsel (fax no. [ * ]) 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
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT C
Standard Legal Terms & Conditions
---------------------------------
reasonably identified by AOL. 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, provided that consent will not be required 'in
connection with an 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 MERCHANTs stock or assets). 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 D
Operations
----------
1. CAPACITY. 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 Service, AOL.com and the CompuServe Service, except for the proprietary
client software necessary to access the AOL and CompuServe Services. In the
event that MERCHANT fails to provide the requisite infrastructure, AOL will have
the right to regulate the promotions it provides to MERCHANT hereunder to the
extent necessary to minimize user delays until such time as MERCHANT corrects
its infrastructure deficiencies. In the event that MERCHANT elects to crests a
custom version of the Merchant Site in order to comply with the terms of this
Agreement. MERCHANT will bear responsibility for the implementation, management
and cost of such mirrored 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 Users; and (b) the Merchant
Site is designed and populated in a manner that minimizes delays when AOL Users
attempt to access such site. At a minimum, MERCHANT will ensure that the
Merchant Site's data transfers initiate within [ * ].
3. SERVICE LEVEL RESPONSE. MERCHANT agrees to use commercially reasonable
- --------------------------
efforts to address material technical problems (over which MERCHANT exercises
control) affecting use by AOL Users of the Merchant Site (a "MERCHANT Technical
Problem") promptly following notice thereof. In the event that AOL has received
substantial AOL Member complaints regarding a MERCHANT Technical Problem based
on MERCHANT's failure to satisfy a site operating standard specified in this
Agreement (and MERCHANT is unable to promptly resolve such MERCHANT Technical
Problem following notice thereof), 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).
4. MONITORING. MERCHANT will ensure that the performance and availability of
- --------------
the Merchant Site is monitored on a continuous basis. MERCHANT will provide
escalation procedures (e.g., contact names and notification mechanisms) for use
in connection with technical problems, as described more fully above.
5. 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).
MERCHANT will facilitate periodic reviews of the MERCHANT Site by AOL in order
to evaluate the security risks of such site. MERCHANT will fix any security
risks or breaches of security as may be identified by AOL's Operations Security.
6. TECHNICAL PERFORMANCE.
- --------------------------
(i) MERCHANT will design the Merchant Site to support the Windows version of
the Microsoft Internet Explorer 3.0 and 4.0 browser, the Macintosh version of
the Microsoft Internet Explorer 3.0. and make commercially reasonable efforts to
support all other AOL browsers listed at:
"http://webmaster.info.aol.com/BrowTable.html."
(ii) To the extent MERCHANT creates customized pages on the Merchant Site for
AOL Members, MERCHANT will configure the server from which it serves the site to
examine the HTTP User-Agent field in order to identify the "AOL Member-Agents"
listed at: "http://webMaster.info.aol.com/Brow2Text.html."
(iii) MERCHANT will periodically review the technical information made available
by AOL at http://webmaster.info.aol.com/CacheText.html.
---------------------------------------------
(iv) MERCHANT will design its site to support HTTP 1.0 or later protocol as
defined In RFC 1945 (available at "http://ds.internic.net/rfc/rfcl945.text") and
to adhere to AOL's parameters for refreshing cached information listed . at
http://webmaster.info.aol.com/CacheText.html.
(v) Prior to releasing material, new functionality or features through the
MERCHANT Site ("New Functionality"), MERCHANT will use commercially reasonable
efforts to either (i) test the New Functionality to confirm its compatibility
with AOL Service client software or (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.
7. AOL INTERNET PRODUCTS PARTNER 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
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT D
Operations
----------
technologies, databases, software or other applications which are not supported
by AOL or are related to 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 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
in this Exhibit.
<PAGE>
EXHIBIT E
---------
Garden Escape Product Categories (2 Pages)
------------------------------------------
I. LIVE GOODS
- -------------
[ * ]
[ * ]
[ * ]
[ * ]
II. HARD GOODS
- ---------------
[ * ]
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
[ * ]
III. GIFTS & HOLIDAY
- --------------------
[ * ]
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
[ * ]
IV. APPAREL
- -----------
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
CONSENT TO BINARY COMPASS ENTERPRISES, INC.
-------------------------------------------
GARDEN ESCAPE, INC. ("Merchant") hereby authorizes Binary Compass Enterprises,
Inc. (BCE) to provide to America Online, Inc. (AOL) any and all reports provided
to Merchant by BCE as part of Merchant's participation in AOL's Merchant
Certification Program.
Garden Escape, Inc.
By: /s/ Clifford A. Sharples
---------------------------------
Print Name: Clifford A. Sharples
Title: President and CEO
Date: 10/2/98
--------------------
Tax ID/EIN#: 74-2765381
-------------
