<PAGE>
As filed with the Securities and Exchange Commission on August 11, 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. 4
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)
----------------
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
Paul R. Tobias, Esq. Carla S. Newell, Esq.
William B. Owens, Jr., Esq. Brian K. Beard, Esq.
Robert E. Horton, Esq. Anthony M. Allen, Esq.
Wilson Sonsini Goodrich & Rosati James D. Robinett, Esq.
Professional Corporation Gunderson Dettmer Stough Villeneuve
8911 Capital of Texas Highway, Franklin & Hachigian, LLP
Suite 3350 8911 Capital of Texas Highway, Suite 4240
Austin, Texas 78759 Austin, Texas 78759
(512) 338-5400 ---------------- (512) 342-2300
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................. $56,580,000 $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 AUGUST 11, 1999
PROSPECTUS
4,100,000 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 $11 and $13 per share.
---------
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 options for a period of 30 days to purchase up to 615,000
additional shares of common stock.
The underwriters have reserved up to 287,000 shares of common stock to be
sold in the offering and offered for sale, at the public offering price, to our
directors, officers, employees, business associates and related persons.
---------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
---------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or 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]
COVER PAGE
Garden.com logo highlighted over a daisy and circuit board background
OUTSIDE PORTION OF GATEFOLD
Top center: garden.com logo and text reading "our virtual supply
chain"
Middle: Virtual supply chain flow chart diagram with images of plants,
vegetables, computers showing the product order process and the
shipping mechanisms of products with the following text:
"1. Our customer places an order online"
"2. Utilizing the internet, our supplier downloads the order
from our proprietary information system, which we call
TRELLIS"
"3. Each plant or product is carefully inspected and backed by
a 110% guarantee"
"4. Our supplier's unique brand is highlighted alongside the
Garden.com brand"
"5. Our TRELLIS information system allows our suppliers to
download Fedex shipping labels and provides our customers
real-time order tracking"
"6. The plants arrive in great shape just in time for
planting"
Bottom: Text reading "more than 16,000 products from over 60
suppliers"
GATEFOLD
Top center: text reading "meeting gardeners' needs online"
Left: images of a woman gardening, a newly opening leaf, a flower
blooming and a man gardening and a box with the following text:
"design a garden We give our members the resources to plan a
successful, helping them to design their garden plots, and to
choose plants that will thrive in their gardens:
Our members use Plant Finder to search our
proprietary database of over 4,700 plants and flowers
to find plants that meet their unique preferences,
garden conditions, and geographic location.
Our members use Garden Planner to design their garden
plots by dragging and dropping plant graphics onto a
grid; they can buy these plants online too"
Middle: screenprint of garden.com's homepage together with an
additional sub page surrounded by the following text: (moving counter-
clockwise)
"shopping We offer more than 16,000 products online--plants
ranging from asters to zinnias, and garden accessories ranging
from seeds and soil to greenhouses and furnishings.
. perrenials
. bulbs
. herbs
. watergardening
. tools
. cool garden gear
. furniture"
and a box with the following text:
"magazine The online magazine section of Garden.com includes weekly
inspirational features, garden ideas, practical tips, design and
planting advice"
"customer solutions Through the Customer Solutions Center, customers
have full access to their order status, order history, frequently
asked questions, and other customer services"
"community We have created an online gardening community to make
gardening accessible to a wide range of gardeners and to facilitate
discussion and exchange between gardeners. We offer:
. chat sessions with other members, authors and gardening
experts
. a portal for gardening information and websites
. Garden Doctor--a network of gardening experts to answer our
user's questions
"my stuff It's a personal Garden.com! In My Stuff our members can:
. store personalized information and notes
. review saved garden plans
. check on the status of their orders
. read Garden Doctor's responses to their individual questions
. revisit or update their gift reminders
. add to their gift registry
"Hello Karen, Welcome Back to Garden.com! How are your six rose bushes
doing? Our personalized auto log-in feature greets customers,
acknowledging their past purchases and advising them on plant care and
maintenance. It will also suggest appropriate products based on a
customer's profile."
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 7
Forward-Looking Statements............................................ 22
Use of Proceeds....................................................... 23
Dividend Policy....................................................... 23
Preemptive Rights..................................................... 23
Capitalization........................................................ 24
Dilution.............................................................. 25
Selected Financial Data............................................... 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 27
Business.............................................................. 38
Management............................................................ 53
Related Party Transactions............................................ 61
Principal Stockholders................................................ 64
Description of Capital Stock.......................................... 67
Shares Eligible for Future Sale....................................... 70
Underwriting.......................................................... 72
Legal Matters......................................................... 75
Experts............................................................... 75
Additional Garden.com Information..................................... 75
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. We have recently received publicity from several widely
disseminated publications. The information regarding us and our business in
these publications does not constitute part of the prospectus. Prospective
investors should consider only the information contained in this prospectus in
making their investment decision.
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.
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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 an 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. 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 both our
customers and suppliers through the Internet, we provide consistent, high
quality customer service and streamlined distribution. We use our proprietary
supplier information system, Trellis, to provide information and submit orders
to suppliers and to allow customers to track their orders. Based on internally
generated reports, currently over 645,000 persons have requested to be
registered as users on our Web sites. In addition, according to our internal
database records, we had 1.5 million visitors during the month of May. 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, and limited personalized service, information and
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, the Internet,
because of its increasing functionality and acceptance, has emerged as an ideal
medium to provide a one-stop destination for commerce, content and information
to serve the gardening market.
Our Solution
Our online destination integrates gardening and gardening-related
commerce, content and community to provide value to consumers and suppliers. We
believe we offer attractive benefits to consumers, including convenience, ease
of use, personalization, avenues to reach others in the gardening
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community and greater selection. Our Trellis system streamlines the
distribution channel and provides our suppliers with access to an expanded
customer base. The key features of our solution include:
. establishing a complete shopping destination that offers centrally
located content, a broad selection of high quality gardening products,
and convenient purchasing opportunities, 24 hours a day, seven days a
week;
. targeting personalized services and content to consumers based on
their individual preferences, geographic location and level of
gardening sophistication;
. creating a new distribution channel between our suppliers and our
customers that will provide consistent customer service and streamline
distribution;
. maintaining a broad and deep product selection for our customers, with
over 16,000 products including live plants, shrubs, trees, bulbs,
seeds, tools, furniture and garden accessories;
. delivering compelling content on an interactive basis, including daily
and weekly online features that are hyperlinked to companion product
offerings and that provide gardeners with planting advice, design
ideas and introductions to gardening trends; and
. providing access to an online community to make gardening information
readily available and to give gardeners around the world the
opportunity to communicate with each other and with authors and other
experts in gardening.
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 new and improved resources;
. continuing to execute a virtual warehouse model in which suppliers
ship directly to consumers 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.......... 4,100,000 shares
Common stock to be outstanding after this
offering.................................... 16,894,150 shares
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 June 30, 1999,
assumes that the over-allotment options will not be exercised, reflects an
amendment to Garden.com's Restated Certificate of Incorporation which resulted
in a four-for-five reverse stock split of our outstanding shares of common
stock and preferred stock and reflects the conversion of each outstanding share
of preferred stock into one share of common stock which will occur upon the
consummation of this offering. Unless otherwise indicated, the information in
this prospectus does not give effect to the exercise of preemptive rights of
holders of our Series E Preferred Stock to purchase a portion of the shares of
common stock sold in this offering at the initial public offering price. 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.
------------
The following summary financial data are derived from the financial
statements of Garden.com. The pro forma balance sheet data give effect to the
conversion of each outstanding share of preferred stock into one share of
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 $12.00,
after deducting the estimated underwriting discounts and commissions and
offering expenses.
Summary Financial Data
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
--------------------------------
1997 1998 1999
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<S> <C> <C> <C>
Statement of Operations Data:
Revenues................................... $ 316 $ 1,339 $ 5,394
Operating loss............................. (2,480) (4,878) (19,843)
Net loss................................... (2,440) (4,684) (19,059)
Net loss applicable to common
shareholders.............................. (2,440) (4,684) (21,759)
Basic net loss per share................... $ (2.44) $ (4.68) $ (20.48)
Shares used to compute basic net loss per
share..................................... 999,993 1,000,820 1,062,696
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
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<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $15,340 $15,340 $59,840
Working capital................................ 18,323 18,323 62,823
Total assets................................... 25,222 25,222 69,722
Total liabilities and deferred revenue......... 3,343 3,343 3,343
Total redeemable convertible preferred stock,
warrants, and stockholders' deficit........... 21,879 21,879 66,379
</TABLE>
6
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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. If we do not achieve profitability, our financial
condition and our stock price could suffer.
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, $4.7
million in fiscal 1998 and $19.1 million in fiscal 1999. As of June 30, 1999,
we have incurred cumulative net losses of $26.8 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. We do not have sufficient cash to indefinitely sustain these
operating losses. Further, 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 been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
To date, we have funded our operations from the sale of equity securities
and have not generated sufficient cash from operations. Cash from revenues must
increase significantly for us to fund anticipated development and marketing
costs internally. If our cash flows are insufficient to fund these costs, we
may need to fund our growth through additional debt or equity financings or
reduce costs. Further, we may not be able to obtain financing on satisfactory
terms. Our inability to finance our growth, either internally or externally,
may limit our growth potential and our ability to execute our business
strategy.
We have a limited operating history and expect to encounter risks and
difficulties frequently faced by early stage companies in rapidly evolving
markets. This subjects an investment in our stock to additional risks that our
market may not develop as anticipated or that we may not successfully execute
our business strategy.
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. Because of our limited operating history, it
is difficult to assess whether we will succeed at executing on our business
strategy, managing growth, and addressing the market risks that we face in a
rapidly developing market.
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
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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 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 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. 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. We believe that many of the other risk factors listed in this
prospectus may negatively affect our quarterly operating results and contribute
to fluctuations. Further, our quarterly gross margins also may be impacted by a
number of different factors that are difficult for us to anticipate at this
stage in our business. Likely causes of gross margin fluctuations include
changes in 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. If we do not establish the Garden.com brand quickly, we
may not capture sufficient market share or increase revenues enough to achieve
profitability.
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. For example, existing gardening retailers with established brand
names may establish an online presence that competes with our Web sites and
existing online providers with better name recognition than Garden.com may
begin selling garden products. 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, and the timing of
these expenses may contribute to fluctuations in quarterly operating results.
If our revenues do not increase proportionately with these expenses, our net
losses will be greater than expected.
We face additional potential stock-based compensation charges related to our
relationship with Administaff.
In July 1996, we began a co-employment arrangement with Administaff
Companies, Inc., an independent company, involving all of our personnel. On
March 31, 1999, the Financial Accounting Standards Board (FASB) issued an
Exposure Draft of a FASB Interpretation, Accounting for Certain Transactions
involving Stock Compensation -- an interpretation of APB Opinion No. 25. The
FASB Exposure Draft, if adopted in its current form, could be interpreted to
indicate that employees subject to co-employment arrangements would not be
considered our employees for purposes of applying APB No. 25. If the FASB
Exposure Draft is adopted in its current form and if we maintain our
arrangement with Administaff, the final interpretation could require the fair
value method of accounting for stock-based compensation to the leased
employees, which could harm our results. If additional clarification regarding
the definition of an employee is not provided in the final pronouncement and if
we terminate this co-employment arrangement, we may be required to establish a
new measurement date for stock options granted after December 15, 1998 to these
employees for the purpose of accounting for stock options under APB No. 25. If
a new measurement date is required to be established, we would recognize the
deferred stock-based compensation which would be amortized over the remaining
vesting periods of the options.
Gardening consumers may not accept our online solution. This may result in
slower revenue growth, loss of revenues and increased operating losses.
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 by increasing or prolonging operating
losses. 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
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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. Any significant downturn in the gardening industry
or in general economic conditions could result in decreased revenues and could
seriously harm our business.
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 result in decreased revenues and seriously harm our business, operating
results and financial condition. Purchases of 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 result in decreased advertising revenues and 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. If we fail to maintain our supplier relationships on acceptable terms,
our sales and profitability could suffer.
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 a small
percentage 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. If we cannot supply our
products to consumers at acceptable prices, we may lose sales and market share
as consumers make purchases elsewhere. Further, an increase in supply costs
could increase operating losses beyond current expectations.
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We depend on our third party suppliers to provide quality products directly to
our customers. We could lose revenues and market share and harm our brand name
if our suppliers fail to ship quality products to our consumers.
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. As a result, inclement weather could increase our costs or decrease
our revenues.
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. Decreased availability could lead to
reduced sales or increased costs and operating losses. Further, inclement
weather during the peak gardening season in spring and early summer may
discourage consumer gardening purchases.
Because we face significant competition from established traditional gardening
retailers, mail order catalogs, online retailers and others, we may emerge from
this period of growth with only a modest increase in market share or decreased
profit margins.
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 as companies attempt to
utilize the advantages of the Internet. 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;
. 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
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commercial relationships with larger, more established and well-financed
companies. Due to their size and greater resources, 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. Their financial strength could prevent us from
increasing market share. In addition, the development of 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. A deterioration in our relationship with Federal Express
could decrease our ability to track shipments, cause shipment delays, and
increase our shipping costs and the number of damaged products.
Our supply and distribution system is dependent upon our relationship with
Federal Express. Federal Express ships approximately 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. If
these relationships do not continue, it will be difficult for us to increase
market share and achieve profitability.
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 reduce our profit margins and may result in termination of
these types of relationships. Without these relationships, it is unlikely that
we can sufficiently increase market share and achieve profitability.
Our performance, including our revenue growth, 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, increase market share and respond to
competition. We may be unable to offer such products or services in a cost-
effective or
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timely manner. Furthermore, any new product or service we launch that is not
favorably received by consumers could damage our reputation and brand name,
resulting in lower revenues. 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 48 employees on June 30, 1998 to 169
employees on June 30, 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.
We rely on content and technologies licensed from third parties. The loss of or
increase in cost of our licensed content and technology may impair our ability
to assimilate and maintain consistent, appealing content or maintain and
improve the services we offer to consumers.
We intend to continue to strategically license a portion of our 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.
Although substantially all of the content on garden.com is developed and
created internally, we license a majority of the content for our Virtual Garden
site from third parties. 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 some of the technology incorporated into our Web
sites from third parties. For example, third parties have developed
substantially all of the hardware used for our Web sites. However, we have
developed a majority of the software that we use to run our Web sites.
Therefore, we rely to a material extent on technology developed and licensed
from third parties. This reliance on licensed technology exposes us to
increased risks:
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. third parties from which we license our technology may not be able to
defend successfully their proprietary rights against claims of
infringement, which could cause us to lose our rights to use such
technology or increase our licensing costs;
. third parties from which we license our technology may not develop new
technology quickly enough to meet our needs for improvement; and
. renewals, replacements and upgrades for our licensed technology may
not be available on commercially reasonable terms.
The loss of existing technology licenses could negatively affect the
performance of our existing services until equivalent technology can be
identified, obtained and integrated. Failure to obtain new technology licenses
may result in delays or reductions in the introduction of new features,
functions or services. Our business could suffer if these risks materialize.
Protection of our domain names is uncertain. If we cannot protect our domain
names, it will impair our ability to brand successfully the Garden.com name.
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. We may not
successfully carry out our business strategy of establishing a strong brand for
Garden.com if we cannot prevent others from using similar domain names or
trademarks. This could impair our ability to increase market share and
revenues.
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 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
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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 sales volume, 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 sales volume, business, operating results and financial condition.
If we expand our business internationally, our business would become
increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires
businesses to pursue or consider pursuing international expansion. We will
probably expand into international markets. 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 that
could affect our profitability, including:
. the need to develop new supplier relationships;
. unexpected changes in international regulatory requirements and
tariffs;
. difficulties in staffing and managing foreign operations;
. 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 or other gardening enterprises. As part of our
business strategy, we expect to review acquisition prospects that would
complement our existing business, augment the distribution of our content and
community or enhance our technical capabilities. We anticipate that we will
acquire other businesses or assets meeting our strategic goals that can be
purchased on terms acceptable to us. We may not locate suitable acquisition
opportunities. Any future acquisitions would expose us to increased risks,
including:
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. issuances of equity securities that may dilute existing stockholders;
. increased debt obligations or contingent liabilities;
. 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 retain the customers of acquired businesses and
generate sufficient revenues from new sites or businesses 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.
If these risks materialize, future acquisitions could require additional
capital investment or result in additional operating losses, amortization of
goodwill and other intangible assets or other charges against earnings.
We are subject to government regulations relating to the shipment of live
goods, fertilizers and other products, which exposes us to risks that we will
be fined or exposed to civil or criminal liability, receive negative publicity
or be prevented from shipping products into one or more states.
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
subject to the following if these requirements have not been fully met by our
suppliers or by us directly:
. we could be fined or exposed to civil or criminal liability or
remediation expenses;
. we could receive negative publicity, devaluing our brand name; and
. we may be prevented from shipping products into one or more states.
We may be adversely impacted by the Year 2000 because our systems or our
suppliers' systems may fail.
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 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."
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Risks Related to the Internet Industry
Our performance depends on the growth and acceptance of the Internet as a
medium for commerce. Without the growth and acceptance of electronic commerce,
we may not achieve the revenue growth required for us to achieve profitability.
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 sales growth may be
insufficient to achieve profitability, and our operating results and financial
condition will consequently suffer.
Rapid technological change could render our Web sites and systems obsolete and
require significant capital expenditures.
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
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
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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. Updating our technology
internally and licensing new technology from third parties may require
significant additional capital expenditures and could affect our profitability.
We are exposed to risks associated with online commerce security and credit
card fraud, which may reduce collections and discourage online transactions.
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 reduce our collections and 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 result in litigation costs or increased
insurance costs.
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Future government regulations of the Internet could decrease demand for our
product or 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, leading to further losses.
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, we could be
subject to liability, and even if we could successfully defend such claims,
they may involve significant legal compliance and litigation costs.
Risks Related to the Securities Markets
No public market for our common stock currently exists and our stock price may
fluctuate after this offering. As a result, investors in our common stock may
not be able to resell their shares at or above the initial public offering
price.
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 trading volume, which are
particularly common among highly volatile securities of Internet and
online commerce companies.
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As a result, investors in our common stock may not be able to resell their
shares at or above the initial public offering price. 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 our 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 and execute on our
business strategy.
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. Because we are not
currently generating sufficient cash to fund our operations, we may be forced
to rely on external financing to meet future capital requirements. After the
next 12 months, 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 and increase
revenues, 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, grow market share,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could negatively impact our business,
operating results and financial condition.
A substantial number of our securities may be sold in the market in the near
future. This could cause our stock price to decline significantly, even if our
business is doing well.
After this offering, we will have 16,894,150 shares of outstanding common
stock. This includes the 4,100,000 shares we are selling in this offering,
which may be immediately resold in the public market. The remaining 76% or,
12,794,150 million shares of our total outstanding shares will become available
for resale in the public market in the near future. In addition, 54,760 shares
of common stock are issuable upon exercise of options exercisable within 90
days of the date of this prospectus.
As restrictions on resale end, the market price could drop significantly
if the holders of these restricted shares sell them or are perceived by the
market as intending to sell them. See "Shares Eligible for Future Sale" for
further discussion of these issues.
Our existing stockholders will exercise significant control over Garden.com,
which could delay or prevent someone from acquiring or merging with us.
On completion of this offering, executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately 51.5% of our
outstanding common stock. As a result, these stockholders 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."
20
<PAGE>
The broad discretion we have in the use of proceeds of this offering increases
the risk that we may not use them effectively or that we may use them in ways
with which you or the market in general 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, such as upgrading our computer systems architecture.
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. Our stock
price could decline if the market does not view favorably our use of the
proceeds from this offering. 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.
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 by:
. 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. For a detailed description of the
anti-takeover provisions in our charter documents, see "Description of Capital
Stock--Delaware Anti-Takeover Law and Our Restated Certificate of Incorporation
and Amended and Restated By-law Provisions."
Investors purchasing shares in this offering will face immediate and
substantial dilution.
The initial public offering price of our common stock is expected to
exceed substantially the tangible net book value per share of the common stock
immediately after this offering. Based upon the midpoint of the estimated
offering price range, you could pay as much as $12.00 per share and the net
tangible book value per share is expected to be $3.93 immediately after the
offering. The net tangible book value per share represents the per share value
of our tangible assets after subtracting our liabilities. Further, investors in
this offering will contribute approximately 49% of our net tangible assets, but
will own only approximately 24% of our company.
21
<PAGE>
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.
22
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of $44,500,000 from the sale of 4,100,000
shares of common stock at an assumed initial public offering price of $12.00
per share after deducting underwriting discounts and commissions of $3,444,000
and expenses of $1,256,000. 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. Through June 30, 2001, we presently intend to use the proceeds
of this offering, together with our current cash balances, cash equivalents and
short-term investments, as follows: 56.7% for marketing and sales, 18.0% for
content and product development and the remaining 25.3% for working capital and
capital expenditures such as upgrading our computer systems architecture.
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complementary to our business, we currently have no
commitments or agreements for such acquisitions and are not involved in
negotiations regarding any acquisitions. 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.
We have a revolving credit facility under which we had borrowed
approximately $148,000 as of June 30, 1999. The terms of our bank credit
agreement for this revolving credit facility prohibit us from paying cash
dividends on shares of our common stock.
PREEMPTIVE RIGHTS
The 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 assuming conversion of all Series E shares into common
stock. The shares of Series E Preferred Stock will convert into shares of
common stock on a one for one basis. As of the date of this prospectus, such
stockholders have the right to purchase approximately 253,576 of the shares to
be issued in this offering, assuming the over-allotment options 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.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on
an actual, pro forma and pro forma as adjusted basis. The "actual" column
reflects our capitalization as of June 30, 1999 on a historical basis, without
any adjustments to reflect subsequent events or anticipated events. The "pro
forma" column reflects our capitalization as of June 30, 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 amendment to Garden.com's Restated Certificate of Incorporation
which resulted in a four-for-five reverse stock split of our
outstanding shares of common stock and preferred stock;
. the automatic conversion of 11,637,397 shares of outstanding preferred
stock including the outstanding shares of Series E Preferred Stock
into 11,637,397 shares of common stock on a one for one basis upon the
closing of this offering.
The "pro forma as adjusted" column reflects our capitalization as of June
30, 1999 with the preceding "pro forma" adjustments plus:
. the receipt of the estimated net proceeds from our sale of 4,100,000
shares of common stock at an assumed initial public offering price of
$12.00 per share.
None of the columns set forth below reflect the following:
. the exercise of options to purchase 1,157,880 shares of common stock
outstanding as of June 30, 1999, at an average exercise price of
$3.26, the exercise of warrants to purchase 584,467 shares of
preferred stock outstanding as of June 30, 1999, at an average
exercise price of $2.74, and 2,000,000 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>
June 30, 1999
------------------------------------
Pro Forma As
Actual Pro Forma Adjusted
------- -------------- ------------
(in thousands)
--------------
<S> <C> <C> <C>
Current portion of long-term debt.... $ 128 $ 128 $ 128
------- -------- -------
Long-term debt, less current
portion............................. 20 20 20
Redeemable convertible preferred
stock, $0.01 par value; 16,509,199
shares authorized, 11,637,397 issued
and outstanding actual; no shares
authorized, none issued and
outstanding pro forma and pro forma
as adjusted......................... 48,215 -- --
Warrants to purchase redeemable
convertible preferred stock......... 24 24 24
Stockholders' equity:
Preferred Stock, $0.01 par value;
16,509,199 shares authorized,
11,637,397 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,
12,000,000 shares authorized,
1,156,753 issued and outstanding
actual; $0.01 par value 12,794,150
shares issued and outstanding pro
forma; 50,000,000 shares
authorized, 16,894,150 shares
issued and outstanding pro forma as
adjusted........................... 12 128 169
Additional paid-in capital........... 5,768 53,867 98,367
Deferred compensation................ (2,305) (2,305) (2,305)
Accumulated deficit.................. (29,835) (29,835) (29,835)
------- -------- -------
Total stockholders' deficit......... (26,360) 21,855 66,355
------- -------- -------
Total capitalization............... $22,027 $ 22,027 $66,527
======= ======== =======
</TABLE>
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $21,855,349,
or approximately $1.71 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 conversion of each share of preferred stock into one share
of common stock upon completion of this offering. After giving effect to the
sale of the 4,100,000 shares of common stock offered hereby at an assumed
initial public offering price of $12.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses, the pro forma net tangible book value as of June 30, 1999 would have
been $66,355,349, or approximately $3.93 per share. This represents an
immediate increase in pro forma net tangible book value of $2.22 per share to
existing stockholders and an immediate dilution in net tangible book value of
$8.07 per share to new investors of common stock in this offering. Based upon
the midpoint of the offering price range, new investors will pay $12.00 per
share and the net tangible book value per share is expected to be $3.93
immediately after the offering. The net tangible book value per share
represents the per share value of our tangible assets after subtracting our
liabilities. Further, investors in this offering will contribute approximately
49% of our net tangible assets, but will own approximately 24% of our company.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma net tangible book value per share as of June 30,
1999........................................................ $1.71
Increase in pro forma net tangible book value per share
attributable to
new investors............................................... 2.22
-----
Pro forma net tangible book value per share after offering..... 3.93
------
Dilution in pro forma net tangible book value per share to new
investors..................................................... $ 8.07
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 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.. 12,794,150 76% $50,623,496 51% $ 3.96
New investors.......... 4,100,000 24 49,200,000 49 12.00
---------- --- ----------- ---
Total................ 16,894,150 100% $99,823,496 100%
========== === =========== ===
</TABLE>
The foregoing discussion and tables assume no exercise of stock options or
warrants outstanding as of June 30, 1999. As of June 30, 1999, there were
outstanding options to purchase 1,157,880 shares of common stock at a weighted
average exercise price of $3.26 per share and 1,360,000 shares were reserved
for issuance under our stock plan. As of June 30, 1999, there were outstanding
warrants to purchase 584,467 shares of preferred stock at a weighted average
exercise price of $2.74 per share. The foregoing discussion also excludes an
additional 640,000 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.
25
<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, 1998 and 1999 and the balance sheet data as of June 30, 1997, 1998
and 1999 are derived from our financial statements that have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere in this
prospectus. Actual results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Period from Fiscal Year Ended
October 2, 1995 June 30,
(inception) to -----------------------------
June 30, 1996 1997 1998 1999
--------------- ------- --------- ---------
(in thousands, except share and per share
data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Products...................... $ 8 $ 308 $ 1,283 $ 4,952
Advertising................... -- 8 56 442
------- ------- --------- ---------
Total revenues.............. 8 316 1,339 5,394
------- ------- --------- ---------
Cost of revenues:
Products...................... 5 242 1,086 4,466
Advertising................... -- 4 22 74
------- ------- --------- ---------
Total cost of revenues...... 5 246 1,108 4,540
------- ------- --------- ---------
Gross profit................... 3 70 231 854
Operating expenses:
Marketing and sales........... 189 927 2,410 13,305
Content and product
development.................. 161 858 1,188 3,167
General and administrative.... 340 765 1,510 4,225
------- ------- --------- ---------
Total operating expenses.... 690 2,550 5,108 20,697
------- ------- --------- ---------
Operating loss................. (687) (2,480) (4,877) (19,843)
Other income and expense....... 22 40 193 784
------- ------- --------- ---------
Net loss....................... $ (665) $(2,440) $ (4,684) $ (19,059)
======= ======= ========= =========
Beneficial conversion feature
and insubstance dividend...... -- -- -- (2,700)
------- ------- --------- ---------
Net loss applicable to common
stockholders.................. (665) (2,440) (4,684) (21,759)
======= ======= ========= =========
Basic net loss per share....... $ (0.95) $ (2.44) $ (4.68) $ (20.48)
======= ======= ========= =========
Shares used to compute basic
net loss per share............ 561,651 999,993 1,000,820 1,062,696
======= ======= ========= =========
<CAPTION>
Period from
October 2, 1995 June 30,
(inception) to -----------------------------
June 30, 1996 1997 1998 1999
--------------- ------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...... $ 114 $ 4,948 $ 19,042 $ 15,340
Working capital................ (10) 4,568 18,308 18,323
Total assets................... 323 5,423 20,489 25,222
Total liabilities and deferred
revenue....................... 251 586 1,473 3,343
Total redeemable convertible
preferred stock, warrants, and
stockholders' deficit......... 92 4,837 19,015 21,879
</TABLE>
26
<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.
For approximately 90% of our product revenues, customers place orders on our
Web site which orders are routed to the appropriate supplier. We take title and
recognize revenues for products when they are shipped from the supplier to the
customer. The remaining 10% of our product revenues are for products purchased
and inventoried by us and shipped to customers when ordered. We buy products
from the suppliers at a wholesale price and then sell the products to the
customer at a retail price. The revenues we record reflect the sales price of
the products collected from the customer. The revenues generated from shipping
charges to our customers do not have a direct correlation to the costs that we
pay Federal Express for shipping the products. Typically, we charge the
customer a shipping amount equal to the greater of $4.50 and a variable
percentage from 10 to 16 percent for shipping based on the total purchase
amount. Revenues received from shipping charges are recognized when the related
products for that order are shipped to the customer. 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.
Approximately 90% of our advertising revenues represent transactions in which
we recognize a short-term receivable that typically is converted into cash
within 60 days. The remaining percentage of our advertising revenues consists
of barter transactions in which we receive advertising in print publications
with companies in exchange for offering those companies guaranteed impressions
on our Web sites or offering them Web site services. 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
27
<PAGE>
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 June 30,
1999, had incurred cumulative net losses of $26.8 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 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 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.
28
<PAGE>
Results of Operations
The following table sets forth 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
---------------------------
Period from Fiscal Year Ended
October 2, 1995 June 30,
(inception) to ---------------------------
June 30, 1996 1997 1998 1999
--------------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Products................. 100% 97% 96% 92%
Advertising.............. -- 3 4 8
------ ------- ------- -------
Total Revenues.......... 100% 100 100 100
------ ------- ------- -------
Cost of revenues:
Products................. 63 77 81 83
Advertising.............. -- 1 2 1
------ ------- ------- -------
Total cost of revenues.. 63 78 83 84
------ ------- ------- -------
Gross profit.............. 37 22 17 16
Operating expenses:
Marketing and sales...... 2,363 293 180 247
Content and product
development............. 2,012 272 89 59
General and
administrative.......... 4,250 242 113 78
------ ------- ------- -------
Total operating
expenses............... 8,625 807 382 384
------ ------- ------- -------
Operating loss............ (8,588) (785) (365) (368)
Other income and expense.. 27.5 13 15 15
------ ------- ------- -------
Net loss.................. (8,313)% (772)% (350)% (353)%
====== ======= ======= =======
</TABLE>
Comparison of Fiscal Years Ended June 30, 1998 and June 30, 1999
Revenues
Products. Product revenues consist of product sales to customers and
charges to customers for shipping. Revenues for products are recognized when
the products are shipped to the customer. Revenues are recorded net of
promotional discounts and coupons. Product returns are recorded as a reduction
of revenues. Product revenues increased 286% from $1.3 million, or 96% of total
revenues, for the fiscal year ended June 30, 1998 to $5.0 million, or 92% of
total revenues, for the fiscal year ended June 30, 1999. Product revenues
increased primarily as a result of the 293% growth in our customer base, which
we believe was primarily influenced by increased marketing activities, expanded
product offerings and enhancements to the features and functionality of our Web
sites.
Advertising. Advertising revenues increased 689% from $56,000, or 4% of
total revenues, for the fiscal year ended June 30, 1998 to $442,000, or 8% of
total revenues, for the fiscal year ended June 30, 1999. Advertising revenues
increased primarily due to a 159% increase in page views on the garden.com Web
site from 36.9 million for the fiscal year ended June 30, 1998 to 95.7 million
for the fiscal year ended June 30, 1999.
Gross Profit
Gross profit consists of total revenues minus cost of total revenues. Cost
of total revenues consists primarily of the cost of products sold to customers,
shipping and handling costs for product sales, and advertising sales
commissions paid both to a third party advertising agency and to our internal
advertising
29
<PAGE>
sales department. Gross profit increased from $231,000 for the fiscal year
ended June 30, 1998 to $854,000 for the fiscal year ended June 30, 1999. Gross
margin decreased from 17% of total revenues for the fiscal year ended June 30,
1998 to 16% of total revenues for the fiscal year ended June 30, 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. This one-time promotional activity, which
decreased gross profit by $79,000, resulted in a decrease in gross margin from
17% to 16% for the fiscal year ended June 30, 1999.
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 $2.4 million, or 180% of total revenues, for the fiscal year
ended June 30, 1998 to $13.3 million, or 247% of total revenues, for the fiscal
year ended June 30, 1999. Marketing and sales expenses increased primarily due
to a 689% increase from 1,364,000 in the fiscal year ended June 30, 1998 to
10,763,000 in the fiscal year ended June 30, 1999 in expenses related to
advertising to promote our brand and to acquire new customers as well as a 158%
increase from $1,467,178 in the fiscal year ended June 30, 1998 to $568,971 in
the fiscal year ended June 30, 1999 in payroll and related costs used to hire
additional marketing, sales, and customer solutions personnel. We intend to
continue to pursue an aggressive branding and marketing campaign and to 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 personnel involved in creating and
publishing content, product merchandising and Web site development. Our
personnel involved in these efforts produce gardening related stories, graphics
and photographs that appear in both our Web sites and the Garden Escape
Magazine. In addition personnel involved in content and product development
support our Web site infrastructure and product merchandising efforts, which
involve the management of supplier relationships and product demand planning.
Content and product development expenses increased from $1.2 million, or 89% of
total revenues, for the fiscal year ended June 30, 1998 to $3.2 million, or 59%
of total revenues, for the fiscal year ended June 30, 1999. The increase in
content and product development expenses in absolute dollars is primarily due
to a 141% increase from $820,250 in the fiscal year ended June 30, 1998 to
$1,979,786 in the fiscal year ended June 30, 1999 in payroll and related costs
used for hiring additional personnel as well as associated costs related to
enhancing the products and features, editorial content and functionality of our
Web sites. As a percent of total revenues, content and product development
expenses decreased due to the increase in total 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, we 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, professional
services expenses, depreciation and deferred compensation expense. Supplier
operations support includes costs such as travel and computer related expenses
incurred when consulting with new and existing suppliers. For example, we
configure computer software and hardware located on the premises of our
suppliers to ensure consistent and reliable shipping performance from those
suppliers. General and administrative expenses increased from $1.5 million, or
113% of revenues, for the fiscal year ended June 30, 1998 to $4.2 million, or
78% of revenues, for the fiscal year ended June 30, 1999. The increase in
general and administrative expenses in absolute dollars is primarily due to a
179% increase from $432,358 in the fiscal year ended June 30, 1998 to
$1,204,281 in the fiscal year ended June 30, 1999 in payroll and related
30
<PAGE>
costs used for hiring additional personnel as well as associated expenses
necessary to support the growth of our operations. As a percent of total
revenues, general and administrative expenses decreased due to the increase in
total 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 fiscal years ended June 30, 1998 and 1999, we recorded total
deferred stock compensation expense of $314,000 and $2,739,000, respectively,
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 $73,000 and $674,000 for the
fiscal years ended June 30, 1998 and 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 these 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 $193,000 for the fiscal year ended June 30, 1998 to $784,000 for
the fiscal year ended June 30, 1999 as a result of interest earned on the net
proceeds from the sale of our preferred stock in June 1998, April 1999 and May
1999.
Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1998
Revenues
Products. Product revenues increased 317% from $308,000, or 97% of total
revenues, for the fiscal year ended June 30, 1997 to $1.3 million, or 96% of
total revenues, for the fiscal year ended June 30, 1998. Product revenues
increased primarily as a result of the 279% growth in our customer base.
Advertising. Advertising revenues increased 600% from $8,000, or 3% of
total revenues, for the fiscal year ended June 30, 1997 to $56,000, or 4% of
total revenues, for the fiscal year ended June 30, 1998. Advertising revenues
increased primarily due to a 739% increase in page views on the garden.com Web
site from 4.4 million for the fiscal year ended June 30, 1997 to 36.9 million
for the fiscal year ended June 30, 1998.
Gross Profit
Gross profit increased from $70,000 for the fiscal year ended June 30,
1997 to $231,000 for the fiscal year ended June 30, 1998. Gross margin
decreased from 22% of total revenues for the fiscal year ended June 30, 1997 to
17% of total revenues for the fiscal year ended June 30, 1998. Of the
percentage decrease in gross margin, approximately 4% was associated with
increased freight charges incurred as a result of switching most of our
suppliers to shipping products through Federal Express.
Operating Expenses
Marketing and Sales. Marketing and sales expenses increased from $927,000,
or 293% of total revenues, for the fiscal year ended June 30, 1997 to $2.4
million, or 180% of total revenues, for the fiscal year ended June 30, 1998.
The increase in marketing and sales expenses is primarily due to a 592%
increase in expenses related to our advertising as well as a 36% increase from
$417,681 in the fiscal year ended June 30, 1998 to $568,971 in the fiscal year
ended June 30, 1999 in payroll and related costs. As a percent of total
revenues, marketing and sales expenses decreased due to the increase in total
revenues during the period.
Content and Product Development. Content and product development expenses
increased from $858,000, or 272% of total revenues, for the fiscal year ended
June 30, 1997 to $1.2 million, or 89% of total
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revenues, for the fiscal year ended June 30, 1998. The increase in content and
product development expenses is primarily due to a 35% increase from $606,523
in the fiscal year ended June 30, 1998 to $820,250 in the fiscal year ended
June 30, 1999 in payroll and related costs as well as associated costs related
to enhancing the products and features, editorial content and functionality of
our Web sites. As a percent of total revenues, content and product development
expenses decreased due to the increase in total revenues during the period.
General and Administrative. General and administrative expenses increased
from $765,000, or 242% of total revenues, for the fiscal year ended June 30,
1997 to $1.5 million, or 113% of total revenues, for the fiscal year ended June
30, 1998. The increase in general and administrative expenses is primarily due
to a 107% increase from $208,840 in the fiscal year ended June 30, 1998 to
$432,358 in the fiscal year ended June 30, 1999 in payroll and related costs as
well as associated expenses necessary to support the growth of our operations.
As a percent of total revenues, general and administrative expenses decreased
due to the increase in total revenues during the period. In the fiscal year
ended June 30, 1998, we recorded total deferred stock compensation expense of
$314,000 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 $73,000 for the
fiscal year ended June 30, 1998. 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 these grants.
Other Income
Other income increased from $40,000 for the fiscal year ended June 30,
1997 to $193,000 for the fiscal year ended June 30, 1998 as a result of
interest earned on the net proceeds from the sale of our preferred stock in May
1997 and June 1998.
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Selected Quarterly Results of Operations
The following table sets forth selected unaudited statement of income data
for the six quarters ended June 30, 1999, both in dollar amounts and as a
percentage of total revenues. This data should be read in conjunction with the
audited financial statements for the fiscal years ended June 30, 1998 and 1999
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products.............. $ 220 $ 636 $ 333 $ 1,125 $ 856 $ 2,637
Advertising........... 10 16 25 87 83 247
------- ------- ------- ------- ------- -------
Total revenues....... 230 652 358 1,212 939 2,884
------- ------- ------- ------- ------- -------
Cost of revenues:
Products.............. 168 555 359 898 763 2,446
Advertising........... 4 8 13 32 8 20
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 172 563 372 930 771 2,466
------- ------- ------- ------- ------- -------
Gross profit............ 58 89 (14) 282 168 418
Operating expenses:
Marketing and sales... 404 1,381 2,133 1,246 3,686 6,239
Content and product
development.......... 315 376 640 599 928 1,001
General and
administrative....... 394 529 721 778 1,062 1,664
------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,113 2,286 3,494 2,623 5,676 8,904
------- ------- ------- ------- ------- -------
Operating loss.......... (1,055) (2,197) (3,508) (2,341) (5,508) (8,486)
Other income and
expense................ 52 58 248 192 124 220
------- ------- ------- ------- ------- -------
Net loss................ $(1,003) $(2,139) $(3,260) $(2,149) $(5,384) $(8,266)
======= ======= ======= ======= ======= =======
<CAPTION>
Percentage of Total Revenues
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products.............. 96% 98% 93% 93% 91% 91%
Advertising........... 4 2 7 7 9 9
------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100
------- ------- ------- ------- ------- -------
Cost of revenues:
Products.............. 73 85 100 74 81 85
Advertising........... 2 1 4 3 1 1
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 75 86 104 77 82 86
------- ------- ------- ------- ------- -------
Gross profit............ 25 14 (4) 23 18 14
Operating expenses:
Marketing and sales... 176 212 596 103 392 216
Content and product
development.......... 137 58 179 50 99 35
General and
administrative....... 171 81 201 63 113 58
------- ------- ------- ------- ------- -------
Total operating
expenses............ 484 351 976 216 604 309
------- ------- ------- ------- ------- -------
Operating loss.......... (459) (337) (980) (193) (586) (295)
Other income and
expense................ 23 9 69 16 13 8
------- ------- ------- ------- ------- -------
Net loss................ (436)% (328)% (911)% (177)% (573)% (287)%
======= ======= ======= ======= ======= =======
</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
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gardening products for the spring gardening season to extend into the next
quarter. During the quarter ended June 30, 1999, revenues increased primarily
as a result of increased product sales from the 1999 spring gardening season,
and to a lesser extent due to the shipment of the gardening products that were
delayed in shipping during the prior 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.
The negative gross margin in the quarter ended September 30, 1998 reflects
costs associated with the coupon promotion during that quarter. This one-time
promotional activity, which decreased gross profit by $79,000, resulted in a
decrease in gross margin from 18% to (4%) for the quarter ended September 30,
1998. The decrease in our gross margin in the quarter ended June 30, 1999
reflects a relative increase in sales of lower margin live goods compared to
higher margin products.
Marketing and sales expenses as a percent of total revenues fluctuate
quarter to quarter primarily due to varying levels of spending for seasonal
brand promotion and marketing initiatives. We increase our marketing and sales
expenses in the quarters ended September 30 and March 31 in anticipation of the
holiday and spring gardening seasons. Marketing and sales expenses increased in
the quarter ended June 30, 1999 due primarily to higher levels of advertising
expenditures designed to promote our brand during the spring gardening season.
Marketing and sales expenses as a percentage of total revenues were higher
during the quarters ended September 30, 1998 and March 31, 1999 due to
relatively lower total revenues during these quarters.
Content and product development expenses increased during the quarters
ended September 30, 1998, March 31, 1999, and June 30, 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 total revenues
during the quarters ended September 30, 1998 and March 31, 1999 due to lower
total 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,
amortization of deferred compensation and, to a lesser extent, due to
additional depreciation expense resulting from increases in our purchases of
property and computer equipment. General and administrative expenses increased
as a percentage of total revenues in the quarters ended September 30, 1998 and
March 31, 1999 due to lower total revenues during these quarters.
Other income increased in the quarters ended September 30, 1998 and June
30, 1999 due to interest earned on the proceeds received from our sale of our
preferred stock.
We expect to continue to experience significant fluctuations in our future
operating results due to the above factors and other factors which may be
outside our control. As a result, we believe 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 June 30, 1999, we had approximately $15.3 million in cash
and cash equivalents and $3.7 million in short-term investments.
Net cash used in operating activities increased from $4.1 million for the
fiscal year ended June 30, 1998 to $18.5 million for the fiscal year ended June
30, 1999. The increase in net cash used in operating activities can be
substantially attributed to the increased net loss.
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Net cash used in investing activities increased from $684,000 for the
fiscal year ended June 30, 1998 to $6.3 million for the fiscal year ended June
30, 1999. The increase in net cash used in investing activities resulted
primarily from the purchase of securities for investment purposes and from the
purchase of property and computer equipment.
Net cash provided by financing activities increased from $18.9 million for
the fiscal year ended June 30, 1998 to $21.1 million for the fiscal year ended
June 30, 1999. The increase in net cash provided by financing activities
resulted primarily from the proceeds from the sale of our preferred stock in
April and May 1999.
Our line of credit term note totals $400,000. At June 30, 1999,
approximately $148,000 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 term note secure the borrowings under
this line of credit term note. These assets consist primarily of purchased
computer equipment.
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. Since we consider our business activities as a single segment, the
adoption of FAS No. 131 did not have a significant 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 do not anticipate that SFAS No. 133
will have an impact on our financial statements.
On March 31, 1999, the FASB issued an exposure draft entitled "Accounting
for Certain Transactions Involving Stock Compensation," which is a proposed
interpretation of APB Opinion No. 25. The proposed interpretation, if adopted,
would require that the fair value method of accounting for stock-based
compensation be used for options granted to individuals who are not our
employees. Because we have a leasing arrangement with a third party regarding
employees, it is possible that these individuals could be deemed non-employees
of Garden.com under the proposed interpretation. We believe that our entire
work force qualifies as employees of Garden.com under common law. Therefore,
the proposed interpretation, if
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adopted, is not expected to harm our financial results. However, the final
interpretation could require the fair value method of accounting for stock-
based compensation to our leased employees, which could harm our results.
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. As of the date of this
filing, our Year 2000 compliance assessment is as follows:
. Web site and database servers and Web site software applications
provided by vendors, including Sun Microsystems, Apache, Oracle,
Netgravity and Verity, all are now Year 2000 compliant per the
specifications of the manufacturer.
. Our Web site equipment is now Year 2000 compliant per the
specifications of the manufacturer and assurance of our network
service provider.
. Our proprietary software assessment will be complete by the fall of
1999. We believe that we will be required to modify certain of our
internally developed software used on our Web site. We believe we will
become Year 2000 compliant prior to the end of the year.
. Telecommunications equipment provided by vendors, including Northern
Telecom and Southwestern Bell, are now all Year 2000 compliant per the
specifications of the manufacturer.
. Back-office network servers, software and equipment will require
upgrades, or patches, from vendors, including Microsoft and Dell. We
are in the process of making these upgrades, and anticipate these
systems will be Year 2000 compliant by the fall of 1999. Our
accounting software system is already Year 2000 compliant.
. Personal computers and desktop applications will require upgrades, or
patches, from vendors, including Microsoft and Dell. We are in the
process of making these upgrades, and anticipate these systems will be
Year 2000 compliant by the fall of 1999.
. Non-IT systems assessment is in progress, and we anticipate will be
complete by the end of the year. We do not believe non-IT systems Year
2000 compliance poses a material risk to us because no non-IT systems
components are critical to our operating success. However, the non-IT
systems of third parties may not be compliant. The compliance of the
third parties' non-IT systems will be addressed in our external
systems assessment in the fall of 1999.
. We are now assessing our external systems. By the fall of 1999 we plan
to obtain Year 2000 compliance assurances from suppliers of most of
our products and from key external trading partners, including
telecommunications and electricity service providers.
We do not have a contingency plan. We plan to establish our contingency plan
after we have completed our Year 2000 compliance assessment in the fall of
1999. The costs associated with remediating our non-
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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 harm our business, operating results and
financial condition.
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BUSINESS
Overview
Garden.com is an 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. 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 both our
customers and suppliers through the Internet, we provide consistent, high
quality customer service and streamlined distribution. We use our proprietary
supplier information system, Trellis, to provide information and submit orders
to suppliers and to allow customers to track their orders. 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. According to our internal database
records, we estimate that the number of visitors to our Web sites grew from
495,000 visitors in May 1998 to 1.5 million visitors in May 1999. Our revenues
have increased from $652,000 in the quarter ended June 30, 1998 to
approximately $2.9 million in the quarter ended June 30, 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
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improvement superstores and mass merchant retailers offer attractive pricing to
home gardeners, they offer 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 generally 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 142 million Internet users worldwide at the end of 1998 and
anticipates that the number will increase to approximately 502 million users by
the end of 2003. 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,
catalog companies and online merchants will increase from approximately $50.4
billion in 1998 to approximately $1.3 trillion by 2003. In addition, according
to Forrester Research, advertising spending on the Internet will increase from
$1.5 billion in 1998 to more than $15.3 billion in 2003.
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
IDC, women represented 56% of all Internet users in 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,
according to Jupiter Communications, 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 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. While there is no publicly available information
regarding the size of the online gardening market, we believe that there is an
opportunity to leverage technology to offer consumers enhanced and deep product
selection, customized information and
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access to a community of fellow gardeners. For example, an online gardening
destination 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 an 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
interaction with our online gardening community. With 645,000 members currently
and 1.5 million visitors during the month of May 1999, 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 targeting 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 bring
value to consumers and suppliers. By interacting with our customers through our
internally developed Web sites and with our suppliers through our proprietary
supplier information system, Trellis, 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. Trellis 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:
Provide Value 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 reduce the likelihood that our suppliers will switch to other online
providers.
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;
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. engaging in targeted radio, television and other media campaigns;
. developing cross-media partnerships and projects, such as Garden
Escape Magazine;
. conducting an ongoing public relations campaign; and
. 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).
In addition, we utilize our other Web sites, www.virtualgarden.com and
www.hortmag.com, to further build the Garden.com brand. Through our Virtual
Garden web site, we are making gardening resources and information more
accessible to gardeners, attempting to build the overall category of gardening
online and, ultimately, creating an avenue for promoting Garden.com's brand and
products to the consumers who are most likely to purchase our products. Through
our Horticulture Magazine Online web site, we capitalize on the editorial
content of Horticulture Magazine to attract its readers to the Internet and to
simultaneously promote our products through hyperlinks to www.garden.com.
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 capitalize on the
flexibility of our online format for retail sales. We believe that we have
greater flexibility to enhance our service offerings, meet increased demand and
take advantage of the efficiencies of online retailing because our technology
and streamlined distribution system permit growth without significant added
infrastructure. 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 proprietary supplier information system, intuitive interfaces that enhance
the overall customer experience and technologies that improve our ability to
target content and marketing 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. Although substantially all of the content on
garden.com is developed and created internally, we license a majority
of the content for our Virtual Garden site from third parties. 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.
. Relationship with Horticulture Magazine. In March 1998, we commenced a
relationship 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.
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
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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 fiscal year ended June 30, 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.
During the fiscal year ended June 30, 1999, these relationships accounted for
eight percent of our revenues. None of them accounted for more than 6.2 percent
of the revenues. We have established the following relationships, among others,
for marketing, distribution and product enhancement:
HGTV. In May 1999, HGTV purchased 699,300 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.
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Our strategic online relationships include:
. AOL. We have a strategic relationship with AOL under which we serve as
an anchor merchant on AOL and Compuserve and under which we maintain a
separate online gardening store within AOL for the convenience of
AOL's subscribers. We are also prominently promoted through banner and
other advertisements on AOL's online services.
. Microsoft Network. We serve as an anchor merchant on Microsoft's
online shopping channel. The Microsoft Network prominently features
our products, advertisements and links to our Web site.
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 Forests 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.
Public Television Sponsorships. We have established relationships with
public television stations to sponsor television programs related to gardening
and our product offerings. For example, we sponsor the PBS television program
The Perennial Gardener with Karen Strohbeen and maintain a Web site for the
program. We also sponsored a PBS documentary entitled America's Historic Trees.
We believe that our sponsorship of these programs heightens awareness of
Garden.com among gardeners and furthers our broad marketing objectives.
Supply Management
We combine over 60 supplier relationships and proprietary supplier
information 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 fiscal year ended June 30,
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.
For the fiscal year ended June 30, 1998, no supplier accounted for more
than 10% of our revenue. However, for the fiscal year ended June 30, 1999, one
external supplier, Milaeger's Gardens, accounted for more than 14% of our
revenue for fiscal 1999. Milaeger's Gardens has consistently been one of our
largest suppliers, since we began shipping in March 1996.
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To ensure that our automated supply network is efficient and scaleable, we
have built an extensive proprietary supplier information system, Trellis, 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 the Trellis 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. Our order process and the respective roles of our suppliers and
Federal Express can be summarized as follows:
1. Our customer visits the garden.com Web site, browses for products,
selects items for purchase and completes the order online or by
calling Garden.com's Customer Solutions 800 telephone number. A
customer may purchase several items on the same order, and these items
may ship directly from one or more of our suppliers.
2. The customer order is recorded in Trellis.
3. After the order is recorded, we route it to the appropriate supplier
or suppliers for processing via Trellis. Suppliers can access the
Internet, enter a special supplier area of the garden.com Web site,
view all the orders that contain one of their products and print
packing slips to prepare the order.
4. The supplier prepares the order for shipment by selecting the items
specified on the packing slip from its warehouse or growing field and
by packing the items.
5. The supplier then downloads a Federal Express shipping label from
Trellis and places the label on the exterior of the box. When the
supplier requests a label for an order, our system also automatically
updates that customer's order record with the Federal Express tracking
number. After being assigned a tracking order and until the box is
delivered to the customer's location, both Garden.com customer
solutions representatives and the customer can track the status of the
shipment through our garden.com Web site.
6. Federal Express picks up all of the processed orders and delivers the
orders directly to the location specified by the customer in its
online order.
7. The supplier then uses Trellis to print a summary of all the items
processed that day for Garden.com and uses the summary to invoice
Garden.com on a weekly or monthly basis. The amount the supplier
charges Garden.com for each product is based on a discount off the
retail price that Garden.com charges its customers. The discount
percent varies by supplier and is negotiated with each supplier at the
beginning of each shipping season.
8. Federal Express bills Garden.com directly for all the shipping costs
associated with each order. Our suppliers are not responsible for
processing shipping invoices.
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
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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, including Trellis, Garden
Doctor, Garden Planner and PlantFinder, and commercially available, licensed
technologies. Our Web site and our proprietary supplier information system,
Trellis, 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 $675,000 in the fiscal year ended June 30, 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 our proprietary supplier information system, Trellis.
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 operating results. 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 operating
results.
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
. multi-channel online retailers seeking to diversify their product
offerings, such as 1-800-FLOWERS and FTD.
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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 of lower quality or performance standards or at
greater cost, which could negatively impact our business, results of operations
and financial condition.
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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 have applied for qualification to do business in
Michigan, 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, always do so, or that their actions are
adequate or sufficient to satisfy all governmental requirements that
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<PAGE>
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 June 30, 1999, we employed 169 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.
52
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Garden.com as of June 30, 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......... 36 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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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, none of which is related to the business of
Garden.com. 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. Prior to
joining Garden.com, Mr. Jimerson edited or authored 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. Mr. Phillips intends to resign from the Board of Directors
immediately prior to the closing of this offering.
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 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.
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<PAGE>
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 will stand for election or re-election
at the 2000 annual meeting of stockholders. The Class II directors will stand
for election or re-election at the 2001 annual meeting of stockholders. The
Class III directors 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.
Garden.com relies on the fiduciary duties of its directors and on the
conflict of interest rules imposed under Delaware law with respect to potential
conflicts of interest and corporate opportunities. One of Garden.com's
directors is affiliated with The E.W. Scripps Company, which has a number of
relationships with Garden.com. All of these relationships were negotiated by
officers of Garden.com and, after full disclosure of all of the material terms
thereof, approved by a majority of our disinterested directors. See "Related
Party Transactions."
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 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;
55
<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. Under these agreements, we
are obligated to 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 four other most
highly paid executive officers who earned more than $100,000 for the fiscal
year ended June 30, 1999.
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Positions Salary ($) Options (#) Compensation ($)
- ---------------------------- ------------ ------------ ----------------
<S> <C> <C> <C>
Clifford A. Sharples ............... $113,670 68,200 --
Chief Executive Officer and
President
James N. O'Neill.................... 113,670 68,200 --
Chief Operating Officer
Lisa W.A. Sharples.................. 113,670 68,200 --
Chief Merchandising and Marketing
Officer
Andrew R. Martin ................... 143,000 60,200 $68,150(1)
Chief Technology Officer
Douglas A. Jimerson................. 102,870 32,400 --
Vice President of Publishing and
Editor-in-Chief
</TABLE>
- ------------------
(1) Represents compensation upon the exercise of a non-statutory stock option.
56
<PAGE>
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,
1999. Garden.com granted to its employees options to purchase 797,200 shares of
its stock during fiscal year ended June 30, 1999. All options were granted with
an exercise price equal to the fair market value of the common stock on the
date of the grant, as determined by the Board of Directors. Options may
terminate before their expiration date if the optionee is no longer an employee
or consultant of the company. Please note that for the purposes of calculating
the potential realizable value, we have done the following, in accordance with
Securities and Exchange Commission Rules:
. multiplied the number of shares subject to each option by $12.00, the
assumed initial public offering price; and
. calculated the gains or "option spreads" that would exist for the
options assuming an annual compound stock appreciation of 0%, 5% and
10% from the date the option was granted over the full option term.
These assumed annual compound rates are mandated by the Securities and
Exchange Commission and do not represent Garden.com's estimate or projection of
future stock prices.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term ($)
------------------------------------------------ ----------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted (#) Fiscal Year (%) Share ($) Date 0% 5% 10%
- ---- ----------- --------------- --------- ---------- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Clifford A. Sharples.... 28,000 3.5% $0.94 07/15/08 $-- $ 16,553 $ 41,947
200 * 0.94 12/25/08 -- 118 300
40,000 5.0 7.15 05/07/09 -- 179,864 455,810
James N. O'Neill........ 28,000 3.5 0.94 07/15/08 -- 16,553 41,947
200 * 0.94 12/25/08 -- 118 300
40,000 5.0 7.15 05/07/09 -- 179,864 455,810
Lisa W.A. Sharples...... 28,000 3.5 0.94 07/15/08 -- 16,553 41,947
200 * 0.94 12/25/08 -- 118 300
40,000 5.0 7.15 05/07/09 -- 179,864 455,810
Andrew R. Martin........ 200 * 0.94 12/25/08 -- 118 300
20,000 2.5 0.94 01/01/09 -- 11,823 29,962
40,000 2.5 7.15 05/07/09 -- 179,864 455,810
Douglas A. Jimerson..... 4,000 * 0.94 07/16/08 -- 2,365 5,992
200 * 0.94 12/25/08 -- 118 300
28,200 3.5 7.15 05/07/09 -- 126,804 321,346
</TABLE>
- ------------------
* Represents less than 1.0% of the options granted to employees in the fiscal
year ended June 30, 1999.
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<PAGE>
Aggregated Fiscal Year-End Option Values
The following table provides summary information regarding options held by
our named executive officers as of June 30, 1999. The value realized is equal
to the fair market value of the purchased shares on the date of option
exercise, less the exercise price paid for such shares. The value of
unexercised in-the-money options is based on an assumed initial public offering
price of $12.00, less the exercise price payable for such shares.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the
Options/SARs at Fiscal Year Money Options/SARs at
Shares Acquired Value End (#) Fiscal Year End
Name on Exercise (#) Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---- --------------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Clifford A. Sharples.... 6,480 $ 5,994 13,600/84,520 $201,950/$951,895
James N. O'Neill........ 6,400 5,936 13,680/84,520 204,213/ 951,895
Lisa W.A. Sharples...... 6,480 5,994 13,600/84,520 201,950/ 951,895
Andrew R. Martin........ 78,880 71,305 7,400/70,320 110,908/ 887,662
Douglas A. Jimerson..... 1,680 -- 22,400/71,920 335,720/ 877,105
</TABLE>
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
On July 12, 1999, we entered into separate employment agreements with
Clifford A. Sharples, James N. O'Neill and Lisa W.A. Sharples. Each of these
employment agreements has a term of three years and each provides for a base
salary of $130,000 per year. The employment agreements also provide that
Messrs. Sharples and O'Neill and Ms. Sharples are eligible to participate in a
cash bonus program and in any other employee benefit programs for which other
senior executives of Garden.com are generally eligible. Under the employment
agreements, Garden.com may terminate the executive officer's employment upon
the executive officer's death or disability or if the Board of Directors
determines that termination is in Garden.com's best interests. Each executive
officer may resign at any time. If Garden.com terminates employment without
cause, or if there is a constructive termination, the executive officer is
entitled to receive payment of his or her base salary and to continue to
receive other employee benefits for 12 months from the date of termination. If
employment is terminated for any other reason, the executive officer is not
entitled to receive any base salary or other benefits for periods after the
termination date. If Garden.com experiences a change of control at any time
more than six months after the date of the employment agreement, all options
held by Messrs. Sharples or O'Neill or by Ms. Sharples will immediately vest.
Each of Clifford A. Sharples, James N. O'Neill and Lisa W.A. Sharples has also
entered into a nondisclosure agreement under which each executive officer 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.
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. Our Board of
Directors and stockholders adopted our 1996 Stock Option/Stock Issuance Plan in
March 1996. We have reserved a total of 1,360,000 shares of common stock for
issuance under the plan. In May 1999, our Board of Directors and
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<PAGE>
stockholders approved an amendment to the 1996 Stock Option/Stock Issuance
Plan. Effective upon the date of this offering, the amendment will increase 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 under
the plan on the first day of each of our fiscal years beginning on July 1, 2000
in an amount equal to the lesser of:
. 1,200,000 shares;
. 5% of the outstanding shares of our common stock on the first day of
our fiscal year; or
. any lesser number of shares determined by our Board of Directors.
The 1996 Stock Option/Stock Issuance Plan provides for grants of incentive
stock options to our employees, including officers and employee-directors, and
for grants of nonstatutory stock options and stock purchase rights to our
employees, consultants and nonemployee directors. The purposes of the plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to our employees and
consultants and to promote the success of our business. At the request of the
Board of Directors, the compensation committee administers the plan and
determines who will receive option grants and the terms of the options granted,
including the exercise price, number of shares subject to the option and the
exercisability of the option. However, incentive stock options:
. may not have a term exceeding ten years;
. must have an exercise price equal to at least 110% of the fair market
value on the grant date if granted to an optionee who owns stock
possessing more than 10% of the voting rights of Garden.com's
outstanding capital stock; and
. may not 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.
We will enter into an option grant agreement with the optionee at the time
of grant. The option agreement will set forth the term of the option, the
exercise price, the vesting schedule for the exercisability of the option and
other terms of the option. No employee may be granted, in any fiscal year,
options to purchase more than 500,000 shares or, in the case of the employee's
initial employment, 1,000,000 shares.
The 1996 Stock Option/Stock Issuance Plan will terminate in March 2006,
unless sooner terminated by the Board of Directors.
As of June 30, 1999, 156,760 shares of common stock had been issued upon
the exercise of options granted under the 1996 Stock Option/Stock Issuance
Plan, options to purchase 1,157,880 shares of common stock at a weighted
average exercise price of $3.26 per share were outstanding and, upon completion
of this offering, 1,185,360 shares will be available for future grants under
the plan.
1999 Employee Stock Purchase Plan. The Board of Directors and our
stockholders adopted our 1999 Employee Stock Purchase Plan in May 1999 to
become effective upon the date of this offering. We have reserved a total of
400,000 shares of common stock for issuance under the 1999 Employee Stock
Purchase Plan, together with an annual increase on the first day of each of our
fiscal years beginning on July 1, 2000 equal to the lesser of:
. 400,000 shares;
. 1.5% of the outstanding shares of our common stock on the first day of
our fiscal year; or
. any lesser number of shares determined by the Board of Directors.
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<PAGE>
The Purchase Plan, which is intended to qualify under Section 123 of the
Internal Revenue Code, is administered by the Board of Directors. Employees,
including our officers and employee directors but excluding 5% stockholders,
may 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. No participant may purchase more than $25,000 worth of stock under
the Purchase Plan in any calendar year.
We will implement the Purchase Plan through a series of overlapping
offering periods, each to be approximately 24 months duration. The initial
offering period under the Purchase Plan will begin on the first trading day on
or after January 1st and July 1st each year. Each participant will be granted
an option on the first day of the offering period and this option will be
automatically exercised on the last day 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 the fair market value of the common stock on the
start date of that offering period, then all participants will automatically
be withdrawn from that offering period and re-enrolled in the next 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 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 purchasers
included venture capital funds affiliated with Austin Ventures, The E.W.
Scripps Company, Phillips-Smith Specialty Retail Group III, LP, Oak Investment
Partners, Global Retail Partners, Pequot Capital Management, Inc, Attractor
Ventures LLC and Patricof & Co. Ventures. Each of these venture capital funds
holds more than 5% of our outstanding capital stock and/or has designated a
member of our Board of Directors.
Series A Financing. On December 21, 1995, we issued 599,998 shares of
Series A Preferred Stock to entities affiliated with Austin Ventures for
aggregate consideration of approximately $750,000. The shares of Series A
Preferred Stock were sold at $1.25 per share.
Series B Financing. On August 12, 1996, we issued 1,144,000 shares of
Series B Preferred Stock to Phillips-Smith Specialty Retail Group III, LP and
entities affiliated with Austin Ventures for aggregate consideration of
approximately $2,000,000. The shares of Series B Preferred Stock were sold at
$1.75 per share.
Series C Financing. On May 7, 1997 and May 15, 1997, we issued a total of
1,754,482 shares of Series C-1 Preferred Stock, 659,309 shares of Series C-2
Preferred Stock and warrants to purchase 482,757 shares of Series C-1 Preferred
Stock to seven investors, including entities affiliated with Austin Ventures,
The E.W. Scripps Company, Phillips-Smith Specialty Retail Group III, LP and Oak
Investment Partners, for aggregate consideration of approximately $5,250,000.
The shares of Series C-1 Preferred Stock and Series C-2 Preferred Stock were
sold at $2.18 per share. All shares of Series C-2 Preferred Stock were
converted into shares of Series C-1 Preferred Stock in May 1999. The Series C-1
Preferred Stock warrants may be exercised at any time until May 7, 2002 to
purchase a total of 482,757 shares of Series C-1 Preferred Stock at an exercise
price of $2.18 per share.
Series D Financing. On June 11, 1998, we issued 4,313,514 shares of Series
D Preferred Stock to 19 investors, including entities affiliated with Austin
Ventures, The E.W. Scripps Company, Phillips-Smith Specialty Retail Group III,
LP, Oak Investment Partners, Global Retail Partners and Pequot Capital
Management, Inc., for aggregate consideration of approximately $20,274,000. The
shares of Series D Preferred Stock were sold at $4.70 per share.
Series E Financing. On April 13, 1999, we issued 2,466,794 shares of
Series E Preferred Stock to 24 investors, including entities affiliated with
Austin Ventures, The E.W. Scripps Company, Phillips-Smith Specialty Retail
Group III, LP, Oak Investment Partners, Pequot Capital Management, Inc.,
Attractor Ventures and Patricof & Co. Ventures, for aggregate consideration of
approximately $17,638,000, and on May 24, 1999, we issued 699,300 shares of
Series E Preferred Stock to HGTV for aggregate consideration of approximately
$5,000,000. The shares of Series E Preferred Stock were sold at $7.15 per
share.
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The following table summarizes the private placement transactions in which
we sold preferred stock to our directors and 5% stockholders and persons and
entities affiliated with them.
<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........ 599,998 572,000 137,930(1) 99,660 43,023
Phillips-Smith Specialty
Retail Group III,
L.P. .................. -- 570,284 275,034(2) 53,310 28,018
Entities affiliated with
The E.W. Scripps
Company................ -- -- 1,655,172(3) 277,142 757,840
Entities affiliated with
Oak Investment
Partners............... -- -- 827,586(4) 266,229 33,312
Entities affiliated with
Global Retail Partners,
L.P.................... -- -- -- 1,599,998 --
Entities affiliated with
Pequot Capital
Management, Inc........ -- -- -- 1,219,148 38,611
Entities affiliated with
Attractor Ventures
LLC.................... -- -- -- -- 909,090
Entities affiliated with
Patricof
& Co. Ventures ........ -- -- -- -- 909,090
Total Amount of
Financing.............. $750,000 $2,000,000 $5,250,000 $20,274,000 $22,638,000
</TABLE>
- ------------------
(1) Includes warrants to purchase 22,988 shares exercisable at any time until
May 7, 2002 at an exercise price of $2.18 per share.
(2) Includes warrants to purchase 45,839 shares exercisable at any time until
May 7, 2002 at an exercise price of $2.18 per share.
(3) Includes warrants to purchase 275,862 shares exercisable at any time until
May 7, 2002 at an exercise price of $2.18 per share.
(4) Includes warrants to purchase 137,931 shares exercisable at any time until
May 7, 2002 at an exercise price of $2.18 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 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.
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 699,300 shares of our Series E Preferred
Stock for a total purchase price of $5,000,000, or $7.15 per share.
Approximately $1,500,000 of the purchase price has been paid in the form of an
advertising
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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. Our strategic alliance with HGTV is
reflected in a letter agreement which contemplates that we will work together
with HGTV to negotiate mutually beneficial future agreements.
Since March 1998, we have conducted a national marketing program with
United Media. Pursuant to this program, we prepare a syndicated newspaper
column for publication through United Media. In exchange for our services,
United Media has agreed to pay us 50% of United Media's newspaper syndication
income relating to our newspaper column. We have agreed to pay United Media
10% of our product sales generated through our newspaper column. We have also
agreed not to prepare any newspaper column in competition with the column
distributed by United Media and to give United Media a right of first refusal
to acquire distribution rights for other newspaper columns we may develop. Our
agreement with United Media expires on March 31, 2001, although United Media
has an option to extend the agreement through March 31, 2004.
We made payments of approximately $75,000 and $130,000 to affiliates of
The E.W. Scripps Company during our fiscal years ended June 30, 1998 and 1999,
respectively.
Other Transactions
Kenneth Sharples, the brother of Clifford A. Sharples and brother-in-law
of Lisa W.A. Sharples, directors of Garden.com, has provided legal services to
Garden.com. During fiscal years ended June 30, 1998 and June 30, 1999, we
incurred expenses of $27,552 and $32,343 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 6,400 shares of common stock with a
weighted average exercise price of $0.93 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 landscaping and maintaining the
gardens. Other than these landscape and maintenance expenses, we do not pay
Mr. Jimerson rent for the use of the gardens. Garden.com estimates that the
value of its use of these gardens is $20,000 per year, based on approximate
values for similar properties in the area and the cost of reestablishing the
gardens elsewhere.
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 132,000 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 June 30, 1999, as adjusted to
reflect the sale of 4,100,000 shares of common stock in this offering, the
amendment to Garden.com's Restated Certificate of Incorporation which resulted
in a four-for-five reverse stock split of our outstanding shares of common
stock and preferred stock and the 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.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons and
entities included in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to applicable community
property laws. Shares of common stock subject to options that are either
currently exercisable or exercisable within 60 days of June 30, 1999 are
treated as outstanding and beneficially owned by the option holder for the
purpose of computing the percentage ownership of the option holder. However,
these shares are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. The percentages contained in the
"After the Offering" column assume that the underwriters do not exercise their
over-allotment option to purchase up to 615,000 additional shares.
<TABLE>
<CAPTION>
Percent of Common Stock
Shares of Beneficially Owned
Common Stock ---------------------------
Beneficially Before the After the
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
Douglas R. Stern ................. 2,690,154 20.6% 15.7%
Entities affiliated with The E.W.
Scripps Company (1)
Steven J. Dietz .................. 1,599,998 12.5 9.5
Entities affiliated with Global
Retail Partners, L.P. (2)
John D. Thornton ................. 1,452,611 11.3 8.6
Entities affiliated with Austin
Ventures (3)
Entities affiliated with Pequot
Capital Management,
Inc. (4)......................... 1,257,759 9.8 7.4
Gerald R. Gallagher (5)........... 1,127,127 8.7 6.7
Entities affiliated with Oak
Investment Partners
Donald J. Phillips................ 926,646 7.2 5.5
Phillips-Smith Specialty Retail
Group, III, L.P. (6)
Entities affiliated with Patricof 909,090 7.1 5.4
& Co. Ventures (7)...............
Entities affiliated with Attractor 909,090 7.1 5.4
LLC (8)..........................
Clifford A. Sharples (9).......... 315,012 2.5 1.9
James N. O'Neill (10)............. 315,010 2.5 1.9
Lisa W.A. Sharples (11)........... 315,012 2.5 1.9
Andrew R. Martin (12)............. 221,479 1.7 1.3
Douglas A. Jimerson (13).......... 38,560 * *
All directors and executive 9,009,577 67.3 51.5
officers as a group (11 persons)
(14).............................
</TABLE>
- ------------------
* Less than 1%
(1) Represents (i) 1,990,854 shares held of record by Scripps Ventures, LLC,
including 275,862 shares issuable upon exercise of outstanding warrants,
and (ii) 699,300 shares held of record by HGTV. 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.
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<PAGE>
(2) Represents (i) 1,025,834 shares held of record by Global Retail Partners,
L.P., (ii) 305,677 shares held of record by DLJ Diversified Partners, L.P.,
(iii) 113,519 shares held of record by DLJ Diversified Partners-A, L.P.,
(iv) 66,687 shares held of record by GRP Partners, L.P., (v) 70,626 shares
held of record by Global Retail Partners Funding, Inc., and (vi) 17,655
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.
(3) Represents (i) 468,886 shares held of record by Austin Ventures IV-A, L.P.,
including 7,420 shares issuable upon exercise of outstanding warrants, and
(ii) 983,725 shares held of record by Austin Ventures IV-B, L.P., including
15,568 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.
(4) Represents (i) 1,116,410 shares held of record by Pequot Private Equity
Fund, LP, and (ii) 141,349 shares held of record by Pequot Offshore Private
Equity Fund, Inc. Arthur J. Samberg, Lawrence D. Lenihan, Jr., Gerald Poch
and Mark Broach, as members of the Pequot Private Equity Investment
Committee, may be deemed to share the power to direct the voting and
disposition of all of the shares held by these entities, and they disclaim
beneficial ownership of such shares. The address for each of these entities
is 500 Nyala Farm Road, Westport, Connecticut 06880.
(5) Represents (i) 1,099,515 shares held of record by Oak Investment Partners
VII, Limited Partnership, including 134,552 shares issuable upon exercise
of outstanding warrants, and (ii) 27,612 shares held of record by Oak VII
Affiliates Fund, Limited Partnership, including 3,379 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.
(6) Includes 45,839 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.
(7) Represents (i) 746,181 shares held of record by APA Excelsior V, L.P., (ii)
153,846 shares held of record by The P/A Fund III, L.P. and (iii) 9,063
shares held of record by Patricof Private Investment Club II, L.P. Alan
Patricof may be deemed to be the beneficial owner of all of the shares held
by these entities with the sole power to vote and dispose of such shares.
He disclaims beneficial ownership of such shares. The address for each of
these entities is 445 Park Avenue, 11th Floor, New York, New York 10022.
(8) Represents (i) 796,206 shares held of record by Attractor LP, (ii) 52,904
shares held of record by Attractor Institutional LP, and (iii) 59,980
shares held of record by Attractor Ventures LLC. Gigi Brisson and Harvey
Allison may be deemed to share the power to direct the voting and
disposition of all of the shares held by these entities, and they disclaim
beneficial ownership of such shares. The address for each of these entities
is 1110 Burlingame Avenue, Suite 211, Burlingame, California 94010.
(9) Includes (i) 5,896 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) 19,200
shares subject to stock options held by Mr. Sharples. Excludes (i) 295,812
shares held of record by Mr. Sharples' spouse, (ii) 19,200 shares subject
to stock options held by Mr. Sharples' spouse and (iii) 5,896 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 15,000 shares to cover over-
allotments, if
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any. If such option is exercised in full, following completion of the
offering, Mr. Sharples will beneficially own 300,012 shares, or 1.7% of
Garden.com common stock.
(10) Includes (i) 19,280 shares subject to exercise of stock options and (ii)
15,264 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 15,000 shares
to cover over-allotments, if any. If such option is exercised in full,
following completion of the offering, Mr. O'Neill will beneficially own
300,010 shares, or 1.7% of Garden.com common stock.
(11) Includes (i) 5,896 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) 19,200
shares subject to stock options held by Ms. Sharples. Excludes (i) 295,812
shares held of record by Ms. Sharples' spouse, (ii) 19,200 shares subject
to stock options held by Ms. Sharples' spouse and (iii) 5,896 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 15,000 shares to cover
over-allotments, if any. If such option is exercised in full, following
completion of the offering, Ms. Sharples will beneficially own 300,012
shares, or 1.7% of Garden.com common stock.
(12) Includes (i) 10,600 shares subject to exercise of stock options and (ii)
5,593 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.
(13) Includes 36,000 shares subject to exercise of stock options and 880 shares
held by Mr. Jimerson's spouse. Mr. Jimerson has granted the Underwriters a
30-day option to purchase 10,000 shares to cover over-allotments, if any.
If such option is exercised in full, Mr. Jimerson will beneficially own
28,560 shares, or less than one percent of Garden.com common stock.
(14) Includes 104,280 shares subject to exercise of stock options and 482,620
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. For more detail regarding our
capital stock, see 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.
Common Stock
As of June 30, 1999, on a pro forma basis, there were 12,794,150 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 June 30, 1999, there were 1,157,880 shares of
common stock subject to outstanding options. Upon completion of this offering,
there will be 16,894,150 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. The terms of our
bank credit agreement for this revolving credit facility prohibit us from
paying cash dividends on shares of our common stock. 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 11,637,397 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 June 30, 1999, there were outstanding warrants to purchase 584,467
shares of our preferred stock with a weighted average exercise price of $2.74
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 11,637,397 shares of preferred stock and 584,467 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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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
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. We have summarized the
relevant provisions of Delaware law and our existing charter and By-laws below.
These provisions 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. 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" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. 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 American Stock
Transfer & Trust Company. The transfer agent's address is 40 Wall Street, New
York, NY 100051, and its telephone number is (718) 921-8286.
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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 16,894,150 outstanding
shares of common stock. Of these shares, the 4,100,000 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 12,794,150 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 54,760
shares subject to fully vested options will be eligible for sale.
. Beginning 180 days after the effective date, approximately 9,628,043
shares will be eligible for sale.
. At various times thereafter upon the expiration of applicable holding
periods, 3,166,107 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 168,942 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
70
<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.
71
<PAGE>
UNDERWRITING
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 have agreed to sell them, an
aggregate of 4,100,000 shares of common stock pursuant to an underwriting
agreement. The number of shares of common stock that each underwriter has
agreed to purchase is listed opposite its name below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC.............................................
BancBoston Robertson Stephens Inc. ...............................
Thomas Weisel Partners LLC........................................
Total............................................................. 4,100,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us 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 by this prospectus 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 listed on the
cover page of this prospectus and part to selected 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 selected
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
Charles Schwab & Co. Inc. The underwriters have agreed to allocate a limited
number of shares to Charles Schwab & Co. Inc. for sale to its brokerage account
holders.
In the underwriting agreement, Garden.com, Clifford A. Sharples, James N.
O'Neill, Lisa W.A. Sharples and Douglas A. Jimerson have granted to the
underwriters options, exercisable no later than 30 days after the date of this
prospectus, to purchase up to an aggregate of 615,000 additional shares of
common stock at the initial public offering price, less underwriting discounts
and commissions, listed on the cover page of this prospectus. To the extent
that the underwriters exercise these options, each underwriter will have a firm
commitment to purchase approximately the same percentage 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 by this prospectus.
At our request, the underwriters have reserved up to 287,000 shares of
common stock to be sold in the offering and offered 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 these individuals purchase the
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 by this
prospectus.
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.
72
<PAGE>
Garden.com and the selling stockholders have agreed to indemnify the
underwriters against liabilities, including liabilities under the Securities
Act, and to contribute to payments the underwriters may be required to make
with respect to these liabilities.
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 later 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 63,828 shares of Series D Preferred Stock for
approximately $300,000, or $4.70 per share, and H&Q Garden Escape Investors, LP
purchased 148,936 shares of Series D Preferred Stock for approximately
$700,000, or $4.70 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 72,340 shares of Series D Preferred Stock at
$4.70 per share to Hambrecht & Quist LLC. In January 1999, Hambrecht & Quist
California transferred 21,276 shares of Series D 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.
73
<PAGE>
In our April 1999 Series E Preferred Stock private placement, Hambrecht &
Quist California purchased 3,009 shares of Series E Preferred Stock for
$21,518.64, or $7.15 share, and Hambrecht & Quist Employee Venture Fund, L.P.
II purchased 3,009 shares of Series E Preferred Stock for $21,518.64 or $7.15
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 29,370 shares of Series E Preferred Stock
at $7.15 per share to Hambrecht & Quist LLC. Hambrecht & Quist Employee Venture
Fund, L.P. II is an affiliate of Hambrecht & Quist LLC. In addition, 1,502
shares of Series E Preferred Stock are beneficially owned by other persons
affiliated with Hambrecht & Quist LLC.
The underwriters 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. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. 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. 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 on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.
74
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Austin, Texas.
Legal matters will be passed upon for the underwriters by Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, Austin, Texas. 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 10,638 shares of our common
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 1998 and 1999, and for each of the three years in the
period ended June 30, 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 room at 450 Fifth
Street, N.W., Washington, D.C. 20549. 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.
75
<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. as of
June 30, 1998 and 1999 and the related statements of operations, changes in
redeemable convertible preferred stock and stockholders' deficit and cash flows
for each of the three years in the period ended June 30, 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, 1998 and 1999 and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
August 10, 1999
Austin, Texas
/s/ Ernst & Young LLP
F-2
<PAGE>
GARDEN.COM, INC.
<TABLE>
<CAPTION>
Pro Forma
Redeemable
Convertible
Preferred
Stock and
June 30, Stockholders'
------------------------- Equity at
1998 1999 June 30, 1999
----------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $19,042,218 $ 15,340,160
Investments.............. -- 3,709,432
Prepaid advertising...... 378,065 987,844
Other prepaid expenses
and current assets...... 47,250 1,086,158
Inventory................ 158,818 522,483
----------- ------------
Total current assets.... 19,626,351 21,646,077
Property and equipment:
Equipment................ 54,262 480,459
Leasehold improvements... 29,224 455,585
Computers and purchased
software................ 829,338 2,110,840
Furniture and fixtures... 15,064 440,340
----------- ------------
Total property and
equipment.............. 927,888 3,487,224
Accumulated depreciation.. (328,176) (827,860)
----------- ------------
Property and equipment,
net.................... 599,712 2,659,364
Other assets, net of
accumulated amortization
of $16,901 and 109,815 as
of June 30, 1998, and
1999, respectively....... 262,489 916,992
----------- ------------
Total assets............ $20,488,552 $ 25,222,433
=========== ============
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable......... $ 910,378 $ 2,051,802
Accrued expenses and
other liabilities....... 137,323 955,870
Unearned revenue......... 95,759 187,912
Current portion of long-
term debt............... 175,312 127,661
----------- ------------
Total current
liabilities............ 1,318,772 3,323,245
Long-term debt, less
current portion.......... 154,332 20,004
Redeemable convertible
preferred stock.......... 26,975,496 48,215,297 $ --
Warrants to purchase
redeemable convertible
preferred stock.......... 23,835 23,835 23,835
Stockholders' deficit:
Common Stock--$.01 par
value: 12,000,000
authorized, actual;
50,000,000 authorized,
pro forma; 1,006,553 and
1,156,753 actual shares
issued and outstanding
on June 30, 1998 and
1999, 12,794,150 shares
issued and outstanding,
proforma................ 10,066 11,568 127,941
Additional paid-in
capital................. 322,301 5,768,463 53,867,387
Deferred stock
compensation............ (240,506) (2,305,293) (2,305,293)
Retained deficit......... (8,075,744) (29,834,686) (29,834,686)
----------- ------------ ------------
Total stockholders'
(deficit) equity......... (7,983,883) (26,359,948) $ 21,855,349
----------- ------------ ------------
Total liabilities and
stockholders' deficit.... $20,488,552 $ 25,222,433
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Products...................... $ 308,469 $ 1,283,114 $ 4,952,306
Advertising................... 7,500 55,487 441,554
----------- ----------- ------------
Total revenues............... 315,969 1,338,601 5,393,860
----------- ----------- ------------
Cost of revenues:..............
Products...................... 242,239 1,085,620 4,465,723
Advertising................... 3,750 21,852 73,701
----------- ----------- ------------
Total cost of revenues....... 245,989 1,107,472 4,539,424
----------- ----------- ------------
Gross profit................... 69,980 231,129 854,436
----------- ----------- ------------
Operating expenses:
Marketing and sales........... 927,343 2,410,509 13,304,691
Content and product
development.................. 858,388 1,188,140 3,167,271
General and administrative.... 764,741 1,510,050 4,225,534
----------- ----------- ------------
Total operating expenses..... 2,550,472 5,108,699 20,697,496
----------- ----------- ------------
Operating loss................. (2,480,492) (4,877,570) (19,843,060)
Other income (expense):
Interest income............... 62,170 226,246 803,791
Interest expense.............. (22,126) (32,902) (19,673)
----------- ----------- ------------
Net loss....................... $(2,440,448) $(4,684,226) $(19,058,942)
=========== =========== ============
less: Beneficial conversion
feature and insubstance
dividend..................... -- -- (2,700,000)
----------- ----------- ------------
Net loss applicable to common
stockholders.................. (2,440,448) (4,684,226) (21,758,942)
=========== =========== ============
Basic net loss per share....... $ (2.44) $ (4.68) $ (20.48)
=========== =========== ============
Shares used in computing basic
net loss per share............ 999,993 1,000,820 1,062,696
=========== =========== ============
Pro forma basic net loss per
share......................... $ (1.71)
============
Shares used in computing pro
forma basic net loss per
share......................... 12,700,093
============
</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 Equity
---------- ----------- -------- --------- --------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1996........ 599,998 $ 724,641 $ -- 999,993 $10,000 $ 2,500 $ -- $ (665,177) $ 71,964
Issuance of
Common Stock... -- -- -- 160,000 1,600 26,400 -- 28,000
Issuance of
Series B, C-1
and C-2
Redeemable
Convertible
Preferred
Stock, net of
issuance costs
of $75,877..... 3,557,791 7,154,191 -- -- -- -- -- -- 7,154,191
Issuance of
warrants to
purchase
482,759 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........ 4,157,789 7,878,832 22,931 1,159,993 11,600 28,900 -- (3,105,625) 4,836,638
Issuance of
Series D
Redeemable
Convertible
Preferred Stock
and warrants,
net of issuance
costs of
$1,176,890..... 4,255,303 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.......... 58,211 273,589 -- -- -- -- -- -- 273,589
Repurchase of
common stock... -- -- -- (160,000) (1,600) (26,400) -- -- (28,000)
Deferred stock
compensation... -- -- -- -- -- 313,920 (313,920) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 73,414 -- 73,414
Exercise of
stock options.. -- -- -- 6,560 66 5,881 -- -- 5,947
Net loss........ -- -- -- -- -- -- -- (4,684,226) (4,684,226)
---------- ----------- ------- --------- ------- ---------- ------------ ------------ ------------
Balance at June
30, 1998........ 8,471,303 26,975,496 23,835 1,006,553 10,066 322,301 (240,506) (8,075,744) 19,015,448
Issuance of
Series E
Redeemable
Convertible
Preferred Stock
net of issuance
costs of
$1,397,859..... 3,166,094 21,239,801 -- -- -- -- -- -- 21,239,801
Beneficial
conversion
feature and in
substance
dividend....... -- -- -- -- -- 2,700,000 -- (2,700,000) --
Deferred stock
compensation... -- -- -- -- -- 2,738,777 (2,738,777) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 673,990 -- 673,990
Exercise of
stock options.. -- -- -- 150,200 1,502 7,385 -- -- 8,887
Net loss........ -- -- -- -- -- -- -- (19,058,942) (19,058,942)
---------- ----------- ------- --------- ------- ---------- ------------ ------------ ------------
Balance at June
30, 1999........ 11,637,397 $48,215,297 $23,835 1,156,753 $11,568 $5,768,463 $(2,305,293) $(29,834,686) $ 21,879,184
========== =========== ======= ========= ======= ========== ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss.............................. $(2,440,448) $(4,684,226) $(19,058,942)
Adjustment to reconcile net loss to
cash used in operating activities:
Depreciation.......................... 96,617 219,448 516,866
Amortization.......................... -- -- 92,915
Amortization of deferred stock
compensation......................... -- 73,414 673,990
Changes in operating assets and
liabilities:
Prepaid advertising.................. (3,922) (374,143) (609,779)
Other prepaid expenses and current
assets.............................. (50,973) 7,990 (1,038,908)
Inventory............................ (24,379) (134,439) (363,665)
Other assets......................... (2,482) (6,876) (738,002)
Accounts payable..................... 152,746 674,770 1,141,424
Accrued expenses and other
liabilities......................... 59,404 47,325 818,547
Unearned revenue..................... 28,321 80,212 92,153
----------- ----------- ------------
Net cash used in operating
activities......................... (2,185,116) (4,096,525) (18,473,401)
----------- ----------- ------------
Investing activities:
Proceeds from sale of investments..... -- -- 11,082,690
Purchase of investments............... -- -- (14,792,122)
Purchase of property and equipment.... (280,398) (421,783) (2,576,518)
Purchase of other assets.............. -- (262,000) (9,416)
----------- ----------- ------------
Net cash used in investing
activities......................... (280,398) (683,783) (6,295,366)
----------- ----------- ------------
Financing activities:
Proceeds from long-term debt.......... 95,000 200,028 --
Repayments of long-term debt.......... -- (115,443) (181,979)
Proceeds from issuance of common
stock................................ 28,000 -- --
Repurchase of common stock............ -- (28,000) --
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 -- --
Proceeds from issuance of Series D
Redeemable Convertible Preferred
Stock and warrants, net of issuance
costs of $1,176,890.................. -- 18,823,979 --
Proceeds from issuance of Series E
Redeemable Convertible Preferred
Stock and warrants, net of issuance
costs of $1,397,859.................. 21,239,801
Exercises of stock options............ -- 5,947 8,887
Dividend paid on Series A, B and C
Redeemable Convertible Preferred
Stock................................ -- (12,304) --
----------- ----------- ------------
Net cash provided by financing
activities......................... 7,300,122 18,874,207 21,066,709
----------- ----------- ------------
Change in cash and cash equivalents.... 4,834,608 14,093,899 (3,702,058)
Cash and cash equivalents, beginning of
year.................................. 113,711 4,948,319 19,042,218
----------- ----------- ------------
Cash and cash equivalents, end of
year.................................. $ 4,948,319 $19,042,218 $ 15,340,160
=========== =========== ============
Supplemental disclosures:
Interest paid......................... $ 29,767 $ 30,649 $ 22,380
=========== =========== ============
Beneficial conversion and insubstance
dividend (see Note 6)................ $ 2,700,000
</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 a transaction accounted for at historical cost. 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. Substantially all product sales are
shipped directly from various product suppliers to the customer. The Company
takes title to all goods at the shipping point and, accordingly, has the risks
and rewards of ownership for such shipments. Revenues are recorded net of
promotional discounts and coupons. Product returns are recorded as a reduction
of revenues.
Advertising revenues are recognized in proportion to the number of
impressions delivered under each contract. The Company has certain contracts
under which it generates a minimum number of click-throughs and has
historically met these guarantees. 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.
Investments
Management determines the appropriate classification of investments at the
time of purchase and reevaluates such designation as of each balance sheet
date. Investments as of June 30, 1999 consisted of high-grade commercial paper,
corporate notes, and government securities, are classified as available-for-
sale, and are reported at an amount that approximates fair market value as of
June 30, 1999. All of these securities mature within one year.
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
and amortization. Depreciation of property and equipment is based on the useful
lives of the assets, generally three to seven years, and is 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.
F-7
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2.Significant Accounting Policies (continued)
Other Assets
Other assets include prepaid advertising and the cost of a Web site and a
licensing agreement for related databases purchased during fiscal 1998 which
are carried at cost less accumulated amortization. Amortization of the
intangible other 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.
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 fiscal years
ended June 30, 1997, 1998, and 1999, the Company incurred advertising expenses
of $197,000, $1,364,000, and $10,763,000, respectively.
Content Licenses
The Company licenses certain content from third party providers and
records these expenditures as incurred.
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
The Company has elected to account for stock-based compensation expense
under APB No. 25 and make the required pro forma disclosures for compensation
as required by SFAS No. 123. The Company uses the intrinsic value method in
accounting for its stock based employee compensation plans.
Net Loss 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.
F-8
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2.Significant Accounting Policies (continued)
Segments
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 1999 presentation.
3.Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
--------------------
1998 1999
--------- ---------
<S> <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 plus 1% (9.04% at
June 30, 1999), collateralized by the assets of the
Company.............................................. $ 186,693 $ 106,682
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 plus 1% (9.04% at
June 30, 1999), collateralized by the assets of the
Company.............................................. 142,951 40,983
--------- ---------
Total long-term debt.................................... 329,644 147,665
Less current portion.................................... (175,312) (127,661)
--------- ---------
Long-term debt, net of current portion.................. $ 154,332 $ 20,004
========= =========
</TABLE>
Long-term debt as of June 30, 1999 matures as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Maturities
----------------- ----------
<S> <C>
2000........................................................... $127,661
2001........................................................... 20,004
--------
$147,665
========
</TABLE>
As of June 30, 1999 the Company had approximately $252,335 available under
the two lines of credit. As of June 30, 1998 and 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.
4.Income Taxes
As of June 30, 1999, the Company had net operating loss carryforwards of
approximately $26,933,000 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 June 30, 1999, the Company had federal
research and development tax credit carryforwards of approximately $70,000. 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.
F-9
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4.Income Taxes (continued)
Significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Prepaid expenses and other........................... $ -- $ 460,294
----------- -----------
Total deferred tax liabilities...................... -- 460,294
----------- -----------
Deferred tax assets:
Depreciable assets................................... 23,658 69,990
Accrued liabilities and other........................ 17,629 53,162
Tax carryforwards.................................... 2,841,314 10,035,512
----------- -----------
Total deferred tax assets........................... 2,882,601 10,158,664
----------- -----------
Net deferred tax assets............................... 2,882,601 9,698,370
Valuation allowance for net deferred tax assets....... (2,882,601) (9,698,370)
----------- -----------
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 $6,815,769 during the year ended June 30,
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>
Fiscal year ended
June 30,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.................................. (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit..................... (3.0) (3.0) (3.0)
Change in valuation allowance........................... 38.0 37.0 36.0
Other................................................... (1.0) -- 1.0
----- ----- -----
Effective tax rate...................................... 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
5.Commitments
Future minimum payments under all operating leases as of June 30, 1999,
are as follows:
<TABLE>
<S> <C>
2000............................................................. $266,340
2001............................................................. 194,915
2002............................................................. 153,540
2003............................................................. 7,560
2004............................................................. --
Thereafter....................................................... --
--------
Total............................................................ $622,355
========
</TABLE>
F-10
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5.Commitments (continued)
Rent expense for the three fiscal years ended June 30, 1997, 1998, and
1999 was approximately $43,000, $114,000, and $195,000, respectively.
In September 1997, the Company entered into an arrangement with Microsoft,
whereby Microsoft provides the Company with anchor status on the MSN shopping
channel. The Company agreed to purchase approximately $130,000 of banner
advertising from Microsoft and to pay a guaranteed minimum of $6,000 per month
and to pay Microsoft 10% of revenues from purchases initiated from the
Microsoft site when total purchases exceed $60,000 per month. The Company has
also agreed to purchase $150,000 of banner advertising from Microsoft. All
amounts are expensed as advertising expense as incurred. This contract
terminates October 31, 1999.
In October 1998, the Company entered into an arrangement with America
Online, Inc., whereby AOL provides the Company with anchor merchant status on
AOL and Compuserve. The Company agreed to pay AOL $480,000, payable in equal
quarterly installments, for displaying the Company's promotions on AOL, AOL.com
and CompuServe. All amounts are expensed as advertising expense as incurred.
This contract terminates October 1, 1999.
In addition, the Company has entered into several strategic relationships,
including arrangements with HGTV, Yahoo!, American Forests and PBS pursuant to
which the Company purchases or will purchase advertising and provides or will
provide sponsorship of programs. Under certain of these arrangements, the
Company is obligated to pay royalties ranging from five to ten percent of
revenues from sales of products or the Company's Web site. The arrangements
generally are terminable by either party with or without cause. All amounts in
connection with such agreements are expensed as advertising expense as
incurred.
Garden.com and Administaff Company Inc. are parties to a co-employment
agreement, as amended July 1, 1997, pursuant to which Administaff administers
some of the benefits plans of Garden.com. This arrangement is terminable by
either party upon 30 days prior written notice.
On March 31, 1999, the FASB issued an exposure draft entitled "Accounting
for Certain Transactions Involving Stock Compensation," which is a proposed
interpretation of APB Opinion No. 25. The proposed interpretation, if adopted,
would require that the fair value method of accounting for stock-based
compensation be used for options granted to individuals who are not
Garden.com's employees. Because Garden.com has a leasing arrangement with a
third party regarding employees, it is possible that these individuals could be
deemed non-employees of Garden.com under the proposed interpretation. We
believe that Garden.com's entire work force qualifies as employees of
Garden.com under common law because Garden.com has the right to direct and
control, subject to limited circumstances, described in the Administaff
agreement, its workforce, both as to the final results and the details of when,
where and how the work is to be performed. Furthermore, Garden.com determines
the quantity of options to be awarded, whether the leased employees will
participate in all of Garden.com's benefits plans, whether Garden.com is
legally obligated to pay the leased employees' salaries in the event the third
party fails to pay them, and whether the employees receive options solely from
Garden.com as opposed to the third party lessor. However, full implementation
guidelines have not been issued for this proposed interpretation. Once
available, the current accounting may need to change and such changes could
affect Garden.com's future earnings.
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, 1999:
<TABLE>
<CAPTION>
Liquidation Conversion Redemption
Description Dividend Features Preferences Features Features Voting Rights
----------- -------------------- -------------------- ---------------------------- --------------- -----------------------
<C> <C> <C> <C> <C> <S>
Series A All cumulative $1.25 per share plus One for one subject to $1.25 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 $1.75 per share plus One for one subject to $1.75 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 All cumulative $2.18 per share plus One for one subject to $2.18 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 D Per the Dividend $4.70 per share plus One for one subject to $4.70 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
Series E None $7.15 per share One for one subject to $7.15 per share One per converted share
certain anti dilution of common stock
adjustments, as
defined. Also,
automatically converts
upon public offering
</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, D and E vote together as a single class with the common stock on
all matters of the Company.
In connection with the issuance of Series B Preferred Stock, the Company
issued 160,000 shares of common stock to certain holders of the Series B
Preferred Stock. The agreement under which they were issued stipulated that
the Company could repurchase the common shares from the holders at the
issuance price ($1.75) if the Company completed a qualified financing or sale
prior to August 31, 1998. As the Company met this requirement, the shares were
repurchased.
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
F-12
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.Redeemable Convertible Preferred Stock and Stockholders' Deficit (continued)
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 $0.05 per share, were converted
into 58,211 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.
In May 1999 all outstanding shares of Series C-2 Preferred Stock were
converted into Series C-1 shares.
Each holder of Series A through E 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% $25,434,669
December 31, 2005 25 12,728,307
December 31, 2006 25 12,728,307
</TABLE>
The six series of preferred stock designated as of June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Shares Shares Issued Consideration per Share
Par Value Authorized and Outstanding Received in Issuance
--------- ---------- --------------- -----------------------
<S> <C> <C> <C> <C>
Redeemable convertible
preferred stock
Series A.............. $0.01 750,000 599,998 $1.25 cash
Series B.............. 0.01 1,430,000 1,144,000 $1.75 cash
Series C-1............ 0.01 3,620,000 2,413,791 $2.18 cash
Series C-2............ 0.01 824,138 0 $2.18 cash
Series D.............. 0.01 5,482,330 4,313,514 $4.70 cash
Series E.............. 0.01 4,402,731 3,166,094 $7.15 cash and services
---------- ----------
16,509,199 11,637,397
========== ==========
</TABLE>
The 699,300 shares of Series E Preferred Stock that were sold to a related
party have been accounted for as having a beneficial conversion feature which
has been deemed to approximate $2.7 million. This amount was accounted for as
an increase in additional paid in capital and an insubstance dividend to the
related preferred shareholders.
Warrants
In connection with the issuance of the Series C-1 Redeemable Convertible
Preferred Stock, the Company also issued a warrant to purchase 482,757 shares
of Series C-1 Redeemable Convertible Preferred Stock at $2.18 per share to an
existing stockholder. The warrant is exercisable for a five-year period
beginning May 7, 1997. The Company has reserved 482,757 shares of Series C-1
Redeemable Convertible Preferred Stock for issuance upon conversion of the
warrant.
F-13
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6.Redeemable Convertible Preferred Stock and Stockholders' Deficit (continued)
In connection with the issuance of the Series D Redeemable Convertible
Preferred Stock, the Company issued a warrant to purchase 72,340 shares of
Series D Redeemable Convertible Preferred Stock at $4.70 per share to the
placement agent as partial consideration for their services. The warrant
expires on December 31, 2002. The Company has reserved 72,340 shares of Series
D Redeemable Convertible Preferred Stock for issuance upon conversion of the
warrant.
In connection with the issuance of the Series E Redeemable Convertible
Preferred Stock, the Company issued a warrant to purchase 29,370 shares of
Series E Redeemable Convertible Preferred Stock at $7.15 to the placement
agent as partial consideration for their services. The warrant was valued to
be immaterial by the Company using the Black-Scholes model, an assumed
volatility of 5%, a risk-free interest rate of 6%, a weighted-average expected
life of one year and a dividend rate of 0%. The warrant is exercisable for a
five-year period beginning May 24, 1999. The Company has reserved 29,370
shares of Series E 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 960,000 to 1,360,000. The Company has reserved 1,360,000 shares
of common stock for issuance upon conversion of the options.
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.
The following represents a summary of the Company's stock option activity,
and related information:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Price Per Exercise Fair
Shares Share Price Value
--------- -------------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1996........ 133,200 $0.01 to 0.01 $0.01
Granted........................... 210,400 0.11 to 0.11 0.11 $0.13
Exercised......................... -- 0.01 to 0.01 --
Canceled.......................... -- -- --
Outstanding at June 30, 1997........ 343,600 0.01 to 0.11 0.08
Granted below fair value.......... 211,600 0.01 to 0.94 0.25 1.69
Exercised......................... (6,560) 0.01 to 0.21 0.06
Canceled.......................... (18,640) 0.01 to 0.21 0.13
--------- -------------- -----
Outstanding at June 30, 1998........ 530,000 0.01 to 0.94 0.15
Granted (below fair value) ....... 797,200 0.94 to 12.50 4.71 8.04
Exercised......................... (150,200) 0.01 to 0.94 0.06
Canceled.......................... (19,120) 0.01 to 7.15 1.63
--------- -------------- -----
Outstanding at June 30, 1999........ 1,157,880 $0.01 to 12.50 $3.26
========= ============== =====
</TABLE>
The Company recorded deferred compensation for the fiscal years ended
June 30, 1998 and 1999 of $313,920 and $2,738,777, respectively. The amount
recorded represents the difference between the option 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 five
years. Total amortization recognized was $73,414 and $673,990 for the fiscal
years ended June 30, 1998 and 1999, respectively.
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 June 30, 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>
354,400 $ 0.01 to 0.21 $ 0.13 7.78 97,400 $0.06
297,480 0.94 to 0.94 0.94 9.30 2,200 0.94
478,800 3.75 to 7.15 6.51 9.84 -- --
27,200 12.50 to 12.50 12.50 10.00 -- --
- --------- --------------- ------ ----- ------ -----
1,157,880 $ 0.01 to 12.50 $ 3.26 9.07 99,600 $0.08
========= =============== ====== ===== ====== =====
</TABLE>
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 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 five 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.
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.
F-15
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. Net Loss Per Share and Pro Forma Net Loss Per Share (continued)
The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Numerator:
Net loss.............................. $(2,440,448) $(4,684,226) $(19,058,942)
less: Beneficial conversion feature
and in substance dividend............ -- -- (2,700,000)
----------- ----------- ------------
Net loss applicable to common
shareholders.......................... (2,440,448) (4,684,226) (21,758,942)
=========== =========== ============
Denominator:
Weighted average shares............... 1,129,308 1,152,468 1,062,696
less: contingently issuable shares -
issued with Series B Preferred Stock
and subject to repurchase (129,405) (151,648) --
----------- ----------- ------------
Denominator for basic calculation...... 999,993 1,040,820 1,062,696
Weighted average effect of pro forma
securities:...........................
Series A Redeemable Convertible
Preferred Stock...................... 599,998
Series B Redeemable Convertible
Preferred Stock...................... 1,144,000
Series C-1 Redeemable Convertible
Preferred Stock...................... 1,754,482
Series C-2 Redeemable Convertible
Preferred Stock...................... 659,309
Series D Redeemable Convertible
Preferred Stock...................... 4,313,514
Series E Redeemable Convertible
Preferred Stock...................... 3,166,094
------------
Denominator for pro forma calculation.. 12,700,093
============
Net loss per share:....................
Basic................................. $ (2.44) $ (4.68) $ (20.48)
=========== =========== ============
Pro forma............................. $ (1.71)
============
</TABLE>
8. Related Parties
The Company incurred expense of $18,640, $27,552, and $32,343 for the
fiscal years ended 1997, 1998, 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. In addition, at various dates
the Company has issued to Kenneth Sharples options to purchase 6,400 shares of
common stock with a weighted-average purchase price of $0.93 per share.
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.
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.
On May 24, 1999, 699,300 shares of the Company's Series E Preferred Stock
were purchased by Scripps Howard Broadcasting Company d/b/a Home & Garden
Television ("HGTV") for a total purchase price of $5,000,000, or $7.15 per
share. Approximately $1,500,000 of the purchase price has been paid in the
F-16
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. Related Parties (continued)
form of an advertising credit, which the Company may use over the next 24
months to advertise on HGTV. The Company and HGTV will negotiate the rates
which HGTV will charge for the advertising and the dates and times on which
the advertising will be telecasted on HGTV, provided that the rates may not
exceed the rates payable by third-party advertisers of a similar quantity and
qualify of advertising on HGTV. The Company may not transfer the advertising
credit to a third party without HGTV's prior written consent. The Company
expects to utilize approximately $750,000 of these credits in each of the next
two fiscal years. In addition, the Company has entered into a strategic
alliance with HGTV to pursue mutually beneficial opportunities to leverage
each party's content, subscriber/membership base and expertise. The Company's
strategic alliance with HGTV is reflected in a letter agreement which
contemplates that the Company will work together with HGTV to negotiate
mutually beneficial future agreements. See also Note 6.
Since March 1998, the Company has conducted a national marketing program
with United Media.
The Company made payments of approximately $75,000 and $130,000 to
affiliates of The E.W. Scripps Company during the fiscal years ended June 30,
1998 and 1999, respectively.
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.
The Company pays 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. Subsequent Events
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. The
Company has filed a Restated Certificate of Incorporation to effect a four-
for-five stock split of common stock and preferred stock to be effective
immediately prior to the effective date of the Company's Registration
Statement on Form S-1. All common and preferred stock information has been
adjusted to reflect the stock split as if such split had taken place at the
inception of the Company.
1999 Employee Stock Purchase Plan. The Company's Board of Directors and
stockholders adopted the 1999 Employee Stock Purchase Plan in May 1999 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 1999 Employee Stock
Purchase Plan.
F-17
<PAGE>
[ARTWORK]
INSIDE BACK COVER PAGE ARTWORK
Middle: tool shed with gardening tools surrounding a computer mouse
Bottom center: text reading "You don't need a green thumb. Just an index
finger." and the garden.com logo
BACK COVER
Right: Daisy and circuit board background
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,100,000 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................................... 185,000
Legal fees and expenses........................................ 500,000
Accounting fees and expenses................................... 350,000
Blue Sky fees and expenses..................................... 10,000
Transfer Agent and Registrar fees.............................. 10,000
Miscellaneous expenses......................................... 161,265
----------
Total...................................................... $1,256,000
==========
</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 June 30, 1996, Garden.com has sold and issued the following
securities:
(a) On August 12, 1996, Garden.com issued 1,144,000 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
1,754,481 shares of Series C-1 Preferred Stock, 659,310 shares of Series C-
2 Preferred Stock and issued warrants to purchase 482,757 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 482,757 shares of Series C
Preferred Stock at an exercise price of $2.18 per share.
(c) On June 11, 1998, Garden.com issued 4,313,514 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 72,340 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 72,340 shares of Series D
Preferred Stock at an exercise price of $4.70 per share.
(d) On April 13, 1999, Garden.com issued 2,466,794 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 699,300
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 29,370 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 29,370 shares of Series E
Preferred Stock at an exercise price of $7.15 per share.
(e) Since inception, Garden.com has issued an aggregate of 1,352,400
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 37,760 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** Form of 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 America Online, Inc.
10.8** License Agreement, dated as of April 13, 1998, between the
Registrant and Time Life Inc.
10.9A** Employment Agreement, dated July 12, 1999, between the
Registrant and Clifford A. Sharples.
10.9B** Employment Agreement, dated July 12, 1999, between the
Registrant and James N. O'Neill.
10.9C** Employment Agreement, dated July 12, 1999, between the
Registrant and Lisa W.A. Sharples.
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 & Zimmerman.
10.11C Intentionally omitted.
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
+ Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment, and the omitted portions have been separately filed
with the Commission.
** 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 Amendment No. 4 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on the 11th day of August, 1999.
GARDEN.COM, INC.
/s/ Clifford A. Sharples
By: _________________________________
Clifford A. Sharples,
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to the 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 August 11, 1999
______________________________________ Officer (Principal
Clifford A. Sharples Executive Officer) and
Director
/s/ Jana D. Wilson* Chief Financial Officer August 11, 1999
______________________________________ (Principal Financial and
Jana D. Wilson Accounting Officer)
/s/ Steven J. Dietz* Director August 11, 1999
______________________________________
Steven J. Dietz
/s/ Gerald R. Gallagher* Director August 11, 1999
______________________________________
Gerald R. Gallagher
/s/ James N. O'Neill* Director August 11, 1999
______________________________________
James N. O'Neill
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
Signature Title Date
- -------------------------------------- -------------------------- -------------------
/s/ Donald J. Phillips* Director August 11, 1999
______________________________________
Donald J. Phillips
/s/ Lisa W.A. Sharples* Director August 11, 1999
______________________________________
Lisa W.A. Sharples
/s/ Douglas R. Stern* Director August 11, 1999
______________________________________
Douglas R. Stern
/s/ John D. Thornton* Director August 11, 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 America Online, Inc.
10.8** License Agreement, dated as of April 13, 1998, between the
Registrant and Time Life Inc.
10.9A** Employment Agreement, dated July 12, 1999, between the Registrant
and Clifford A. Sharples.
10.9B** Employment Agreement, dated July 12, 1999, between the Registrant
and James N. O'Neill.
10.9C** Employment Agreement, dated July 12, 1999, between the Registrant
and Lisa W. A. Sharples.
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 & Zimmerman.
10.11C Intentionally omitted.
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
+ Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment, and the omitted portions have been separately filed
with the Commission.
** Previously filed
<PAGE>
EXHIBIT 1.1
GARDEN.COM, INC.
4,100,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
August 9, 1999
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERSTON STEPHENS INC.
THOMAS WEISEL PARTNERS LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Garden.com, Inc., a Delaware corporation (herein called the Company),
proposes to issue and sell 4,100,000 shares of its authorized but unissued
Common Stock, $.01 par value (herein called the Common Stock) (said 4,100,000
shares of Common Stock being herein called the Underwritten Stock). The Company
and the stockholders of the Company named in Schedule II hereto (herein
collectively called the Selling Securityholders) propose to grant to the
Underwriters (as hereinafter defined) an option to purchase up to 615,000
additional shares of Common Stock (herein called the Option Stock and with the
Underwritten Stock herein collectively called the Stock). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-79487), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the
- ----------------------
/1/ Plus an option to purchase from the Company and Selling Securityholders up
to 615,000 additional shares to cover over-allotments.
<PAGE>
Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company and the Selling
Securityholders.
(a) Each of the Company and the Selling Securityholders hereby represents
and warrants as follows:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus and as being conducted, and is duly qualified
as a foreign corporation and in good standing in all jurisdictions in which
the character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure to
be so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company).
The Company does not presently own or control, directly or indirectly, any
material interest in any other corporation, association or other business
entity.
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, other than as set forth in
the Registration Statement and the Prospectus, and since such dates, except
in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement and the
Prospectus.
(iii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus relating to the proposed
offering of the stock nor instituted or, to the knowledge of the Company,
threatened instituting proceedings for that purpose. The Registration
Statement and the Prospectus comply, and on the Closing Date (as
hereinafter defined) and any later date on which Option Stock is to be
purchased, the Prospectus will comply with the provisions of the Securities
Act and the Securities Exchange Act of 1934, as amended (herein after
called the Exchange Act) and the rules and regulations of the Commission
thereunder; on the Effective Date, the Registration Statement did not
contain any untrue statement of a material fact and did not omit to state
any material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and, on the Effective Date the
Prospectus did not and, on the Closing Date and any later date on which
Option Stock is to be purchased, will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon and in conformity with information herein
or otherwise furnished in writing to the Company by or on behalf of the
Underwriters for use in the Registration Statement or the Prospectus.
(iv) As of the closing of the sale of the Underwritten Stock and
assuming the filing of the Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware, the authorized capital stock
of the Company consists of 5,000,000 shares of Preferred Stock, $0.01 par
value, of which there are no shares outstanding, and 50,000,000 shares of
Common Stock, $0.01 par value, of which there are 16,894,150 outstanding
shares (including the Underwritten Stock); proper corporate proceedings
have been taken validly to authorize such authorized capital stock; all of
the outstanding shares of such capital stock (including the Underwritten
Stock) have been duly and validly issued and are fully paid and non-
2
<PAGE>
assessable; and, except as described in the Prospectus, no preemptive
rights of, or rights of first refusal in favor of, stockholders of the
Company exist with respect to the Stock, or the issue and sale thereof,
pursuant to the Restated Certificate of Incorporation or Bylaws of the
Company. Except as set forth in the Prospectus and other than options to
purchase ________ shares of the Company's Common Stock granted pursuant to
the Company's Amended and Restated 1996 Stock Option/ Stock Issuance Plan
(herein called the 1996 Plan) since June 30, 1999, the Company does not
have outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. All outstanding shares of capital stock and options and other
rights to acquire capital stock have been issued in compliance with the
registration and qualification provisions of all applicable securities laws
(or applicable exemptions thereof) and were not issued in violation of any
preemptive rights, rights of first refusal and other similar rights. The
issue and sale by the Company of the shares of Stock to be sold by the
Company as contemplated herein will be validly issued, fully paid and non-
assessable, will not conflict with, or result in a breach of, the Restated
Certificate of Incorporation or Bylaws of the Company or any agreement or
instrument filed as exhibits to the Registration Statement or any federal,
Delaware corporate or Texas law or regulation applicable to the Company, or
any order, writ, injunction or decree of any court or governmental
instrumentality binding upon the Company. No further approval or authority
of the stockholders or the Board of Directors of the Company will be
required for the transfer and sale of the Stock to be sold by the Company
or the issuance and sale of the Stock as contemplated herein.
(v) The authorized capital stock of the Company conforms as to legal
matters in all material respects to the description thereof contained in
the Prospectus. The form of certificates for the Stock conforms in all
material respects to the corporate law of Delaware.
(vi) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(vii) Prior to the Closing Date, the Stock to be sold by the Company
will be authorized for listing by the Nasdaq National Market upon official
notice of issuance.
(viii) The consolidated financial statements of the Company, together
with related notes and schedules as set forth in the Registration Statement
("Financial Statements"), present fairly the financial position and the
results of operations of the Company, at the indicated dates and for the
indicated periods. The Financial Statements, schedules and related notes
have been prepared in accordance with generally accepted accounting
principles, consistently applied through the period involved, except as may
be otherwise stated therein, and all adjustments necessary for a fair
presentation of results for such periods have been made.
(ix) The Company is not in violation or default under any provision of
its Restated Certificate of Incorporation or Bylaws, as currently in
effect, or any indenture, license, mortgage, lease, franchise, permit, deed
of trust or other agreement or instrument to which the Company is a party
or by which the Company or its properties is bound or may be affected,
except where such violation or default would not have a material adverse
effect on the business, financial condition or results of operations of the
Company.
(x) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable laws and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally, or by general equitable principles.
(xi) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of, or violation of,
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any of the terms or provisions of, or constitute, either by itself or upon
notice or the passage of time or both, a default under, any indenture,
license, mortgage, lease, franchise, permit, deed of trust or other
agreement or instrument to which the Company currently is a party or by
which the Company or its properties currently is bound or may be affected,
except where such breach, violation or default would not have a materially
adverse effect on the business, financial condition or results of
operations of the Company or violate any of the provisions of the Restated
Certificate of Incorporation or Bylaws, as currently in effect, of the
Company or violate any material order, judgment, statute, rule or
regulation currently applicable to the Company of any court or of any
regulatory, administrative or governmental body or agency having
jurisdiction over the Company or its properties.
(xii) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company is a party or to
which any of the properties of the Company is subject that are required to
be described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof except as
disclosed therein; and neither the Company nor, to the Company's knowledge
any other party, is in material breach of or default under any of such
contracts.
(xiii) The Company possesses all consents, approvals, orders,
certificates, authorizations and permits issued by, and has made all
declarations and filings with, all appropriate federal, state or foreign
governmental and self-regulatory authorities and all courts and other
tribunals, including but not limited to all required state agencies in
connection with applicable franchise laws, regulations and requirements
necessary to conduct its business and to own, lease, license and use its
properties in the manner described in the Prospectus, except to the extent
that the failure to obtain or file would not have a material adverse effect
on the Company, and the Company has not received any notice of proceedings
related to the revocation or modification of any such consent, approval,
order, certificate, authorization or permit that, singly or in the
aggregate, could reasonably be expected to result in a material adverse
change in the condition, financial or otherwise, or in the earnings,
business or operations of the Company.
(xiv) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) has received all permits, licenses or other approvals required
of them under applicable Environmental Laws with respect to its business as
conducted and as proposed to be conducted in the Registration Statement and
(iii) is in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental
Laws, failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits, licenses
or approvals would not, singly or in the aggregate, have a material adverse
effect on the Company.
(xv) The Company has good and marketable title in fee simple to all
real property and good and valid title to all personal property that it
owns free and clear of all liens, encumbrances and defects except such as
are described in the Registration Statement or the Prospectus or such as do
not materially and adversely affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by the
Company are held under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company.
(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Stock.
(xvii) To the knowledge of the Company, the Company owns or possesses
adequate rights to use, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures),
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trademarks, service marks and trade names currently
employed by the Company in connection with the business now operated by the
Company, and, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company.
(xviii) The Company is in compliance, in all material respects, with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for with the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified and nothing has occurred, whether by action or failure to
act, that would cause the loss of such qualification.
(xix) The Company is not and, after giving effect to the offering and
sale of the Stock and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(xx) There is no holder of any securities of the Company who has any
right, not effectively satisfied or waived, to require registration of any
shares of capital stock of the Company in connection with the filing of the
Registration Statement or the sale of any shares thereunder. There are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Stock registered pursuant to the Registration
Statement, except in each case as described in the Prospectus.
(xxi) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principals of the United States and to maintain asset
accountability; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxii) No material labor dispute with employees of the Company exists
or to the knowledge of the Company is imminent, and, without conducting any
independent investigation, the Company is not aware of any written
communication of any existing, threatened or imminent labor disturbance by
the employees of any of its principal suppliers, manufacturers or
contractors that could result in any material adverse change in the
condition, financial or otherwise, the earnings, the business or operations
of the Company. Except as described in the Prospectus, the employment of
each officer and employee of the Company is terminable at the will of the
Company. To its knowledge, the Company has complied in all material
respects with all applicable state and federal equal employment opportunity
laws and with other laws related to employment. To the Company's
knowledge, no employee of the Company, nor any consultant or independent
contractor with whom the Company has contracted, is in violation of any
term of any employment contract, proprietary information agreement or any
other agreement relating to the right of any such individual to be employed
by, or to contract with, the Company because of the nature of the business
to be conducted by the Company; and to the Company's knowledge, the
continued employment by the Company of its present employees, and the
performance of the Company's contracts with its independent contractors,
will not result in any such violation. The Company has not received any
notice alleging that any such violation has occurred. Except as described
in the Prospectus, no employee of the Company has been granted the right to
continued employment by the Company or to any other material compensation
following termination of employment with the Company. The Company is not
aware that any
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officer or employee, or that any group of employees, intends to terminate
their employment with the Company, nor does the Company have a present
intention to terminate the employment of any of the foregoing.
(xxiii) The Company has not offered, or caused the Underwriters to
offer, Stock to any person by way of directed shares with the specific
intent to unlawfully influence (i) a customer or supplier of the Company to
alter the customer's or supplier's level or type of business with the
Company, or (ii) a trade journalist or publication to write or publish
favorable information about the Company or its products.
(xxiv) To the Company's knowledge, after due investigation, the
Company's software will produce no material, logical or arithmetic
inconsistencies when dealing with leap years or dates beyond the year 1999.
Without limiting the foregoing, to the Company's knowledge, the Company's
services will not materially impede the accurate processing of data, or
cause programming or processing errors resulting from the rollover of two-
digit year values to "00" on January 1, 2000. The foregoing does not
constitute a warranty or representation that the Company's software will be
capable of recording, storing, processing, calculating and displaying
correct calendar dates based on software supplied by any party other than
the Company, or that other Company's software will properly interact with
such third party software.
(xxv) To the Company's knowledge, no consent, approval, authorization
or order of any federal, Delaware or Texas governmental agency or body is
required on the part of the Company for the consummation of the
transactions contemplated herein, except such as have been obtained under
the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock
by the Underwriters.
(b) Each of the Selling Securityholders hereby represents and warrants as
follows:
(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Securityholder, to the
rights of American Stock Transfer & Trust Company, as Custodian (herein
called the Custodian), and that upon the delivery of and payment for such
shares of the Stock hereunder, the several Underwriters will receive good
and marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the shares of the Stock to
be sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that
on the Effective Date, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date the Prospectus
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contained and, on the Closing Date and any later date on which Option Stock
is to be purchased, contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
4,100,000 shares of the Underwritten Stock to the several Underwriters, and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per share. The
obligation of each Underwriter to the Company shall be to purchase from the
Company that number of shares of the Underwritten Stock which represents the
same proportion of the total number of shares of the Underwritten Stock to be
sold by the Company pursuant to this Agreement as the number of shares of the
Underwritten Stock set forth opposite the name of such Underwriter in Schedule I
hereto represents of the total number of shares of the Underwritten Stock to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Stock which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock that each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
and the Selling Securityholders grant an option to the several Underwriters to
purchase, severally and not jointly, up to 615,000 shares in the aggregate of
the Option Stock from the Company and the Selling Securityholders at the same
price per share as the Underwriters shall pay for the Underwritten Stock. Said
option may be exercised only to cover over-allotments in the sale of the
Underwritten Stock by the Underwriters and may be exercised in whole or in part
at any time (but not more than once) on or before the thirtieth day after the
date of this Agreement upon written or telegraphic notice by you to the Company
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setting forth the aggregate number of shares of the Option Stock as to which the
several Underwriters are exercising the option. Delivery of certificates for
the shares of Option Stock, and payment therefor, shall be made as provided in
Section 5 hereof. The number of shares of the Option Stock to be purchased by
each Underwriter shall be the same percentage of the total number of shares of
the Option Stock to be purchased by the several Underwriters as such Underwriter
is purchasing of the Underwritten Stock, as adjusted by you in such manner as
you deem advisable to avoid fractional shares.
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Wilson Sonsini Goodrich & Rosati, 8911 Capital of Texas Highway N.,
Suite 3350, Austin, Texas 78759, at 10:00 a.m., Austin time, on the fourth
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day, as
shall be agreed upon in writing by the Company, the Selling Securityholders and
you. The date and hour of such delivery and payment (which may be postponed as
provided in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
10:00 a.m., Austin time, on the date two business days preceding the Closing
Date, delivery of certificates for the shares of Option Stock, and payment
therefor, shall be made at the office of Wilson Sonsini Goodrich & Rosati, 8911
Capital of Texas Highway N., Suite 3350, Austin, Texas 78759, at 10:00 a.m.,
Austin time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
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6. Further Agreements of the Company and the Selling Securityholders.
Each of the Company and the Selling Securityholders respectively and severally
covenants and agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act
or the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement, (iii) the
institution or notice of intended institution of any action or proceeding
for that purpose, (iv) the receipt by the Company of any notification with
respect to the suspension of the qualification of the Stock for sale in any
jurisdiction, or (v) the receipt by it of notice of the initiation or
threatening of any proceeding for such purpose. The Company and the
Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of
each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously
furnished to you) and will also deliver to you, for distribution to the
Underwriters, a sufficient number of additional conformed copies of each of
the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to
you and send to the several Underwriters, at such office or offices as you
may designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in which
a prospectus is required by law to be delivered by an Underwriter or
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of
any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement
or amend the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser of the Stock, the Company will forthwith prepare and file with
the Commission a supplement to the Prospectus or an amended prospectus so
that the Prospectus as so supplemented or amended will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters shall
propose to vary the terms of offering thereof by reason of changes in
general market conditions or otherwise, you will advise the Company in
writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the
Stock may be sold by the several Underwriters to use the Prospectus, as
from time to time amended or supplemented, in connection with the sale of
the Stock in accordance with the applicable provisions of the Securities
Act and the applicable rules and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
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(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter
or dealer, in keeping such qualifications in good standing under said
securities or blue sky laws; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Stock.
(g) During a period of three years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request
in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports
filed with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its security holders an
earnings statement in accordance with Section 11(a) of the Securities Act
and Rule 158 thereunder.
(i) The Company and the Selling Securityholders severally agree to pay
all costs and expenses incident to the performance of their obligations
under this Agreement, including all costs and expenses incident to (i) the
preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. ("NASD") of the Registration
Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and
of the several documents required by paragraph (c) of this Section 6 to be
so furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and filing of
all supplements and amendments to the Prospectus referred to in paragraph
(d) of this Section 6, (v) the furnishing to you and the Underwriters of
the reports and information referred to in paragraph (g) of this Section 6
and (vi) the printing and issuance of stock certificates, including the
transfer agent's fees. The Selling Securityholders will pay any transfer
taxes incident to the transfer to the Underwriters of the shares the Stock
being sold by the Selling Securityholders.
(j) The Company and the Selling Securityholders severally agree to
reimburse you, for the account of the several Underwriters, for blue sky
fees and related disbursements (including counsel fees and disbursements
and cost of printing memoranda for the Underwriters) paid by or for the
account of the Underwriters or their counsel in qualifying the Stock under
state securities or blue sky laws and in the review of the offering by the
NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and
costs which the Company and the Selling Securityholders hereby agree to pay
and shall not affect any agreement which the Company and the Selling
Securityholders may make, or may have made, for the sharing of any such
expenses and costs.
(l) The Company and each of the Selling Securityholders hereby agrees
that, without the prior written consent of Hambrecht & Quist LLC on behalf
of the Underwriters, the Company or such Selling Securityholder, as the
case may be, will not, for a period of 180 days from the effective date of
the Registration Statement, directly or indirectly, sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale,
pledge or otherwise dispose of (collectively, a "Disposition") any shares
of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock.
The foregoing sentence shall not apply to (A) the Stock to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued
by the Company upon the exercise of options granted under the stock option
plans of the Company (the "Option Plans") or upon the exercise of warrants
outstanding as of the date hereof, all as described in the Preliminary
Prospectus, and (C) options to purchase Common Stock granted under the
Option Plans.
(m) The Company agrees to use its best efforts to cause all
stockholders to agree that, without the prior written consent of Hambrecht
& Quist LLC on behalf of the Underwriters, such person or entity will
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<PAGE>
not, for a period of 180 days from the effective date of the Registration
Statement, directly or indirectly, sell, offer, contract to sell, transfer
the economic risk of ownership in, make a Disposition of any shares of
Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and, if
the Company determines to do so in its reasonable judgment, disseminate a
press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(o) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was
not and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
7. Indemnification and Contribution.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise, and the Company and the Selling Securityholders jointly and
severally agree to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, (3) each Selling
Securityholder (other than the Founding Selling Securityholders) shall only be
liable under this paragraph with respect to (A) information pertaining to such
Selling Securityholder furnished by or on behalf of such Selling Securityholder
expressly for use in any Preliminary Prospectus or the Registration Statement or
the Prospectus or any such amendment thereof or supplement thereto or (B) facts
that would constitute a breach of any representation or warranty of such Selling
Securityholder set forth in Section 2(b) hereof and (4) each Selling
Securityholder shall be liable under this paragraph (a) only with respect to
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<PAGE>
(A) information pertaining to each Selling Securityholder furnished by or on
behalf of such Selling Securityholder expressly for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto, and (B) facts that would constitute a breach of
any representation or warranty of such Selling Securityholder set forth in
Section 2 hereof. The indemnity agreements of the Company and the Selling
Securityholders contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Securityholders contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be
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<PAGE>
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholders on the one hand and the Underwriters on the other shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Stock received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
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<PAGE>
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (a) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the initial public offering price of the stock sold by such
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
8. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and
no proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel for the Underwriters.
(c) You shall have received from Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Company and the Selling
Securityholders, an opinion, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex A hereto, and if
Option Stock is purchased at any date after the Closing Date, an additional
opinion from each such counsel, addressed to the Underwriters and dated
such later date, confirming that the statements expressed as of the Closing
Date in such opinions remain valid as of such later date.
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<PAGE>
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not
misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, the Company has not entered into any material
transaction not referred to in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
(iv) the Company does not have any material contingent obligations which
are not disclosed in the Registration Statement and the Prospectus, (v)
there are not any pending or known threatened legal proceedings to which
the Company is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed
in the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to be
filed as exhibits to the Registration Statement which have not been filed
as required, (vii) the representations and warranties of the Company herein
are true and correct in all material respects as of the Closing Date or any
later date on which Option Stock is to be purchased, as the case may be,
and (viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions
from those reasonably foreseeable as to render it impracticable in your
reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of
companies in particular) or financial or economic conditions which render
it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from Ernst & Young LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any
later date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(herein called the Original Letter), but carried out to a date not more
than three business days prior to the Closing Date or such later date on
which Option Stock is purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date, as the case may be, and
(ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect
any changes in the facts described in the Original Letter since the date of
the Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting
the business or properties of the Company which, in your sole judgment,
makes it impractical or inadvisable to proceed with the public offering of
the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have received from Ernst & Young LLP a letter stating
that their review of the Company's system of internal accounting controls,
to the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as at June 30, 1999, did
not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.
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<PAGE>
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 5% of the
outstanding Common Stock agreements, in form reasonably satisfactory to
Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity
will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP,counsel for the Underwriters, shall be satisfied that they comply
in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby, but the Company
and the Selling Securityholders shall not in any event be liable to any of the
several Underwriters for damages on account of loss of anticipated profits from
the sale by it of the Stock.
10. Conditions of the Obligation of the Company and the Selling
Securityholders. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders severally agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof.
11. Reimbursement of Certain Expenses. In addition to their other
obligations under Section 7 of this Agreement, the Company and the Selling
Securityholders hereby severally agree to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 7 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
---------
however, that (i) to the extent any such payment is ultimately held to be
- -------
improper, the persons receiving such payments shall
16
<PAGE>
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telecopy and, if to the Underwriters, shall
be mailed, telecopied or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telecopied or delivered to it at its office, 3301 Steck Avenue, Austin, Texas
78757, Attention: Clifford A. Sharples; and if to the Selling Securityholders,
shall be mailed, telecopied or delivered to the Selling Securityholders in care
of Clifford A. Sharples at 3301 Steck Avenue, Austin, Texas 78757. All notices
given by copy shall be promptly confirmed by letter.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
- -----------------
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
[Remainder of page intentionally left blank.]
17
<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
GARDEN.COM
By __________________________
Clifford A. Sharples
President and Chief Executive Officer
SELLING SECURITYHOLDERS:
Clifford A. Sharples
Lisa W.A. Sharples
James N. O'Neill
Douglas A. Jimerson
By __________________________
Clifford A. Sharples, Attorney-in-Fact
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
THOMAS WEISEL PARTNERS LLC
By Hambrecht & Quist LLC
By __________________________
Robert Keller, Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
18
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Shares
Underwriters to be Purchased
------------ ---------------
Hambrecht & Quist LLC..............................
BancBoston Robertson Stephens Inc..................
Thomas Weisel Partners, LLC........................
____
Total.........................................
====
19
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
Name and Address Number of Share
of Selling Securityholders to be Sold
-------------------------- ----------
<S> <C>
Garden.com, Inc. 560,000
Clifford A. Sharples 15,000
Lisa W.A. Sharples 15,000
James N. O'Neill 15,000
Douglas A. Jimerson 10,000
Total.......................................... 615,000
=======
</TABLE>
20
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation
Counsel for the Company
and the Selling Securityholders
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good
standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification (except where
the failure to be so qualified would not have a material adverse effect on
the business, financial condition or results of operations of the Company),
and has full corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement;
(ii) the authorized capital stock of the Company consists of
5,000,000 shares of Preferred Stock, $0.01 par value of which there are no
shares outstanding and 50,000,000 shares of Common Stock, $0.01 par value,
of which there are outstanding 16,894,150 shares (including the
Underwritten Stock plus the number of shares of Option Stock issued on the
date hereof) plus shares issued under the Option Plan after June 30, 1999;
proper corporate proceedings have been taken validly to authorize such
authorized capital stock; all of the outstanding shares of such capital
stock (including the Underwritten Stock and the shares of Option Stock
issued, if any) have been duly and validly issued and are fully paid and
nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting Agreement, will have been duly and validly issued and be fully
paid and nonassessable; and no preemptive rights of, or rights of refusal
in favor of, stockholders exist with respect to the Stock, or the issue and
sale thereof, pursuant to the Restated Certificate of Incorporation or
Bylaws of the Company and, to the knowledge of such counsel, there are no
contractual preemptive rights that have not been waived, rights of first
refusal or rights of co-sale which exist with respect to the Stock being
sold by the Selling Securityholders or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Securities Act,
the Exchange Act and with the rules and regulations of the Commission
thereunder;
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief)
at the Effective Date contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or that the Prospectus
(except as to the financial statements and schedules and other financial
and statistical data contained or incorporated by reference therein, as to
which such counsel need not express any opinion or belief) as of its date
or at the Closing Date (or any later date on which Option Stock is
purchased), contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel)
and 11(c) of Form S-1 is to the best of such counsel's knowledge accurately
and adequately set forth therein in all material respects or no response is
required with respect to
21
<PAGE>
such Items and, the description of the Company's stock option plan and the
options granted and which may be granted thereunder and the options granted
otherwise than under such plan set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to said
plan and options to the extent required by the Securities Act and the rules
and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion
of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) based insofar as factual matters are concerned solely upon
certificates of the Selling Securityholders (the accuracy of which we have
no reason to question), the Underwriting Agreement has been duly executed
and delivered by or on behalf of the Selling Securityholders and the
Custody Agreement between the Selling Securityholders and American Stock
Transfer & Trust Company, as Custodian, and the Power of Attorney referred
to in such Custody Agreement have been duly executed and delivered by the
several Selling Securityholders;
(x) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Restated Restated Certificate of
Incorporation or Bylaws of the Company or any agreement or instrument known
to such counsel to which the Company is a party or any applicable law or
regulation, or so far as is known to such counsel, any order, writ,
injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(xi) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights
or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;
(xii) good and marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of
all liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this
opinion that the Underwriters purchased the same in good faith without
notice of any adverse claims; and
(xiii) based insofar as factual matters are concerned solely upon
certificates of the Selling Securityholders (the accuracy of which we have
no reason to question), no consent, approval, authorization or order of any
court or governmental agency or body is required by the Company for the
consummation of the transactions contemplated in the Underwriting
Agreement, except such as have been obtained under the Securities Act and
such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Stock by the
Underwriters.
(xiv) the Stock sold by the Selling Securityholders is listed and
duly admitted to trading on the NASDAQ Stock Exchange, and the Stock issued
and sold by the Company will been duly authorized for listing the NASDAQ
Stock Exchange upon official notice of issuance.
(xv) the Company is not and after giving effect to the offering and
the sale of stock and the application of proceeds thereof as described in
the prospectus, will not be an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
____________________________________
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the State of Delaware upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
22
<PAGE>
Exhibit 10.7
CONFIDENTIAL
SHOPPING CHANNEL PROMOTIONAL AGREEMENT
This Agreement, dated as of October 2, 1998 (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 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 $480,000.00 for displaying the Promotion on the AOL Service,
AOL.com and the CompuServe Service. The total amount of $480,000.00 will be
payable in equal quarterly installments, with the first such payment to be made
upon the Effective Date and subsequent quarterly payments to be made on the
first day of each subsequent quarter. MERCHANT agrees
-1-
<PAGE>
that except as specified herein, once the Promotion is installed, there will be
no refunds or proration of rates if MERCHANT elects to discontinue display of
the Promotion prior to expiration of the Term. Should AOL fail to display the
Promotion in accordance with the terms of this Agreement due to MERCHANT's
failure to comply with any requirement of this Agreement, MERCHANT will remain
liable for the full amount indicated above.
3.2 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 twelve (12) months
commencing on the October 1, 1998 (the "Term").
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.
-2-
<PAGE>
EXHIBIT A
---------
Description of Products: The only categories of Products to be sold through the
- -----------------------
Merchant Site are as listed below. MERCHANT shall be entitled to offer, sell,
promote, or otherwise include in the Merchant Site any content or service
reasonably related to gardening and outdoor living (collectively, the "Merchant
C&S"); provided that MERCHANT shall not be entitled to promote any such Merchant
C&S through AOL-controlled content screens appearing within the AOL Service,
AOL.com or the CompuServe Service unless (i) such Merchant C&S is directly
related to sale of the Products which are permitted to be promoted through such
screens in accordance with the following provisions (the "Permitted Products")
or (ii) MERCHANT has obtained AOL's prior written approval with respect to
promotion through such screens of any Merchant C&S which is not directly related
to sale of the Permitted Products.
Product List. Merchant shall be entitled to promote and sell any Product within
- ------------
the categories specified on Exhibit E, subject to the "Product Restrictions"
below. Merchant shall not be entitled to promote through AOL-controlled content
screens appearing within the AOL Service or AOL.com (absent AOL's prior written
approval with respect to any specific promotion) the following plant products:
(i) the items listed at roman numeral I under the heading "Live Goods," with the
exception of trees, wreaths, shrubs, vines, seeds, bulbs and fish; and (ii) the
items listed at roman numeral III under the subheading "Blooming/Gift Plants".
Product Restrictions. In no event will MERCHANT promote, or be entitled to
- --------------------
promote, any plants through AOL-controlled content screens appearing within the
AOL Service or AOL.com (absent AOL's prior written approval with respect to any
specific promotion); provided that the restriction contained in the foregoing
clause is not intended to restrict MERCHANT promotion of trees, wreaths, shrubs,
vines, seeds, bulbs and fish. In addition, AOL shall have the right to impose
additional restrictions with respect to MERCHANT's promotion of plants
(including, without limitation, trees, wreaths, shrubs, vines, seeds, bulbs and
fish for purposes of any additional restrictions) under this Agreement (for
example, which would restrict MERCHANT's promotion of plants on the first page
of the Merchant Site directly linked to the promotions for MERCHANTS appearing
on the AOL Service or AOL.com); provided that (i) any additional restrictions
which would directly impact the Merchant Site shall require thirty (30) days
prior written notice from AOL; and (ii) in the event that AOL imposes additional
restrictions (including, without limitation, any additional restrictions on
promotions of specific products), MERCHANT shall be entitled to terminate this
Agreement with fifteen (15) days prior written notice to AOL, in which case
MERCHANT shall only be responsible for the pro-rata portion of payments
allocable on a daily basis to the period preceding the effectiveness of such
termination. In the event that MERCHANT is uncertain regarding its ability to
promote a specific product in accordance with the terms of this Agreement,
MERCHANT may submit a promotion featuring such product to AOL for its approval.
Folowing MERCHANT's submission of a promotion featuring a specific product, AOL
will use commercially reasonable efforts to indicate to MERCHANT within two (2)
business days AOL's determination that the featured product is subject to
restriction under this Agreement. If AOL reasonably deems the additional product
in question to be restricted, then MERCHANT may, in its discretion, submit to
AOL substitute promotion featuring a different product which is not restricted
under the terms of this Agreement.
Impressions: The screens on which the promotions appear on each of the AOL
- -----------
Service, AOL.com and the CompuServe Service will receive a minimum of [****]
Impressions in the aggregate, subject to the remainder of this paragraph. In the
event there is (or will be in AOL's reasonable judgment) a shortfall in
Impressions as of the end of the Initial Term (a "Shortfall"), AOL will provide
MERCHANT, as its sole remedy, with advertising placements through reasonably
comparable advertising on AOL properties (determined by AOL) which has a total
value, based on AOL's then-current advertising rate card, equal to [****.] 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.
-3-
<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: One continuous (24/7) [****] button with corporate brand or
logo on the department front screen of the AOL Service.
. One continuous (24/7) [****] button with corporate brand or logo on
the department front screen of AOL.com. One continuous (24/7) [****]
button with corporate brand or logo on the department front screen of
the CompuServe Service.
Additional Promotion on the AOL Service Shopping Channel.
. One continuous (24/7) [****] with featured product to promote store
product offerings on the corresponding department screen.
. Product listing availability through the AOL Service Shopping channel
search screen. Web MERCHANT search links to storefront.
. Up to [****] AOL Keywords(TM) for use from the AOL Service, for
registered MERCHANT trade name or trademark (subject to the other
provisions contained herein).
. [****] discount from the then-current rate card on purchases of
additional advertising banners or buttons on the AOL Service, AOL.com
and the CompuServe Service, subject to availability for the period
requested (with such purchases to be made in accordance with the then-
applicable Standard Advertising Insertion Order for the property in
question).
Eligibility to participate in the following AOL Shopping promotional
programs (the "Program Areas"):
Bargain Basement by Department
Quick Gifts
Seasonal Catalogs or Special Events areas (e.g., Christmas Shop)
Order from Print Catalogs
Gift Reminder
Newsletters
AOL's Quick Checkout
BizRate(R) Program
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.
-4-
<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
-5-
<PAGE>
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, 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 any of the foregoing. In the event
that MERCHANT cannot, through such efforts, block access to the Content in
question, then MERCHANT will provide AOL prompt written notice of such fact no
later than five (5) days after AOL notifies MERCHANT of AOL's objection to such
Content. AOL may then, at its option, either (i) restrict access by AOL Users to
the Content in question using technology available to AOL or (ii) terminate all
links, promotions and advertisements for the Merchant Site until such time as
the Content in question is no longer displayed. MERCHANT will cooperate with
AOL's reasonable requests to the extent AOL elects to implement any of the
foregoing access restrictions. 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 terminate this Agreement upon fifteen (15) days written notice to
AOL (unless AOL, following receipt of written notice from MERCHANT, agrees to
forego, the restrictions in question), in which case MERCHANT shall only be
responsible for the pro-rata portion of payments allocable on a daily basis to
the period preceding the effectiveness of such termination (and AOL shall refund
to MERCHANT any amounts which MERCHANT has paid pursuant to Section 3.1 in
excess of such pro-rata portion of payments). 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 MERCHANT. AOL reserves the right to reject, cancel or remove
at any time the Promotion for any reason within fifteen (15) days prior notice
to MERCHANT, and AOL will refund to MERCHANT a pro-rata portion of the fee
allocable to the display of the Promotion based on the number of days that the
Promotion
-6-
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was displayed. AOL will not be liable in any way for any rejection, cancellation
or removal of the Promotion. AOL reserves the right to redesign or modify the
organization, navigation, structure, "look and feel" and other elements of the
AOL Service, AOL.com 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 will have
the right to cancel the Promotion, upon fifteen (15) days advance written notice
to AOL. In such case, MERCHANT will only be responsible for the pro-rata portion
of payments attributable to the period from the Effective Date through the end
of the fifteen (15) day notice period. 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
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
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<PAGE>
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.
-8-
<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.
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<PAGE>
6. License. MERCHANT hereby grants AOL a non-exclusive worldwide 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 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.
-----------------------------------------------------
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<PAGE>
(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 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,
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<PAGE>
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, [*****.]
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, [*****.]
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
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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. 703-265-1206) and the Deputy General Counsel (fax no.
703-265-1105), each at the address of AOL set forth in the first paragraph of
this Agreement. In the case of MERCHANT, except as otherwise specified herein,
the notice address will be the address for MERCHANT set forth in the first
paragraph of this Agreement, with the other relevant notice information,
including the recipient for notice and, as applicable, such recipient's fax
number or AOL email address, to be as reasonably identified by AOL. 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
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<PAGE>
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 MERCHANT's 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.
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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."
* Certain confidential information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
-15-
<PAGE>
(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 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.
-16-
<PAGE>
EXHIBIT E
---------
Garden Escape Product Categories (2 Pages)
------------------------------------------
I. LIVE GOODS
Plants
. Landscaping plant collections (3-7 potted plants shipped together)
. Perennials (4", 6" or 1 gallon nursery pot sizes)
. Herbs (4" nursery pots)
. Scented geraniums (4" nursery pots)
. Roses (bare root and 1 gallon potted)
. Peonies (bare root)
. Heaths and Heathers (6", 1 gallon, 2 gallon nursery pots)
. Cacti & Succulents (2", 4", 6" nursery pots)
. Orchids (4", 6", 12" nursery pots)
. Toplaries (4", 6",12" nursery pots)
. Annuals (2", 4", 6" nursery pots)
. Flower and Vegetable Seedlings (6-8 week old seedlings)
. Trees, Shrubs, and Vines (between 4"-5 gallon pots, and bare root)
Seeds
. Vegetable
. Flower
. Ornamental
. Trees
Bulbs
. Fall blooming
. Spring blooming
. Indoor forcing bulbs
. Bulb collections
. Bulb kits (bulbs, tool, fertilizer, etc.)
Water Gardening:
. Water lilies
. Lotus
. Iris
. Floating plants
. Submerged plants
. Marginal plants
. Fish
II. HARD GOODS
Seed Starting
Seed starting kits
. Seed starting supplies
. Grow lights
Organics and Composting
. Composing products
. Fertilizers
. Organic pest control solutions
. Beneficial insects
Tools & Essentials
. Garden tools
. Boots, clogs, and gloves
. Books
. Garden accesories
. Greenhouses
. Irrigation supplies
. Pots and containers
. Water gardening supplies and accessories
Furniture
. Teak
. Wicker
. Metal
. Other woods
Outdoor Living
. Garden ornaments
. Entertaining products
. Lighting
. Pottery
. Tableware
. Bird feeders and houses
-17-
<PAGE>
III. GIFTS & HOLIDAY
Blooming/Gift Plants
. Potted blooming plants
. Plant collections
. Toplaries
Bulb Kits
. Indoor bulb forcing kits
Decorating & Home
. Wreaths
. Garlands
. Botanicals - bath & beauty
. Jewelry
. Candles
. Vases, Baskets and Containers
. Gift Baskets
. Edible Gifts
-18-
<PAGE>
Holiday Specific
. Wreaths
. Garlands
. Christmas Trees
. Holiday Entertaining Products
. Other Holiday Decorating
IV. APPAREL
-19-
<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
-20-
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated July 12, 1999
(except Note 9, as to which the date is August 10, 1999), in Amendment No. 4 to
the Registration Statement (Form S-1) and related Prospectus of Garden.com,
Inc. for the registration of 4,100,000 shares of its common stock.
Austin, Texas
August 10, 1999
/s/ Ernst & Young LLP
