SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-26265
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Garden.com, Inc.
-------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2765381
--------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3301 Steck Avenue, Austin, TX 78757
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 512-532-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X*
---
*The Registrant became subject to the filing requirements of Sections 13 or
15(d) of the Securities Exchange Act of 1934 on September 15, 1999.
On September 30, 1999, there were outstanding 17,506,680 shares of the
Registrant's $.01 par value common stock.
<PAGE>
GARDEN.COM, INC.
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Balance Sheets as of September 30, 1999 and
June 30, 1999 3
Statements of Operations for the Quarters Ended September 30,
1999 and 1998 4
Statements of Cash Flows for the Quarters Ended September 30,
1999 and 1998 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Garden.com, Inc.
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
-------------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 43,302 $ 15,340
Investments . . . . . . . . . . . . . . . . . . . . . . 18,534 3,710
Prepaid advertising . . . . . . . . . . . . . . . . . . 1,529 988
Other prepaid expenses and current assets . . . . . . . 1,616 1,086
Inventory . . . . . . . . . . . . . . . . . . . . . . . 904 522
-------------------- ---------------
Total current assets . . . . . . . . . . . . . . . . 65,885 21,646
Property and equipment. . . . . . . . . . . . . . . . . . 5,167 3,487
Accumulated depreciation. . . . . . . . . . . . . . . . . (1,141) (828)
-------------------- ---------------
Property and equipment, net . . . . . . . . . . . . . . . 4,026 2,659
Other assets, net . . . . . . . . . . . . . . . . . . . . 1,067 917
-------------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 70,978 $ 25,222
==================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . $ 1,999 $ 2,052
Accrued expenses and other liabilities. . . . . . . . . 1,603 956
Unearned revenue. . . . . . . . . . . . . . . . . . . . 426 188
Current portion of long-term debt . . . . . . . . . . . 104 127
-------------------- ---------------
Total current liabilities. . . . . . . . . . . . . . 4,132 3,323
Long-term debt, less current portion. . . . . . . . . . . - 20
Commitments and contingencies:
Redeemable convertible preferred stock. . . . . . . . . - 48,215
Warrants to purchase redeemable
convertible preferred stock . . . . . . . . . . . . . - 24
Stockholders' equity (deficit):
Common stock - $.01 par value; 50,000,000 shares
authorized and 17,506,680 shares issued and
outstanding on September 30, 1999; 12,000,000
shares authorized and 1,156,753 shares issued
and outstanding on June 30, 1999 . . . . . . . . . . . 175 12
Additional paid-in-capital. . . . . . . . . . . . . . . 104,004 5,768
Deferred stock compensation . . . . . . . . . . . . . . (1,931) (2,305)
Retained deficit. . . . . . . . . . . . . . . . . . . . (35,402) (29,835)
-------------------- ---------------
Total stockholders' equity (deficit) . . . . . . . . 66,846 (26,360)
-------------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 70,978 $ 25,222
==================== ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Garden.com, Inc.
Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the quarter ended September 30,
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES
Products . . . . . . . . . . . . . . . . . . . . $ 1,159 $ 333
Advertising. . . . . . . . . . . . . . . . . . . 253 25
------------ ------------
Total revenues. . . . . . . . . . . . . . . . 1,412 358
COST OF REVENUES
Products . . . . . . . . . . . . . . . . . . . . 1,049 359
Advertising. . . . . . . . . . . . . . . . . . . 44 13
------------ ------------
Total cost of revenues. . . . . . . . . . . . 1,093 372
GROSS PROFIT (LOSS). . . . . . . . . . . . . . . . 319 (14)
OPERATING EXPENSES
Marketing and sales. . . . . . . . . . . . . . . 2,699 2,133
Content and product development. . . . . . . . . 1,408 640
General and administrative . . . . . . . . . . . 1,655 616
Amortization of deferred compensation. . . . . . 374 105
------------ ------------
Total operating expenses. . . . . . . . . . . 6,136 3,494
OPERATING LOSS . . . . . . . . . . . . . . . . . . (5,817) (3,508)
Other income and expense . . . . . . . . . . . . . 249 248
------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . $ (5,568) $ (3,260)
============ ============
Basic net loss per share . . . . . . . . . . . . . $ (1.45) $ (3.23)
============ ============
Pro forma basic net loss per share . . . . . . . . $ (0.41) $ (0.34)
============ ============
Shares used in computing basic net loss per share. 3,828 1,010
============ ============
Shares used in computing pro forma basic net loss
per share. . . . . . . . . . . . . . . . . . . . 13,568 9,482
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Garden.com, Inc.
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the quarter ended September 30,
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . $ (5,568) $ (3,260)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization. . . . . . . 347 112
Amortization of deferred compensation. . . 374 105
Changes in operating assets and liabilities:
Prepaid advertising. . . . . . . . . . . . (541) (107)
Other prepaid expenses and current assets. (530) (105)
Inventory. . . . . . . . . . . . . . . . . (381) -
Accounts payable . . . . . . . . . . . . . (53) (14)
Accrued expenses and other liabilities . . 648 1,185
Unearned revenue . . . . . . . . . . . . . 238 114
------------ ------------
Net cash used in operating activities. . (5,466) (1,970)
Investing activities:
Purchase of other assets . . . . . . . . . (185) -
Purchase of property and equipment . . . . (1,679) (264)
Purchase of investments. . . . . . . . . . (14,824) -
------------ ------------
Net cash used in investing activities. . (16,688) (264)
Financing activities:
Repayment of long-term debt. . . . . . . . (44) (50)
Exercise of stock options. . . . . . . . . 10 10
Exercise of warrants . . . . . . . . . . . 210 -
Proceeds from issuance of common stock,
net of issuance costs of $1,954. . . . . 49,940 -
------------ ------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . 50,116 (40)
Increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . 27,962 (2,274)
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . 15,340 19,042
------------ ------------
Cash and cash equivalents, end of period . . $ 43,302 $ 16,768
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GARDEN.COM, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of September 30, 1999 and 1998 have been
prepared by Garden.com, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). These
statements are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and accruals) necessary
to present fairly the results for the periods presented. The balance sheet at
June 30, 1999 has been derived from the audited financial statements at that
date. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such SEC rules and regulations.
Operating results for the quarter ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2000. These financial statements should be read in conjunction with the
audited financial statements and the accompanying notes included in the
Company's Form S-1 Registration Statement declared effective on September 15,
1999 (the "S-1") (SEC File No. 333-79487).
Certain prior-period balances have been reclassified to conform to the
current-period presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE LOSS
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive loss and
its components in the financial statements. The Company does not have any
components of comprehensive income or loss for the quarter ended September 30,
1999.
6
<PAGE>
NOTE 2 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.
NOTE 3 - STOCKHOLDERS' EQUITY
On September 21, 1999, the Company completed its initial public offering of
4,650,000 shares of its common stock, which also included 550,000 shares sold by
the Company pursuant to the underwriters' overallotment option. Net proceeds to
the Company aggregated $49.9 million. As of the closing date of the offering,
all of the redeemable convertible preferred stock outstanding was converted into
an aggregate of 11,637,422 shares of common stock. On September 17, 1999
warrants issued by the Company in connection with the prior issuance of
convertible preferred stock were exercised. The exercise of these warrants
resulted in the Company issuing 29,370 shares of common stock.
In August 1999, the Company's Board of Directors declared a stock split of
four shares for every five shares of Common Stock then outstanding. The stock
split was effective September 15, 1999, the date the S-1 was declared effective.
Accordingly, the accompanying financial statements and footnotes have been
restated to reflect the stock split. The par value of the shares of common
stock to be issued in connection with the stock split was credited to common
stock and a like amount charged to additional paid-in capital.
BASIC NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding. Shares associated with stock options are not included
because they are antidilutive. The shares of redeemable convertible preferred
stock automatically converted into common stock effective upon the closing of
the Company's initial public offering are included in the calculation of
weighted average number of shares as of that date.
PRO FORMA BASIC NET LOSS PER SHARE
Pro forma basic 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 July 1,
1998, or at the date of original issuance, if later.
7
<PAGE>
The following table sets forth the computation of basic net loss per share
and pro forma basic net loss per share for the periods indicated (in thousands,
except per share amount):
<TABLE>
<CAPTION>
Quarter Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Numerator:
Net loss. . . . . . . . . . . . . . . . . . . . . $(5,568) $(3,260)
Denominator:
Weighted average shares . . . . . . . . . . . . . 3,828 1,010
-------- --------
Denominator for basic calculation . . . . . . . . 3,828 1,010
Weighted average effect of pro forma securities:
Series A Redeemable Convertible Preferred Stock . 502 600
Series B Redeemable Convertible Preferred Stock . 957 1,144
Series C-1 Redeemable Convertible Preferred Stock 2,021 2,414
Series D Redeemable Convertible Preferred Stock . 3,610 4,314
Series E Redeemable Convertible Preferred Stock . 2,650 -
-------- --------
Denominator for pro forma calculation . . . . . . . 13,568 9,482
Net loss per share:
Basic . . . . . . . . . . . . . . . . . . . . . . $ (1.45) $ (3.23)
Pro forma . . . . . . . . . . . . . . . . . . . . $ (0.41) $ (0.34)
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion and analysis of the Company's financial
condition, results of operations, liquidity and capital resources. The
discussion and analysis should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included elsewhere
herein. This Form 10-Q and the following "Management's Discussion and Analysis
of Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact the Company makes in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and the Company's future results of operations or financial position
are forward-looking statements. Forward-looking statements reflect the
Company's current expectations and are inherently uncertain. The Company's
actual results may differ significantly from the Company's expectations. The
section entitled "Additional Factors That May Affect Future Results" describes
some, but not all, of the factors that could cause these differences.
RESULTS OF OPERATIONS
PRODUCT REVENUES
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Product revenues $ 1,159 $ 333 248%
</TABLE>
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. The
growth in product revenues in the quarter ended September 30, 1999 as compared
to the quarter ended September 30, 1998 is primarily attributable to increases
in both the Company's cumulative customer base and repeat orders taken from the
Company's existing customers. The cumulative customer base increased 255% to
110,000 for the quarter ended September 30, 1999 as compared to 31,000 for the
same quarter in the prior fiscal year. During the quarter as a percent of total
orders taken, purchases from existing customers increased to 50.9% as compared
to 29.0% for the quarter ended September 30, 1998.
9
<PAGE>
ADVERTISING REVENUES
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Advertising revenues $ 253 $ 25 912%
</TABLE>
Advertising revenues consist primarily of short-term advertising contracts
for either guaranteed impression levels on the Company's Web sites, or
advertising placements in the Company's print publications. Those revenues are
recognized ratably in the period in which the advertisement is displayed. The
Company also recognizes a small portion of its advertising revenues through
barter transactions in which advertising in print publications is exchanged for
either guaranteed impressions on the Company's Web site or by providing Web site
services. Advertising revenues increased primarily due to a 96% increase in
page views on the garden.com Web site to 23.9 million for the quarter ended
September 30, 1999 as compared to 12.2 million for the quarter ended September
30, 1998.
GROSS PROFIT
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Gross profit $ 319 $ (14) -
Gross margin 22.6% (3.9%)
</TABLE>
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 the Company's internal
advertising sales department. The increase in gross profit in absolute dollars
is due in part to the Company's overall increased total revenues. Gross margin
increased primarily due to the elimination of a one-time promotional activity,
which totaled $79,000 in the quarter ended September 30, 1998 and which reduced
gross margin from 18.2% to (3.9%) for that period. The Company typically
experiences some sequential quarterly variances in gross margins due to seasonal
shifts in sales of its product mix. Additionally, the Company may at times use
discounting and other promotional activities to promote customer purchases that
would negatively affect gross margins.
10
<PAGE>
MARKETING AND SALES
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Marketing and sales $ 2,699 $ 2,133 26.5%
Percentage of total revenues 191.1% 595.8%
</TABLE>
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, in absolute
dollars, primarily due to an increase in the Company's advertising and
promotional expenditures, and increases in payroll costs associated with the
Company's marketing and customer solutions departments. Such expenses decreased
as a percentage of total revenues due to the significant increase in total
revenues. The Company intends to continue to pursue an aggressive branding and
marketing campaign and to hire additional marketing and sales personnel and,
therefore, expects marketing and sales expenses to increase significantly in
absolute dollars in future periods. In addition, if the Company's sales volume
increases in future periods, the Company will need to continue to expand its
customer solutions and distribution departments, which will result in increased
marketing and sales expenses.
CONTENT AND PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Content and product
development $ 1,408 $ 640 120%
Percentage of total revenues 99.7% 178.8%
</TABLE>
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. The increase in content and product
development expenses in absolute dollars is primarily due to an increase 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 the Company's Web sites. Such expenses decreased
as a percentage of total revenues due to the significant increase in total
revenues. The Company believes that continued investment in content and product
development is critical to attaining its strategic objectives and, as a result,
the Company expects content and product development expenses to increase in
absolute dollars in future periods.
11
<PAGE>
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
General and
administrative $ 1,655 $ 616 168.7%
Percentage of total revenues 117.2% 172.1%
</TABLE>
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
amortization of other assets. The increase in general and administrative
expenses in absolute dollars is primarily due to an increase in payroll and
related costs used for hiring additional personnel as well as associated
expenses necessary to support the growth of the Company's operations, including
facilities, professional services and supplier operations support. Such
expenses decreased as a percentage of total revenues due to the significant
increase in total revenues. The Company expects general and administrative
expenses to increase in absolute dollars in future periods as the Company
expands its staff and incurs additional costs related to the growth of its
business.
AMORTIZATION OF DEFERRED COMPENSATION
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998
--------------- ---------------
(In Thousands)
<S> <C> <C>
Amortization of
deferred compensation $ 374 $ 105
</TABLE>
Deferred stock compensation is amortized to expense over the vesting
periods of the applicable stock options. The Company expects to record $763,000
of amortization over the remaining nine months ended June 30, 2000. These
amounts represent the difference between the exercise price of stock option
grants and the deemed fair value of the Company's common stock at the time of
such grants. Amortization of deferred compensation expense for each of the next
four fiscal years is expected to be as follows:
Year ended Amount in thousands
- ----------- ---------------------
June 30, 2001 $614
June 30, 2002 348
June 30, 2003 166
June 30, 2004 40
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<PAGE>
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998 % Change
--------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Interest income $ 252 $ 252 -
Interest expense $ 3 $ 5 (40%)
</TABLE>
Interest income remained at the same level due to similar average cash
balances during both the quarters ended September 30, 1999 and September 30,
1998, respectively. Interest income is expected to increase because subsequent
quarters will include a full three months of interest income on the proceeds of
the Company's initial public offering.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. The Company has provided a full valuation allowance on the deferred
tax asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's principal source of liquidity
consisted of $43.3 million of cash and cash equivalents compared to $15.3
million of cash and cash equivalents at June 30, 1999.
Net cash used in operating activities was $5.5 million and $2.0 million for
the quarters ended September 30, 1999 and 1998, respectively. Net operating
cash flows were primarily attributable to quarterly net losses and increases in
prepaid advertising, other prepaid expenses and current assets, and inventories,
offset by increases in accrued expenses and unearned revenue.
Net cash used in investing activities was $16.7 million and $264,000 for
the quarters ended September 30, 1999 and 1998, respectively, and consisted of
purchases of investments, property and equipment and other assets. Cash
available for investment purposes increased substantially in the quarter ended
September 30, 1999 as a result of the proceeds from the issuance of common stock
in the Company's initial public offering.
Net cash provided by financing activities of $50.1 million for the quarter
ended September 30, 1999 resulted from net proceeds from the issuance of common
stock in the Company's initial public offering. Net cash used in financing
activities of $40,000 for the quarter ended September 30, 1998 resulted from
payments on the Company's long term debt net of the proceeds from stock option
exercises.
13
<PAGE>
The Company believes that current cash and marketable securities and
investments balances will be sufficient to meet its anticipated cash needs
through the remainder of the fiscal year ended June 30, 2000. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash, marketable securities and cash that may be
generated from operations are insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or debt securities
or to obtain a line of credit. The sale of additional equity or convertible
debt securities could result in additional dilution to the Company's
stockholders. In addition, the Company will, from time to time, consider the
acquisition of or investment in complementary businesses, products, services and
technologies, which might impact the Company's liquidity requirements or cause
the Company to issue additional equity or debt securities. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
YEAR 2000 PREPARATIONS
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.
The Company may be affected by the Year 2000 issue related to non-compliant
information technology ("IT") systems or non-IT systems operated by the Company
or by third parties. The Company has not completed its assessment of its
internal and external (third-party) IT systems and non-IT systems. As of the
date of this filing, the Company's 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.
- The Company's Web site equipment is now Year 2000 compliant per the
specifications of the manufacturer and assurance of the Company's network
service provider.
- The Company has completed its proprietary software assessment. Based
on its assessment, the Company believes it is Year 2000 compliant, although no
assurances can be given that the Company will not encounter any Year 2000
compliance issues with respect to its proprietary software.
- 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. The Company
is in
14
<PAGE>
the process of making these upgrades, and anticipates these systems
will be Year 2000 compliant by the end of 1999. The Company's accounting
software system is already Year 2000 compliant.
- Personal computers and desktop applications will require upgrades, or
patches, from vendors, including Microsoft and Dell. The Company is in the
process of making these upgrades, and anticipates these systems will be Year
2000 compliant by the end of 1999.
- Non-IT systems assessment is in progress, and the Company anticipates
it will be complete by the end of the year. The Company does not believe non-IT
systems Year 2000 compliance poses a material risk to the Company because no
non-IT systems components are critical to its 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 the Company's external
systems assessment by the end of 1999.
- The Company is now assessing its external systems. By the end of
1999 the Company's plans to obtain Year 2000 compliance assurances from
suppliers of most of its products and from key external trading partners,
including telecommunications and electricity service providers.
The Company has not finalized its contingency plan. The Company plans to
finalize its contingency plan after it has completed its Year 2000 compliance
assessment. The costs associated with remediating the Company's non-compliant
IT systems and non-IT systems have not been material to date and the Company
does not anticipate that such costs will be material in the future, although
there can be no assurance that such costs will not be material.
To the extent that the Company's assessment is finalized without
identifying any material non-compliant IT systems operated by the Company or by
third parties, the likely worst case Year 2000 scenario is a systematic failure
beyond the Company's control, such as a prolonged telecommunications or
electrical failure. Such a failure could prevent the Company from operating its
business, prevent users from accessing its Web sites, or change the behavior of
advertising consumers or persons accessing its Web sites. The Company believes
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 the Company's Web sites, and
- claims of mismanagement, misrepresentation or breach of contract.
Any of these risks would likely harm the Company's business, operating
results and financial condition.
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this report and in the Company's Registration
Statement on Form S-1, the following additional factors may affect the Company's
future results.
RISKS RELATED TO THE COMPANY'S BUSINESS
THE COMPANY HAS A HISTORY OF SIGNIFICANT LOSSES AND EXPECTS TO INCUR SUBSTANTIAL
NET LOSSES IN THE FUTURE. IF THE COMPANY DOES NOT ACHIEVE PROFITABILITY, ITS
FINANCIAL CONDITION AND ITS STOCK PRICE COULD SUFFER.
The Company incurred net losses of $0.7 million in its inception period
from October 2, 1995 through June 30, 1996, $2.4 million in fiscal 1997, $4.7
million in fiscal 1998, $19.1 million in fiscal 1999 and $5.6 million in the
first quarter of fiscal 2000. As of September 30, 1999, the Company has
incurred cumulative net losses of $32.5 million. The Company expects to
experience operating losses and negative cash flow for the foreseeable future.
The Company anticipates its 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. The Company does not have sufficient cash to indefinitely sustain
these operating losses. Further, the Company will need to generate significant
revenues to achieve and maintain profitability. Although the Company's revenues
have grown significantly in recent quarters, the Company cannot be certain that
it can sustain these growth rates or that it will achieve sufficient revenues
for profitability. If the Company does achieve profitability, it cannot be
certain that it can sustain or increase profitability on a quarterly or annual
basis in the future. The Company has been unable to fund its operations with
the cash generated from its business. If the Company does not generate cash
sufficient to fund its operations, it may need additional financing to continue
its growth or its growth may be limited. To date, the Company has funded its
operations from the sale of equity securities and has not generated sufficient
cash from operations. Cash from revenues must increase significantly for the
Company to fund anticipated development and marketing costs internally. If the
Company's cash flows are insufficient to fund these costs, it may need to fund
its growth through additional debt or equity financings or reduce costs.
Further, the Company may not be able to obtain financing on satisfactory terms.
The Company's inability to finance its growth, either internally or externally,
may limit its growth potential and its ability to execute its business strategy.
THE COMPANY HAS A LIMITED OPERATING HISTORY AND EXPECTS TO ENCOUNTER RISKS AND
DIFFICULTIES FREQUENTLY FACED BY EARLY STAGE COMPANIES IN RAPIDLY EVOLVING
MARKETS. THIS SUBJECTS THE COMPANY'S STOCKHOLDERS TO ADDITIONAL RISKS THAT THE
COMPANY'S MARKET MAY NOT DEVELOP AS ANTICIPATED OR THAT THE COMPANY MAY NOT
SUCCESSFULLY EXECUTE ITS BUSINESS STRATEGY.
The Company has a limited operating history on which to base an evaluation
of its business and prospects. The Company was formed in December 1995, and it
initiated its online operations and first recognized revenues in March 1996.
Accordingly, the
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Company's prospects must be considered 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 the Company's limited
operating history, it is difficult to assess whether the Company will succeed at
executing on its business strategy, managing growth, and addressing the market
risks that it faces 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 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 the Company's products may not achieve or sustain
market acceptance. To address these risks, the Company must maintain and expand
its customer base, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade the technology and systems that the
Company uses to process customers' orders and payments, improve its Web sites,
provide superior customer service, respond to competitive developments and
attract, retain and motivate qualified personnel. There can be no assurance
that the Company will be successful in addressing these risks, and any failure
by the Company to do so could have a negative impact on its business, operating
results and financial condition.
THE COMPANY'S DEPENDENCE ON THE HIGHLY SEASONAL GARDENING INDUSTRY WILL CAUSE
ITS 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 the Company's quarterly revenues and
product margins. For instance, the Company expects its revenues to be
relatively higher in its fourth fiscal quarter, which coincides with the spring
gardening season, and relatively lower in its first fiscal quarter, reflecting
decreasing consumer demand for garden products during the late summer. In
addition, as is typical for gardening retailers, the Company's product mix
generally varies by season. Due to this variation in product mix offered during
the year, the Company's 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, the Company anticipates that
operating costs will typically increase in the third quarter of its fiscal year
as marketing expenses increase in anticipation of the spring planting season.
Due to the Company's limited operating history, it is difficult to predict
the seasonal pattern of the Company's future revenues and operating costs and
the impact of such seasonality on the Company's future operating results. If
they become more pronounced, seasonal revenue and cost patterns may strain the
Company's personnel and fulfillment activities and could cause a shortfall in
revenues as compared to costs in a given period.
THE COMPANY EXPECTS ITS QUARTERLY OPERATING RESULTS TO FLUCTUATE. IF THE
COMPANY FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS,
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK COULD DECLINE.
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The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside its control. As a result, the Company believes that quarterly
comparisons of its operating results are not necessarily meaningful and that
investors should not rely on the results of one quarter as an indication of the
Company's future performance. The Company believes it is likely that, in the
future, fluctuations in its quarterly operating results will cause its results
to fall below the expectations of securities analysts and investors, which could
cause the price of the Company's common stock to drop. The Company believes
that many of the other risk factors listed in this report may negatively affect
its quarterly operating results and contribute to fluctuations. Further, the
Company's quarterly gross margins also may be impacted by a number of different
factors that are difficult for the Company to anticipate at this stage in its
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
the Company's Web sites and the Web sites of its distribution and advertising
partners.
The Company's limited operating history and the rapidly evolving nature of
its industry make forecasting quarterly operating results difficult.
Accordingly, the Company bases its expenses in large part on its operating plans
and future revenue projections. Most of the Company's expenses are fixed in the
short term, and the Company may not be able to quickly reduce spending if its
revenues are lower than it projects. Therefore, any significant shortfall in
revenues would likely have an immediate, negative impact on the Company's
business, operating results and financial condition.
ESTABLISHING THE GARDEN.COM BRAND QUICKLY AND COST-EFFECTIVELY IS ESSENTIAL FOR
THE COMPANY TO BE SUCCESSFUL. IF THE COMPANY DOES NOT ESTABLISH THE GARDEN.COM
BRAND QUICKLY, IT MAY NOT CAPTURE SUFFICIENT MARKET SHARE OR INCREASE REVENUES
ENOUGH TO ACHIEVE PROFITABILITY.
The Company believes that it must establish, maintain and enhance the
Garden.com brand to attract more customers to its 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
the Company's 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 the Company's success in providing a
high quality online experience supported by a high level of customer service,
which cannot be assured. The Company expects that it will need to increase
substantially its spending on programs designed to create and maintain strong
brand loyalty among customers and the Company cannot be certain that its efforts
will be successful.
THE COMPANY EXPECTS SIGNIFICANT INCREASES IN IT OPERATING EXPENSES, WHICH COULD
HAVE A NEGATIVE IMPACT ON ITS OPERATING RESULTS.
The Company plans to increase its operating expenses substantially to
develop the Garden.com brand nationally, offer new gardening-related products
and services, enter
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into additional strategic relationships and further develop its technology and
transaction-processing systems. These expenses will be incurred before the
Company derives any revenues from this increased spending, and the timing of
these expenses may contribute to fluctuations in quarterly operating results.
If the Company's revenues do not increase proportionately with these expenses,
its losses will be greater than expected.
GARDENING CONSUMERS MAY NOT ACCEPT THE COMPANY'S ONLINE SOLUTION. THIS MAY
RESULT IN SLOWER REVENUE GROWTH, LOSS OF REVENUES AND INCREASED OPERATING
LOSSES.
To be successful, the Company must attract and retain a significant number
of consumers to the garden.com Web site at a reasonable cost. Any significant
shortfall in the number of transactions occurring over the Company's Web site
will negatively affect its financial results by increasing or prolonging
operating losses. Conversion of customers from traditional shopping methods to
electronic shopping may not occur as rapidly as the Company expects, if at all.
Therefore, the Company may not achieve the critical mass of customer traffic it
believes is necessary to become successful. Specific factors that could prevent
widespread customer acceptance of the Company's solution, and its 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 the Company's 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.
THE COMPANY DEPENDS 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 THE COMPANY'S BUSINESS.
The Company derives substantially all of its revenues directly or
indirectly from the gardening industry, and its 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 the
Company's 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, the Company's business strategy relies on advertising by and
agreements with other Internet companies. Any significant deterioration in
general
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economic conditions that harms these companies could result in decreased
advertising revenues and have a negative impact on the Company's business,
operating results and financial condition.
THE COMPANY'S BUSINESS RELIES ON ITS ABILITY TO MAINTAIN RELATIONSHIPS WITH ITS
SUPPLIERS TO OBTAIN SUFFICIENT QUANTITIES OF QUALITY MERCHANDISE ON ACCEPTABLE
COMMERCIAL TERMS. IF THE COMPANY FAILS TO MAINTAIN ITS SUPPLIER RELATIONSHIPS
ON ACCEPTABLE TERMS, ITS SALES AND PROFITABILITY COULD SUFFER.
Because the Company carries minimal inventory and relies largely on rapid
fulfillment from its suppliers, the Company's business would be seriously harmed
if it were unable to develop and maintain relationships with suppliers that
allow it to obtain sufficient quantities of quality merchandise on acceptable
commercial terms. The Company's 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 the
Company has alternative sources of supply for a small percentage of the products
it offers, the Company has not established alternative sources for all its
products. The Company's current suppliers may not continue to sell products to
it on current terms or at all, and the Company 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 it. In addition, the Company's supply
contracts typically do not restrict a supplier from selling products to
retailers other than online retailers, which could limit the Company's ability
to supply the quantity of product requested by its customers. If the Company
cannot supply its products to consumers at acceptable prices, the Company may
lose sales and market share as consumers make purchases elsewhere. Further, an
increase in supply costs could increase operating losses beyond current
expectations.
THE COMPANY DEPENDS ON ITS THIRD PARTY SUPPLIERS TO PROVIDE QUALITY PRODUCTS
DIRECTLY TO ITS CUSTOMERS. THE COMPANY COULD LOSE REVENUES AND MARKET SHARE AND
ITS BRAND NAME COULD BE HARMED IF THE COMPANY'S SUPPLIERS FAIL TO SHIP QUALITY
PRODUCTS TO ITS CONSUMERS.
Because the Company's revenues depend on the number of customers who buy
products from the Company, the reliability and quality of the Company's products
are critical to its operating results. The Company is heavily dependent on
suppliers for assuring the quality and health of the products shipped directly
to the Company's customers. The failure of the Company's suppliers to
consistently provide high quality products could result in lost revenues, delays
in customer acceptance, damage to the Company's reputation and harm to the
Company's brand name. In addition, the Company does 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 THE
COMPANY'S PRODUCTS. AS A RESULT, INCLEMENT WEATHER COULD INCREASE THE COMPANY'S
COSTS OR DECREASE ITS REVENUES.
Weather and other acts of nature outside of the Company's control could
negatively impact its business, operating results and financial condition.
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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 the
Company's 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 THE COMPANY FACES SIGNIFICANT COMPETITION FROM ESTABLISHED TRADITIONAL
GARDENING RETAILERS, MAIL ORDER CATALOGS, ONLINE RETAILERS AND OTHERS, THE
COMPANY MAY EMERGE FROM ITS PERIOD OF GROWTH WITH ONLY A MODEST INCREASE IN
MARKET SHARE OR DECREASED PROFIT MARGINS.
The Company may be unable to compete successfully against current and
future competitors, and competitive pressures could have a negative impact on
the Company's business, operating results and financial condition. Online
commerce, and specifically the online retail gardening market, is new and
rapidly evolving, and the Company expects competition to intensify in the future
as companies attempt to utilize the advantages of the Internet. The Company's
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. The Company currently or potentially competes 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.
The Company expects competition to increase as current competitors increase
the sophistication of their offerings and as new participants enter the market.
Many of the Company's 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 the Company does and could enter into strategic or commercial
relationships with larger, more established and well-financed companies. Due to
their size and greater resources, many of the Company's 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
the Company does. Their financial strength could prevent the Company from
increasing
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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 the Company. Increased competition may result in reduced operating
margins, as well as loss of market share and brand recognition.
THE COMPANY DEPENDS UPON FEDERAL EXPRESS TO DELIVER ITS PRODUCTS ON A TIMELY AND
CONSISTENT BASIS. A DETERIORATION IN THE COMPANY'S RELATIONSHIP WITH FEDERAL
EXPRESS COULD DECREASE THE COMPANY'S ABILITY TO TRACK SHIPMENTS, CAUSE SHIPMENT
DELAYS, AND INCREASE ITS SHIPPING COSTS AND THE NUMBER OF DAMAGED PRODUCTS.
The Company's supply and distribution system is dependent upon its
relationship with Federal Express. Federal Express ships substantially all of
the Company's orders, and the Company does not currently maintain a distribution
relationship with any other carrier. Because the Company does not have a
written agreement with Federal Express, the Company cannot be sure that its
relationship with Federal Express will continue on terms favorable to the
Company, if at all. If the Company's relationship with Federal Express is
terminated or impaired or if Federal Express is unable to deliver product for
the Company, whether through labor shortage, slow down or stoppage,
deteriorating financial or business condition or for any other reason, the
Company would be required to use alternative carriers for the shipment of
products to its customers. The Company may be unable to engage an alternative
carrier on a timely basis or upon terms favorable to the Company. Changing
carriers would likely have a negative effect on the Company's 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.
THE COMPANY RELIES SUBSTANTIALLY ON ITS RELATIONSHIPS WITH VARIOUS ONLINE
SERVICES, SEARCH ENGINES AND DIRECTORIES TO DRIVE TRAFFIC TO THE COMPANY'S WEB
SITES. IF THESE RELATIONSHIPS DO NOT CONTINUE, IT WILL BE DIFFICULT FOR THE
COMPANY TO INCREASE MARKET SHARE AND ACHIEVE PROFITABILITY.
The Company has relationships with various online services, search engines and
directories to provide content and advertising banners that hyperlink to the
Company's Web sites. The Company relies on search engines, directories and
other navigational tools to direct traffic to the Company's Web sites. The
Company cannot be sure that such relationships will be available to it in the
future on acceptable commercial terms, if at all. If the Company is unable to
maintain satisfactory relationships with these parties on acceptable commercial
terms, or if the Company's competitors are better able to leverage such
relationships, the Company's business, operating results and financial condition
could be negatively affected. The Company may not achieve sufficient online
traffic or product purchases to realize sufficient sales to
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compensate for the Company's 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 the Company's profit margins and may result in termination of
these types of relationships. Without these relationships, it is unlikely that
the Company can sufficiently increase market share and achieve profitability.
THE COMPANY'S PERFORMANCE, INCLUDING ITS REVENUE GROWTH, DEPENDS ON ITS ABILITY
TO OFFER NEW AND EXPANDED PRODUCTS AND SERVICES.
The Company plans 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. The Company may be unable to offer such products or services in
a cost- effective or timely manner. Furthermore, any new product or service the
Company launches that is not favorably received by consumers could damage its
reputation and brand name, resulting in lower revenues. Expansion of the
Company's products or services in this manner would also require significant
additional expenses and development and may strain the Company's management,
financial and operational resources. The Company's business, operating results
and financial condition could be seriously harmed if it is unable to generate
revenues from expanded services or products sufficient to offset their cost.
The Company's success also depends on its 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. The
Company may be unsuccessful in determining customer requirements, and the
Company's offerings may not adequately satisfy current or future customer
demands. Furthermore, even if the Company correctly forecasts customer demands,
the Company may be unable to design and implement a Web site that meets these
demands.
THE COMPANY HAS EXPERIENCED SIGNIFICANT GROWTH IN ITS BUSINESS IN RECENT PERIODS
AND ANY INABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH COULD HARM THE
COMPANY'S BUSINESS.
The Company's historical growth has placed, and any further growth is
likely to continue to place, a significant strain on the Company's management
and resources. Any failure to manage growth effectively could seriously harm
the Company's business and operating results. The Company has also recently
moved into new headquarters and significantly expanded its operations. To be
successful, the Company will need to continue to implement management
information systems and improve its operating, administrative, financing and
accounting systems and controls. The Company will also need to train new
employees and maintain close coordination among its executive, accounting,
finance, marketing, sales and operations organizations. These processes are time
consuming and expensive, will increase management responsibilities and will
divert management attention.
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THE COMPANY RELIES ON CONTENT AND TECHNOLOGIES LICENSED FROM THIRD PARTIES. THE
LOSS OF OR INCREASE IN COST OF THE COMPANY'S LICENSED CONTENT AND TECHNOLOGY MAY
IMPAIR ITS ABILITY TO ASSIMILATE AND MAINTAIN CONSISTENT, APPEALING CONTENT OR
MAINTAIN AND IMPROVE THE SERVICES THE COMPANY OFFERS TO CONSUMERS.
The Company intends to continue to strategically license a portion of its
content for its Web sites from third parties, including content that is
integrated with internally developed content and used on the Company's Web sites
to provide key services. Although substantially all of the content on
garden.com is developed and created internally, the Company licenses a majority
of the content for its Virtual Garden site from third parties. These third
party content licenses may be unavailable to the Company on commercially
reasonable terms, and the Company may be unable to integrate third party content
successfully. Such content licenses may expose the Company to increased risks,
including:
- - the risks associated with the assimilation of new content;
- - the diversion of resources from the development of the Company's 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 the Company's business, operating results and financial
condition.
The Company currently licenses some of the technology incorporated into its
Web sites from third parties. For example, third parties have developed
substantially all of the hardware used for the Company's Web sites. However,
the Company has developed a majority of the software that the Company uses to
run its Web sites. Therefore, the Company relies to a material extent on
technology developed and licensed from third parties. This reliance on licensed
technology exposes the Company to increased risks:
- - third parties from which the Company licenses its technology may not be
able to defend successfully their proprietary rights against claims of
infringement, which could cause the Company to lose its rights to use such
technology or increase its licensing costs;
- - third parties from which the Company licenses its technology may not
develop new technology quickly enough to meet the Company's needs for
improvement; and
- - renewals, replacements and upgrades for the Company's licensed technology
may not be available on commercially reasonable terms.
The loss of existing technology licenses could negatively affect the
performance of the Company's 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. The Company's business could suffer if these risks
materialize.
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PROTECTION OF THE COMPANY'S DOMAIN NAMES IS UNCERTAIN. IF THE COMPANY CANNOT
PROTECT ITS DOMAIN NAMES, IT WILL IMPAIR THE COMPANY'S ABILITY TO BRAND
SUCCESSFULLY THE GARDEN.COM NAME.
The Company currently holds 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,
the Company may be unable to acquire or maintain relevant domain names in all
countries in which it conducts business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, the Company may be unable to prevent
third parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of the Company's trademarks and other proprietary
rights. The Company may not successfully carry out its business strategy of
establishing a strong brand for Garden.com if the Company cannot prevent others
from using similar domain names or trademarks. This could impair the Company's
ability to increase market share and revenues.
THE COMPANY'S OPERATING RESULTS DEPEND ON ITS INTERNALLY DEVELOPED WEB SITES,
NETWORK INFRASTRUCTURE AND TRANSACTION-PROCESSING SYSTEMS.
The satisfactory performance, reliability and availability of the Company's
Web sites, transaction-processing systems and network infrastructure are
critical to the Company's operating results, as well as to its ability to
attract and retain customers and maintain adequate customer service levels. Any
system interruptions that result in the unavailability of the Company's Web
sites or reduced performance of the transaction systems would reduce the volume
of sales and the attractiveness of the Company's service offerings, which would
seriously harm its business, operating results and financial condition. The
Company is currently upgrading its system architecture to accommodate increased
traffic and processing needs. The Company expects this process to be time
consuming and expensive and its upgrade may not be successful.
The Company uses internally developed systems for its Web sites and
substantially all aspects of transaction processing, including customer
profiling and order verifications. The Company has experienced periodic systems
interruptions due to server failure, which the Company believes will continue to
occur from time to time. If the volume of traffic on the Company's Web sites or
the number of purchases made by customers substantially increases, the Company
will need to further expand and upgrade its technology, transaction processing
systems and network infrastructure. The Company has 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.
The Company's transaction processing systems and network infrastructure may
not be able to accommodate increases in traffic in the future. The Company may
be unable to project accurately the rate or timing of traffic increases or
successfully upgrade
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its systems and infrastructure to accommodate future traffic levels on its
Web sites. In addition, the Company may be unable in a timely manner to
effectively upgrade and expand its transaction processing systems or to
successfully integrate any newly developed or purchased modules with its
existing systems. Any inability to do so could negatively impact the Company's
sales volume, business, operating results and financial condition.
THE COMPANY'S COMPUTERS AND COMMUNICATIONS SYSTEMS ARE VULNERABLE TO DAMAGE OR
INTERRUPTION WHICH MAY HINDER THE COMPANY'S ABILITY TO DELIVER TIMELY
INFORMATION OR EXECUTE ONLINE TRANSACTIONS.
The Company's ability to successfully receive and fulfill orders and
provide high quality customer service depends on the efficient and uninterrupted
operation of its computer and communications hardware systems. Substantially
all of the Company's computer and communications systems are located in three
separate locations in Austin, Texas. The Company's systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins and similar events. Despite the Company's
implementation of network security measures, its 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 the Company's sales volume, business, operating
results and financial condition.
IF THE COMPANY EXPANDS ITS BUSINESS INTERNATIONALLY, ITS BUSINESS WOULD BECOME
INCREASINGLY SUSCEPTIBLE TO NUMEROUS INTERNATIONAL BUSINESS RISKS AND CHALLENGES
THAT COULD AFFECT THE COMPANY'S PROFITABILITY.
The Company believes that the current globalization of the economy requires
businesses to pursue or consider pursuing international expansion. The Company
will probably expand into international markets. Although the Company has not
had international sales revenue to date, the Company may increase its
international sales efforts. International sales are subject to inherent risks
and challenges that could affect the Company's 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.
26
<PAGE>
To the extent the Company generates international sales in the future, any
negative effects on its international business could impact detrimentally the
Company's 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 the Company's 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 THE COMPANY'S BUSINESS.
The Company may broaden the scope and content of its Web sites by acquiring
other online services and businesses or other gardening enterprises. As part of
the Company's business strategy, the Company expects to review acquisition
prospects that would complement its existing business, augment the distribution
of its content and community or enhance its technical capabilities. The Company
anticipates that it will acquire other businesses or assets meeting its
strategic goals that can be purchased on terms acceptable to the Company. The
Company may not locate suitable acquisition opportunities. Any future
acquisitions would expose the Company to increased risks, including:
- - 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 the Company's 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.
THE COMPANY IS SUBJECT TO GOVERNMENT REGULATIONS RELATING TO THE SHIPMENT OF
LIVE GOODS, FERTILIZERS AND OTHER PRODUCTS, WHICH EXPOSES THE COMPANY TO RISKS
THAT IT WILL BE FINED OR EXPOSED TO CIVIL OR CRIMINAL LIABILITY, RECEIVE
NEGATIVE PUBLICITY OR BE PREVENTED FROM SHIPPING PRODUCTS INTO ONE OR MORE
STATES.
The Company is subject to federal, state and local laws and regulations
relating to the shipment of live goods, fertilizers and other products. For
instance, various federal,
27
<PAGE>
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. The Company currently relies on its suppliers to comply with these
laws and regulations. However, the Company is unable to verify that its
suppliers have complied or will comply with all such laws and regulations. The
Company could be subject to the following if these requirements have not been
fully met by its suppliers or by it directly:
- - the Company could be fined or exposed to civil or criminal liability or
remediation expenses;
- - the Company could receive negative publicity, devaluing its brand name;
and
- - the Company may be prevented from shipping products into one or more
states.
THE COMPANY MAY BE ADVERSELY IMPACTED BY THE YEAR 2000 BECAUSE ITS SYSTEMS OR
ITS SUPPLIERS' SYSTEMS MAY FAIL.
The Company believes that its internal computer systems are Year 2000
compliant and the Company does not anticipate that it 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 the Company relies, including content providers, advertisers
and affiliates may contain errors or faults with respect to the Year 2000. For
example, the Company depends on financial institutions to process credit card
transactions, on telecommunications vendors to maintain the Company's network
and on Federal Express to deliver product to customers. Known or unknown errors
or defects that affect the operation of the Company's 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 the
Company's reputation, increased service and warranty costs, and litigation
costs. A more detailed description of the Company's Year 2000 compliance is in
this report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Preparations."
RISKS RELATED TO THE INTERNET INDUSTRY
THE COMPANY'S PERFORMANCE DEPENDS ON THE GROWTH AND ACCEPTANCE OF THE INTERNET
AS A MEDIUM FOR COMMERCE. WITHOUT THE GROWTH AND ACCEPTANCE OF ELECTRONIC
COMMERCE, THE COMPANY MAY NOT ACHIEVE THE REVENUE GROWTH REQUIRED FOR IT TO
ACHIEVE PROFITABILITY.
The Company 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, the Company cannot be sure that the necessary infrastructure will
be in place to process such transactions. The Company's long-term viability
depends substantially upon the widespread acceptance and
28
<PAGE>
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
the Company 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, the Company's sales growth may be insufficient to
achieve profitability, and its operating results and financial condition will
consequently suffer.
RAPID TECHNOLOGICAL CHANGE COULD RENDER THE COMPANY'S WEB SITES AND SYSTEMS
OBSOLETE AND REQUIRE SIGNIFICANT CAPITAL EXPENDITURES.
If the Company is unable, for technical, legal, financial or other reasons,
to adapt in a timely manner in response to changing market conditions or
customer requirements, the Company's 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
29
<PAGE>
new industry standards and practices that could render the Company's existing
online sites and proprietary technology and systems obsolete. The emerging
nature of these products and services and their rapid evolution will require
that the Company continually improve the performance, features and reliability
of its online services, particularly in response to competitive offerings. The
Company's success will depend, in part, on its ability:
- - to enhance the Company's existing services;
- - to develop and license new services and technology that address the
increasingly sophisticated and varied needs of the Company's 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. The Company may be unable to use new technologies effectively or
adapt its Web sites, proprietary technology and transaction-processing systems
to customer requirements or emerging industry standards. Updating the Company's
technology internally and licensing new technology from third parties may
require significant additional capital expenditures and could affect the
Company's profitability.
THE COMPANY IS 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, the Company relies on encryption and
authentication technology that it licenses from third parties. The Company
cannot predict whether events or developments will result in a compromise or
breach of the algorithms the Company uses to protect customer transaction data.
Furthermore, the Company's servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. The Company may need
to expend significant additional capital and other resources to protect against
a security breach or to alleviate problems caused by any breaches. The
Company's business may be adversely affected if its security measures do not
prevent security breaches and there can be no assurance that it can prevent all
security breaches.
To date, the Company has 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 the Company processes, that merchant
does not obtain a cardholder's signature. A failure to adequately control
fraudulent credit card transactions could reduce the Company's collections and
harm its business.
30
<PAGE>
THE COMPANY COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED
THROUGH ITS WEB SITES, WHICH COULD RESULT IN HIGH LITIGATION OR INSURANCE COSTS.
As a publisher and distributor of online content, the Company faces
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that the Company publishes or distributes. Claims have been successfully
brought against online services. In addition, the Company does not and cannot
practically screen all of the content generated by its users on the bulletin
board system on its Web sites, and the Company could be exposed to liability
with respect to such content. Although the Company carries general liability
insurance, the Company's insurance may not cover claims of these types or may
not be adequate to indemnify the Company 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 the
Company's reputation and result in litigation costs or increased insurance
costs.
FUTURE GOVERNMENT REGULATION OF THE INTERNET COULD DECREASE DEMAND FOR THE
COMPANY'S PRODUCTS OR INCREASE THE COMPANY'S 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 the Company's business, operating
results and financial condition. The Company is 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 the Company's products and services and increase the
Company's 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 the Company was alleged to
have violated federal, state or foreign civil or criminal law, the Company could
be subject to liability, and even if the Company could successfully defend such
claims, they may involve significant legal compliance and litigation costs.
31
<PAGE>
RISKS RELATED TO THE SECURITIES MARKETS
THE COMPANY'S COMMON STOCK PRICE MAY FLUCTUATE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL STOCKHOLDERS.
The market price for the Company's common stock may fluctuate significantly
in response to a number of factors, some of which are beyond the Company's
control, including:
- - variations in quarterly operating results;
- - changes in financial estimates by securities analysts;
- - changes in market valuations of online commerce companies;
- - announcements by the Company or its 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.
As a result, investors in the Company's common stock may not be able to
resell their shares at or above their purchase 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. The Company may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources,
which could negatively impact the Company's business, operating results and
financial condition.
THE COMPANY MAY BE UNABLE TO MEET ITS FUTURE CAPITAL REQUIREMENTS AND EXECUTE ON
ITS BUSINESS STRATEGY.
The Company expects current cash balances, cash equivalents and investments
to meet its working capital and capital expenditure needs for the remainder of
the fiscal year ended June 30, 2000. Because the Company is not currently
generating sufficient cash to fund its operations, the Company may be forced to
rely on external financing to meet future capital requirements. After June 30,
2000, the Company may need to raise additional funds, and no assurance can be
given that the Company will be able to obtain additional financing on favorable
terms, if at all. The Company's capital requirements depend upon several
factors, including the rate of market acceptance, its ability to expand its
customer base and increase revenues, its level of expenditures for marketing and
sales,
32
<PAGE>
the cost of Web site upgrades and other factors. If the Company's capital
requirements vary materially from those currently planned, the Company may
require additional financing sooner than anticipated. Further, if the Company
issues 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 the Company cannot raise funds, if
needed, on acceptable terms, the Company may not be able to continue its
operations, develop or enhance its Web site, grow market share, take advantage
of future opportunities or respond to competitive pressures or unanticipated
requirements, which could negatively impact the Company's business, operating
results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not hold any significant market risk sensitive instruments
during the period covered by this report.
33
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of its business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On September 21, 1999, the Company sold 4,650,000 shares of common
stock and certain selling stockholders sold 65,000 shares of common stock in an
underwritten public offering (the "Offering"), which constituted all of the
securities registered pursuant to the Company's Registration Statement on Form
S-1 (Registration No. 333-79487). The Securities and Exchange Commission
declared the Registration Statement effective on September 15, 1999. The
managing underwriters of the Offering were Hambrecht & Quist LLC, BancBoston
Robertson Stephens Inc. and Thomas Weisel Partners LLC.
The selling stockholders sold 65,000 shares of common stock in the offering
for an aggregate offering price of $780,000 and received aggregate net proceeds
of $725,400.
The following table summarizes the offering expenses incurred by the
Company through September 30, 1999 and the net proceeds received by the Company
as of September 30, 1999 pursuant to the Offering:
<TABLE>
<CAPTION>
<S> <C>
Aggregate offering price of shares sold by the Company $55,800,000
Underwriting discounts and commissions . . . . . . . . 3,906,000
Finder's fees. . . . . . . . . . . . . . . . . . . . . -
Expenses paid to or for underwriters . . . . . . . . . -
Other expenses . . . . . . . . . . . . . . . . . . . . 1,953,606
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . 5,859.606
-----------
Net offering proceeds to the Company . . . . . . . . . 49,940,394
</TABLE>
As of September 30, 1999, the net proceeds of the Offering were invested in
short-term investments pending the Company's use of the net proceeds.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
34
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to written consents of the stockholders of the Company executed in
August 1999, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation to effect a four-for-five reverse stock
split of all of the outstanding shares of the Company's common stock immediately
prior to the effectiveness of the Company's Registration Statement on Form S-1
(File No. 333-79487).
Holders of 100% of the Company's Series A Preferred Stock, 100% of the
Company's Series B Preferred Stock, 100% of the Company's Series C Preferred
Stock, 100% of the Company's Series D Preferred Stock, 77.9% of the Company's
Series E Preferred Stock and 99.9% of the Company's common stock consented to
the foregoing action, and no stockholders voted against such action.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
27 Financial Data Schedule
(b) Reports on Form 8-K: None in the first quarter of fiscal 2000.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 15th day of November, 1999.
GARDEN.COM, INC.
By /s/ Clifford A. Sharples
------------------------------------------------
Clifford A. Sharples, President and
Chief Executive Officer
By /s/ Jana D. Wilson
------------------------------------------------
Jana D. Wilson, Chief Financial Officer
36
RESTATED CERTIFICATE OF INCORPORATION
OF
GARDEN.COM, INC.
Garden.com, Inc., a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Garden.com, Inc. The corporation was
originally incorporated under the name GardenEscape, Inc., and the original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on November 30, 1995.
B. Pursuant to Sections 228, 242 and 245 of the General Corporation Law
of the State of Delaware, this Restated Certificate of Incorporation restates
and amends the provisions of the Certificate of Incorporation of the
corporation.
C. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
The name of this corporation is Garden.com, Inc.
ARTICLE II
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.01 par value, and Preferred Stock,
$0.01 par value. The total number of shares that the corporation is authorized
to issue is 55,000,000 shares. The number of
<PAGE>
shares of Common Stock authorized is 50,000,000. The number of shares of
Preferred Stock authorized is 5,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the board of directors (authority to do so being hereby expressly vested in the
board). The board of directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to fix the number of shares of any
series of Preferred Stock and the designation of any such series of Preferred
Stock. The board of directors, within the limits and restrictions stated in any
resolution or resolutions of the board of directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares in any such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The authority of the board of directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the number
of shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or series
shall be declared and paid, or set aside for payment, whether dividends at the
rate so determined shall be cumulative or accruing, and whether the shares of
such class or series shall be entitled to any participating or other dividends
in addition to dividends at the rate so determined, and if so, on what terms;
(c) the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the corporation;
(e) the terms and conditions, if any, upon which shares of such class
or series shall be convertible into, or exchangeable for, shares of capital
stock of any other class or series, including the price or prices or the rate or
rates of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem or
purchase shares of such class or series pursuant to a sinking fund or fund of a
similar nature or otherwise, and the terms and conditions of such obligation;
(g) voting rights, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
2
<PAGE>
(h) limitations, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
and
(i) such other preferences, powers, qualifications, special or relative
rights and privileges thereof as the board of directors of the corporation,
acting in accordance with this Restated Certificate of Incorporation, may deem
advisable and are not inconsistent with law and the provisions of this Restated
Certificate of Incorporation.
ARTICLE V
The corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-------------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The corporation shall indemnify to the fullest
---------------
extent permitted by law any person made or threatened to be made a party to an
action or proceeding, whether criminal, civil, administrative or investigative,
by reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the corporation, or any predecessor of
the corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to the
corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII,
----------
nor the adoption of any provision of the corporation's Certificate of
Incorporation inconsistent with this Article VII, shall eliminate or reduce the
effect of this Article VII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article VII, would accrue
or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
3
<PAGE>
ARTICLE VIII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the corporation.
ARTICLE IX
1. Number of Directors. The number of directors which constitutes the
--------------------
whole Board of Directors of the corporation shall be designated in the By-Laws
of the corporation. The directors shall be divided into three classes, as equal
in number as possible, with the term of office of the first class (Class I) to
expire at the annual meeting of stockholders held in 2000; the term of office of
the second class (Class II) to expire at the annual meeting of stockholders held
in 2001; the term of office of the third class (Class III) to expire at the
annual meeting of stockholders held in 2002; and thereafter for each such term
to expire at each third succeeding annual meeting of stockholders after such
election.
2. Election of Directors. Elections of directors need not be by
-----------------------
written ballot unless the By-Laws of the corporation shall so provide.
ARTICLE X
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the By-Laws of the corporation.
ARTICLE XI
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of the stockholders called in accordance with the
By-Laws and no action shall be taken by the stockholders by written consent.
The affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the then
outstanding voting securities of the corporation, voting together as a single
class, shall be required for the amendment, repeal or modification of the
provisions of Article IX, Article X, Article XI or Article XII of this Restated
Certificate of Incorporation or Sections 2.3 (Special Meeting), 2.4 (Notice of
Stockholders' Meetings), 2.5 (Advanced Notice of Stockholder Nominees and
Stockholder Business), 2.9 (Voting), or 2.10 (Stockholder Action by Written
Consent Without a Meeting), 3.2 (Number of Directors) or 3.5 (Removal of
Directors) of the corporation's By-Laws.
ARTICLE XII
Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the corporation.
4
<PAGE>
IN WITNESS WHEREOF, Garden.com, Inc. has caused this certificate to be
signed by Clifford A. Sharples, its President and Chief Executive Officer, this
21st day of September, 1999.
/s/ Clifford A. Sharples
---------------------------
Clifford A. Sharples, President and
Chief Executive Officer
5
AMENDED AND RESTATED BYLAWS
OF
GARDEN.COM, INC.
(A DELAWARE CORPORATION)
<PAGE>
AMENDED AND RESTATED BYLAWS OF
GARDEN.COM, INC.
(a Delaware corporation)
TABLE OF CONTENTS
Page
ARTICLE I CORPORATE OFFICES 1
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1.1 REGISTERED OFFICE 1
1.2 OTHER OFFICES 1
ARTICLE II MEETINGS OF STOCKHOLDERS 1
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2.1 PLACE OF MEETINGS 1
2.2 ANNUAL MEETING 1
2.3 SPECIAL MEETING 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE 4
2.7 QUORUM 4
2.8 ADJOURNED MEETING; NOTICE 4
2.9 VOTING 5
2.10 PROHIBITION OF STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING 5
2.12 PROXIES 6
2.13 ORGANIZATION 6
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE 6
2.15 WAIVER OF NOTICE 6
ARTICLE III DIRECTORS 7
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3.1 POWERS 7
3.2 NUMBER OF DIRECTORS 7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS 7
3.4 RESIGNATION AND VACANCIES 7
3.5 REMOVAL OF DIRECTORS 9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE 9
3.7 REGULAR MEETINGS 9
3.8 SPECIAL MEETINGS; NOTICE 9
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3.9 QUORUM 10
3.10 WAIVER OF NOTICE 10
3.11 ADJOURNMENT 10
3.12 NOTICE OF ADJOURNMENT 10
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING 10
3.14 FEES AND COMPENSATION OF DIRECTORS 11
3.15 APPROVAL OF LOANS TO OFFICERS 11
3.16 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION 11
ARTICLE IV COMMITTEES 11
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4.1 COMMITTEES OF DIRECTORS 11
4.2 MEETINGS AND ACTION OF COMMITTEES 12
4.3 COMMITTEE MINUTES 12
ARTICLE V OFFICERS 13
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5.1 OFFICERS 13
5.2 ELECTION OF OFFICERS 13
5.3 SUBORDINATE OFFICERS 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS 13
5.5 VACANCIES IN OFFICES 14
5.6 CHAIRMAN OF THE BOARD 14
5.7 PRESIDENT AND CHIEF EXECUTIVE OFFICER 14
5.8 CHIEF OPERATING OFFICER 15
5.9 CHIEF MERCHANDISING AND MARKETING OFFICER 15
5.10 CHIEF TECHNOLOGY OFFICER 15
5.11 VICE PRESIDENTS 15
5.12 SECRETARY 15
5.13 CHIEF FINANCIAL OFFICER 16
5.14 ASSISTANT SECRETARY 16
5.15 ADMINISTRATIVE OFFICERS 17
5.16 AUTHORITY AND DUTIES OF OFFICERS 17
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
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OTHER AGENTS 17
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6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS 17
6.2 INDEMNIFICATION OF OTHERS 18
6.3 INSURANCE 18
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ARTICLE VII RECORDS AND REPORTS 19
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7.1 MAINTENANCE AND INSPECTION OF RECORDS 19
7.2 INSPECTION BY DIRECTORS 19
7.3 ANNUAL STATEMENT TO STOCKHOLDERS 19
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS 19
7.5 CERTIFICATION AND INSPECTION OF AMENDED AND RESTATED BYLAWS 20
ARTICLE VIII GENERAL MATTERS 20
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8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING 20
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS 20
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED 20
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES 21
8.5 SPECIAL DESIGNATION ON CERTIFICATES 22
8.6 LOST CERTIFICATES 22
8.7 TRANSFER AGENTS AND REGISTRARS 22
8.8 CONSTRUCTION; DEFINITIONS 22
ARTICLE IX AMENDMENTS 23
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AMENDED AND RESTATED BYLAWS
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OF
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GARDEN.COM, INC.
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(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
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1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the certificate of
incorporation of the corporation.
1.2 OTHER OFFICES
The corporation may have such principal and other business offices as the Board
of Directors may designate or the business of the corporation may require from
time to time, both within and without the State of Delaware, in any and all
States of the United States of America, in the District of Columbia, in any or
all commonwealths, territories, dependencies, colonies, possessions, agencies or
instrumentalities of the United States, and in any foreign countries.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the State
of Delaware designated by the board of directors. In the absence of any such
designation, stockholders' meetings shall be held at the principal executive
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Wednesday of November in each year starting in 2000 at 10:00 a.m. However, if
such day falls on a legal holiday, then the meeting shall be held at the same
time and place on the next succeeding full business day. At the meeting,
directors shall be elected, and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the board of
directors, by the chairman of the board, or by the president.
If a special meeting is called by any person or persons other than the board of
directors, then the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, or the
secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these Amended and Restated
Bylaws, that a meeting will be held at the time requested by the person or
persons calling the meeting, so long as that time is not less than 35 nor more
than 60 days after the receipt of the request. If the notice is not given
within 20 days after receipt of the request, then the person or persons
requesting the meeting may give the notice. Nothing contained in this paragraph
of this Section 2.3 shall be construed as limiting, fixing or affecting the time
when a meeting of stockholders called by action of the board of directors may be
held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these Amended and Restated Bylaws not less than
ten nor more than 60 days before the date of the meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called (no business
other than that specified in the notice may be transacted) or (ii) in the case
of the annual meeting, those matters which the board of directors, at the time
of giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting may be made
by the board of directors or proxy committee appointed by the board of directors
or by any stockholder entitled to vote in the election of directors generally if
such nomination or business proposed is otherwise proper business before such
meeting. However, any such stockholder may nominate one or
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more persons for election as directors at a meeting or propose business to be
brought before a meeting, or both, only if such stockholder has given timely
notice in proper written form of their intent to make such nomination or
nominations or to propose such business. To be timely, such stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than 120 calendar days in advance of the
date specified in the corporation's proxy statement released to stockholders in
connection with the previous year's annual meeting of stockholders; provided,
however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than 30 days from the
date contemplated at the time of the previous year's proxy statement, notice by
the stockholder to be timely must be so received a reasonable time before the
solicitation is made. To be in proper form, a stockholder's notice to the
secretary shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the person or
persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of stock of
the corporation entitled to vote at such meeting and, if applicable, intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice;
(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder;
(iv) such other information regarding each nominee or each matter of business
to be proposed by such stockholder as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, or the
matter been proposed, or intended to be proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director of the
corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
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2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either personally
or by first-class mail or by telegraphic or other written communication.
Notices not personally delivered shall be sent charges prepaid and shall be
addressed to the stockholder at the address of that stockholder appearing on the
books of the corporation or given by the stockholder to the corporation for the
purpose of notice. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting in accordance with Section 2.7 of
these Amended and Restated Bylaws.
When a quorum is present at any meeting, the vote of the holders of a majority
of the stock having voting power present in person or represented by proxy shall
decide any question brought before such meeting, unless the question is one upon
which, by express provision of the laws of the State of Delaware or of the
certificate of incorporation or these Amended and Restated Bylaws, a different
vote is required, in which case such express provision shall govern and control
the decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these Amended and
Restated Bylaws otherwise require, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact any
business that might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for
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the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these Amended
and Restated Bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or these
Amended and Restated Bylaws, each stockholder shall be entitled to one vote for
each share of capital stock held by such stockholder and stockholders shall not
be entitled to cumulate their votes in the election of directors or with respect
to any matter submitted to a vote of the stockholders.
2.10 PROHIBITION OF STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of the
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any meeting
or to vote thereat, the board of directors may fix, in advance, a record date,
which shall not precede the date upon which the resolution fixing the record
date is adopted by the board of directors and which shall not be more than 60
days nor less than ten days before the date of any such meeting, and in such
event only stockholders of record on the date so fixed are entitled to notice
and to vote, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting unless the
board of directors fixes a new record date for the adjourned meeting, but the
board of directors shall fix a new record date if the meeting is adjourned for
more than 30 days from the date set for the original meeting.
The record date for any other purpose shall be as provided in Section 8.1 of
these Amended and Restated Bylaws.
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2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period. A proxy shall be
deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
The president, or in the absence of the president, the chairman of the board,
or, in the absence of the president and the chairman of the board, one of the
corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.15 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Amended and Restated Bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of
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objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Amended and Restated
Bylaws.
ARTICLE III
DIRECTORS
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3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and to any
limitations in the Certificate of Incorporation or these Amended and Restated
Bylaws relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors which shall constitute the whole Board shall be not less
than five nor more than 15, as may be designated from time to time by the Board
of Directors. The directors shall be divided into three classes, as nearly
equal in number as possible, with the term of office of the first class (Class
I) to expire at the annual meeting of stockholders held in 2000; the term of
office of the second class (Class II) to expire at the annual meeting of
stockholders held in 2001; the term of office of the third class (Class III) to
expire at the annual meeting of stockholders held in 2002; and thereafter for
each such term to expire at each third succeeding annual meeting of stockholders
after such election.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these Amended and Restated Bylaws,
directors shall be elected at each annual meeting of stockholders to hold office
until the next annual meeting. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman of
the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that
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resignation to become effective. If the resignation of a director is effective
at a future time, the board of directors may elect a successor to take office
when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the remaining
directors, even if less than a quorum, or by a sole remaining director; however,
a vacancy created by the removal of a director by the vote of the stockholders
or by court order may be filled only by the affirmative vote of a majority of
the shares represented and voting at a duly held meeting at which a quorum is
present (which shares voting affirmatively also constitute a majority of the
required quorum). Each director so elected shall hold office until the next
election of the class for which such director shall have been chosen and until a
successor has been elected and qualified.
Unless otherwise provided in the certificate of incorporation or these Amended
and Restated Bylaws:
(i) Vacancies and newly created directorships resulting from any increase in
the authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series thereof
are entitled to elect one or more directors by the provisions of the certificate
of incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Amended and Restated
Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an
election as provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship, the
directors then in office constitute less than a majority of the whole board (as
constituted immediately prior to any such increase), then the Court of Chancery
may, upon application of any stockholder or stockholders holding at least 10% of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office as aforesaid, which election shall be governed by
the provisions of Section 211 of the General Corporation Law of Delaware as far
as applicable.
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3.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute or by the certificate of incorporation,
any director or the entire board of directors may only be removed only for cause
by the holders of a majority of the shares then entitled to vote at an election
of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within or
outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at such
time as shall from time to time be determined by the board of directors. If any
regular meeting day shall fall on a legal holiday, then the meeting shall be
held at the same time and place on the next succeeding full business day.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may be
called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered personally
or by telephone to each director or sent by first-class mail, telecopy or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four days before the time
of the holding of the meeting. If the notice is delivered personally or by
telephone, telecopy or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least 48 hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
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3.9 QUORUM
A majority of the authorized number of directors shall constitute a quorum for
the transaction of business, except to adjourn as provided in Section 3.12 of
these Amended and Restated Bylaws. Every act or decision done or made by a
majority of the directors present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of directors, subject to the
provisions of the certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a waiver of
notice, whether before or after the meeting, or (ii) who attends the meeting
other than for the express purposed of objecting at the beginning of the meeting
to the transaction of any business because the meeting is not lawfully called or
convened. All such waivers shall be filed with the corporate records or made
part of the minutes of the meeting. A waiver of notice need not specify the
purpose of any regular or special meeting of the board of directors.
3.11 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum, may
adjourn any meeting of the board to another time and place.
3.12 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of the board need
not be given unless the meeting is adjourned for more than 24 hours. If the
meeting is adjourned for more than 24 hours, then notice of the time and place
of the adjourned meeting shall be given before the adjourned meeting takes
place, in the manner specified in Section 3.9 of these Amended and Restated
Bylaws, to the directors who were not present at the time of the adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may be
taken without a meeting, provided that all members of the board individually or
collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.
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3.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any, for
their services and such reimbursement of expenses as may be fixed or determined
by resolution of the board of directors. This Section 3.15 shall not be
construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or otherwise
assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.16 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
In the event only one director is required by these Amended and Restated Bylaws
or the certificate of incorporation, then any reference herein to notices,
waivers, consents, meetings or other actions by a majority or quorum of the
directors shall be deemed to refer to such notice, waiver, etc., by such sole
director, who shall have all the rights and duties and shall be entitled to
exercise all of the powers and shall assume all the responsibilities otherwise
herein described as given to the board of directors.
ARTICLE IV
COMMITTEES
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4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee
11
<PAGE>
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation), (ii) adopt an agreement of merger or consolidation
under Sections 251 or 252 of the General Corporation Law of Delaware, (iii)
recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution or (v) amend the Amended and Restated Bylaws of the corporation;
and, unless the board resolution establishing the committee, the Amended and
Restated Bylaws or the certificate of incorporation expressly so provide, no
such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken in
accordance with, the following provisions of Article III of these Amended and
Restated Bylaws: Section 3.6 (place of meetings; meetings by telephone), Section
3.8 (regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section
3.13 (notice of adjournment) and Section 3.14 (board action by written consent
without meeting), with such changes in the context of those Amended and Restated
Bylaws as are necessary to substitute the committee and its members for the
board of directors and its members; provided, however, that the time of regular
meetings of committees may be determined either by resolution of the board of
directors or by resolution of the committee, that special meetings of committees
may also be called by resolution of the board of directors, and that notice of
special meetings of committees shall also be given to all alternate members, who
shall have the right to attend all meetings of the committee. The board of
directors may adopt rules for the government of any committee not inconsistent
with the provisions of these Amended and Restated Bylaws.
4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the same to
the board of directors when required.
12
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
The Corporate Officers of the corporation shall be a chief executive
officer, a president, a secretary and a chief financial officer. The
corporation may also have, at the discretion of the board of directors, a
chairman of the board, a chief operating officer, a chief merchandising and
marketing officer, a chief technology officer, one or more vice presidents
(however denominated), one or more assistant secretaries, a treasurer and one or
more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these Amended and Restated
Bylaws. Any number of offices may be held by the same person.
In addition to the Corporate Officers of the Company described above, there may
also be such Administrative Officers of the corporation as may be designated and
appointed from time to time by the president of the corporation in accordance
with the provisions of Section 5.12 of these Amended and Restated Bylaws.
5.2 ELECTION OF OFFICERS
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these Amended and Restated Bylaws, shall be chosen by the board of directors,
subject to the rights, if any, of an officer under any contract of employment,
and shall hold their respective offices for such terms as the board of directors
may from time to time determine.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to appoint,
such other Corporate Officers as the business of the corporation may require,
each of whom shall hold office for such period, have such power and authority,
and perform such duties as are provided in these Amended and Restated Bylaws or
as the board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these Amended and Restated Bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any contract of
employment, any Corporate Officer may be removed, either with or without cause,
by the board of directors at any regular or special meeting of the board or,
except in case of a Corporate Officer chosen by the board
13
<PAGE>
of directors, by any Corporate Officer upon whom such power of removal may be
conferred by the board of directors.
Any Corporate Officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may be
removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal, disqualification
or any other cause shall be filled in the manner prescribed in these Amended and
Restated Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if present,
preside at meetings of the board of directors and exercise such other powers and
perform such other duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these Amended and Restated Bylaws.
If there is no president, then the chairman of the board shall also be the chief
executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these Amended and Restated Bylaws.
5.7 PRESIDENT AND CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president and chief executive officer shall be the chief executive officer of
the corporation and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business and the officers
of the corporation. He or she shall preside at all meetings of the stockholders
and, in the absence or nonexistence of a chairman of the board, at all meetings
of the board of directors. He or she shall have the general powers and duties
of management usually vested in the office of president and chief executive
officer of a corporation, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or these Amended and
Restated Bylaws.
14
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5.8 CHIEF OPERATING OFFICER
Subject to such supervisory powers, if any, as may be given by the board of
directors to the president and chief executive officer, the chief operating
officer shall be the principal operating officer and shall, subject to the
control of the board of directors and/or the president and chief executive
officer, have general supervision, direction and control of the business and the
officers of the corporation. In general, he or she shall perform all duties
incident to the office of chief operating officer and such other duties as may
be assigned to him or her from time to time by the board of directors or the
president and chief executive officer.
5.9 CHIEF MERCHANDISING AND MARKETING OFFICER
Subject to such supervisory powers, if any, as may be given by the board of
directors to the president and chief executive officer, the chief merchandising
and marketing officer shall be the principal officer in charge of the
corporation's merchandising, marketing and similar functions. In general, he or
she shall perform all duties incident to the office of chief merchandising and
marketing officer and such other duties as may be assigned to him or her from
time to time by the board of directors or the president and chief
executive officer.
5.10 CHIEF TECHNOLOGY OFFICER
Subject to such supervisory powers, if any, as may be given by the board of
directors to the president and chief executive officer, the chief technology
officer shall be the principal officer in charge of the corporation's
information and non-information technology and systems. In general, he or she
shall perform all duties incident to the office of chief technology officer and
such other duties as may be assigned to him or her from time to time by the
board of directors or the president and chief executive officer.
5.11 VICE PRESIDENTS
In the absence or disability of the president, and if there is no chairman of
the board, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors, these Amended and Restated Bylaws, the president or the
chairman of the board.
5.12 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive office
of the corporation or such other place as the board of directors may direct, a
book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The
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minutes shall show the time and place of each meeting, whether regular or
special (and, if special, how authorized and the notice given), the names of
those present at directors' meetings or committee meetings, the number of shares
present or represented at stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office
of the corporation or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of the
stockholders and of the board of directors required to be given by law or by
these Amended and Restated Bylaws. He or she shall keep the seal of the
corporation, if one be adopted, in safe custody and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
by these Amended and Restated Bylaws.
5.13 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any director for a purpose reasonably related to his position as a
director.
The chief financial officer shall deposit all money and other valuables in the
name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these Amended and Restated
Bylaws.
5.14 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one, the assistant
secretaries in the order determined by the board of directors (or if there be no
such determination, then in the order of their election) shall, in the absence
of the secretary or in the event of his or her inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
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5.15 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these Amended and Restated Bylaws and such subordinate Corporate
Officers as may be appointed in accordance with Section 5.3 of these Amended and
Restated Bylaws, there may also be such Administrative Officers of the
corporation as may be designated and appointed from time to time by the
president of the corporation. Administrative Officers shall perform such duties
and have such powers as from time to time may be determined by the president or
the board of directors in order to assist the Corporate Officers in the
furtherance of their duties. In the performance of such duties and the exercise
of such powers, however, such Administrative Officers shall have limited
authority to act on behalf of the corporation as the board of directors shall
establish, including but not limited to limitations on the dollar amount and on
the scope of agreements or commitments that may be made by such Administrative
Officers on behalf of the corporation, which limitations may not be exceeded by
such individuals or altered by the president without further approval by the
board of directors.
5.16 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all officers of the
corporation shall respectively have such authority and powers and perform such
duties in the management of the business of the corporation as may be designated
from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by the
General Corporation Law of Delaware as the same now exists or may hereafter be
amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of
17
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such action, suit, or proceeding (or part thereof) by the director or officer
was authorized by the Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred by a
director or officer of the corporation entitled to indemnification hereunder in
defending any action, suit or proceeding referred to in this Section 6.1 in
advance of its final disposition; provided, however, that payment of expenses
incurred by a director or officer of the corporation in advance of the final
disposition of such action, suit or proceeding shall be made only upon receipt
of an undertaking by the director or officer to repay all amounts advanced if it
should ultimately be determined that the director of officer is not entitled to
be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive of any
other rights which such person may have or hereafter acquire under any statute,
provision of the corporation's Certificate of Incorporation, these Amended and
Restated Bylaws, agreement, vote of the stockholders or disinterested directors
or otherwise.
Any repeal or modification of the foregoing provisions of this Article shall not
adversely affect any right or protection hereunder of any person in respect of
any act or omission occurring prior to the time of such repeal or modification.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now exists or
may hereafter be amended, to indemnify any person (other than directors and
officers) against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending or completed action, suit, or proceeding, in which such
person was or is a party or is threatened to be made a party by reason of the
fact that such person is or was an employee or agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) shall mean any person (i) who is or was an employee
or agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by him
or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation
18
<PAGE>
would have the power to indemnify him or her against such liability under the
provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such place
or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Amended and Restated Bylaws as
amended to date, accounting books and other records of its business and
properties.
Any stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the corporation's
stock ledger, a list of its stockholders, and its other books and records and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any special
meeting of the stockholders when called for by vote of the stockholders, a full
and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice president, the chief
financial officer, the secretary or any assistant secretary of this corporation,
or any other person authorized by the board of directors or the president or a
vice president, is authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of the stock of any other
corporation
19
<PAGE>
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
7.5 CERTIFICATION AND INSPECTION OF AMENDED AND RESTATED BYLAWS
The original or a copy of these Amended and Restated Bylaws, as amended or
otherwise altered to date, certified by the secretary, shall be kept at the
corporation's principal executive office and shall be open to inspection by the
stockholders of the corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purpose of any other lawful action, the board of directors
may fix, in advance, a record date, which shall not precede the date upon which
the resolution fixing the record date is adopted and which shall not be more
than sixty (60) days before any such action. In that case, only stockholders of
record at the close of business on the date so fixed are entitled to receive the
dividend, distribution or allotment of rights, or to exercise such rights, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided by law.
If the board of directors does not so fix a record date, then the record date
for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution which
person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these Amended and
Restated Bylaws, may authorize and empower any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the corporation; such power and authority
20
<PAGE>
may be general or confined to specific instances. Unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly paid and
subject to call for the remainder of the consideration to be paid therefor.
Upon the face or back of each stock certificate issued to represent any such
partly paid shares, or upon the books and records of the corporation in the case
of uncertificated partly paid shares, the total amount of the consideration to
be paid therefor and the amount paid thereon shall be stated. Upon the
declaration of any dividend on fully paid shares, the corporation shall declare
a dividend upon partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.
21
<PAGE>
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or more
than one series of any class, then the powers, the designations, the preferences
and the relative, participating, optional or other special rights of each class
of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights shall be set forth in full or summarized on
the face or back of the certificate that the corporation shall issue to
represent such class or series of stock; provided, however, that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the face or back of
the certificate that the corporation shall issue to represent such class or
series of stock a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, the designations, the preferences
and the relative, participating, optional or other special rights of each class
of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares shall be
issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these Amended and Restated Bylaws. Without limiting
the generality of this provision, as used in these Amended and Restated Bylaws,
the singular number includes the plural, the plural number includes the
singular, and the term "person" includes both an entity and a natural person.
22
<PAGE>
ARTICLE IX
AMENDMENTS
----------
The original or other Amended and Restated Bylaws of the corporation may be
adopted, amended or repealed by the stockholders entitled to vote or by the
board of directors of the corporation. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Amended and Restated Bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the book of
Amended and Restated Bylaws with the original Amended and Restated Bylaws, in
the appropriate place. If any bylaw is repealed, the fact of repeal with the
date of the meeting at which the repeal was enacted or the filing of the
operative written consent(s) shall be stated in said book.
23
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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