<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-78885
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GREATFOOD.COM, INC.
(Exact name of Registrant as specified in its charter)
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WASHINGTON 5961 91-1694451
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification
No.)
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2731 EASTLAKE AVENUE EAST
SEATTLE, WA 98102
(206) 322-7539
(Address and telephone number of principal executive offices)
BENJAMIN NOURSE
CHIEF EXECUTIVE OFFICER
GREATFOOD.COM, INC.
2731 EASTLAKE AVENUE EAST
SEATTLE, WA 98102
(206) 322-7539
(Name, address and telephone number of agent for service)
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COPIES TO:
THOMAS S. HODGE, ESQ. BRUCE ALAN MANN, ESQ.
NOELLE E. COOPER, ESQ. JAMES H. LAWS, ESQ.
SOFIA S. MICHELAKIS, ESQ. Morrison & Foerster LLP
Heller Ehrman White and McAuliffe 425 Market Street
6100 Columbia Center San Francisco, CA 94105-2482
701 Fifth Avenue (415) 268-7000
Seattle, WA 98104-7098
(206) 447-0900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act, please
check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE AMOUNT OF REGISTRATION FEE(1)
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Series D Convertible Redeemable Preferred Stock (no par
value)................................................... $12,500,000 $3,300
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(1) This registration statement originally related to 2,500,000 shares of common
stock with a proposed maximum aggregate offering price of $38,812,500. The
registrant paid $10,790 upon the initial filing of this registration
statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
OFFERING PROSPECTUS
SUBJECT TO COMPLETION, OCTOBER 8,
1999
2,500,000 SHARES OF SERIES D CONVERTIBLE, REDEEMABLE PREFERRED STOCK
$ PER SHARE
[LOGO]
GreatFood.com is selling 2,500,000 shares of its Series D Convertible,
Redeemable Preferred Stock.
Each share of Series D preferred stock is convertible at any time at the
holder's option into one share of common stock as more fully described in this
prospectus. In addition, GreatFood.com may require the conversion of all
outstanding shares of Series D preferred stock upon either (a) the completion of
an underwritten public offering with total proceeds of at least $15 million and
a per share price of at least $8.00 or (b) the election by holders of a majority
of the Series D preferred stock to convert their shares.
Dividends on the Series D preferred stock are cumulative and will cumulate and
accrue on a semi-annual basis, at the annual rate of 8% of the purchase price,
from the date of issuance.
Upon any liquidation of GreatFood.com, holders of shares of Series D preferred
stock will have the right, together with holders of shares of GreatFood.com's
Series C preferred stock, to receive their purchase price plus all accrued but
unpaid dividends on such shares, prior to any assets being distributed to
holders of common stock or other series of preferred stock. Holders of Series D
preferred stock will also share, together with holders of Series C preferred
stock, in any remaining assets distributed to holders of common stock, after
payment is made to holders of other series of preferred stock, as more fully
described in this prospectus.
If requested by holders of a majority of the outstanding shares of Series D
preferred stock at any time after October , 2004, GreatFood.com will redeem
all outstanding shares of Series D preferred stock at a price equal to the
purchase price paid for such shares plus all accrued and unpaid dividends. The
redemption will be done in three equal annual installments beginning on the date
stated in the request.
We expect the price in this offering to be between $4.00 and $5.00 per share.
The securities will not be listed on any national securities exchange or the
Nasdaq Stock Market. No public market currently exists for our stock and we do
not expect a public market to develop.
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PER SHARE TOTAL
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Public price........................................................................... $ $
Placement agent commissions............................................................ $ $
Proceeds to GreatFood.com.............................................................. $ $
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THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY IF
YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have entered into an agreement with WR Hambrecht & Company, LLC to act as a
placement agent with respect to this offering. WR Hambrecht is not required to
sell a specific number or dollar amount of securities. WR Hambrecht and some of
our existing shareholders have indicated an interest in purchasing $4,500,000 of
the Series D preferred stock, but they are not obligated to do so.
[LOGO]
, 1999
<PAGE>
[INSIDE FRONT COVER ART DESCRIPTION]
[GREATFOOD.COM LOGO]
[Images depict pages of the GreatFood.com Web site, including the GreatFood.com
home page at www.greatfood.com and a page from GreatFood.com retail shop. The
images incorporate logos of Verisign and Truste.]
From our home page, visitors can access several different areas of our site,
each designed to enhance the browsing and shopping experience for its intended
audience. The retail shop offers a variety of products for sale to retail
customers. The corporate gifts area offers selected products and etiquette tips
specifically geared for corporate gifting. Our wholesale area offers products by
the case at wholesale prices to registered specialty shops, gift basket
companies, caterers and restaurants. About greatfood.com provides information
about our company history, policies, becoming a supplier, testimonials and
awards we have won.
Site navigation tabs on every page allow visitors to move easily between the
different areas of the site.
Our electronic shopping cart and online credit card processing make the ordering
process simple, convenient and secure.
We emphasize special selections which change regularly, including our Express
Shoppe, Special Offers, and Seasonal Suggestions.
We make it easy to shop for our wide variety of specialty food products by
offering customers the ability to browse products by food category, meal
occasion, price range or brand. Or they can search for something specific by
typing in a keyword.
It's easy to access food related information, including product reviews written
by our in-house food expert, recipes, and an online message forum with comments
and suggestions from other visitors.
We emphasize customer service throughout the site. Frequently asked questions,
shipping costs and policies, contract phone numbers and security information are
all readily accessible.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our Series D preferred stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary......................................................................................... 1
The Offering............................................................................................... 2
Summary Financial Data..................................................................................... 5
Risk Factors............................................................................................... 6
Special Note Regarding Forward Looking Statements.......................................................... 17
Use of Proceeds............................................................................................ 18
Dividend Policy............................................................................................ 18
Capitalization............................................................................................. 19
Dilution................................................................................................... 20
Selected Financial Data.................................................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 31
Management................................................................................................. 47
Relationships with GreatFood.com and Related Transactions.................................................. 53
Principal Shareholders..................................................................................... 55
Description of Capital Stock............................................................................... 57
Shares Eligible For Future Sale............................................................................ 62
Plan of Distribution....................................................................................... 63
Legal Matters.............................................................................................. 64
Experts.................................................................................................... 64
Where to Find Additional Information About GreatFood.com................................................... 64
Index to Financial Statements.............................................................................. F-1
Appendix A -- Form of Series D Preferred Stock Purchase Agreement.......................................... A-1
</TABLE>
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"GreatFood.com" and the GreatFood.com logo are trademarks of GreatFood.com,
Inc. All other trademarks or tradenames referred to in this prospectus are the
property of their respective owners.
Information contained on our Web site does not constitute a part of this
prospectus.
i
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION DESCRIBED MORE FULLY ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY.
GREATFOOD.COM
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Our Business:.............. GreatFood.com is an electronic commerce company focused on the
sale of gourmet and specialty food over the Internet to the
retail, corporate gift and wholesale markets.
Our Opportunity:........... There is no dominant retailer within the gourmet and specialty
food market--a market which we believe exceeded $30 billion at
the retail level in 1998. Furthermore, this market is
characterized by a fragmented supplier and distribution
network. This limits the product choices and shopping
convenience available to both retail and wholesale customers.
As a result of these factors, we believe electronic commerce
provides opportunities to improve the specialty food shopping
experience and selection in both the retail and wholesale
markets.
Our Strategy:.............. We plan to utilize the following strategies to be the leading
online provider of specialty food:
- expand brand recognition;
- utilize our suppliers as our "virtual warehouses";
- expand the breadth and depth of our product offerings;
- take advantage of the relationship between retail and
wholesale distribution channels;
- acquire leading market share to leverage economies of scale;
and
- expand internationally.
Our Distribution:.......... We have established strategic supplier relationships with
specialty food manufacturers, distributors and importers who
ship products directly to customers on our behalf. As a result,
each of our suppliers serves as a GreatFood.com "virtual
warehouse." This direct supplier to customer fulfillment model
enables us to:
- minimize inventory related risks and holding costs;
- limit overhead costs;
- offer a broad range of perishable and non-perishable
products; and
- provide prompt delivery.
While we believe this model provides significant advantages, it
also presents challenges associated with ensuring timely
shipment and packaging which is consistent with our brand
identity.
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1
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Our Marketing:............. We target potential online customers, both retail and
wholesale, in a proactive manner. We have entered into
promotional agreements or partnering arrangements with Peapod,
America Online and Excite. We use a mix of traditional and
online marketing techniques, including online and print
advertising, direct mail, public relations and trade shows.
Our Competition:........... Although there is no dominant retailer in the gourmet and
specialty food market, the specialty food market is extremely
competitive. We face competition from traditional physical
store and catalog retailers, as well as other online retailers.
Moreover, we expect more online competitors in the future as
barriers to entry are low.
Our Web Site:.............. Our online store is accessed on the Internet at
WWW.GREATFOOD.COM. It provides pictures and detailed
information relating to specialty food products, and is
conveniently organized by category, brand, or meal occasion.
Shoppers can search for, browse and select products throughout
the store and place their selection in a "virtual shopping
cart" for purchase. Traffic on our Web site reached 1.2 million
"unique visits" in 1998 and approximately 1.6 million "unique
visits" in the first six months of 1999.
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THE OFFERING
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Securities Offered........................... 2,500,000 shares of Series D Convertible,
Redeemable Preferred Stock.
Dividends.................................... Dividends will be cumulative and will
cumulate and accrue on a semi-annual basis,
without interest, at the annual rate of 8% of
the purchase price per share from the date of
issuance. The Series D preferred stock is
ranked equally with GreatFood.com's Series C
preferred stock and senior to GreatFood.com's
Series A and B preferred stock and common
stock in its right to receive dividends.
Liquidation Preference....................... The Series D preferred stock is ranked
equally with GreatFood.com's Series C
preferred stock and senior to GreatFood.com's
Series A and B preferred stock and common
stock in liquidation preference. Upon any
liquidation, dissolution or winding up of
GreatFood.com, GreatFood.com's assets will be
distributed as follows:
-If the net proceeds from the liquidation
event are equal to or less than the aggregate
price paid for the outstanding shares of
Series C and D preferred stock, plus all
accrued and unpaid dividends on such shares,
then any net proceeds will be distributed
among all holders of Series C and D
preferred stock in proportion to the
liquidation value of their shares;
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2
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-If the net proceeds are greater than the
aggregate price paid for the outstanding
shares of Series C and D preferred stock
plus all accrued and unpaid dividends on
such shares, then any net proceeds will be
distributed as follows:
(1) an amount equal to the aggregate price
paid for the outstanding shares of Series
C and D preferred stock plus all accrued
and unpaid dividends on such shares will
be distributed to all holders of Series C
and D preferred stock in proportion to
the liquidation value of their shares;
(2) the remainder of the net proceeds will be
distributed (a) first to the holders of
Series A and B preferred stock to return
their purchase price in proportion to the
liquidation value of their shares, (b)
second to all holders of common stock to
return their cost, and (c) third to all
holders of common stock and holders of
Series C and D preferred stock as if such
shares were converted to common stock.
Voting Rights................................ The holders of Series D preferred stock will
be entitled to vote on all matters submitted
to GreatFood.com's shareholders and will be
entitled to one vote for each share of common
stock into which the Series D preferred stock
is convertible. Also, a number of corporate
actions will require the approval of at least
a majority of the outstanding shares of
Series D preferred stock as more fully
described in "Description of Capital Stock --
Preferred Stock" on page 57.
Conversion Rights............................ The Series D preferred stock is convertible
into common stock, at the option of the
holder, at any time, at an initial conversion
rate of one share of common stock for each
share of Series D preferred stock. The
conversion rate will be adjusted if there is
a stock split, stock dividend, combination of
shares or other change in GreatFood.com's
common stock or GreatFood.com makes a
dilutive issuance of common stock, as more
fully described in "Description of Capital
Stock -- Preferred Stock" on page 57.
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3
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GreatFood.com may require the conversion of
all outstanding shares of Series D preferred
stock either (a) upon completion of an
underwritten public offering with net
proceeds of at least $15,000,000 and a price
per share of at least $8.00 or (b) if the
holders of a majority of the outstanding
shares of Series D preferred stock elect to
convert.
Redemption Rights............................ If requested by the holders of a majority of
outstanding shares of Series D preferred
stock at any time after October , 2004,
GreatFood.com will redeem all outstanding
shares of Series D preferred stock at a price
per share equal to the price paid for the
shares plus all accrued and unpaid dividends
as follows:
- one third of the shares will be redeemed on
the date stated in the written request;
- an additional one third of the shares will
be redeemed on the first anniversary of such
date; and
- the final one third of the shares will be
redeemed on the second anniversary of such
date.
Common stock equivalents to be outstanding
after this offering........................ 6,552,532 shares(1)
Use of proceeds.............................. For expansion of advertising and promotion,
implementation of a new order processing
system, increases of our management team and
personnel, expansion of our business
operations and general corporate purposes.
See "Use of Proceeds" at page 18 for more
information.
</TABLE>
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(1) This includes 4,948,368 shares of common stock to be issued upon conversion
of all outstanding shares of Series A, B and C preferred stock and the
2,500,000 shares of Series D preferred stock being offered by this
prospectus. This does not include 1,632,888 shares reserved as of August 31,
1999 for future issuance as follows: (a) 991,000 shares of common stock
reserved for issuance pursuant to outstanding options granted under our 1997
Stock Incentive Plan; (b) 318,811 shares of common stock reserved for
issuance pursuant to outstanding warrants; and (c) 323,077 shares of common
stock reserved for issuance upon conversion of Series C preferred stock
issuable upon the exercise of warrants which will become exercisable on
January 31, 2000 if GreatFood.com has not completed an underwritten public
offering with an aggregate offering price of at least $10,000,000 and a
price per share of at least $10.00 by that date. If the warrants to purchase
shares of Series C preferred stock become exercisable, they will reduce the
effective price for the shares of Series C preferred stock from $5.00 to
$3.25 per share. This also does not include 609,000 shares reserved as of
August 31, 1999 for issuance pursuant to future grants under our 1997 Stock
Incentive Plan.
GreatFood.com's principal offices are located at 2731 Eastlake Avenue East,
Seattle, WA 98102.
4
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SUMMARY FINANCIAL DATA
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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SIX
FISCAL YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
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1996 1997 1998 1998 1999
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STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 18 $ 120 $ 748 $ 65 $ 410
Gross profit............................ 4 28 143 12 64
Loss from operations.................... (61) (83) (1,493) (145) (2,524)
Net loss................................ (40) (82) (1,463) (145) (2,488)
Basic and diluted net loss per share.... (0.04) (0.06) (0.93) (0.09) (1.58)
</TABLE>
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AS OF JUNE 30, 1999
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents......................... $3,438 $ 13,038
Total assets...................................... 4,210 13,810
Mandatorily redeemable convertible preferred
stock........................................... 2,993 12,593
Total shareholders' equity........................ 396 396
</TABLE>
The as adjusted information above gives effect to our receipt of the
estimated net proceeds from the sale of 2,500,000 shares of Series D preferred
stock in this offering at an assumed price of $4.00 per share.
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR STOCK. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS
COULD BE MATERIALLY AND ADVERSELY AFFECTED. IF THIS OCCURS, THE VALUE OF OUR
STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY
OUR STOCK.
RISKS RELATED TO GREATFOOD.COM'S OPERATIONS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
We were incorporated in August 1995 and began operations in March 1996. As
of June 30, 1999 we had generated total revenues of $1,295,000 since inception.
Accordingly, we have a limited operating history upon which you may evaluate us.
You must consider our prospects in light of the risks, uncertainties, expenses
and difficulties frequently encountered by early stage companies like us in new
and rapidly evolving markets, including the market for the sale of goods and
services on the Internet. To address these risks we must:
- attract and retain a larger number of retail and business customers to our
online store;
- increase our profit margin;
- increase awareness of the GreatFood.com brand;
- attract a significant number of high quality suppliers and expand our
product offerings;
- work with our suppliers to develop and expand order fulfillment processes
and systems to ensure prompt delivery of customer orders;
- respond effectively to competitive pressures;
- upgrade and develop our information systems to effectively manage rapidly
expanding operations and traffic on our Web site;
- attract, retain and motivate qualified personnel; and
- anticipate and adapt to a developing market.
We may not be able to accomplish all of these objectives successfully, and
if we fail to do so, our business, financial condition, and operating results
will be harmed. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 22 for more information on our
limited operating history.
WE ARE NOT PROFITABLE AND EXPECT TO CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE
FUTURE.
We have not achieved profitability and expect to incur significant operating
losses for the foreseeable future. As of June 30, 1999, we had an accumulated
deficit of $4.0 million. We incurred net losses of $2.5 million during the first
six months of 1999, $1.4 million in 1998, $81,937 in 1997, and $39,833 in 1996.
We expect our operating losses will increase in future periods because we expect
to incur additional costs and expenses related to:
- marketing and promotional activities to enhance the GreatFood.com brand;
- implementation of a new order processing system to link us to our
suppliers, improve order processing and expand the capacity of order
fulfillment;
- improvements and enhancements to our Web site;
6
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- expansion of our retail product offerings and Web site content;
- expansion of our wholesale program and implementation of our international
program; and
- attracting and retaining talented personnel.
We will need to generate significant revenues to achieve profitability and
we may not be able to do so. Even if we do achieve profitability, we may not be
able to sustain it. If our revenues grow more slowly than we anticipate or if
our operating expenses exceed our expectations, our financial results would be
harmed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 22 for more information on our
operating history.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We believe that our current cash resources, combined with the net proceeds
from this offering, are sufficient to meet our anticipated working capital and
capital expenditure requirements only until the middle of the year 2000. As a
result, we will need to raise a significant amount of additional capital after
the first half of the year 2000. Prior to raising this capital, the limited
amount of our capital resources may limit our ability to:
- fund more rapid expansion;
- respond to competitive pressures;
- acquire complementary businesses; or
- finance our operations if our revenues are lower than expected or our
expenses are greater than expected.
We may not be able to obtain the additional financing we may require on
favorable terms, or at all. If adequate capital is not available on acceptable
terms, we may not be able to fund expansion and may have to curtail operations
significantly.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT.
Our operating results have fluctuated on a quarterly basis in the past and
may fluctuate significantly in the future. Many of the factors which could cause
these fluctuations are outside of our control. Factors that may harm our
business or cause our operating results to fluctuate include those discussed in
greater detail in this section and the following:
- our ability to obtain new customers or encourage repeat purchases;
- the ability of our competitors to offer new or enhanced Web sites,
services or products;
- fluctuations in the amount of consumer spending on specialty food and
gifts;
- our ability to manage order fulfillment and maintain or increase gross
margins;
- our ability to obtain a breadth of desirable products for sale on our Web
site;
- the termination of existing, or failure to develop new, marketing
relationships which would give us exposure to traffic on other Web sites;
and
- the amount and timing of operating costs and capital expenditures relating
to expansion of our operations.
7
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BECAUSE THE DEMAND FOR OUR PRODUCTS IS SEASONAL, OUR QUARTERLY SALES WILL
CONTINUE TO FLUCTUATE AND WE MAY HAVE INSUFFICIENT CASH FLOW TO MAINTAIN OUR
OPERATIONS.
We have experienced, and expect to continue to experience, substantial
seasonality in our sales. Approximately 86% of our 1998 net sales were realized
in the fourth quarter. Since most of our operating costs are not directly
related to our sales volume, these seasonal sales patterns may result in
insufficient cash flow to support our operations during the times of the year
when our sales are lower. This seasonality reflects a combination of seasonal
fluctuations in Internet usage as well as traditional retail seasonality for the
gift and "special occasion" oriented products we offer. We plan to increase our
advertising and promotional spending even more significantly in the third
quarter of 1999 and hire additional employees to handle the increased order
activity which we expect to occur in the fourth quarter of 1999. If sales fall
below expectations in the fourth quarter, the value of our stock could decline.
WE MAY NOT BE ABLE TO ACHIEVE THE BROAD RECOGNITION OF THE GREATFOOD.COM BRAND
NECESSARY FOR SUCCESS.
We believe that broader recognition and a favorable consumer perception of
the GreatFood.com brand are essential to our future success. Accordingly, we
intend to continue to pursue a substantial advertising and marketing campaign to
establish the GreatFood.com brand. This campaign will involve significant
expense. See "Use of Proceeds" on page 18. If we are unable to achieve broader
brand recognition, we may be unable to increase future revenues and we may never
recover these expenses. In addition, even if brand recognition increases, the
number of new customers or the number of transactions in our online store, and
consequently our revenues, may not increase.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL OR OUR FAILURE TO
HIRE, INTEGRATE OR RETAIN OTHER QUALIFIED PERSONNEL COULD DISRUPT OUR BUSINESS.
We depend upon the continued services and expertise of our Chairman and
Chief Executive Officer, Benjamin Nourse, and our President, William Cuff. The
loss of the services of Mr. Nourse or Mr. Cuff may make us unable to continue
our operations. Mr. Nourse and Mr. Cuff are not bound by employment agreements
for any specific term. Our future success also depends on our ability to attract
and retain additional qualified technical, operating, marketing and customer
service personnel. Competition for qualified personnel in the Internet industry
is intense and we may not be able to retain or hire necessary personnel.
OUR EFFORTS TO DEVELOP OUR WHOLESALE BUSINESS MAY NOT BE SUCCESSFUL.
Prior to December 1998, we focused our operations exclusively on sales to
retail consumers. In December 1998, we launched an initial version of our
wholesale program through which we sell products to retailers in bulk quantities
at wholesale prices. Our expansion into this area will require significant
additional expenses and management resources to develop, market and promote this
program. As a result, this expansion may strain our management, financial and
operational resources. To date, we have had limited experience in the wholesale
market and our wholesale sales have only generated limited revenue. Certain
aspects of our business model may limit the growth of our wholesale business.
These include:
- retailers' unfamiliarity with Internet commerce;
- limitations of our current order processing system which require us to
base our shipping charges on estimated rather than actual costs;
- our current inability to extend credit to wholesale purchasers; and
8
<PAGE>
- potentially higher shipping costs due to our inability to consolidate
orders because we do not operate a warehouse.
As a result, we may not be able to successfully expand into the wholesale
market and may not be able to recover our expenses in developing this program.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" on page 22.
OUR INTERNATIONAL EXPANSION EFFORTS MAY NOT BE SUCCESSFUL.
We are in the process of developing a Canadian GreatFood.com site and
establishing a network of suppliers in Canada which will offer products to
customers in Canada. In addition, we currently contemplate replicating our
online store in other international markets. To date, we have no experience in
distributing products on an international basis and in developing localized
versions of our business model. We cannot assure you that our international
efforts will be successful. We expect to incur significant costs in:
- establishing international distribution networks;
- promoting our brand name internationally;
- developing localized versions of our Web site in other countries;
- complying with local regulations;
- overseeing the distribution of products in foreign markets; and
- modifying our order processing system for each international market we
enter.
If our international revenues are inadequate to offset the expense of
establishing and maintaining foreign operations, our business could be harmed.
In addition, there are several risks inherent in doing business on an
international level. These risks include:
- potentially complex regulatory requirements;
- export and import restrictions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- fluctuations in currency exchange rates;
- seasonal fluctuations in business activity in other parts of the world;
and
- potentially adverse tax consequences.
Any of these risks could adversely impact the success of our international
operations.
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BUSINESS COULD BE SERIOUSLY HARMED.
We may choose to expand our operations by developing new Web sites, offering
products or services not currently offered, or expanding our market presence
through relationships with third parties. Although we have no present
understandings, commitments or agreements with respect to any material
acquisitions or investments, we may pursue the acquisition of new or
complementary businesses, products or technologies. Any new Web site or product
category that is launched by us but not favorably received by consumers could
damage our brand or reputation and harm our net sales and results of operations.
In addition, any expansion of our business in any of these manners would require
significant additional expenses, and strain our management, financial and
operational resources.
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<PAGE>
BECAUSE WE DO NOT HAVE LONG TERM OR EXCLUSIVE CONTRACTS WITH OUR SUPPLIERS, WE
MAY BE UNABLE TO OFFER A SUFFICIENT SELECTION OF HIGH QUALITY SPECIALTY FOOD
PRODUCTS AND MAY LOSE CUSTOMERS.
We depend on many specialty food suppliers for products and order
fulfillment. However, sales of products from our five largest suppliers
accounted for approximately 42% of our net revenues in 1998. As a result, we are
substantially dependent on the continued participation of these key suppliers.
We do not have exclusive arrangements with any of our suppliers, and in some
cases, do not have a formal contractual relationship. Our suppliers may
terminate their relationship with us, elect to supply our competitors or decide
to compete with us by offering products on their own Web sites. If we are unable
to maintain a large supplier base and offer an attractive selection of specialty
food products, or if we lose the participation of key suppliers, we may be
unable to attract new customers, or may lose current customers, which would
reduce our ability to generate revenue.
OUR SUPPLIERS MAY NOT BE ABLE TO FULFILL CUSTOMER ORDERS IN A TIMELY MANNER,
WHICH COULD CAUSE US TO LOSE SALES AND HARM OUR BUSINESS.
We currently rely on our suppliers to fulfill our customers' orders directly
and therefore do not maintain inventory or operate distribution centers. Failure
of our suppliers to deliver products to our customers in a timely manner could
cause us to lose sales or damage our reputation which would be harmful to our
business. Many of our suppliers are small businesses with limited production and
delivery capabilities. As a result, during the 1998 holiday season, several of
our suppliers were not able to fulfill orders in a timely manner, which caused
us to experience customer complaints on approximately 3% of the orders placed
with us during that season and, in some cases, lost sales.
WE MAY CHOOSE TO ESTABLISH DISTRIBUTION CENTERS AND STOCK SOME NON-PERISHABLE
PRODUCTS WHICH WOULD INCREASE OUR EXPENSES AND EXPOSE US TO INVENTORY RELATED
RISKS.
The inventory practices of many online retailers have evolved from largely
non-inventory models to limited or expanded inventory and direct distribution
models. We will evaluate on an ongoing basis whether we should maintain
inventories or distribution centers. We may choose to do so for a number of
reasons which are described more fully in "Business -- Supplier Relationships"
beginning on page 38.
If we decide to maintain our own distribution centers:
- our operating and capital costs would significantly increase;
- we would be exposed to additional inventory holding risks; and
- our product offerings could be limited.
IF THE CARRIERS WHICH DISTRIBUTE OUR PRODUCTS EXPERIENCE BUSINESS INTERRUPTIONS,
OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We rely upon third party carriers for delivery of products from our
suppliers to our customers. As a result, we face the risk that these carriers
may not always be able to promptly deliver products to our customers. For
example, these carriers' delivery capabilities may be affected adversely by
employee strikes or inclement weather. Since a disproportionate amount of our
sales are made in the fourth quarter, any inability to deliver our products
during this time would substantially reduce our annual revenues and severely
harm our business. In addition, failure to deliver products to our customers in
a timely manner would harm our reputation and brand name.
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<PAGE>
WE MAY BE HELD LIABLE IF CUSTOMERS ARE HARMED BY ANY OF THE PRODUCTS SOLD ON OUR
WEB SITE.
Food products are subject to spoilage and can convey a variety of food
related human illnesses, including allergies and bacterial contamination.
Customers may sue us if they are harmed by any products purchased in our online
store. Liability claims could require us to spend significant time and money in
litigation or to pay significant damages which could harm our business. Although
our supplier contracts generally require suppliers to maintain product liability
insurance, and we carry insurance for product liability claims, our insurance
carrier may deny coverage in any particular case or the amount of damages could
exceed our policy limits of $2 million.
OUR CONVERSION TO A NEW ORDER PROCESSING SYSTEM MAY NOT BE SUCCESSFUL AND
CONSEQUENTLY WE MAY BE UNABLE TO PROCESS ORDERS AND MAY LOSE CUSTOMERS.
We are in the process of converting to a new customer order processing
system which eventually will include electronic links between our order
processing system and many of our suppliers. If this system does not work
effectively, or if we cannot deploy it without system downtime, particularly
during the fourth quarter, we may be unable to process orders, may lose
customers and our business could be severely harmed. The implementation of this
system will be a complex undertaking. The conversion to new technologies and
systems is often accompanied by unexpected technical problems, operational
disruptions and delays. This may happen to us, and we may lose sales, customers,
or suppliers as a result. Also, if we do not successfully implement this system,
we may experience difficulties fulfilling orders through our remote supplier
network as our sales increase. These difficulties may cause customer complaints,
damage to our reputation, or lost sales which would be harmful to our business.
See "Business -- Technology and Intellectual Property" on page 43 for more
information.
YEAR 2000 READINESS ISSUES OF OUR MATERIAL SYSTEMS OR THOSE OF OUR SUPPLIERS OR
OTHER THIRD PARTIES MAY PREVENT US FROM OPERATING OUR WEB SITE EFFECTIVELY OR
CONDUCTING OTHER FUNDAMENTAL ASPECTS OF OUR BUSINESS.
We have been advised that our existing order processing system is not fully
year 2000 compliant and our credit card processing company has indicated it will
not support this system after October 31, 1999 unless we upgrade to a version
which is year 2000 compliant. We are currently in the process of replacing this
system with a new order processing system. We have received assurances from the
third party supplier of this new system that it is year 2000 compliant and that
the transfer of our order processing functions to the new system can be
completed by October 31, 1999. In addition, we are assessing the year 2000
readiness of other third party supplied software, computer technology, and
embedded systems used in our business. Following this review, we may need to
replace or modify other systems. If we are not able to properly complete the
replacement of our order processing system or the assessment and remediation of
our other software, technology and systems in a timely manner, we may be unable
to operate our Web site, process customer orders, and perform other necessary
operations which would harm our business.
Additionally, our business could be harmed if the systems used by third
parties material to our operations, including Internet service providers,
financial institutions which process credit card orders, telecommunications
vendors, our suppliers, and third party carriers, or the Internet in general,
are not year 2000 compliant. We are still evaluating and have not yet developed
a contingency plan to address situations that may result if we, our suppliers,
other third parties, or the Internet are unable to achieve year 2000 compliance.
The cost of developing and implementing such a plan, if necessary, could be
significant. Any failure of our material systems, our suppliers' or other third
parties' material systems, or the Internet, to be year 2000 compliant could
prevent us from operating our Web site effectively, taking product orders,
making product deliveries or conducting other fundamental aspects of our
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Readiness" on page 28 for more detailed
information.
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<PAGE>
WE ARE GROWING RAPIDLY AND MAY HAVE DIFFICULTY MANAGING OUR GROWTH EFFECTIVELY.
We have increased the number of our employees from 2 as of March 31, 1996 to
33 as of August 31, 1999. In addition, we have increased the number of our
suppliers from approximately 10 to 86 in the same time period. We expect to
continue to grow rapidly both by adding new products and hiring new employees.
This growth is likely to place a significant strain on our management, resources
and systems. If we cannot effectively manage our growth, our business could be
harmed. To manage our growth, we must improve our existing systems or implement
new systems for operational and financial management and effectively train and
manage our growing employee base. If we acquire new businesses, we will also
need to integrate new operations, technologies and personnel.
WE EXPECT TO ISSUE ADDITIONAL SECURITIES TO FUND OUR CAPITAL REQUIREMENTS WHICH
WOULD DILUTE OUR SHAREHOLDERS' INTEREST.
We expect to issue equity or convertible debt securities to fund future
capital requirements. As a result, the percentage ownership of our then current
shareholders will be reduced. In addition, these securities may have rights,
preferences or privileges senior to those of our current shareholders.
THE EXERCISE OF OUTSTANDING WARRANTS MAY SUBSTANTIALLY DILUTE YOUR INTEREST IN
GREATFOOD.COM
In connection with our recent sale of Series C preferred stock, we issued
warrants to purchase an additional 323,077 shares of Series C preferred stock at
a nominal price. These warrants will become exercisable on January 31, 2000 if
we do not complete a public offering with an aggregate price of at least
$10,000,000 and a per share offering price of at least $10.00 before that date.
If these warrants become exercisable they will reduce the effective price for
the shares of Series C preferred stock from $5.00 to $3.25 per share. As a
result, the interest of other shareholders in GreatFood.com, including the
holders of Series D preferred stock, will be diluted.
WE MAY ENGAGE IN FUTURE ACQUISITIONS WHICH MAY HARM OUR FINANCIAL RESULTS, CAUSE
OUR STOCK PRICE TO DECLINE, OR DILUTE OUR SHAREHOLDERS' INTEREST IN
GREATFOOD.COM.
As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. However, to date we have not had any
experience in these types of transactions and have no current agreements or
commitments with respect to any acquisitions. These acquisitions may harm our
operating results or cause our stock price to decline because we may:
- issue equity or equity related securities that dilute our current
shareholders' percentage ownership of GreatFood.com;
- incur substantial debt or assume contingent liabilities of an acquired
business;
- be required to amortize a significant amount of intangible assets acquired
in an acquisition;
- have difficulty assimilating acquired operations, technologies or
products;
- experience diversion of our management's attention from our other business
operations; or
- lose key employees of acquired businesses or of GreatFood.com.
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<PAGE>
RISKS RELATED TO GREATFOOD.COM'S INTERNET BUSINESS AND PROSPECTS
THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF INTERNET COMMERCE,
WHICH GROWTH MAY NOT OCCUR.
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for electronic commerce. If
Internet usage does not grow or grows slower than expected, our business will
suffer. Internet use by consumers is still in an early stage of development and
a sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium for commerce. A number of factors may inhibit the growth of
Internet usage, including:
- failure to develop an adequate network infrastructure to support
substantial growth in usage;
- increased governmental regulation and taxation;
- consumer concerns about security of electronic commerce transactions; and
- inconsistent quality of service and limited availability of cost
effective, high speed access.
OUR SUCCESS DEPENDS ON THE RELIABILITY OF THE INTERNET INFRASTRUCTURE.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend on the development and maintenance of the Internet infrastructure to
support these increased demands and perform reliably. If the Internet
infrastructure is not adequately developed or maintained, use of our Web site
may be reduced and we may not be able to generate revenues. Even if the Internet
infrastructure is adequately developed and maintained, we may incur substantial
expenditures in order to adapt our services and products to changing Internet
technologies. The Internet has experienced outages and other delays as a result
of damage to portions of its infrastructure, and could face such outages and
delays in the future. These outages and delays could reduce the level of
Internet usage and traffic on our Web site. In addition, commerce over the
Internet could be harmed if the development or adoption of new standards and
protocols to handle increased levels of activity is delayed or governmental
regulation is increased.
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS.
We rely on encryption and authentication technology licensed from third
parties to provide secure transmission of confidential information such as
customer credit card numbers. However, the security procedures we use to protect
customer transaction data may be compromised or breached as a result of
developments in computer capabilities or in the field of cryptography. A party
who is able to circumvent our security measures could misappropriate proprietary
information, including customer credit card information, or cause interruptions
in the operation of our Web site. A security breach could result in litigation
against us, potential liability, and damage to our reputation, any of which
could severely harm our business.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. In addition, publicized security breaches could increase
consumer concerns over the security of electronic commerce and may inhibit the
growth of the Internet as a means of conducting commercial transactions.
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<PAGE>
OUR OPERATING RESULTS WOULD BE HARMED IF WE EXPERIENCE SIGNIFICANT CREDIT CARD
FRAUD.
Under current practices, we are liable for fraudulent credit card
transactions because we do not require a customer's signature to authorize a
transaction. A failure to adequately control fraudulent credit card transactions
would harm our results of operations because we do not carry insurance against
this risk. Although we have developed internal controls to safeguard ourselves
from this problem, as of June 30, 1999, we had suffered total losses of
approximately $19,000 since we began operations as a result of orders placed
with fraudulent credit card data. We may suffer these types of losses in greater
amounts in the future.
WE MAY NOT BE ABLE TO RESPOND EFFECTIVELY TO RAPID TECHNOLOGICAL CHANGES IN A
MANNER NECESSARY TO REMAIN COMPETITIVE.
The Internet and the online commerce industry are rapidly changing. To
remain competitive, we must:
- adapt to rapidly changing technologies;
- adapt our business to evolving industry standards; and
- continually improve the performance, features and reliability of our Web
site.
If we face material delays in introducing new products, services or
enhancements, our customers may stop shopping in our online store and use those
of our competitors. Developing our Web site and other proprietary technology
will require significant technical expertise. We may be unable to develop this
expertise. As a result we may use new technologies ineffectively or we may fail
to adapt our Web site, order processing systems, and computer network to
customer requirements or emerging industry standards.
OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC, WHICH WOULD CAUSE US TO LOSE SALES
AND POSSIBLY HARM OUR BUSINESS.
Substantially all of our computer and communications hardware operations for
our Web site is located in a single facility operated by Exodus Communications
in Seattle, Washington. Our systems and operations are vulnerable to damage or
interruption from fire, floods, earthquakes, power loss, telecommunications
failure, break-ins and similar events. Computer viruses, electronic break-ins or
other similar disruptive problems could cause users to stop visiting our Web
site. If any of these circumstances occurred, we would incur substantial
replacement costs, would be unable to generate revenue during the downtime and
could lose customers. As a result, our business would be harmed. Our insurance
policies may not adequately compensate us for any losses that may occur due to
any failures of or interruptions in our systems. We do not presently have any
backup systems or a formal disaster recovery plan.
Since we began operations, our Web site has experienced slower response
times or decreased traffic for periods ranging from a few minutes to several
hours for a variety of reasons approximately one or two times a month. In
addition, although we are unable to accurately estimate the frequency, we
believe that many of the Internet service providers and operators that our
customers use for access to our Web site have experienced significant outages in
the past, and could experience outages, delays and other difficulties in the
future due to system failures unrelated to our systems. Any of these system
failures could cause us to lose sales or customers and harm our business.
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WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The market for Internet commerce is relatively new, rapidly changing and
intensely competitive. We expect future competition to intensify because:
- barriers to entry are minimal;
- current and new competitors can launch new Web sites at a relatively low
cost; and
- we do not have an exclusive relationship with any of our suppliers.
In addition, the specialty food retailing business is highly competitive and
a large number of companies in the industry are attempting to market their
products over the Internet. If we do not compete effectively or if we experience
any pricing pressures, reduced profit margins or loss of market share resulting
from increased competition, our business could be harmed.
Many of our present and potential competitors are likely to enjoy
substantial competitive advantages, including the following:
- larger customer bases;
- greater brand recognition;
- better access to content;
- longer operating histories; and
- substantially greater financial, marketing, technical and other resources.
As a result, it is possible we may not be able to compete effectively in our
market. See "Business -- Competition" on page 45.
MARKETING AGREEMENTS AND STRATEGIC ALLIANCES MAY NOT GENERATE THE EXPECTED
NUMBER OF NEW CUSTOMERS OR MAY BE TERMINATED WHICH COULD CAUSE OUR SALES TO BE
LOWER THAN EXPECTED.
We use marketing agreements and strategic alliances with other Internet
companies to create traffic on our Web site. The success of these relationships
depends on the amount of increased traffic we receive from the Web sites of
these other companies. These arrangements may not generate the expected number
of new customers. Our current agreements with Excite and Yahoo! expire within
the current year and we may not be able to renew these agreements on terms we
find acceptable. If we are unable to renew any of these agreements or find
additional Internet companies to enter into similar agreements with us, the
traffic on our Web site could decrease.
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.
The steps we take to protect our proprietary rights may be inadequate. We
regard our service marks, trademarks, trade dress, trade secrets and similar
intellectual property as integral to our success. We rely on trademark and
copyright law, and trade secret protection to protect our proprietary rights. We
have filed a trademark application for GreatFood.com for online ordering
services featuring specialty food items. However, we cannot assure you that this
trademark will be granted. If this trademark is not granted, we might be unable
to prevent other companies from using this or a similar name. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon, or otherwise decrease the value of our trademarks and other
proprietary rights. As a result, potential traffic to our Web site may be
diverted to other sites and we may lose potential customers.
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WE MAY FACE LEGAL LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
While we currently provide a limited amount of content on our Web site, we
anticipate increasing the amount of content in the future. We could face legal
liability for defamation, negligence, copyright, patent or trademark
infringement, or other claims based on the nature and content of materials that
we publish or distribute on our Web site. If we are held liable for the content
on our Web site, our business may suffer.
GOVERNMENTAL REGULATION OF THE INTERNET MAY RESTRICT OUR BUSINESS OR INCREASE
THE COSTS OF OUR OPERATIONS.
Government regulation of communications and commerce on the Internet varies
greatly from country to country. In the United States and Canada, the federal
governments have not adopted many laws and regulations to specifically regulate
online communications and commerce. However, the U.S. Congress has recently
enacted legislation addressing such issues as the transmission of certain
materials to children, intellectual property protection, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. The governments of some other countries have been
much more active in regulating these areas than has the United States. There is
some risk that the United States and other countries will increase their
regulation of the Internet in the future. An increase in regulation or the
application of existing laws to the Internet may require us to modify the manner
in which we conduct our business and could significantly increase our costs of
operations or harm our business. The law of the Internet remains largely
unsettled and it may take years to determine whether and how existing laws such
as those governing intellectual property, privacy, libel and taxation apply to
the Internet. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. Imposition of access fees could increase
the cost of transmitting data over the Internet which would reduce Internet
usage and possibly reduce our profit margins.
POSSIBLE STATE SALES AND OTHER TAXES COULD AFFECT OUR RESULTS OF OPERATIONS.
We do not currently collect sales or other similar taxes on sales of food
products in any state. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies, including GreatFood.com, which
engage in or facilitate electronic commerce. A number of proposals have been
made at the state and local level that would impose additional taxes on the sale
of goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce and could reduce our
revenues.
RISKS RELATED TO THIS OFFERING
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR SHAREHOLDERS WILL RETAIN SIGNIFICANT
CONTROL OVER GREATFOOD.COM AFTER THIS OFFERING.
After this offering, executive officers, directors and current holders of 5%
or more of our outstanding stock will, in the aggregate, own approximately 69%
of our outstanding voting securities. As a result, these shareholders will be
able to influence significantly all matters requiring approval by our
shareholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
delay, deter or prevent a change in control of GreatFood.com and may make some
transactions more difficult or impossible without the support of these
shareholders.
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OUR MANAGEMENT WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS
OFFERING.
We intend to use the net proceeds from the sale of the Series D preferred
stock for implementation of a new order processing system, the development and
marketing of our wholesale and international programs, advertising and promotion
of the GreatFood.com brand and product offering, and general corporate purposes.
Accordingly, our management will have significant flexibility in applying the
net proceeds of this offering. See "Use of Proceeds" on page 18.
THERE WILL NOT BE A PUBLIC MARKET FOR OUR STOCK.
No class of our stock will be listed for trading on any securities exchange
or the Nasdaq National Market. Accordingly, there will be no public trading
market for our stock and we do not expect a market to develop in the future. We
do not intend to apply to list our stock on the Nasdaq National Market, or any
other securities exchange until we complete an underwritten public offering.
Even if we do complete an underwritten public offering, a trading market may not
develop for our stock, or if a market does develop, our stock may be difficult
to trade. As a result of these factors, you may not be able to resell your
shares for an indefinite period of time.
YOU WILL EXPERIENCE IMMEDIATE DILUTION.
The price in this offering is higher than the pro forma net tangible book
value per share of the outstanding common stock immediately after the offering.
Accordingly, purchasers of stock in this offering will experience immediate
dilution of approximately $2.01 in net tangible book value per share, or
approximately 50% of the assumed offering price of $4.00 per share. In contrast,
existing shareholders paid an average price of $1.80 per share. If outstanding
stock options and warrants are exercised, your interest would be further
diluted. See "Dilution" at page 20.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains "forward looking statements." These statements may
include statements regarding:
- our business strategy;
- timing of and plans for the introduction or phase-out of products and
services;
- plans for hiring additional personnel;
- entering into strategic alliances;
- adequacy of anticipated sources of funds, including the proceeds from this
offering, to fund our operations until the middle of the year 2000; and
- other statements about our plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward looking statements. Because these forward looking
statements involve risks and uncertainties, actual results could differ
materially from those expressed or implied by these forward looking statements
for a number of reasons, including those discussed under "Risk Factors" and
elsewhere in this prospectus. We assume no obligation to update any forward
looking statements.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of $9,600,000 from the sale of
the 2,500,000 shares of Series D preferred stock offered hereby, at an assumed
offering price of $4.00 per share and after deducting estimated placement agent
commissions and offering expenses. We currently intend to use:
- approximately $3 to $4 million of the net proceeds of this offering to
expand advertising, promotion and marketing of the GreatFood.com brand and
product offering;
- approximately $500,000 to implement a new order processing system linking
us with our suppliers;
- approximately $500,000 to continue the development of our wholesale and
international programs;
- approximately $750,000 for continued development of our Web site; and
- approximately $300,000 to pay fees owing to service providers in
connection with prior offerings of our securities.
The remainder of the net proceeds will be used for working capital and
general corporate purposes or be allocated to the above categories as deemed
appropriate. In addition, although we do not have any current agreements or
commitments with respect to any acquisition, we may use some of the proceeds for
acquisitions of complementary businesses.
Pending these uses, the net proceeds of the offering will be invested in
short-term, interest bearing investments or accounts.
The allocations described above are only an estimate and the amounts that we
actually spend on these items and the cost, timing and amount of funds we need
cannot be precisely determined at this time. Our expenditures and need for funds
will be based on numerous factors, including our future revenue growth, the
amount of cash generated by our operations, the frequency and timing of the need
for advertising expenditures and the need for additional or upgraded systems and
technology. Our management has broad discretion in determining how the proceeds
of this offering will be applied.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future. We currently intend to retain
any future earnings to develop and expand our business.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
- on an actual basis; and
- on an as adjusted basis to reflect (a) the increase of our authorized
preferred stock to 10,000,000 shares immediately prior to completion of
this offering and (b) our receipt of the estimated net proceeds from the
sale of 2,500,000 shares of Series D preferred stock in this offering at
an assumed offering price of $4.00 per share after deducting estimated
placement agent commissions and estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
SHARE DATA)
Long term debt--including current portion................................................. $ 87 $ 87
--------- -----------
Mandatorily redeemable convertible preferred stock, no par value, 1,384,615 shares
authorized and 600,000 shares issued and outstanding (actual); 3,884,615 shares
authorized and 3,100,000 shares issued and outstanding (as adjusted).................... 2,993 12,593
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares authorized (including 1,384,615 shares
of mandatorily redeemable convertible preferred stock) and 1,848,368 shares issued and
outstanding (actual); 10,000,000 shares authorized (including 3,884,615 shares of
mandatorily redeemable convertible preferred stock) and 1,848,368 shares outstanding
(as adjusted)......................................................................... 4,069 4,069
Common stock, no par value; 20,000,000 shares authorized (actual and as adjusted); and
1,604,164 shares issued and outstanding (actual and as adjusted)...................... 421 421
Deferred compensation................................................................... (143) (143)
Accumulated deficit..................................................................... (3,951) (3,951)
--------- -----------
Total shareholders' equity.............................................................. 396 396
--------- -----------
Total capitalization...................................................................... $ 3,476 $ 13,076
--------- -----------
--------- -----------
</TABLE>
The common stock outstanding as shown above is based on shares outstanding
as of August 31, 1999 and excludes: (a) 991,000 shares of common stock reserved
for issuance under outstanding options granted under our 1997 Stock Incentive
Plan; (b) 609,000 shares of common stock reserved for issuance under future
grants under our 1997 Stock Incentive Plan; and (c) 318,811 shares of common
stock reserved for issuance under outstanding warrants. The above table also
excludes 323,077 shares of common stock issuable upon the conversion of shares
of Series C preferred stock issuable upon the exercise, at a nominal exercise
price, of warrants granted to the purchasers of our Series C preferred stock in
connection with that offering. These warrants will become exercisable on January
31, 2000 if we have not completed an underwritten public offering with an
aggregate offering price of at least $10,000,000 and a price per share of at
least $10.00 by that date. If these warrants become exercisable, they will
reduce the effective price for the shares of Series C preferred stock from $5.00
to $3.25 per share.
19
<PAGE>
DILUTION
Our net tangible book value as of June 30, 1999 was approximately
$3,389,000, or $0.84 per share of outstanding common stock equivalents. Net
tangible book value per share is equal to our total tangible assets less our
total liabilities, divided by the number of outstanding shares of common stock
equivalents which includes 2,448,368 shares of preferred stock. Dilution per
share represents the difference between the price per share paid by investors in
this offering and the pro forma as adjusted net tangible book value per share
immediately after this offering.
After giving effect to the sale of the 2,500,000 shares of Series D
preferred stock in this offering at an assumed offering price of $4.00 per share
(after deducting the estimated fee payable to the placement agents and offering
expenses payable by us), our as adjusted net tangible book value at June 30,
1999 would have been approximately $12,989,000, or $1.99 per share. This
represents an immediate dilution of $2.01 per share to new investors purchasing
shares in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share.............................................. $ 4.00
Net tangible book value per share as of June 30, 1999....................... $ 0.84
Increase per share attributable to new investors............................ $ 1.15
---------
As adjusted net tangible book value after this offering....................... $ 1.99
---------
Dilution per share to new investors in this offering.......................... $ 2.01
---------
</TABLE>
The following table summarizes, on a pro forma basis after giving effect to
this offering, the number of shares purchased from us, the total consideration
paid and the average price per share paid by existing shareholders and by the
new investors purchasing the shares offered in this prospectus assuming an
offering price of $4.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................... 4,027,532 62% $ 7,232,083 42% $ 1.80
New investors....................................... 2,500,000 38 10,000,000 58
---------- --- ------------- ---
Total............................................. 6,527,532 100% $ 17,232,083 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
This information is based on pro forma shares outstanding as of June 30,
1999 and does not include (a) 884,000 shares of common stock reserved for
issuance under outstanding options granted under our 1997 Stock Incentive Plan;
(b) 716,000 shares of common stock reserved for issuance under future grants
under our 1997 Stock Incentive Plan; and (c) 343,811 shares of common stock
reserved for issuance under outstanding warrants which were reserved as of that
date. The above table also excludes 323,077 shares of common stock issuable upon
the conversion of shares of Series C preferred stock issuable upon the exercise,
at a nominal exercise price, of warrants granted to the purchasers of our Series
C preferred stock in connection with that offering. These warrants will become
exercisable on January 31, 2000 if we have not completed an underwritten public
offering with an aggregate offering price of at least $10,000,000 and a price
per share of at least $10.00 by that date. If these warrants become exercisable,
they will reduce the effective price for the shares of Series C preferred stock
from $5.00 to $3.25 per share.
20
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data as of and for
each of the fiscal years in the period from August 31, 1995 (inception) to
December 31, 1998 and as of June 30, 1999 and for the six month periods ended
June 30, 1998 and 1999. The statements of operations data for each of the fiscal
years in the period from January 1, 1996 to December 31, 1998 and the balance
sheet data as of December 31 1996, 1997 and 1998 have been derived from our
financial statements, audited by PricewaterhouseCoopers LLP, independent
accountants. The statements of operations data for the period from August 31,
1995 (inception) to December 31, 1995 and for the six month periods ended June
30, 1998 and 1999 and the balance sheet data as of December 31, 1995 and June
30, 1999 have been derived from our unaudited financial statements that include,
in the opinion of management, all normal and recurring adjustments that
management considers necessary for a fair statement of the results. The
operating results for the six months ended June 30, 1999 are not necessarily
indicative of results that may be expected for the year ending December 31,
1999. The following information is qualified by reference to, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes. The audited financial statements and related notes as of December 31,
1997 and 1998 and for the three years in the period ended December 31, 1998 and
the unaudited financial statements as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX
AUGUST 31, 1995 MONTHS
(INCEPTION) TO FISCAL YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, JUNE 30
----------------- ------------------------------- ---------
1995 1996 1997 1998 1998
----------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $ 0 $ 18 $ 120 $ 748 $ 65
Cost of goods sold......................................... 0 14 92 605 53
----- --------- --------- --------- ---------
Gross profit............................................... 0 4 28 143 12
Operating expenses:
Sales and marketing...................................... 0 11 36 1,102 48
Product and site development............................. 0 1 9 84 8
General and administrative............................... 8 53 66 450 101
----- --------- --------- --------- ---------
Total operating expenses................................... 8 65 111 1,636 157
----- --------- --------- --------- ---------
Loss from operations....................................... (8) (61) (83) (1,493) (145)
Other income, net.......................................... 6 21 1 30 --
----- --------- --------- --------- ---------
Net loss................................................... $ (2) $ (40) $ (82) $ (1,463) $ (145)
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Basic and diluted net loss per share....................... $ (.01) $ (.04) $ (.06) $ (.93) $ (.09)
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Weighted average shares of common stock outstanding used in
computing basic and diluted net loss per share............. 304 1,007 1,274 1,579 1,579
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
<CAPTION>
1999
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................... $ 410
Cost of goods sold......................................... 346
---------
Gross profit............................................... 64
Operating expenses:
Sales and marketing...................................... 1,709
Product and site development............................. 153
General and administrative............................... 725
---------
Total operating expenses................................... 2,587
---------
Loss from operations....................................... (2,523)
Other income, net.......................................... 35
---------
Net loss................................................... $ (2,488)
---------
---------
Basic and diluted net loss per share....................... $ (1.60)
---------
---------
Weighted average shares of common stock outstanding used in
computing basic and diluted net loss per share............. 1,579
---------
---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1999
---------------------------------------------- ----------------------
1995 1996 1997 1998 ACTUAL AS ADJUSTED
----- ----- --------- --------- --------- -----------
BALANCE SHEET DATA (IN THOUSANDS):
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.......................... $ 5 $ 14 $ 124 $ 678 $ 3,438 $ 13,038
Working capital.................................... 0 (1) 51 633 3,079 12,679
Total assets....................................... 33 55 161 1,428 4,210 13,810
Total long term liabilities (including current
portion)......................................... 0 15 13 47 87 87
Mandatorily redeemable convertible preferred
stock............................................ 2,993 12,593
Total shareholders' equity......................... 28 25 74 716 396 396
</TABLE>
The as adjusted information above gives effect to our receipt of the
estimated net proceeds from the sale of 2,500,000 shares of Series D preferred
stock in this offering at an assumed offering price of $4.00 per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS PROSPECTUS CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE
STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "INTENDS," "PLANS" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING
STATEMENTS. THE PRINCIPAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO DIFFERENCES
IN OUR ACTUAL RESULTS ARE DISCUSSED IN THE SECTION TITLED "RISK FACTORS."
OVERVIEW
GreatFood.com is an electronic commerce company focused on the sale of
gourmet and specialty food over the Internet to the retail, corporate gift and
wholesale markets. We offer a broad selection of high quality branded specialty
food products which appeal to a wide range of customers for special occasions,
parties and gifts. Our product offering includes specialty and gourmet food such
as chocolates, caviar, prime beef, fancy fruit, and lobster dinners. Our
merchandise mix is focused on a carefully selected assortment of high quality
products, and our Web site combines a unique blend of merchandise and related
content. We do not operate a warehouse and our customers' orders are fulfilled
directly by our suppliers.
We were incorporated in August 1995 and launched our online retail store in
March 1996. Since March 1996, we have focused on expanding our product
offerings, building our brand name through advertising and promotional
campaigns, pursuing participation in shopping programs conducted by other
Internet sites, recruiting personnel, developing our wholesale and corporate
gift programs and exploring a variety of strategic partnerships which take
advantage of our specialty food oriented products and services. In November 1998
we launched our corporate gift program which targets businesses and
professionals purchasing gifts for customers and clients. In December 1998 we
launched a wholesale program enabling retailers to purchase in bulk at wholesale
prices. Our expenses have increased significantly since inception as we have
increased our advertising and promotional expenses to raise our brand
recognition and added personnel.
We generate all of our revenues from sales of specialty food products. From
inception until December 1998, we generated revenues exclusively from retail
sales. We derive income from our retail sales from the excess of the retail
prices we charge our customers over the product costs we pay our suppliers. We
have initiated a wholesale program in which we will sell bulk quantities of
specialty food products to registered retailers at wholesale prices. In this
program, we purchase products from suppliers at a distributor's discounted price
and derive income from the difference between this discounted price and the
wholesale price we charge. Currently our retail and wholesale customers pay for
orders by credit card while we pay our suppliers on extended terms. As a result,
we are able to increase our working capital between the time we receive payment
for orders and the time we are required to pay suppliers.
Our business model differs from many other electronic commerce businesses
since we do not currently hold inventory in our own facility. Our orders are
fulfilled directly by our suppliers who follow our specifications and
procedures. This reduces procurement and carrying costs, as well as costs of
shipping to a distribution center, and risks of spoilage and oversupply which
are associated with holding inventory. This model also allows us to offer a
greater selection and higher volume of products, including perishable products
and products with a limited shelf life, than we could if constrained by
warehouse space, timing pressures, or inventory holding costs.
Since 1996, we have expanded our management team to help implement our
growth strategy. We hired William Cuff as our President in April 1998, a Vice
President of Merchandising in August 1998, a Vice President of Finance and
Administration in April 1999, a Vice President of Information
22
<PAGE>
Technology and Site Development and a Vice President of Wholesale Programs in
June 1999 and a Vice President of Business Development in September 1999.
Our net revenues have grown since inception, from $17,530 in 1996 to
$747,860 in 1998. Specialty food sales are inherently seasonal, with highest
volumes during the fourth quarter holiday season. Additionally, our business has
a large gift-giving component. As a result of these two factors, approximately
86% of our 1998 sales were realized in the fourth quarter. We have taken steps
intended to reduce the magnitude of this trend such as introducing our wholesale
program, expanding our product selection, and emphasizing non-holiday occasions
and personal consumption. However, we expect fourth quarter sales to continue to
represent a disproportionate amount of annual sales in the future.
As of June 30, 1999, we had generated a limited amount of revenues from our
wholesale program. We believe several aspects of our business model have limited
the growth of this program to date. Our current order processing system does not
enable us to offer credit or extended payment terms and requires credit card
payment from our wholesale purchasers, which is not typical in the wholesale
market. Our current system also requires us to charge wholesale customers
estimated, rather than actual, shipping costs. In addition, our wholesale
business is affected by the unfamiliarity of many retailers with the Internet in
general and, more specifically, as a means for conducting commerce. We are in
the process of implementing a new order processing system which should enable us
to offer credit and extended payment terms and improve our shipping cost
structure. We are also working to increase Internet familiarity among specialty
food retailers by making them aware of the opportunity to order products over
the Internet and educating them about the online ordering process. We are
increasing awareness of the Internet opportunities through advertising, direct
marketing campaigns and discussions at industry trade shows. We are also
instituting training programs and providing incentives to try our entire
service.
We incurred net losses of $2.5 million in the six months ended June 30,
1999, $1.4 million in 1998, $81,937 in 1997, and $39,833 in 1996. At June 30,
1999 we had an accumulated deficit of $4.0 million. We expect operating losses
and negative cash flow to continue for at least the next 2 years. In addition,
we anticipate our losses will increase as we increase advertising and
promotional expenditures to build our brand name and attract customers, continue
the development of our Web site, expand product offerings, develop relationships
with strategic business partners, add personnel, and make capital expenditures
to implement a new order processing system to electronically link us to our
suppliers to improve order processing.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. To address these risks, we must obtain sufficient
operating capital, maintain and expand our customer base, continue to increase
our product offerings, successfully implement our business, marketing and
promotional strategies, continue to develop our order processing technology,
respond to competitive developments in the specialty food market, and attract,
retain and motivate qualified personnel. We cannot assure you that we will be
successful in addressing these risks and our failure could be harmful to our
business, prospects, financial condition and results of operations.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999
At the date of this prospectus we estimate that our net revenues for the
quarter ended September 30, 1999 were approximately $240,000 as compared to
$242,000 in the quarter ended June 30, 1999 and $43,000 in the quarter ended
September 30, 1998.
23
<PAGE>
The following table sets forth statement of operations data as a percentage
of net revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................. 76.9 76.5 80.9 81.9 84.5
--------- --------- --------- --------- ---------
Gross profit....................... 23.1 23.5 19.1 18.1 15.5
Operating expenses:
Sales and marketing.............. 62.9 30.3 147.4 74.6 417.2
Product and site development..... 4.0 7.4 11.2 11.3 37.4
General and administrative....... 301.3 54.9 60.1 156.2 177.0
--------- --------- --------- --------- ---------
Total operating expenses........... 368.2 92.6 218.7 242.1 631.6
--------- --------- --------- --------- ---------
Loss from operations............... (345.1) (69.1) (199.6) (224.0) (616.1)
Other income (expense), net........ 117.9 0.6 4.0 (0.7) 8.7
--------- --------- --------- --------- ---------
Net loss........................... (227.2)% (68.5)% (195.6)% (224.7)% (607.4)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
NET REVENUES. Net revenues consist of product sales to customers and
charges to customers for outbound shipping and handling costs and are net of
product returns and promotional discounts. Revenues are recognized upon the
shipment of products from our suppliers. Net revenues increased to $409,628 for
the six months ended June 30, 1999 from $64,560 for the six months ended June
30, 1998. This increase reflects an increased number of transactions due to
expanded advertising and promotional efforts, broader product offerings, and
improvements to our Web site made over the second half of 1998 and first half of
1999.
COST OF GOODS SOLD. Cost of goods sold consists primarily of the costs of
products sold to customers and actual outbound shipping and handling costs. Cost
of goods sold increased to $345,940 for the six months ended June 30, 1999 from
$52,877 for the six months ended June 30, 1998. This $293,063 increase was
primarily attributable to our increased sales volume. Our gross profit margin
decreased to 15.5% of net revenues for the six months ended June 30, 1999 from
18.1% of net revenues for the six months ended June 30, 1998. This decrease in
gross profit margin was due to a number of factors. During the first quarter of
1999, we offered many products at promotional prices to increase sales after the
holiday season. In addition, during the first quarter of 1999, we experienced an
increase in actual shipping cost due to an increase in the number of customers
ordering goods from multiple suppliers during a single visit to our Web site.
Since we base our shipping charges to retail customers on the size of their
order, rather than the number of suppliers from whom goods are to be shipped, we
do not always recoup our actual shipping costs on multiple supplier orders. We
also experienced substantial demand in the first quarter of 1999 for products
for which our prices did not allow us to recoup our shipping costs. During the
second quarter of 1999, we increased our prices for these products and made
other adjustments to our pricing structure. However, while we attempt to price
products in a manner to absorb product and shipping costs adequately,
promotional pricing and changes in product mix may lead to fluctuating margins
in the future.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of advertising and promotional expenditures and payroll and related
expenses for personnel engaged in sales and marketing activities. Sales and
marketing expenses increased to $1,709,127, or 417.2% of net revenues, for the
six months ended June 30, 1999, from $48,184, or 74.6% of net revenues, for the
six months ended June 30, 1998. This increase in actual dollars expended and as
a percentage of net revenues is
24
<PAGE>
attributable to the expansion of our online, print and direct mail advertising
campaigns and primarily reflects payments under marketing agreements with
America Online, Excite and Yahoo! entered into in the second half of 1998. These
agreements call for fixed monthly payments without regard to the seasonal nature
of our sales. Since most of our sales occur in the fourth quarter, these
agreements contributed to the significant increase in sales and marketing
expenses as a percentage of net revenues in the six months ended June 30, 1999.
In addition, this increase reflects the hiring of additional personnel and
promotional consultants and related expenses required to execute our marketing
strategy which we substantially began to implement in the second half of 1998.
We intend to continue to aggressively pursue advertising and marketing campaigns
and, therefore, expect sales and marketing expenses to increase significantly in
dollar terms in future periods.
PRODUCT AND SITE DEVELOPMENT EXPENSES. Product and site development
expenses consist primarily of payroll and related expenses incurred in
connection with the expansion of our product offerings, Web site development,
and information technology personnel. Product and site development expenses
increased to $153,283, or 37.4% of net revenues, for the six months ended June
30, 1999, from $7,258, or 11.3% of net revenues, for the six months ended June
30, 1998. This increase was primarily attributable to increased staffing and
associated costs related to expanding our product offerings, improving the
design of our Web site, enhancing the content of our online store and increasing
the capacity of our systems that we use to process customers' orders and
payments. We expect product and site development expenses to continue to
increase in dollar terms in future periods as we continue to enhance the
functions of our site.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of payroll and related expenses for executive and administrative
personnel, facilities expenses, professional services expenses, travel and other
general corporate expenses. General and administrative expenses increased to
$725,193, or 177.0% of net revenues, for the six months ended June 30, 1999,
from $100,838, or 156.2% of net revenues, for the six months ended June 30,
1998. This increase was primarily attributable to increased headcount and
related expenses, as well as increased professional services expenses. We expect
general and administrative expenses to increase in dollar terms as we expand our
staff and incur additional costs related to the growth of our business and being
a public company.
OTHER INCOME, NET. Other income consists of earnings on our cash and cash
equivalents, net of interest expense attributable to short-term loans payable
and obligations under capital leases. Other income increased to $35,712 for the
six months ended June 30, 1999 from other expense of $494 for the six months
ended June 30, 1998. This increase was primarily attributable to earnings on
higher average cash and cash equivalent balances in 1999 following our sale of
$2.1 million of Series B preferred stock in March 1999 and our sale of $3.0
million of Series C preferred stock on May 17, 1999.
FISCAL YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NET REVENUES. Net revenues increased to $747,860 in 1998 from $119,633 in
1997 and $17,530 in 1996. These increases primarily were attributable to an
increased number of transactions as a result of the significant growth of our
customer base. Our customer base increased in 1997 as we made improvements to
our Web site and expanded our product offerings. In 1998, we believe the growth
of our customer base was primarily attributable to increased advertising and
promotional activities we began in the second half of 1998, with funds made
available by our sale of $2.0 million of Series A preferred stock in July 1998.
COST OF GOODS SOLD. Cost of goods sold increased to $605,140 in 1998 from
$91,550 in 1997 and $13,484 in 1996. These increases were primarily due to
increases in our sales volume during each period. Our gross profit margin was
19.1% of net revenues in 1998, 23.5% of net revenues in 1997, and 23.1% of net
revenues in 1996. The decrease in gross margin between 1997 and 1998 was
primarily due
25
<PAGE>
to changes in product mix and a reduction made in the second half of 1998 in the
amounts charged to customers for outbound shipping.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$1.1 million, or 147.4% of net revenues, in 1998 from $36,264, or 30.3% of net
revenues, in 1997 and $11,028, or 62.9% of net revenues, in 1996. The increase
in sales and marketing expense in actual dollars and as a percentage of net
revenue in 1998 was primarily attributable to expansions of our online and print
advertising, direct mail, and publicity campaigns, as well as to increased
personnel and related expenses required to implement our marketing strategy. Our
ability to finance advertising and publicity efforts was restricted in 1996 and
1997 by our limited working capital. The substantial increase in advertising and
publicity spending in 1998 reflects the increased availability of funds
following our sale of $2.0 million of Series A preferred stock in July 1998.
PRODUCT AND SITE DEVELOPMENT EXPENSES. Product and site development
expenses increased to $84,000, or 11.2% of net revenues, in 1998, from $8,801,
or 7.4% of net revenues, in 1997 and $706, or 4.0% of net revenues, in 1996.
These increases were primarily attributable to increased staffing and associated
costs related to developing our online store and increasing our product
offerings.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased in dollar terms to $449,623, or 60.1% of net revenues, in 1998 from
$65,707, or 54.9% of net revenues, in 1997 and $52,815, or 301.3% of net
revenues, in 1996. These increases in dollar terms are primarily attributable to
increased headcount and related expenses associated with the hiring of
additional personnel and increased professional services expenses. The increase
in 1998 also reflects the hiring of our president in April 1998, and the
transition of our chairman and chief executive officer from a part-time employee
drawing no salary to a full-time salaried employee in June 1998.
OTHER INCOME, NET. Other income increased to $30,299 in 1998 from $752 in
1997. Other income decreased in 1997 from $20,670 in 1996. Other income in 1996
consisted of income from consulting services while our online store was being
developed. The decrease in other income in 1997 reflects the termination of
these consulting services as we focused our resources on our online store. The
increase in other income between 1997 and 1998 was primarily attributable to
earnings on higher average cash and cash equivalent balances during 1998,
following our receipt of proceeds of $2.0 million from our sale of Series A
preferred stock in July 1998.
INCOME TAXES. As of December 31, 1998, we had $1.3 million of net operating
loss carryforwards for federal income tax purposes, which expire beginning in
2018. We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability. Changes in the ownership of our common stock, as
defined in the Internal Revenue Code of 1986, as amended, may restrict the
utilization of such carryforwards. See Note 6 of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth quarterly statements of operations data for
the seven quarters ended June 30, 1999. This quarterly information has been
derived from our unaudited financial statements and, in the opinion of our
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered. The quarterly data should be read in conjunction with our
financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
26
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
DECEMBER
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 31, MARCH 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
------------- ----------- ----------- ------------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 97 $ 28 $ 37 $ 43 $ 640 $ 168 $ 242
Cost of goods sold.............. 76 22 31 34 518 147 199
----- ----- ----- ------ ----------- ----------- ---------
Gross profit.................... 21 6 6 9 122 21 43
Operating expenses:
Sales and marketing........... 31 23 25 241 813 565 1,144
Product and site
development................. 4 1 7 26 50 44 109
General and administrative.... 15 20 81 143 206 280 445
----- ----- ----- ------ ----------- ----------- ---------
Total operating expenses........ 50 44 113 410 1,069 889 1,698
----- ----- ----- ------ ----------- ----------- ---------
Loss from operations............ (29) (38) (107) (401) (947) (868) (1,655)
Other income, net............... 1 0 0 16 14 5 30
----- ----- ----- ------ ----------- ----------- ---------
Net loss........................ $ (28) $ (38) $ (107) $ (385) $ (933) $ (863) (1,625)
----- ----- ----- ------ ----------- ----------- ---------
----- ----- ----- ------ ----------- ----------- ---------
Basic and diluted net loss per
share......................... $ (.02) $ (.02) $ (.07) $ (.24) $ (.59) $ (.55) $ (1.05)
----- ----- ----- ------ ----------- ----------- ---------
----- ----- ----- ------ ----------- ----------- ---------
Weighted average shares of
common stock outstanding used
in computing basic and diluted
net loss per share............ 1,274 1,579 1,579 1,579 1,579 1,579 1,579
----- ----- ----- ------ ----------- ----------- ---------
----- ----- ----- ------ ----------- ----------- ---------
</TABLE>
Our operating expenses have increased significantly in the four most recent
quarters, most notably in the quarter just ended, as we have increased our
spending on marketing, advertising and promotional efforts and product and site
development following our sales of preferred stock in July 1998, March 1999 and
May 1999. We expect operating expenses will continue to increase in the future
as we expand our advertising and marketing campaigns, pursue product line
expansion and new channels of distribution such as our wholesale and
international programs and undertake other new business opportunities. To the
extent that these expenses are not accompanied by an increase in net revenue,
our business, results of operations and financial condition could be harmed.
We have experienced significant seasonality in our business, reflecting a
combination of seasonal fluctuations in Internet usage and traditional retail
seasonality patterns. Our business has a large gift giving and special occasion
component and therefore, sales are significantly higher in the fourth calendar
quarter of each year than in the preceding three quarters. In addition, Internet
usage and the rate of Internet growth may be expected to decline during the
summer. We have made efforts to increase our revenues in other quarters by
implementing our wholesale program and increasing our product selection, but we
expect seasonal trends to continue in the future. We are subject to a number of
agreements which require fixed monthly payments, regardless of the seasonal
nature of our sales. As a result, we expect our expenses as a percentage of
revenues to continue to be higher during the first three quarters of each year.
Due to the factors mentioned above, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operation primarily through short term
borrowings and private sales of common and preferred stock which totaled
approximately $7.2 million, net of stock issuance costs, through August 31,
1999. In addition since August 31, 1999, we borrowed $3,000,000 from WR
Hambrecht & Co. and $1,500,000 from First Analysis Corporation in exchange for
convertible promissory notes in these principal amounts which bear interest at
the rate of 8 percent per year. Principal and accrued interest under these notes
is convertible at the holders' option, at any time prior to December 31, 1999,
into shares of Series D preferred stock or any other security offered by
GreatFood.com prior to that date. If these notes are not converted, they will
become due and payable upon the third anniversary of issuance, subject to
earlier prepayment upon a "Change of Control" of GreatFood.com. In addition,
upon a "Change of Control," the holders of these notes will be able to
participate in the proceeds available for distribution to the holders of common
stock (unless these notes had previously become convertible and the holders
elected not to convert).
We raised $2.0 million in July 1998, $2.1 million in March 1999 and $3.0
million in May 1999 through sales of preferred stock.
Net cash used in operating activities was $1.4 million in 1998, $5,009 in
1997 and $15,280 in 1996. Net cash used in operating activities for each of
these periods primarily consisted of marketing, product and site development and
general and administrative expenses. The significant increase in 1998 reflects
increased availability of funds following our receipt of $2.0 million from the
sale of Series A preferred stock in July 1998.
Net cash used in investing activities was $34,022 in 1998, $8,510 in 1997,
and $25,923 in 1996. Net cash used in investing activities for each of these
periods primarily consisted of purchases of computer software and hardware.
Net cash provided by financing activities of $123,610 in 1997 and $50,670 in
1996 consisted primarily of proceeds from sales of common stock. Net cash
provided by financing activities of $2.0 million in 1998 consisted primarily of
net proceeds from the sale of Series A preferred stock. Net cash provided by
financing activities of $5.1 million in the first half of 1999 consisted
primarily of net proceeds from the sale of preferred stock.
As of August 31, 1999 we had approximately $792,000 of cash and cash
equivalents and since that date have borrowed an additional $4,500,000 as
discussed above. In addition to the promissory notes discussed above, our
principal commitments consist of obligations under operating and capital leases,
contracts for online advertising and promotion, and payments required in
connection with implementation of our new order processing system. In addition,
we anticipate a substantial increase in our capital expenditures and lease
commitments in the future as our operations, infrastructure and personnel grow.
As of August 31, 1999 we had entered into a number of commitments for online
advertising and promotion, including agreements with America Online, Excite,
Yahoo! and other online sites. As of August 31, 1999, our remaining commitments
under these agreements were approximately $1.1 million during 1999 and
approximately $1.2 million through the third quarter of 2000.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures until the middle of the year 2000. As a
result, we will need to raise a significant amount of capital after the first
half of the year 2000. However, we may be unable to raise sufficient funds
through the issuance of common stock, in which case we may issue other equity,
equity related or debt securities that have rights, preferences or privileges
senior to those of the rights of our outstanding securities. As a result, our
shareholders may experience additional dilution. We cannot be certain that such
additional financing will be available to us on favorable terms, or at all. If
additional financing is not available
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when required or is not available on acceptable terms, we may be unable to
develop or enhance our products or services and may be compelled to curtail
operations significantly. In addition, we may be unable to take advantage of
business opportunities or to respond to competitive pressures. Any of these
events could harm our business, financial condition or results of operations.
YEAR 2000 READINESS
Many existing computer programs use only two digits to identify a year and
cannot reliably distinguish dates beginning on January 1, 2000 from dates prior
to the year 2000. If not corrected, many computer software applications could
fail or create erroneous results by, on or after the year 2000. We use software,
computer technology and other services provided by third parties that may fail
due to the year 2000 phenomenon.
We are currently in the process of replacing our order processing system for
reasons unrelated to the year 2000 problem. However, we have been advised by the
supplier of our existing order processing system and the company that processes
our credit card orders that this system is not fully year 2000 compliant. Also,
the company which processes our credit card orders has indicated that it will
not support our current order processing system after October 31, 1999 unless we
upgrade this system. The third party supplier of the new order processing system
has assured us that the new order processing system is year 2000 compliant. We
have begun transferring our operations to the new system and expect this
transfer to be completed prior to October 31, 1999. Until the transfer is
complete, we will continue to run our existing system in parallel with this
system. However, if installation of the new order processing system is not
completed by October 31, 1999, we may be unable to operate our Web site or
process customer orders until such installation is complete.
We are currently assessing the year 2000 readiness of other third party
supplied software, computer technology, and embedded systems used in our
business, as well as that of the third party which hosts our servers. As part of
our assessment of the year 2000 compliance of these systems, we plan to seek
assurances from these vendors that their software, computer technology and other
services are year 2000 compliant. We expect this assessment process to be
completed during the fourth quarter of 1999. Following this assessment, we will
develop, if necessary, a remediation plan with respect to third party software,
third party vendors and computer technology and services that may fail to be
year 2000 compliant. We expect to complete any required remediation during the
fourth quarter of 1999. As of August 31, 1999, we have spent no funds explicitly
to address year 2000 issues. However, we have invested approximately $25,000 in
technology upgrades which are year 2000 compliant, as discussed above. At this
time, we cannot determine the expenses that we may incur in connection with this
assessment and potential remediation plan. If our assessment and remediation is
not properly made or completed in a timely manner, the reasonable worst case
scenario is that we would be unable to operate our Web site, process customer
orders, and perform other necessary operations, which would have a material
adverse effect on our business.
Our business could also be materially harmed if the systems used by other
third parties failed to be year 2000 compliant. If year 2000 issues prevented
our suppliers from being able to fulfill customers' orders, we would lose sales
and our business and reputation may be harmed. We are in the process of seeking
assurances from suppliers of products which represent a material portion of our
sales that their systems are year 2000 compliant. However, we believe that the
nature and size of our suppliers' operations makes it unlikely that year 2000
issues associated with their systems will prevent or significantly delay order
fulfillment.
In addition to our suppliers, our business depends on a network of third
parties, including Internet service providers, the financial institutions which
process our customers' credit card payments, telecommunications vendors, third
party carriers which deliver orders to customers, as well as the integrity of
the Internet in general. In addition, our business could be harmed by the year
2000
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problems faced by our customers if they were unable to access our online store.
Since this network consists of unrelated parties located throughout the world,
we do not believe any entity has the ability to manage the year 2000 compliance
of the entire network and our ability to assess the year 2000 issues associated
with this network is limited to publicly available information contained in news
reports and other similar media.
At this time, we have not yet developed a contingency plan to address
situations that may result if we, our suppliers, other third parties, or the
Internet are unable to achieve year 2000 compliance. The cost of developing and
implementing such a plan, if necessary, could be material. Any failure of our
material systems, our suppliers' or other third parties' material systems or the
Internet to be year 2000 compliant could prevent us from operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement will
be effective in 1999 and establishes accounting standards for costs incurred in
the acquisition or development and implementation of computer software. These
new standards will require the capitalization of certain software implementation
costs relating to software acquired or developed and implemented for the
Company's use. This statement is not expected to have a significant effect on
GreatFood.com's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start
Up Activities." This statement will be effective in 1999 and will require costs
of start up activities and organization costs to be expensed as incurred. This
statement is not expected to have a significant effect on GreatFood.com's
financial position or results of operations.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management approach." The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of GreatFood.com's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. GreatFood.com adopted SFAS No. 131 on January 1, 1998.
GreatFood.com has determined that it does not have any separately reportable
business or geographic segments.
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BUSINESS
GreatFood.com is an electronic commerce company focused on the sale of
gourmet and specialty food over the Internet to the retail, corporate gift and
wholesale markets. We offer a broad selection of high quality branded specialty
food products which appeal to a wide range of customers for special occasions,
parties and gifts. Our product offering includes specialty and gourmet food such
as chocolates, caviar, prime beef, fancy fruit, and lobster dinners. Our
merchandise mix is focused on a carefully selected assortment of high quality
products, and our Web site combines a unique blend of merchandise and related
content.
We have established strategic supplier relationships with specialty food
manufacturers, distributors and importers who ship products directly to our
customers on our behalf. As a result, each of our suppliers serves as a
GreatFood.com "virtual warehouse." This direct supplier to customer fulfillment
model enables us to minimize inventory related risks and holding costs, limit
overhead costs, offer a broad range of perishable and non-perishable products,
and provide prompt delivery. This model allows us to offer products from a
supplier's entire product line rather than just the fastest selling products.
There is no dominant retailer within the gourmet and specialty food
market--a market which we believe exceeded $30 billion at the retail level in
1998. Furthermore, this market is characterized by a fragmented supplier and
distribution network. This limits the product choices and shopping convenience
available to customers. The retail market involves the sale of products to
consumers at retail prices while the wholesale market involves the sale of bulk
quantities of products to retailers at wholesale prices. In both the retail and
wholesale markets, we believe electronic commerce provides opportunities to
improve the specialty food shopping experience and selection.
Our online store is accessed on the Internet at WWW.GREATFOOD.COM. It
provides pictures and detailed information relating to specialty food products
that are conveniently organized by category, brand, or meal occasion. Shoppers
can search for, browse and select products throughout the store for purchase.
Traffic on our Web site reached 1.2 million "unique visits" in 1998 and
approximately 1.6 million "unique visits" in the first six months of 1999.
"Unique visits" are defined as periods of time in which a person (or in some
cases, a computer, automatically) views one or more screens of the GreatFood.com
Web site. A unique visit ends when a 30 minute period has gone by in which that
person or computer has not viewed any additional screens of the GreatFood.com
site.
INDUSTRY OVERVIEW
The following discussion of GreatFood.com's industry contains market
projections prepared by various research firms. These market projections may not
be achieved.
GROWTH IN ELECTRONIC COMMERCE
The growing popularity of the Internet represents an opportunity for
companies to take advantage of the potential for commercial transactions
conducted online, referred to as electronic commerce. International Data
Corporation, a market research firm, estimates that sales by businesses to
consumers over the Internet will increase from over $50 billion worldwide at the
end of 1998 to approximately $1.3 trillion worldwide by the end of 2003.
Further, according to a 1997 report by Jupiter Communications, another market
research firm, an estimated 70% of adult Internet users will make purchases
online by the year 2002, as compared to an estimated 22% that did so in 1997.
Several factors are driving the growth in sales to both consumers and businesses
over the Internet. These factors include:
- increasing familiarity with the Internet;
- broadening consumer acceptance of online shopping;
- increasing acceptance of online distribution relationships by businesses;
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- improved online network security;
- the growing base of personal computers and improved hardware, software and
services to access the Internet; and
- expanded ability of computer systems to process larger amounts of data at
higher speeds.
We believe the Internet is particularly well suited for promoting,
marketing, selling and distributing merchandise both on a retail and a wholesale
level. The Internet permits customers throughout the world to have direct access
to suppliers. Online stores can provide direct customer service and product
information to a large number of customers at the same time with a substantially
smaller sales staff than traditional stores. Online stores also have the ability
to rapidly and continually update this information. Internet merchandisers,
unlike traditional stores, do not have the same expenses associated with
operation of physical stores and warehouse facilities, and can change store
design without substantial cost. In contrast to catalog merchandisers, Internet
retailers can react quickly to change product descriptions, pricing or product
mix and are not subject to the costs of catalog publication and distribution.
Additionally, online merchandisers have the ability to track directly customer
responses and preferences which enables the merchandisers to customize their
online stores to target specific customer groups and individuals.
THE SPECIALTY FOOD MARKET TODAY
The products we sell are known as "gourmet and specialty food," defined as
distinctive food of high quality. This includes traditional gourmet food and
confections, as well as such products as prime beef, extra fancy fruit and
seafood. This category also includes branded specialty products which are
available in specialty restaurants or retail shops. Our criteria for determining
whether to classify a food product as gourmet or specialty include:
- cost of ingredients;
- cost of processing;
- freshness/perishability;
- uniqueness;
- newness/cutting edge;
- cost of packaging; and
- cost of importation/distribution.
We select products for our Web site through a formal review process which
involves review of the supplier background and the details of their product
line. Our product review committee then samples representative products from
each supplier and rates the products by standardized criteria.
THE RETAIL MARKET. The retail food market involves the sale of food
products to individual consumers and households. The gourmet and specialty food
industry is a sizable segment of the United States retail food market. According
to a 1995 market report published by Packaged Facts, retail sales of gourmet and
specialty food are projected to reach approximately $48 billion in 2000.
Currently, specialty food is principally sold through the following retail
channels:
- supermarkets;
- gourmet and specialty food stores;
- mail order catalogs;
- department stores;
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- television shopping channels; and
- discount warehouse retailers.
The combination of the size of the specialty food market and the growth of
online shopping has created what we believe to be a sizable market opportunity.
THE WHOLESALE MARKET. The wholesale market involves sales to specialty food
retailers, gift shops, caterers, restaurants and other resellers of specialty
food products. Traditionally, suppliers of specialty food have distributed their
products either by using a food broker to sell to retailers at wholesale prices,
or by selling their products to specialty food distributors who in turn sell to
retailers. In these arrangements, food brokers generally receive a 10%
commission on the wholesale price and distributors generally purchase the
product at a 20% to 25% discount from the supplier's wholesale price. The
assortment of specialized food brokers and distributors that currently supports
the industry is highly fragmented. As a result, many retail outlets for
specialty food products are underserved or have limited access to these food
brokers and distributors.
THE ONLINE OPPORTUNITY IN SPECIALTY FOOD
In both the retail and wholesale markets, we believe electronic commerce
offers opportunities to improve the specialty food shopping experience and
selection. We believe traditional specialty food businesses face a number of
challenges in providing a satisfying experience:
- the specialty food market is highly fragmented with no single dominant
retailer or wholesaler, and we estimate there are at least 5,000 suppliers
throughout the United States;
- this fragmentation leaves both retail and wholesale customers without
access to a broad base of specialty food products;
- distributors who carry specialty food products are limited in the products
they can offer by inventory holding costs, inventory spoilage and
warehouse size, which restricts the supply and selection available for
customers;
- mail order catalogs are not updated as inventory level or consumer demand
changes and are expensive to produce and mail; and
- traditional retail stores have costs associated with occupying and
operating a physical store and selection is limited by the size of the
store and inventory considerations.
We believe that sales of gourmet and specialty food over the Internet
provides a means to address many of these challenges.
THE GREATFOOD.COM SOLUTION
GreatFood.com provides online retail and wholesale customers a broad
selection of high quality specialty food which can be ordered at any time and
promptly delivered. We aim to generate repeat business by providing a positive
ordering experience for our customers.
Our online sales model offers several advantages over traditional specialty
food retail sales channels. These advantages include:
- our ability to offer a large selection of products organized for easy
browsing by our customers;
- our ability to change, update, or delete our product offerings quickly;
- low incremental costs of increasing our product offerings;
- a business model that reduces many of the costs associated with physical
retail locations and catalog distribution;
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- the convenience of ordering from home or office 24 hours a day, seven days
a week;
- our ability to sell unique, hard to find items not easily obtainable at a
local supermarket; and
- access to Web technology that can be used to directly yet inexpensively
target specific customer groups for special offers and promotions based on
their preferences or ordering history.
In addition, GreatFood.com's individual suppliers ship goods directly to
customers. By using this supplier direct fulfillment model, we do not have to
operate a warehouse and can limit our overhead costs, but still offer a wide
selection of products from numerous suppliers. As of August 31, 1999, we offered
products from 86 specialty food suppliers.
BUSINESS STRATEGY
Our objective is to be the leading online provider of gourmet and specialty
food. Key elements of our strategy include:
EXPAND BRAND RECOGNITION. As an early entrant to online specialty food
retailing, we have established GreatFood.com as a leading online brand in our
industry. We believe that expanding our brand recognition is critical to growing
our customer base. Our strategy is to promote, advertise and increase the
recognition and visibility of the GreatFood.com brand. We intend to do this
through:
- offering an extensive selection of high quality gourmet and specialty food
products;
- providing excellent customer service;
- advertising on leading Web sites and in other media;
- conducting an ongoing public relations campaign; and
- developing business alliances and partnerships.
Additionally, we plan to expand our food oriented content which includes
product reviews, recipes, visiting chefs, and helpful hints, in order to make
our customers' experience more enjoyable and to more tightly tie together
content with our product offerings. We believe that GreatFood.com is well
positioned as not only an online specialty food store, but as an online
gathering place or "community" for people with interests related to specialty
food. Additionally, we believe GreatFood.com provides high quality product
offerings and related content as well as excellent customer service.
UTILIZE OUR SUPPLIERS AS "VIRTUAL WAREHOUSES." Our suppliers ship products
directly to our customers on our behalf. As a result, we do not operate our own
warehouse. Instead, each of our suppliers serves as a GreatFood.com "virtual
warehouse." This direct supplier to customer fulfillment model enables us to
minimize inventory related risks and holding costs, limit overhead costs, offer
a broad range of perishable and non-perishable products, and provide prompt
delivery. We are in the process of converting to a new electronic commerce
transaction processing and order fulfillment system. This system is being
designed to, among other things, directly link our suppliers' warehouses with
our order processing system and provide our customers with online order
tracking. See "-- Technology and Intellectual Property" at page 43 for more
information concerning implementation of this new system.
EXPAND THE BREADTH AND DEPTH OF OUR PRODUCT OFFERINGS. We continually
strive to expand our product offerings by working with suppliers of high quality
goods who respond on a timely basis to orders and ship products directly to our
customers. Our objective is to aggressively, yet selectively, add additional
specialty food products to our Web site in 1999. Additionally, we are
considering expansion into complementary product offerings which would enhance
the specialty food "occasion," such as wine, tableware and music.
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TAKE ADVANTAGE OF THE RELATIONSHIP BETWEEN RETAIL AND WHOLESALE DISTRIBUTION
CHANNELS. We have established supplier relationships with 86 manufacturers,
distributors and importers of specialty food products. We believe the retail and
wholesale aspects of our business complement one another. The wide recognition
of our consumer brand has helped us gain credibility among our targeted
wholesale customer base. Just as our online retail store offers hard to find,
high quality specialty food products to consumers, our wholesale site provides a
convenient channel for retailers of specialty food to purchase these products in
bulk quantities. Additionally, by building our overall sales volume through our
wholesale program, we believe we will be able to obtain preferential pricing
from suppliers and enjoy more favorable margins from our retail business.
ACQUIRE LEADING MARKET SHARE TO LEVERAGE ECONOMIES OF SCALE. By moving
quickly to take advantage of our brand recognition, we believe we can become the
online high volume market share leader in the specialty food industry. In order
to increase sales volume on our site, we have entered into an arrangement with
Peapod in which GreatFood.com products will be offered to Peapod customers on a
special area of the Peapod site which includes both GreatFood.com and Peapod
branding logos. In addition, we have been selected to be a regularly featured,
or "tenant," merchant on both the America Online and Excite networks and have
entered into targeted marketing arrangements with Yahoo!, Lycos and other
Internet sites. We believe that our business model will allow us to take
advantage of economies of scale as our sales volume increases.
EXPAND INTERNATIONALLY. Although we have historically focused on specialty
food customers and suppliers in the United States, we believe that growth in the
use of the Internet outside of the United States will represent additional
specialty food market opportunities for us. To take advantage of these
opportunities, we intend to replicate our business model and build our brand
name in selected international markets with appropriate demographics and market
characteristics. As our first expansion into this area, we are currently
developing a Canadian GreatFood.com site and establishing a network of suppliers
in Canada who will sell and deliver specialty food products to customers in
Canada.
THE GREATFOOD.COM SITE
Our Web site is divided into the following areas: THE RETAIL SHOP, THE
WHOLESALE SITE, CORPORATE GIFTS, and ABOUT GREATFOOD.COM. The following is a
summary of some of these areas:
THE RETAIL SHOP. GreatFood.com has established a leading consumer brand in
specialty food on the Internet through our retail shop, which is the most
popular destination within the GreatFood.com site. In addition to offering
products for sale, the retail shop has several areas that provide information,
allow visitors to exchange ideas and stimulate buying. The front page of the
retail shop usually has a featured brand, special offers and seasonal
suggestions. Information is provided in categories such as:
<TABLE>
<S> <C>
PRODUCT REVIEWS..... PRODUCT REVIEWS are written by our in-house food expert for every
product line offered in our store. These reviews highlight the reasons
for selecting each product line, and provide interesting commentary
and colorful facts about the products and companies that produce them.
SEASONAL IDEAS...... SEASONAL IDEAS present products or groups of products around seasonal
themes. In the past we have featured barbecue items during the summer
months and gourmet snacks during the fall football season.
VISITING CHEF....... VISITING CHEF features biographical information and recipes from a
number of celebrity chefs. In cases where the chefs' products are
featured in our store, links are provided to the product offerings.
</TABLE>
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<TABLE>
<S> <C>
RECIPES............. RECIPES feature and highlight different product lines. These recipes,
many of which are provided by our suppliers, are linked to areas in
our store where the products can be purchased.
CUSTOMER FORUMS..... CUSTOMER FORUMS allow visitors to the site to share their own product
reviews and comments.
</TABLE>
THE WHOLESALE SITE. In December 1998, we launched our wholesale site which
offers products from suppliers, typically in case quantities, to retail stores,
specialty food shops, gift shops, caterers, restaurants and other traditional
merchants. Initial access to the GreatFood.com wholesale home page is available
to anyone, but information on products and pricing is limited to retailers who
register with us and are issued a password. Once a password is issued, these
customers can view products and pricing and can buy bulk quantities at wholesale
prices. Our wholesale shop uses a different search methodology than our retail
shop. In the wholesale shop, wholesale customers principally search by product
categories and the brand names of our suppliers.
CORPORATE GIFTS. Our corporate gifts site is designed for use by businesses
and professionals who are procuring gifts for their customers or clients. We
offer these customers the assistance of our gift consultants, available online
or by phone, to facilitate the purchasing decision. The corporate gifts site
features a number of products which are particularly appropriate for corporate
gifts. Customers can shop online for a variety of specialty food gift baskets
and have them sent directly to their customers and clients. We believe that the
convenience of ordering gifts for customers and clients from the workplace is an
attractive solution for businesses and professionals.
SHOPPING AT OUR SITE
We believe that the sale of specialty food at our Web site offers several
benefits to our customers. These benefits include enhanced selection,
convenience, ease of use, depth of content and information, and competitive
pricing. Key features of our online store include:
BROWSING. Our Web site offers visitors a variety of highlighted subject
areas and special features arranged in a simple, easy to use format intended to
enhance product search, selection and discovery. Our visitor starts by selecting
a shop among retail, wholesale or corporate gifts. By clicking on these
permanently displayed shop names, the visitor moves directly to the home page of
the desired shop and can quickly view promotions and featured products. Visitors
can use a quick keyword search in order to locate a specific product. They can
also execute more sophisticated searches based on pre-selected criteria
depending upon the shop that they are in. For example, at our retail shop,
visitors can search using the following sample criteria:
<TABLE>
<CAPTION>
Sample Categories Meal Occasion Gift Finder
- ----------------- -------------- ----------------
<S> <C> <C>
Appetizers Backpacking $15 and under
Candy Barbecue $20 range
Cheese Beach party $30 range
Chocolates Cocktail party $40 range
Fruits Dessert $50-$75
Gift baskets Dinner party $75-$100
Meats Fireside $100 and up
Pastas Picnic Gift basket
Sauces Pre-game Gift certificate
Seafood Romantic meal Gift of the
month
</TABLE>
In addition, visitors can browse our online retail store by clicking on
links which bring them to specially designed pages dedicated to products from
key national and specialty brands. Customers can
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also click through to "Featured Brand" pages and browse through our seasonal
"Express Shoppes," designed to facilitate holiday shopping for the harried
customer who needs a quick gift.
GETTING INFORMATION. One of the unique advantages of an Internet retail
store is the ability to combine product information and editorial content. Our
site includes destinations where visitors can read food reviews, featured
recipes and about selected chefs. In addition, visitors can enter a forum where
they can read or offer customer reviews, suggestions and comments.
FINDING A GIFT. We have designed parts of our site to encourage and
facilitate gift giving. Visitors can draw down the Gift Finder menu to help them
find a gift in a particular price range. Our site also has an area called "Gift
giving etiquette" which offers guidance on appropriate occasions for business-
related gifts.
SELECTING A PRODUCT AND CHECKING OUT. To purchase products, customers
simply click on either the "add to cart" or "buy it now" buttons to add products
to their "shopping cart." Customers can add and subtract products from their
shopping cart as they browse around our online store, prior to making a final
purchase decision, just as in a physical store. To execute orders, customers
click on the "checkout" button and, depending upon whether the customer has
previously shopped with us, the customer may be prompted to supply shipping
details online. America Online members can access the AOL Quick Checkout feature
which already has the customer's billing and shipping information online. Prior
to finalizing an order by clicking the "submit order" button, customers are
shown their total charges along with the various products and shipping options
chosen. The customer then has the ability to change their order or cancel it
entirely. As an additional service, we offer customers the option to place
orders directly over the telephone by calling our toll free number.
PAYING. Customers must use a credit card to pay for their orders. They
authorize charges to their credit card during the checkout process, but we do
not process the charge until our suppliers ship the customer's items from their
distribution facilities.
ORDER PROCESSING AND FULFILLMENT. Upon receipt of a customer order, we
transmit fulfillment instructions to the appropriate supplier via e-mail or
facsimile, depending upon their systems. The supplier, in turn, ships the
products directly to the customer and supplies to us confirmation of shipment.
Over time, we anticipate that a majority of our suppliers' warehouses will be
electronically linked to our order processing system. Because we do not
currently use a warehouse, the risks and costs associated with carrying
inventory are reduced. Suppliers fulfill orders placed through our Web site
through a variety of third party shippers, including UPS and Federal Express.
See "-- Technology and Intellectual Property" beginning on page 43 for more
information on order processing and fulfillment.
CUSTOMER SERVICE. GreatFood.com places significant emphasis on customer
service and offers a 100% satisfaction guarantee on all of our products and
services through which GreatFood will replace or provide a refund for any
product for which a customer is not 100% satisfied. In this area of our site, we
assist customers in searching for, shopping for, ordering and returning
products. We also provide information on shipping charges and other policies. In
addition, we provide customers with answers to the most frequently asked
questions and encourage our visitors to send us feedback and suggestions via
e-mail. Furthermore, customer service agents are available via telephone or
e-mail to answer questions about products and the shopping process as well as
assist in the corporate gift giving process. One of the key features of the
GreatFood.com site is our Safe Shopping Guarantee, which ensures that all of our
customers' personal information is encrypted, and covers the full amount of each
shopper's personal liability for unauthorized credit card usage.
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THE GREATFOOD.COM RETAIL CUSTOMER
We believe that in general, customers are visiting our site in anticipation
of a food related event: special occasions, birthdays, holidays or parties,
where convenience and ease of use are essential. The average customer spent
approximately $48 per visit in the first six months of 1999, including shipping
charges. According to surveys conducted among a limited number of our customers
in the 1998 calendar year by BizRate.com, a market research firm:
- 65% of our customers were female;
- 75.3% of our customers were 35 years of age or older, with an average age
of 45 years; and
- average annual income of our customers was approximately $87,000.
We are highly committed to excellent customer service with the goal of
providing a positive ordering experience that will capture the customer for
repeat visits. The BizRate.com survey indicated that 89% of the customers
responding were highly or very highly satisfied with their shopping experience
and 80% of the customers responding were likely or very likely to shop in our
online store again.
SUPPLIER RELATIONSHIPS
GreatFood.com currently features approximately 4,100 products from 86 of the
country's leading specialty food companies. Our five most popular product lines
during 1998 were those offered by Port Chatham Smoked Salmon, Lobster Gram, Ham
I Am!, Chukar Cherry Company, and Pacific Cookie Company. We evaluate all of our
products for quality and freshness and inclusion in our Web site is by
invitation only. We bear the cost of setting up and operating a Web site for our
suppliers within our site so that they have no setup fees or site operating
costs.
In our GreatFood.com retail business, we pay our suppliers at wholesale
prices and generally sell our products to customers at standard retail prices.
GreatFood.com wholesale orders are sold at wholesale pricing to retailers while
we pay our suppliers at a discount from wholesale. Terms with our suppliers
typically require payment within 30 days.
As of August 31, 1999, we offered products from the following suppliers and
brands:
Ackerman & Cooke -- PRIME BEEF STEAKS AND ROASTS
Advantage Int'l Foods Corp. -- IMPORTED CHEESES
Barrows Tea -- GOURMET TEA
Bella Cucina Artful Food -- PASTA, SAUCES AND OLIVE OIL
Big Daddy's Fabulous Fudge -- BELGIAN CHOCOLATE AND FUDGE
Blue Crab Bay Company -- SOUPS, CRACKERS AND BLOODY MARY MIX FROM THE
CHESAPEAKE BAY AREA
Brown & Haley -- ALMOND ROCA AND OTHER FINE CHOCOLATES
Buckhead Gourmet -- MEAT SAUCES
Caffe Appassionato -- SPECIALTY COFFEE
California Harvest (Grapevine Trading) -- TAPENADES, FRUIT VINEGARS AND
OLIVE OIL FROM
CALIFORNIA
Calio Groves -- OLIVE OILS FROM CALIFORNIA
Carpe Diem -- SUPERIOR COFFEE
Carson's Ribs -- BARBECUE RIBS FROM CHICAGO
Celebration Specialty Foods -- BIRTHDAY AND SPECIAL OCCASION CAKES, TARTS
AND PASTRIES
Charlie Palmer Foods -- COOKING SAUCE FOR MEAT, POULTRY AND FISH
Chewy's Rugulach -- FLAVORED RUGULACH PASTRIES
Chukar Cherry Company -- DRIED FRUITS, CANDIES AND GIFT BASKETS
Cibo Fresh Specialties -- FRESH HERB BUTTERS, CHEESES AND PESTOS
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Cinnabar Specialty Foods, Inc. -- CHUTNEYS AND SAUCES
Cinnabon -- CINNAMON ROLLS
Cornfields -- GOURMET POPCORN
Crinklaw Farms -- WREATHS, DRIED FLOWERS AND GARLIC BRAIDS
D'Artagnan -- PATES, SAUSAGES AND SPECIALTY MEATS
David Rio -- TEA AND CHAI
Da Vinci Gourmet -- FLAVORED SYRUPS
Delacre (Liberty Richter) -- EUROPEAN STYLE COOKIES AND BISCUITS
Desserts on Us -- BAKLAVA
Downey's Cakes (Liberty Richter) -- LIQUEUR CAKES FOR SPECIAL OCCASIONS
AND GIFTS
Edible Eats -- GOURMET CHEESECAKES
Elena's -- PASTA AND PASTA SAUCES
Essence of India -- INDIAN SPICES
Farm Country Specialties -- FRENCH TOAST BATTER MIX
The Famous Pacific Dessert Company -- CHOCOLATE DECADENCE, TORTES AND
BROWNIES
Formula 9 -- GOURMET KETCHUP
Fox's Fine Foods -- RELISHES AND PESTOS
Frontera -- CHEF-CREATED SALSAS
Golden Malted -- WAFFLES AND PANCAKES
Goldwater's Foods of Arizona -- ALL NATURAL HOT AND FRUIT SALSAS
Grafton Village Cheese -- VERMONT CHEDDAR CHEESES
Graysmarsh Farms -- JAMS AND PRESERVES
Greenwich Bay Clams -- RHODE ISLAND LITTLENECK CLAMS
Grimaud Farms -- MUSCOVY DUCK, RABBIT AND GOOSE
Hagerty Foods -- SAUCES AND PICKLED VEGETABLES
Ham I Am! -- HICKORY SMOKED HAMS, TURKEYS, QUAIL AND BEEF BRISKET
Harbor Sweets -- HANDMADE GIFT CHOCOLATES
Highland Sugarworks -- VERMONT MAPLE SYRUP AND BREAKFAST GIFT PACKS
Hogue Cellars (Hogue Farms) -- PICKLED VEGETABLES FOR APPETIZERS AND
SNACKS
Hot Licks -- HOT SAUCES
John Wm. Macy Cheesesticks -- GOURMET CHEESESTICKS
Kids Cooking Kits -- BAKING KITS FOR KIDS
Killer Pecans (People Gotta Eat) -- TWICE-COOKED JUNIOR MAMMOTH PECAN
HALVES
Kim & Scotts's Gourmet Pretzels -- PRETZELS
Lobster Gram -- LIVE MAINE LOBSTER DINNERS
Loewy Foods Inc. (Chef's Pride) -- FRESH TURKEYS AND KOSHER TURKEYS
Melissa's -- EXOTIC FRUIT AND GIFT BASKETS
Mendocino Mustard -- FLAVORED MUSTARDS
Michel Cluizel -- FRENCH CHOCOLATE
Mo Hotta Mo Betta -- HOT SAUCES
Moonshine Trading -- HONEYS AND NUT BUTTERS
My Favorite Muffin -- MUFFIN BASKETS
Native Kjalii -- FRESH CUT TORTILLA CHIPS
Nell Baking Company -- SHOO-FLY PIE AND CHEESECAKE
Omaha Steaks -- CORN FED MIDWEST BEEF
Oregon Orchard (Hazelnut Growers of Oregon) -- SEASONED AND CHOCOLATE
COATED HAZELNUTS
Pacific Cookie Company -- OATMEAL, CHOCOLATE CHIP AND OTHER COOKIES
Parmacotto Ham -- PARMA HAM FROM ITALY
Partners Crackers -- CRACKERS
Patti's Plum Puddings -- PLUM PUDDING
Paul Proudhomme's Magic Seasoning Blends -- SPICE MIXES
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Perona Farms -- ATLANTIC SMOKED SALMON
Perugina (Peters Imports) -- CHOCOLATES IMPORTED FROM ITALY
Petrossian Paris -- IMPORTED CAVIAR
Port Chatham Smoked Salmon (Icicle Seafoods) -- SMOKED SALMON AND GIFT
PACKS
Quality Citrus Packs -- EXTRA FANCY FRUIT
Reward Specialty Food Company -- GOURMET GRANOLA
The Rainforest Company -- BRAZIL NUTS AND CASHEWS WITH A BUTTER CRUNCH
COATING
Restaurant Lulu -- VINEGARS, SAUCES AND SEASONINGS
Ristorante Teatro -- FLAVORED VINEGARS AND OILS
Scharffen Berger -- CHOCOLATES
The Sideboard, Inc. -- SMOKED MEAT
SWEET dreamz -- COOKIES, BROWNIES AND TEA CAKES
Torn Ranch -- DRIED FRUITS, NUTS AND GIFT PACKS
Tortuga -- RUM CAKES
Two Buddies BBQ -- BBQ SAUCES AND MARINADES
Ultimate Baking Company -- GOURMET BISCOTTI
The Ultimate Basket -- GIFT BASKETS
Walker's Shortbreads (Peters Imports) -- IMPORTED SHORTBREAD FROM
SCOTLAND
Wild Thymes -- FRUIT SPREADS, CHUTNEYS, SAUCES AND MUSTARDS
We currently rely on our suppliers to fulfill our customers' orders directly
and therefore do not maintain inventory or operate distribution centers. Many of
our suppliers are small businesses with limited production and delivery
capabilities. Supplier order fulfillment difficulties may limit the growth or
our sales. We will evaluate on a continuous basis whether we should maintain
inventories or one or more distribution centers. We may choose to do so, for
example:
- if the timing or amount of purchases causes our significant suppliers to
be unable to deliver to our customers in a timely manner;
- if we determine it is necessary or beneficial to be able to consolidate
orders, particularly from wholesale customers, to reduce shipping costs or
achieve other cost savings;
- if we determine that it would be worthwhile in order to enable us to
purchase products in bulk at a discount from wholesale prices and obtain
the resulting higher profit margin on sales of these products; and
- if we begin experiencing problems maintaining consistent quality of
packaging and order fulfillment.
MARKETING AND PROMOTION
GreatFood.com targets potential online customers, both retail and wholesale,
in a proactive manner, using a mix of traditional and online marketing
techniques. These techniques include online and print advertising, direct mail,
public relations and trade shows.
OUR RETAIL CUSTOMER MARKETING STRATEGY
ONLINE ADVERTISING AND PROMOTION. Online advertising to date has been the
most successful method in directing traffic to our Web site. We use commercially
available tracking software to track and monitor our incoming traffic. We
believe that our promotional relationships are a critical component of achieving
brand recognition. We have entered into promotional arrangements with major Web
sites called "portals" which bring together a large variety of content. Through
these agreements, we believe we can reach a significant portion of the online
consumer audience and obtain visibility on new and
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innovative programs within these sites. We intend to continue to pursue
distribution arrangements with additional portals and other leading Internet
sites to further broaden awareness of the GreatFood.com brand and drive more
users to our Web site. Our current aggregate obligations under these promotional
agreements are approximately $1.1 million through the end of 1999 and
approximately $1.2 million through the third quarter of 2000. We anticipate
spending a portion of the proceeds of this offering to increase our online
advertising and promotional spending.
In August 1998, we entered into a shopping channel promotional agreement
with America Online. Under this agreement, we became a regularly featured
merchant in America Online's Shopping Channel. The Shopping Channel can be
accessed through the America Online and CompuServe online services and the AOL
Web site. A link to our Web site is located in the Gourmet and Grocery area of
the Shopping Channel. America Online has also selected us to participate in the
AOL Quick Checkout program which enables America Online members to enter their
credit card and shipping information once and subsequently make purchases from
selected merchants without having to reenter their credit card and shipping
information. This contract with America Online extends through December 1999. In
August 1999, we entered into a new contract with America Online which
effectively expanded the 1998 contract. This contract provides for several
sponsorship positions within America Online's Shopping Channel as well as
additional advertising and promotional placement within America Online and other
affiliated sites. America Online is a leading Internet shopping site. According
to a January 1999 press release issued by America Online, its members spent over
$1 billion with online retailers available through their network during the six
weeks of the 1998 holiday shopping season.
In September 1998, we entered into a sponsorship agreement with Excite.
Under this agreement, links to our Web site and promotional materials have been
placed on several areas of the Excite Web site including the Gourmet and
Groceries department of the Excite site. In addition, we participate in Excite's
one click shopping program, where shoppers can choose from a wide array of
seasonal gift items and are able to reorder without having to re-enter their
credit card number. Our agreement with Excite extends through December 1999.
GreatFood.com also participated in targeted online programs with
approximately 15 other sites during 1998. We have contracted for approximately
100 food related search "keywords" under our agreement with Yahoo! where we
expect to show GreatFood.com advertising banners 110 million times to viewers of
the Yahoo! site. Our agreement with Yahoo! extends until December 31, 1999. In
addition, we purchase advertising space or structure promotional arrangements
with a variety of other Web sites which we believe are appropriately targeted to
our customers.
AFFILIATE PROGRAM. Our retail shop also has an affiliate program which
encourages users to set up links to our Web site, and, in turn, allows us to
work collaboratively with owners of other Web sites. In this program, qualified
Web sites operated by third parties can sign up to become GreatFood.com
affiliates and will share in the profits on every transaction directly referred
by their Web sites. We expect to significantly increase our customer base
through these programs.
THE PRIVATE LABEL, CO-BRANDED PROGRAM. We team with marketing partners that
maintain Web sites which target customers outside GreatFood.com's primary
customer base. GreatFood.com products are offered to these customers and we
fulfill the orders through our supplier channel, in return for sharing profits
on the sale with our marketing partner. We have established these "co-branded"
relationships with Peapod, Wells Fargo and YourSchoolShop.com, among others.
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PRINT ADVERTISING. We have conducted a print advertising campaign aimed at
gourmet and mail order consumers. During 1998 and the first six months of 1999,
we have placed ads in the following publications:
<TABLE>
<S> <C>
Better Homes and Gardens The New York Times Magazine
Bon Appetit The New Yorker
Country Living The Puget Sound Business Journal
Eating Well Saveur
Fine Cooking Southern Living
Food and Wine Sunset
Gourmet Town and Country
House Beautiful The Wall Street Journal
</TABLE>
CATALOGS. GreatFood.com has produced a 32 page color catalog designed to
attract new customers and encourage repeat customers. This catalog is expected
to be distributed to approximately 1.2 million households during the remainder
of 1999.
SPECIAL DRAWINGS AND PROMOTIONS. From time to time we hold special drawings
to encourage visitors to register on our site. For example, we conducted a
drawing for visitors considering specialty food for corporate gifts and selected
five winners who received a Varietal Sampler of Caffe Appasionato coffee. We
believe special promotions increase return visits by our customers and we plan
to continue similar promotions in the future.
GIFT CERTIFICATES. We offer gift certificates to both retail and corporate
clients. We believe this is particularly effective during the holiday season as
it provides an opportunity for additional customers to visit our Web site and
purchase products of their choice.
DIRECT MAIL. During 1998 we initiated two fourth quarter direct mail
campaigns aimed at specialty food consumers and the corporate gift market. We
plan on continuing our direct mail campaigns and instituting systems for
tracking the effectiveness of our direct mail programs.
OUR WHOLESALE CUSTOMER MARKETING STRATEGY
TRADE SHOWS. Industry trade shows, in particular the National Association
of the Specialty Food Trade (NASFT) Fancy Food & Confection Shows held annually
in San Francisco, Chicago, and New York, are an important part of the marketing
activity between specialty food suppliers and their retailer customers. As part
of our activities to grow our wholesale program, we plan to participate as an
exhibitor at these industry trade shows during 1999.
PRINT ADVERTISING. As part of our wholesale business, we have advertised in
such specialty food industry publications as GOURMET NEWS, FANCY FOOD, GOURMET
RETAILER, GIFT BASKET REVIEW and the NASFT SHOWCASE.
TELEMARKETING. We believe another way to reach specialty food retailers is
through telemarketing. We plan to use this method to attract and recruit these
customers.
GOVERNMENT REGULATION
Government regulation of communications and commerce on the Internet varies
greatly from country to country. In the United States and Canada, the federal
governments have not adopted many laws and regulations to specifically regulate
online communications and commerce. However, the U.S. Congress has recently
enacted legislation addressing such issues as the transmission of certain
materials to children, intellectual property protection, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. The governments of some other
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countries have been much more active in regulating in these areas than has the
United States. The United States and other countries may increase their
regulation of the Internet in the future. The law of the Internet, however,
remains largely unsettled and it may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. An increase in regulation or the application of
existing laws to the Internet may require us to modify the manner in which we
conduct our business and could significantly increase our costs of operations or
harm our business.
CUSTOMER SERVICE
We believe that excellent customer service and support is critical to
retaining and expanding our customer base. Customers can access our customer
service representatives either through our toll free number or e-mail. Our
customer service team is responsible for handling general customer inquiries and
investigating the status of orders, shipments and payments. In addition, we
process orders for customers who prefer live interaction or are uncomfortable
transmitting their credit card information over the Internet. Our customer
service representatives are a valuable source of feedback regarding customer
satisfaction. Our Web site also contains customer service pages that outline
store policies, provide answers to frequently asked questions, and provide an
opportunity for customers to easily send us inquiries by e-mail.
TECHNOLOGY AND INTELLECTUAL PROPERTY
TECHNOLOGY. We have implemented a variety of site management, search,
customer interaction and order processing systems that we use to process
customers' orders and payments. These systems use a combination of commercially
available, licensed technologies and, to a lesser extent, our own proprietary
software. We are currently focusing our internal development efforts on:
- enhancement of the appearance and functionality of our Web site;
- systems to support order processing, fulfillment and accounting; and
- databases to track customer activities, preferences and contacts.
We currently use the Netscape Merchant System provided by Netscape
Communications Corporation to provide an electronic "shopping cart" interface
and an Oracle database to store product and order information. This system
includes a built-in credit card approval and processing facility which
interfaces directly to First Data Corporation, a credit card processing company.
Our Web site currently is maintained on two servers connected to the Internet.
The servers are capable of supporting thousands of Web visitors and hundreds of
transactions per day. For information concerning the year 2000 compliance status
of our systems, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Readiness" on page 28.
We have recently completed an internal evaluation of our electronic commerce
systems for customer interaction, transaction processing, order fulfillment and
customer service. As a result, we have begun a major upgrade of our systems to:
- provide capacity for added order volume;
- enable us to offer state of the art online shopping technology; and
- tie together internal order processing systems to more fully automate the
business processes related to fulfilling and monitoring orders generated
through our online sales.
To effect this upgrade, we have chosen a commercially available e-commerce
system provided by Pandesic, a joint venture of Intel and SAP, for this
implementation. This system provides business automation features based on SAP
R/3 software and will be configured by Pandesic specifically for our
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electronic commerce requirements. Additionally, the Pandesic system will provide
servers, networking equipment and connection to the Internet, which will replace
our current system. Hardware will be located at a third party facility operated
by Digex, Inc. in Sunnyvale, CA, which will provide several servers dedicated to
the GreatFood.com site, communications lines and emergency power backup.
The Pandesic system is intended to provide advantages to both our ordering
customers and our order processing and fulfillment departments. For our
customers the Pandesic system is expected to facilitate online order tracking,
recommendations of alternative or related products and processing of gift
certificates and coupons. In support of GreatFood.com's wholesale program, the
Pandesic system also will be used to automate account management functions:
setting up accounts, providing credit terms and credit limits. For our order
processing and fulfillment departments, the Pandesic system is expected to
provide an Internet based means for transferring orders to suppliers, generating
packing lists and shipping labels, tracking shipments, invoicing and payment.
Additionally, we expect the Pandesic system to provide overall financial
reporting with respect to vendor payments.
We will be running our existing system in parallel with the Pandesic system
during its implementation. We have begun installation and testing of the system
as well as introduction of the features that will affect our customers. Once
this installation and testing is completed, we expect to introduce the portions
of the system which will assist our order processing and fulfillment departments
with a small group of our key suppliers during the fourth quarter of 1999 and,
assuming the availability of sufficient working capital, to complete
installation with the majority of our suppliers in mid to late 2000. In return
for software licenses, support, use of hardware and Internet hosting, we have
agreed to pay Pandesic a monthly fee.
REMOTE ORDER PROCESSING AND TRACKING NETWORK. Currently, our suppliers ship
orders directly to our customers on our behalf. To date, we have transmitted
orders to our suppliers through traditional means, including facsimile, or, in
some cases, e-mail. By contrast, in connection with our implementation of the
Pandesic system, we expect to be able to provide greater automation of the
process of submitting orders to our suppliers and tracking their status by
creating an "extranet" which will consist of electronic links between our order
processing system and our suppliers over the Internet. Many of our suppliers
have limited technical capabilities. We believe that the successful
implementation of this system is essential to our business to mitigate the order
fulfillment problems we have experienced during high volume periods.
Implementing this system will require us to provide a number of suppliers with
personal computers, software, Internet access and training. For this and other
reasons, implementation of our supplier extranet will be a complex undertaking.
We may not be able to implement this system successfully or implementation may
interfere with the successful operation of our business due to:
- the substantial capital expenditures required to purchase the hardware and
software;
- difficulties in training our suppliers to use the new system;
- the availability of technical support for these new systems;
- the demands the maintenance of the new system and training will place on
our financial, personnel and other resources; and
- difficulties we may encounter in achieving acceptance of this system by
our suppliers.
To succeed in the market in which we compete, we must:
- adapt to rapidly changing technologies;
- adapt our business to evolving industry standards; and
- continually improve the performance, features and reliability of our
service in response to competitive service and product offerings and
evolving demands of the marketplace.
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Our failure to adapt to changes in our market would have a material adverse
effect on our business, results of operations and financial condition. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by us to modify or adapt our services or technology.
This could harm our business, results of operations and financial condition.
INTELLECTUAL PROPERTY. We regard our service marks, trademarks, trade
dress, trade secrets and similar intellectual property as integral to our
success. We rely on trademark and copyright law, and trade secret protection to
protect our proprietary rights. We have filed a trademark application for
GreatFood.com for online ordering services featuring specialty food items.
However, we cannot assure you that this trademark will be granted. If this
trademark is not granted, we might be unable to prevent other companies from
using this or a similar name. In addition, effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which we plan to sell our products online.
COMPETITION
The specialty food market is extremely competitive but there is no single
dominant competitor. We believe that the principal competitive factors in our
market are:
- brand recognition;
- selection;
- personalized services;
- convenience;
- price;
- accessibility;
- customer service;
- quality of search tools;
- quality of site content; and
- reliability and speed of fulfillment.
On the retail side of our business, we compete with supermarkets, warehouse
clubs, and other specialty food retailers who have physical stores but do not
offer the convenience of shopping from home or work 24 hours a day, 7 days a
week. We also compete with specialty food catalogs and mail order companies such
as Omaha Steaks, Harry & David, Dean & DeLuca, Balducci's and Hickory Farms.
Many of these catalog and mail order companies have established their own Web
sites and offer their products for sale online.
There are other online specialty food retailers which sell products or offer
content that compete with discreet portions of our business including Virtual
Vineyards, Tavolo and Cooking.com. However, we are not aware of any significant
online specialty food stores dedicated to selling a broad line of specialty food
products. To a lesser extent, we also compete with Internet grocery stores such
as Peapod and HomeGrocer.com and Internet "mall" retailers such as Shopping.com
and CyberShop.
On the wholesale side of our business, we compete with the food brokers and
distributors that currently serve the specialty food distribution market.
We expect many more online competitors in the future, as barriers to entry
are minimal, and new competitors can launch sites at a relatively low cost.
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Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. In addition, online
retailers may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Some of
our competitors may be able to secure merchandise from manufacturers on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than we
can. Increased competition may result in reduced operating margins, loss of
market share and diminished brand recognition. New technologies and the
expansion of existing technologies may increase the competitive pressures on us.
EMPLOYEES
As of August 31, 1999, we had 33 full-time employees, including 8 in product
and site development, 14 in sales and marketing and 11 in general and
administration. None of our employees are represented by a union. We believe
that our relationship with our employees is good.
FACILITIES
We lease approximately 3,000 square feet of space in Seattle, Washington for
our corporate headquarters. The rent for this space is currently $4,313 per
month. Our lease expires in February 2002, although we may terminate it, at our
option, in September 2000. We have an option to renew our lease for this space
for an additional three year term at a then current market rate of rent. We have
entered into a one year agreement to lease an additional 5,800 square feet with
a monthly rental expense of $13,533. We have an option to renew our lease for
this space for an additional 18 months at a monthly rental rate of $14,742.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
GreatFood.com's executive officers, key employees and directors and their
ages as of August 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
Benjamin Nourse..................................... 41 Chief Executive Officer, Chairman of the Board of
Directors and Secretary
William Cuff........................................ 57 President and Director
Gayle Stetson....................................... 37 Vice President of Finance and Administration and
Chief Financial Officer
Donna Nourse........................................ 47 Vice President of Merchandising
Ronald Pankiewicz................................... 47 Vice President of Information Technology and Site
Development
Noel Thompson....................................... 47 Vice President of Wholesale Programs
Scott Ellis......................................... 36 Director of Operations
Stacey L. True...................................... 30 Vice President of Business Development
R. Stockton Rush III................................ 37 Director
Geoffrey Barker..................................... 36 Director
David E. Wyman...................................... 54 Director
Mark Koulogeorge.................................... 35 Director
</TABLE>
BENJAMIN NOURSE founded GreatFood.com and has served as the Chairman of our
board of directors since September 1995. Mr. Nourse served as our President from
September 1995 until April 1998 and became our Chief Executive Officer in May
1999. From 1996 to 1998, Mr. Nourse was the Vice President of Development for
The Cobalt Group, Inc., a provider of Internet marketing solutions to automotive
dealerships. From 1993 to 1995, Mr. Nourse was an Executive Vice President of
Scifor Corporation, a start up company which developed a large area video and
multimedia graphic display system. From 1991 to 1992, he was the Vice President
of Finance and Corporate Development of Tera Computer Company, a supercomputer
manufacturer. From 1987 to 1991, he was an investment banker with U.S. Bancorp
Piper Jaffray, Inc. Mr. Nourse holds a bachelor's degree in Engineering Sciences
from Dartmouth College and a Masters in Business Administration from the Wharton
School of the University of Pennsylvania.
WILLIAM CUFF has been our President since April 1998, a director since May
1998, and was our Chief Executive Officer from April 1998 until May 1999. From
1990 to 1997, Mr. Cuff was President and Chief Executive Officer of Diamond
Walnut Growers, Inc., a nut marketing and processing company. From 1986 to 1990,
Mr. Cuff served as President of The Bachman Company, a major regional snack food
company. From 1982 to 1986, he was the Vice President of Specialty Foods for
Nestle Corporation, and from 1979 to 1982 he was the Vice President of Business
Development for the Libby subsidiary of Nestle. Prior to joining Nestle, Mr.
Cuff spent 11 years in various marketing management positions with General
Foods. Mr. Cuff holds a bachelor's degree in Economics from Yale University and
a Masters in Business Administration from Columbia University.
GAYLE STETSON was appointed our Vice President of Finance and Administration
in April 1999, and our Chief Financial Officer in May 1999. From 1993 until
joining us, Ms. Stetson was a partner of Stetson Guske & Koenes, PLLC, an
accounting firm. From 1985 to 1991, Ms. Stetson worked as an audit manager with
KPMG Peat Marwick. Ms. Stetson holds a bachelor's degree in Accounting from
Western Washington University and is a Certified Public Accountant.
DONNA NOURSE joined GreatFood.com as our Vice President of Merchandising in
August 1998. Prior to that time, Mrs. Nourse acted as an advisor to
GreatFood.com since its inception. From 1988 to
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1998, she was the corporate home economist for Quality Food Centers (QFC), an
upscale Pacific Northwest supermarket chain. From 1982 to 1987, she served as
the Senior Manager for the Creative Food Center of Campbell Soup Company. From
1978 to 1982, Mrs. Nourse was Food Editor for Seventeen Magazine. She holds a
bachelor's degree in Home Economics from Plattsburgh State University. Mr. and
Mrs. Nourse are husband and wife.
RON PANKIEWICZ joined GreatFood.com as our Vice President of Information
Technology and Site Development in June 1999. From March 1996 until joining us,
Mr. Pankiewicz was the Director of Information Systems Development for Advanced
Radio Telecom. From January 1995 to March 1996, he was the Manager of
Applications Software for NORCOM Networks Corporation. Prior to that time, from
March 1993 to January 1995, he was a Lead Software Developer for NavGuard, Inc.
Before joining NavGuard, he was employed for 13 years by Fluke Corporation, a
manufacturer of electronic instrumentation. Mr. Pankiewicz holds a bachelor's
degree in Applied Mathematics from the University of Washington, a Masters in
Computer Science from Massachusetts Institute of Technology and a Masters in
Management Science from the Sloan School of Management of Massachusetts
Institute of Technology.
NOEL THOMPSON joined GreatFood.com as our Vice President of Wholesale
Programs in June 1999. From September 1994 until joining us, Mr. Thompson was
the general manager of The Newmarket Co., a specialty foods distributor. From
1986 to 1994, Mr. Thompson served as a Vice President and National Sales Manager
for Select Origins, a cooking ingredient and condiment manufacturer. Prior to
joining Select Origins, he was employed in Sales Management positions at The
Silver Palate and Dean and Deluca Imports. Mr. Thompson holds a bachelor's
degree in German from Dartmouth College.
SCOTT ELLIS has been our Director of Operations since December 1998. Prior
to joining us, from 1990 to 1998, Mr. Ellis held various positions at Unisea,
Inc., a processor of seafood for wholesale and retail distribution, including
most recently, production director. He holds a bachelor's degree in
International Studies from the Jackson School of International Studies at the
University of Washington.
STACEY L. TRUE joined GreatFood.com as our Vice President of Business
Development in September 1999. From May 1998 until joining us, Ms. True was
Brand Manager, Strategic Alliances Pepsi Joint Venture, for Starbucks Coffee
Company. From 1997 to 1998, Ms. True was Associate Product Manager, New Ventures
at Frito Lay, Inc. She attended the University of Chicago in 1996 and 1997 and
worked in marketing at M & M Mars, Inc. in the summer of 1996. Prior to that,
Ms. True managed marketing campaigns for various entities as an independent
contractor, from 1993 to 1996. Ms. True holds a bachelor's degree in Political
Sciences from University of Colorado, a Master of Science in Broadcast
Journalism from Northwestern University, and a Masters in Business
Administration from the University of Chicago.
R. STOCKTON RUSH III has served as a director of GreatFood.com since May
1998 and is a private investor. Since 1990, Mr. Rush has been the President and
Chairman of the Board of Directors of Remote Control Technology, Inc., a
manufacturer of industrial wireless remote control products. Mr. Rush holds a
bachelor's degree in Aerospace Engineering from Princeton University and a
Masters in Business Administration from the Haas Business School at the
University of California at Berkeley.
GEOFFREY BARKER has been a director of GreatFood.com since May 1998. Mr.
Barker co-founded The Cobalt Group, Inc., a provider of Internet marketing
solutions to automotive dealerships, in 1995, and has been its Co-Chief
Executive Officer since that time. From 1994 to 1995, he was the Vice President
for New Business at IVI Publishing, Inc., a multimedia developer and publisher.
From 1989 to 1994, Mr. Barker was an investment banker with U.S. Bancorp Piper
Jaffray, Inc. Mr. Barker holds a bachelor's degree in Economics from Tufts
University and a Masters in Business Administration from Columbia University.
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<PAGE>
DAVID E. WYMAN has served as a director of GreatFood.com since November 1998
and is a private investor. From 1990 to 1998, Mr. Wyman served as the Chairman
of the Board of Directors of Prime Advisors, a fixed income investment advisory
firm. From 1973 to 1994, he was a director and Vice President of Kinzua
Corporation, a privately held forest products manufacturing company. He is also
a director of P.C. Fixx, Inc., a closely held computer networking and repair
business.
MARK KOULOGEORGE became a director of GreatFood.com in May 1999. Mr.
Koulogeorge is a managing director of First Analysis Corporation, a venture
capital investment firm. Prior to joining First Analysis in 1994, he was the
Vice President of Corporate Development of Eagle Industries, Inc., a diversified
manufacturer, from 1991 to 1994. Mr. Koulogeorge holds a bachelor's degree in
Economics from Dartmouth College and a Masters in Business Administration from
Stanford University.
BOARD OF DIRECTORS
Our board of directors currently consists of six members. Each director is
elected to serve until the next annual meeting of shareholders or until the
election and qualification of his successor or his earlier resignation or
removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors established a compensation committee in March 1999
and an audit committee in May 1999. Messrs. Rush, Barker and Wyman are the sole
members of the compensation committee and Messrs. Rush, Wyman and Koulogeorge
are the sole members of the audit committee. The compensation committee makes
recommendations to the board concerning salaries and incentive compensation for
our officers and employees and administers our employee benefit plans. The audit
committee reviews GreatFood.com's financial statements and accounting practices,
makes recommendations to the board regarding the selection of our independent
auditors and reviews the results and scope of the audit and other services
provided by the independent auditors.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation from us for
their service as members of the board of directors, although they are reimbursed
for reasonable travel and lodging expenses in connection with attendance at
board or committee meetings. Under our stock incentive plan, non-employee
directors are entitled to receive stock option grants and stock purchase rights
at the discretion of the board of directors or other administrator of the plan.
In addition, Messrs. Rush, Barker and Wyman each hold an option to purchase
10,000 shares of common stock which becomes exercisable in full one year after
the date of grant. Messrs. Rush and Barker's options are exercisable at $0.30
per share and Mr. Wyman's option is exercisable at $1.75 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the compensation committee in March 1999, the
entire board participated in all executive compensation decisions. None of our
executive officers presently serves, or in the past fiscal year has served, as a
member of the compensation committee or board of directors of any other company
whose executive officers served in the past fiscal year on our compensation
committee. Certain of our directors have purchased our securities. See
"Relationships with Greatfood.com and Related Transactions" on page 53 and
"Principal Shareholders" on page 55.
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<PAGE>
SUMMARY COMPENSATION
The following table sets forth information concerning the compensation paid
for services rendered to GreatFood.com in all capacities during 1996, 1997 and
1998 to our Chief Executive Officer and all other persons who earned
compensation in excess of $100,000 in any of those years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL -----------------
COMPENSATION SECURITIES
----------------- UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) OPTIONS(#)
- ---------------------------------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
William Cuff(1)............................... 1998 $ 57,282 514,286
President
Benjamin Nourse............................... 1998 40,000
Chief Executive Officer 1997 1,820
1996 8,000
</TABLE>
- ------------------------
(1) Mr. Cuff has served as President since April 1998 and served as Chief
Executive Officer from April 1998 to May 1999. On an annual basis, Mr.
Cuff's salary in 1998 would have been approximately $80,000.
OPTIONS GRANTED IN 1998
We did not grant Mr. Nourse any stock options during 1998. However, on May
6, 1999, we granted Mr. Nourse an option to purchase 60,000 shares at an
exercise price of $5.50, which option becomes exercisable in four equal annual
amounts on each anniversary of the grant date. The following table sets forth
certain information regarding stock options we granted Mr. Cuff during 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(3)
OPTIONS FISCAL PRICE($/ EXPIRATION --------------------
GRANTED(1) YEAR(2) SHARE) DATE 5% 10%
--------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William Cuff.................... 100,000(4) 18.4% $ 0.30 4/13/08 $ 145,921 $ 250,124
President 100,000(5) 18.4 0.30 4/13/08 145,921 250,124
300,000(6) 55.2 1.75 4/13/08 330,170 836,715
14,286(7) 2.6 1.75 7/20/08 15,723 39,844
</TABLE>
- ------------------------
(1) 500,000 options were granted to Mr. Cuff under the 1997 Stock Incentive
Plan. In addition, Mr. Cuff was granted a warrant for 14,286 shares outside
of the 1997 Stock Incentive Plan.
(2) Based on an aggregate of 529,500 option shares and 14,286 warrant shares
granted to employees in 1998.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the common stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.
(4) This option became exercisable in full on April 13, 1999.
(5) This option becomes exercisable in equal amounts on a monthly basis from the
vesting commencement date of April 13, 1998 until fully vested on April 13,
2001.
50
<PAGE>
(6) This option becomes exercisable in equal amounts on a monthly basis from the
vesting commencement date of April 13, 1998 until fully vested on April 13,
2003.
(7) This warrant was fully vested upon issuance on July 20, 1998.
1997 STOCK INCENTIVE PLAN
GreatFood.com's 1997 Stock Incentive Plan was adopted by GreatFood.com's
board of directors and approved by our shareholders in September 1997.
Initially, 250,000 shares of common stock were reserved for issuance under the
plan. In May 1998, this total was increased to 1,000,000, and in May 1999, this
total was increased to 1,600,000.
As of August 31, 1999, no shares had been issued upon the exercise of
options granted under the plan, options to purchase 991,000 shares of common
stock were outstanding with a weighted average exercise price of $2.88 and
609,000 shares remained available for future grant. No awards may be granted
under the plan after September 27, 2007, but the vesting and effectiveness of
awards previously granted may extend beyond that date.
The plan provides for the grant of incentive stock options, as defined under
the Internal Revenue Code of 1986, to employees (including officers and employee
directors) of GreatFood.com and its affiliates. The plan also provides for the
grant of nonqualified options to such employees as well as to non-employee
directors, consultants, agents and other key contributors to GreatFood.com.
The board of directors has appointed its compensation committee to
administer the plan. The compensation committee determines both the recipients
of options and the type of options to be granted, including the exercise price,
number of shares subject to the option and the exercisability of the option. The
compensation committee also has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the plan and to
interpret its provisions. The board of directors also granted the chairman of
GreatFood.com the authority to grant options under the plan (in an amount not to
exceed 25,000 shares in the aggregate to any individual) to eligible
participants under the plan, other than our officers, at an exercise price which
is not less than the fair market value of GreatFood.com's common stock on the
date of grant.
While the compensation committee determines the exercise price of the
options, the exercise price of an incentive stock option may not be less than
100% of the fair market value of the common stock on the date of the option
grant.
The compensation committee may not grant an incentive stock option to a
person who, at the time of the grant, owns (or is deemed to own) stock
representing more than 10% of the total combined voting power of GreatFood.com
or any affiliate of GreatFood.com, unless the option exercise price is at least
110% of the fair market value of the common stock from the date of grant. In
addition, the aggregate fair value, determined at the time of grant, of the
shares of common stock with respect to which incentive stock options are
exercisable for the first time by the optionee during any calendar year may not
exceed $100,000.
The plan also provides for the grant of restricted shares, which are shares
of common stock, the transfer of which is restricted and which may be forfeited
in the manner determined by the compensation committee. The plan also authorizes
the compensation committee to award or offer bonuses of shares of common stock,
either restricted or non-restricted, as current or deferred compensation,
instead of all or any portion of the cash compensation to which the employee is
entitled. In addition, the compensation committee may grant cash bonus rights
under the plan in connection with options, stock bonuses or shares granted under
to the plan.
In the event of certain corporate transactions, such as a merger or sale of
GreatFood.com, each outstanding option and restricted stock award will
automatically accelerate and become 100% vested
51
<PAGE>
immediately before the corporate transaction and the holder of an option will be
able to purchase the full number of shares of our stock under such option,
unless the option or restricted stock award is, in connection with the corporate
transaction, assumed by GreatFood.com's successor corporation or parent or
subsidiary of this successor.
EMPLOYMENT ARRANGEMENTS
In April 1998, we entered into a letter agreement with Mr. Cuff, our
President. The agreement entitles Mr. Cuff to an annual salary of $80,000 per
year. Under the agreement, we granted Mr. Cuff options to purchase (a) 100,000
shares of common stock at an exercise price of $0.30 per share which became
exercisable in equal amounts over the first twelve months of his employment; (b)
100,000 shares of common stock at an exercise price of $0.30 a share which vest
monthly in equal amounts over a 36 month period and (c) 300,000 shares of common
stock at an exercise price of $1.75 which vest monthly in equal amounts over a
sixty month period. The vesting of these options will accelerate upon a change
of control of GreatFood.com. We also granted Mr. Cuff a warrant to purchase
14,286 shares of our common stock at an exercise price of $1.75 per share under
the terms of the agreement.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our articles of incorporation limit the liability of directors and officers
to the fullest extent permitted by the Washington Business Corporation Act as it
currently exists or as it may be amended in the future. Consequently, except as
otherwise provided in the Washington Business Corporation Act, no director or
officer will be personally liable to GreatFood.com or its shareholders for
monetary damages resulting from his or her conduct as a director or officer of
GreatFood.com, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions to our shareholders; or
- transactions from which the director or officer personally receives a
benefit in money, property or services to which the director or officer is
not legally entitled.
Our articles of incorporation also require us to indemnify any individual
made a party to a proceeding because that individual is or was a director or
officer of GreatFood.com and to advance or reimburse reasonable expenses
incurred by such individual in advance of the final disposition of the
proceeding to the full extent permitted by applicable law. Any repeal or
modification to our articles of incorporation may not adversely affect any right
of a director or officer of GreatFood.com who is a director or officer at the
time of such repeal or modification. To the extent provisions of our articles of
incorporation provide for indemnification of directors for liabilities arising
under the Securities Act, those provisions are, in the opinion of the SEC,
against public policy as expressed in the Securities Act and are therefore
unenforceable. In addition, we have entered into separate indemnification
agreements with our directors and officers that may require us, among other
things, to indemnify them against liabilities that arise because of their status
or service as directors or officers and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
We believe that the limitation of liability provisions in our articles of
incorporation, the indemnification agreements and the liability insurance policy
will facilitate our ability to continue to attract and retain qualified
individuals to serve as directors and officers of GreatFood.com.
52
<PAGE>
RELATIONSHIPS WITH GREATFOOD.COM AND RELATED TRANSACTIONS
Upon our inception in August 1995, we issued 1,000,000 shares of common
stock to Benjamin Nourse, our Chairman of the Board and Chief Executive Officer,
in exchange for $48,590, which was paid in several installments over a period
beginning in September 1995 and ending in November 1996. On March 23, 1997, Mr.
Nourse purchased 50,000 shares of common stock for $10,000, and on October 12,
1997, Mr. Nourse purchased 33,333 shares of common stock for $10,000. On July 17
1998, Mr. Nourse purchased 7,142 shares of Series A preferred stock for $12,499
and on March 18, 1999, he purchased 5,000 shares of Series B preferred stock for
$15,000. Donna Nourse, our Vice President of Merchandising, owns these shares
jointly with Mr. Nourse, her husband.
In April 1998, we entered into a letter agreement with Mr. Cuff, our
President, which is described at page 52 above in "Management -- Employment
Arrangements." In July 1998, Mr. Cuff purchased 28,571 shares of Series A
preferred stock for $49,999 and in March 1999 he purchased 5,000 shares of
Series B preferred stock for $15,000. Mr. Cuff also received a warrant to
purchase 14,286 shares of common stock at a price of $1.75 per share under his
employment agreement.
R. Stockton Rush, III, one of our directors, purchased 50,000 shares of
common stock for $10,000 in December 1996, 75,000 shares of common stock for
$15,000 in March 1997, and 83,333 shares of common stock for $25,000 in
September 1997. In July 1998, the Ralph K. Davies Trust FBO R.S. Rush III, a
trust of which Mr. Rush III is the sole trustee and an income beneficiary,
purchased 60,000 shares of Series A preferred stock for $105,000 and in March
1999 the trust purchased 66,666 shares of Series B preferred stock for $199,998.
In July 1998, Catherine W. Rush, Mr. Rush III's sister, purchased 28,571 shares
of Series A preferred stock for $49,999. In October 1997, R. Stockton Rush, Mr.
Rush III's father, purchased 33,333 shares of common stock for $10,000. In July
1998, Mr. Rush purchased 17,142 shares of Series A preferred stock for $29,999
and in March 1999 he purchased 16,666 shares of Series B preferred stock for
$49,998. In July 1998, Richard M. Weil, Mr. Rush III's brother-in-law, purchased
14,285 shares of Series A preferred stock for $24,999.
In October 1997, David E. Wyman, a director of GreatFood.com, purchased
83,333 shares of common stock for $25,000. In July 1998, Mr. Wyman purchased
42,857 shares of Series A preferred stock for $75,000. In the same private
placement, WYNOT Investments, of which Mr. Wyman and his sister, Ann McCall
Wyman, are each fifty percent beneficial owners, purchased 56,571 shares of
Series A preferred stock for $98,999 and in March 1999, WYNOT Investments
purchased 33,333 shares of Series B preferred stock for $99,999.
In March 1999, Geoffrey T. Barker, one of our directors, purchased 8,333
shares of Series B preferred stock for $24,999.
In connection with the issuances of preferred stock, we entered into an
Investors' Rights Agreement with the holders of our common stock, Series A
preferred stock, and Series B preferred stock, including Messrs. Nourse, Cuff,
Wyman and Barker, WYNOT Investments, and Mr. Rush III, his trust, his sister,
his father and his brother-in-law. Under the terms of this agreement, we may
become obligated to effect a registration under the Securities Act of 1933 of
shares of common stock held by these holders or obtained upon the conversion of
their preferred stocks. See "Description of Capital Stock -- Registration
Rights" on page 61 for more information on this agreement and when this
obligation arises.
In exchange for a warrant (which vests ratably over a period of 36 months if
the conditions to its vesting are met) to purchase 36,000 shares of our common
stock at an exercise price of $0.20 per share, The Cobalt Group hosted our
servers from March 1997 through May 1999 and provided us with high speed
Internet access. The vesting of this warrant terminated on May 14, 1999 with
25,000 shares vested and the warrant was exercised on July 23, 1999. Mr. Barker,
one of our directors, is the
53
<PAGE>
Co-Chief Executive Officer, a director, and a significant shareholder of The
Cobalt Group. Mr. Koulogeorge, another of our directors, is a director of The
Cobalt Group.
On May 17, 1999, we sold 600,000 shares of Series C preferred stock at $5.00
per share of which 588,000 shares were purchased by partnerships controlled by
First Analysis Corporation: 528,000 by Riverside Partnership and 60,000 by The
Productivity Fund IV, L.P. First Analysis owns a majority ownership interest in
two limited liability companies: one of which is the direct general partner of
The Productivity Fund IV, L.P. and the other of which is the indirect general
partner of Riverside Partnership. In addition, 10,000 shares were purchased by
Mr. Koulogeorge, one of our directors. Mr. Koulogeorge is a member of the
limited liability company which is the direct general partner of The
Productivity Fund IV, L.P. and is also a member of the limited liability company
which is indirect general partner of Riverside Partnership. The purchasers of
the Series C preferred stock also agreed to purchase, at our option, up to
300,000 additional shares of Series C preferred stock at $5.00 per share. We
have until May 17, 2000 to exercise this option to sell additional shares of
Series C preferred stock. The purchasers of the Series C preferred stock also
received warrants to purchase up to a total of 323,077 additional shares of
Series C preferred stock at $0.01 per share (up to 484,615 shares if we exercise
our option to sell the additional 300,000 shares of Series C preferred stock).
The warrants issued to Riverside Partnership entitle it to purchase up to
284,307 shares; the warrants issued to The Productivity Fund IV, L.P. entitle it
to purchase up to 32,308 shares and the warrants issued to Mr. Koulogeorge
entitle him to purchase up to 5,385 shares. These share amounts would be
proportionately increased if we exercise our option to sell 300,000 additional
shares of Series C preferred stock. These warrants will become exercisable if we
fail to complete a public offering of at least $10,000,000 of our common stock
at a price of at least $10.00 per share by January 31, 2000. If these warrants
become exercisable, they will reduce the effective price for the Series C
preferred stock from $5.00 to $3.25. If we complete a public offering of that
size and value at any time in the future, all shares of Series C preferred stock
will automatically convert into shares of our common stock. We also granted to
these purchasers the right to require us to register their shares of common
stock for resale under the Securities Act. See "Description of Capital Stock --
Registration Rights" on page 61 for more information.
We have also borrowed $1,500,000 from First Analysis Corporation in exchange
for the issuance of a convertible promissory note in that principal amount which
bears interest at the rate of 8 percent per year. Principal and accrued interest
under this note may be converted at the option of First Analysis Corporation
into the number of shares of Series D preferred stock, or other securities
offered by us. See "Management's Discussion and Analysis -- Liquidity and
Capital Resources" on page 28. First Analysis has indicated an interest in
converting this note into shares of Series D preferred stock but they are not
obligated to do so.
We are a party to a Merchant Agreement, dated December 20, 1995, which
obligates us to honor Visa and Mastercard credit cards when properly presented
as payment by our customers. Mr. Nourse has personally guaranteed our
obligations under this agreement.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table describes the beneficial ownership of GreatFood.com's
common stock as of August 31, 1999 and as adjusted to reflect the sale of the
shares of common stock offered in this prospectus by:
- each person or group that we know beneficially owns more than 5% of our
outstanding common stock;
- each of our directors;
- our chief executive officer; and
- all of our executive officers and directors as a group.
Unless otherwise indicated, the address for each of the named individuals is
c/o GreatFood.com, 2731 Eastlake Avenue East, Seattle, Washington 98102. Except
as otherwise indicated or as may otherwise be determined by applicable community
property laws, the persons named in the table have sole voting and investment
power over all shares of common stock held by them. The number of shares in the
table assumes no exercise of the underwriters' over-allotment option.
Applicable percentage ownership in the table is based on 4,052,532 shares of
common stock outstanding as of August 31, 1999 (assuming the conversion of all
outstanding shares of preferred stock), and 6,552,532 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined according to the rules of the SEC. Shares of common stock which are
issuable upon the exercise of options or warrants that are presently exercisable
or exercisable within 60 days of August 31, 1999 are deemed outstanding for the
purpose of computing the percentage ownership of the person or entity holding
such options or warrants, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person or entity. To the extent
that any shares are issued upon the exercise of options, warrants or other
rights to acquire GreatFood.com's common stock that are presently outstanding or
which may be granted in the future or reserved for future issuance under
GreatFood.com's stock plans, the percentage ownership of new public investors
will be reduced.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF SHARES OUTSTANDING
BENEFICIALLY ------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PRIOR TO OFFERING AFTER OFFERING
- ----------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Benjamin Nourse................................ 1,095,475 27.0% 16.7%
William Cuff................................... 287,856 7.1 4.4
R. Stockton Rush, III.......................... 344,999 8.5 5.3
Geoffrey Barker................................ 43,333 1.1 *
David E. Wyman................................. 216,094 5.3 3.3
Mark Koulogeorge............................... 973,000 22.0 14.8
All directors and executive officers as a group
(10 persons)................................. 2,960,757 66.1 45.1
5% SHAREHOLDERS
Furman C. and Susan R. Moseley................. 700,000 17.3 10.7
411 University Street, Suite 1200
Seattle, Washington 98101
First Analysis Corporation..................... 963,000 21.8 14.7
9500 Sears Tower
Chicago, IL 60606
WR Hambrecht & Company, LLC.................... 866,666 18.0 13.2
550 Fifteenth Street
San Francisco, CA 94103
</TABLE>
- ------------------------------
* Less than one percent.
55
<PAGE>
Shares listed as held by Mr Cuff include 14,286 shares of common stock
issuable upon exercise of a warrant currently exercisable and 239,999 shares
subject to options exercisable within 60 days of August 31, 1999.
Shares listed as held by Mr. Rush III include 10,000 shares of common stock
issuable upon exercise of an option currently exercisable and 126,666 shares of
preferred stock held by the Ralph K. Davies Trust FBO R.S. Rush III of which Mr.
Rush III is the sole trustee and an income beneficiary.
Shares listed as held by Mr. Barker include 25,000 shares of common stock
issued upon the exercise of a warrant issued to The Cobalt Group of which Mr.
Barker is the Co-Chief Executive Officer, a director and a significant
shareholder and 10,000 shares of common stock issuable upon exercise of an
option currently exercisable.
Shares listed as held by Mr. Wyman include 89,904 shares held by WYNOT
Investments. Mr. Wyman and his sister, Ann McCall Wyman, are each fifty percent
equity owners of WYNOT Investments.
Shares listed as held by Mr. Koulogeorge include 528,000 shares of preferred
stock held by Riverside Partnership, 60,000 shares of preferred stock held by
The Productivity Fund IV, L.P. and 375,000 shares of Series D preferred stock
issuable upon the conversion of a promissory note held by First Analysis
Corporation within 60 days of August 31, 1999. Mr. Koulogeorge is a member of a
limited liability company which is the direct general partner of The
Productivity Fund IV, L.P. and is also a member of a limited liability company
which is the indirect general partner of Riverside Partnership. Mr. Koulogeorge
is also an executive officer of First Analysis Corporation which holds a
majority ownership interest in these limited liability companies.
Shares listed as held by First Analysis Corporation include 528,000 shares
of common stock held by Riverside Partnership, 60,000 shares of common stock
held by The Productivity Fund IV, L.P. and 375,000 shares of Series D preferred
stock issuable upon the conversion of a promissory note held by First Analysis
Corporation within 60 days of August 31, 1999. First Analysis Corporation holds
a majority ownership interest in a limited liability company which is the direct
general partner of The Productivity Fund IV, L.P. and also holds a majority
ownership in another limited liability company which is the indirect general
partner of Riverside Partnership.
Shares listed as held by WR Hambrecht & Co., LLC include 750,000 shares of
Series D preferred stock issuable upon conversion of a promissory note within 60
days of August 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, we will be authorized to issue up to
20,000,000 shares of common stock, and 10,000,000 shares of preferred stock. The
following discussion summarizes key provisions of the common stock and preferred
stock. You should also refer to our articles of incorporation and bylaws, which
are included as exhibits to the Registration Statement, of which this prospectus
is a part, and to the provisions of applicable Washington law.
COMMON STOCK
As of August 31, 1999, there were outstanding 1,604,164 shares of common
stock and 2,448,368 shares of preferred stock which are each convertible into
one share of common stock at the holder's option, held of record by 47
shareholders. Following this offering, there will be 6,552,532 shares of common
stock outstanding, including 4,948,368 shares of preferred stock which are each
convertible into one share of common stock at the holder's option. The holders
of common stock are entitled to one vote per share on all matters to be voted on
by the shareholders. Cumulative voting for the election of directors is not
authorized by our articles of incorporation, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election. After payment is made to holders of outstanding shares of preferred
stock which have preferential rights to dividends, the holders of common stock
are entitled to receive ratably any dividends the board of directors declares
out of funds legally available for the payment of dividends. If GreatFood.com is
liquidated, dissolved or wound up, the holders of common stock are entitled to
share pro rata all assets remaining after payment of liabilities and liquidation
preferences of any outstanding shares of preferred stock. Holders of common
stock have no preemptive rights or rights to convert their common stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued following this
offering will be fully paid and nonassessable.
PREFERRED STOCK
As of August 31, 1999, there were 2,448,368 shares of preferred stock
outstanding as follows:
- 1,142,847 shares of Series A preferred stock,
- 705,521 shares of Series B preferred stock, and
- 600,000 shares of Series C preferred stock.
In addition, the board of directors has authorized the issuance of 294,479
additional shares of Series B preferred stock and 784,615 additional shares of
Series C preferred stock. Following this offering, there will be 4,948,368
shares of preferred stock outstanding which will consist of the shares of Series
A, B and C preferred stock listed above and 2,500,000 shares of Series D
preferred stock to be issued in this offering.
Under our articles of incorporation, our board of directors is authorized to
issue up to 3,972,538 additional shares of preferred stock in one or more series
without shareholder approval. The board has discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences of
each series of preferred stock.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a shareholder vote on specific issuances. The ability to issue preferred stock,
while providing desirable flexibility in connection with possible acquisitions,
financings and other corporate purposes, could make it more difficult for a
third party to acquire, or could discourage a third party from acquiring, a
majority of the outstanding voting stock of GreatFood.com. GreatFood.com has no
present plans to issue any shares of preferred stock other than the 2,500,000
shares of Series D preferred stock to be issued in this offering.
57
<PAGE>
The following chart summarizes the principal terms of the Series A, B, C,
and D preferred stock:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
<S> <C> <C> <C> <C>
Ranking with Equal with Series B Equal with Series A Equal with Series D preferred Equal with Series C preferred
respect to preferred stock and preferred stock and stock stock
dividends any future class or any future class or Senior to common stock, Senior to common stock,
and series of stock series of stock Series A preferred stock and Series A preferred stock and
liquidation designated to be designated to be Series B preferred stock Series B preferred stock
preference equal in rank equal in rank
Senior to common Senior to common
stock and any future stock and any future
class or series of class or series of
stock designated to stock designated to
be junior in rank be junior in rank
Junior to Series C Junior to Series C
and D preferred and D preferred
stock and any future stock and any future
class or series of class or series of
stock designated to stock designated to
be senior in rank be senior in rank
Dividends None unless declared None unless declared Dividends cumulate and accrue Dividends cumulate and accrue
by the Board by the Board on a semi-annual basis at the on a semi-annual basis at the
annual rate of 8% of the annual rate of 8% of the
average purchase price of the purchase price in this
shares of Series C preferred offering
stock
Liquidation Upon the Upon the Upon the liquidation, Upon the liquidation,
Preference liquidation, liquidation, dissolution or winding up of dissolution or winding up of
dissolution or dissolution or GreatFood.com, GreatFood.com,
winding up of winding up of GreatFood.com's assets will GreatFood.com's assets will
GreatFood.com, the GreatFood.com, the be distributed as follows: be distributed as follows:
holders will receive holders will receive -If the net proceeds from the -If the net proceeds from the
$1.75(1) per share $3.00(1) per share liquidation event are equal liquidation event are equal
before payment is before payment is to or less than the to or less than the
made to holders of made to holders of aggregate price paid for the aggregate price paid for the
securities ranked securities ranked outstanding shares of Series outstanding shares of Series
junior to this junior to this C and D preferred stock plus C and D preferred stock plus
series series all accrued and unpaid all accrued and unpaid
dividends on such shares, dividends on such shares,
then any net proceeds will then any net proceeds will
be distributed among all be distributed among all
holders of outstanding holders of outstanding
shares of Series C and D shares of Series C and D
preferred stock in preferred stock in
proportion to the proportion to the
liquidation value of their liquidation value of their
shares shares
-If the net proceeds are -If the net proceeds are
greater than the aggregate greater than the aggregate
price paid for the price paid for the
outstanding shares of Series outstanding shares of Series
C and D preferred stock plus C and D preferred stock plus
all accrued and unpaid all accrued and unpaid
dividends on such shares, dividends on such shares,
then any net proceeds will then any net proceeds will
be distributed as follows: be distributed as follows:
(1) an amount equal to the (1) an amount equal to the
aggregate price paid for aggregate price paid for
the outstanding shares of the outstanding shares of
Series C and D preferred Series C and D preferred
stock plus all accrued stock plus all accrued
and unpaid dividends on and unpaid dividends on
such shares will be such shares will be
distributed to all distributed to all
holders of shares of holders of shares of
Series C and D preferred Series C and D preferred
stock in proportion to stock in proportion to
the liquidation value of the liquidation value of
their shares their shares
</TABLE>
(1) These amounts will be adjusted if there is a stock dividend, stock split,
combination, reorganization, reclassification or similar event involving a
change in GreatFood.com's capital structure.
58
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SERIES A SERIES B SERIES C SERIES D
(2) the remaining net assets (2) the remainder will be
will be distributed (a) distributed (a) first to
first to the holders of the holders of Series A
Series A and B preferred and B preferred stock to
stock to return their return their purchase
purchase price in price in proportion to
proportion to the the liquidation value of
liquidation value of their shares, (b) second
their shares, (b) second to all holders of common
to all holders of common stock to return their
stock to return their cost, and (c) third to
cost, and (c) third to all holders of common
all holders of common stock and holders of
stock and holders of shares of Series C and D
shares of Series C and D preferred stock as if
preferred stock as if such shares were
such shares were converted into common
converted into common stock
stock
Voting Votes on an as- Votes on an as- Votes on an as-converted Votes on an as-converted
rights converted basis on converted basis on basis on all matters basis on all matters
all matters all matters submitted to shareholders submitted to shareholders
submitted to submitted to Entitled to elect one Consent of a majority of
shareholders shareholders director as a class outstanding shares is
Entitled to elect Consent of a Consent of a majority of required for any amendment,
one director as a majority of outstanding shares is modification or waiver of the
class outstanding shares required for any amendment, terms of this series,
Consent of a is required for any modification or waiver of the So long as 25% of the series
majority of corporate action terms of this series (other remains outstanding, consent
outstanding shares which would change than changes to the amount of of a majority of outstanding
is required for any any of the rights, redemption payment, the shares is required for (i)
corporate action preferences, or timing of redemption or the dividends and distributions,
which would change privileges of, or conversion rate which require (ii) redemptions of equity
any of the rights, limitations provided the consent of 90% of the securities, (iii) issuances
preferences, or for the benefit of, outstanding shares) of securities which are
privileges of, or this series So long as 25% of the series senior or equal with respect
limitations provided remains outstanding, consent to proceeds from liquidation,
for the benefit of, of a majority of outstanding (iv) mergers, consolidations
this series shares is required for (i) or sales of substantially all
dividends and distributions, assets, or (v) engagement in
(ii) redemptions of equity a different type of business.
securities, (iii) issuances
of securities which are
senior or equal with respect
to proceeds from liquidation,
(iv) mergers, consolidations
or sales of substantially all
assets, (v) engagement in a
different type of business,
(vi) increase in board size
above seven members, (vii)
incurrence of funded
indebtedness and (viii)
specific increases in officer
compensation.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
<S> <C> <C> <C> <C>
Conversion Convertible into Convertible into Convertible into common stock Convertible into common stock
Rights common stock at the common stock at the at the initial rate of one to at the initial rate of one to
initial rate of one initial rate of one one(2) one(2)
to one(2) to one(2) May be converted at the May be converted at the
May be converted at May be converted at holder's option at any time holder's option at any time
the holder's option the holder's option GreatFood.com may require GreatFood.com may require
at any time at any time conversion either (a) upon conversion either (a) upon
Will be Will be completion of an underwritten completion of an underwritten
automatically automatically public offering in which the public offering in which the
converted upon a converted upon a net proceeds are at least net proceeds are at least
firm commitment firm commitment $10,000,000 and the per share $15,000,000 and the per share
underwritten public underwritten public offering price is at least offering price is at least
offering or offering or twice the average purchase twice the purchase price of
conversion of 50% or conversion of 50% or price of these shares or (b) these shares or (b) if the
more of outstanding more of outstanding if the holders of a majority holders of a majority of the
shares of this shares of this of the outstanding shares of outstanding shares of Series
series series Series C preferred stock D preferred stock elect to
elect to convert convert
Redemption None None If requested by the holders If requested by the holders
Rights of a majority of outstanding of a majority of outstanding
shares of Series C preferred shares of Series D preferred
stock at any time after May stock at any time after
14, 2004, GreatFood.com will October , 2004,
redeem all shares of Series C GreatFood.com will redeem all
preferred stock at a price shares of Series D preferred
per share equal to the price stock at a price per share
paid for these shares plus equal to the price paid for
all accrued and unpaid these shares plus all accrued
dividends as follows: and unpaid dividends as
-one third of the shares will follows:
be redeemed on the date -one third of the shares will
stated in the written be redeemed on the date
request; stated in the written
-an additional one third of request;
the shares will be redeemed -an additional one third of
on the first anniversary of the shares will be redeemed
such date; and on the first anniversary of
-the final one third of such such date; and
shares will be redeemed on -the final one third of such
the second anniversary of shares will be redeemed on
such date the second anniversary of
such date
Additional GreatFood.com is GreatFood.com is GreatFood.com is required to GreatFood.com is required to
rights required to provide required to provide provide monthly and annual provide quarterly and annual
quarterly and annual quarterly and annual financial information, an financial information, an
financial financial annual budget, notice of annual budget, notice of
information information defaults under any material defaults under any material
agreement and any other agreement and any other
reports provided to reports provided to
shareholders shareholders
Holders of 25% of the
outstanding shares have
rights to visit
GreatFood.com's properties
and examine its records
</TABLE>
(2) The conversion rate will be adjusted to protect the holders from the
dilutive effect of stock dividends, stock splits, combinations of common
stock or other specified issuances of common stock at a price less than the
purchase price for that series.
60
<PAGE>
STOCK INCENTIVE PLAN
As of August 31, 1999, (1) options to purchase a total of 991,000 shares of
common stock were outstanding, and (2) up to 609,000 additional shares of common
stock are reserved for issuance under options granted in the future under the
1997 Stock Incentive Plan. See "Management -- 1997 Stock Incentive Plan" on page
51.
WARRANTS
As of August 31, 1999, GreatFood.com had the following outstanding warrants
to purchase shares of common stock: (1) a warrant to purchase up to 300,000
shares of common stock at an exercise price of $3.00 per share; (2) a warrant to
purchase up to 14,286 shares of common stock at an exercise price of $1.75 per
share that is held by William Cuff, our President; (3) warrants issued to an
entity to purchase up to 2,858 shares of common stock at an exercise price of
$1.75 per share and up to 1,667 shares of common stock at an exercise price of
$3.00 per share; and (4) warrants to purchase up to a total of 323,077 shares of
Series C preferred stock at an exercise price of $0.01 per share which will
become exercisable if we fail to complete a public offering of at least
$10,000,000 of our common stock at a price of at least $10.00 per share by
January 31, 2000. For additional information concerning the warrants described
in items (2) and (4) above, see "Relationships with GreatFood.com and Related
Transactions" at page 53.
REGISTRATION RIGHTS
After this offering, the holders of 4,027,532 shares of common and preferred
stock will be entitled to rights with respect to the registration of such shares
under the Securities Act. If we propose to register our common stock under the
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, in connection with the public offering
of common stock solely for cash, then these holders are entitled to notice of
the registration and to include shares of common stock in the registration at
our expense. Additionally, holders of 3,427,532 of these shares may require us
to file up to four additional registration statements on Form S-3 at our
expense. Holders of up to 600,000 of these shares have the right to demand on
one occasion that we register their shares for resale at our expense on any form
of SEC registration statement available for use by us. All of these registration
rights are limited by the terms and conditions of our agreements with these
shareholders, including the right of the underwriters of an offering to limit
the number of shares included in such registration and our right to decline to
effect such a registration before six months after the closing of the initial
public offering.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
There has been no public market for our common stock and one will not
develop after this offering.
After this offering, we will have outstanding 6,552,532 shares of common
stock (including preferred stock convertible into common stock), assuming no
exercise of outstanding warrants and options, which as of August 31, 1999 were
vested for an aggregate of 323,380 shares of common stock and will vest for up
to an additional 1,157,008 shares of common stock in the future. Of these
shares, the 2,500,000 shares that we expect to sell in this offering will be
freely tradable without restriction under the Securities Act, unless such shares
are held by "affiliates" of GreatFood.com, as that term is defined in Rule 144
under the Securities Act.
The remaining 4,052,532 shares of common and preferred stock that will be
outstanding after this offering will be restricted shares. We issued and sold
the restricted shares in private transactions in reliance on exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 or Rule 701 under the Securities Act, as
summarized below.
After this offering 2,551,179 shares will be eligible for sale under Rule
144 but will be limited by the Rule 144 volume restrictions and 170,832 shares
will be eligible for sale under Rule 144(k). The remaining 1,330,521 restricted
shares will be eligible for sale under Rule 144 on the expiration of various one
year holding periods.
Under Rule 144, a person who has beneficially owned restricted shares for at
least one year would be entitled to sell in any three month period up to the
greater of:
- one percent of the then outstanding shares of common stock (approximately
6,552,532 shares immediately after this offering); and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 must be made in "broker's transactions" and comply with
the notice requirements in that Rule and to the Rule's requirement that there be
current public information available about GreatFood.com. It will be difficult
for holders to sell their shares in broker's transactions if a public market
does not develop for our stock. Further, it is unlikely that adequate current
public information will be available once we are no longer required to file
periodic reports with the SEC. Under Rule 144(k), a person who has not been an
affiliate of GreatFood.com during the preceding 90 days and who has beneficially
owned the restricted shares for at least two years is entitled to sell them
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
We intend to file, after the effective date of this offering, a registration
statement on Form S-8 to register the 1,600,000 shares of common stock reserved
for issuance under the 1997 Stock Incentive Plan. The registration statement
will become effective automatically upon filing. Shares issued under this plan,
after the filing of a registration statement on Form S-8, may be sold in the
open market, subject, in the case of certain holders, to the Rule 144
limitations applicable to affiliates and to vesting restrictions imposed by us.
In addition, following this offering, the holders of 4,027,532 shares of
outstanding common and preferred stock will have rights to require us to
register their shares for future sale. See "Description of Capital Stock --
Registration Rights" on page 61.
62
<PAGE>
PLAN OF DISTRIBUTION
GreatFood.com entered into a placement agency agreement with WR Hambrecht &
Company, LLC under which WR Hambrecht agrees to offer the shares of Series D
preferred stock to potential investors on a non-exclusive "best efforts" basis.
WR Hambrecht will not be required to purchase any of the Series D preferred
stock for its own account or for the accounts of others, or to sell a specific
number or dollar amount of shares. GreatFood.com may also offer the shares to
its existing shareholders and other potential investors directly. In addition,
WR Hambrecht and First Analysis Corporation, have indicated an interest in
purchasing up to $4,500,000 of shares of Series D preferred stock, although they
are not obligated to do so.
Under the placement agency agreement, GreatFood.com has agreed to pay WR
Hambrecht a cash fee equal to $200,000 plus 2% of the gross proceeds received
from investors in this offering. No fee will be payable to WR Hambrecht on the
gross proceeds received from existing shareholders or investors solicited by
GreatFood.com or parties other than WR Hambrecht unless WR Hambrecht undertakes
negotiations with these new investors on behalf of GreatFood.com. GreatFood.com
has also agreed to reimburse WR Hambrecht for reasonable expenses incurred in
connection with this offering. The placement agency agreement also provides that
GreatFood.com will indemnify WR Hambrecht against specified liabilities,
including liabilities under the Securities Act, or contribute to payments that
WR Hambrecht may be required to make as a result of these liabilities.
The shares are being offered to "accredited investors" within the meaning of
Rule 501(a) under the Securities Act, at the offering price set forth on the
cover page of this prospectus, although GreatFood.com may determine to sell to
persons who are not accredited investors on a case-by-case basis in its sole
discretion. The sale of the shares will be made under a purchase agreement
between GreatFood.com and the purchasers in this offering substantially in the
form of Appendix A to this prospectus. The purchase agreement will contain
customary financial and business representations and warranties of
GreatFood.com, including a representation concerning the accuracy of the
information about GreatFood.com's business in this prospectus and that there has
been no material adverse change in GreatFood.com's business prior to the closing
of the offering. The purchase agreement will also contain covenants of
GreatFood.com which will provide the purchasers of Series D preferred stock with
specific rights including the right to consent to specified corporate
transactions, and receive periodic reports from GreatFood.com, as more fully
described in "Description of Capital Stock -- Preferred Stock -- Voting Rights"
and "-- Additional Rights" on pages 58 and 59.
The sale of the shares of Series D preferred stock will occur in one or more
closings. Proceeds received from subscriptions will be deposited into an
interest-bearing escrow account until GreatFood.com decides to close on the
sales represented by those subscriptions. The initial closing may be held at any
time after subscriptions for $4,500,000 or more of Series D preferred stock have
been received. After the initial closing, GreatFood.com may continue the
offering and schedule subsequent closings at its discretion until the full
amount of the offered shares has been sold. A subscriber may withdraw their
subscription by written notice to GreatFood.com at any time prior to the closing
with respect to that subscription. In addition, GreatFood.com reserves the right
to reject any subscription in its sole discretion. Upon the withdrawal or
GreatFood's rejection of any subscription, the amount of the subscription will
be returned to the subscriber, together with any interest earned on that amount.
If GreatFood.com closes on a subscription, the interest earned on the subscribed
amount will be payable to GreatFood.com.
WR Hambrecht is an investment banking firm formed as a limited liability
company in February 1998. In addition to this offering, WR Hambrecht has engaged
in the business of public and private equity investing and financial advisory
services since its inception. The manager of WR Hambrecht, William R. Hambrecht,
has 40 years of experience in the securities industry. Persons affiliated and
associated with WR Hambrecht beneficially own an aggregate of 116,666 shares of
63
<PAGE>
GreatFood.com's common stock issuable upon the conversion of preferred stock. WR
Hambrecht has also been issued a convertible promissory note in exchange for a
$3,000,000 loan to GreatFood.com. See "Management's Discussion and Analysis --
Liquidity and Capital Resources" on page . WR Hambrecht has indicated an
interest in converting this note into Series D preferred stock but is not
obligated to do so.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for GreatFood.com by Heller Ehrman White & McAuliffe. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Morrison and Foerster LLP. Upon the closing of the offering, Heller Ehrman will
own 4,285 shares of GreatFood.com's common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as expects in auditing and accounting.
WHERE TO FIND ADDITIONAL INFORMATION ABOUT GREATFOOD.COM
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information included in the registration statement. We have
omitted information which the SEC does not require to be included in this
prospectus and you should refer to the registration statement and its exhibits.
You may review a copy of the registration statement, including exhibits, at the
SEC's public reference rooms at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or Seven World Trade Center, 13th Floor, New York, New
York 10048 or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information
about the public reference rooms. Our SEC filings are also available to the
public from the SEC's Web site at http://www.sec.gov.
Upon completion of this offering, we will be required to file with the SEC
periodic reports and other information required by the Exchange Act for all
periods ending prior to January 1, 2000. Such periodic reports and other
information will be available for inspection and copying at the SEC's public
reference rooms and the SEC's Web site, which is described above.
64
<PAGE>
GREATFOOD.COM, INC.
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheet as of December 31, 1997 and 1998 and June 30, 1999 (unaudited).......... F-3
Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998 and for
the
Six Months Ended June 30, 1999 and 1998 (unaudited)................................. F-4
Statement of Changes in Shareholders' Equity for the Years Ended December 31, 1996,
1997, 1998 and for the Six Months Ended June 30, 1999 (unaudited)................... F-5
Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and for
the
Six Months Ended June 30, 1999 and 1998 (unaudited)................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
GreatFood.com, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of GreatFood.com, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
May 17, 1999
F-2
<PAGE>
GREATFOOD.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- 1999
1997 1998 (UNAUDITED)
--------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 124,092 $ 678,096 $ 3,437,628
Accounts receivable, net of allowance for doubtful accounts of $0, $2,000 and
$3,500 (unaudited) in 1997, 1998 and 1999, respectively......................... 1,931 500,084 13,120
Prepaid expenses.................................................................. 140,270 403,067
--------- ----------- -----------
126,023 1,318,450 3,853,815
Property and equipment, net......................................................... 34,626 99,594 255,877
Other assets........................................................................ 10,363 100,328
--------- ----------- -----------
Total assets.................................................................... $ 160,649 $ 1,428,407 $ 4,210,020
--------- ----------- -----------
--------- ----------- -----------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable.................................................................. $ 73,768 $ 625,982 $ 720,003
Accrued payroll and related benefits.............................................. 38,934 13,858
Current portion of shareholder loans payable...................................... 1,489
Current portion of capital lease obligation....................................... 20,391 41,143
--------- ----------- -----------
75,257 685,307 775,004
--------- ----------- -----------
Noncurrent portion of shareholder loans payable..................................... 11,791
---------
Noncurrent portion of capital lease obligation...................................... 27,012 45,584
----------- -----------
Commitments and contingencies (Note 5)
Series C mandatorily redeemable convertible preferred stock, no par value; 1,384,615
(unaudited) shares authorized in 1999; 600,000 (unaudited) shares issued and
outstanding in 1999; liquidation value of $5.00 per share plus unpaid dividends... 2,993,045
-----------
Shareholders' equity
Series A convertible preferred stock, no par value; 1,142,857 shares authorized in
1998 and 1999 (unaudited); 1,142,847 shares issued and outstanding in 1998 and
1999 (unaudited); liquidation value of $1.75 per share.......................... 1,964,066 1,964,066
Series B convertible preferred stock, no par value; 1,000,000 (unaudited) shares
authorized in 1999; 705,521 (unaudited) shares issued and outstanding in 1999;
liquidation value of $3.00 per share............................................ 2,104,830
Common stock, no par value; 5,000,000, 20,000,000 and 20,000,000 (unaudited),
respectively, shares authorized; 1,545,831, 1,579,164 and 1,579,164 (unaudited)
shares issued and outstanding, respectively..................................... 197,043 314,891 421,604
Deferred compensation............................................................... (100,203) (143,244)
Accumulated deficit................................................................. (123,442) (1,462,666) (3,950,869)
--------- ----------- -----------
73,601 716,088 396,387
--------- ----------- -----------
Total liabilities, mandatorily redeemable convertible preferred stock and
shareholders' equity........................................................... $ 160,649 $ 1,428,407 $ 4,210,020
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GREATFOOD.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................ $ 17,530 $ 119,633 $ 747,860 $ 64,560 $ 409,628
Cost of goods sold...................... 13,484 91,550 605,140 52,877 345,940
--------- --------- ---------- --------- ----------
Gross profit............................ 4,046 28,083 142,720 11,683 63,688
Operating expenses
Sales and marketing................... 11,028 36,264 1,102,062 48,184 1,709,127
Product and site development.......... 706 8,801 84,000 7,258 153,283
General and administrative............ 52,815 65,707 449,623 100,838 725,193
--------- --------- ---------- --------- ----------
Total operating expenses.............. 64,549 110,772 1,635,685 156,280 2,587,603
--------- --------- ---------- --------- ----------
Loss from operations.................... (60,503) (82,689) (1,492,965) (144,597) (2,523,915)
Other income (expense)
Other income.......................... 24,500 3,200 793
Interest income....................... 63 164 33,298 506 39,426
Interest expense...................... (3,893) (2,612) (3,792) (1,000) (3,714)
--------- --------- ---------- --------- ----------
Net loss................................ $ (39,833) $ (81,937) $(1,462,666) $(145,091) $(2,488,203)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Net loss available to common
shareholders.......................... $ (39,833) $ (81,937) $(1,462,666) $(145,091) $(2,519,151)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Basic and diluted net loss per share.... $ (0.04) $ (0.06) $ (0.93) $ (0.09) $ (1.60)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Weighted average shares outstanding..... 1,007,432 1,273,915 1,579,164 1,579,164 1,579,164
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
GREATFOOD.COM, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------
SERIES A SERIES B COMMON STOCK
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995............................. -- $ -- -- $ -- 1,000,000 $ 30,090
Net loss..................................................
Capital contribution from founder......................... 18,500
Proceeds from issuance of stock, net...................... 87,500 17,500
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1996............................. -- -- -- -- 1,087,500 66,090
Net loss..................................................
Proceeds from issuance of stock, net...................... 458,331 125,000
Issuance of stock options to non-employees................ 2,320
Issuance of warrants...................................... 3,633
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1997............................. -- -- -- -- 1,545,831 197,043
Net loss..................................................
Conversion from S corporation to C corporation............ (123,442)
Proceeds from issuance of stock, net...................... 1,142,847 1,964,066 33,333 10,000
Issuance of stock options to employees.................... 196,134
Issuance of warrants...................................... 35,156
Amortization of deferred compensation.....................
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1998............................. 1,142,847 1,964,066 -- -- 1,579,164 314,891
Net loss (unaudited)......................................
Proceeds from issuance of stock, net (unaudited).......... 705,521 2,104,830
Issuance of stock options to employees (unaudited)........ 126,205
Issuance of warrants (unaudited).......................... 11,456
Amortization of deferred compensation (unaudited).........
Accretion of mandatorily redeemable convertible preferred
stock (unaudited)....................................... (948)
Dividends on mandatorily redeemable convertible preferred
stock (unaudited)....................................... (30,000)
--------- --------- --------- --------- --------- ---------
Balances at June 30, 1999 (unaudited)..................... 1,142,847 $1,964,066 705,521 $2,104,830 1,579,164 $ 421,604
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ------------ ----------
<S> <C> <C> <C>
Balances at December 31, 1995............................. $ -- $ (1,672) $ 28,418
Net loss.................................................. (39,833) (39,833)
Capital contribution from founder......................... 18,500
Proceeds from issuance of stock, net...................... 17,500
------------ ------------ ----------
Balances at December 31, 1996............................. -- (41,505) 24,585
Net loss.................................................. (81,937) (81,937)
Proceeds from issuance of stock, net...................... 125,000
Issuance of stock options to non-employees................ 2,320
Issuance of warrants...................................... 3,633
------------ ------------ ----------
Balances at December 31, 1997............................. -- (123,442) 73,601
Net loss.................................................. (1,462,666) (1,462,666)
Conversion from S corporation to C corporation............ 123,442
Proceeds from issuance of stock, net...................... 1,974,066
Issuance of stock options to employees.................... (196,134) --
Issuance of warrants...................................... 35,156
Amortization of deferred compensation..................... 95,931 95,931
------------ ------------ ----------
Balances at December 31, 1998............................. (100,203) (1,462,666) 716,088
Net loss (unaudited)...................................... (2,488,203) (2,488,203)
Proceeds from issuance of stock, net (unaudited).......... 2,104,830
Issuance of stock options to employees (unaudited)........ (126,205) --
Issuance of warrants (unaudited).......................... 11,456
Amortization of deferred compensation (unaudited)......... 83,164 83,164
Accretion of mandatorily redeemable convertible preferred
stock (unaudited)....................................... (948)
Dividends on mandatorily redeemable convertible preferred
stock (unaudited)....................................... (30,000)
------------ ------------ ----------
Balances at June 30, 1999 (unaudited)..................... $ (143,244) $(3,950,869) $ 396,387
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GREATFOOD.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- ----------- ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................... $ (39,833) $ (81,937) $(1,462,666) $ (145,091) $(2,488,203)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization................... 14,004 14,577 24,827 8,729 32,319
Amortization of deferred compensation........... 95,931 18,752 83,164
Expense related to the issuance of stock options
and warrants.................................. 5,953 7,737 1,268 11,456
Changes in:
Accounts receivable........................... (1,931) (498,153) 1,931 486,964
Prepaid expenses.............................. (140,270) (262,797)
Other assets.................................. (5,802) (91,260)
Accounts payable.............................. 10,549 58,329 552,214 (49,576) 94,021
Accrued payroll and related benefits.......... 38,934 16,313 (25,076)
--------- --------- ----------- ---------- -----------
Net cash used in operating activities......... (15,280) (5,009) (1,387,248) (147,674) (2,159,412)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment............... (25,923) (8,510) (34,022) (11,806) (133,336)
--------- --------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions from founder
and issuance of common and preferred stock, net
of costs........................................ 36,000 125,000 1,996,924 10,000 5,066,927
Proceeds from preferred stock subscriptions....... 486,000
Proceeds from issuance of shareholder loan
payable......................................... 15,000 60,000 40,000 100,000
Payments of shareholder loan payable.............. (330) (1,390) (73,280) (810) (100,000)
Payment of capital lease obligation............... (8,370) (14,647)
--------- --------- ----------- ---------- -----------
Net cash provided by financing activities..... 50,670 123,610 1,975,274 535,190 5,052,280
--------- --------- ----------- ---------- -----------
Net increase in cash and cash equivalents........... 9,467 110,091 554,004 375,710 2,759,532
Cash and cash equivalents, beginning of period...... 4,534 14,001 124,092 124,092 678,096
--------- --------- ----------- ---------- -----------
Cash and cash equivalents, end of period............ $ 14,001 $ 124,092 $ 678,096 $ 499,802 $ 3,437,628
--------- --------- ----------- ---------- -----------
--------- --------- ----------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.............................. $ 3,893 $ 2,612 $ 3,792 $ 1,000 $ 3,790
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased under capital
leases............................................ $ 55,773 $ 53,971
Conversion from S corporation to C corporation...... $ 123,442 $ 123,442
Issuance of stock warrants.......................... $ 27,419
Issuance of stock options........................... $ 15,625 $ 196,134 $ 126,205
Accretion of mandatorily redeemable convertible
preferred stock................................... $ 948
Dividends on mandatorily redeemable convertible
preferred stock................................... $ 30,000
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
GreatFood.com (the Company) is an electronic commerce company focused on the
sale of gourmet and specialty food over the Internet to the retail, corporate
gift and wholesale markets. The Company offers a broad selection of high quality
branded specialty food products to a wide range of customers for special
occasions, parties and gifts. The Company's Web site combines a unique blend of
merchandise and related content.
The Company was incorporated as StratMan Associates, Inc. on August 31, 1995
under the laws of the state of Washington. The Company's name was legally
changed to Online Specialty Retailing, Inc. on September 25, 1997, and the name
was again legally changed to GreatFood.com, Inc. on May 14, 1999.
CASH AND CASH EQUIVALENTS
The Company considers all short term highly liquid investments purchased
within three months of their original maturity date to be cash equivalents.
CONCENTRATION OF CREDIT RISK AND MAJOR SUPPLIERS
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and cash and
cash equivalents. The majority of the Company's sales are charged to customer
credit cards. The Company mitigates its credit risk by receiving
preauthorizations on all credit card charges. The Company's customers primarily
consist of small retail and wholesale customers, none of which accounted for
more than 10% of accounts receivable or net revenues as of and for the years
ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999
(unaudited). The Company maintains an allowance for doubtful accounts based upon
its historical experience and the expected collectibility of all accounts
receivable. Credit losses to date have been within the Company's estimates.
The Company maintains its cash accounts with a financial institution where
certain deposits up to $100,000 are insured by the Federal Deposit Insurance
Corporation. The Company's deposits in overnight repurchase accounts are not
insured.
The Company purchases its products from specialty food suppliers. In 1996,
1997 and 1998, four suppliers provided 66%, 56%, and 34%, respectively, of the
Company's product purchases. In 1998, a fifth supplier provided 12% of the
Company's product purchases. For the six months ended June 30, 1998 and June 30,
1999, these five suppliers provided 46% and 28% (unaudited), respectively, of
the Company's product purchases.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued payroll and related benefits,
capital lease obligations and mandatorily redeemable convertible preferred
stock. Except for capital lease obligations and mandatorily redeemable
convertible preferred stock, the carrying amounts of financial instruments
approximate fair value due to their short maturities. The fair value of capital
lease obligations at December 31, 1998 and
F-7
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
June 30, 1999 (unaudited) is not materially different from the carrying amount,
based on interest rates available to the Company for similar types of
arrangements. The fair value of the mandatorily redeemable convertible preferred
stock at June 30, 1999 is equal to the estimated initial public offering price
of the common stock into which it is convertible plus unpaid dividends
(unaudited).
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation and
amortization is computed using the straight line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter. The
useful lives of the property and equipment range from three to seven years.
Maintenance and repairs, which neither materially add to the value of the
property nor prolong its life, are charged to expense as incurred. Gains or
losses on dispositions of property and equipment are included in income.
IMPAIRMENT OF LONG LIVED ASSETS
The Company periodically evaluates the carrying value of long lived assets
to be held and used, including but not limited to, property and equipment and
other assets, when events and circumstances warrant such a review. The carrying
value of a long lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long lived asset. Fair
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Losses on long lived assets to be
disposed of are determined in a similar manner, except that fair values are
reduced for the cost to dispose. No losses from impairment have been recognized
in the financial statements.
REVENUE RECOGNITION
The Company recognizes revenue from product sales, shipping and handling,
net of any returns and discounts, when the products are shipped to customers.
The Company provides an allowance for sales returns, which to date have not been
significant, based on historical experience.
PRODUCT AND SITE DEVELOPMENT
Product and site development expenses consist principally of payroll and
related expenses for Web site development and systems personnel and systems
programming costs. To date, all product and site development costs have been
expensed as incurred.
ADVERTISING COSTS
The Company utilizes print and online advertising, direct mail, trade shows
and online promotions to expand brand and product awareness. The Company's
online advertising contracts include contracts for presence on third party Web
sites and Internet page impressions. These contracts require either monthly or
quarterly payments and range in length from one to sixteen months. Costs
incurred for online advertising contracts are recognized ratably over the term
of the arrangements. All other advertising costs are expensed as incurred.
Advertising costs for 1996, 1997 and 1998 were $11,028,
F-8
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
$26,864 and $1,044,591, respectively, and for the six months ended June 30, 1998
and June 30, 1999 were $27,779 and $1,623,787 (unaudited), respectively. At
December 31, 1998 and June 30, 1999, the Company has recorded in prepaid
expenses $138,602 and $28,558 (unaudited), respectively, of prepayments under
online advertising contracts.
INCOME TAXES
The Company provides for income taxes using the liability method. This
method requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. If it is more likely than
not that some portion of a deferred tax asset will not be realized, a valuation
allowance is recorded.
NET LOSS PER SHARE
Basic net loss per share represents net loss available to common
shareholders divided by the weighted average number of shares outstanding during
the period. Diluted net loss per share represents net loss available to common
shareholders divided by the weighted average number of shares outstanding
including the potentially dilutive impact of common stock options and warrants
and convertible preferred stock. Common stock options and warrants are converted
using the treasury stock method. Convertible preferred stock is converted using
the if converted method. Basic and diluted net loss per share are equal for the
periods presented because the impact of common stock equivalents is
anti-dilutive. Potentially dilutive securities totaling 126,000 and 2,145,491
shares for 1997 and 1998, respectively, and 551,000 and 3,999,256 (unaudited)
for the six months ended June 30, 1998 and June 30, 1999, respectively, were
excluded from diluted net loss per share due to their anti-dilutive effect.
There were no potentially dilutive securities during 1996.
The following table sets forth the computation of the numerators in the
basic and diluted net loss per share calculation for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- ----------- ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss........................................ $ (39,833) $ (81,937) $(1,462,666) $ (145,091) $(2,488,203)
Dividends on mandatorily redeemable convertible
preferred stock............................... (30,000)
Accretion of mandatorily redeemable convertible
preferred stock............................... (948)
--------- --------- ----------- ---------- -----------
Net loss available to common
shareholders.................................. $ (39,833) $ (81,937) $(1,462,666) $ (145,091) (2,519,151)
--------- --------- ----------- ---------- -----------
--------- --------- ----------- ---------- -----------
</TABLE>
F-9
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK OPTIONS
The Company's stock option plan is subject to the provisions of the
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock Based Compensation" (SFAS 123). Under the provisions of this statement,
employee stock based compensation expense is measured using either the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), or the fair value method.
The Company has elected to account for its employee stock based compensation
under the provisions of APB 25 and to disclose the pro forma impact of the fair
value method on net loss and net loss per share. The Company accounts for stock
based awards issued to non-employees in accordance with the fair value method of
SFAS 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments with Variable Terms that are Issued for Consideration other than
Employee Services under FASB Statement No. 123."
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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement will
be effective in 1999 and establishes accounting standards for costs incurred in
the acquisition or development and implementation of computer software. These
new standards will require the capitalization of certain software implementation
costs relating to software acquired or developed and implemented for the
Company's use. This statement is not expected to have a significant effect on
the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start
Up Activities." This statement will be effective in 1999 and will require costs
of start up activities and organization costs to be expensed as incurred. This
statement is not expected to have a significant effect on the Company's
financial position or results of operations.
The FASB recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management approach." The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas and major customers. The Company adopted SFAS 131
on January 1, 1998. The Company has determined that it does not have any
separately reportable business or geographic segments.
F-10
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of June 30, 1999 and for the six months ended
June 30, 1999 and June 30, 1998 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the Company's financial
position as of June 30, 1999 and the results of its operations and cash flows
for the six months ended June 30, 1999 and 1998.
2. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment........................................................... $ 40,108 $ 88,149 $ 171,271
Furniture and office equipment............................................... 1,461 42,445 124,896
Software..................................................................... 22,337 23,107 33,235
Leasehold improvements....................................................... 11,606
---------- ---------- -----------
63,906 153,701 341,008
LESS: Accumulated depreciation and amortization.............................. (29,280) (54,107) (85,131)
---------- ---------- -----------
$ 34,626 $ 99,594 $ 255,877
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Computer and office equipment held under capital leases are included in
property and equipment. The cost of the leased equipment is $55,773 and $109,747
(unaudited) at December 31, 1998 and June 30, 1999, respectively. Accumulated
amortization for these items was $6,247 and $20,309 (unaudited) at December 31,
1998 and June 30, 1999, respectively.
3. SHAREHOLDER LOANS PAYABLE
During 1996, a shareholder entered into a $15,000 loan on behalf of the
Company for the purchase of property and equipment. The loan was payable in
monthly installments over four years, with interest at 13.9% per annum. During
1998, the Company repaid its entire obligation under this loan to the
shareholder.
During 1998, two shareholders each loaned the Company $30,000 for working
capital needs prior to obtaining the Series A preferred stock financing. These
loans bore interest at 10% per annum. Upon receipt of the proceeds from the
Series A financing, the two shareholder notes were repaid.
4. SHAREHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
In July 1998, the Company issued 1,142,847 shares of Series A convertible
preferred stock for $1.75 per share. These shares have voting rights,
registration rights and liquidation preferences, and are convertible, on a one
for one basis, into common stock at any time at the option of the holder. These
F-11
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
4. SHAREHOLDERS' EQUITY (CONTINUED)
shares automatically convert to common stock upon an initial public offering.
The holders of the Series A preferred shares, voting separately as a class, are
entitled to elect one member of the Company's Board of Directors.
STOCK WARRANTS
During March 1997, the Company issued warrants to purchase 36,000 shares of
common stock with an exercise price of $0.20 per share. These warrants were
issued to the company from which the Company subleases space in consideration
for the shared use of certain technology facilities. The warrants vest ratably
over 36 months; vesting ceases upon termination of shared use of the technology
facilities. Vested warrants are exercisable through the earlier of (i) March 15,
2002, (ii) the effective date of an initial public offering of the Company's
common stock with cash proceeds of at least $10 million (an IPO), (iii) three
months following the termination of shared use of the technology facilities or
(vi) the effective date of a merger of the Company or the sale of substantially
all of the Company's assets (a Change of Control). The value of these warrants
is estimated using the Black Scholes pricing model and is being recorded as
general and administrative expense over the vesting period using the accelerated
amortization method prescribed by FASB Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" (FIN
28). The Company recognized expense of $3,633 and $7,737 in 1997 and 1998,
respectively. Vesting terminated May 14, 1999 upon termination of shared use of
technology facilities.
In conjunction with the Series A preferred stock offering in July 1998, the
Company issued 14,286 warrants to purchase common stock with an exercise price
of $1.75 per share. The warrants expire after the earlier of ten years, an IPO
or a Change of Control. These warrants were recorded at their Black Scholes fair
value of $22,858, which was recorded as a stock issue cost.
In August 1998, the Company issued warrants to purchase 2,858 shares of
common stock with an exercise price of $1.75 per share. The warrants expire
after the earlier of ten years, an IPO or a Change of Control. These warrants
were issued in conjunction with obtaining a capital lease line. The warrants
were recorded at their Black Scholes fair value of $4,561, which was recorded as
a debt issue cost and is being amortized over the term of the capital lease
line.
In October 1998, the Company issued warrants to purchase 300,000 shares of
common stock with an exercise price of $3.00 per share. These warrants were
issued in conjunction with entering into a marketing agreement. The Company may
cancel the marketing agreement and these warrants if certain sales targets are
not achieved by December 31, 1999. The warrants become exercisable on February
1, 2000, if not previously canceled, and remain exercisable through the earlier
of (i) December 31, 2001, (ii) 30 days following notice of completion of a stock
sale of at least $500,000 on or after December 31, 2000 or (iii) the date, if
any, the marketing agreement is terminated. The Company will record the value of
the warrants when it determines that it is probable that the sales targets will
be achieved. No value for the warrants was recorded during 1998.
STOCK OPTION PLAN
In September 1997, the Company adopted the 1997 Stock Incentive Plan (the
Plan) which provides for the granting of incentive stock options to key
employees and non qualified stock options to
F-12
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
4. SHAREHOLDERS' EQUITY (CONTINUED)
employees, consultants, and nonemployee directors of the Company. The Plan also
contains provisions for stock bonuses, cash bonus rights, performance units and
other stock based incentives. A maximum of 1,000,000 shares of common stock may
be issued under the Plan. In May 1999, the maximum number of common shares
reserved for issuance under the Plan was increased to 1,600,000 shares.
The option price, number of shares, grant date and vesting schedule are
determined at the discretion of the Company's board of directors. While some
options vest immediately upon grant, options generally vest over one to five
years and are exercisable for a period not to exceed ten years from the grant
date.
In 1997, compensation expense of $2,320 was recognized under the Plan for
certain options granted to third parties. The fair value of each option grant
was estimated on the date of grant using the Black Scholes option pricing model.
The Company did not grant any options to third parties in 1996 and 1998.
In 1998, compensation expense of $95,931 was recognized under the Plan for
certain options that were granted to employees with exercise prices below the
fair value of the common stock. The compensation expense represents the
differential between the exercise price and the fair value, as determined by the
board of directors. Compensation related to these options is recognized as
expense using the accelerated method of FIN 28. There was no compensation
expense relating to option grants with exercise prices below fair market value
in 1996 or 1997.
Had the Company determined compensation expense based on the fair value of
the option at the grant date for its stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
<S> <C> <C>
1997 1998
---------- -------------
Net loss
As reported....................................................................... $ (81,937) $ (1,462,666)
Pro forma......................................................................... $ (82,903) $ (1,502,441)
Basic and diluted net loss per share
As reported....................................................................... $ (0.06) $ (0.93)
Pro forma......................................................................... $ (0.07) $ (0.95)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing model. The following weighted average
assumptions were used for employee stock option grants in 1997 and 1998,
respectively: risk free interest rate at grant date of 5.99% and 5.48%, expected
lives of 4.1 and 4.6 years and 0% volatility and no dividends in both years.
The full impact of calculating compensation expense for stock options based
on fair value at the grant date is not reflected in the pro forma net loss
amounts because compensation expense is reflected over the options' vesting
period. In addition, because the determination of the fair value of all options
granted after such time as the Company becomes a public entity will include an
expected volatility factor in addition to the factors described in the
preceeding paragraph, the above results may not be representative of future
periods.
F-13
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
4. SHAREHOLDERS' EQUITY (CONTINUED)
The following summarizes the activity under the Plan:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED- WEIGHTED-
SHARES UNDER AVERAGE AVERAGE
OPTION EXERCISE GRANT DATE
AGREEMENTS PRICE FAIR VALUE
------------ ----------- -----------
<S> <C> <C> <C>
Options granted during 1997.................................................. 90,000 $ 0.30 $ 0.08
------------
Balance at December 31, 1997................................................. 90,000 $ 0.30
Options granted.............................................................. 559,500 $ 1.17 $ 0.29
------------
Balance at December 31, 1998................................................. 649,500 $ 1.05
------------
------------
Options exercisable at:
December 31, 1997.......................................................... 10,000 $ 0.30
December 31, 1998.......................................................... 180,139 $ 0.62
</TABLE>
At December 31, 1998, 350,500 shares remained reserved and available for
grant under the Plan.
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.30 315,000 7.7 $ 0.30 140,139 $ 0.30
$ 1.75 334,500 9.1 $ 1.75 40,000 $ 1.75
----------- -----------
649,500 8.4 $ 1.05 180,139 $ 0.62
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
5. COMMITMENTS
CAPITAL LEASES
The Company leases various equipment under capital lease agreements which
expire at various dates between February 2001 and June 2001. Future minimum
lease payments under capital leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999.......................................................... $ 24,415
2000.......................................................... 24,788
2001.......................................................... 5,810
---------
Total minimum lease payments...................................... 55,013
LESS: Portion representing interest............................... (7,610)
---------
Present value of capital lease obligation......................... 47,403
LESS: Current portion............................................. (20,391)
---------
Noncurrent portion of capital lease obligation.................... $ 27,012
---------
---------
</TABLE>
At December 31, 1998, the Company had a $50,000 capital lease line, $2,597
of which remained unused. In March 1999, the total amount available under this
capital lease line was increased to $100,000.
OPERATING LEASES
As of December 31, 1998 the Company sublet its office facilities on a month
to month basis from a company whose chief executive officer is a shareholder and
director of the Company. This sublease was terminated in April 1999. In March
1999, the Company entered into an operating lease of office space from a
shareholder. The three year lease term expires February 2002 with a termination
option available in September 2000 and is subject to one three year renewal
option at the then fair market rent. Monthly rental payments under this lease
are $4,313.
Operating lease expense was $0, $1,413 and $5,631 in 1996, 1997 and 1998,
respectively, and $997 and $10,675 (unaudited) for the six months ended June 30,
1998 and June 30, 1999, respectively.
ADVERTISING AND AFFILIATE AGREEMENTS
The Company has entered into several long term agreements to display its
logo and other messages on third party Web sites. Under these agreements, the
Company pays a fixed monthly or quarterly fee. One agreement also requires the
Company to pay commissions on sales generated through the agreement. During
1998, the Company paid $745,360 under these and other short term agreements,
including $1,215 in commissions. At December 31, 1998, future minimum payments
under these agreements are approximately $1,418,000 all payable in 1999. During
1999, the Company entered into additional advertising agreements.
In May 1999, the Company entered into an affiliate agreement with a
community oriented Web site. The affiliate program encourages users to create
links to the Company's Web site. Under this
F-15
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
5. COMMITMENTS (CONTINUED)
agreement, the Company pays a fixed monthly fee of $25,000 through May 2000, as
well as referral fees.
OTHER COMMITMENTS
In March 1999, the Company entered into an arrangement to purchase Web site
hosting services and license order processing software from a third party for a
monthly fee. For monthly sales up to $2,500,000, the monthly base fee is
$12,500, with an incremental transaction fee of 2% per sales dollar. For monthly
sales in excess of $2,500,000, the monthly base fee is $62,500, with an
incremental transaction fee of 1% per sales dollar in excess of $2,500,000. This
agreement has an initial term of two years and will be automatically renewed if
not previously cancelled.
6. INCOME TAXES
Effective January 1, 1998, the Company became a C corporation for income tax
reporting purposes. Previously, it was organized as an S Corporation, and as
such, the tax effects were passed directly to the shareholders. A current
provision for income taxes has not been recorded for the year ended December 31,
1998 due to taxable losses incurred during the year. A valuation allowance has
been recorded for deferred tax assets because realization is primarily dependent
on generating sufficient taxable income prior to expiration of net operating
loss carry forwards.
At December 31, 1998, the Company has net operating loss carry forwards
which have been generated since becoming a C corporation of approximately
$1,347,000 which will expire in the year 2018, if not previously utilized.
Should certain changes in the Company's ownership occur, there could be a
limitation on the utilization of these net operating losses.
Temporary differences that give rise to the Company's deferred tax assets
and liabilities comprise the following at December 31, 1998:
<TABLE>
<S> <C>
Deferred income tax assets:
Net operating loss carry forwards.............................. $ 458,000
Stock options and warrants..................................... 35,000
Allowance for doubtful accounts................................ 1,000
Accrued liabilities............................................ 3,000
---------
497,000
---------
Deferred income tax liabilities:
Depreciation and amortization.................................. (1,000)
---------
496,000
Valuation allowance.............................................. (496,000)
---------
$ --
---------
---------
</TABLE>
F-16
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
6. INCOME TAXES (CONTINUED)
For 1998, the first year in which the Company was a C corporation, a
reconciliation of taxes on loss at the federal statutory rate is as follows:
<TABLE>
<S> <C>
Tax at statutory rate............................................ $(497,306)
Nondeductible items.............................................. 1,306
Change in valuation allowance.................................... 496,000
---------
$ --
---------
---------
</TABLE>
7. SUBSEQUENT EVENTS
On March 18, 1999, the Company sold 705,521 shares of Series B convertible
preferred stock for $3.00 per share, or approximately $2.1 million. These shares
are convertible into common stock on a one-for-one basis and have rights and
preferences similar to the Series A preferred shares, including automatic
conversion into common stock upon an initial public offering. On May 17, 1999,
the Company sold 600,000 shares of Series C mandatorily redeemable convertible
preferred stock for $5.00 per share, or $3,000,000. The Company also has the
option to sell an additional 300,000 shares of Series C preferred stock at $5.00
per share prior to May 17, 2000. In connection with the sale of the Series C
shares, the Company issued warrants to purchase up to a total of 323,077 shares
of Series C preferred stock at $.01 per share (up to 484,615 shares if the
Company exercises its option to sell the additional 300,000 shares). These
warrants will be exercisable in the event that the Company does not complete a
public offering of at least $10,000,000 of common stock at a price of at least
$10.00 per share by January 31, 2000. The Series C preferred shares
automatically convert into common stock on a one for one basis upon a qualified
initial public offering.
In April 1999, the Company issued warrants to purchase 1,667 shares of
common stock with an exercise price of $3.00 per share in conjunction with
increasing its capital lease line. The terms of these warrants are similar to
those issued in August 1998. Between January 1, 1999 and May 17, 1999, the
Company issued 214,000 common stock options to employees at a weighted average
exercise price of $4.05 per share.
8. CONVERTIBLE PROMISSORY NOTES (UNAUDITED)
In September and October 1999, the Company issued $4,500,000 in convertible
promissory notes. These notes bear interest at a rate of 8% per annum and are
payable on the third anniversary of the date of issuance, subject to earlier
prepayment upon a change in control. If the Company sells common stock or other
securities convertible into common stock, the holders of these notes may, at any
time prior to December 31, 1999, convert these notes into the securities sold in
that offering at a conversion rate equal to the offering price.
F-17
<PAGE>
APPENDIX A
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
DATED AS OF OCTOBER , 1999
BY AND AMONG
GREATFOOD.COM, INC.
AND
THE PURCHASERS NAMED HEREIN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 1. Authorization and Closings............................................ A-1
1.1 Authorization of the Preferred Stock........................ A-1
1.2 Purchases and Sales of the Preferred Stock.................. A-1
1.3 The Closings................................................ A-1
Section 2. Conditions of Each Party's Obligations................................ A-2
2.1 Conditions of Each Purchaser's Obligations.................. A-2
2.2 Conditions of the Company's Obligations..................... A-3
Section 3. Covenants............................................................. A-3
3.1 Financial Statements and Other Information.................. A-3
3.2 Restrictions................................................ A-4
3.3 Affirmative Covenants....................................... A-4
3.4 Compliance with Agreements.................................. A-5
3.5 Reservation of Common Stock................................. A-5
3.6 FIRPTA...................................................... A-5
3.7 Future Opportunities........................................ A-6
Section 4. Restrictions on Transfer of Preferred Stock........................... A-6
4.1 General..................................................... A-6
4.2 Market Stand-off Agreement.................................. A-6
Section 5. Representations and Warranties........................................ A-6
5.1 Organization and Corporate Power............................ A-6
5.2 Capital Stock and Related Matters........................... A-7
5.3 Subsidiaries; Investments................................... A-7
5.4 Authorization; No Breach.................................... A-7
5.5 Absence of Undisclosed Liabilities.......................... A-8
5.6 No Material Adverse Change.................................. A-8
5.7 Absence of Certain Developments............................. A-8
5.8 Assets...................................................... A-9
5.9 Tax Matters................................................. A-9
5.10 Contracts and Commitments................................... A-10
5.11 Proprietary Rights.......................................... A-11
5.12 Litigation.................................................. A-11
5.13 Brokerage................................................... A-11
5.14 Governmental Consent........................................ A-12
5.15 Insurance................................................... A-12
5.16 Employees................................................... A-12
5.17 ERISA....................................................... A-12
5.18 Compliance with Laws........................................ A-12
5.19 Real Estate................................................. A-12
5.20 Affiliated Transactions..................................... A-12
5.21 Real Property Holding Corporation Status.................... A-13
5.22 Disclosure.................................................. A-13
Section 6. Definitions........................................................... A-13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 7. Miscellaneous......................................................... A-14
7.1 Expenses.................................................... A-14
7.2 Remedies.................................................... A-15
7.3 Purchasers' Representations................................. A-15
7.4 Consent to Amendments....................................... A-15
7.5 Survival of Representations and Warranties; Knowledge....... A-15
7.6 Successors and Assigns...................................... A-15
7.7 Severability................................................ A-15
7.8 Counterparts................................................ A-16
7.9 Descriptive Headings; Interpretation........................ A-16
7.10 Governing Law............................................... A-16
7.11 Notices..................................................... A-16
</TABLE>
ii
<PAGE>
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES D STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
October , 1999, between and among GreatFood.com, Inc., a Washington
corporation (the "Company"), and the Persons listed on the Schedule of
Purchasers attached hereto (collectively referred to herein as the "Purchasers"
and individually as a "Purchaser"). Except as otherwise indicated herein,
capitalized terms used herein are defined in Section 6 hereof.
The parties hereto agree as follows:
Section 1. AUTHORIZATION AND CLOSINGS
1.1 AUTHORIZATION OF THE PREFERRED STOCK.
The Company shall authorize the issuance and sale to the Purchasers of up to
2,500,000 shares of its Series D Preferred Stock, no par value per share (the
"Preferred Stock"), which is convertible into shares of the Company's Common
Stock, no par value per share (the "Common Stock"), pursuant to the terms of the
Company's Amended and Restated Articles of Incorporation.
1.2 PURCHASES AND SALES OF THE PREFERRED STOCK.
At each Closing, the Company shall sell to each Purchaser in that Closing
and, subject to the terms and conditions set forth herein, each Purchaser in
that Closing shall purchase from the Company, the number of shares of Preferred
Stock set forth opposite such Purchaser's name on the Schedule of Purchasers
attached hereto, at a purchase price of $4.00 per share.
1.3 THE CLOSINGS.
The purchases and sales of the Preferred Stock at each Closing shall take
place at the offices of Heller Ehrman White & McAuliffe, 6100 Columbia Center,
701 Fifth Avenue, Seattle, WA 98104, or at such other place as the Company and
the Purchasers in such Closing may mutually agree. The initial Closing of the
purchase and sale of the Preferred Stock hereunder (the "Initial Closing") shall
be for no less than 1,125,000 shares of Preferred Stock and shall be held on
such date as the Company and the Purchasers in such Closing may mutually agree.
Following the Initial Closing, the Company may sell up to the balance of the
shares of Preferred Stock authorized to be sold under this Agreement not sold at
the Initial Closing in one or more closings (each, a "Subsequent Closing"). Any
sale of shares at a Subsequent Closing shall be on the same terms and conditions
set forth in this Agreement. By execution of this Agreement, each Purchaser in a
Subsequent Closing shall be deemed a "Purchaser" for all purposes of this
Agreement. In connection with a Subsequent Closing, the Company may add the name
of additional Purchasers to the Schedule of Purchasers attached hereto. The
purchases and sales of the Preferred Stock at each Subsequent Closing shall take
place at the same location as the Initial Closing or such other place as the
Company and the Purchasers at such Subsequent Closing may mutually agree. At
each Closing, the Company shall deliver to each Purchaser certificates
evidencing the Preferred Stock to be purchased by such Purchaser at that
Closing, as set forth in the Schedule of Purchasers, each registered in such
Purchaser's name, upon payment of the purchase price therefor by a cashier's or
certified check, or by wire transfer of immediately available funds to the
Company, in the amounts set forth opposite such Purchaser's name on the Schedule
of Purchasers.
A-1
<PAGE>
Section 2. CONDITIONS OF EACH PARTY'S OBLIGATIONS.
2.1 CONDITIONS OF EACH PURCHASER'S OBLIGATIONS.
The obligations of each Purchaser to purchase and pay for the Preferred
Stock are subject to the satisfaction, as of the date of Closing for such sale,
of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES; COVENANTS.
The representations and warranties contained in Section 5 hereof shall
be true and correct in all material respects at and as of such Closing as
though then made, except to the extent of changes caused by the transactions
expressly contemplated herein, and the Company shall have performed in all
material respects all of the covenants required to be performed by it
hereunder prior to such Closing.
(b) ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF
INCORPORATION.
The Articles of Amendment to the Company's Amended and Restated Articles
of Incorporation to provide for the Preferred Stock (the "Articles of
Amendment") shall have been filed with the Secretary of State of Washington
and such Articles of Amendment shall be in full force and effect under the
laws of Washington and shall not have been further amended or modified as of
the date of such Closing.
(c) REGISTRATION STATEMENT EFFECTIVENESS.
The Registration Statement on Form S-1 filed by the Company with the
Securities and Exchange Commission ("SEC") with respect to the shares of
Preferred Stock to be sold pursuant to this Agreement (the "Registration
Statement") shall have been declared effective by the SEC and no stop order
with respect to such registration shall have been issued.
(d) BLUE SKY CLEARANCE.
The Company shall have made all filings under applicable state
securities laws necessary to consummate the issuance of the Preferred Stock
pursuant to this Agreement in compliance with such laws.
(e) OPINION OF THE COMPANY'S COUNSEL.
Each Purchaser shall have received from Heller Ehrman White & McAuliffe,
counsel for the Company, an opinion substantially in the form attached as
Exhibit B hereto, which shall be addressed to each Purchaser, dated the date
of such Closing.
(f) CLOSING DOCUMENTS.
The Company shall have delivered at Closing all of the following
documents:
(A) an Officer's Certificate, dated the date of such Closing, stating
that the conditions specified in Sections 2.1(a) and 2.1(b) have been
fully satisfied; and
(B) certified copies of the Articles of Amendment as in effect at
such Closing.
(g) DUE DILIGENCE REVIEW.
The Purchasers shall have completed their legal, business and financial
due diligence review of the Company and shall be satisfied with the results
thereof, such satisfaction to be determined in their complete discretion.
This condition shall be deemed satisfied unless invoked by written notice
delivered to the Company prior to such Closing.
A-2
<PAGE>
2.2 CONDITIONS OF THE COMPANY'S OBLIGATIONS.
The obligations of the Company to each Purchaser under this Agreement at the
relevant Closing are subject to the satisfaction as of such Closing of each of
the following conditions by that Purchaser:
(a) REPRESENTATIONS AND WARRANTIES.
The representations and warranties of each Purchaser contained in
Section 7.3 shall be true on and as of such Closing with the same effect as
though such representations and warranties had been made on and as of such
Closing.
(b) QUALIFICATIONS.
All authorizations, approvals or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the shares of
the Preferred Stock at the Closing shall be duly obtained and effective.
(c) TENDER OF PAYMENT.
At each such Closing, each Purchaser shall have tendered payment for all
of the shares of Preferred Stock being purchased by such Purchaser in such
Closing.
(d) REGISTRATION STATEMENT EFFECTIVENESS.
The Registration Statement shall have been declared effective by the SEC
and no stop order with respect to such registration shall have been issued.
Section 3. COVENANTS.
3.1 FINANCIAL STATEMENTS AND OTHER INFORMATION.
Prior to a Qualified Public Offering, the Company shall deliver to each
Purchaser so long as such Purchaser holds at least 25% of the total number of
shares of Preferred Stock or Underlying Common Stock purchased by all Purchasers
under this Agreement:
(a) as soon as available but in any event within 45 days after the end
of each fiscal quarter, internally generated unaudited statements of income
of the Company for such quarter and for the period from the beginning of the
fiscal year to the end of such quarter, and balance sheets of the Company as
of the end of such quarter, setting forth in each case comparisons to the
corresponding period in the preceding fiscal year;
(b) within 105 days after the end of each fiscal year, statements of
income and cash flows of the Company for such fiscal year, and a balance
sheet of the Company as of the end of such fiscal year, setting forth in
each case comparisons to the preceding fiscal year, all prepared in
accordance with GAAP, consistently applied, and accompanied by an opinion of
an independent accounting firm of recognized national standing;
(c) promptly upon receipt thereof, any additional reports, management
letters or other detailed information concerning significant aspects of the
Company's operations or financial affairs given to the Company by its
independent accountants (and not otherwise contained in other materials
provided hereunder);
(d) prior to the beginning of each fiscal year, an annual budget
prepared on a monthly basis for the Company for such fiscal year (displaying
anticipated statements of income and cash flows and balance sheets), and
promptly upon preparation thereof any other significant budgets prepared by
the Company and any revisions of such annual or other budgets;
(e) promptly (but in any event within five business days) after the
discovery or receipt of notice of any material default under any material
agreement to which the Company is a party or
A-3
<PAGE>
any other material adverse event or circumstance affecting the Company
(including the filing of any material litigation against the Company or the
existence of any dispute with any Person which involves a reasonable
likelihood of such litigation being commenced), an Officer's Certificate
specifying in reasonable detail the nature and period of existence thereof;
and
(f) within ten days after transmission thereof, copies of all financial
statements, proxy statements, reports and any other general written
communications which the Company sends to its shareholders and copies of all
registration statements and all regular, special or periodic reports which
it files with the SEC or with any securities exchange on which any of its
securities are then listed, and copies of all press releases made available
generally by the Company to the public concerning material developments in
the Company's business.
3.2 RESTRICTIONS.
So long as at least 25% of the shares of Preferred Stock remain outstanding,
without the consent of the majority of the holders of the then Underlying Common
Stock, the Company shall not:
(a) directly or indirectly declare or pay any dividends or make any
distributions upon any of its equity securities junior to the Preferred
Stock except for the repurchase of shares of Common Stock from employees,
officers, directors, consultants or other persons performing services for
the Company pursuant to agreements under which the Company has the option to
repurchase such shares upon the occurrence of certain events, such as the
termination of employment;
(b) directly or indirectly redeem, purchase or otherwise acquire any of
the Company's equity securities (including, without limitation, warrants,
options and other rights to acquire equity securities) other than the Series
C Preferred Stock or the Preferred Stock pursuant to the terms of the
Company's articles of incorporation; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock from
employees, officers, directors, consultants or other persons performing
services for the Company pursuant to agreements under which the Company has
the option to repurchase such shares upon the occurrence of certain events,
such as the termination of employment;
(c) except as expressly contemplated by this Agreement, authorize, issue
or enter into any agreement providing for the issuance (contingent or
otherwise) of any equity securities of the Company that are senior to or
PARI PASSU with the Preferred Stock;
(d) merge or consolidate with any Person;
(e) sell, lease or otherwise dispose of all or substantially all of the
assets of the Company in any transaction or series of related transactions;
or
(f) enter into the ownership, active management or operation of any
business other than as presently conducted.
3.3 AFFIRMATIVE COVENANTS.
Prior to the consummation of a Qualified Public Offering, the Company shall:
(a) at all times cause to be done all things necessary to maintain,
preserve and renew its corporate existence and all material licenses,
authorizations and permits necessary to the conduct of its business;
(b) maintain and keep its properties in good repair, working order and
condition, and from time to time make all necessary repairs, renewals and
replacements, so that its business may be properly conducted at all times;
(c) pay and discharge when due all taxes, assessments and governmental
charges imposed upon its properties or upon the income or profits therefrom
(in each case before the same
A-4
<PAGE>
becomes delinquent and before penalties accrue thereon) and all claims for
labor, materials or supplies to the extent to which the failure to pay or
discharge such obligations would reasonably be expected to have a material
adverse effect upon the financial condition, operating results, assets or
operations of the Company, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and adequate reserves
(as determined in accordance with GAAP) have been established on its books
with respect thereto;
(d) comply with all other material obligations which it incurs pursuant
to any contract or agreement, whether oral or written, express or implied,
as such obligations become due to the extent to which the failure to so
comply would reasonably be expected to have a material adverse effect upon
the financial condition, operating results, assets or operations of the
Company taken as a whole, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and adequate reserves
(as determined in accordance with GAAP) have been established on its books
with respect thereto;
(e) comply with all applicable laws, rules and regulations of all
governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets or operations taken as a whole of the Company;
(f) maintain a key-man life insurance policy on the life of Benjamin
Nourse in the face amount of Three Million Dollars ($3,000,000), naming the
Company as beneficiary; and
(g) maintain proper books of record and account in accordance with GAAP.
3.4 COMPLIANCE WITH AGREEMENTS.
The Company shall perform and observe all of its obligations to each holder
of the Preferred Stock and the Underlying Common Stock set forth in the
Company's articles of incorporation and bylaws.
3.5 RESERVATION OF COMMON STOCK.
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of the Preferred Stock, such number of shares of
Common Stock issuable upon the conversion of all outstanding Preferred Stock.
All shares of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges (other than liens or charges created by or imposed upon the holder of
the shares of Common Stock). The Company shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately transmitted by the Company upon issuance).
3.6 FIRPTA.
The Company acknowledges that certain Purchasers or holders of Underlying
Common Stock may be foreign entities or have foreign persons and entities as
partners and that the Company may be required to file or cause to be filed in
the future with the IRS certain statements with its United States income tax
returns required under Section 1.897-2(h) of the Treasury Regulations. The
Company shall use reasonable efforts consistent with sound business practice to
avoid becoming a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the IRC. Upon the request of any holder of
Underlying Common Stock, the Company shall provide such holder with a statement
that the Company is or is not a "United States real property holding
corporation" as of the date specified by the holder (or as of the date of the
request if the holder does not specify a date) and shall send a copy of such
statement to the IRS in a form and manner which identifies the holder and which
otherwise satisfies the requirements of Section 1.89-2(h)(2) of the Treasury
Regulations. In the event
A-5
<PAGE>
the Company in the future becomes a "United States real property holding
corporation," the Company shall promptly notify each holder in writing of such
fact. Thereafter, upon written request from any holder of Underlying Common
Stock, the Company shall provide information, documentation and assistance to
such holder reasonably related to the Company's status as a "United States real
property holding corporation," including but not limited to (i) an affidavit
stating (if true) that the stock held by such holder is of a class that is
regularly traded (as defined by Sections 1.897-1(n) and 1.897-9T of the Treasury
Regulations) on an established securities market (as defined by Section
1.897-1(m) of the Treasury Regulations), and (ii) information or assistance
which would enable such holder to obtain a withholding certificate permitting a
transferee of such holder's stock to avoid or reduce any withholding obligation
such transferee would otherwise have under federal tax law.
3.7 FUTURE OPPORTUNITIES.
The Company shall pursue any and all future opportunities involving
products, services and markets of the Company only through the Company or its
Subsidiaries, if any, and shall use its best efforts to ensure that the
Company's officers and key employees act consistent with this Section 3.7.
Section 4. RESTRICTIONS ON TRANSFER OF PREFERRED STOCK.
4.1 GENERAL.
The parties agree that the shares of Preferred Stock shall be transferable
only (i) in compliance with applicable federal and state securities laws and
(ii) subject to the condition set forth in Section 4.2.
4.2 MARKET STAND-OFF AGREEMENT.
The Purchasers hereby agree that they shall not, to the extent requested by
the Company or the underwriters of Common Stock (or other securities) of the
Company in an underwritten public offering, sell or otherwise dispose of any
shares of Preferred Stock or Underlying Common Stock for up to 180 days
following the effective date of a registration statement of the Company filed
under the Securities Act with respect to an offering of its securities to the
public. In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Preferred Stock or the Underlying
Common Stock until the end of such 180 day period. The Purchasers shall not
transfer any shares of Preferred Stock or Underlying Common Stock unless the
transferees agree in writing to be bound by the provisions of this Section 4.2.
Certificates representing shares of Preferred Stock and Underlying Common Stock
may contain a legend indicating that the transferee of such shares is subject to
this agreement.
Section 5. REPRESENTATIONS AND WARRANTIES.
As a material inducement to the Purchasers to enter into this Agreement and
purchase the Preferred Stock, the Company hereby represents and warrants that:
5.1 ORGANIZATION AND CORPORATE POWER.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of Washington, and is qualified to do business in every
jurisdiction in which its ownership of property or conduct of business requires
it to qualify and where the failure to so qualify would have a material adverse
effect on the business of the Company. The Company has all requisite corporate
power and authority and all material licenses, permits and authorizations
necessary to own and operate its properties, to carry on its business as now
conducted and presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement. The copies of the Company's
articles of incorporation and bylaws which have been furnished or made available
to the Purchasers reflect all amendments made thereto at any time prior to the
date of this Agreement and are correct and complete other than the filing of the
Articles of Amendment.
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5.2 CAPITAL STOCK AND RELATED MATTERS.
(a) As of the Initial Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (a) 10,000,000 shares of preferred
stock, 1,142,857 shares of which have been designated as Series A Preferred
Stock, 1,000,000 shares of which have been designated as Series B Preferred
Stock, 1,384,615 shares of which have been designated as Series C Preferred
Stock and 2,500,000 of which have been designated as Series D Preferred Stock,
and (b) 20,000,000 shares of Common Stock. As of the Initial Closing, the
Company shall not have outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock, nor shall it have outstanding
any rights or options to subscribe for or to purchase its capital stock or any
stock or securities convertible into or exchangeable for its capital stock or
any stock appreciation rights or phantom stock plans except (i) as set forth in
the Registration Statement and (ii) for options granted under the Company's 1997
Stock Incentive Plan in the ordinary course of business since the date of the
information with respect to issued stock options contained in the Registration
Statement. As of the Initial Closing, the Company shall not be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock, options or other rights to acquire its
capital stock, except as set forth in the Registration Statement or pursuant to
the Company's articles of incorporation. As of the Initial Closing, all of the
outstanding shares of the Company's capital stock shall be validly issued, fully
paid and nonassessable.
(b) There are no statutory or contractual shareholders preemptive rights or
rights of refusal with respect to the issuance of the Preferred Stock hereunder
or the issuance of the Common Stock upon conversion of the Preferred Stock other
than rights provided to the holders of the Series C Preferred Stock which are
set forth in the Company's articles of incorporation. The Company has complied
with all applicable federal and state securities laws in connection with the
offer, sale and issuance of its capital stock. Except as contemplated by this
Agreement, there are no agreements between the Company's shareholders with
respect to the voting or transfer of the Company's capital stock or with respect
to any other aspect of the Company's affairs other than (i) the rights of the
holders of the Company's Series A Preferred Stock and the holders of the
Company's Series C Preferred Stock, each as set forth in the Company's articles
of incorporation and the purchase agreements with respect to such shares and
(ii) the Shareholders Agreement dated September 1, 1997 among certain
shareholders and the Company.
5.3 SUBSIDIARIES; INVESTMENTS.
The Company does not own or hold any rights to acquire any shares of stock
or any other security or interest in any other Person. The Company has no
Subsidiaries other than GreatFood.com Canada, Limited, a wholly-owned subsidiary
organized under the federal laws of Canada.
5.4 AUTHORIZATION; NO BREACH.
The execution, delivery and performance of this Agreement and the filing of
the Articles of Amendment have been duly authorized by the Company. This
Agreement constitutes a valid and binding obligation of the Company, enforceable
in accordance with its terms except as the same may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting the enforcement of creditors' rights generally, now or hereafter in
effect and subject to the application of equitable principles and the
availability of equitable remedies. The execution and delivery by the Company of
this Agreement, the filing by the Company of the Articles of Amendment, and the
offering, sale and issuance of the Preferred Stock hereunder, and the issuance
of the Common Stock upon conversion of the Preferred Stock, and the fulfillment
of and compliance with the respective terms hereof and thereof by the Company,
do not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) result in
the creation of any lien, security interest, charge or encumbrance upon the
Company's capital stock or assets pursuant to, (iv) give any third party the
right to modify, terminate or accelerate any obligation
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under, (v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice to any court or administrative
or governmental body pursuant to the charter or bylaws of the Company, or any
law, statute, rule or regulation to which the Company is subject, or any
material agreement, material instrument, order, judgment or decree to which the
Company is subject, except where the failure to comply with clauses (i), (ii),
(iii), (iv), (v) or (vi) would not reasonably be expected to have a material
adverse effect upon the financial condition, operating results, assets or
operations of the Company, taken as a whole.
5.5 ABSENCE OF UNDISCLOSED LIABILITIES.
The Company does not have any material obligation or material liability
(whether accrued, absolute, contingent, unliquidated or otherwise) arising out
of transactions entered into at or prior to the Initial Closing, or any action
or inaction at or prior to the Initial Closing, or any state of facts existing
at or prior to the Initial Closing other than liabilities and obligations
disclosed in the Registration Statement.
5.6 NO MATERIAL ADVERSE CHANGE.
Since the date of filing the most recently filed amendment to the
Registration Statement, there has been no material adverse change in the
financial condition, operating results, assets or operations of the Company
taken as a whole which has not been disclosed in the Registration Statement.
5.7 ABSENCE OF CERTAIN DEVELOPMENTS.
(a) Except as expressly contemplated by this Agreement, or as disclosed in
the Registration Statement, since June 30, 1999, the Company has not:
(A) issued any notes, bonds or other debt securities or any equity
securities or any securities convertible, exchangeable or exercisable into
any equity securities other than (i) the Bridge Notes and (ii) options
granted under the Company's 1997 Stock Incentive Plan in the ordinary cause
of business since the date of the information with respect to stock options
contained in the Registration Statement;
(B) borrowed any amount or incurred or become subject to any material
liabilities, except (i) liabilities under the Bridge Notes, (ii) current
liabilities incurred in the ordinary course of business and (iii)
liabilities under contracts entered into in the ordinary course of business;
(C) discharged or satisfied any material lien or encumbrance or paid any
material obligation or liability, other than (i) current liabilities paid in
the ordinary course of business and (ii) the satisfaction of the Bridge
Notes;
(D) declared or made any payment or distribution of cash or other
property to its shareholders with respect to its stock or purchased or
redeemed any shares of its stock or any warrants, options or other rights to
acquire its stock;
(E) pledged any of its properties or assets or subjected them to any
material lien, security interest, charge or other encumbrance, except (i) in
the ordinary course of business, (ii) a security interest granted to First
Portland Corporation in connection with that certain Equipment Lease dated
August 27, 1998, and (iii) liens for current taxes not yet due and payable;
(F) sold, assigned or transferred any of its tangible assets, except in
the ordinary course of business, or canceled any material debts or claims;
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(G) sold, assigned or transferred any patents or patent applications,
trademarks, service marks, trade names, corporate names, copyrights or
copyright registrations, trade secrets or other intangible assets, or
disclosed any material proprietary confidential information to any Person,
except in connection with the Registration Statement, or pursuant to an
executed confidentiality or non-disclosure agreement.
(H) suffered any material extraordinary losses or waived any rights of
material value, whether or not in the ordinary course of business or
consistent with past practice;
(I) made capital expenditures or commitments therefor that aggregate in
excess of $300,000;
(J) entered into any other material transaction other than in the
ordinary course of business;
(K) made any loans or advances to, guarantees for the benefit of, or any
Investments in, any Persons in excess of $25,000 in the aggregate;
(L) suffered any damage, destruction or casualty loss exceeding in the
aggregate $25,000, whether or not covered by insurance; or
(M) made any Investment in or taken steps to incorporate any Subsidiary
except as otherwise disclosed pursuant to this Agreement.
(b) The Company has not at any time made any payments for political
contributions or made any bribes, kickback payments or other illegal payments.
5.8 ASSETS.
The Company has good and marketable title to, or a valid leasehold interest
in, all material properties and assets used by it, located on its premises or
shown on its balance sheet dated June 30, 1999 included in the Registration
Statement (the "Latest Balance Sheet") or acquired thereafter, free and clear of
all liens, security interests, charges and encumbrances, except for (a)
properties and assets disposed of in the ordinary course of business since June
30, 1999, (b) liens disclosed in the Registration Statement (including the
financial statements contained therein and any notes thereto) or otherwise
disclosed pursuant to this Agreement and (c) liabilities for current taxes not
yet due and payable. The Company's material equipment and other material
tangible assets are in good operating condition in all material respects except
for normal wear and tear not caused by neglect. The Company owns, or has a valid
leasehold interest in, all assets necessary for the conduct of its business as
presently conducted.
5.9 TAX MATTERS.
The Company has filed all tax returns which it is required to file under
applicable laws and regulations; all such returns are complete and correct in
all material respects; the Company has paid all taxes due and owing by it and
has withheld and paid over all taxes which it is obligated to withhold from
amounts paid or owing to any employee, shareholder, creditor or other third
party; the Company has not waived any statute of limitations with respect to
taxes or agreed to any extension of time with respect to a tax assessment or
deficiency; the accrual for current taxes on the Latest Balance Sheet would be
adequate to pay all of the Company's current tax liabilities if its current tax
year were treated as ending June 30, 1999; the assessment of any additional
taxes for periods for which returns have been filed is not expected to
materially exceed the related recorded liability on such balance sheet; to the
Company's knowledge, no foreign, federal, state or local tax audits are pending
or being conducted with respect to the Company, no information related to tax
matters has been requested by any foreign, federal, state or local taxing
authority and no notice indicating an intent to open an audit or other review
has been received by the Company from any foreign, federal, state or local
taxing authority except for an audit by the Washington Department of Revenue
which was completed in April 1999 and
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which resulted in an assessment of approximately $1,300; and to the Company's
knowledge, there are no material unresolved questions or claims concerning the
Company's tax liability.
5.10 CONTRACTS AND COMMITMENTS.
(a) Except as expressly contemplated by this Agreement or as set forth as an
exhibit to the Registration Statement, as of the Initial Closing, the Company is
not a party to any written:
(A) pension, profit sharing, stock option, employee stock purchase or
other plan or arrangement providing for deferred or other compensation to
employees or any other employee benefit plan or arrangement, any contract
with any labor union, or any severance agreements, other than agreements
related to the Company's 401(k) plan, and other health and welfare plans
provided to all employees in the ordinary course of business;
(B) contract for the employment of any officer, individual employee or
other Person on a full-time, part-time, consulting or other basis providing
for an annual base cash salary in excess of $100,000 or contract relating to
loans to officers, directors or affiliates;
(C) contract under which the Company has advanced or loaned any other
Person amounts in the aggregate exceeding $25,000;
(D) agreement or indenture relating to the borrowing of money or the
mortgaging, pledging or otherwise placing a lien on any material asset or
material group of assets of the Company, other than the Bridge Notes;
(E) guarantee of any obligation in excess of $25,000;
(F) lease or agreement under which the Company is lessee of or holds or
operates any property, real or personal, owned by any other party, except
for any lease of real or personal property under which the aggregate annual
rental payments do not exceed $25,000;
(G) lease or agreement under which the Company is lessor of or permits
any third party to hold or operate any property, real or personal, owned or
controlled by the Company;
(H) contract or group of related contracts with the same party or group
of affiliated parties the performance of which involves payment obligations
on the part of the Company in excess of $50,000 annually and is not
terminable upon 60 or fewer days' notice;
(I) assignment, license, indemnification or agreement with respect to
any material intangible property (including, without limitation, any patent,
trademark, trade name, copyright, know-how, trade secret or confidential
information) but excluding shrink-wrap licenses for the internal use by the
Company of off-the-shelf software;
(J) warranty agreement with respect to its services rendered or its
products sold or leased (other than the warranty provided to all customers
on the Company's Website);
(K) agreement under which it has granted any Person any registration
rights (including piggyback rights);
(L) contract, agreement or other arrangement with any officer, director,
employee or Affiliate, or any Affiliate of any officer, director or
employee;
(M) contract or agreement prohibiting it from freely engaging in any
business or competing anywhere in the world (other than covenants contained
in agreements set forth as exhibits to the Registration Statement or listed
on the Contracts Schedule); or
(N) any other agreement not in the ordinary course of business which is
material to its operations or involves payment obligations on the part of
the Company in excess of $25,000 annually.
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(b) To the Company's knowledge, all of the contracts, agreements and
instruments set forth as exhibits to the Registration Statement are valid,
binding and enforceable in accordance with their respective terms. The Company
has performed all material obligations required to be performed by it and is not
in material default under, or in material breach of, nor in receipt of any claim
of default or breach under, any material contract, agreement or instrument to
which the Company is subject; to the Company's knowledge, no event has occurred
which with the passage of time or the giving of notice or both would result in a
material default, breach or event of noncompliance under any material contract,
agreement or instrument set forth as an exhibit to the Registration Statement
except to the extent that such breach or non-compliance will not have a material
adverse effect on the Company's financial condition, operating results, assets
or operations; the Company does not have any present expectation or intention of
not performing all such obligations; the Company has no knowledge of any breach
or anticipated breach by the other parties to any material contract or
commitment to which it is a party except to the extent that such breach or
non-compliance will not have a material adverse effect on the Company's
financial condition, operating results, assets or operations.
5.11 PROPRIETARY RIGHTS.
(a) To the Company's knowledge after reasonable inquiry, (i) the Company
owns or has sufficient right to use all Proprietary Rights (as defined below)
necessary for its business as now conducted and (ii) the Company's Proprietary
Rights do not conflict with or constitute an infringement of the rights of
others;
(b) The Company has not received any communications alleging that the
Company has violated or infringed any of the Proprietary Rights of others;
(c) The Company is not aware of any belief on the part of any third party
that the Company has violated or infringed any of the Proprietary Rights of
others.
As used herein, "Proprietary Rights" means all patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, proprietary processes
and formulae and applications for patents, trademarks, service marks and
copyrights.
5.12 LITIGATION.
There are no actions, suits, proceedings, orders, investigations or claims
pending or, to the Company's knowledge, threatened against or affecting the
Company (or to the Company's knowledge, pending or threatened against any of the
officers, directors or employees of the Company with respect to its business or
proposed business activities) at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, any actions, suits, proceedings or
investigations with respect to the transactions contemplated by this Agreement);
the Company is not subject to any arbitration proceedings under collective
bargaining agreements or otherwise or, to the Company's knowledge, any
governmental investigations or inquiries, and, to the Company's knowledge, there
is no basis for any of the foregoing. The Company is not subject to any
judgment, order or decree of any court or other governmental agency. The Company
has not received any written opinion or memorandum or written legal advice from
legal counsel to the effect that it is exposed, from a legal standpoint, to any
liability which may be material to its business.
5.13 BROKERAGE.
Other than the fee payable to W.R. Hambrecht & Co., LLC pursuant to a
placement agency agreement dated September 22, 1999 there are no claims for
brokerage commissions, finders' fees or similar compensation in connection with
the transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company. The Company shall pay, and hold each
Purchaser harmless against, any liability, loss or expense (including, without
limitation, reasonable
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attorneys' fees and out-of-pocket expenses) arising in connection with any such
claim, for which the Company is responsible.
5.14 GOVERNMENTAL CONSENT.
No permit, consent, approval or authorization of, or declaration to or
filing with, any governmental authority is required in connection with the
execution, delivery and performance by the Company of this Agreement or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except (i) the filing by the Company of the Registration Statement with
the SEC and the SEC's declaration of the Registration Statement effective and
(ii) such filings, if any, as are required to be made under applicable state
securities laws.
5.15 INSURANCE.
The Company is not in material default with respect to its obligations under
any insurance policy maintained by it. The insurance coverage of the Company is
customary for corporations of similar size engaged in similar lines of business.
5.16 EMPLOYEES.
To the Company's knowledge no executive or key employee of the Company or
any group of employees of the Company has any plans to terminate employment with
the Company. The Company has complied in all material respects with all laws
relating to the employment of labor, including provisions thereof relating to
wages, hours, equal opportunity, collective bargaining and the payment of social
security and other taxes, and the Company has no material labor relations
problems (including any union organization activities, threatened or actual
strikes or work stoppages or material grievances). To the Company's knowledge,
none of the Company's employees is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreements relating to,
affecting or in conflict with the present business activities of the Company
except for agreements between the Company and its present and former employees.
5.17 ERISA.
The Company does not have any Employee Benefit Plan as defined in ERISA
except as otherwise disclosed pursuant to this Agreement.
5.18 COMPLIANCE WITH LAWS.
The Company has not violated any law or any governmental regulation or
requirement which violation would reasonably be expected to have a material
adverse effect upon the financial condition, operating results, assets or
operations of the Company, and the Company has received no written notice of any
such violation.
5.19 REAL ESTATE.
The Company owns no real estate.
5.20 AFFILIATED TRANSACTIONS.
Except as disclosed in the Registration Statement and except for employment
agreements entered into in the ordinary course of business, no officer,
director, shareholder or Affiliate of the Company or any individual related by
blood or marriage to any such Person or any entity in which any such Person or
individual owns any beneficial interest, is a party to any material agreement,
contract, commitment or transaction with the Company or has any material
interest in any material property used by the Company.
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5.21 REAL PROPERTY HOLDING CORPORATION STATUS.
Since its date of incorporation the Company has not been a "United States
real property holding corporation", as defined in Section 897(c)(2) of the IRC,
and in Section 1.897-2(b) of the Treasury Regulations issued thereunder. The
Company has no current plans or intentions which would cause the Company to
become a "United States real property holding company," and the Company has
filed with the IRS all statements, if any, with its United States income tax
returns which are required under Section 1.897-2(h) of the Treasury Regulations.
5.22 DISCLOSURE.
Neither this Agreement nor the Registration Statement contains any untrue
statement of a material fact or omits a material fact necessary to make each
statement contained herein or therein, in the light of the circumstances under
which they were made, not misleading. There is no fact which the Company has not
disclosed to the Purchasers in writing or included in the Registration Statement
which has had or would reasonably be anticipated to have a material adverse
effect upon the financial condition, operating results, assets or business of
the Company taken as a whole.
Section 6. DEFINITIONS.
For the purposes of this Agreement, the following terms have the meanings
set forth below:
"AFFILIATE" of any particular person or entity means any other person or
entity controlling, controlled by or under common control with such particular
person or entity.
"ARTICLES OF AMENDMENT" means the Articles of Amendment as described in
Section 2.1(b), and in the form attached as EXHIBIT A hereto.
"BRIDGE NOTES" means those certain promissory notes in the aggregate
principal amount of up to $4,500,000 on September , 1999.
"CLOSING" means the Initial Closing or the any Subsequent Closing, as the
case may be.
"COMMON STOCK" has the meaning described in Section 1.1.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"INITIAL CLOSING" has the meaning described in Section 1.2.
"INVESTMENT" as applied to any Person means (i) any direct or indirect
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and any reference
to any particular IRC section shall be interpreted to include any revision of or
successor to that section regardless of how numbered or classified.
"IRS" means the United States Internal Revenue Service.
"LATEST BALANCE SHEET" has the meaning described in Section 5.8.
"OFFICER'S CERTIFICATE" means a certificate signed by an officer of the
Company stating that (i) such officer has made or has caused to be made such
investigations as are necessary in order to permit him or her to verify the
accuracy of the information set forth in such certificate and (ii) to the best
of such officer's knowledge, such certificate does not misstate any material
fact and does not omit to state any fact necessary to make the certificate, in
light of the circumstances under which such certificate is made, not misleading.
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"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PREFERRED STOCK" has the meaning described in Section 1.1.
"QUALIFIED PUBLIC OFFERING" means the sale in an underwritten public
offering registered under the Securities Act of shares of the Company's common
stock in which (i) the aggregate price paid by the public for the shares shall
be at least $15 million, and (ii) the price per share paid by the public for
such shares shall be at least an amount equal to two times the average per share
price paid for the Preferred Stock by the holders thereof.
"REGISTRATION STATEMENT" has the meaning provided in Section 2.1(c).
"SEC" has the meaning provided in Section 2.1(c).
"SUBSEQUENT CLOSING" has the meaning provided in Section 1.2.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"SUBSIDIARY" means any corporation of which the securities having a majority
of the ordinary voting power in electing the board of directors are, at the time
as of which any determination is being made, owned by the Company either
directly or through one or more subsidiaries.
"TREASURY REGULATIONS" means the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
"UNDERLYING COMMON STOCK" means (i) the Common Stock issued or issuable upon
conversion of the Preferred Stock and (ii) any Common Stock issued or issuable
with respect to the securities referred to in clause (i) above by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes of
this Agreement, any Person who holds Preferred Stock shall be deemed to be the
holder of the Underlying Common Stock obtainable upon conversion of the
Preferred Stock in connection with the transfer thereof or otherwise regardless
of any restriction or limitation on the conversion of the Preferred Stock. As to
any particular shares of Underlying Common Stock, such shares shall cease to be
Underlying Common Stock when they have been sold by the Purchaser.
Section 7. MISCELLANEOUS.
7.1 EXPENSES.
The Company agrees to pay, and hold each Purchaser and all holders of
Underlying Common Stock harmless against liability for the payment of (i) the
fees and expenses of [Stoel Rives LLP] arising in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement which shall be payable promptly
after the Initial Closing in an amount not to exceed $25,000 and (ii) stamp and
other taxes which may be payable in respect of the execution and delivery of
this Agreement or the issuance, delivery or acquisition of any shares of
Preferred Stock or any shares of Common Stock issuable upon conversion of the
Preferred Stock.
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7.2 REMEDIES.
Each holder of Preferred Stock and Underlying Common Stock shall have all
rights and remedies set forth in this Agreement, and the Articles of Amendment
and all of the rights which such holders have under any law. Any Person having
any rights under any provision of this Agreement shall be entitled to enforce
such rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
7.3 PURCHASERS' REPRESENTATIONS.
(a) Each Purchaser hereby represents and warrants that it has full power and
authority to enter into this Agreement and that this Agreement constitutes a
valid and legally binding obligation of such Purchaser. Each Purchaser also
hereby represents and warrants that it or he (i) is an "accredited investor," as
such term is defined in Rule 501(a) of the Regulation D promulgated under the
Securities Act; (ii) has had a reasonable opportunity to ask questions of and
received answers from the Company concerning the Company and the Preferred Stock
and to verify the accuracy of any representation or information set forth in
this Agreement or the Registration Statement, and all such questions, if any,
have been answered to the full satisfaction of such Purchaser; and (iii) has
received from the Company, and has reviewed, such information which such
Purchaser considers necessary or appropriate to evaluate the risks and merits of
an investment in the Preferred Stock.
(b) Each Purchaser hereby represents and warrants that there are no claims
for brokerage commissions, finders' fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any arrangement or
agreement binding upon such Purchaser.
7.4 CONSENT TO AMENDMENTS.
Except as otherwise expressly provided herein, the provisions of this
Agreement may be amended and the Company may take any action herein prohibited,
or omit to perform any act herein required to be performed by it, only if the
Company has obtained the prior written consent of the Company and the holders of
a majority of the outstanding Preferred Stock and the Underlying Common Stock
considered together as a voting group. For purposes of this Agreement, shares of
Preferred Stock or Underlying Common Stock held by the Company shall not be
deemed to be outstanding.
7.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; KNOWLEDGE.
All representations and warranties contained herein or made in writing by
any party in connection herewith shall survive the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by a party until two years from the date
hereof. To the extent a statement made herein is made "to the knowledge of the
Company" or characterized using words of similar import, "knowledge" shall mean
to the actual knowledge of Benjamin Nourse, Donna Nourse or Bill Cuff.
7.6 SUCCESSORS AND ASSIGNS.
Except as otherwise expressly provided herein, all covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not.
7.7 SEVERABILITY.
Whenever possible, each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this Agreement.
A-15
<PAGE>
7.8 COUNTERPARTS.
This Agreement may be executed in counterparts, any one of which need not
contain the signatures of more than one party, but all such counterparts taken
together shall constitute one and the same Agreement.
7.9 DESCRIPTIVE HEADINGS; INTERPRETATION.
The descriptive headings of this Agreement are inserted for convenience only
and do not constitute a substantive part of this Agreement. The use of the word
"including" in this Agreement shall be by way of example rather than by
limitation.
7.10 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Washington without giving effect to any choice or
conflict of law provision or rule (either of the State of Washington or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Washington.
7.11 NOTICES.
All notices, demands or other communications to be given or delivered under
or by reason of the provisions of this Agreement shall be in writing and shall
be deemed to have been given when delivered personally to the recipient, sent to
the recipient by reputable express courier service (charges prepaid),
transmitted by electronic mail or facsimile, or mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid. Such
notices, demands and other communications shall be sent to each Purchaser at the
address indicated beneath the signature and to the Company at the address
indicated below:
GreatFood.com, Inc.
2731 Eastlake Avenue East
Seattle, WA 98102
Attention: Benjamin Nourse
EMAIL: [email protected]
With a copy to:
Heller Ehrman White & McAuliffe
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104-7098
Attention: Thomas Hodge
Fax: (206) 447-0849
EMAIL: [email protected]
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[Signature page follows]
A-16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
<TABLE>
<S> <C> <C> <C>
GREATFOOD.COM, a Washington corporation
By:
-----------------------------------------
Name:
-----------------------------------
Title:
------------------------------------
PURCHASERS:
-----------------------------------------
By:
-------------------------------------
-------------------------------------
Address for Notices:
-----------------------------------------
-----------------------------------------
-----------------------------------------
</TABLE>
A-17
<PAGE>
SCHEDULE OF PURCHASERS
A-18
<PAGE>
LIST OF EXHIBITS
Exhibit A--Amendment to Articles of Incorporation
Exhibit B--Opinion of Counsel
A-19
<PAGE>
[LOGO]
Until , 1999, which is 90 days after the date of this prospectus, all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions to be paid by GreatFood.com, in
connection with this offering. All amounts shown are estimates except for the
registration fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.............................................................. $ 10,790
Blue Sky fees and expenses........................................................ 10,000
Printing and engraving expenses................................................... 20,000
Legal fees and expenses........................................................... 30,000
Accounting fees and expenses...................................................... 15,000
Miscellaneous expenses............................................................ 4,210
----------
Total......................................................................... 90,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Sections 23B.08.500 through 23.B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omission as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or any transaction from which
the director personally receives a benefit in money, property or services to
which the director is not legally entitled. Article VIII of the registrant's
Amended and Restated Articles of Incorporation contains provisions implementing,
to the fullest extent permitted by Washington law, such limitations on a
director's liability to the registrant and its shareholders.
The registrant has entered into certain indemnification agreements with its
directors and certain of its officers, the form of which is attached as Exhibit
10.1 to this Registration Statement and incorporated hereby by reference. The
indemnification agreements provide the registrant's directors and certain of its
officers with indemnification to the maximum extent permitted by the WBCA.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 1996, the registrant has issued and sold unregistered securities
as follows:
(1) Between December 1996 and March 1997, the registrant issued an aggregate
of 212,500 shares of common stock in a private placement to three accredited
investors. The aggregate consideration received for such shares was $42,500.
(2) On March 15, 1997, the registrant issued a warrant for the purchase of
36,000 shares of common stock with an exercise price of $0.20 per share to The
Cobalt Group, Inc. in consideration of The Cobalt Group hosting the registrant's
servers and providing the registrant with high speed Internet access.
II-1
<PAGE>
(3) Between September 1997 and January 1998, the registrant issued an
aggregate of 366,664 shares of common stock in a private placement to eight
accredited investors. The aggregate consideration received for such shares was
$109,999.
(4) On July 17, 1998, the registrant issued an aggregate of 1,142,847 shares
of Series A preferred stock to twenty two accredited investors pursuant to a
Series A preferred stock purchase agreement. The aggregate consideration
received for such shares was $1,999,982.
(5) On July 20, 1998, the registrant issued a warrant for the purchase of
14,286 shares of common stock with an exercise price of $1.75 per share to
William Cuff, the President of the registrant.
(6) On August 23, 1998, the registrant issued a warrant for the purchase of
2,858 shares of common stock with an exercise price of $1.75 and on April 9,
1999, the registrant issued a warrant for the purchase of 1,667 shares of common
stock with an exercise price of $3.00, each as partial consideration for
obtaining a capital lease credit line.
(7) On October 5, 1998, the registrant issued a warrant for the purchase of
300,000 shares of common stock with an exercise price of $3.00 per share to
Peapod, Inc. as partial consideration for Peapod's performance under a marketing
agreement between Peapod and the registrant.
(8) The registrant issued an aggregate of 705,521 shares of Series B
preferred stock in a private placement on March 18, 1999 to twenty seven
accredited investors pursuant to a Series B Preferred Stock Purchase Agreement.
The aggregate consideration received for such shares was $2,116,563.
(9) On May 17, 1999, the registrant sold 600,000 shares of Series C
preferred stock to four accredited investors. The aggregate consideration
received for such shares was $3,000,000. The purchasers of the Series C
preferred stock also agreed to purchase, at the registrant's option, up to
300,000 additional shares of Series C preferred stock at $5.00 per share. The
registrant has until May 17, 2000 to exercise this option. The purchasers of the
Series C preferred stock also received warrants to purchase up to a total of
323,077 additional shares of Series C preferred stock at $.01 per share (up to
484,615 shares if the registrant exercises the option to sell 300,000 additional
shares of Series C preferred stock).
(10) From September 1997 through August 31, 1999, the registrant granted
stock options to purchase an aggregate of 991,000 shares of common stock to
employees, executive officers, consultants and directors with exercise prices
ranging from $0.30 to $11.00 per share pursuant to the registrant's 1997 Stock
Incentive Plan in consideration for services.
(11) On July 23, 1999, the registrant issued 25,000 shares to The Cobalt
Group for an aggregate price of $5,000 pursuant to the exercise of the warrant
issued to them on March 15, 1997.
(12) On September 24, 1999, the registrant issued a $3,000,000 convertible
promissory note to WR Hambrecht & Co, LLC.
(13) On October 5, 1999, the registrant issued a $1,500,000 convertible
promissory note to First Analysis Corporation.
The issuances described above in this Item 15 were deemed exempt from
registration under the Securities Act in reliance on either (1) Rule 701
promulgated under the Securities Act of 1933 as offers or sales of securities
pursuant to certain compensatory benefit plans and contracts relating to
compensation in compliance with Rule 701 and (2) Section 4(2) of the Securities
Act as transactions by an issuer not involving a public offering.
No underwriters were used in connection with these issuances. The recipients
of securities in each such transaction represented their intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received
II-2
<PAGE>
adequate information about GreatFood.com or had access, through employment or
other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -------------------------------------------------------------
<C> <S>
1.1 Placement Agency Agreement.
3.1+ Amended and Restated Articles of Incorporation of the registrant, as amended to date.
3.2 Form of Amended and Restated Articles of Incorporation of the registrant to be in effect immediately
prior to the closing of this offering.
3.3+ Amended and Restated Bylaws of the registrant.
3.4+ Form of Amended and Restated Bylaws of the registrant to be in effect immediately prior to the closing
of this offering.
4.1+ Amended and Restated Investors' Rights Agreement, dated March 18, 1999, as amended to date.
4.2+ Registration Rights Agreement, dated May 17, 1999, between the registrant and the persons listed on
the schedule of purchasers attached thereto.
5.1 Opinion of Heller Ehrman White & McAuliffe as to the legality of the shares.
10.1+ 1997 Stock Incentive Plan, as amended.
10.2+ 1999 Employee Stock Purchase Plan.
10.3+ Form of Series A Preferred Stock Purchase Agreement, dated July 17, 1998, between the registrant and
the investors named therein.
10.4+ Form of Series B Preferred Stock Purchase Agreement, dated March 18, 1999, between the registrant and
the investors named therein.
10.5+ Series C Preferred Stock Purchase Agreement, dated May 17, 1999, between the registrant and the
investors named therein.
10.6+ Form of Indemnification Agreement between the registrant and each of its directors and executive
officers.
10.7+ Employment Letter Agreement, dated April 2, 1998, between the registrant and William Cuff.
10.8+ Lease Agreement, dated January 25, 1999, between the registrant and Eastlake at Hamlin, LLC.
10.9+ Equipment Lease, dated August 23, 1998, between the registrant and First Portland Corporation.
10.10+* "Pages that Pay" Affiliates Program Merchant Agreement, dated May, 1999, between the registrant and
GeoCities.
10.11+* Shopping Channel Promotional Agreement, dated October 1, 1998, between the registrant and America
Online, Inc.
10.12+* Advertising Insertion Order, dated March 15, 1999, between the registrant and Yahoo! Inc.
10.13+* Sponsorship Agreement, dated September 17, 1998, between the registrant and Excite, Inc. with respect
to the Excite Network.
10.14+* Sponsorship Agreement, dated September 17, 1998, between the registrant and Excite, Inc. with respect
to the Netscape Network.
10.15+ Internet Data Center Services Agreement, dated April 10, 1999, between the registrant and Exodus
Communications, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.16+* Pandesic Agreement, dated March 18, 1999, between the registrant and Pandesic LLC.
10.17+ Professional Services Agreement, dated July 8, 1996, between the registrant and Netscape
Communications Corporation.
10.18+* Marketing Partners Agreement, dated October 5, 1998, between the registrant and Peapod, Inc.
10.19+ Common Stock Purchase Warrant, dated March 15, 1997, issued by the registrant to The Cobalt Group,
Inc.
10.20+ Common Stock Purchase Warrant, dated July 20, 1998, issued by the registrant to William Cuff.
10.21+ Common Stock Purchase Warrant, dated August 23, 1998, issued by the registrant to First Portland
Corporation.
10.22+ Common Stock Purchase Warrant, dated April 9, 1999, issued by the registrant to First Portland
Corporation.
10.23+ Common Stock Purchase Warrant, dated October 5, 1998, issued by the registrant to Peapod, Inc.
10.24+ Form of Series C Preferred Stock Warrant, dated May 17, 1999, issued by the registrant to purchasers
of Series C preferred stock.
10.25 Form of Series D Preferred Stock Purchase Agreement (incorporated herein by reference to Appendix A of
this Registration Statement). Registrant agrees to furnish supplementally to the Commission, upon
request, a copy of any omitted schedule.
10.26+ Advertising Insertion Order, dated August 24, 1999, between the registrant and America Online, Inc.
10.27+ Lease Agreement, dated July 27, 1999, between the registrant and Blume Eastlake Limited Partnership.
10.28 Promissory note dated October 1, 1999 issued by GreatFood.com, Inc. to First Analysis Corporation.
10.29 Promissory note dated September 24, 1999 issued by GreatFood.com, Inc. to WR Hambrecht and Company,
LLC.
21.1+ List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1).
23.3+ Consent of Jupiter Communications.
23.4+ Consent of International Data Corporation.
23.5+ Consent of Kalorama Information LLC (with respect to Packaged Facts study).
23.6+ Consent of BizRate.com.
24.1+ Power of Attorney (included on page II-6).
27.1+ Financial Data Schedule (EDGAR filed version only).
</TABLE>
- ------------------------
+ Previously filed
* Certain portions of this document have been omitted pursuant to a
confidential treatment request.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by GreatFood.com for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of GreatFood.com pursuant to the provisions described in Item 14 above,
or otherwise, GreatFood.com has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by GreatFood.com of expenses incurred or paid by a director,
officer, or controlling person of GreatFood.com in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, GreatFood.com will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
GreatFood.com certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, in the
City of Seattle, State of Washington, on the 8th day of October, 1999.
<TABLE>
<S> <C> <C>
GREATFOOD.COM, INC.
By: /s/ BENJAMIN NOURSE
------------------------------------------
Benjamin Nourse
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
</TABLE>
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------ -------------------
<S> <C> <C>
Chief Executive Officer,
/s/ BENJAMIN NOURSE Chairman of the Board of
- ------------------------------------ Directors, and Secretary October 8, 1999
Benjamin Nourse (Principal Executive Officer)
*
- ------------------------------------ President and Director October 8, 1999
William Cuff
Vice President of Finance and
* Administration and Chief
- ------------------------------------ Financial Officer (Principal October 8, 1999
Gayle Stetson Financial and
Accounting Officer)
*
- ------------------------------------ Director October 8, 1999
R. Stockton Rush, III
*
- ------------------------------------ Director October 8, 1999
Geoffrey Barker
*
- ------------------------------------ Director October 8, 1999
David E. Wyman
*
- ------------------------------------ Director October 8, 1999
Mark Koulogeorge
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ BENJAMIN NOURSE
-------------------------
Benjamin Nourse
(ATTORNEY-IN-FACT)
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------
<C> <S>
1.1 Placement Agency Agreement.
3.1+ Amended and Restated Articles of Incorporation of the registrant, as amended to date.
3.2 Form of Amended and Restated Articles of Incorporation of the registrant to be in effect immediately
prior to the closing of this offering.
3.3+ Amended and Restated Bylaws of the registrant.
3.4+ Form of Amended and Restated Bylaws of the registrant to be in effect immediately prior to the closing
of this offering.
4.1+ Amended and Restated Investors' Rights Agreement, dated March 18, 1999, as amended to date.
4.2+ Registration Rights Agreement, dated May 17, 1999, between the registrant and the persons listed on
the schedule of purchasers attached thereto.
5.1 Opinion of Heller Ehrman White & McAuliffe as to the legality of the shares.
10.1+ 1997 Stock Incentive Plan, as amended.
10.2+ 1999 Employee Stock Purchase Plan.
10.3+ Form of Series A Preferred Stock Purchase Agreement, dated July 17, 1998, between the registrant and
the investors named therein.
10.4+ Form of Series B Preferred Stock Purchase Agreement, dated March 18, 1999, between the registrant and
the investors named therein.
10.5+ Series C Preferred Stock Purchase Agreement, dated May 17, 1999, between the registrant and the
investors named therein.
10.6+ Form of Indemnification Agreement between the registrant and each of its directors and executive
officers.
10.7+ Employment Letter Agreement, dated April 2, 1998, between the registrant and William Cuff.
10.8+ Lease Agreement, dated January 25, 1999, between the registrant and Eastlake at Hamlin, LLC.
10.9+ Equipment Lease, dated August 23, 1998, between the registrant and First Portland Corporation.
10.10+* "Pages that Pay" Affiliates Program Merchant Agreement, dated May, 1999, between the registrant and
GeoCities.
10.11+* Shopping Channel Promotional Agreement, dated October 1, 1998, between the registrant and America
Online, Inc.
10.12+* Advertising Insertion Order, dated March 15, 1999, between the registrant and Yahoo! Inc.
10.13+* Sponsorship Agreement, dated September 17, 1998, between the registrant and Excite, Inc. with respect
to the Excite Network.
10.14+* Sponsorship Agreement, dated September 17, 1998, between the registrant and Excite, Inc. with respect
to the Netscape Network.
10.15+ Internet Data Center Services Agreement, dated April 10, 1999, between the registrant and Exodus
Communications, Inc.
10.16+* Pandesic Agreement, dated March 18, 1999, between the registrant and Pandesic LLC.
10.17+ Professional Services Agreement, dated July 8, 1996, between the registrant and Netscape
Communications Corporation.
10.18+* Marketing Partners Agreement, dated October 5, 1998, between the registrant and Peapod, Inc.
10.19+ Common Stock Purchase Warrant, dated March 15, 1997, issued by the registrant to The Cobalt Group,
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.20+ Common Stock Purchase Warrant, dated July 20, 1998, issued by the registrant to William Cuff.
10.21+ Common Stock Purchase Warrant, dated August 23, 1998, issued by the registrant to First Portland
Corporation.
10.22+ Common Stock Purchase Warrant, dated April 9, 1999, issued by the registrant to First Portland
Corporation.
10.23+ Common Stock Purchase Warrant, dated October 5, 1998, issued by the registrant to Peapod, Inc.
10.24+ Form of Series C Preferred Stock Warrant, dated May 17, 1999, issued by the registrant to purchasers
of Series C preferred stock.
10.25 Form of Series D Preferred Stock Purchase Agreement (incorporated herein by reference to Appendix A of
this Registration Statement). Registrant agrees to furnish supplementally to the Commission, upon
request, a copy of any omitted schedule.
10.26+ Advertising Insertion Order, dated August 24, 1999, between the registrant and America Online, Inc.
10.27+ Lease Agreement, dated July 27, 1999, between the registrant and Blume Eastlake Limited Partnership.
10.28 Promissory Note dated October 1, 1999 issued by GreatFood.com, Inc. to First Analysis Corporation.
10.29 Promissory Note dated September 24, 1999 issued by GreatFood.com, Inc. to WR Hambrecht & Company, LLC.
21.1+ List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1).
23.3+ Consent of Jupiter Communications.
23.4+ Consent of International Data Corporation.
23.5+ Consent of Kalorama Information LLC (with respect to Packaged Facts study).
23.6+ Consent of BizRate.com.
24.1+ Power of Attorney (included on page II-6).
27.1+ Financial Data Schedule (EDGAR filed version only).
</TABLE>
- ------------------------
+ Previously filed
* Certain portions of this document have been omitted pursuant to a
confidential treatment request.
<PAGE>
WRHAMBRECHT+CO
September 22, 1999
Ben Nourse
Chairman and CEO
GreatFood.com, Inc.
2731 Eastlake Avenue East
Seattle, Washington 98102
Dear Ben:
This will confirm your engagement of WR Hambrecht + Co, LLC ("WR
Hambrecht + Co") to act as your non-exclusive placement agent as follows:
1. You wish to place up to $10,000,000 of your Series D Preferred Stock
(the "Securities"). The placement will be made on terms you and we
agree on, as reflected in agreements to be entered into between you and
the purchasers.
2. As compensation for our services as placement agent, you will pay us a
fee equal to $200,000 plus 2.0% of the sales price of the Securities.
The initial $200,000 will be payable to WR Hambrecht + Co upon (i) our
purchase of $3 million of the Securities, or the cancellation of a $3
million promissory note held by WR Hambrecht + Co in exchange for
common stock or securities convertible into common stock. The remaining
2% fee will payable at the closing of the sale. Whether or not any
Securities are sold, you will reimburse our reasonable out-of-pocket
expenses (including fees and expenses of counsel) in connection with
our acting as placement agent. Such expenses shall not exceed $25,000
without your prior written consent. WR Hambrecht + Co will not receive
a 2% fee for Securities sold to (i) existing shareholders, including
First Analysis Corporation and WR Hambrecht + Co, or (ii) new investors
which are introduced to GreatFood.com by someone other than William R.
Hambrecht or WR Hambrecht + Co, unless WR Hambrecht + Co. is asked by
you to undertake negotiations with such new investors on behalf of
GreatFood.com concerning purchase of Securities.
3. You agree to qualify the Securities for offer and sale under the
securities laws of the states we specify or to identify a relevant
exemption from such securities laws.
4. If in connection with this Agreement we become involved in any lawsuit,
claim or other proceeding, you shall promptly reimburse us for any
legal or other expenses reasonably incurred in connection with
investigating, preparing to defend or defending such lawsuit, claim or
other proceeding. You also agree to indemnify us
<PAGE>
from any losses, claims, damages, liabilities or expenses (i) arising
out of any alleged untrue statement of a material fact or material
omission in any communication provided with your approval to any
prospective purchaser of the Securities, or (ii) arising in connection
with this Agreement, but you will not be liable under clause (ii) of
this paragraph to the extent that it is finally judicially determined
that our loss, claim, damage or liability resulted directly from our
own gross negligence or willful misconduct. No Indemnified Person (as
defined below) shall have any liability to you arising out of this
Agreement except to the extent that any loss, claim, damage or
liability is finally judicially determined to have resulted from our
gross negligence or willful misconduct.
If indemnification or reimbursement pursuant to this paragraph 4 is
finally judicially determined to be unavailable for a reason other than
our gross negligence or willful misconduct, then, whether or not we are
the Indemnified Person, you and we shall contribute to the losses,
claims, damages, liabilities and expenses for which such
indemnification or reimbursement is held unavailable in such proportion
as is appropriate to reflect the relative benefits to you, on one hand,
and us on the other, in connection with the transactions to which such
indemnification or reimbursement relates, but in no event shall the
amount we contribute exceed the amount of the fee we actually receive
hereunder.
The indemnification and reimbursement commitments set forth in this
paragraph 4: (A) apply whether or not we are a formal party to any such
lawsuit, claim or other proceeding and we are entitled to retain
separate counsel of our choice in connection with any of the matters to
which such commitments relate, (B) are in addition to any liability
that you may otherwise have to us and (C) extend to any of our
controlling persons, affiliates, directors, officers, employees or
agents (each, an "Indemnified Person"). Any settlement of a lawsuit,
claim or other proceeding you enter shall include a release from the
party bringing such lawsuit, claim or other proceeding of each
Indemnified Person, which release shall be reasonably satisfactory to
us.
5. Our engagement under this Agreement terminates 6 months from the date
of this Agreement or upon 30 days written notice (whichever shall first
occur), but the obligation for reimbursing our expenses under paragraph
2 and the reimbursement, indemnification and contribution obligations
under paragraph 4 shall survive any termination of this Agreement. If
during a period of 12 months following termination, you sell any
securities of the same or a similar class as the Securities (other than
common stock pursuant to a registered public offering) to purchasers
which were contacted by us in our capacity as placement agent hereunder
and with respect to which we would have been entitled to the placement
fee in accordance with paragraph 2 above, you will pay us a fee equal
to the fee which would have
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been payable to us pursuant to paragraph 2 if the sale had occurred
during the term of this Agreement. To the extent an initial public
offering of shares of Greatfood.com occurs within the next 12 months,
it is understood that WR Hambrecht + Co will act as a manager of such
offering.
6. This Agreement may not be modified or terminated except in writing
signed by you and us and shall be governed and construed in accordance
with the laws of the State of California.
Please confirm your agreement in the space below.
WR Hambrecht + Co, LLC
By:
------------------------
Name: Barclay Corbus
AGREED:
GreatFood.com, Inc.
By:
---------------------------------
Name: Benjamin C. Nourse
Title: CEO
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SECOND
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GREATFOOD.COM, INC.
ARTICLE I
NAME
The name of the Corporation is GreatFood.com, Inc.
ARTICLE II
CAPITAL STOCK
(A) COMMON STOCK. The Corporation is authorized to issue 20,000,000 shares of
common stock (the "Common Stock"). Common Stock is subject to the rights and
preferences of the Preferred Stock as hereinafter set forth.
(B) PREFERRED STOCK. The Corporation is authorized to issue 10,000,000 shares
of preferred stock (the "Preferred Stock").
(1) ISSUANCE. The Preferred Stock may be issued from time to time in one
or more series in any manner permitted by law and these Articles of
Incorporation of the Corporation, as determined from time to time by the Board
of Directors and stated in the resolution or resolutions providing for the
issuance thereof, prior to the issuance of any shares thereof. The Board of
Directors shall have the authority to fix and determine and to amend, subject to
the provisions hereof, the designations, preferences, limitations and relative
rights of the shares of any series that is wholly unissued or to be established.
Unless otherwise specifically provided in the resolution establishing any
series, the Board of Directors shall further have the authority, after the
issuance of shares of a series whose number it has designated, to amend the
resolution establishing such series to decrease the number of shares of that
series, but not below the number of shares of such series then outstanding.
(2) DIVIDENDS. The holders of shares of Preferred Stock shall be entitled
to receive dividends, out of the funds of the Corporation legally available
therefor, at the rate and at the time or times, whether cumulative or
noncumulative, as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. If such dividends on the Preferred Stock
shall be cumulative, then if dividends shall not have been paid, the
<PAGE>
deficiency shall be fully paid or the dividends declared and set apart for
payment at such rate, but without interest on cumulative dividends, before any
dividends on the Common Stock shall be paid or declared and set apart for
payment. The holders of the Preferred Stock shall not be entitled to receive
any dividends thereon other than the dividends referred to in this section.
(3) REDEMPTION. The Preferred Stock may be redeemable at such price, in
such amount, and at such time or times as may be provided by the Board of
Directors in designating a particular series of Preferred Stock. In any event,
such Preferred Stock may be repurchased by the Corporation to the extent legally
permissible.
(4) LIQUIDATION. In the event of any liquidation, dissolution, or winding
up of the affairs of the Corporation, whether voluntary or involuntary, then,
before any distribution shall be made to the holders of the Common Stock, the
holders of the Preferred Stock at the time outstanding shall be entitled to be
paid the preferential amount or amounts per share as may be provided by the
Board of Directors in designating a particular series of Preferred Stock and
dividends accrued thereon to the date of such payment. The holders of the
Preferred Stock shall not be entitled to receive any distributive amounts upon
the liquidation, dissolution, or winding up of the affairs of the Corporation,
other than the distributive amounts referred to in this section, unless
otherwise provided by the Board of Directors in designating a particular series
of Preferred Stock.
(5) CONVERSION. Shares of Preferred Stock may be convertible into Common
Stock of the Corporation upon such terms and conditions, at such rate and
subject to such adjustments as may be provided by the Board of Directors in
designating a particular series of Preferred Stock.
(6) VOTING RIGHTS. Holders of Preferred Stock shall have such voting
rights, if any, as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
(C) SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK. A total of
1,142,857 shares of Preferred Stock shall be designated "Series A Preferred
Stock" and a total of 1,000,000 shares of Preferred Stock shall be designated
"Series B Preferred Stock". The Series A Preferred Stock and the Series B
Preferred Stock shall have the rights, preferences, privileges and restrictions
set forth in this Section C. The Series A Preferred Stock and the Series B
Preferred Stock shall sometimes be collectively referred to herein as the "A/B
Preferred Stock."
(1) LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, or in the event of its insolvency (a "Liquidation Event"), before
any distribution or payment is made
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to any holders of Common Stock or any other class or series of capital stock of
the Corporation designated to be junior to the A/B Preferred Stock and subject
to the liquidation rights and preferences of the Series C Preferred Stock and
the Series D Preferred Stock and any other class or series of preferred stock
designated in the future to be senior to, or on a parity with, the A/B Preferred
Stock with respect to liquidation preferences, the holders of each share of A/B
Preferred Stock shall be entitled to be paid first out of the assets of the
Corporation available for distribution to holders of the Corporation's capital
stock of all classes whether such assets are capital, surplus or earnings
("Available Assets"), an amount equal to (a) $1.75 per share of Series A
Preferred Stock (the "Series A Liquidation Preference") and (b) $3.00 per share
of Series B Preferred Stock (the "Series B Liquidation Preference")
The amounts set forth above and throughout this Section (C)(1) shall be
subject to equitable adjustment whenever there shall occur a stock dividend,
stock split, combination, reorganization, recapitalization, reclassification or
other similar event involving a change in the capital structure of the
Corporation.
If, upon a Liquidation Event, the Available Assets shall be insufficient to
pay the holders of A/B Preferred Stock the full amount to which they otherwise
would be entitled to receive, the holders of A/B Preferred Stock shall share
ratably in any distribution of Available Assets pro rata in proportion to the
respective Liquidation Preference amounts to which they would otherwise be
entitled to receive upon liquidation if all Liquidation Preference dollar
amounts owing to the holders of A/B Preferred Stock were paid in full.
After such payment shall have been made in full to the holders of the A/B
Preferred Stock or funds necessary for such payment shall have been set aside by
the Corporation in trust for the account of holders of the A/B Preferred Stock
so as to be available for such payment, the remaining assets available for
distribution shall be distributed ratably among the holders of the Common Stock.
Whenever the distribution provided for in this Section (C)(1) shall be
payable in property other than cash, the value of such distribution shall be the
fair market value of such property as determined in good faith by the Board of
Directors of the Corporation, which determination shall be final and binding on
the holders of A/B Preferred Stock. All distributions (including distributions
other than cash) made hereunder shall be made pro rata with respect to each
holder of A/B Preferred Stock in accordance with the liquidation preference
amounts described in this Section (C)(1) above.
(2) VOTING POWER. Except as otherwise expressly provided in this
Section (C)(2), or as otherwise required by law, each holder of A/B Preferred
Stock shall be entitled to vote on all matters and shall be entitled to that
number of votes equal to the largest number of whole shares of Common Stock into
which such holder's shares of A/B
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Preferred Stock could be converted, pursuant to the provisions of Section (C)(3)
hereof, at the record date for the determination of stockholders entitled to
vote on such matter or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited. Except as
otherwise expressly provided herein or as otherwise required by law, the holders
of shares of Series A Preferred Stock, Series B Preferred Stock and Common Stock
shall vote together (or render written consents in lieu of a vote) as a single
class on all matters submitted to the stockholders of the Corporation.
The Corporation shall not take any corporate action or otherwise amend its
Articles of Incorporation without the approval by vote or written consent of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock (voting as a separate class) or Series B Preferred Stock (voting
as a separate class), each share of Series A Preferred Stock or Series B
Preferred Stock to be entitled to one vote in each instance, if such corporate
action or amendment would change any of the rights, preferences, or privileges
of, or limitation provided in here for the benefit of, any shares of that series
of Preferred Stock.
At any time prior to the closing of the Corporation's initial firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act")
covering the offer and sale of Common Stock for the account of the Corporation
to the public (an "IPO"), the holders of Series A Preferred Stock, voting as a
separate class, shall be entitled to elect one director (the "Series A
Director"). At any annual or special meeting of the Corporation (or in a
written consent in lieu thereof) held for the purpose of electing directors, the
presence in person or by proxy of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock (voting together as a separate
class) shall constitute a quorum for the election of the Series A Director. The
holders of at least a majority of the shares of Series A Preferred Stock then
outstanding present in person or by proxy at any meeting relating to the
election of directors (calculated after the determination of a quorum) shall
then be entitled to elect the Series A Director.
A Series A Director may be removed during his or her term of office without
cause, by and only by, the affirmative vote or written consent of at least a
majority of the then outstanding shares of the Series A Preferred Stock (voting
as a separate class). A vacancy in a seat held by a Series A Director shall be
filled by the vote of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock (voting as a separate class) present in
person or represented by proxy at any meeting (calculated after the
determination of a quorum) or by written consent of all of the holders of the
then outstanding shares of Series A Preferred Stock (voting as a separate
class).
(3) CONVERSION RIGHTS.
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<PAGE>
(a) VOLUNTARY CONVERSION. Subject to and in compliance with the
provisions of this Section (C)(3), each share of A/B Preferred Stock held by any
person or entity may, at the option of such person or entity, be converted at
any time and from time to time into fully-paid and non-assessable shares of
Common Stock. The number of shares of Common Stock to which a holder of A/B
Preferred Stock shall be entitled to receive upon conversion shall be the
product obtained by multiplying the Series A Applicable Conversion Rate (for
conversions of shares of Series A Preferred Stock) or the Series B Applicable
Conversion Rate (for conversions of shares of Series B Preferred Stock), as such
rates are determined as provided in Section (C)(3)(c) by the number of shares of
Series A or Series B Preferred Stock, as applicable, being converted at any
time.
(b) AUTOMATIC CONVERSION. Each share of Series A or Series B
Preferred Stock shall automatically be converted into the number of shares of
Common Stock into which such share of A/B Preferred Stock is convertible
pursuant to Section (C)(3)(a), and in accordance with Section (C)(3)(h)
immediately prior to the closing of the Corporation's IPO or upon the conversion
of fifty percent (50%) or more of the shares of that series of Preferred Stock
then outstanding (whichever shall occur first).
(c) APPLICABLE CONVERSION RATES. The conversion rate in effect at
any time for the Series A Preferred Stock (the "Series A Applicable Conversion
Rate") shall be the quotient obtained by dividing $1.75 by the Series A
Applicable Conversion Price, calculated as provided in Section (C)(3)(d). The
conversion rate in effect at any time for the Series B Preferred Stock (the
"Series B Applicable Conversion Rate") shall be the quotient obtained by
dividing $3.00 by the Series B Applicable Conversion Price, calculated as
provided in Section (C)(3)(d).
(d) APPLICABLE CONVERSION PRICES. The Applicable Conversion Price
in effect from time to time for the Series A Preferred Stock, except as adjusted
in accordance with Section (C)(3)(e) and Section (C)(3)(f) hereof, shall be
$1.75 (the "Series A Applicable Conversion Price"). The Applicable Conversion
Price in effect from time to time for the Series B Preferred Stock, except as
adjusted in accordance with Section (C)(3)(e) and Section (C)(3)(f) hereof,
shall be $3.00 (the "Series B Applicable Conversion Price").
(e) ADJUSTMENTS TO APPLICABLE CONVERSION PRICES FOR DILUTIVE
EVENTS.
(i) SPECIAL DEFINITIONS. For purposes of this Section C only, the
following definitions shall apply:
(A) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
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(B) "Original Issue Date" shall mean the date on which the
first share of Series A Preferred Stock was issued, for purposes of
determining whether an adjustment to the Series A Applicable Conversion Price is
required, or the date on which the first share of Series B Preferred Stock was
issued, for purposes of determining whether an adjustment to the Series B
Applicable Conversion Price is required.
(C) "Convertible Securities" shall mean any evidence of
indebtedness, shares of capital stock (other than the Common Stock) or other
securities convertible into or exchangeable for Common Stock.
(D) "Dilutive Event" shall mean any transaction pursuant to
which the Corporation shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
(C)(3)(e)(ii)) without consideration or for a consideration (as determined in
Section (C)(3)(e)(iv)) per share issued less than the Series A Applicable
Conversion Price (a "Series A Dilutive Event") or the Series B Applicable
Conversion Price (a "Series B Dilutive Event") in effect on the date of and
immediately prior to such issuance.
(E) "Fully-Diluted Shares" on the date of any Dilutive
Event shall mean the sum of the following amounts: (1) the number of shares of
Common Stock outstanding on the date of and immediately prior to such Dilutive
Event, (2) the number of shares of Common Stock issuable upon conversion or
exercise of any Convertible Security, or Option outstanding, and at the
conversion or exercise or other purchase price in effect, on the date of and
immediately prior to such Dilutive Event, and (3) the number of shares of
Common Stock reserved for issuance, but not yet issued, pursuant to any stock
option plan or other restricted stock plan or employee stock bonus program of
the Corporation or other grant designated and approved by the Board of
Directors.
(F) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section (C)(3)(e)(iii), deemed to
be issued) by the Corporation after the applicable Original Issue Date, other
than: (1) shares of Common Stock issued or issuable upon conversion of or in
exchange for the Corporation's Series A Preferred Stock (for purposes of
determining whether an adjustment to the Series A Applicable Conversion Price is
required) or shares of Common Stock issued or issuable upon conversion of or in
exchange for the Corporation's A/B Preferred Stock (for purposes of determining
whether an adjustment to the Series B Applicable Conversion Price is required);
(2) shares of Common Stock issued or issuable at any time to employees, officers
or directors of, or consultants or advisors to, the Corporation pursuant to any
stock option plan, or other restricted stock plan or employee stock bonus
program or other grant designated and approved by the Board of Directors; (3)
shares of Common Stock issued or issuable at any time as a dividend or
distribution on Series A Preferred Stock (for purposes of determining whether an
adjustment to the Series A Applicable Conversion Price is
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<PAGE>
required) or shares of Common Stock issued or issuable at any time as a dividend
or distribution on A/B Preferred Stock (for purposes of determining whether an
adjustment to the Series B Applicable Conversion Price is required), or upon the
occurrence of any other event for which adjustment is made pursuant to Section
(C)(3)(f) hereof; (4) shares of Common Stock issued to financial institutions or
lessors in connection with commercial credit arrangements, equipment financings,
or similar transactions; (5) shares of Common Stock issued in connection with a
merger of the Corporation with or into another corporation or the acquisition by
the Corporation of another entity; (6) shares of Common Stock issued or issuable
at any time by way of dividend or other distribution on shares of Common Stock
excluded from the definition of Additional Shares of Common Stock; and (7) any
other share of Common Stock or any other securities convertible into or
exchangeable or exercisable for shares of Common Stock, provided that such
securities are designated as excluded from the definition of Additional Shares
of Common Stock by the vote or written consent of holders of at least a majority
of the then outstanding shares of Series A Preferred Stock, for purposes of
determining whether an adjustment to the Series A Applicable Conversion Price is
required, or a majority of the then outstanding shares of Series B Preferred
Stock, for purposes of determining whether an adjustment to the Series B
Applicable Conversion Price is required.
(ii) DEEMED ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
(A) OPTIONS AND CONVERTIBLE SECURITIES. In the event the
Corporation at any time or from time to time after the applicable Original Issue
Date shall issue any Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number upon the
occurrence of an event which has not yet occurred and is uncertain to occur) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall, except as otherwise provided herein, be deemed to
be Additional Shares of Common Stock issued as of the time such Options or
Convertible Securities are issued; PROVIDED, HOWEVER, that if a Dilutive Event
requiring an adjustment in the Series A or Series B Applicable Conversion Price
occurs as a result of Additional Shares of Common Stock deemed to be issued
pursuant to this Section (C)(3)(e), then (notwithstanding the foregoing): (1) no
further adjustment in the Applicable Conversion Price for which an adjustment
was previously made shall be made (a) upon the subsequent issuance of shares of
Common Stock upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or (b), in the case of Options for the purchase of
Convertible Securities, upon the subsequent issuance of such Convertible
Securities upon exercise of such Options; (2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, except
as provided in this Section (C)(3)(e), for any increase or decrease in the
consideration payable to the Corporation, or in the number of shares of Common
Stock issuable, upon the exercise,
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<PAGE>
conversion or exchange thereof (a "Change Event"), the Series A and Series B
Applicable Conversion Prices computed upon the original issuance thereof, and
any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities; PROVIDED, HOWEVER, that anything to the contrary
notwithstanding, if the Change Event is triggered or caused by a Dilutive Event
(as defined in Section (C)(3)(e)(i)(D), this Section (C)(3)(e)(ii) shall be
inapplicable and no adjustment shall be made to the Series A or Series B
Applicable Conversion Price as a result of the Change Event; (3) upon the
expiration of any such Options or any rights of conversion or exchange under
such Convertible Securities which shall not have been exercised, the Series A
and Series B Applicable Conversion Price computed upon the original issuance
thereof, and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if: (a) in the case of Convertible Securities or
Options for Common Stock, only the shares of Common Stock, if any, actually
issued upon the exercise of such Options or the conversion or exchange of such
Convertible Securities were issued at the time of the issuance of such
Convertible Securities or Options and the consideration received therefor was
the consideration actually received by the Corporation for the issue of all such
Options or Convertible Securities, whether or not exercised, converted, or
exchanged, plus the consideration actually received by the Corporation upon such
exercise, conversion or exchange, and (b) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Corporation upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised; (4) no readjustment pursuant to clause (2) or (3) above
shall have the effect of increasing the Series A or Series B Applicable
Conversion Priceto an amount which exceeds the lower of (a) the Applicable
Conversion Price for the applicable series of Preferred Stock on the original
adjustment date, or (b) the Applicable Conversion Price for the applicable
series of Preferred Stock that would have resulted from any other issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date; and (5) in the case of any Options which expire by their
terms not more than one hundred twenty (120) days after the date of issuance
thereof, no adjustment of the Series A or Series B Applicable Conversion Price
shall be made until the exercise and/or expiration of all such Options.
In the event that a record date is established for the purpose of
determining the holders of the Corporation's securities who shall be entitled to
receive Options or Convertible Securities as a dividend or a distribution, the
Options or Convertible Securities to be so distributed or issued shall, for
purposes of this Section (C)(3)(e)(ii), be deemed to
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have been issued as of such record date (PROVIDED that the Applicable Conversion
Prices so computed shall be recomputed if such Options or Convertible Securities
are not so distributed or issued).
(B) STOCK DIVIDENDS. In the event the Corporation at any
time or from time to time after the applicable Original Issue Date shall declare
or pay any dividend on the Common Stock payable in Common Stock, then and in any
such event, Additional Shares of Common Stock shall be deemed to have been
issued immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend; PROVIDED, HOWEVER, that if such record date is fixed and such dividend
is not fully paid, the only Additional Shares of Common Stock deemed to have
been issued will be the number of shares of Common Stock actually issued in such
dividend, and such shares will be deemed to have been issued as of the close of
business on such record date, and the Applicable Conversion Prices shall be
recomputed accordingly.
(iii) ADJUSTMENT OF APPLICABLE CONVERSION PRICES UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK.
(A) SERIES A PREFERRED STOCK. If a Series A Dilutive Event
shall occur at any time or from time to time after the Series A Preferred
Stock's Original Issue Date, the Series A Applicable Conversion Price shall be
reduced, concurrently with the occurrence of such Dilutive Event, to a price
determined by multiplying the Series A Applicable Conversion Price with respect
to such Dilutive Event by a fraction, the numerator of which shall be the sum of
the Fully-Diluted Shares plus the number of shares of Common Stock which could
be purchased at such Series A Applicable Conversion Price with the aggregate
consideration received by the Corporation for the Additional Shares of Common
Stock issued, or deemed to be issued, in connection with such Dilutive Event;
and the denominator of which shall be the sum of the Fully-Diluted Shares plus
the number of Additional Shares of Common Stock issued, or deemed to be issued,
in connection with such Dilutive Event. The provisions of this paragraph as
they may apply to the Series A Preferred may be waived in any instance (without
the necessity of convening any meeting of stockholders of the Corporation) upon
written agreement of at least a majority of the outstanding shares of Series A
Preferred Stock (voting as a separate class).
(B) SERIES B PREFERRED STOCK. If a Series B Dilutive Event
shall occur at any time or from time to time after the Series B Preferred
Stock's Original Issue Date, the Series B Applicable Conversion Price shall be
reduced, concurrently with the occurrence of such Dilutive Event, to a price
determined by multiplying the Series B Applicable Conversion Price with respect
to such Dilutive Event by a fraction, the numerator of which shall be the sum of
the Fully-Diluted Shares plus the number of shares of Common Stock which could
be purchased at such Series B Applicable Conversion Price with the aggregate
consideration received by the Corporation for the Additional Shares of Common
Stock issued, or deemed to be issued, in connection with such Dilutive Event;
and the denominator of which shall be the sum of the Fully-Diluted Shares plus
the number of Additional Shares of
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Common Stock issued, or deemed to be issued, in connection with such Dilutive
Event. The provisions of this paragraph as they may apply to the Series B
Preferred may be waived in any instance (without the necessity of convening any
meeting of stockholders of the Corporation) upon written agreement of at least a
majority of the outstanding shares of Series B Preferred Stock (voting as a
separate class).
(iv) DETERMINATION OF CONSIDERATION. For purposes of this Section
(C)(3)(e), the consideration received by the Corporation for any Additional
Shares of Common Stock shall be computed as follows:
(A) CASH AND PROPERTY. Such consideration shall: (1)
insofar as it consists of cash, be deemed to be the amount of cash paid therefor
before deducting any discounts, commissions or other expenses allowed, paid or
incurred by the Corporation for any underwriting or otherwise in connection with
the issuance and sale thereof, but excluding amounts paid or payable for accrued
interest or accrued dividends; (2) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the Board; and (3)in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses (1) and (2)
above, as determined in good faith by the Board.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section (C)(3)(e)(ii), relating to
Options and Convertible Securities, shall be determined by dividing: (x) the
total amount, if any, received or receivable by the Corporation as consideration
for the issue of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the Corporation upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities; by (y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(C) STOCK DIVIDENDS. Any Additional Shares of Common Stock
issued as stock dividends shall be deemed to have been issued for no
consideration.
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(f) ADDITIONAL ADJUSTMENTS TO APPLICABLE CONVERSION PRICE. In
addition to the adjustments made pursuant to Section (C)(3)(e), the Series A and
Series B Applicable Conversion Prices shall be subject to adjustment from time
to time as follows:
(i) DIVIDENDS AND STOCK SPLITS. If the number of shares of Common
Stock outstanding at any time after the applicable Original Issue Date is
increased by a dividend on the Common Stock payable in shares of Common Stock or
by a stock split, then immediately after the record date fixed for the
determination of holders of Common Stock entitled to receive such stock dividend
or stock split, as the case may be, the Series A and Series B Applicable
Conversion Prices shall be automatically reduced so that the holder of any
shares of Series A or Series B Preferred Stock thereafter converted shall be
entitled to receive the number of shares of Common Stock which it would have
owned immediately following such action had such shares of Preferred Stock been
converted immediately prior to the record date. Any adjustment under this
section shall become effective at the close of business on the date the dividend
or stock split becomes effective.
(ii) COMBINATIONS OF COMMON STOCK. If the number of shares of
Common Stock outstanding at any time after the applicable Original Issue Date is
decreased by a combination of the outstanding shares of Common Stock, then
immediately after the record date fixed for the combination, the Series A and
Series B Applicable Conversion Prices shall be automatically increased so that
the holder of any shares of Preferred Stock thereafter converted shall be
entitled to receive the number of shares of Common Stock which it would have
owned immediately following such action had such shares of Preferred Stock been
converted immediately prior to the record date. Any adjustment under this
section shall become effective the close of business on the date the combination
becomes effective.
(iii) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time after the applicable Original Issue
Date issues a dividend or other distribution to holders of Common Stock payable
in securities of the Corporation other than shares of Common Stock, in each such
event provision shall be made so that the holders of the Series A or Series B
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of other securities
of the Corporation which they would have received had their shares of Preferred
Stock been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such securities during such period, subject to all
other adjustments called for during such period under this Section (C)(3) with
respect to the rights of the holders of the Preferred Stock or with respect to
such other securities by their terms.
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(iv) REORGANIZATIONS. After a Reorganization (defined below) which
is not subject to Sections (C)(3)(e) or (C)(3)(f), upon the conversion of a
share of Series A or Series B Preferred Stock, the holder of that share shall be
entitled to receive that number of shares of stock and/or other property (the
"Reorganization Shares") which it would have been entitled to receive upon the
Reorganization had it converted into Common Stock immediately prior to the
record date for the Reorganization.
After a Reorganization, the Reorganization Shares shall be subject to terms
which, as nearly as may reasonably be possible, have the same effect as this
Section (C)(3)(f).
For purposes of this Section (C)(3) only, a "Reorganization" shall mean any
(A) capital reorganization of the Corporation, (B) reclassification of the
Common Stock of the Corporation, (C) consolidation, merger or share exchange of
the Corporation with or into any other entity, or (D) the sale, lease or other
disposition of all or substantially all of the assets of the Corporation.
(g) ROUNDING OF CALCULATIONS; MINIMUM ADJUSTMENT. All
calculations under Section (C)(3)(e) or Section (C)(3)(f) shall be made by
rounding downward to the nearest cent or rounding upward to the nearest
one-tenth (1/10th) of a share, as the case may be. Any provision of Section
(C)(3)(e) or Section (C)(3)(f) to the contrary notwithstanding, no adjustment in
the Series A or Series B Applicable Conversion Price shall be made if the amount
of such adjustment would be less than 1% thereof, but any such amount shall be
carried forward and an adjustment with respect thereto shall be made at the time
of and together with any subsequent adjustment which, together with such amount
and any other amount or amounts so carried forward, shall aggregate 1% or more
of the Series A or Series B Applicable Conversion Price then in effect.
(h) MECHANICS OF CONVERSION.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series A or Series B Preferred Stock. In
lieu of any fractional share to which a holder would otherwise be entitled, the
Corporation shall, after aggregating all Series A Preferred Stock and Series B
Preferred Stock to be converted to Common Stock by such holder, pay cash equal
to such fraction multiplied by the fair market value of the Common Stock as
determined by the Board on the date of the conversion.
(ii) VOLUNTARY CONVERSION. Any holder of Series A or Series B
Preferred Stock wishing to convert shares of Series A or Series B Preferred
Stock into Common Stock pursuant to Section (C)(3)(a) shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or any transfer agent for the Preferred Stock and shall give the
Corporation written notice (the "Conversion Notice") stating that such
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holder elects to convert the same, the number of shares being converted and the
name or names in which the holder wishes the certificate or certificates for
shares of Common Stock to be issued. Any conversion pursuant to Section
(C)(3)(a) shall be deemed to be effective for all purposes upon receipt by the
Corporation or a transfer agent for the Preferred Stock of such certificates,
duly endorsed, and the Conversion Notice and shall be deemed to have been made
immediately prior to the close of business on the date thereof. As soon as
practicable after the effectiveness of any conversion of Series A or Series B
Preferred Stock, the Corporation shall cause to be issued and delivered pursuant
to the Conversion Notice certificates representing the Common Stock into which
such Preferred Stock has been converted; PROVIDED, HOWEVER, that the Corporation
shall not be required to issue certificates for Common Stock in any name other
than that of the holder of the Series A or Series B Preferred Stock so converted
in the absence of assurances reasonably satisfactory to the Corporation that all
stamp and other transfer taxes relating to the transfer of such securities have
been or will be paid and that such transfer complies with all applicable
securities laws and applicable transfer restrictions.
(iii) AUTOMATIC CONVERSION. Upon any automatic conversion of Series
A or Series B Preferred Stock pursuant to Section (C)(3)(b), the outstanding
shares of Series A or Series B Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent; PROVIDED, HOWEVER, that the Corporation shall not be obligated
to issue to any such holder certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificate or certificates evidencing
the shares of Series A or Series B Preferred Stock so converted (or an affidavit
of lost, stolen or destroyed certificate and indemnification agreement in
respect of such certificate or certificates in form and substance satisfactory
to the Corporation in its sole discretion) are delivered to the Corporation or
any transfer agent of the Corporation.
(i) EFFECT OF CONVERSION. Notwithstanding any issuance or lack
thereof of certificates representing Common Stock, from and after the
effectiveness of any conversion of any shares of Series A or Series B Preferred
Stock, the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated by the Corporation for all
purposes as the record holders of the Common Stock obtainable upon such
conversion and shall cease to have any other rights of a holder of Series A or
Series B Preferred Stock with respect to the shares of Series A or Series B
Preferred Stock so converted.
(j) PAYMENT OF DECLARED BUT UNPAID DIVIDENDS. Any dividends which
have been declared but remain unpaid with respect to any Series A or Series B
Preferred Stock which has been converted shall be payable in cash, or, to the
extent sufficient funds are not legally available therefor, in Common Stock (at
the Common Stock's fair market
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value as determined by the Board as of the date of such conversion) not later
than fourteen (14) days after the effectiveness of such conversion.
(k) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities;
(ii) to offer for subscription pro rata to the holders of Common
Stock any additional shares of any class or series of any of the Corporation's
capital stock or any other rights;
(iii) to effect a Reorganization; or
(iv) to effect a Liquidation Event;
then, in connection with each such event, the Corporation shall send to the
holders of Series A Preferred Stock and Series B Preferred Stock at least ten
(10) days' prior written notice of the record date for such event and/or the
record date of any vote with respect to such event.
(l) STATEMENT REGARDING ADJUSTMENTS. Whenever the Series A or
Series B Applicable Conversion Price shall be adjusted as provided in Section
(C)(3)(e) or Section (C)(3)(f), the Corporation shall as soon as practicable and
at its expense, file, at the office of any transfer agent for the Series A or
Series B Preferred Stock and at the principal office of the Corporation, a
statement showing in detail the facts requiring such adjustment and the Series A
or Series B Applicable Conversion Price that shall be in effect after such
adjustment, and the Corporation shall also send a copy of such statement to the
holders of Series A or Series B Preferred Stock, as applicable.
(m) RESERVATION OF SHARES. The Corporation shall reserve and keep
available at all times, so long as any Series A or Series B Preferred Stock
remains outstanding, free from preemptive rights, out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series A or Series B Preferred Stock, sufficient shares of
Common Stock to provide for the conversion of all outstanding Series A and
Series B Preferred Stock. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding Series A and Series B Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
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(D) SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK. A total of
1,384,615 shares of the authorized shares of Preferred Stock are hereby
designated "Series C Preferred Stock" and a total of 2,500,000 shares of the
authorized Preferred Stock are hereby designated "Series D Preferred Stock."
The capitalized terms used in this Section (D) are defined within the paragraphs
of this Section or in Section (D)(9) below. The rights, preferences,
privileges, restrictions and other matters relating to the Series C Preferred
Stock and Series D Preferred Stock are as follows:
(1) LIQUIDATION. Upon any liquidation, dissolution or winding up of the
Corporation, the Corporation's assets shall be distributed as follows: (i) if
the Net Proceeds are equal to or less than the aggregate Liquidation Value of
the Series C and Series D Preferred Stock, plus all accrued and unpaid dividends
on the Series C and Series D Preferred Stock, then such Net Proceeds shall be
distributed ratably among all holders of Series C and Series D Preferred Stock
in proportion to the total Liquidation Value amounts to which they are otherwise
entitled; (ii) if the Net Proceeds are greater than the aggregate Liquidation
Value of the Series C and Series D Preferred Stock, plus all accrued and unpaid
dividends on such shares, then such Net Proceeds shall be distributed as
follows: (a) an amount equal to the aggregate Liquidation Value of the Series C
and Series D Preferred Stock, plus all accrued and unpaid dividends on such
shares, shall be distributed ratably among all holders of Series C and Series D
Preferred Stock in proportion to the total Liquidation Value amounts to which
they are entitled; and (b) after the distribution set forth in clause (a), the
remainder of such Net Proceeds shall be distributed (x) first, ratably among all
holders of Junior Securities in an amount sufficient to return to such holders
an amount equal to the original price paid by such holders for their shares (y)
second, ratably among all holders of Common Stock in an amount sufficient to
return to such holders their cost basis in the shares, and (z) third, to all
holders of Common Stock and the Series C and Series D Preferred Stock, ratably
on an as-converted basis.
The Corporation shall mail written notice of such liquidation, dissolution
or winding up, not less than 10 days prior to the payment date stated therein,
to each record holder of Series C and Series D Preferred Stock.
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(2) CUMULATIVE DIVIDENDS. Dividends on the Series C and Series D
Preferred Stock shall be cumulative and shall cumulate and accrue on a
semi-annual basis, without interest, at the rate of 8.0% of the purchase price
per share per annum from the date of issue of such shares, regardless of whether
the Corporation shall have funds legally available for such purpose. The
holders of the Series C and Series D Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available for such purpose, cumulative dividends at the rates specified
above.
(3) REDEMPTIONS.
(a) MANDATORY REDEMPTION. If requested in writing by holders of a
majority of the Series C Preferred Stock at any time after May 14, 2004, the
Corporation shall redeem, with funds legally available therefor, all shares of
Series C Preferred Stock at a price per share equal to the Liquidation Value
thereof, plus all accrued and unpaid dividends thereon (the "Series C Redemption
Price"). If requested in writing by holders of a majority of Series D Preferred
Stock at any time after October __, 2004, the Corporation shall redeem, with
funds legally available therefor, all shares of Series D Preferred Stock at a
price per share equal to the Liquidation Value thereof plus all accrued and
unpaid dividends thereon (the "Series D Redemption Price"). Any redemption of
Series C or Series D Preferred Stock under this paragraph shall be made as
follows:
(i) one-third of the shares of Series C or Series D Preferred
Stock shall be redeemed on the date stated in such written request, which date
shall not be earlier than May 14, 2004, in the case of Series C Preferred Stock,
and October ___, 2004 in the case of Series D Preferred Stock;
(ii) an additional one-third of such shares shall be redeemed on
the first anniversary of such date; and
(iii) the final one-third of such shares shall be redeemed on the
second anniversary of such date (each of the dates in (i)-(iii) being referred
to as a "Redemption Date").
(b) SURRENDER OF CERTIFICATES. Ten days prior to each Redemption
Date, the Corporation shall mail written notice (the "Redemption Notice"),
postage prepaid, to each holder of record of the series of Preferred Stock being
redeemed on such Redemption Date, at such holder's address as shown on the
records of the Corporation; PROVIDED, HOWEVER, that the Corporation's failure to
give such Redemption Notice shall in no way affect its obligation to redeem the
Preferred Stock as provided in Section (D)(3)(a) hereof. The Redemption Notice
shall contain the following information:
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(i) The number of shares of Preferred Stock held by the
holder which shall be redeemed by the Corporation on such Redemption Date
pursuant to the provisions of Section (D)(3)(a);
(ii) the Redemption Date; and
(iii) the address at which the holder may surrender to the
Corporation its certificate or certificates representing shares of
Preferred Stock to be redeemed.
Each holder of shares of the series of Preferred Stock to be redeemed shall
surrender the certificate or certificates representing such shares to the
Corporation at the place specified in the Redemption Notice on or before the
Redemption Date designated in the Redemption Notice (PROVIDED that failure to
surrender a stock certificate shall not prevent the redemption of the underlying
stock), and thereupon the applicable Redemption Price for such shares as set
forth in this Section (D)(3) shall be paid to the order of the person whose name
appears on such certificate or certificates. Each surrendered certificate shall
be canceled and retired and a new certificate, representing the remaining,
unredeemed shares of Series C or Series D Preferred Stock, as applicable, if
any, shall be issued to the holder of such shares.
(c) DIVIDENDS AFTER REDEMPTION DATE. No share of Series C or
Series D Preferred Stock is entitled to any dividends accruing after the date on
which the Liquidation Value of such share, plus all accrued and unpaid dividends
thereon, is paid to the holder thereof. On such date all rights of the holder
of such share shall cease, and such share shall not be deemed to be outstanding.
(d) REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares of
Preferred Stock which are redeemed or otherwise acquired by the Corporation
shall be canceled and shall not be reissued, sold or transferred.
(e) ACCRUED DIVIDENDS MUST BE PAID PRIOR TO ANY REDEMPTION. The
Corporation may not redeem any Series C or Series D Preferred Stock, unless all
dividends accrued on the outstanding shares of such series through the
immediately preceding Redemption Date have been paid in full.
(f) FUNDS LEGALLY AVAILABLE. If the funds of the Corporation
legally available for a redemption pursuant to RCW 23B.06.400 on a Redemption
Date are insufficient to redeem the total number of shares of the series of
Preferred Stock submitted for redemption, those funds which are legally
available will be used to redeem the maximum possible number of whole shares
ratably among the holders of such shares.
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(4) VOTING RIGHTS. The holders of the Series C and Series D Preferred
Stock shall be entitled to notice of all shareholders meetings in accordance
with the Corporation's bylaws and shall be entitled to vote on all matters
submitted to the shareholders for a vote together with the holders of the Common
Stock voting together as a single class with each share of Common Stock entitled
to one vote per share and each share of Series C and Series D Preferred Stock
entitled to one vote for each share of Common Stock issuable upon conversion of
such shares at the time the vote is taken, except as otherwise provided herein
or by law.
At any time prior to the closing of the Corporation's Qualified Public
Offering, the holders of Series C Preferred Stock, voting as a separate class,
shall be entitled to elect one director (the "Series C Director"). At any
annual or special meeting of the Corporation (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy of the holders of at least a majority of the then outstanding shares of
Series C Preferred Stock (voting together as a separate class) shall constitute
a quorum for the election of the Series C Director. The holders of at least a
majority of the shares of Series C Preferred Stock present in person or by proxy
at any meeting relating to the election of directors (calculated after the
determination of a quorum) shall then be entitled to elect the Series C
Director.
A Series C Director may be removed during his or her term of office without
cause, by and only by, the affirmative vote or written consent of at least a
majority of the then outstanding shares of the Series C Preferred Stock (voting
as a separate class). A vacancy in a seat held by a Series C Director shall be
filled by the vote of the holders of at least a majority of the shares of
Series C Preferred Stock (voting as a separate class) present in person or
represented by proxy at any meeting at which a quorum of the Series C Preferred
Stock is present (calculated after the determination of a quorum) or by written
consent of the holders of at least a majority of the then outstanding shares of
Series C Preferred Stock (voting as a separate class).
(5) CONVERSION.
(a) CONVERSION PROCEDURE.
(i) At any time and from time to time, any holder of Series C or
Series D Preferred Stock may convert all or any portion of the Series C or
Series D Preferred Stock (including any fraction of a share) held by such holder
into a number of shares of Conversion Stock computed by multiplying the number
of shares to be converted by the Liquidation Value for such shares and dividing
the result by the Series C Conversion Price or Series D Conversion Price, as
applicable, then in effect.
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(ii) Each conversion of Series C or Series D Preferred Stock shall
be deemed to have been effected as of the close of business on the date on which
the certificate or certificates representing the shares to be converted have
been surrendered at the principal office of the Corporation. At such time as
such conversion has been effected, the rights of the holder of such Series C or
Series D Preferred Stock as such holder shall cease and the Person or Persons in
whose name or names any certificate or certificates for shares of Conversion
Stock are to be issued upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Conversion Stock represented
thereby.
(iii) The conversion rights of any Series C or Series D Preferred
share shall terminate on the Redemption Date for such share unless the
Corporation has failed to pay to the holder thereof the Liquidation Value
thereof plus all accrued and unpaid dividends thereon.
(iv) As soon as possible after a conversion has been effected (but
in any event within ten days in the case of subparagraph (A) below), the
Corporation shall deliver to the converting holder:
(A) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting
holder has specified;
(B) payment in an amount equal to all accrued dividends with
respect to each share of Series C or Series D Preferred Stock converted,
which have not been paid prior thereto, plus the amount payable under
subparagraph (viii) below with respect to such conversion; and
(C) a certificate representing any shares of Series C or Series D
Preferred Stock which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but which
were not converted.
(v) If the Corporation is not permitted under applicable law to
pay any portion of the accrued dividends on the shares of Preferred Stock being
converted, the Corporation shall pay such dividends to the converting holder as
soon thereafter as funds of the Corporation are legally available for such
payment. At the request of any such converting holder, the Corporation shall
provide such holder with written evidence of its obligation to such holder.
(vi) The issuance of certificates for shares of Conversion Stock
upon conversion of Series C or Series D Preferred Stock shall be made without
charge to the
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holders of such Series C or Series D Preferred Stock for any issuance tax in
respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares of Conversion Stock. Upon
conversion of each share of Series C or Series D Preferred Stock, the
Corporation shall take all such actions as are necessary in order to insure that
the Conversion Stock issuable with respect to such conversion shall be validly
issued, fully paid and nonassessable.
(vii) The Corporation shall assist and cooperate with any holder of
shares of Series C or Series D Preferred Stock required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of shares of Series C or Series D Preferred Stock hereunder
(including, without limitation, making any filings required to be made by the
Corporation).
(viii) If any fractional interest in a share of Conversion Stock
would, except for the provisions of this subparagraph, be deliverable upon any
conversion of the Series C or Series D Preferred Stock, the Corporation, in lieu
of delivering the fractional share therefor, shall pay an amount to the holder
thereof equal to the Market Price of such fractional interest as of the date of
conversion.
(ix) If the shares of Conversion Stock issuable by reason of such
conversion of Series C or Series D Preferred Stock are convertible into or
exchangeable for any other stock or securities of the Corporation, the
Corporation shall, at the converting holder's option, upon surrender of the
shares of Series C or Series D Preferred Stock to be converted by such holder as
provided above together with any notice, statement or payment required to effect
such conversion or exchange of Conversion Stock, deliver to such holder or as
otherwise specified by such holder a certificate or certificates representing
the stock or securities into which the shares of Conversion Stock issuable by
reason of such conversion are so convertible or exchangeable, registered in such
name or names and in such denomination or denominations as such holder has
specified.
(b) CONVERSION PRICE.
(i) The initial "Series C Conversion Price" shall be an amount
equal to the average per share price paid for the Series C Preferred by the
holders thereof (the "Series C Conversion Price"). The initial "Series D
Conversion Price" shall be $4.00 ("Series D Conversion Price"). In order to
prevent dilution of the conversion rights granted under this subdivision, the
Series C Conversion Price and the Series D Conversion Price shall be subject to
adjustment from time to time pursuant to this Section (D)(5).
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(ii) If and whenever on or after the original date of issuance of
the Series C or Series D Preferred Stock, as applicable, the Corporation issues
or sells, or in accordance with Section (D)(5)(c) is deemed to have issued or
sold, any shares of its Common Stock for a consideration per share less than the
Series C Conversion Price or Series D Conversion Price in effect immediately
prior to the time of such issuance or sale, then forthwith upon such issue or
sale the Series C Conversion Price and/or the Series D Conversion Price, as
applicable, shall be reduced to the Conversion Price for such series determined
by dividing (a) the sum of (1) the product derived by multiplying the Conversion
Price for such series in effect immediately prior to such issue or sale by the
number of shares of Common Stock Deemed Outstanding immediately prior to such
issue or sale, plus (2) the consideration, if any, received by the Corporation
upon such issue or sale, by (b) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale; provided that there shall be
no adjustment in the Series C or Series D Conversion Price as a result of any
issuance or sale (or deemed issuance or sale) of (i) up to an aggregate of
1,600,000 shares of Common Stock to directors, officers, employees or
consultants of the Corporation pursuant to stock option plans and stock
ownership plans and issuances approved by the Corporation's board of directors
under which the Corporation may grant options to purchase or otherwise acquire
Common Stock ("Options"), (ii) up to an aggregate of 354,811 shares of Common
Stock pursuant to warrant agreements outstanding on May 14, 1999 (as such number
of shares is proportionately adjusted for subsequent stock splits, combinations
and dividends affecting the Common Stock and as such number includes all such
employee stock options and purchase rights outstanding at the time of the
issuance of the Series C Preferred), (iii) shares of Common Stock issued or
issuable upon conversion or in exchange for the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
(collectively the "Preferred"), (iv) shares of Common Stock issued or issuable
as a dividend or distribution on the Preferred, or any other share of Common
Stock or other security convertible into or exchangeable or exercisable for
shares of Common Stock that are designated as excluded from adjustment of the
Series C or Series D Conversion Price by the vote or written consent of at least
a majority of the then outstanding shares of such series.
(c) EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Series C and Series D Conversion Prices under
Section (D)(5)(b), the following shall be applicable after the date of the
original issuance of the Series C or Series D Preferred Stock, as applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Corporation in any
manner grants any securities convertible into or otherwise exchangeable for
Common Stock ("Convertible Securities") or Options and the price per share for
which Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than the Series C
Conversion Price or Series D Conversion
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Price, as applicable, in effect immediately prior to the time of the issuance or
sale of such Convertible Securities or granting of such Options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities shall be deemed to be outstanding and to have been issued
and sold by the Corporation at the time of the issuance or sale of such
Convertible Securities or granting of such Options for such price per share.
For purposes of this paragraph, the "price per share for which Common Stock is
issuable" shall be determined by dividing (A) the total amount, if any, received
or receivable by the Corporation as consideration for the issuance or sale of
such Convertible Securities or granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the Corporation upon
exercise of all such Options or issuance or sale of such Convertible Securities,
plus in the case of such Options which relate to Convertible Securities and in
the case of Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the issuance of sale or
such Convertible Securities and the conversion or exchange thereof, by (B) the
total maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities, including Convertible Securities issuable upon the exchange of such
Options. No further adjustment of the Series C or Series D Conversion Price
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or Common Stock is actually issued upon the exercise of such
Options or upon the conversion or exchange of such Convertible Securities.
(d) EFFECT ON CONVERSION PRICE OF CERTAIN OTHER EVENTS. For
purposes of determining the adjusted Series C and Series D Conversion Prices
under Section (D)(5)(b), the following shall be applicable at all times after
the original issuance of the Series C or Series D Preferred Stock, as
applicable:
(i) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase
price provided for in any Option, the additional consideration (if any) payable
upon the issue, conversion or exchange of any Convertible Securities, or the
rate at which any Convertible Securities are convertible into or exchangeable
for Common Stock change at any time, the Series C and Series D Conversion Prices
in effect at the time of such change shall be readjusted to the Series C and
Series D Conversion Prices which would have been in effect at such time had such
Option or Convertible Securities originally provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(ii) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
SECURITIES. Upon the expiration of any Option or the termination of any right
to convert or exchange any Convertible Securities without the exercise of any
such Option or right, the Series C and Series D Conversion Prices then in effect
hereunder shall be adjusted to
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the Series C and Series D Conversion Prices which would have been in effect at
the time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
termination, never been issued.
(iii) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock,
Option or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the gross amount received by the Corporation therefor. In case any Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by the
Corporation shall be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Corporation shall be the Market Price thereof as of the date of
receipt. If any Common Stock, Option or Convertible Securities are issued to
the owners of the non-surviving entity in connection with any merger in which
the Corporation is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash and securities shall be determined in good
faith by the Board of Directors of the Corporation.
(iv) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Corporation, and the disposition of any shares so owned or
held shall be considered an issue or sale of Common Stock.
(v) RECORD DATE. If the Corporation takes a record of the holders
of Common Stock for the purpose of entitling them (a) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (b) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or upon the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the case
may be.
(e) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Series C Conversion Price in
effect immediately prior to such subdivision shall be proportionately reduced,
and if the Corporation at any time combines (by reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Series C and Series D Conversion Prices in effect
immediately prior to such combination shall be proportionately increased.
23
<PAGE>
(f) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change." Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance reasonably satisfactory to the holders of a
majority of the Series C Preferred Stock and the holders of a majority of the
Series D Preferred Stock then outstanding) to insure that each of the holders of
Series C and Series D Preferred Stock shall thereafter have the right to acquire
and receive, in lieu of or in addition to (as the case may be) the shares of
Conversion Stock immediately theretofore acquirable and receivable upon the
conversion of such holder's Series C or Series D Preferred Stock, such shares of
stock, securities or assets as such holder would have received in connection
with such Organic Change if such holder had converted its Series C or Series D
Preferred Stock immediately prior to such Organic Change. In each such case,
the Corporation shall also make appropriate provisions (in form and substance
satisfactory to the holders of a majority of the Series C Preferred then
outstanding) to insure that the provisions of this Section (D)(5) and Sections
(D)(6) and (D)(7) hereof shall thereafter be applicable to the Series C and
Series D Preferred Stock (including, in the case of any such consolidation,
merger or sale in which the successor entity or purchasing entity is other than
the Corporation, immediate adjustments of the Series C and Series D Conversion
Prices to the value for the Common Stock reflected by the terms of such
consolidation, merger or sale, and corresponding immediate adjustments in the
number of shares of Conversion Stock acquirable and receivable upon conversion
of Series C and Series D Preferred Stock, if the value so reflected is less than
the Series C or Series D Conversion Price in effect immediately prior to such
consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing such assets assumes by
written instrument (in form satisfactory to the holders of a majority of the
Series C Preferred Stock and the holders of a majority of the Series D Preferred
Stock then outstanding), the obligation to deliver to each such holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
(g) CERTAIN EVENTS. If any event occurs of the type contemplated
by the provisions of this Section (D)(5) but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's board of directors shall make an appropriate adjustment in the
Series C Conversion Price and the Series D
24
<PAGE>
Conversion Price so as to protect the rights of the holders of Series C and
Series D Preferred Stock; provided that no such adjustment shall increase the
Series C or Series D Conversion Price as otherwise determined pursuant to this
Section (D)(5) or decrease the number of shares of Conversion Stock issuable
upon conversion of each share of Series C or Series D Preferred Stock.
(h) NOTICES.
(i) Upon any adjustment of the Series C or Series D Conversion
Price, the Corporation shall give written notice thereof to all holders of
Series C or Series D Preferred Stock, as the case may be, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(ii) The Corporation shall give written notice to all holders of
Series C and Series D Preferred Stock at least 10 days prior to the date on
which the Corporation closes its books or takes a record (a) with respect to any
dividend or distribution upon Common Stock, or (b) with respect to any pro rata
subscription offer to holders of Common Stock or at least 20 days prior for
determining rights to vote with respect to any Organic Change, dissolution or
liquidation.
(iii) The Corporation shall also give written notice to the holders
of Series C and Series D Preferred Stock at least 20 days prior to the date on
which any Organic Change shall take place.
(i) MANDATORY CONVERSION. The Corporation may at any time require
the conversion of all of the outstanding Series C Preferred Stock if the
Corporation is at such time consummating a Qualified Public Offering, with such
mandatory conversion only to be effected at the time of and subject to the
closing of the sale of such shares pursuant to such Qualified Public Offering;
or if the holders of a majority of the outstanding shares of Series C Preferred
Stock elect by affirmative vote or written consent to convert.
The Corporation may at any time require the conversion of all of the
outstanding Series D Preferred Stock if the Corporation is at such time
consummating the sale in a public offering under the Securities Act of 1933, as
amended, of shares of the Common Stock in which (i) the aggregate price paid by
the public for the shares shall be at least $15,000,000 and the price per share
paid by the public for such shares shall be at least $8.00, with such mandatory
conversion only to be effected at the time of and subject to the closing of the
sale of such shares pursuant to such offering; or if the holders of a majority
of the outstanding shares of Series D Preferred Stock elect by affirmative vote
or written consent to convert.
25
<PAGE>
(6) PURCHASE RIGHTS. If at any time the Corporation grants, issues or
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then each holder of Series C or Series D
Preferred Stock shall be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Conversion Stock
acquirable upon conversion of such holder's Series C or Series D Preferred Stock
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(7) REGISTRATION OF TRANSFER. The Corporation shall keep at its principal
office a register for the registration of Series C and Series D Preferred Stock.
Upon the surrender of any certificate representing Series C and Series D
Preferred Stock at such place, the Corporation shall, at the request of the
record holder of such certificate, execute and deliver (at the Corporation's
expense) a new certificate or certificates in exchange therefor representing in
the aggregate the number of shares represented by the surrendered certificate.
Each such new certificate shall be registered in such name and shall represent
such number of shares as is requested by the holder of the surrendered
certificate and shall be substantially identical in form to the surrendered
certificate, and dividends shall accrue on the Series C or Series D Preferred
Stock represented by such new certificate from the date to which dividends have
been fully paid on such Series C or Series D Preferred Stock represented by the
surrendered certificate.
(8) REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing shares of any Series C or Series D Preferred Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation, or, in the case of any such mutilation upon
surrender of such certificate, the Corporation shall (at such shareholder's
expense) execute and deliver in lieu of such certificate a new certificate of
like kind representing the number of shares represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen,
destroyed or mutilated certificate, and dividends shall accrue on the Series C
or Series D Preferred Stock represented by such new certificate from the date to
which dividends have been fully paid on such lost, stolen, destroyed or
mutilated certificate.
(9) DEFINITIONS. As used in this Section (D) only, the following terms
shall have the following meanings:
"COMMON STOCK" means, collectively, the Corporation's Common Stock.
26
<PAGE>
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Section (D)(5)(c)
hereof whether or not the Options or Convertible Securities are actually
exercisable at such time.
"CONVERSION STOCK" means shares of the Corporation's Common Stock;
provided that if there is a change such that the securities issuable upon
conversion of the Series C and Series D Preferred Stock are issued by an entity
other than the Corporation or there is a change in the class of securities so
issuable, then the term "Conversion Stock" shall mean one share of the security
issuable upon conversion of the Series C and Series D Preferred Stock if such
security is issuable in shares, or shall mean the smallest unit in which such
security is issuable if such security is not issuable in shares.
"CONVERTIBLE SECURITIES" has the meaning provided in
Section (D)(5)(c).
"JUNIOR SECURITIES" means the Corporation's Series A Preferred Stock
and Series B Preferred Stock.
"LIQUIDATION VALUE" as of any particular date for (a) any share of
Series C Preferred shall be an amount equal to the average per share price paid
for the Series C Preferred by the holders thereof and (b) for any share of
Series D Preferred Stock shall be an amount equal to the price paid for the
Series D Preferred Stock by the holders thereof.
"MARKET PRICE" of any security means the average of the closing prices
of such security's sales on all securities exchanges on which such security may
at the time be listed, or, if there has been no sales on any such exchange on
any day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in The
Nasdaq Stock Market as of 4:00 P.M., New York time, or, if on any day such
security is not quoted in The Nasdaq Stock Market, the average of the highest
bid and lowest asked prices on such day in the domestic over-the-counter market
as reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the
20 consecutive business days prior to such day. If at any time such security is
not listed on any securities exchange or quoted in The Nasdaq Stock Market or
the over-the-counter market, the "Market Price" shall be the fair value thereof
determined in good faith by the Board of Directors of the Corporation.
27
<PAGE>
"NET PROCEEDS" means gross consideration paid to the Corporation upon
a liquidation event less any commissions or other expenses payable by the
Corporation in connection therewith.
"OPTIONS" has the meaning provided in Section (D)(5)(b).
"ORGANIC CHANGE" has the meaning provided in Section (D)(5)(f).
"PERSON" means an individual, a partnership, a corporation, limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PURCHASE RIGHTS" has the meaning provided in Section (D)(6).
"QUALIFIED PUBLIC OFFERING" means the sale in an underwritten public
offering registered under the Securities Act of 1933, as amended, of shares of
the Common Stock in which (i) the aggregate price paid by the public for the
shares shall be at least $10,000,000, and (ii) the price per share paid by the
public for such shares shall be at least two times an amount equal to the
average per share price paid for the Series C Preferred by the holders thereof.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of May 17, 1999 by and among the Corporation and the holders
of the Series C Preferred Stock.
(10) AMENDMENT AND WAIVER. No amendment, modification or waiver shall be
binding or effective with respect to any provision of this Section (D) without
the prior written consent of (a) the holders of at least a majority of the
Series C Preferred Stock outstanding at the time such action is taken, if such
amendment, modification or waiver relates to the terms of the Series C Preferred
Stock and (b) the holders of at least a majority of the Series D Preferred Stock
outstanding at the time such action is taken, if such amendment, modification or
waiver relates to the terms of the Series D Preferred Stock; provided that no
such action shall change (a) the amount payable on redemption of the Series C
Preferred Stock or the times at which redemption of Series C Preferred Stock is
to occur, without the prior written consent of the holders of at least 90% of
the shares of Series C Preferred Stock then outstanding, (b) the Series C
Conversion Price of the Series C Preferred Stock or the number of shares or
class of stock into which the Series C Preferred Stock is convertible, without
the prior written consent of the holders of at least 90% of the shares of Series
C Preferred Stock then outstanding or (c) the percentage required to approve any
change described in clauses (a) and (b) above, without the prior written consent
of the holders of at least 90% of the shares of Series C
28
<PAGE>
Preferred Stock then outstanding; and provided further that no change in the
terms hereof may be accomplished by merger or consolidation of the Corporation
with another corporation or entity unless the Corporation has obtained the prior
written consent of the holders of at least 90% of the shares of Series C
Preferred Stock then outstanding.
(11) NOTICES. Except as otherwise expressly provided hereunder, all
notices referred to herein shall be in writing and shall be delivered by
registered or certified mail, return receipt requested and postage prepaid, by
reputable overnight courier service, charges prepaid, or by electronic mail or
facsimile transmission and shall be deemed to have been given when so mailed or
sent (i) to the Corporation, at its principal executive offices, attention CEO;
and (ii) to any shareholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
ARTICLE III
NO PREEMPTIVE RIGHTS
Except as may otherwise be provided by the Board of Directors, no holder of
any shares of this Corporation shall have any preemptive right to purchase,
subscribe for or otherwise acquire any securities of this Corporation of any
class or kind now or hereafter authorized.
ARTICLE IV
NUMBER OF DIRECTORS
This Corporation shall have at least one director, the actual number to be
fixed in accordance with the Bylaws. The initial Board of Directors shall
consist of (1) Director.
ARTICLE V
CUMULATIVE VOTING
There shall be no cumulative voting of shares in this Corporation.
ARTICLE VI
LIMITATION ON DIRECTOR LIABILITY
29
<PAGE>
To the fullest extent permitted by Washington law and subject to the Bylaws
of this Corporation, a director of this Corporation shall not be liable to the
Corporation or its shareholders for monetary damages for his or her conduct as a
director. Any amendment to or repeal of this Article shall not adversely affect
any right of a director of this Corporation hereunder with respect to any acts
or omissions of the director occurring prior to amendment or repeal.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS
To the fullest extent permitted by its Bylaws and Washington law, this
corporation is authorized to indemnify any of its directors. The Board of
Directors shall be entitled to determine the terms of indemnification, including
advance of expenses, and to give effect thereto through the adoption of Bylaws,
approval of agreements, or by any other manner approved by the Board of
Directors. Any amendment to or repeal of this Article shall not adversely
affect any right of an individual with respect to any right to indemnification
arising prior to such amendment or repeal
ARTICLE VIII
REGISTERED OFFICE AND REGISTERED AGENT
The name of the registered agent of this Corporation and the street address
of its registered office are as follows:
Noelle E. Cooper
Heller Ehrman White & McAuliffe
701 Fifth Avenue, Suite 6100
Seattle, Washington 98104
ARTICLE IX
SHAREHOLDER ACTION WITHOUT A MEETING BY LESS THAN UNANIMOUS CONSENT
Any action required or permitted to be taken at a meeting of shareholders
of the Corporation may be taken without a meeting or a vote if the action is
taken by shareholders holding of record or otherwise entitled to vote in the
aggregate not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
on the action were present and voted, provided that at the time the action is
taken the Corporation is not a Public Company (as defined in the
30
<PAGE>
Washington Business Corporation Act, as amended, the "Act"). Notice of the
taking of action by shareholders without a meeting by less than unanimous
written consent of all shareholders entitled to vote on the action shall be
given to those shareholders entitled to vote on the action who have not
consented in writing such that such notice shall be deemed effective (in the
manner described below) no fewer than twenty four hours before the effective
date of the action, except where longer notice is required under the Act. The
notice shall be in writing and may be transmitted by: mail, private carrier or
personal delivery; telegraph or teletype; telephone, wire or wireless equipment
which transmits a facsimile of the notice; or by any other means permitted by
the Act. Written notice shall be effective as provided in Section 23B.01.410 of
the Act (specifically including paragraph 5(a) thereof) or any successor
provisions thereto.
31
<PAGE>
IN WITNESS WHEREOF, the undersigned certifies that he or she is an officer
of the Corporation and has executed these Amended and Restated Articles of
Incorporation in an official and authorized capacity under penalty of perjury on
this ____ day of October, 1999.
GREATFOOD.COM, INC.
By:______________________________
32
<PAGE>
October 8, 1999
GreatFood.com, Inc.
2731 Eastlake Avenue East
Seattle, Washington 98102
Re: LEGALITY OF SECURITIES TO BE REGISTERED UNDER REGISTRATION
STATEMENT ON FORM S-1 FILE NO. 333-78885
Dear Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to GreatFood.com,
Inc., a Washington corporation (the "Company"), in connection with the
preparation and filing by the Company with the Securities and Exchange
Commission (the "Commission") of a Registration Statement on Form S-1 (the
"Registration Statement") relating to 2,500,000 shares of Series D preferred
stock, no par value (the "Securities"). The Securities will be sold pursuant to
one or more stock purchase agreements (the "Stock Purchase Agreement") to be
entered into between the Company and the purchasers of the Securities (the
"Purchasers").
I.
We have assumed the authenticity of all records, documents and
instruments submitted to us as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
records, documents and instruments submitted to us as copies. We have based our
opinion upon our review of the following records, documents, instruments and
certificates:
(a) The Registration Statement;
(b) The form of the proposed Stock Purchase Agreement;
(c) The Articles of Incorporation (including all amendments thereto)
of the Company certified by the Washington Secretary of State as
of October 6,
<PAGE>
GreatFood.com, Inc. [LETTERHEAD]
October 8, 1999
Page 2
1999, and certified to us by an officer of the Company as being
complete and in full force and effect as of the date of this
opinion;
(d) The executed Amended and Restated Articles of Incorporation of
the Company to be filed with the Washington Secretary of State
immediately prior to the closing of the public offering of the
Securities pursuant to the Registration Statement, certified to
us by an officer of the Company as being complete;
(e) The Bylaws of the Company (and all amendments thereto) certified
to us by an officer of the Company as being complete and in full
force and effect as of the date of this opinion;
(f) The Amended and Restated Bylaws of the Company to be in effect
immediately prior to the closing of the public offering of the
Securities pursuant to the Registration Statement, certified to
us by an officer of the Company as being complete (the "Amended
and Restated Articles");
(g) A Certificate of Existence/Authorization relating to the Company
issued by the Washington Secretary of State dated October 6,
1999;
(h) Records of the corporate proceedings of the Company certified to
us by an officer of the Company constituting all records of
proceedings and actions of the Company's board of directors
relating to the transactions contemplated by the Stock Purchase
Agreement; and
(i) Certificates of officers of the Company as to certain factual
matters.
We have also assumed that the Securities will be duly executed,
authenticated and delivered on behalf of the Company prior to their issuance
against the consideration therefor to be set forth in a supplement or
supplements to the prospectus constituting a part of the Registration Statement.
In addition, we have also assumed that the Registration Statement will have been
declared effective by the Securities and Exchange Commission prior to, and will
continue to be effective at the time of, the issuance of the Securities.
II.
We express no opinion as to:
A. The applicable choice of law rules that may affect the
interpretation or enforcement of the Stock Purchase Agreement or the Securities.
<PAGE>
Page 3
B. Any tax, anti-trust, land use, safety, environmental or hazardous
materials laws, rules or regulations.
This opinion is limited to the federal laws of the United States of
America and the corporate law of the State of Washington, and we disclaim any
opinion as to the laws of any other jurisdiction. We further disclaim any
opinion as to any statute, rule, regulation, ordinance, order or other
promulgation of any regional or local governmental body or as to any related
judicial or administrative opinion.
III.
Based upon the foregoing and our examination of such questions of
law as we have deemed necessary or appropriate for the purpose of our
opinion, and subject to the limitations and qualifications expressed below,
it is our opinion that when the Amended and Restated Articles are filed with
the Washington Secretary of State and the Securities are sold to the
Purchasers and paid for pursuant to the terms of the Stock Purchase
Agreement, the Securities will be duly authorized, validly issued and fully
paid and non-assessable.
IV.
We hereby consent to the filing of this opinion as an exhibit to, and
to the use of this opinion in connection with, the Registration Statement and to
the reference to this firm under the heading "Legal Matters" in the prospectus
constituting a part of the Registration Statement.
This opinion is rendered to you and to purchasers of the Securities
offered by you pursuant to the Registration Statement and is solely for the
benefit of you and such purchasers. This opinion may not be relied upon by any
other person, firm, corporation or other entity without our prior written
consent. We disclaim any obligation to advise you of any change of law that
occurs, or any facts of which we become aware, after the date of this opinion.
Very truly yours,
HELLER EHRMAN WHITE & McAULIFFE
<PAGE>
Page 4
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE
SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS THE COMPANY
RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT
SUCH TRANSFER DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT OR OTHER
STATE SECURITIES LAWS.
**NON-NEGOTIABLE**
PROMISSORY NOTE
$1,500,000 October 1, 1999
FOR VALUE RECEIVED, GreatFood.com, Inc., a Washington corporation (the
"Company") promises to pay in lawful money of the United States of America to
the order of First Analysis Corporation, an Illinois corporation ("Holder"),
at 233 South Wacker Drive, Suite 9500, Chicago, IL 60606, or at such other place
as the Holder may designate in writing, the principal sum of One Million, Five
Hundred Thousand and 00/00 Dollars ($1,500,000), together with all interest
accrued thereon from the date of issuance, on October 5, 2002 (the "Maturity
Date"), subject to earlier prepayment upon a Change of Control (as defined
below). Interest (computed on the basis of a 360 day year and compounded
annually) shall accrue on the unpaid balance of such principal amount at the
rate of eight percent (8%) per annum.
The Company may prepay this Note in whole or in part at any time, and
from time to time, without being required to pay any penalty or premium for such
privilege.
If the Company shall make an offering of common stock or securities
convertible into common stock to one or more entities, Holder may, at its
option, at any time prior to December 31, 1999, convert this Note into an amount
of shares to be issued in such offering equal to (i) the outstanding balance of
principal and interest due on this Note, divided by (ii) the offering price per
common share equivalent. In order to exercise this conversion option, Holder
must deliver written notice to the Company, together with this original Note, no
later than the date the Company has designated as the closing date in such
offering.
Upon the closing of any transaction which constitutes a "Change of
Control" (as defined below), the Company shall pay to Holder, in full
satisfaction of all amounts owing under this Note, an amount equal to (i) the
principal amount otherwise outstanding under this Note, plus all accrued and
unpaid interest on such amount, plus (ii) subject to
<PAGE>
the conditions stated in this paragraph, an amount equal to the amount which
would have been receivable by Holder in the Change of Control transaction had
Holder purchased 461,538 shares of common stock (without a cost basis) on the
date of this Note and held such shares on the closing date of the Change of
Control transaction; provided that the amount stated in the preceding clause
(ii) shall not become due and payable if the Company has issued common stock or
securities convertible into common stock in the aggregate amount of at least
$2,000,000 to after the date of this Note but prior to the date of the closing
of such Change of Control transaction. For purposes of this Note, a "Change of
Control" means (i) the consummation of a merger or consolidation of the Company
with or into another entity if more than 50% of the combined voting power of the
continuing or surviving entity's securities outstanding immediately after such
merger, consolidation or other reorganization is owned by persons who were not
shareholders of the Company immediately prior to such merger or consolidation,
or (ii) the sale, transfer or other disposition of all or substantially all of
the Company's capital stock or assets. A transaction shall not constitute a
Change of Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company's securities
immediately before such transaction.
All terms, obligations, and provisions of this Note are to be
determined and governed by the laws of the State of Washington. Should any term
or provision of this Note be declared invalid, such determination shall not
affect the remaining provisions hereof, which shall remain in full force and
effect. Notwithstanding any provision contained herein to the contrary, Holder
shall not be entitled to receive, collect, or apply as interest on the
obligation evidenced hereby, any amount in excess of the maximum rate of
interest permitted by applicable law.
If this Note is placed in the hands of an attorney for collection, the
Company agrees to pay any reasonable attorneys' fees and costs incurred by
Holder in connection therewith, and in the event suit or action is instituted to
enforce or interpret this Note, the prevailing party shall be entitled to
recover all expenses reasonably incurred at, before or after trial and appeal,
or in connection with post-judgment collection efforts, including, without
limitation, reasonable attorneys' fees and costs.
In the event any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law shall be
instituted by or against the Company, Holder may declare this Note immediately
due and payable.
This Note is given in a commercial transaction solely for business
purposes.
2
<PAGE>
NOTICE IS HEREBY GIVEN THAT ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
GREATFOOD.COM, INC.
By: /s/ Benjamin C. Nourse
-------------------------
Benjamin C. Nourse
Chief Executive Officer
3
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE
SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS THE COMPANY
RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT
SUCH TRANSFER DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT OR OTHER
STATE SECURITIES LAWS.
**NON-NEGOTIABLE**
PROMISSORY NOTE
$3,000,000 September 24, 1999
FOR VALUE RECEIVED, GreatFood.com, Inc., a Washington corporation (the
"Company") promises to pay in lawful money of the United States of America to
the order of WR Hambrecht & Co., LLC, a limited liability company organized
under the laws of California ("Holder"), at 550 Fifteenth Street, San
Francisco, CA 94103, or at such other place as the Holder may designate in
writing, the principal sum of Three Million and 00/00 Dollars ($3,000,000),
together with all interest accrued thereon from the date of issuance, on
September 24, 2002 (the "Maturity Date"), subject to earlier prepayment upon a
Change of Control (as defined below). Interest (computed on the basis of a 360
day year and compounded annually) shall accrue on the unpaid balance of such
principal amount at the rate of eight percent (8%) per annum.
The Company may prepay this Note in whole or in part at any time, and
from time to time, without being required to pay any penalty or premium for such
privilege.
If the Company shall make an offering of common stock or securities
convertible into common stock to one or more entities, Holder may, at its
option, at any time prior to December 31, 1999, convert this Note into an amount
of shares to be issued in such offering equal to (i) the outstanding balance of
principal and interest due on this Note, divided by (ii) the offering price per
common share equivalent. In order to exercise this conversion option, Holder
must deliver written notice to the Company, together with this original Note, no
later than the date the Company has designated as the closing date in such
offering.
Upon the closing of any transaction which constitutes a "Change of
Control" (as defined below), the Company shall pay to Holder, in full
satisfaction of all amounts owing under this Note, an amount equal to (i) the
principal amount otherwise outstanding under this Note, plus all accrued and
unpaid interest on such amount, plus (ii) subject to
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the conditions stated in this paragraph, an amount equal to the amount which
would have been receivable by Holder in the Change of Control transaction had
Holder purchased 923,077 shares of common stock (without a cost basis) on the
date of this Note and held such shares on the closing date of the Change of
Control transaction; provided that the amount stated in the preceding clause
(ii) shall not become due and payable if the Company has issued to one or more
entities (not including the Holder) common stock or securities convertible into
common stock in the aggregate amount of at least $2,000,000 after the date of
this Note but prior to the date of the closing of such Change of Control
transaction. For purposes of this Note, a "Change of Control" means (i) the
consummation of a merger or consolidation of the Company with or into another
entity if more than 50% of the combined voting power of the continuing or
surviving entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
shareholders of the Company immediately prior to such merger or consolidation,
or (ii) the sale, transfer or other disposition of all or substantially all of
the Company's capital stock or assets. A transaction shall not constitute a
Change of Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company's securities
immediately before such transaction.
All terms, obligations, and provisions of this Note are to be
determined and governed by the laws of the State of Washington. Should any term
or provision of this Note be declared invalid, such determination shall not
affect the remaining provisions hereof, which shall remain in full force and
effect. Notwithstanding any provision contained herein to the contrary, Holder
shall not be entitled to receive, collect, or apply as interest on the
obligation evidenced hereby, any amount in excess of the maximum rate of
interest permitted by applicable law.
If this Note is placed in the hands of an attorney for collection, the
Company agrees to pay any reasonable attorneys' fees and costs incurred by
Holder in connection therewith, and in the event suit or action is instituted to
enforce or interpret this Note, the prevailing party shall be entitled to
recover all expenses reasonably incurred at, before or after trial and appeal,
or in connection with post-judgment collection efforts, including, without
limitation, reasonable attorneys' fees and costs.
In the event any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law shall be
instituted by or against the Company, Holder may declare this Note immediately
due and payable.
This Note is given in a commercial transaction solely for business
purposes.
2
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NOTICE IS HEREBY GIVEN THAT ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
GREATFOOD.COM, INC.
By: /s/ Benjamin C. Nourse
-------------------------
Benjamin C. Nourse
Chief Executive Officer
3
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1/A of
our report dated May 17, 1999, relating to the financial statements of
GreatFood.com, Inc., which appears in such Registration Statement. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
October 5, 1999
