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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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. Morrison & Foerster LLP
CHARLES P. CARTER, ESQ. 425 Market Street
Heller Ehrman White and McAuliffe San Francisco, CA 94105-2482
6100 Columbia Center (415) 268-7000
701 Fifth Avenue
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. / /
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(1) AMOUNT OF REGISTRATION FEE
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Common Stock (no par value)..................................... $38,812,500 $10,790
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(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
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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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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>
INITIAL PUBLIC OFFERING
PROSPECTUS
SUBJECT TO COMPLETION, MAY
20, 1999
2,500,000 SHARES OF COMMON STOCK
$ PER SHARE
[LOGO]
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GreatFood.com, Inc.
2731 Eastlake Avenue East
Seattle, Washington 98102
THE OFFERING
PER SHARE TOTAL
----------- ---------
Public price............... $ $
Underwriting discounts
and commissions.......... $ $
Proceeds to
GreatFood.com.............. $ $
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.
This is our initial public offering and no public
market currently exists for our shares. We expect
that the public offering price in the offering will
be between $10.50 and $13.50 per share. This price
may not reflect the market price of our shares
after this offering.
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PROPOSED TRADING SYMBOL:
THE NASDAQ NATIONAL MARKET - GTFD
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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 4.
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 a firm commitment underwriting agreement with the
underwriters for the sale of shares in this offering. We have granted the
underwriters a 30 day option to purchase up to an additional 375,000 shares of
our common stock to cover over-allotments. The underwriters expect to deliver
shares of common stock to purchasers on , 1999.
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[LOGO] [LOGO]
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, 1999
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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 common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
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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..................................................................................... 3
Risk Factors............................................................................................... 4
Special Note Regarding Forward Looking Statements.......................................................... 16
Use of Proceeds............................................................................................ 17
Dividend Policy............................................................................................ 17
Capitalization............................................................................................. 18
Dilution................................................................................................... 19
Selected Financial Data.................................................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21
Business................................................................................................... 30
Management................................................................................................. 45
Certain Relationships and Related Transactions............................................................. 52
Principal Shareholders..................................................................................... 54
Description of Capital Stock............................................................................... 56
Shares Eligible For Future Sale............................................................................ 59
Plan of Distribution....................................................................................... 60
Legal Matters.............................................................................................. 63
Experts.................................................................................................... 63
Where to Find Additional Information About GreatFood.com................................................... 63
Index to Financial Statements.............................................................................. F-1
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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.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION DESCRIBED MORE FULLY ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. THIS PROSPECTUS CONTAINS FORWARD
LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND
PROJECTIONS ABOUT OUR BUSINESS AND OUR INDUSTRY. THESE FORWARD LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, WHICH ARE MORE FULLY DESCRIBED IN THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 4 AND ELSEWHERE IN THIS PROSPECTUS. WE UNDERTAKE NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
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. 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 offerings include 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.
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 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 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;
- capitalize on the relationship between retail and wholesale
distribution channels;
- acquire leading market share to leverage economies of scale;
and
- expand internationally.
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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.
Our Marketing:............. We target potential online customers, both retail and
wholesale, in a proactive manner. We have established a
co-branded program with Peapod and entered into an affiliate
program with GeoCities and merchant tenancy agreements with
America Online and Excite. We utilize a mix of traditional and
online marketing techniques, including online and print
advertising, direct mail, public relations and trade shows.
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 813,593 unique visits in the first
quarter of 1999.
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THE OFFERING
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Type of security............................. Common stock
Common stock offered......................... 2,500,000 shares
Common stock to be outstanding
after this offering........................ 6,527,532 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 17 for more
information.
Proposed Nasdaq National Market Symbol....... GTFD
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(1) Does not include 1,530,388 shares reserved for future issuance as follows:
(a) 863,500 shares of common stock reserved for issuance pursuant to
outstanding options granted under our 1997 Stock Incentive Plan; (b) 343,811
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 only become exercisable if the per share price in this
offering is less than $10.00. This also does not include 1,136,500 shares
reserved for issuance pursuant to future grants under our 1997 Stock
Incentive Plan and our 1999 Employee Stock Purchase Plan.
THE METHOD OF DISTRIBUTION BEING USED BY THE UNDERWRITERS IN THIS OFFERING
DIFFERS SOMEWHAT FROM THAT TRADITIONALLY EMPLOYED IN FIRM COMMITMENT
UNDERWRITTEN PUBLIC OFFERINGS. IN PARTICULAR, THE PUBLIC OFFERING PRICE AND
ALLOCATION OF SHARES WILL BE DETERMINED PRIMARILY BY AN AUCTION PROCESS
CONDUCTED BY THE UNDERWRITERS AND OTHER SECURITIES DEALERS PARTICIPATING IN THIS
OFFERING. A MORE DETAILED DESCRIPTION OF THIS PROCESS IS INCLUDED IN "PLAN OF
DISTRIBUTION."
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SUMMARY FINANCIAL DATA
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS)
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THREE
FISCAL YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
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1996 1997 1998 1998 1999
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STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 18 $ 120 $ 748 $ 28 $ 168
Gross profit............................ 4 28 143 6 21
Loss from operations.................... (61) (83) (1,401) (38) (831)
Net loss................................ (40) (82) (1,371) (38) (826)
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AS OF MARCH 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents......................... $1,932 $ 4,902 $ 32,662
Total assets...................................... 2,258 5,228 32,988
Total shareholders' equity........................ 2,004 4,974 32,734
</TABLE>
The pro forma information above reflects the net proceeds from the sale of
600,000 shares of Series C preferred stock on May 17, 1999.
The pro forma as adjusted information above also gives effect to our receipt
of the estimated net proceeds from the sale of 2,500,000 shares of common stock
in this offering at an assumed public offering price of $12.00 per share.
We were incorporated in Washington in August 1995. Our headquarters are
located at 2731 Eastlake Avenue East, Seattle, Washington 98102 and our
telephone number is (206) 322-7539. Our Web site is located at
WWW.GREATFOOD.COM. Information contained on our Web site does not constitute a
part of this prospectus.
UNLESS OTHERWISE INDICATED, ANY INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES THAT:
- THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION; AND
- ALL OUTSTANDING CONVERTIBLE PREFERRED STOCK WILL BE CONVERTED TO COMMON
STOCK BEFORE THIS OFFERING IS COMPLETED.
3
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO ADVERSELY
AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS
COULD BE HARMED. IF OUR BUSINESS IS HARMED, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY
OUR COMMON 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, began operations in March 1996 and have
had limited sales. 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 systems and infrastructure 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 successfully accomplish all of these objectives, 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 21 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 March 31, 1999, we had an accumulated
deficit of $2.3 million. We incurred net losses of $826,470 in the first quarter
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;
- expansion of our retail product offerings and Web site content;
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- 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 21 for more information on our
operating history.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. WE MAY FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS WHICH COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECREASE SIGNIFICANTLY.
Our operating results have fluctuated on a quarterly basis in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. It is likely that in some future quarter our
operating results may fall below the expectations of securities analysts and
investors which may cause our stock price to significantly decline. 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, strategic
marketing relationships under which we receive exposure to traffic on
third party Web sites; and
- the amount and timing of operating costs and capital expenditures relating
to expansion of our operations.
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 certain times of the
year. 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, our quarterly or annual results could
be below the expectation of securities analysts and investors which could cause
our stock price to 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
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significant expense. 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 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 generated limited revenues. Certain aspects of our business
model may limit the growth of our wholesale business. These include:
- unfamiliarity with Internet commerce among retailers;
- 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
- 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 21.
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;
- complying with local regulations;
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- 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.
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
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to fulfill orders in a timely manner, which caused us to experience customer
complaints and, in some cases, lost sales.
WE MAY CHOOSE TO ESTABLISH DISTRIBUTION CENTERS AND STOCK CERTAIN 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 example:
- if our suppliers are not able to deliver products to our customers in a
timely manner;
- to be able to consolidate orders, particularly from wholesale customers,
to reduce shipping costs or achieve other economies; or
- to obtain distributor margins on a higher portion of our sales.
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 offering 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 are subject to certain risks
associated with these carriers' ability to promptly deliver products to our
customers, including the risk of 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.
WE MAY BE SUBJECT TO LIABILITY FOR 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.
OUR CONVERSION TO A NEW ORDER PROCESSING SYSTEM MAY NOT BE SUCCESSFUL AND 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
8
<PAGE>
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 41 for more information.
OUR BUSINESS MAY BE AFFECTED BY YEAR 2000 READINESS ISSUES.
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 June 30, 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
June 30, 1999. As a backup, we are also considering the purchase of a more
recent version of our existing order processing system which is year 2000
compliant and which our credit card processing company will continue to support.
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 various other
systems. If we are not able to properly complete the replacement or upgrade 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 27 for more detailed
information.
WE ARE GROWING RAPIDLY AND MAY HAVE DIFFICULTY MANAGING OUR GROWTH EFFECTIVELY.
We have grown and 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 MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We believe that our current cash resources, combined with the net proceeds
from this offering, will meet our anticipated working capital and capital
expenditure requirements for at least the 18 months following the date of this
prospectus. After that time, we may need to raise additional capital.
Alternatively, we may need to raise additional funds sooner to:
- fund more rapid expansion;
- respond to competitive pressures;
9
<PAGE>
- 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, take advantage of opportunities,
respond to competitive pressures or acquire complementary businesses.
WE MAY ISSUE ADDITIONAL SECURITIES TO FUND OUR CAPITAL REQUIREMENTS WHICH WOULD
DILUTE OUR SHAREHOLDERS' INTEREST.
We may need to issue equity or convertible debt securities to fund future
capital requirements. If we do so, 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.
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.
ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CHARTER DOCUMENTS AND WASHINGTON LAW
MAY DELAY OR PREVENT A CHANGE OF CONTROL.
Provisions of our articles of incorporation, our bylaws and Washington law
could:
- delay or prevent a change in control of our company;
- discourage bids for our common stock at a premium over the market price;
or
- prevent changes in management.
See "Description of Capital Stock" on page 56 for more detailed information.
RISKS RELATED TO GREATFOOD.COM'S INTERNET BUSINESS AND PROSPECTS
THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF INTERNET COMMERCE.
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
10
<PAGE>
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 a variety of 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, the Internet
could lose its viability 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.
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, we have suffered losses in the past as a result of orders
placed with fraudulent credit card data and it is possible we will continue to
suffer such losses in the future.
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<PAGE>
WE MAY NOT BE ABLE TO RESPOND EFFECTIVELY TO RAPID TECHNOLOGICAL CHANGES.
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 cease to shop in our online store and use those
of our competitors. To develop our Web site and other proprietary technology
entails significant technical and business risks. 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.
Substantially all of our computer and communications hardware operations for
our Web site is located in a single facility 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.
Our Web site has experienced in the past and may in the future experience
slower response times or decreased traffic for a variety of reasons. In
addition, 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.
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 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;
12
<PAGE>
- 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 43.
MARKETING 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 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 alliance partners' Web
sites. These arrangements may not generate the expected number of new customers.
Our current agreements with America Online, 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
alliance partners, 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.
WE MAY BE SUBJECT TO 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 be subject
to 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 face liability, then our
reputation and 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
13
<PAGE>
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 common stock will, in the aggregate, own
approximately 45.8% of our outstanding common stock. 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.
OUR STOCK PRICE MAY BE HIGHLY VOLATILE.
The market price for our common stock is likely to be highly volatile as the
market prices of securities of technology companies, particularly Internet
related companies, have been highly volatile. You may not be able to resell your
shares of our common stock following periods of volatility because of the stock
market's adverse reaction to volatility. In addition, you may not be able to
resell your shares at or above the initial offering price.
The volatility in our stock price will be affected by the following factors,
many of which are outside of our control:
- actual or anticipated variations in quarterly operating results;
- seasonal patterns of our business;
- announcements of technological innovations or new products or services by
us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet or online commerce industries;
14
<PAGE>
- changes in the economic performance or market valuations of other Internet
or electronic commerce companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, or capital commitments;
- additions or departures of key personnel; and
- sales of our common stock.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
If we were sued in this type of litigation we could incur substantial costs and
our management's attention and resources would be diverted from our operations.
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 common 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, expansion of our management team and staffing, and general
corporate purposes, including possible acquisitions. Accordingly, our management
will have significant flexibility in applying the net proceeds of this offering.
See "Use of Proceeds" on page 17.
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO
DECLINE AND COULD HARM OUR ABILITY TO RAISE FUNDS FROM STOCK OFFERINGS IN THE
FUTURE.
Sales of a large number of shares of our common stock in the market after
the offering, or the belief that such sales could occur, could cause a drop in
the market price of our common stock and could impair our ability to raise
capital through offerings of our equity securities. Upon completion of this
offering, there will be 6,527,532 shares of our common stock outstanding and an
additional 1,530,388 shares of common stock reserved for issuance under
outstanding stock options and warrants. All of the 2,500,000 shares sold in this
offering will be freely tradable without restrictions or further registration
under the Securities Act, unless such shares are purchased by our "affiliates,"
as that term is defined in Rule 144 under the Securities Act. The remaining
4,027,532 shares of common stock held by existing shareholders will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act.
All of our existing shareholders have agreed that to the extent we request,
that they will not sell or otherwise dispose of any of the 4,027,532 shares held
by them for a period of 180 days from the date of this prospectus. Upon
expiration of this 180 day period, 2,722,011 shares will be eligible for
immediate resale under Rule 144. The remaining 1,305,521 restricted shares will
be eligible for sale pursuant to Rule 144 on the expiration of various one year
holding periods.
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register 1,600,000 shares
reserved for issuance under our 1997 Stock Incentive Plan, and 400,000 shares
reserved for our issuance under our 1999 Employee Stock Purchase Plan. Upon
registration, all of these shares will be freely tradable when issued.
THERE MAY NOT BE A PUBLIC MARKET FOR OUR COMMON STOCK.
While we have applied to list our common stock on the Nasdaq National
Market, a trading market for our common stock may not develop or, if a market
does develop, the common stock may still be difficult to trade. In addition, to
enable our common stock to continue to be listed on the Nasdaq National Market,
we must continue to meet Nasdaq's requirements for continued listing. These
15
<PAGE>
requirements include thresholds with respect to our net tangible assets, public
float, and share price. If we fail to meet these requirements, our common stock
may be delisted from the Nasdaq National Market. As a result of these risks, you
may not be able to resell your shares at or above the initial public offering
price.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after the offering. Accordingly, purchasers of common stock in
this offering will experience immediate and substantial dilution of
approximately $6.99 in net tangible book value per share, or approximately 58.3%
of the assumed offering price of $12.00 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.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains "forward looking statements," as defined in Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934. 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 for at least the 18 months following the
date of this prospectus; 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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<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $27,760,000 from the sale
of the 2,500,000 shares of common stock offered hereby, assuming an initial
public offering price of $12.00 per share and after deducting estimated
underwriting discounts and offering expenses. If the underwriters exercise their
over-allotment option in full, the net proceeds are estimated to be $32,035,000.
We currently intend to use the proceeds of this offering to:
- expand our advertising and promotion of the GreatFood.com brand;
- implement a new order processing system linking us with our suppliers;
- increase our management team and personnel; and
- continue the development of our wholesale and international programs.
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 cost, timing and amount of funds we need cannot be precisely determined
at this time and will be based on numerous factors. 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 March 31, 1999. Our
capitalization is presented:
- on an actual basis;
- on a pro forma basis to reflect:
- the sale of 600,000 shares of Series C preferred stock on May 17, 1999;
- the automatic conversion of all outstanding shares of preferred stock
into common stock; and
- the increase of our authorized capital stock to 60,000,000 shares of
common stock and 20,000,000 shares of preferred stock prior to
consummation of this offering; and
- on a pro forma as adjusted basis to also reflect our receipt of the
estimated net proceeds from the sale of 2,500,000 shares of common stock
in this offering at an assumed initial public offering price of $12.00 per
share, after deducting underwriting discounts and commission and estimated
offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- -------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Long term debt--including current portion............................. $ 51 $ 51 $ 51
----------- -------------- -----------
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares authorized and
1,848,368 shares issued and outstanding (actual); 20,000,000
shares authorized and none outstanding (pro forma and pro forma as
adjusted)......................................................... 4,069 -- --
Common stock, no par value; 20,000,000 shares authorized and
1,579,164 shares issued and outstanding (actual); 60,000,000
shares authorized (pro forma and pro forma as adjusted); 4,027,532
shares issued and outstanding (pro forma); and 6,527,532 shares
issued and outstanding (pro forma as adjusted).................... 281 7,320 35,080
Deferred compensation............................................... (25) (25) (25)
Accumulated deficit................................................. (2,321) (2,321) (2,321)
----------- -------------- -----------
Total shareholders' equity.......................................... 2,004 4,974 32,734
----------- -------------- -----------
Total capitalization.................................................. $ 2,055 $ 5,025 $ 32,785
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
The common stock outstanding as shown above is based on shares outstanding
as of March 31, 1999 and excludes: (a) 863,500 shares of common stock reserved
for issuance pursuant to outstanding options granted under our 1997 Stock
Incentive Plan; (b) 736,500 shares of common stock reserved for issuance
pursuant to future grants under our 1997 Stock Incentive Plan; (c) 343,811
shares of common stock reserved for issuance pursuant to outstanding warrants;
and (d) 400,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan. 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 which will
only become exercisable if the per share price in this offering is less than
$10.00.
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DILUTION
Our net tangible book value as of March 31, 1999 was approximately
$2,004,000, or $1.27 per share of outstanding common stock. 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.
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 (a) the sale of 600,000 shares of Series C preferred
stock on May 17, 1999 and (b) the automatic conversion of all 2,448,368
outstanding shares of preferred stock into common stock upon consummation of
this offering, our pro forma net tangible book value at March 31, 1999 would
have been approximately $4,974,000, or $1.23 per share. After giving effect to
the sale of the 2,500,000 shares of common stock in this offering at an assumed
initial public offering price of $12.00 per share (after deducting the estimated
fee payable to the underwriter and offering expenses payable by us), our pro
forma as adjusted net tangible book value at March 31, 1999 would have been
approximately $32,734,000, or $5.01 per share. This represents an immediate
dilution of $6.99 per share to new investors purchasing shares in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 12.00
Pro forma tangible book value per share as of March 31, 1999.............. $ 1.23
Increase per share attributable to new investors.......................... $ 3.78
---------
Pro forma as adjusted net tangible book value after this offering........... $ 5.01
---------
Dilution per share to new investors in this offering........................ $ 6.99
---------
</TABLE>
The following table summarizes, on a pro forma basis assuming conversion
into common stock of all outstanding shares of preferred stock, including
600,000 shares of Series C preferred stock issued on May 17, 1999, and 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 hereby
assuming an initial public offering price of $12.00 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% $ 7,239,986 19% $ 1.80
New public investors................................ 2,500,000 38 30,000,000 81 12.00
---------- --- ------------- -----
Total............................................. 6,527,532 100% $ 37,239,986 100%
---------- --- ------------- -----
---------- --- ------------- -----
</TABLE>
This information is based on pro forma shares outstanding as of March 31,
1999 and excludes (a) 863,500 shares of common stock reserved for issuance
pursuant to outstanding options granted under our 1997 Stock Incentive Plan; (b)
736,500 shares of common stock reserved for issuance pursuant to future grants
under our 1997 Stock Incentive Plan; (c) 343,811 shares of common stock reserved
for issuance pursuant to outstanding warrants; and (d) 400,000 shares of common
stock reserved for issuance under our 1999 Employee Stock Purchase Plan. 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 which will only become exercisable if the
per share price in this offering is less than $10.00.
19
<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 March 31, 1999 and for the three month periods ended
March 31, 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 three month periods ended
March 31, 1998 and 1999 and the balance sheet data as of December 31, 1995 and
March 31, 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 three months ended March 31, 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 March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE
AUGUST 31, 1995 MONTHS
(INCEPTION) TO FISCAL YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, MARCH 31,
----------------- ------------------------------- ---------
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 $ 28
Cost of goods sold............................................. 0 14 92 605 22
----- --------- --------- --------- ---------
Gross profit................................................... 0 4 28 143 6
Operating expenses:
Sales and marketing.......................................... 0 11 36 1,102 23
Product and site development................................. 0 1 9 84 1
General and administrative................................... 8 53 66 358 20
----- --------- --------- --------- ---------
Total operating expenses....................................... 8 65 111 1,544 44
----- --------- --------- --------- ---------
Loss from operations........................................... (8) (61) (83) (1,401) (38)
Other income, net.............................................. 6 21 1 30 0
----- --------- --------- --------- ---------
Net loss....................................................... $ (2) $ (40) $ (82) $ (1,371) $ (38)
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Basic and diluted net loss per share........................... $ (.01) $ (.04) $ (.06) $ (.87) $ (.02)
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
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
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Pro forma basic and diluted net loss per share................. $ (.66)
---------
---------
Shares of common stock used in computing pro forma basic and
diluted net loss per share..................................... 2,090
---------
---------
<CAPTION>
1999
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................... $ 168
Cost of goods sold............................................. 147
---------
Gross profit................................................... 21
Operating expenses:
Sales and marketing.......................................... 565
Product and site development................................. 44
General and administrative................................... 243
---------
Total operating expenses....................................... 852
---------
Loss from operations........................................... (831)
Other income, net.............................................. 5
---------
Net loss....................................................... $ (826)
---------
---------
Basic and diluted net loss per share........................... $ (.52)
---------
---------
Weighted average shares of common stock outstanding used in
computing basic and diluted net loss per share................. 1,579
---------
---------
Pro forma basic and diluted net loss per share................. $ (.29)
---------
---------
Shares of common stock used in computing pro forma basic and
diluted net loss per share..................................... 2,824
---------
---------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
AS OF DECEMBER 31, ------------------------
----------------------------------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
----- ----- --------- --------- ----------- -----------
BALANCE SHEET DATA (IN THOUSANDS):
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 5 $ 14 $ 124 $ 678 $ 1,932 $ 4,902
Working capital..................................... 0 (1) 51 633 1,846 4,816
Total assets........................................ 33 55 161 1,428 2,258 5,228
Total long term liabilities (including current
portion).......................................... 0 15 13 47 51 51
Total shareholders' equity.......................... 28 25 74 716 2,004 4,974
<CAPTION>
PRO FORMA AS
ADJUSTED
-------------
BALANCE SHEET DATA (IN THOUSANDS):
<S> <C>
Cash and cash equivalents........................... $ 32,662
Working capital..................................... 32,576
Total assets........................................ 32,988
Total long term liabilities (including current
portion).......................................... 51
Total shareholders' equity.......................... 32,734
</TABLE>
The pro forma information above reflects the net proceeds from the sale of
600,000 shares of Series C preferred stock on May 17, 1999.
The pro forma as adjusted information above also gives effect to our receipt
of the estimated net proceeds from the sale of 2,500,000 shares of common stock
in this offering at an assumed public offering price of $12.00 per share.
20
<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 CONTAINED HEREIN, 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 SUCH FORWARD LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THE RISKS 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 online shopping initiatives, recruiting personnel,
developing business to business services and exploring strategic electronic
commerce opportunities. 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
are proceeding with the roll-out of our 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 trade
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, subject to our specifications and
procedures. This reduces procurement and carrying costs, as well as costs of
shipping to a distribution center, and certain risks 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 and a Vice President of Finance and
Administration in April 1999. We plan to add a Vice President of
21
<PAGE>
Development, a Vice President of Wholesale Programs and a Vice President of
Consumer Marketing in 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 March 31, 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 trade 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 certain 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 trade
terms and improve our shipping cost structure. We are also working to increase
Internet familiarity among specialty food retailers.
We incurred net losses of $826,470 in the quarter ended March 31, 1999, $1.4
million in 1998, $81,937 in 1997, and $39,833 in 1996. At March 31, 1999 we had
an accumulated deficit of $2.3 million. We expect operating losses and negative
cash flow to continue for the foreseeable future. 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 develop an "extranet"
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 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.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
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 77.5 87.5
--------- --------- --------- --------- ---------
Gross profit....................... 23.1 23.5 19.1 22.5 12.5
Operating expenses:
Sales and marketing.............. 62.9 30.3 147.4 81.6 335.2
Product and site development..... 4.0 7.4 11.2 2.8 26.6
General and administrative....... 301.3 54.9 47.8 73.5 144.0
--------- --------- --------- --------- ---------
Total operating expenses........... 368.2 92.6 206.4 157.9 505.8
--------- --------- --------- --------- ---------
Loss from operations............... (345.1) (69.1) (187.3) (135.4) (493.3)
Other income (loss), net........... 117.9 0.6 4.0 (1.0) 2.9
--------- --------- --------- --------- ---------
Net loss........................... (227.2)% (68.5)% (183.3)% (136.4)% (490.4)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
QUARTERS ENDED MARCH 31, 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 $168,525 for
the quarter ended March 31, 1999 from $28,036 for the quarter ended March 31,
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.
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 $147,458 for the quarter ended March 31,1999 from
$21,729 for the quarter ended March 31, 1998. This $125,729 increase was
primarily attributable to our increased sales volume. Our gross profit margin
decreased to 12.5% of net revenues for the quarter ended March 31, 1999 from
22.5% of net revenues for the quarter ended March 31, 1998. This decrease in
gross profit margin was due to a number of factors. During the quarter ended
March 31, 1999, we offered a number of products at promotional prices to
increase sales after the holiday season. Additionally, 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. Also
during this period we experienced substantial demand for products for which our
prices did not allow us to recoup our shipping costs. We have since increased
our prices for these products. However, while we attempt to price products in a
manner to absorb product 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 $564,921, or 335.2% of net revenues, for the
quarter ended March 31, 1999, from $22,886, or 81.6% of net revenues, for the
quarter ended March 31, 1998. This increase in actual dollars expended and as a
percentage of net revenues is
23
<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 quarter ended March 31, 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 $44,782, or 26.6% of net revenues, for the quarter ended March 31,
1999, from $783, or 2.8% of net revenues, for the quarter ended March 31, 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
$242,739, or 144.0% of net revenues, for the quarter ended March 31, 1999, from
$20,610, or 73.5% of net revenues, for the quarter ended March 31, 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 $4,905 for the
quarter ended March 31, 1999 from other expense of $272 for the quarter ended
March 31, 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.
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 to changes in product mix and a reduction made in the second half
of 1998 in the amounts charged to customers for outbound shipping.
24
<PAGE>
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 $357,709, or 47.8% 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 six quarters ended March 31, 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.
25
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
DECEMBER
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 31, MARCH 31,
1997 1998 1998 1998 1998 1999
------------- ----------- ----------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues........................... $ 97 $ 28 $ 37 $ 43 $ 640 $ 168
Cost of goods sold..................... 76 22 31 34 518 147
----- ----- ----- ------ ----------- -----------
Gross profit........................... 21 6 6 9 122 21
Operating expenses:
Sales and marketing.................. 31 23 25 241 813 565
Product and site development......... 4 1 7 26 50 44
General and administrative........... 15 20 62 106 170 243
----- ----- ----- ------ ----------- -----------
Total operating expenses............... 50 44 94 373 1,033 852
----- ----- ----- ------ ----------- -----------
Loss from operations................... (29) (38) (88) (364) (911) (831)
Other income, net...................... 1 0 0 16 14 5
----- ----- ----- ------ ----------- -----------
Net loss............................... $ (28) $ (38) $ (88) $ (348) $ (897) $ (826)
----- ----- ----- ------ ----------- -----------
----- ----- ----- ------ ----------- -----------
Basic and diluted net loss per share... $ (.02) $ (.02) $ (.06) $ (.22) $ (.57) $ (.52)
----- ----- ----- ------ ----------- -----------
----- ----- ----- ------ ----------- -----------
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
----- ----- ----- ------ ----------- -----------
----- ----- ----- ------ ----------- -----------
</TABLE>
Our operating expenses have increased significantly in the three most recent
quarters as we have increased our spending on marketing, advertising and
promotional efforts and product and site development following our sale of
Series A preferred stock in July 1998. We expect operating expenses will
continue to increase in the future as we expand our advertising and marketing
campaigns and pursue 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. It is likely that in some future quarter our operating results may
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock may fall significantly.
26
<PAGE>
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 May 17, 1999.
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. Each share of preferred
stock will convert into common stock upon the closing of this offering.
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 $2.1 million in the first quarter of 1999 consisted
primarily of net proceeds from the sale of Series B preferred stock.
As of May 17, 1999 we had approximately $4.4 million of cash and cash
equivalents. As of that date, our principal commitments consisted 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 May 17, 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 May 17, 1999, our remaining commitments
under these agreements were approximately $1.3 million during 1999 and
approximately $114,000 during the first half 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 through at least the next 18 months. We
may need to raise additional funds prior to the expiration of such period if,
for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and 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 such financing is not available when
required or is not available on acceptable terms, we may be unable to develop or
enhance our products or services. 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
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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 current order processing
system for reasons unrelated to the year 2000 problem. However, we have been
advised that our existing order processing system is not fully year 2000
compliant. Also, the company which processes our credit card orders indicated
that it will not support our current order processing system after June 30, 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 and that the transfer of our operations to the new system can be
completed prior to June 30, 1999. As a backup, we are considering the purchase
of a more recent version of our existing order processing system which is year
2000 compliant and which our credit card processing company will support.
However, if installation of the new order processing system or the upgrade of
our existing system is not completed by June 30, 1999, we may be unable to
operate our Web site or process customer orders until such installation or
upgrade 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 third and fourth quarters 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 May 17, 1999, we have not
expended any material amount to address potential year 2000 issues, exclusive of
costs associated with previously planned upgrades and replacements unrelated to
year 2000 issues. 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 do not plan to seek assurances
from our suppliers that their systems are year 2000 compliant. However, we
believe that the nature and size of their operations makes it reasonably
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 problems faced by our customers if they were unable to access our online
store. We only have a limited ability to assess the year 2000 issues associated
with the network of third parties who are material to our operations.
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.
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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 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 813,593 unique visits in the first
quarter of 1999.
INDUSTRY OVERVIEW
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 business to consumer
commerce over the Internet will increase from over $12 billion worldwide at the
end of 1997 to approximately $425 billion worldwide by the end of 2002. Market
research firm Forrester Research estimates that business to business electronic
commerce is expected to grow from $17 billion in 1998 to approximately $327
billion in 2002. Further, Jupiter Communications, another market research firm,
predicts that by 2002, 44% of Internet users will make purchases online, as
compared to an estimated 22% that did so in 1997. Several factors are driving
the growth in both business to consumer and business to business electronic
commerce. These factors include:
- increasing familiarity with the Internet;
- broadening consumer acceptance of online shopping;
- increasing acceptance of online distribution relationships by businesses;
- improved online network security and infrastructure;
- the growing base of personal computers and improved Internet access; and
- expanding network bandwidth and access speeds.
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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 such 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.
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 Find/SVP, a market research firm, 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;
- television shopping channels; and
- off price 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.
While we are not aware of any statistical estimates of the amount of online
sales of gourmet and specialty food products as we define them, Forrester
Research estimates that total online food sales for 1998 were approximately $234
million. Forrester Research further estimates that total online food sales are
expected to reach $1.1 billion in 2000 and $10.8 billion by 2003, representing a
compounded annual growth rate of 115%.
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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 published in real time 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 customers
to easily access;
- 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;
- 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.
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In addition, GreatFood.com utilizes a supplier direct fulfillment model, in
which individual suppliers promptly drop ship goods to customers. By using this
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 May
17, 1999, we offered products from 67 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 a pioneer online specialty food retailer, 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 GreatFood.com's brand
equity and visibility. 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 integrate 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 specialty food
community, with 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 platform. 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 41 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.
CAPITALIZE ON THE RELATIONSHIP BETWEEN RETAIL AND WHOLESALE DISTRIBUTION
CHANNELS. We have established supplier relationships with 67 leading
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 access such
unique products for purchases in bulk quantities. Additionally, by building our
overall
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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 capitalize on 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 a co-branded
arrangement with Peapod, an affiliate arrangement with GeoCities and have been
selected as a tenant merchant on both the America Online and Excite networks.
Additionally, we have targeted marketing arrangements with Yahoo!, Lycos and
other leading 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 this, 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 certain 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.
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 password protected and
limited to retailers who register with us. Once a password is issued, these
customers can view products and pricing
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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 on 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 also click through to "featured
brand" pages and browse through the Express Shoppe, 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 Reasons" which offers guidance on gift giving etiquette.
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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 virtual 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, are 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 utilize 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 41 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. 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 each shopper's personal liability for unauthorized credit
card usage.
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 $47 per visit in the first quarter of 1999, including shipping
charges. According to surveys conducted among a limited number of our customers
in November and December of 1998 by BizRate.com, a market research firm:
- 64% of our customers were female;
- 78.2% 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 $95,000.
We are highly committed to excellent customer service with the goal of
providing a highly positive ordering experience that will capture the customer
for repeat visits. The BizRate.com survey indicated that 87% of the customers
responding were highly or very highly satisfied with their shopping
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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 3,400 products from 67 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 presence 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 May 17, 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
Blue Crab Bay Company -- SOUPS, CRACKERS AND BLOODY MARY MIX FROM THE
CHESAPEAKE BAY AREA
Brown & Haley -- ALMOND ROCA AND OTHER FINE CHOCOLATES
Caffe Appassionato -- SPECIALTY COFFEE
California Harvest (Grapevine Trading) -- TAPENADES, FRUIT VINEGARS AND
OLIVE OIL FROM
CALIFORNIA
Calio Groves -- OLIVE OILS FROM CALIFORNIA
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
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
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
The Famous Pacific Dessert Company -- CHOCOLATE DECADENCE, TORTES AND
BROWNIES
Formula 9 -- GOURMET KETCHUP
Fox's Fine Foods -- RELISHES AND PESTOS
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
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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
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
Mo Hotta Mo Betta -- HOT SAUCES
Moonshine Trading -- HONEYS AND NUT BUTTERS
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
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
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 our suppliers are not able to deliver to our customers in a timely
manner;
- to be able to consolidate orders, particularly from wholesale customers,
to reduce shipping costs or achieve other economies; and
- to obtain distributor margins on a higher portion of our sales.
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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
portal sites 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 innovative programs within the portal
sites. We intend to continue to pursue distribution arrangements with additional
portals and other leading Internet destination sites in order to further broaden
awareness of the GreatFood.com brand and drive more users to our Web site. Our
current aggregate obligations under these agreements are approximately $1.3
million through the end of 1999 and approximately $114,000 through the first
half 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 tenant 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.
Our contract with America Online extends through December 1999. 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 two sponsorship agreements with Excite.
Under these agreements, links to our Web site and promotional materials have
been placed on several areas of the Excite Web site and the Excite programmed
portion of the Netscape Netcenter Web site. These areas include the Gourmet and
Groceries department of the Excite site and, through June 1999, a similar
channel on the Netscape 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 re-order without having to re-enter their credit card
number. Our agreements with Excite extend 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 keywords under our agreement with Yahoo! where we expect to
realize approximately 110 million advertising banner impressions. Our agreement
with Yahoo! extends until December 31, 1999. Other Web sites with which we have
had promotional arrangements include: Lycos, Epicurious, StarChefs, Women.com,
Flycast Network, FoodWine.com, Christmas 98, GoTo.com, Culinary Cafe, HotBot and
others.
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. In addition to the affiliate program we run directly, we
have entered into a contract with GeoCities to participate in their "Pages That
Pay" affiliate network. GeoCities is an online community with
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<PAGE>
approximately four million members all of whom create their own 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
provide online access to 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 such co-branded relationships
with Peapod, Wells Fargo and YourSchoolShop.com, among others.
PRINT ADVERTISING. We have conducted a print advertising campaign aimed at
gourmet and mail order consumers. During 1998 and the first quarter of 1999, we
have placed ads in the following publications:
<TABLE>
<S> <C>
Better Homes and Gardens The New Yorker
Bon Appetit The Puget Sound Business Journal
Country Living Saveur
Eating Well Southern Living
Fine Cooking Sunset
Gourmet Town and Country
House Beautiful The Wall Street Journal
The New York Times Magazine
</TABLE>
CATALOGS. GreatFood.com has implemented a limited distribution of catalogs
to heighten brand awareness and stimulate traffic from our existing customer
base.
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 such 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.
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<PAGE>
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 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
modules. We focus 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
with a high bandwidth data link. 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 27.
We have recently completed an evaluation of our electronic commerce systems
for customer interaction, transaction processing, order fulfillment and customer
service. As a result, we have commenced a major upgrade of our systems to:
- provide capacity for added order volume;
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<PAGE>
- enable us to offer state of the art online shopping technology; and
- provide integration with back end order processing systems to more fully
automate the back end of our online sales.
To effect this upgrade, we have chosen a commercially available 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 electronic commerce
requirements. Additionally, the Pandesic system will provide server hardware and
hosting services as part of the system, that is intended to replace the two
servers described earlier. Hardware will be hosted at a third party facility
operated by Digex, Inc. in Sunnyvale, CA, which will provide redundant servers
and communications lines, load balancing and emergency power backup.
The Pandesic system is intended to provide both front and back end
advantages for our electronic commerce activities. On the front end, the
Pandesic system is expected to facilitate online order tracking, cross selling
and processing of gift certificates and coupons. In support of GreatFood.com's
business to business strategy, the Pandesic system also will be used to automate
account management functions: setting up accounts, providing credit terms and
credit limits. On the back end, the Pandesic system is expected to provide an
Internet based means for transferring orders to suppliers (described in greater
detail below), 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. The schedule for implementation of the Pandesic
system calls for installation and testing of the system as well as introduction
of the front end functionality during the second and third quarters of 1999.
Subsequently, we expect to introduce the back end portion of the system with
certain key suppliers during the fourth quarter of 1999 and 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" to link us with our suppliers. This will be accomplished
by the creation 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.
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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.
Our failure to adapt to such changes 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 infrastructure. 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.
Certain other online specialty food retailers compete with certain aspects
of our business including Virtual Vineyards, Digital Chef and Cooking.com.
However, we are not aware of any online specialty food stores dedicated to
selling a broad line of specialty food products. To a lesser extent, we also
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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.
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 a diminished brand franchise. New technologies and the
expansion of existing technologies may increase the competitive pressures on us.
EMPLOYEES
As of May 17, 1999, we had 15 full-time and two part-time employees,
including five in product and site development, six in sales and marketing and
six 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
GreatFood.com's executive officers, key employees and directors and their
ages as of May 17, 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
Scott Ellis......................................... 36 Director of Operations
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 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
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Seventeen Magazine. She holds a bachelor's degree in Home Economics from
Plattsburgh State University. Mr. and Mrs. Nourse are husband and wife.
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.
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.
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. Prior to the date
of this offering, each director was 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. In connection with the closing of this
offering, the board of directors will be divided into three classes (Class 1,
Class 2 and Class 3), each class containing two directors. Messrs. Wyman and
Koulogeorge will be the Class 1 directors, with terms expiring at the annual
shareholders' meeting in 2000; Messrs. Cuff and Barker will be the Class 2
directors, with terms expiring at the annual shareholders' meeting in 2001; and
Messrs. Nourse and Rush will be the Class 3 directors, with terms expiring at
the annual shareholders' meeting in 2002. Commencing with the annual
shareholders' meeting in 2000 and thereafter, each newly elected director will
be elected to serve for a period of three years. The classification of the board
may make it more difficult for a third party to acquire, or discourage a third
party from acquiring control of, GreatFood.com.
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 both committees. The compensation committee makes recommendations to
the board concerning salaries and incentive
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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 "Certain
Relationships and Related Transactions" on page 52 and "Principal Shareholders"
on page 54.
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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 $ 18,867 $ 47,812
President 100,000(5) 18.4 0.30 4/13/08 18,867 47,812
300,000(6) 55.2 1.75 4/13/08 110,057 278,905
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.
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<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 May 17, 1999, no shares had been issued upon the exercise of options
granted under the plan, options to purchase 863,500 shares of common stock were
outstanding with a weighted average exercise price of $1.79 and 736,500 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 that are subject to transfer restrictions determined by the
compensation committee and subject to substantial risk of forfeiture. 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
49
<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 thereof.
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the board of directors adopted an employee stock purchase plan,
and we have reserved a total of 400,000 shares of our common stock for issuance
under the 1999 Employee Stock Purchase Plan. We have not issued any shares under
the employee stock purchase plan. The employee stock purchase plan permits
eligible employees to purchase our common stock at a discount through payroll
deductions during offering periods of up to 24 months. An offering period
generally will be six months in duration and begin on the first trading day of
each January and July. The initial offering period will begin no earlier than
July 1999. The price at which stock is purchased under the employee stock
purchase plan will be equal to 85% of the fair market value of our common stock
on the first or last day of the offering period, whichever is lower.
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, subject to
the Washington Business Corporation Act, no director or officer shall 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; 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 of 1933, as amended, 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
50
<PAGE>
indemnify them against certain 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
also intend to purchase and maintain a liability insurance policy, under which
our directors and officers may be indemnified against liability they may incur
for serving in their capacities as directors and officers of GreatFood.com.
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.
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<PAGE>
CERTAIN RELATIONSHIPS 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 commencing 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 50 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.
In December 1996, March 1997, and September 1997, R. Stockton Rush, III, one
of our directors, purchased 50,000 shares, 75,000 shares, and 83,333 shares of
common stock for $10,000, $15,000, and $25,000, respectively. 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 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
and Wyman, WYNOT Investments, and Mr. Rush III, his trust, his sister, his
father and his brother-in-law. Under the terms of this agreement, we are
obligated, under certain circumstances, to effect a registration under the
Securities Act of 1933 of shares of common stock. See "Description of Capital
Stock -- Registration Rights" on page 57 for more information.
In exchange for a warrant (which vests ratably over a period of 36 months
provided certain conditions 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. Mr. Barker, one of our directors, is the 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
52
<PAGE>
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 also a member of the limited liability company which is the direct general
partner of The Productivity Fund IV, L.P. and 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. 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, The
Productivity Fund IV, L.P., and Mr. Koulogeorge entitle them to purchase up to
284,307, 32,308, and 5,385 shares, respectively (which amounts would be
proportionately increased if we exercise our option to sell 300,000 additional
shares of Series C preferred stock). These warrants will be exercisable only 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 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 57 for more
information.
We are a party to a Merchant Agreement, dated December 20, 1995, which
obligates us, under certain conditions, to honor all 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 sets forth the beneficial ownership of GreatFood.com's
common stock as of May 17, 1999 and as adjusted to reflect the sale of the
shares of common stock offered hereby 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, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
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 4,027,532 shares of
common stock outstanding as of May 17, 1999 (assuming the conversion of all
outstanding shares of preferred stock), and 6,527,532 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. Shares of common stock
subject to options or warrants that are presently exercisable or exercisable
within 60 days of the date of this prospectus 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 exercise of options, warrants or other rights to
acquire GreatFood.com's capital stock that are presently outstanding or granted
in the future or reserved for future issuance under GreatFood.com's stock plans,
there will be further dilution to new public investors.
<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 27.2% 16.8%
William Cuff................................... 264,523 6.2 3.9
R. Stockton Rush, III.......................... 344,999 8.5 5.3
Geoffrey Barker................................ 43,333 1.1 *
David E. Wyman................................. 216,094 5.4 3.3
Mark Koulogeorge............................... 598,000 14.8 9.2
All directors and executive officers as a group
(8 persons).................................. 2,562,424 59.5 37.7
5% SHAREHOLDERS
Furman C. and Susan R. Moseley................. 700,000 17.4 10.7
411 University Street, Suite 1200
Seattle, Washington 98101
First Analysis Corporation..................... 588,000 14.6 9.0
9500 Sears Tower
Chicago, IL 60606
</TABLE>
- ------------------------
* Less than one percent.
54
<PAGE>
Shares listed as held by Mr Cuff include 14,286 shares of common stock
issuable upon exercise of a warrant currently exercisable and 216,666 shares
subject to options exercisable within 60 days of May 17, 1999.
Shares listed as held by Mr. Rush III include 10,000 shares subject to an
option currently exercisable and 126,666 shares 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
issuable upon exercise of a warrant currently exercisable held by The Cobalt
Group of which Mr. Barker is the Co-Chief Executive Officer, a director and a
significant shareholder and 10,000 shares subject to 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 common
stock held by Riverside Partnership and 60,000 shares of common stock held by
The Productivity Fund IV, L.P. Mr. Koulogeorge is a member of a limited
liability company which is the direct general partner of The Productivity Fund
IV, L.P. and 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 and 60,000 shares of common stock
held by The Productivity Fund IV, L.P. 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 a limited liability
company which is the indirect general partner of Riverside Partnership.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, we will be authorized to issue up to
60,000,000 shares of common stock, and 20,000,000 shares of preferred stock. The
following summary of certain provisions of the common stock and preferred stock
is not complete and may not contain all the information you should consider
before investing in the common stock. You should read carefully our articles of
incorporation, which are included as an exhibit to the Registration Statement,
of which this prospectus is a part.
COMMON STOCK
As of May 17, 1999, assuming conversion of all outstanding shares of
preferred stock, there were 4,027,532 shares of common stock outstanding held of
record by 46 shareholders. Following this offering, there will be 6,527,532
shares of common stock outstanding (assuming no exercise of the underwriters'
overallotment option and no exercise of outstanding options or warrants). 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. Subject to preferences of any outstanding shares of preferred stock,
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 May 17, 1999, there were 2,448,368 shares of preferred stock
outstanding, all of which will be converted into common stock on a one for one
basis at the time of the closing of this offering. Thereafter, under our
articles of incorporation, our board of directors is authorized to issue up to
20,000,000 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 issuance of 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.
STOCK PLANS
As of May 17, 1999, (1) options to purchase a total of 863,500 shares of
common stock were outstanding; and (2) up to 736,500 additional shares of common
stock may be subject to options granted in the future under the 1997 Stock
Incentive Plan. See "Management -- 1997 Stock Incentive Plan" on page 49. In
addition, 400,000 shares are reserved for issuance under the 1999 Employee Stock
Purchase Plan. See "Management -- 1999 Employee Stock Purchase Plan" on page 50.
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<PAGE>
WARRANTS
As of May 17, 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 25,000 shares of common stock at an exercise price of $0.20 per
share that is held by The Cobalt Group; (3) 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; (4) warrants to purchase up to 2,858 and 1,667
shares of common stock at exercise prices of $1.75 and $3.00, respectively; and
(5) warrants to purchase up to a total of 323,077 shares of Series C preferred
stock at $0.01 per share which will be exercisable only 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), (3) and (5) above, see "Certain
Relationships and Related Transactions" at page 52.
REGISTRATION RIGHTS
After this offering, the holders of 4,027,532 shares of common stock will be
entitled to certain 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
available for use by us. All of these registration rights are subject to certain
conditions and limitations, 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.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION, BYLAWS
AND WASHINGTON LAW
As noted above, our board of directors, without shareholder approval, has
the authority under our articles of incorporation to issue preferred stock with
rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of GreatFood.com or make removal of
management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. Following this offering, our board of
directors will be divided into three staggered classes, each of whose members
will serve a three year term. See "Management -- Board of Directors" on page 46.
Also following this offering, directors may be removed only for cause. Because
this system of electing and removing directors generally makes it more difficult
for shareholders to replace a majority of the board of directors, it may tend to
discourage a third party from making a tender offer or otherwise attempting to
gain control of GreatFood.com and may maintain the incumbency of the board of
directors.
APPROVAL OF CERTAIN BUSINESS COMBINATIONS. Upon completion of this
offering, our articles of incorporation will require that certain business
combinations (including a merger, share exchange and the sale, lease, exchange,
mortgage, pledge, transfer or other disposition or encumbrance of a substantial
part of our assets other than in the usual and regular course of business) be
approved by the holders of not less than two-thirds of the outstanding shares,
unless such business combination has been approved by a majority of the board of
directors, in which case the affirmative vote required shall be a majority of
the outstanding shares.
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<PAGE>
REQUIREMENTS FOR ADVANCE NOTIFICATION OF SHAREHOLDER NOMINATIONS AND
PROPOSALS. Upon completion of this offering, our bylaws will establish advance
notice procedures with respect to shareholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the
direction of the board of directors or a committee thereof.
AMENDMENT OF BYLAWS AND ARTICLES. Upon completion of this offering, our
articles of incorporation will provide that amendments to our bylaws which are
proposed by our shareholders and amendments to our articles of incorporation
must be approved by a two-thirds vote of all shares eligible to vote.
TRANSACTIONS WITH CERTAIN SIGNIFICANT SHAREHOLDERS. Washington law imposes
restrictions on certain transactions between a public corporation and certain
significant shareholders. Chapter 23B.19 of the Washington Business Corporation
Act prohibits a "target corporation," with certain exceptions, from engaging in
certain significant business transactions with an "acquiring person," which is
defined as a person or group of persons that beneficially owns 10% or more of
the voting securities of the target corporation, for a period of five years
after such acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. Such prohibited transactions
include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive any disproportionate benefit as a
shareholder.
After the five year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute or is
approved by the target corporation's shareholders. A public corporation may not
"opt out" of this statute. This provision may have the effect of delaying,
deterring or preventing a change in control of GreatFood.com.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is Chase Mellon
Shareholder Services, 400 S. Hope St., 4th Floor, Los Angeles, CA 90071.
LISTING
We have applied to have the common stock listed for quotation on the Nasdaq
National Market under the symbol "GTFD."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot guarantee that a significant public market for the common stock
will develop or be sustained after this offering. Future sales of substantial
amounts of common stock in the public market, including shares issued upon
exercise of outstanding options and warrants, could adversely affect prevailing
market prices for the common stock or our future ability to raise capital
through the sale of our equity securities.
After this offering, we will have outstanding 6,527,532 shares of common
stock, assuming no exercise of outstanding warrants and options, which as of May
17, 1999 were vested for an aggregate of 322,547 shares of common stock and will
vest for up to an additional 1,207,841 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 in the public market 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 4,027,532 shares of common 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.
All of our existing shareholders have agreed that to the extent we request,
that they will not sell or otherwise dispose of any of the 4,027,532 shares held
by them for a period of 180 days from the date of this prospectus. We also have
entered into an agreement with the underwriters that we will not offer, sell or
otherwise dispose of common stock for a period of 180 days from the date of this
prospectus.
On the date of the expiration of the 180 day period described above,
2,517,846 shares will be eligible under Rule 144 subject to volume restrictions
and 204,165 shares will be eligible under Rule 144(k). The remaining 1,305,521
restricted shares will be eligible for sale pursuant to Rule 144 on the
expiration of various one year holding periods over the six months following the
expiration of the lock up period.
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
6,527,532 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 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about
GreatFood.com. 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 2,000,000 shares of common stock reserved
for issuance under our 1997 Stock Incentive Plan and the 1999 Employee Stock
Purchase Plan. The registration statement will become effective automatically
upon filing. Shares issued under the foregoing plans, 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, the above referenced lock up agreements and vesting restrictions
imposed by us.
In addition, following this offering, the holders of 4,027,532 shares of
outstanding common stock will, under certain circumstances, have rights to
require us to register their shares for future sale. See "Description of Capital
Stock -- Registration Rights on page 57."
59
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement, W.R.
Hambrecht & Co., LLC and First Security Van Kasper, as underwriters, have agreed
to purchase from GreatFood.com the following respective shares of common stock
at the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
W.R. Hambrecht & Co., LLC........................................................
First Security Van Kasper........................................................
----------
Total........................................................................ 2,500,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in GreatFood.com's business, and the receipt of certificates, opinions and
letters from GreatFood.com and its counsel and independent auditors. Subject to
those conditions, the underwriters are committed to purchase all shares of
common stock offered if any of the shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus, as
this price is determined by the process described below, and to certain dealers
at this price less a concession not in excess of $[ ] per share. Any
dealers or agents that participate in the distribution of the common stock may
be deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After the completion of the initial public
offering of the shares, the public offering price and other selling terms may be
changed by the underwriters.
The public offering price set forth on the cover page of this prospectus
will be based on the results of an auction process, rather than solely through
negotiations between GreatFood.com and the underwriters. The plan of
distribution of the offered shares differs somewhat from traditional
underwritten public offerings of equity securities.
The auction process will proceed as follows:
- Prior to effectiveness of the registration statement relating to this
offering, the underwriters and participating dealers will solicit
indications of interest from prospective investors through the Internet as
well as by traditional means. The indications of interest will specify the
number of shares the potential investor proposes to purchase and the price
the investor is willing to pay for the shares. The public offering price
will ultimately be determined by negotiation between the underwriters and
GreatFood.com. The principal factor in establishing the public offering
price will be the price per share, or clearing price, that equals the
highest price set forth in valid indications of interest at which all of
the shares may be sold to potential investors. The public offering price
may be lower than the clearing price based on negotiations between the
underwriters and GreatFood.com. Valid indications of interest are those
that meet the requirements, including suitability, account status and
size, established by the underwriters or participating dealers.
- In determining the validity of indications of interest, in addition to
minimum account balances, a prospective investor submitting indications of
interest through a W.R. Hambrecht & Co., LLC brokerage account may be
required to maintain an account balance equal to or in excess of the
aggregate dollar amount of the prospective investor's indications of
interest. Although funds may be required to be in an account, the funds
will not be transferred to the underwriters until the
60
<PAGE>
closing of the offering. Conditions for valid indications of interest,
including suitability standards and account funding requirements, of other
underwriters or participating dealers may vary.
- The offered shares will be purchased from GreatFood.com by the
underwriters and offered through the underwriters and participating
dealers to investors who have submitted indications of interest at or in
excess of the public offering price. The number of shares offered to an
investor submitting an indication of interest precisely at the public
offering price may be subject to a pro rata reduction. Each participating
dealer has agreed with the underwriters to offer shares they purchase from
the underwriters in this manner, unless otherwise consented to by the
underwriters. Shares issued upon exercise of the underwriters'
over-allotment option will be allocated in the same manner. The
underwriters reserve the right, in exceptional circumstances, to alter
this method of allocation as they deem necessary to effect a fair and
orderly distribution of the offered shares. For example, large orders may
be reduced to insure a public distribution and indications of interest may
be rejected by the underwriters or participating dealers based on
suitability or creditworthiness criteria.
Price and volume volatility in the market for GreatFood.com's common stock
may result from the somewhat unique nature of the proposed plan of distribution.
Price and volume volatility in the market for GreatFood.com's common stock after
the completion of this offering may adversely affect the market price of
GreatFood.com's common stock.
GreatFood.com has granted to the underwriters an option, exercisable no
later than 30 days after the date of this prospectus, to purchase up to an
aggregate of 375,000 additional shares of common stock at the offering price,
less the underwriting discount, set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, the underwriters will
have a firm commitment to purchase the additional shares, and GreatFood.com will
be obligated to sell the additional shares to the underwriters. The underwriter
may exercise the option only to cover over-allotments made in connection with
the sale of shares offered.
The underwriting agreement provides that GreatFood.com will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
GreatFood.com has agreed not to offer, sell, contract to sell, or otherwise
dispose of any shares of common stock, or any options or warrants to purchase
common stock other than the shares of common stock or options to acquire common
stock issued under GreatFood.com's 1997 Stock Incentive Plan or upon the
exercise of outstanding warrants to purchase up to 666,888 shares of common
stock, for a period of 180 days after the date of this prospectus, except with
the prior written consent of W.R. Hambrecht & Co., LLC.
Prior to the offering, there has been no public market for GreatFood.com's
common stock. The initial public offering price for the common stock will be
determined by the process described above and does not necessarily bear any
direct relationship to GreatFood.com's assets, current earnings or book value or
to any other established criteria of value, although these factors were
considered in establishing the initial public offering price range. Other
factors considered in determining the initial public offering price range
include:
- market conditions;
- the industry in which GreatFood.com operates;
- an assessment of GreatFood.com's management;
- GreatFood.com's operating results;
- GreatFood.com's capital structure;
61
<PAGE>
- the business potential of GreatFood.com;
- the demand for similar securities of comparable companies; and
- other factors deemed relevant.
Persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of GreatFood.com's common
stock, including over-allotment, stabilizing and short-covering transactions in
GreatFood.com's common stock, and the imposition of a penalty bid, in connection
with the offering.
W.R. Hambrecht & Co., LLC is an investment banking firm formed as a limited
liability company in February 1998. In addition to this offering, W.R. Hambrecht
& Co., LLC has engaged in the business of public and private equity investing
and financial advisory services since its inception. The manager of W.R.
Hambrecht & Co., LLC, William R. Hambrecht, has 40 years of experience in the
securities industry. Persons affiliated and associated with W.R. Hambrecht &
Co., LLC beneficially own an aggregate of 116,666 shares of GreatFood.com's
common stock issuable upon the conversion of preferred stock.
62
<PAGE>
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. Certain
information is omitted 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 become subject to the information
and periodic reporting requirements of the Exchange Act, and will file periodic
reports, proxy statements and other information with the SEC. Such periodic
reports, proxy statements and other information will be available for inspection
and copying at the SEC's public reference rooms and the SEC's Web site, which is
described above.
63
<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 March 31, 1999 (unaudited)......... F-3
Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998 and for
the Three Months Ended March 31, 1998 and 1999 (unaudited).......................... F-4
Statement of Changes in Shareholders' Equity for the Years Ended December 31, 1996,
1997, 1998 and for the Three Months Ended March 31, 1999 (unaudited)................ F-5
Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and for
the Three Months Ended March 31, 1998 and 1999 (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>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
DECEMBER 31, MARCH 31, MARCH 31,
---------------------- 1999 1999
1997 1998 (UNAUDITED) (UNAUDITED)
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 124,092 $ 678,096 $ 1,932,277
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 42,951
Prepaid expenses........................................... 140,270 94,548
--------- ----------- -----------
126,023 1,318,450 2,069,776
Property and equipment, net.................................. 34,626 99,594 148,055
Other assets................................................. 10,363 40,339
--------- ----------- -----------
Total assets............................................. $ 160,649 $ 1,428,407 $ 2,258,170
--------- ----------- -----------
--------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $ 73,768 $ 625,982 $ 161,922
Accrued payroll and related benefits....................... 38,934 40,523
Current portion of shareholder loans payable............... 1,489
Current portion of capital lease obligation................ 20,391 21,415
--------- ----------- -----------
75,257 685,307 223,860
--------- ----------- -----------
Noncurrent portion of shareholder loans payable.............. 11,791
---------
Noncurrent portion of capital lease obligation............... 27,012 29,958
----------- -----------
Commitments and contingencies (Note 5)
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); no shares issued and outstanding, pro forma
(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; no
shares issued and outstanding, pro forma (unaudited);
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; 60,000,000
(unaudited) shares authorized, 3,427,532 (unaudited)
shares issued and outstanding, pro forma................. 197,043 257,824 281,396 $4,350,292
Deferred compensation........................................ (11,608) (25,276) (25,276)
Accumulated deficit.......................................... (123,442) (1,494,194) (2,320,664) (2,320,664)
--------- ----------- ----------- ------------
73,601 716,088 2,004,352 $2,004,352
--------- ----------- ----------- ------------
Total liabilities and shareholders' equity............... $ 160,649 $ 1,428,407 $ 2,258,170
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GREATFOOD.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $ 17,530 $ 119,633 $ 747,860 $ 28,036 $ 168,525
Cost of goods sold.................... 13,484 91,550 605,140 21,729 147,458
--------- --------- ---------- --------- ---------
Gross profit.......................... 4,046 28,083 142,720 6,307 21,067
Operating expenses
Sales and marketing................. 11,028 36,264 1,102,062 22,886 564,921
Product and site development........ 706 8,801 84,000 783 44,782
General and administrative.......... 52,815 65,707 357,709 20,610 242,739
--------- --------- ---------- --------- ---------
Total operating expenses............ 64,549 110,772 1,543,771 44,279 852,442
--------- --------- ---------- --------- ---------
Loss from operations.................. (60,503) (82,689) (1,401,051) (37,972) (831,375)
Other income (expense)
Other income........................ 24,500 3,200 793
Interest income..................... 63 164 33,298 187 6,952
Interest expense.................... (3,893) (2,612) (3,792) (459) (2,047)
--------- --------- ---------- --------- ---------
Net loss.............................. $ (39,833) $ (81,937) $(1,370,752) $ (38,244) $(826,470)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Basic and diluted net loss per
share............................... $ (0.04) $ (0.06) $ (0.87) $ (0.02) $ (0.52)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Weighted average shares outstanding... 1,007,432 1,273,915 1,579,164 1,579,164 1,579,164
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Pro forma basic and diluted net loss
per share (unaudited)............... $ (0.66) $ (0.29)
---------- ---------
---------- ---------
Pro forma weighted average shares
outstanding (unaudited)............. 2,089,531 2,823,968
---------- ---------
---------- ---------
</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..................................................
Proceeds from issuance of stock, net...................... 1,142,847 1,964,066 33,333 10,000
Issuance of stock options to employees.................... 15,625
Issuance of warrants...................................... 35,156
Amortization of deferred compensation.....................
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1998............................. 1,142,847 1,964,066 -- -- 1,579,164 257,824
Net loss (unaudited)......................................
Proceeds from issuance of stock, net (unaudited).......... 705,521 2,104,830
Issuance of stock options to employees (unaudited)........ 19,672
Issuance of warrants (unaudited).......................... 3,900
Amortization of deferred compensation (unaudited).........
--------- --------- --------- --------- --------- ---------
Balances at March 31, 1999 (unaudited).................... 1,142,847 $1,964,066 705,521 $2,104,830 1,579,164 $ 281,396
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<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.................................................. (1,370,752) (1,370,752)
Proceeds from issuance of stock, net...................... 1,974,066
Issuance of stock options to employees.................... (15,625) --
Issuance of warrants...................................... 35,156
Amortization of deferred compensation..................... 4,017 4,017
------------- ------------ ----------
Balances at December 31, 1998............................. (11,608) (1,494,194) 716,088
Net loss (unaudited)...................................... (826,470) (826,470)
Proceeds from issuance of stock, net (unaudited).......... 2,104,830
Issuance of stock options to employees (unaudited)........ (19,672) --
Issuance of warrants (unaudited).......................... 3,900
Amortization of deferred compensation (unaudited)......... 6,004 6,004
------------- ------------ ----------
Balances at March 31, 1999 (unaudited).................... $ (25,276) $(2,320,664) $2,004,352
------------- ------------ ----------
------------- ------------ ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GREATFOOD.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------------
<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) $ (1,370,752) $ (38,244) $ (826,470)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization............... 14,004 14,577 24,827 4,236 11,409
Amortization of deferred compensation....... 4,017 6,004
Expense related to the issuance of stock
options and warrants...................... 5,953 7,737 722 3,900
Changes in:
Accounts receivable....................... (1,931) (498,153) 1,931 457,133
Prepaid expenses.......................... (140,270) 45,722
Other assets.............................. (5,802) (29,976)
Accounts payable.......................... 10,549 58,329 552,214 (67,350) (464,060)
Accrued payroll and related
benefits................................ 38,934 2,804 1,589
---------- ---------- ------------- ---------- -------------
Net cash used in operating
activities.............................. (15,280) (5,009) (1,387,248) (95,901) (794,749)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment........... (25,923) (8,510) (34,022) (6,762) (50,917)
---------- ---------- ------------- ---------- -------------
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 17,498 2,104,830
Proceeds from issuance of shareholder loan
payable..................................... 15,000 60,000 100,000
Payments of shareholder loan payable.......... (330) (1,390) (73,280) (28) (100,000)
Payment of capital lease obligation........... (8,370) (4,983)
---------- ---------- ------------- ---------- -------------
Net cash provided by financing
activities.............................. 50,670 123,610 1,975,274 17,470 2,099,847
---------- ---------- ------------- ---------- -------------
Net increase (decrease) in cash and cash
equivalents................................... 9,467 110,091 554,004 (85,193) 1,254,181
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 $ 38,899 $ 1,932,277
---------- ---------- ------------- ---------- -------------
---------- ---------- ------------- ---------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.......................... $ 3,893 $ 2,612 $ 3,792 $ 459 $ 2,047
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased under capital
leases........................................ $ 55,773 $ 8,953
Issuance of stock warrants...................... $ 27,419
Issuance of stock options....................... $ 15,625 $ 19,672
</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 three months ended March 31, 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 three months ended March 31, 1998 and March
31, 1999, these five suppliers provided 54% and 27% (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 and
capital lease obligations. Except for capital lease obligations, 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
March 31, 1999
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)
(unaudited) is not materially different from the carrying amount, based on
interest rates available to the Company for similar types of arrangements.
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.
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of
Series A and Series B convertible preferred stock will automatically convert
into 1,142,847 and 705,521 shares, respectively, of common stock. Also effective
prior to the closing of this offering, 60,000,000 shares of common stock and
20,000,000 shares of convertible preferred stock will be authorized. The pro
forma effects of these transactions are unaudited and have been reflected in the
accompanying pro forma shareholders' equity at March 31, 1999.
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.
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)
ADVERTISING COSTS
The Company utilizes print and online advertising, direct mail, trade shows
and online promotions to expand brand and product awareness. Costs incurred for
presence on third party Web sites are recognized ratably over the term of the
arrangements. Costs incurred for Internet page impressions are recognized over
the ratio of the number of impressions delivered over the total number of
contracted impressions. All other advertising costs are expensed as incurred.
Advertising costs for 1996, 1997 and 1998 were $11,028, $26,864 and $1,044,591,
respectively, and for the three months ended March 31, 1998 and March 31, 1999
were $11,642 and $537,762 (unaudited), respectively. At December 31, 1998 and
March 31, 1999, the Company has recorded in prepaid expenses $138,602 and
$85,323 (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 126,000 and 2,871,012 (unaudited)
for the three months ended March 31, 1998 and March 31, 1999, respectively, were
excluded from diluted net loss per share due to their anti-dilutive effect.
There were no potentially dilutive securities during 1996.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible preferred stock into shares of the
Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on the date the shares were
originally issued.
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)
The following table sets forth the computation of the denominator in the
basic and pro forma net loss per share calculation for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding.............. 1,007,432 1,273,915 1,579,164 1,579,164 1,579,164
Weighted average effect of pro forma securities:
Series A converible preferred stock
(unaudited).................................. 510,367 1,142,847
Series B convertible preferred stock
(unaudited).................................. 101,957
---------- ----------
Pro forma weighted average shares outstanding
(unaudited).................................... 2,089,531 2,823,968
---------- ----------
---------- ----------
</TABLE>
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
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)
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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1999 and March 31, 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 March 31, 1999 and the results of its operations and cash flows
for the three months ended March 31, 1999 and 1998.
2. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment........................................................... $ 40,108 $ 88,149 $ 99,680
Furniture and office equipment............................................... 1,461 42,445 80,656
Software..................................................................... 22,337 23,107 33,235
---------- ---------- -----------
63,906 153,701 213,571
LESS: Accumulated depreciation and amortization.............................. (29,280) (54,107) (65,516)
---------- ---------- -----------
$ 34,626 $ 99,594 $ 148,055
---------- ---------- -----------
---------- ---------- -----------
</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 $64,726
(unaudited) at December 31, 1998 and March 31, 1999, respectively. Accumulated
amortization for these items was $6,247 and $10,427 (unaudited) at December 31,
1998 and March 31, 1999, respectively.
F-11
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
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
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.
F-12
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
4. SHAREHOLDERS' EQUITY (CONTINUED)
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 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 $4,017 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.
F-13
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
4. SHAREHOLDERS' EQUITY (CONTINUED)
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) $ (1,370,752)
Pro forma......................................................................... $ (82,903) $ (1,410,497)
Basic and diluted net loss per share
As reported....................................................................... $ (0.06) $ (0.87)
Pro forma......................................................................... $ (0.07) $ (0.89)
</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.
The following summarizes the activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF WEIGHTED- AVERAGE
SHARES UNDER AVERAGE FAIR VALUE
OPTION EXERCISE OF OPTIONS
AGREEMENTS PRICE GRANTED
------------ ----------- -----------
<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.
F-14
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
4. SHAREHOLDERS' EQUITY (CONTINUED)
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>
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.
F-15
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
5. COMMITMENTS (CONTINUED)
Operating lease expense was $0, $1,413 and $5,631 in 1996, 1997 and 1998,
respectively, and $499 and $6,668 (unaudited) for the three months ended March
31, 1998 and March 31, 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 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 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.
F-16
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
6. INCOME TAXES (CONTINUED)
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..................................... 4,000
Allowance for doubtful accounts................................ 1,000
Accrued liabilities............................................ 3,000
---------
466,000
---------
Deferred income tax liabilities:
Depreciation and amortization.................................. (1,000)
---------
465,000
Valuation allowance.............................................. (465,000)
---------
$ --
---------
---------
</TABLE>
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............................................ $(466,056)
Nondeductible items.............................................. 1,056
Change in valuation allowance.................................... 465,000
---------
$ --
---------
---------
</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
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.
F-17
<PAGE>
GREATFOOD.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
7. SUBSEQUENT EVENTS (CONTINUED)
In May 1999, the Company's Board of Directors adopted an employee stock
purchase plan which permits employees to purchase common stock at a discount
from fair market value. A total of 400,000 shares of common stock have been
reserved for issuance under this plan.
In May 1999, the Company's Board of Directors authorized the Company to file
a Registration Statement with the Securities and Exchange Commission to permit
the Company to proceed with an initial public offering of its common stock.
F-18
<PAGE>
[LOGO]
Until , 1999, which is 25 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 and the NASDAQ listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.............................................................. $ 10,790
NASD filing fee................................................................... 5,000
NASDAQ National Market listing fee................................................ 66,875
Blue Sky fees and expenses........................................................ 10,000
Printing and engraving expenses................................................... 110,000
Legal fees and expenses........................................................... 225,000
Accounting fees and expenses...................................................... 190,000
Director and Officer Securities Act liability insurance........................... 100,000
Transfer Agent and Registrar fees................................................. 10,000
Miscellaneous expenses............................................................ 12,335
----------
Total......................................................................... $ 740,000
----------
----------
</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. Section 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.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriter of the registrant and its executive officers and directors
and by the registrant of the Underwriter, for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in this
Registration Statement.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in August 1995, the registrant has issued and sold
unregistered securities as follows:
(1) On September 12, 1995, the registrant issued 1,000,000 shares of common
stock to our founder. The aggregate consideration received for such shares was
$48,590.
(2) 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.
(3) 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.
(4) 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.
(5) On July 17, 1997, 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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).
(11) From September 1997 through May 17, 1999, the registrant granted stock
options to purchase an aggregate of 863,500 shares of common stock to employees,
executive officers, consultants and directors with exercise prices ranging from
$0.30 to $5.50 per share pursuant to the registrant's 1997 Stock Incentive Plan
in consideration for services.
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
II-2
<PAGE>
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 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+ Form of Underwriting 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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.
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.
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).
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- ------------------------
+ To be filed by amendment
(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.
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
II-4
<PAGE>
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.
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 17th day of May, 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>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Benjamin Nourse as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him in any and
all capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments or any abbreviated registration statement
and any amendments thereto filed pursuant to Rule 462(b) increasing the number
of securities for which registration is sought), and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, with full power to act alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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 May 17, 1999
Benjamin Nourse (Principal Executive Officer)
/s/ WILLIAM CUFF
- ------------------------------ President and Director May 17, 1999
William Cuff
Vice President of Finance and
/s/ GAYLE STETSON Administration and Chief
- ------------------------------ Financial Officer (Principal May 17, 1999
Gayle Stetson Financial and
Accounting Officer)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ -------------------
<S> <C> <C>
/s/ R. STOCKTON RUSH, III
- ------------------------------ Director May 17, 1999
R. Stockton Rush, III
/s/ GEOFFREY BARKER
- ------------------------------ Director May 17, 1999
Geoffrey Barker
/s/ DAVID E. WYMAN
- ------------------------------ Director May 17, 1999
David E. Wyman
/s/ MARK KOULOGEORGE
- ------------------------------ Director May 17, 1999
Mark Koulogeorge
</TABLE>
II-7
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
ONLINE SPECIALTY RETAILING, INC.
1. SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
1.1 Annual Meeting. The annual meeting of the shareholders of this
corporation (the "Corporation") for the election of directors and for the
transaction of such other business as may properly come before the meeting shall
be held each year at the principal office of the Corporation, or at some other
place either within or without the State of Washington as designated by the
Board of Directors, on the day and at the time determined by the board of
directors of this corporation.
1.2 Special Meetings. Special meetings of the shareholders for any purpose
or purposes may be called at any time by the Board of Directors, the Chairman of
the Board, the President, a majority of the Board of Directors, or any
shareholder or shareholders holding in the aggregate ten percent of the voting
power of all shareholders. The meetings shall be held at such time and place as
the Board of Directors may prescribe, or, if not held upon the request of the
Board of Directors, at such time and place as may be established by the
President or by the Secretary in the President's absence. Only business within
the purpose or purposes described in the meeting notice may be conducted.
1.3 Notice of Meetings. Written notice of the place, date and time of the
annual shareholders' meeting and written notice of the place, date, time and
purpose or purposes of special shareholders' meetings shall be delivered not
less than 10 (or, if required by Washington law, 20) or more than 60 days before
the date of the meeting, either personally, by facsimile, or by mail, or in any
other manner approved by law, by or at the direction of the President or the
Secretary, to each shareholder of record entitled to notice of such meeting.
Mailed notices shall be deemed to be delivered when deposited in the mail,
first-class postage prepaid, correctly addressed to the shareholder's address
shown in the Corporation's current record of shareholders.
1.4 Waiver of Notice. Except where expressly prohibited by law or the
Articles of Incorporation, notice of the place, date, time and purpose or
purposes of any shareholders' meeting may be waived in a signed writing
delivered to the Corporation by any shareholder at any time, either before or
after the meeting. Attendance at the meeting in person or by proxy waives
objection to lack of notice or defective notice of the meeting unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting. A shareholder waives objection to
consideration of a
<PAGE>
particular matter at a meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects to considering
the matter when it is presented.
1.5 Shareholders' Action Without a Meeting. 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 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.
1.6 Telephone Meetings. Shareholders may participate in a meeting of
shareholders by means of a conference telephone or any similar communications
equipment that enables all persons participating in the meeting to hear each
other during the meeting. Participation by such means shall constitute presence
in person at a meeting.
1.7 List of Shareholders. At least ten days before any shareholders'
meeting, the Secretary of the Corporation or the agent having charge of the
stock transfer books of the Corporation shall have compiled a complete list of
the shareholders entitled to notice of a shareholders I meeting, arranged in
alphabetical order and by voting group, with the address of each shareholder and
the number, class, and series, if any, of shares owned by each.
1.8 Quorum and Voting. The presence in person or by proxy of the holders
of a majority of the votes entitled to be cast on a matter at a meeting shall
constitute a quorum of shareholders for that matter. If a quorum exists, action
on a matter shall be approved by a voting group if the votes cast within a
voting group favoring the action exceed the votes cast within the voting group
opposing the action, unless a greater number of affirmative votes is required by
the Articles of Incorporation or by law. If the Articles of Incorporation or
Washington law provide for voting by two or more voting groups on a matter,
action on a matter is taken only when voted upon by each of those
2
<PAGE>
voting groups counted separately. Action may be taken by one voting group on a
matter even though no action is taken by another voting group.
1.9 Adjourned Meetings. If a shareholders' meeting is adjourned to a
different place, date or time, whether for failure to achieve a quorum or
otherwise, notice need not be given of the new place, date or time if the new
place, date or time is announced at the meeting before adjournment. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in these Bylaws, that determination shall apply to any
adjournment thereof, unless Washington law requires fixing a new record date. If
Washington law requires that a new record date be set for the adjourned meeting,
notice of the adjourned meeting must be given to shareholders as of the new
record date. Any business may be transacted at an adjourned meeting that could
have been transacted at the meeting as originally called.
1.10 Proxies. A shareholder may appoint a proxy to vote or otherwise act
for the shareholder by signing an appointment form, either personally or by an
agent. No appointment shall be valid after 11 months from the date of its
execution unless the appointment form expressly so provides. An appointment of a
proxy is revocable unless the appointment is coupled with an interest. No
revocation shall be effective until written notice thereof has actually been
received by the Secretary of the Corporation or any other person authorized to
tabulate votes.
2. BOARD OF DIRECTORS
2.1 Number and Qualification. The business affairs and property of the
Corporation shall be managed under the direction of a Board of Directors, the
number of members of which is set at six(6). The Board of Directors may increase
or decrease this number by resolution. A decrease in the number of directors
shall not shorten the term of an incumbent director.
2.2 Election -- Term of Office. The directors shall be elected by the
shareholders at each annual shareholders' meeting or at a special shareholders'
meeting called for such purpose. Despite the expiration of a director's term,
the director continues to serve until his or her successor is elected and
qualified or until there is a decrease in the authorized number of directors.
2.3 Vacancies. Except as otherwise provided by law, vacancies in the Board
of Directors, whether caused by resignation, death, retirement,
disqualification, removal, increase in the number of directors, or otherwise,
may be filled for the remainder of the term by the Board of Directors, by the
shareholders, or, if the directors in office constitute less than a quorum of
the Board of Directors, by an affirmative vote of a majority of the remaining
directors. The term of a director elected to fill a vacancy expires at the next
shareholders' meeting at which directors are elected. A vacancy that
3
<PAGE>
will occur at a specific later date may be filled before the vacancy occurs, but
the new director may not take office until the vacancy occurs.
2.4 Quorum and Voting. At any meeting of the Board of Directors, the
presence in person (including presence by electronic means such as a telephone
conference call) of a majority of the number of directors presently in office
shall constitute a quorum for the transaction of business. Notwithstanding the
foregoing, in no case shall a quorum be less than one-third of the authorized
number of directors. If a quorum is present at the time of a vote, the
affirmative vote of a majority of the directors present at the time of the vote
shall be the act of the Board of Directors and of the Corporation except as may
be otherwise specifically provided by the Articles of Incorporation, by these
Bylaws, or by law. A director who is present at a meeting of the Board of
Directors when action is taken is deemed to have assented to the action taken
unless: (a) the director objects at the beginning of the meeting, or promptly
upon his or her arrival, to holding it or to transacting business at the
meeting; (b) the director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or (c) the director delivers written
notice of his or her dissent or abstention to the presiding officer of the
meeting before its adjournment or to the Corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a director who votes in favor of the action taken.
2.5 Regular Meetings. Regular meetings of the Board of Directors shall be
held at such place, date and time as shall from time to time be fixed by
resolution of the Board.
2.6 Special Meetings. Special meetings of the Board of Directors may be
held at any place and at any time and may be called by the Chairman of the
Board, the President, Vice President, Secretary or Treasurer, or any two or more
directors.
2.7 Notice of Meetings. Unless the Articles of Incorporation provide
otherwise, any regular meeting of the Board of Directors may be held without
notice of the date, time, place, or purpose of the meeting. Any special meeting
of the Board of Directors must be preceded by at least two days' notice of the
date, time, and place of the meeting, but not of its purpose, unless the
Articles of Incorporation or these Bylaws require otherwise. Notice may be given
personally, by facsimile, by mail, or in any other manner allowed by law. Oral
notice shall be sufficient only if a written record of such notice is included
in the Corporation's minute book. Notice shall be deemed effective at the
earliest of: (a) receipt; (b) delivery to the proper address or telephone number
of the director as shown in the Corporation's records; or (c) five days after
its deposit in the United States mail, as evidenced by the postmark, if
correctly addressed and mailed with first-class postage prepaid. Notice of any
meeting of the Board of Directors may be waived by any director at any time, by
a signed writing, delivered to the corporation for inclusion in the minutes,
either before or after the meeting. Attendance or participation
4
<PAGE>
by a director at a meeting shall constitute a waiver of any required notice of
the meeting unless the director promptly objects to holding the meeting or to
the transaction of any business on the grounds that the meeting was not lawfully
convened and the director does not thereafter vote for or assent to action taken
at the meeting.
2.8 Directors' Action Without A Meeting. The Board of Directors or a
committee thereof may take any action without a meeting that it could properly
take at a meeting if one or more written consents setting forth the action are
signed by all of the directors, or all of the members of the committee, as the
case may be, either before or after the action is taken, and if the consents are
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Such action shall be effective upon the signing of a consent
by the last director to sign, unless the consent specifies a later effective
date.
2.9 Committees of the Board of Directors. The Board of Directors, by
resolutions adopted by a majority of the members of the Board of Directors in
office, may create from among its members one or more committees and shall
appoint the members thereof. Each such committee must have two or more members,
who shall be directors and who shall serve at the pleasure of the Board of
Directors. Each committee of the Board of Directors may exercise the authority
of the Board of Directors to the extent provided in its enabling resolution and
any pertinent subsequent resolutions adopted in like manner, provided that the
authority of each such committee shall be subject to applicable law. Each
committee of the Board of Directors shall keep regular minutes of its
proceedings and shall report to the Board of Directors when requested to do so.
2.10 Telephone Meetings. Members of the Board of Directors or of any
committee appointed by the Board of Directors may participate in a meeting of
the Board of Directors or committee by means of a conference telephone or
similar communications equipment that enables all persons participating in the
meeting to hear each other during the meeting. Participation by such means shall
constitute presence in person at a meeting.
2.11 Compensation of Directors. The Board of Directors may fix the
compensation of directors as such and may authorize the reimbursement of their
expenses.
3. OFFICERS
3.1 Officers Enumerated -- Election. The officers of the Corporation shall
consist of such officers and assistant officers as may be designated by
resolution of the Board of Directors. The officers may include a Chairman of the
Board, a President, one or more Vice Presidents, a Secretary, a Treasurer, and
any assistant officers. The officers shall hold of f ice at the pleasure of the
Board of Directors. Unless otherwise restricted by the Board of Directors, the
President may appoint any assistant officer, the Secretary may appoint one or
more Assistant Secretaries, and the Treasurer may appoint one or
5
<PAGE>
more Assistant Treasurers; provided that any such appointments shall be recorded
in writing in the corporate records.
3.2 Qualifications. None of the officers of the Corporation need be a
director. Any two or more corporate offices may be held by the same person.
3.3 Duties of the Officers. Unless otherwise prescribed by the Board of
Directors, the duties of the officers shall be as follows:
Chairman of the Board. The Chairman of the Board, if one is elected,
shall preside at meetings of the Board of Directors and of the shareholders,
shall be responsible for carrying out the plans and directives of the Board of
Directors, shall report to and consult with the Board of Directors and, if the
Board so resolves, shall be the Chief Executive Officer. The Chairman of the
Board shall have such other powers and duties as the Board of Directors may from
time to time prescribe.
President. The President shall exercise the usual executive powers
pertaining to the office of President. In the absence of a Chairman of the
Board, the President shall preside at meetings of the Board of Directors and of
the shareholders, perform the other duties of the Chairman of the Board
prescribed in this Section, and perform such other duties as the Board of
Directors may from time to time designate. In addition, if there is no Secretary
in office, the President shall perform the duties of the Secretary.
Vice President. Each Vice President shall perform such duties as the
Board of Directors may from time to time designate. In addition, the Vice
President, or if there is more than one, the most senior Vice President
available, shall act as President in the absence or disability of the President.
Secretary. The Secretary shall be responsible for and shall keep,
personally or with the assistance of others, records of the proceedings of the
directors and shareholders; authenticate records of the Corporation; attest all
certificates of stock in the name of the Corporation; keep the corporate seal,
if any, and affix the same to certificates of stock and other proper documents;
keep a record of the issuance of certificates of stock and the transfers of the
same; and perform such other duties as the Board of Directors may from time to
time designate.
Treasurer. The Treasurer shall have the care and custody of, and be
responsible for, all funds and securities of the Corporation and shall cause to
be kept regular books of account. The Treasurer shall cause to be deposited all
funds and other valuable effects in the name of the Corporation in such
depositories as may be designated by the Board of Directors. In general, the
Treasurer shall perform all of the duties incident to the office of Treasurer,
and such other duties as from time to time may be assigned by the Board of
Directors.
6
<PAGE>
Assistant Officers. Assistant officers may consist of one or more
Assistant Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers. Each assistant officer shall perform those duties assigned
to him or her from time to time by the Board of Directors, the President, or the
officer who appointed him or her.
3.4 Vacancies. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting.
3.5 Removal. Any officer or agent may be removed by action of the Board of
Directors with or without cause, but any removal shall be without prejudice to
the contract rights, if any, of the person removed. Election or appointment of
an officer or agent shall not of itself create any contract rights.
3.6 Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.
4. SHARES AND CERTIFICATES OF SHARES
4.1 Share Certificates. Share certificates shall be issued in numerical
order, and each shareholder shall be entitled to a certificate signed by the
President or a Vice President, and attested by the Secretary or an Assistant
Secretary. Share certificates may be sealed with the corporate seal, if any.
Facsimiles of the signatures and seal may be used as permitted by law. Every
share certificate shall state:
(a) the name of the corporation;
(b) that the Corporation is organized under the laws of the State of
Washington;
(c) the name of the person to whom the share certificate is issued;
(d) the number, class and series (if any) of shares that the
certificate represents; and
(e) if the Corporation is authorized to issue shares of more than
one class or series, that upon written request and without charge, the
Corporation will furnish any shareholder with a full statement of the
designations, preferences, limitations and relative rights of the shares of each
class or series, and the authority of the Board of Directors to determine
variations for future series.
4.2 Consideration for Shares. Shares of the Corporation may be issued for
such consideration as shall be determined by the Board of Directors to be
adequate. The consideration for the issuance of shares may be paid in whole or
in part in cash, or in any tangible or intangible property or benefit to the
corporation, including but not limited to promissory notes, services performed,
contracts for services to be performed, or other
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securities of the corporation. Establishment by the Board of Directors of the
amount of consideration received or to be received for shares of the Corporation
shall be deemed to be a determination that the consideration so established is
adequate.
4.3 Transfers. Shares may be transferred by delivery of the certificate,
accompanied either by an assignment in writing on the back of the certificate,
or by a written power of attorney to sell, assign and transfer the same, signed
by the record holder of the certificate. Except as otherwise specifically
provided in these Bylaws, no shares of stock shall be transferred on the books
of the Corporation until the outstanding certificate therefor has been
surrendered to the Corporation.
4.4 Loss or Destruction of Certificates. In the event of the loss or
destruction of any certificate, a new certificate may be issued in lieu thereof
upon satisfactory proof of such loss or destruction, and upon the giving of
security against loss to the Corporation by bond, indemnity or otherwise, to the
extent deemed necessary by the Board of Directors, the Secretary, or the
Treasurer.
4.5 Fixing Record Date. The Board of Directors may fix in advance a date
as the record date for determining shareholders entitled: (i) to notice of or to
vote at any shareholders I meeting or any adjournment thereof; (ii) to receive
payment of any share dividend; or (iii) to receive payment of any distribution.
The Board of Directors may in addition fix record dates with respect to any
allotment of rights or conversion or exchange of any securities by their terms,
or for any other proper purpose, as determined by the Board of Directors and by
law. The record date shall be not more than 70 days and, in case of a meeting of
shareholders, not less than 10 days (or such longer period as may be required by
Washington law) prior to the date on which the particular action requiring
determination of shareholders is to be taken. If no record date is fixed for
determining the shareholders entitled to notice of or to vote at a meeting of
shareholders, the record date shall be the date before the day on which notice
of the meeting is mailed. If no record date is fixed for the determination of
shareholders entitled to a distribution (other than one involving a purchase,
redemption, or other acquisition of the Corporation's own shares), the record
date shall be the date on which the Board adopted the resolution declaring the
distribution. If no record date is fixed for determining shareholders entitled
to a share dividend, the record date shall be the date on which the Board of
Directors authorized the dividend.
5. BOOKS, RECORDS AND REPORTS
5.1 Records of Corporate Meetings, Accounting Records and Share Registers.
The Corporation shall keep, as permanent records, minutes of all meetings of the
Board of Directors and shareholders, and all actions taken without a meeting,
and all actions taken by a committee exercising the authority of the Board of
Directors. The Corporation or its agent shall maintain, in a form that permits
preparation of a list, a list of the names
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and addresses of its shareholders, in alphabetical order by class of shares, and
the number, class, and series, if any, of shares held by each. The Corporation
shall also maintain appropriate accounting records, and at its principal place
of business shall keep copies of: (a) its Articles of Incorporation or restated
Articles of Incorporation and all amendments in effect; (b) its Bylaws or
restated Bylaws and all amendments in effect; (c) minutes of all shareholders'
meetings and records of all actions taken without meetings for the past three
years; (d) the yearend balance sheets and income statements for the past three
fiscal years, prepared as required by Washington law; (e) all written
communications to shareholders generally in the past three years; (f) a list of
the names and business addresses of its current officers and directors; and (g)
its most recent annual report to the Secretary of State.
5.2 Copies of Corporate Records. Any person dealing with the Corporation
may rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the Chairman
of the Board, President, Vice President, Secretary or Assistant Secretary.
5.3 Examination of Records. A shareholder shall have the right to inspect
and copy, during regular business hours at the principal office of the
Corporation, in person or by his or her attorney or agent, the corporate records
referred to in the last sentence of Section 5.1 of these Bylaws if the
shareholder gives the Corporation written notice of the demand at least five
business days before the date on which the shareholder wishes to make such
inspection. In addition, if a shareholder's demand is made in good faith and for
a proper purpose, a shareholder may inspect and copy, during regular business
hours at a reasonable location specified by the Corporation, excerpts from
minutes of any meeting of the Board of Directors, records of any action of a
committee of the Board of Directors, records of actions taken by the Board of
Directors without a meeting, minutes of shareholders' meetings held or records
of action taken by shareholders without a meeting not within the past three
years, accounting records of the Corporation, or the record of shareholders;
provided that the shareholder shall have made a demand describing with
reasonable particularity the shareholder Is purpose and the records the
shareholder desires to inspect, and provided further that the records are
directly connected to the shareholder's purpose. This section shall not affect
any right of shareholders to inspect records of the Corporation that may be
otherwise granted to the shareholders by law.
5.4 Financial Statements. Not later than four months after the end of each
fiscal year, or in any event prior to its annual meeting of shareholders, the
Corporation shall prepare a balance sheet and income statement in accordance
with Washington law. The Corporation shall furnish a copy of each to any
shareholder upon written request.
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6. FISCAL YEAR
The fiscal year end of the Corporation shall be December 31.
7. MISCELLANEOUS PROCEDURAL PROVISIONS
The Board of Directors may adopt rules of procedure to govern any meetings
of shareholders or directors to the extent not inconsistent with law, the
Corporation's Articles of Incorporation, or these Bylaws, as they are in effect
from time to time. In the absence of any rules of procedure adopted by the Board
of Directors, the chairman of the meeting shall make all decisions regarding the
procedures for any meeting.
8. AMENDMENT OF BYLAWS
The Board of Directors is expressly authorized to make, alter and repeal
the Bylaws of the Corporation, subject to the power of the shareholders of the
Corporation to change or repeal the Bylaws.
9. INDEMNIFICATION OF DIRECTORS AND OTHERS
9.1 Grant of Indemnification. Subject to Section 9.2, each person who was
or is made a party or is threatened to be made a party to or is involved
(including, without limitation, as a witness) in any threatened, pending, or
completed action, suit or proceeding, whether formal or informal, civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the f act that he or she is or was a director of the Corporation or
who, while a director of the Corporation, is or was serving at the request of
the Corporation as a director, officer, employee or agent of this or another
Corporation or of a partnership, joint venture, trust, other enterprise, or
employee benefit plan, whether the basis of such proceeding is alleged action in
an official capacity as a director or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by applicable law, as then in
effect, against all expense, liability and loss (including attorneys' fees,
costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director and shall inure to the benefit of his or her heirs, executors
and administrators.
9.2 Limitations on Indemnification. Notwithstanding Section 9.1, no
indemnification shall be provided hereunder to any such person to the extent
that such indemnification would be prohibited by the Washington Business
Corporation Act or other applicable law as then in effect, nor, except as
provided in Section 9.4 with respect to proceedings seeking to enforce rights to
indemnification, shall the Corporation indemnify any such person seeking
indemnification in connection with a proceeding (or
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part thereof) initiated by such person except where such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
9.3 Advancement of Expenses. The right to indemnification conferred in
this section shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition,
except where the Board of Directors shall have adopted a resolution expressly
disapproving such advancement of expenses.
9.4 Right to Enforce Indemnification. If a claim under Section 9.1 is not
paid in full by the Corporation within 60 days after a written claim has been
received by the Corporation, or if a claim for expenses incurred in defending a
proceeding in advance of its final disposition authorized under Section 9.3 is
not paid within 20 days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, to the extent
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. The claimant shall be presumed to be
entitled to indemnification hereunder upon submission of a written claim (and,
in an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition, where the required undertaking
has been tendered to the Corporation), and thereafter the Corporation shall have
the burden of proof to overcome the presumption that the claimant is so
entitled. It shall be a defense to any such action (other than an action with
respect to expenses authorized under Section 9.3) that the claimant has not met
the standards of conduct which make it permissible hereunder or under the
Washington Business Corporation Act for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
or reimbursement or advancement of expenses to the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth herein or in the Washington Business Corporation Act nor (except as
provided in Section 9.3) an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses shall be a defense to the action or create a presumption
that the claimant is not so entitled.
9.5 Nonexclusivity. The right to indemnification and the payment of
expenses incurred in defending a proceeding in advance of its final disposition
conferred in this section shall be valid to the extent consistent with
Washington law.
9.6 Indemnification of Officers, Employees and Agents. The Corporation
may, by action of its Board of Directors from time to time, provide
indemnification and pay expenses in advance of the final disposition of a
proceeding to officers, employees and
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agents of the Corporation on the same terms and with the same scope and effect
as the provisions of this section with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation or pursuant
to rights granted pursuant to, or provided by, the Washington Business
Corporation Act or on such other terms as the Board may deem proper.
9.7 Insurance and Other Security. The Corporation may maintain insurance,
at its expense, to protect itself and any individual who is or was a director,
officer, employee or agent of the Corporation or another Corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against or incurred by the individual in that capacity or arising from
his or her status as an officer, director, agent, or employee, whether or not
the Corporation would have the power to indemnify such person against the same
liability under the Washington Business Corporation Act. The Corporation may
enter into contracts with any director or officer of the Corporation in
furtherance of the provisions of this section and may create a trust fund, grant
a security interest or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this section.
9.8 Amendment or Modification. This section may be altered or amended at
any time as provided in these Bylaws, but no such amendment shall have the
effect of diminishing the rights of any person who is or was an officer or
director as to any acts or omissions taken or omitted to be taken prior to the
effective date of such amendment.
9.9 Effect of Section. The rights conferred by this section shall be
deemed to be contract rights between the Corporation and each person who is or
was a director or officer. The Corporation expressly intends each such person to
rely on the rights conferred hereby in performing his or her respective duties
on behalf of the Corporation.
10. REPRESENTATION OF SHARES OF OTHER CORPORATIONS
Unless otherwise restricted by the Board of Directors, the Chairman,
President, and any Vice President of the corporation are each authorized to
vote, represent and exercise on behalf of the Corporation all rights incident to
any and all shares of other corporations standing in the name of the
Corporation. This authority may be exercised by such officers either in person
or by a duly executed proxy or power of attorney.
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Amended and Restated Investors' Rights Agreement
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AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Amended and Restated Investors' Rights Agreement (this "Agreement") is made
and entered into as of March 18, 1999 by and among ONLINE SPECIALTY RETAILING, a
Washington corporation (the "Company"), certain holders of the Company's Common
Stock (the "Common Holders"), the holders of the Company's Series A Preferred
Stock (the "Series A Holders") and the holders of the Company's Series B
Preferred Stock (the "Series B Holders" and collectively, with the Common
Holders and the Series A Holders, the "Holders") each as identified on attached
Exhibit A, as such may be amended from time to time in accordance with this
Agreement.
Recitals
A. The Company, the Common Holders and the Series A Holders are parties to that
certain Investors' Rights Agreement, dated as of July 17, 1998 (the "Original
Agreement").
B. The Series B Holders and the Company are parties to that certain Series B
Preferred Stock Purchase Agreement, dated as of March 18, 1999 (the "Stock
Purchase Agreement"), under which certain of the obligations of the Company and
the Series B Holders are conditioned upon amending and restating the Original
Agreement to include the Series B Holders as parties thereto in the manner set
forth in this Agreement.
C. The Original Agreement may be amended with the consent of the Company and the
holders of a majority of the Registrable Securities (as defined therein) and
holders of such majority have consented in writing to this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, the parties hereto agree as follows:
1. REGISTRATION RIGHTS
1.1 Definitions. For purposes of this Agreement:
(a) The term "register," "registered," and "registration" refer to
a registration effected by preparing and filing a registration
statement or similar document in compliance with the
Securities Act of 1933, as amended (the "Securities Act"), and
the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "Registrable Securities" means (i) the Conversion
Shares (as defined below), (ii) any shares of Common Stock
currently held by the Common Holders (the "Common Holder
Shares"), and (iii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant,
right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in
replacement of, the Preferred Shares, the Conversion Shares or
the Common Holder Shares, excluding in all cases, however, any
Registrable Securities (A) that are no longer beneficially
owned by a Holder or a permitted transferee of the rights of a
Holder pursuant to Section 1.11 of this Agreement, (B) that
have been effectively registered under the Securities Act and
disposed of pursuant thereto, or (C) for which registration
under the Securities Act is no longer required for subsequent
public distribution of such security;
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Amended and Restated Investors' Rights Agreement
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(c) The term "Preferred Shares" means the Company's Series A
Preferred Stock and Series B Preferred Stock;
(d) The term "Conversion Shares" means the Common Stock of the
Company issuable or issued upon conversion of the Preferred
Shares;
(e) The term "Holder" means any person owning or having the right
to acquire Registrable Securities who is a party to this
Agreement as of the date hereof or who may be added as a party
hereto pursuant to the terms of this Agreement, and any
assignee thereof in accordance with Section 1.11;
(f) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any registration form
(including any successor to Form S-3) under the Securities Act
subsequently adopted by the Securities and Exchange Commission
(the "SEC") which similarly permits inclusion or incorporation
of substantial information by reference to other documents
filed by the Company with the SEC; and
(g) The term "Exempt Registrations" means registrations relating
solely to employee benefit plans on Form S-8 or any similar
form that may be promulgated in the future, registrations
relating solely to a Commission Rule 145 transaction on Form
S-4 or similar forms that may be promulgated in the future or
registrations on any form that does not include substantially
the same information as would be required to be included in a
registration statement covering the sale of the Registrable
Securities.
1.2 Company Registration. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) its Common Stock under
the Securities Act in connection with the public offering of such securities
solely for cash (other than Exempt Registrations), the Company shall, at each
such time, promptly give each Holder written notice of such registration. Upon
the written request of each Holder given within twenty (20) days after the
mailing of such notice by the Company, the Company shall, subject to the
provisions of Section 1.7, use its reasonable best efforts to cause to be
registered under the Securities Act all of the Registrable Securities that each
such Holder has requested to be registered. If a Holder decides not to include
all of its Registrable Securities in any registration statement filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
Notwithstanding the provisions of this Section 1.2, the Company shall have the
right at any time after it shall have given written notice pursuant to this
Section 1.2 (irrespective of whether any written request for inclusion of such
securities shall have already been made) to elect not to file any such proposed
registration statement, or to withdraw the same.
1.3 Form S-3 Registration. In case the Company shall receive from Holders
holding at least 25 percent of the Registrable Securities then outstanding ("S-3
Initiating Holders") a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to Registrable Securities, subject to the limitations set forth below,
the Company will:
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Amended and Restated Investors' Rights Agreement
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(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders;
(b) as soon as practicable, file a registration statement covering
the Registrable Securities specified in this paragraph and use
its best efforts to effect the registration and all such
qualifications or compliances under the Securities Act of all
or such portion of such Holder's or Holders' Registrable
Securities as are specified in the S-3 Initiating Holders'
request, together with all or such portion of the Registrable
Securities of any other Holder or Holders joining in such
request as are specified in a written request given within
twenty (20) days after the Company's giving of written notice
to such Holders.
Notwithstanding the foregoing, the Company shall not be obligated to effect a
registration pursuant to this Section 1.3: (i) if the Company, within ten (10)
days of the receipt of the request of the S-3 Initiating Holders, gives notice
of its bona fide intention to effect the filing within ninety (90) days of
receipt of such request of a registration statement with respect to which the
Holders shall have registration rights pursuant to Section 1.2; (ii) if Form S-3
is not available for such offering by the Holders; (iii) if the S-3 Initiating
Holders, together with the Holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$250,000; (iv) if the Company shall furnish to the Holders a certificate stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its shareholders for such Form
S-3 registration to be effected at such time, in which event the Company shall
have the right during any 12 consecutive month period to defer the filing of the
Form S-3 registration statement for up to two periods of not more than sixty
(60) days each after receipt of the request of the Holder or Holders under this
Section 1.3; (v) if the Company has, within the twelve-month period preceding
the date of such request, already effected a registration of securities in which
the S-3 Initiating Holders participated to the fullest extent they desired
pursuant to Section 1.2 or this Section 1.3, or (vi) if the Company shall have
previously effected four (4) registrations requested by one or more Holders
under this Section 1.3. The expenses of registration shall be borne by the
Company (pursuant to Section 1.6).
1.4 Obligations of the Company. Whenever required under this Agreement to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable
best efforts to cause such registration statement to become
effective, and, upon the request of the Holders of a majority
of the Registrable Securities registered thereunder, keep such
registration statement effective for up to 90 days, provided,
however, that the Company may cease to keep such registration
statement effective if, in the good faith judgment of the
Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders to do so;
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in
connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by
such registration statement;
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Amended and Restated Investors' Rights Agreement
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(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents
as they may reasonably request in order to facilitate the
disposition of all securities covered by such registration
statement;
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Holders, provided that
the Company shall not be required in connection therewith or
as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or
jurisdictions;
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter of
such offering; and
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to
be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading in the light of the
circumstances then existing.
1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to any selling Holder that such selling Holder shall furnish to the
Company such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of such securities as shall be reasonably
required to effect the registration of its Registrable Securities and to execute
such documents in connection with such registration as the Company may
reasonably request.
1.6 Expenses of Registration. Except as provided otherwise, all reasonable
expenses other than underwriting discounts and commissions and fees and expenses
of counsel to the Holders incurred in connection with the underwriting,
registrations, filings or qualifications pursuant to Sections 1.2 and 1.3,
including, without limitation, all registration, filing and qualification fees,
printing and accounting fees, and the fees and disbursements of counsel for the
Company shall be borne by the Company; provided, however, that the expenses paid
by the Company in connection with exercise of rights to registration pursuant to
this Section 1 shall be limited to those usual and customary expenses associated
with a nonunderwritten offering. In all cases the selling Holders bear the
expenses of any underwriting discounts and expenses relating to Registrable
Securities and the fees and disbursements of counsel or other advisers engaged
by Holders in connection with a registration. If the Holders are required to pay
Registration Expenses, such expenses shall be borne by the Holders (other than
the Company) of securities (including Registrable Securities) requesting such
registration in proportion to the number of shares for which registration was
requested.
1.7 Underwriting Requirements.
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Amended and Restated Investors' Rights Agreement
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(a) If any registration proceeding pursuant to Section 1.3 is at
the election of the majority in interest of the S-3 Initiating
Holders, an underwritten offering, the right of any Holder to
include its Registrable Securities in the registration
pursuant to Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion
of such Holder's Registrable Securities in the underwriting to
the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such
underwriting shall (together with the Company as provided in
Section 1.4(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected
for such underwriting by a majority in interest of the S-3
Initiating Holders. Notwithstanding any other provision of
Section 1.3, if the underwriter advises the Company in writing
that marketing factors require a limitation of the number of
shares to be underwritten, then the Company shall so advise
the Holders of Registrable Securities which otherwise would be
underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof,
including the S-3 Initiating Holders, in proportion (as nearly
as practicable) to the amount of Registrable Securities of the
Company owned by each Holder.
(b) The Company shall not be required under Section 1.2 to
include any of the Holders' securities in an underwritten
offering of the Company's securities unless such Holder
accepts the terms of the underwriting as agreed upon between
the Company and the underwriters selected by it, assuming
usual and customary underwriting terms. If the total amount
of securities, including (a) Registrable Securities
requested by shareholders to be included in such offering,
and (b) securities requested to be included in such offering
under that certain Registration Rights Agreement, dated May
17, 1999, between the Company and the persons listed on the
Schedule of Purchasers attached thereto (the "Series C
Registration Rights Agreement") exceeds the amount of
securities that the underwriters reasonably believe
compatible with the success of the offering, then the
Company shall be required to include in the offering only
that number of such securities, including Registrable
Securities, which the underwriters reasonably believe are
compatible with the success of the offering. In such event
the securities so included will be apportioned (i) first to
the Company, (ii) then pro rata among the New Investors on
the basis of the number of shares owned by each such New
Investor, and (iii) third, pro rata among the other selling
shareholders according to the total amount of securities
otherwise entitled to be included therein owned by each
selling shareholder or in such other proportions as shall
mutually be agreed to by such selling shareholders. No such
reduction shall reduce the securities being offered by the
Company for its own account to be included in the
registration and underwriting.
1.8 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
1.9 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers, agents,
employees and directors of each Holder, any underwriter (as
defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within
the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any
losses, claims, damages or liabilities (joint or several) to
which they may become subject under the
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Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (each
a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration
statement, including any preliminary prospectus or final
prospectus contained therein in light of the circumstances
under which they were made, or any amendments or supplements
thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law; and the Company
will reimburse each such Holder, partner, officer, agent,
employee or director, underwriter or controlling person for
any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that
the indemnity agreement contained in this Section 1.9(a) shall
not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is
effected without the consent of the Company, which consent
shall not be unreasonably withheld, nor shall the Company be
liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for
use in connection with such registration by, or on behalf of,
any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder severally
and not jointly shall indemnify and hold harmless the Company,
each of its officers, directors, agents or employees, each
person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter and any other Holder
selling securities in such registration statement or any of
its partners, agents, employees, directors or officers or any
person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company
or any such director, partner, agent, employee, officer,
controlling person, or underwriter, or other such Holder or
director, officer, partner, agent, employee or controlling
person of such other Holder may become subject, under the
Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon
any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by, or on behalf
of, such Holder; and each such Holder will reimburse any legal
or other expenses reasonably incurred by the Company or such
other Holder or any such partner, agent, employee, director,
officer, controlling person, or underwriter, in connection
with investigating, preparing or defending any such loss,
claim, damage, liability or action; provided, however, that
the indemnity agreement contained in this Section 1.9(b) shall
not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is
effected without the consent of the Holder against whom
indemnity is sought, which consent shall not be unreasonably
withheld; and provided, further, that each
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selling Holder shall be liable, under this Section 1.9(b) for
only that amount of losses, claims, damages and liabilities as
does not exceed the proceeds to such selling Holder as a
result of such registration.
(c) Promptly after receipt by an indemnified party under this
Section 1.9 of notice of the commencement of any action
(including any governmental action), such indemnified party
shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 1.9, deliver to the
indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the
indemnifying party, if, in the opinion of counsel for the
indemnifying party, representation of such indemnified party
by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented
by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within thirty (30)
days of the commencement of any such action shall relieve such
indemnifying party of any liability to the indemnified party
under this Section 1.9 to the extent materially prejudicial to
its ability to defend such action, but the omission so to
deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.9.
(d) If the indemnification provided for in this Section 1.9 is
held by a court of competent jurisdiction to be unavailable to
an indemnified party with respect to any expenses, losses,
claims, damages or liabilities referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall to the extent permitted by applicable
law contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage or
liability, in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and
of the indemnified party on the other in connection with the
Violation(s) that resulted in such expense, loss, claim,
damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of
law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission;
provided, that in no event shall any contribution by a Holder
hereunder exceed the net proceeds from the offering received
by such Holder.
(e) The obligations of the Company and Holders under this Section
1.9 shall survive completion of any offering of Registrable
Securities in a registration statement. No indemnifying party,
in the defense of any such claim or litigation, shall, except
with the consent of each indemnified party, consent to entry
of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the
claimant or plaintiff to such
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indemnified party of a release from all liability in respect
to such claim or litigation.
(f) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in
the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting
agreement shall control.
1.10 Reports Under the Securities Act. With a view to making available to
the Holders the benefits of SEC Rule 144 promulgated under the Securities Act
and any other rule or regulation of the SEC that may at any time permit a Holder
to sell securities of the Company to the public without registration or pursuant
to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after the
effective date of the first registration statement filed by
the Company under the Securities Act for the offering of its
securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is
necessary to enable the Holders to utilize Form S-3 for the
sale of their Registrable Securities, such action to be taken
as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company
for the offering of its securities to the general public is
declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and
the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written
statement by the Company as to its compliance with the
reporting requirements of SEC Rule 144 (at any time after 90
days after the effective date of the first registration
statement filed by the Company), the Securities Act and the
Exchange Act (at any time after it has become subject to such
reporting requirements), or as to its qualification as a
registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most
recent annual or quarterly report of the Company and such
other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without
registration or pursuant to such form.
1.11 Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Agreement may be assigned by a
Holder to a transferee or assignee of such securities who shall, upon such
transfer or assignment, be deemed a "Holder" under this Agreement only upon the
Company's written consent to such assignment and provided that immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act.
1.12 "Market Stand-Off" Agreement. The Holders hereby agree that they
shall not, to the extent requested by the Company as the representative of the
underwriter of Common Stock (or
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other securities) of the Company, sell or otherwise transfer or dispose of any
Registrable Securities for up to 180 days following the effective date of a
registration statement of the Company filed under the Securities Act. In order
to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of the Holders (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period. The obligations described in this Section 1.12
shall not apply to Exempt Registrations.
2. COVENANTS OF THE COMPANY
Until the Company completes a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act
covering the offer and sale of Common Stock for the account of the Company to
the public (an "IPO"), the Company will furnish to each of the Holders or any of
their permitted assignees, (a "Qualifying Holder"):
(a) As soon as available, but in any event no later than sixty
(60) days after the end of each of the first three fiscal
quarters, the unaudited balance sheet of the Company as at the
end of each such period and the related unaudited statement of
operations, stockholders' equity and cash flows of the Company
for such quarterly period and for the elapsed period in such
fiscal year, all in reasonable detail. All such financial
statements shall be subject to normal year end audit
adjustments;
(b) As soon as available, but in any event within ninety (90) days
after the end of each fiscal year of the Company, a copy of
the unaudited balance sheet of the Company as at the end of
such fiscal year and the related unaudited statements of
operations, stockholders' equity and cash flows of the Company
for such fiscal year, all in reasonable detail and stating in
comparative form the figures as at the end of and for the
previous fiscal year;
(c) Such other information and financial data concerning the
Company as a Qualifying Holder may reasonably request;
provided, however, that the Company shall not be obligated to
provide information that it deems in good faith to be
proprietary or confidential unless the Qualifying Holder
provides reasonable assurances in writing that it will
maintain the confidentiality of the information;
3. MISCELLANEOUS
3.1 Notices, Etc. Any notice given under this Agreement shall be in
writing and delivered in person, via facsimile machine, sent by documented
overnight delivery service, or mailed by certified or registered mail, postage
prepaid, to the appropriate party or parties at the addresses referenced below,
or to such other address as the parties may hereinafter designate. Unless
otherwise specified in this Agreement, all such notices and other written
communications shall be effective (and considered received for the purposes of
this Agreement) (a) if delivered in person, upon delivery, (b) if by facsimile
machine during normal business hours upon transmission with confirmation of
receipt by the receiving party's facsimile terminal and if not sent during
normal business hours, then on the next business day, (c) if sent by documented
overnight delivery service, on the date delivered, or (d) if mailed, three (3)
days after mailing. Notices shall be sent (i) if to a Holder, at such Holder's
address set forth in this Agreement, or at such other address as such Holder
shall have furnished to the Company in writing, or (ii) if to the Company, one
copy should be sent to its address set forth on the first page of this
Agreement, or at such other address as the
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Company shall have furnished to the Holders, and addressed to the attention of
Benjamin C. Nourse, and one copy shall be sent to Heller Ehrman White &
McAuliffe, 6100 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104,
Attn: Thomas S. Hodge.
3.2 Governing Law and Venue. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of Washington
(without giving effect to any choice or conflict of law provision or rule,
whether 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). The venue of any arbitration or action brought on or in connection
with this Agreement shall be in King County, Washington.
3.3 Consent to Jurisdiction. The parties hereto irrevocably submit to the
jurisdiction of any Washington state or federal court sitting in Seattle in any
action or proceeding arising out of or relating to this Agreement, and agree
that all claims in respect of such action or proceeding may be heard and
determined in such Washington state or federal court. Each party hereby waives,
to the fullest extent it may effectively do so, the defense of any inconvenient
forum to the maintenance of such action or proceeding. The parties agree that a
final judgment in any action or proceeding shall be conclusive and may be
enforced in any other manner provided by law.
3.4 Costs and Attorney's Fees. If any action at law or equity is necessary
to enforce or interpret the terms of this Agreement, the mostly prevailing party
shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled, including any such fees, costs and necessary disbursements incurred in
any appellate proceeding.
3.5 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto;
provided, however, that, the rights of a Holder to assign its rights hereunder
shall be subject to the terms of Section 1.11 hereof.
3.6 Third Party Beneficiaries. This Agreement shall not confer any rights
or remedies upon any person or entity other than the parties and their
respective successors and permitted assigns.
3.7 Entire Agreement; Amendment. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof and supersedes all prior agreements, contracts or
understandings with respect to the subject matter hereof. This Agreement may be
amended or modified, and the obligations of the Company under Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only upon the written consent of the Company and holders of a
majority of the Registered Securities (treated as if converted); any such
amendment, modification or waiver shall be binding on the Company, all Holders
under this Agreement at the time and each future Holder to become a party
hereto. The foregoing notwithstanding, this Agreement and any term hereof may be
amended, waived, discharged or terminated by a written instrument signed by the
party against whom enforcement of any such amendment, waiver, discharge or
termination is sought.
3.8 Interpretation and Fair Construction. This Agreement has been reviewed
and approved by each of the parties. If it should be determined that any
provision of this Agreement is uncertain or ambiguous, the language in all parts
of this Agreement shall be in all cases construed as a whole according to its
fair meaning and not strictly construed for or against either the Company or the
Holders.
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3.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
3.10 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
3.11 Additional Parties. In the event the Company sells additional shares
of Series B Preferred Stock in a "Subsequent Closing" pursuant to Section 2.2 of
the Stock Purchase Agreement, any purchasers of such shares may become parties
to this Agreement by execution of a signature page hereto and thereby shall be
deemed "Series B Holders" for all purposes of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
THE COMPANY:
ONLINE SPECIALTY RETAILING, INC.
By: /s/ Benjamin C. Nourse
----------------------------
Benjamin C. Nourse, Chairman
COMMON HOLDER
/s/ Benjamin C. Nourse
/s/ R. Stockton Rush III
/s/ Daniel D. Syrdal
SERIES A HOLDER:
/s/ Robert M. Arnold
/s/ William Cuff
/s/ Thomas L. Gilman
/s/ William Heston
/s/ John W.P. Holt
/s/ Laurie Lyford
/s/ Charles A. Lyford IV
/s/ Furman C. Moseley
/s/ Susan R. Moseley Tenants in Common
/s/ Benjamin C. Nourse
/s/ Ralph Pascualy
/s/ Lisa Pascualy
/s/ R. Stockton Rush
/s/ Ralph K. Davies Trust FBO R.S. Rush III
/s/ Paul W. Skinner
/s/ Daniel D. Syrdal
/s/ WYNOT
SERIES B HOLDER:
/s/ Benjamin C. Nourse
/s/ Ralph K. Davies Trust FBO Stockton Rush III
/s/ WYNOT
/s/ David Uvelli
/s/ Suzanne Uvelli Spencer
/s/ Daniel D. Syrdal
/s/ R. Stockton Rush
/s/ Robert M. Arnold
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/s/ T.L. Gilman, Partner, Barrett Gilman & Ziker Investment Partnership (1999)
/s/ Charles A. Lyford IV
/s/ Laurie Lyford
/s/ John W. P. Holt
/s/ Scott F. Wilson
/s/ Les Berthy
/s/ Daniel A. Odell
/s/ Gayle T. Odell
/s/ Harman K. Wales
/s/ John Jacobs
/s/ Fraser Black
/s/ Deirdre Black
/s/ John S. Teutsch Teutsch Partners Profit Sharing Plan
/s/ Sara B. Clair
/s/ Furman C. Moseley
/s/ Susan R. Moseley Tenants in Common
/s/ William R. Hambrecht, Trustee
/s/ Anna-Marie Schweger WR Hambrecht & Co., LLC
/s/ Geoffrey T. Barker
/s/ Ralph Pascualy
/s/ Lisa Pascualy
/s/ William Cuff
/s/ Erin Cuff
/s/ William Heston
/s/ Donald Schade
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EXHIBIT A TO INVESTORS' RIGHTS AGREEMENT
COMMON HOLDERS
1. Fraser Black
2. R. Hunt Green
3. Benjamin C. Nourse
4. R. Stockton Rush
5. R. Stockton Rush III
6. Daniel D. Syrdal
7. Dean Witter Reynolds, Inc. Custodian FBO John S. Teutsch
8. David Uvelli and Suzanne Uvelli-Spencer
9. David E. Wyman
SERIES A HOLDERS:
1. Tom A. Alberg
2. Robert M. Arnold
3. Fraser Black and Dierdre Black, JT TEN
4. William Cuff
5. Thomas L. Gilman
6. Heller Ehrman White & McAuliffe
7. William and Emily Heston
8. John W.P. Holt and Susan Trainor Holt, Tenants in Common
9. Laurie Lyford and Charles A. Lyford IV, Tenants in Common
10. Furman C. Moseley and Susan R. Moseley, Tenants in Common
11. Benjamin C. Nourse
12. Ralph Pascualy and Lisa Pascualy
13. Catherine W. Rush
14. R. Stockton Rush
15. Ralph K. Davies Trust FBO R.S. Rush III
16. Paul W. Skinner
17. Daniel D. Syrdal
18. Morgan Stanley Dean Custodian for John S. Teutsch IRA SEP dated 4/14/89
19. Diane Werthington
20. Richard M. Weil
21. David E. Wyman and Ann McCall Wyman (WYNOT Investments)
22. David E. Wyman
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SERIES B HOLDERS:
1. Benjamin C. Nourse
2. Ralph K. Davies Trust FBO
R. Stockton Rush III
3. David E. Wyman and Ann McCall
Wyman (WYNOT Investments)
4. David Uvelli and Suzanne Uvelli-Spencer
5. Daniel D. Syrdal
6. R. Stockton Rush
7. Robert M. Arnold
8. D. E. Skinner Trust
9. Barrett Gilman & Ziker Investment
Partnership (1999)
10. Charles A. Lyford and Laurie Lyford
11. John W. P. Holt
12. Scott F. Wilson
13. Les and Linda Berthy
14. Daniel A. Odell and Gayle T. Odell
TTEES UTD dated 8/21/98
15. Harman K. Wales
16. John and Christina Jacobs
17. Fraser Black and Deirdre Black, Tenants in Common
18. Teutsch Partners Profit Sharing Plan
19. Sara B. Clair
20. Furman C. Moseley and Susan R. Moseley,
Tenants in Common
21. The Hambrecht 1980 Revocable Trust
22. WR Hambrecht & Co., LLC
23. Geoffrey T. Barker
24. Ralph and Lisa Pascualy
25. William and Emily Heston
26. Erin and William Cuff, IV
27. Donald J. Schade
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of May 17, 1999, between 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").
The parties to this Agreement are parties to a Purchase Agreement of
even date herewith (the "Purchase Agreement"). In order to induce the
Purchasers to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution
and delivery of this Agreement is a condition to the Closing under the
Purchase Agreement. Unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in the Purchase Agreement.
The parties hereto agree as follows:
1. DEMAND REGISTRATIONS.
a. REQUESTS FOR REGISTRATION. At any time after the earlier to
occur of (i) six months following the closing of the Company's initial public
offering or (ii) the date one year from the date hereof, the holders of at
least a majority of the Registrable Securities (as defined below) may request
registration under the Securities Act of 1933, as amended (the "Securities
Act") of all or part of their Registrable Securities on Form S-1 or any
similar long-form registration or on Form S-3 or any similar short-form
registration if available. Such request for a Demand Registration (as
defined herein) shall specify (i) the number of Registrable Securities
requested to be registered, (ii) the anticipated per share price range for
such offering, and (iii) if such holders wish to sell Registrable Securities
in a market other than in a public trading market, the intended method of
distribution. Within ten days after receipt of any such request, the Company
will give written notice of such requested registration to all other holders
of Registrable Securities and, subject to the limitation set forth in Section
l(d) hereof, will include in such registration all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within 15 days after the receipt of the Company's notice. Any
registration requested pursuant to this paragraph l(a) is referred to herein
as "Demand Registration."
b. LIMIT ON REGISTRATIONS. The holders of Registrable Securities
will be entitled to request one Demand Registration for which the Company
will pay all Registration Expenses (as defined in Section 5(a) below). A
registration will not count as the permitted Demand Registration until it has
become effective and unless the holders of Registrable Securities are able to
register and sell at least 70% of the Registrable Securities requested to be
included in such registration; provided that in any event the Company will
pay all Registration Expenses in connection with any registration initiated
as a Long-Form Registration whether or not it has become effective.
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c. PRIORITY ON DEMAND REGISTRATIONS. If a Demand Registration is
an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such
offering exceeds the number of Registrable Securities and other securities,
if any, which can be sold therein without adversely affecting the
marketability of the offering, the Company will include in such registration
prior to the inclusion of any securities which are not Registrable Securities
the number of Registrable Securities requested to be included which in the
opinion of such underwriters can be sold without adversely affecting the
marketability of the offering, pro rata among the respective holders thereof
on the basis of the amount of Registrable Securities owned by each such
holder.
d. RESTRICTIONS ON DEMAND REGISTRATIONS. The Company will not be
obligated to effect a Demand Registration within six months after the
effective date of a registration in which the holders of Registrable
Securities were given piggyback rights pursuant to Section 2 and in which
there was no reduction in the number of Registrable Securities requested to
be included. The Company may postpone for up to six months the filing or the
effectiveness of a registration statement for a Demand Registration if the
Company determines in its reasonable discretion that such Demand Registration
could reasonably be expected to have an adverse effect on any proposal or
plan by the Company to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer or
similar transaction; provided that in such event, the holders of Registrable
Securities initially requesting such Demand Registration will be entitled to
withdraw such request and, if such request is withdrawn, such Demand
Registration will not count as the permitted Demand Registration hereunder.
e. SELECTION OF UNDERWRITERS. The holders of a majority of the
Registrable Securities initially requesting a Demand Registration will have
the right to select the investment banker(s) and manager(s) to administer the
offering, with the consent of the Company, which consent shall not be
unreasonably withheld.
f. OTHER REGISTRATION RIGHTS. Except as provided in this
Agreement or already outstanding as of the date of this Agreement, the
Company will not, after the date hereof, grant to any individual,
partnership, corporation, limited liability company, trust, joint venture or
other entity without limitation ("Person") the right to request the Company
to register any equity securities of the Company, or any securities
convertible or exchangeable into or exercisable for such securities, without
the prior written consent of the holders of at least a majority of the
Registrable Securities, which consent shall not be unreasonably withheld.
g. REGISTRABLE SECURITIES. "Registrable Securities" means (i)
any Common Stock issued upon the conversion of any Series C Preferred Stock
issued pursuant to the Purchase Agreement, and (ii) any Common Stock issued
or issuable with respect to the securities referred to in clause (i) by way
of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As
to any particular Registrable Securities, such securities will cease to be
Registrable Securities when
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<PAGE>
they have been distributed to the public pursuant to an offering registered
under the Securities Act or sold to the public through a broker, dealer or
market maker in compliance with Rule 144 under the Securities Act (or any
similar rule then in force). For purposes of this Agreement, a Person will
be deemed to be a holder of Registrable Securities whenever such Person has
the right to acquire directly or indirectly such Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or
otherwise, but disregarding any restrictions or limitations upon the exercise
of such right), whether or not such acquisition has actually been effected.
2. PIGGYBACK REGISTRATIONS.
a. RIGHT TO PIGGYBACK. Whenever the Company proposes to register
any of its securities under the Securities Act (other than pursuant to a
Demand Registration or a registration on Form S-8) and the registration form
to be used may be used for the registration of Registrable Securities for
sale for cash (a "Piggyback Registration"), the Company will give prompt
written notice to all holders of Registrable Securities of its intention to
effect such a registration, which notice shall specify whether such offer
will be underwritten and will include in such registration all Registrable
Securities with respect to which the Company has received written requests
for inclusion therein within ten days after the receipt of the Company's
notice.
b. PIGGYBACK EXPENSES. The Registration Expenses of the holders
of Registrable Securities will be paid by the Company in all Piggyback
Registrations.
c. PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback
Registration is an underwritten primary registration on behalf of the
Company, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
adversely affecting the marketability of the offering, including the proposed
price for the securities, the Company will include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, the
Registrable Securities requested to be included in such registration, pro
rata among the holders of such Registrable Securities on the basis of the
number of shares owned by each such holder, and (iii) third, other securities
requested to be included in such registration.
d. PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders
of the Company's securities, and the managing underwriters advise the Company
in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering,
including the proposed price for the securities, the Company will include in
such registration (i) first, the securities requested to be included therein
by the holders requesting such registration, (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares
owned by each such holder, and (iii) third, other securities requested to be
included in such registration.
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<PAGE>
3. HOLDBACK AGREEMENTS.
a. Each holder and any transferee or assignee hereby agrees that,
if so requested by the Company and the underwriter (if any) in connection
with the Company's initial public offering, such holder and any such
transferee or assignee shall not sell, make any short sale of, loan, grant
any option for the purchase of, or otherwise transfer or dispose of any
Registrable Securities or other securities of the Company without the prior
written consent of the Company and the underwriter for such period of time
(not to exceed 180 days) following the effective date of a registration
statement of the Company filed under the Securities Act as may be requested
by the underwriter.
b. The Company agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior
to and during the 90-period beginning on the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration or pursuant to
registrations on Form S-8 or any successor form), unless the underwriters
managing the registered public offering otherwise agree, and (ii) to cause
each holder of its Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock, purchased from the Company at
any time after the date of this Agreement (other than in a registered public
offering) to agree not to effect any public sale or distribution (including
sales pursuant to Rule 144) of any such securities during such 90-day period
(except as part of such underwritten registration, if otherwise permitted),
unless the underwriters managing the registered public offering otherwise
agree. Notwithstanding the foregoing, the Company may (i) issue securities
upon exercise or conversion of rights or other securities outstanding on the
date of execution of the underwriting agreement in connection with such
underwritten Demand Registration or underwritten Piggyback Registration and
(ii) issue equity securities in the ordinary course of business pursuant to
the Company's 1997 Stock Incentive Plan.
4. REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered
pursuant to this Agreement, the Company will use its reasonable best efforts
to effect the registration and the sale of such Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant
thereto the Company will as expeditiously as possible:
a. prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use
its reasonable best efforts to cause such registration statement to become
effective (provided that before filing a registration statement or prospectus
or any amendments or supplements thereto, the Company will furnish to the
counsel selected by the holders of a majority of the Registrable Securities
covered by such registration statement copies of all such documents proposed
to be filed);
b. prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a
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<PAGE>
period of not less than 180 days or until holders of the Registrable
Securities have completed the distribution, whichever is earlier, and comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
c. furnish to each seller of Registrable Securities such number
of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such seller;
d. use its reasonable best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions (a) in the case of a Demand Registration, as any seller
reasonably requests, (b) in the case of a Piggyback Registration, in such
jurisdictions as are specified in the notice sent pursuant to Section 2(a),
and (c) do any and all other acts and things which may be reasonably
necessary to enable such seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller (provided,
in each case, that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required
to qualify but for this subparagraph, (ii) subject itself to taxation in any
such jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
e. notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the
statements therein not misleading, and, at the request of any such seller,
the Company will prepare a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements
therein not misleading;
f. cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are
then listed and, if not so listed, to be listed on The Nasdaq Stock Market
and, if listed on The Nasdaq Stock Market, use its reasonable best efforts to
secure designation of all such Registrable Securities covered by such
registration statement as a "national market system security" of The Nasdaq
Stock Market within the meaning of Rule 1lAa2-1 of the Securities and
Exchange Commission or, failing that, to secure Nasdaq authorization for such
Registrable Securities and, without limiting the generality of the foregoing,
use its reasonable best efforts to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the NASD;
g. provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
-5-
<PAGE>
h. enter into such customary agreements satisfactory to the
Company in its reasonable discretion (including underwriting agreements in
customary form);
i. make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained
by any such seller or underwriter upon reasonable notice and at reasonable
times, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees and independent accountants to supply upon reasonable notice and at
reasonable times, all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such
registration statement;
j. otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission,
and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at least twelve
months beginning with the first day of the Company's first full calendar
quarter after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;
k. in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification
of any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
l. use its reasonable best efforts to cause such Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the sellers thereof to consummate the disposition of such
Registrable Securities; and
m. obtain a comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as the holders of a majority of
the Registrable Securities being sold reasonably request (provided that such
Registrable Securities constitute at least 40% of the securities covered by
such registration statement).
5. REGISTRATION EXPENSES.
a. All expenses incident to the Company's performance of or
compliance with this Agreement, including, without limitation, all
registration and filing fees, fees and expenses of compliance with securities
or blue sky laws, printing expenses, messenger and delivery expenses, and
fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding fees, discounts and
commissions attributable to Registrable Securities) and other Persons
retained by the Company (all such expenses being herein called "Registration
Expenses"), will be borne as provided in this
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<PAGE>
Agreement, except that the Company will, in any event, pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance
and the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are
then listed or on The Nasdaq Stock Market.
b. In connection with each Demand Registration and each Piggyback
Registration, the Company will reimburse the holders of Registrable
Securities covered by such registration for the reasonable and documented
fees and disbursements of counsel chosen by the holders of a majority of the
Registrable Securities initially requesting such registration, not to exceed
$10,000.
c. To the extent Registration Expenses are not required to be
paid by the Company, each holder of securities included in any registration
hereunder will pay those Registration Expenses, including without limitation
underwriting fees, discounts and commissions, allocable to the registration
of such holder's securities so included, and any Registration Expenses not so
allocable will be borne by all sellers of securities included in such
registration in proportion to the aggregate selling price of the securities
to be so registered.
6. INDEMNIFICATION.
a. The Company agrees to indemnify, to the extent permitted by
law, each holder of Registrable Securities, its officers and directors and
each person who controls such holder (within the meaning of the Securities
Act) against all losses, claims, damages, liabilities and expenses caused by
any untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are caused by
or contained in any information furnished in writing to the Company by such
holder expressly for use therein. In connection with an underwritten
offering, the Company will indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the meaning
of the Securities Act) to the same extent as provided above with respect to
the indemnification of the holders of Registrable Securities.
b. In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify the Company, its
directors and officers and each Person who controls the Company (within the
Company, its directors and officers and each Person who controls the Company
(within the meaning of the Securities Act) against any losses, claims, damages,
liabilities and expenses resulting from any untrue or alleged untrue statement
of material fact contained in the registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated
-7-
<PAGE>
therein or necessary to make the statements therein not misleading, but only
to the extent that such untrue statement or omission is contained in any
information or affidavit so furnished in writing by such holder; provided
that the obligation to indemnify will be individual to each holder and will
be limited to the net amount of proceeds received by such holder from the
sale of Registrable Securities pursuant to such registration statement.
c. Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party will not be subject to any liability for any
settlement made by the indemnified party without its consent (but such
consent will not be unreasonably withheld). An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
d. The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling
Person of such indemnified party and will survive the transfer of securities.
The indemnifying party also agrees to make such provisions, as are reasonably
requested by any indemnified party, for contribution to such party in the
event the indemnifying party indemnification is unavailable for any reason in
such proportion as is appropriate to reflect the relative fault of the
indemnifying and indemnified parties.
7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any registration hereunder which is underwritten unless such
person (a) agrees to sell such Person's securities on the basis provided in
any underwriting arrangements approved by the Person or Persons entitled
hereunder to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
8. MISCELLANEOUS.
a. NO INCONSISTENT AGREEMENTS. Without the prior consent of the
holders of at least a majority of the Registrable Securities, the Company
will not hereafter enter into any agreement with respect to its securities
which is inconsistent with or violates the rights granted to the holders of
Registrable Securities in this Agreement.
b. ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will
not take any action, with respect to its securities which would materially and
adversely affect the ability of the holders of Registrable Securities to include
such Registrable Securities in a registration
-8-
<PAGE>
undertaken pursuant to this Agreement or which would materially and adversely
affect the marketability of such Registrable Securities in any such
registration (including, without limitation, effecting a stock split or a
combination of shares).
c. REMEDIES. Any Person having rights under any provision of
this Agreement will be entitled to enforce such rights specifically and to
recover damages caused by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law or equity.
d. AMENDMENTS AND WAIVERS. Except as otherwise provided herein,
the provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least as a majority of the
Registrable Securities.
e. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
f. TRANSFER OF RIGHTS. The right to cause the Company to
register securities granted by the Company to the Purchasers under this
Agreement may be assigned by any holder to a transferee or assignee of any
Registrable Securities which (a) is a subsidiary, parent, general partner,
limited partner, retired partner, member or retired member of a holder, (b)
is a holder's family member or trust for the benefit of an individual holder
or (c) acquires at least 100,000 shares of such holder's Registrable
Securities (adjusted for any stock splits, subdivisions, stock dividends,
changes, combinations or the like); provided, however, that (i) the Company
must receive written notice prior to the time of said transfer, stating the
name and address of said transferee or assignee and identifying the
securities with respect to which such rights are being assigned, (ii) the
transferee or assignee of such rights must not be a person deemed by the
Board of Directors of the Company in its reasonable judgment, to be a
competitor or potential competitor of the Company and (iii) the transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement.
g. INCORPORATION OF PURCHASE AGREEMENT PROVISIONS. The sections
entitled "Severability," "Counterparts," "Descriptive Headings;
Interpretation," and "Governing Law" of the Purchase Agreement are hereby
incorporated in this Agreement by reference and made a part hereof, except
that the provisions of such paragraphs shall refer to this Agreement rather
than the Purchase Agreement and shall continue to apply hereto regardless of
whether the Purchase Agreement is no longer in effect.
h. 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 will be sent to each Purchaser at the
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<PAGE>
addresses indicated on the Schedule of Purchasers and to the Company at the
address indicated below:
To the Company: GreatFood.com, Inc.
2731 Eastlake Avenue East
Seattle, WA 98102
Attention: Benjamin Nourse
With a copy to: Heller Ehrman White & McAuliff
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104-7098
Attention: Thomas Hodge
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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
GREATFOOD.COM, INC.
By /s/ Benjamin C. Nourse
-------------------------------------
Name: Benjamin C. Nourse
----------------------------------
Title: CEO
---------------------------------
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<PAGE>
RIVERSIDE PARTNERSHIP
By: RIVERSIDE L.L.C.,
its Managing General Partner
By: FIRST ANALYSIS MANAGEMENT
COMPANY III, L.L.C.
its Manager
By: /s/ Mark Koulogeorge
------------------------------------
Mark Koulogeorge
/s/ Mark Koulogeorge
---------------------------------------
MARK KOULOGEORGE
/s/ Alex Kim
---------------------------------------
ALEX KIM
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<PAGE>
THE PRODUCTIVITY FUND IV, L.P.
a Delaware limited partnership
By: First Analysis Management Company III,
L.L.C., a General Manager
By: /s/ Mark Koulogeorge
------------------------------------
Mark Koulogeorge
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<PAGE>
SCHEDULE OF PURCHASERS
Riverside Partnership
The Productivity Fund IV, L.P.
Mark Koulogeorge
Alex Kim
-13-
<PAGE>
GREATFOOD.COM, INC.
1997 STOCK INCENTIVE PLAN
as amended May 21, 1998
as further amended May 6, 1999
1. Purposes. The purposes of this 1997 Stock Incentive Plan (the "Plan")
are to enable GreatFood.com, Inc., a Washington corporation (the "Company"), and
its affiliated entities to attract and retain the services of selected
employees, officers, directors, consultants, agents, independent contractors and
other key contributors and to provide additional incentive to such individuals
to exert their best efforts on behalf of the Company and to provide recognition
and remuneration for any such persons for services rendered.
2. Shares Subject to the Plan. Subject to adjustment as provided in
Section 10, the stock to be offered under the Plan shall consist of shares of
the Company's common stock ("Stock"). The total number of shares of Stock that
may be issued granted under the Plan shall not exceed in the aggregate 1,600,000
shares. If an option, performance unit or other grant issued under the Plan
shall expire, terminate or otherwise expire for any reason, the unissued shares
shall again be available under the Plan. Stock issued under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Board of Directors of the Company
(the "Board of Directors").
3. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when adopted by
the Board of Directors (the "Effective Date"), but no option granted under the
Plan shall become exercisable until the Plan is approved by the shareholders of
the Company entitled to vote thereon (by written consent or at an annual or
special meeting thereof). Subject to this limitation, options may be granted at
any time after the Effective Date and before termination of the Plan.
(b) Duration. The Plan shall continue in effect until, in the
aggregate, options have been granted and exercised with respect to all of the
shares available pursuant to Section 2 (subject to any adjustments under Section
15); provided, however, that unless sooner terminated by action of the Board of
Directors, the Plan shall terminate on, and no option shall be granted on or
after, the tenth anniversary of the Effective Date. The Board of Directors shall
have the right to suspend or terminate the Plan at any time except with respect
to options then outstanding under the Plan. Termination or suspension of the
Plan shall not affect any right of the Company to repurchase shares or the
forfeitability of shares previously issued under the Plan.
<PAGE>
4. Administration.
(a) The Plan shall be administered by the Board of Directors, which
shall determine and designate from time to time the persons to whom awards may
be made (which persons may be employees, officers, directors, consultants,
agents, independent contractors or other persons who have been or are expected
to be key contributors to the progress of the Company and its affiliated
corporations, as conclusively determined by the Board of Directors), the number
of shares to be covered by each award, and all other terms and conditions
relating to each award. Subject to the provisions of the Plan, the Board of
Directors from time to time may adopt rules and regulations relating to
administration of the Plan, amend rules and regulations relating to
administration of the Plan, advance the lapse of any waiting period, accelerate
any exercise date, waive or modify any restriction applicable to awards or the
underlying stock (except those restrictions imposed by law), and make all other
determinations in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The interpretation and construction of the
provisions of the Plan and the respective agreements thereunder by the Board of
Directors shall be final and conclusive. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any agreement in the manner and to the extent it shall deem expedient to carry
the Plan into effect, and the Board of Directors shall be the sole and final
judge of such expediency.
(b) The Board of Directors by resolution may delegate to a committee
of the Board of Directors consisting of one or more members (the "Committee")
any or all authority for administration of the Plan. If a Committee is
appointed, all references to the Board of Directors in the Plan shall mean and
relate to such Committee, except that only the Board of Directors may amend,
modify, suspend or terminate the Plan as provided in Sections 3 and 17.
5. Grants, Awards and Sales.
(a) Type of Security. The Board of Directors may, from time to time,
take the following action, separately or in combination, under the Plan: (i)
grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), as provided in Section 5(b); (ii) grant
options other than Incentive Stock Options (hereinafter "Non-Statutory Stock
Options") as provided in Section 5(c); (iii) award stock bonuses as provided in
Section 7; (iv) sell shares subject to restrictions as provided in Section 8;
(v) grant cash bonus rights as provided in Section 9; (vi) grant performance
units as provided in Section 10; and (vii) grant foreign qualified awards as
provided in Section 11. The Board of Directors shall select the persons to whom
awards shall be made. The Board of Directors shall specify the action taken with
respect to each person granted any award under the Plan.
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<PAGE>
(b) Incentive Stock Options. Incentive Stock Options shall be
subject to the following additional terms and conditions:
(i) Incentive Stock Options granted under the Plan will be
treated as Non-Statutory Stock Options to the extent that the aggregate fair
market value (as of the dates the options were granted) of Stock with respect to
which options otherwise qualifying as Incentive Stock Options are exercisable
for the first time by the optionee during any calendar year (under the Plan and
any other plan of the Company or any parent or subsidiary of the Company
providing for options described in Section 422(b) of the Code) exceeds $100,000.
This Section 5(b)(i) shall be applied to Incentive Stock Options exercisable for
the first time in the calendar year to which it applies in the order such
options were granted.
(ii) An Incentive Stock Option may be granted under the Plan
to an employee possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of any parent or subsidiary of the
Company (including any such stock that the employee is considered as owning
pursuant to Section 425(d) of the Code) only if the option price is at least 110
% of the fair market value of the Stock subject to the option on the date it is
granted, and the option by its terms is not exercisable after the expiration of
five years from the date it is granted.
(iii) Incentive Stock Options may be granted under the Plan
only to employees of the Company or any parent or subsidiary of the Company,
including employees who are directors. Except as provided in Section 13 of this
Plan, no Incentive Stock Option granted under the Plan may be exercised unless
at the time of such exercise the optionee is employed by the Company or any
parent or subsidiary of the Company and shall have been so employed continuously
since the date such option was granted. Absence on leave or on account of
illness or disability under rules established by the Board of Directors shall
not, however, be deemed an interruption of employment for this purpose.
(iv) Subject to subsections (i), (ii) and (iii) of this
Section 5(b) and subject to Sections 13 and 15(b), Incentive Stock Options
granted under the Plan shall continue in effect for the period fixed by the
Board of Directors, except that no Incentive Stock Option shall be exercisable
after the expiration of 10 years from the date it is granted.
(v) The option price per share shall be determined by the
Board of Directors at the time of grant. Except as provided in Section 5(b)(ii),
the option price shall not be less than 100% of the fair market value of the
shares covered by the Incentive Stock Option at the date the option is granted.
The fair market value of shares covered by an Incentive Stock Option shall be
determined by the Board of Directors.
3
<PAGE>
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall
be subject to the following additional terms and conditions:
(i) Subject to Sections 8 and 15(b), unless otherwise
established by the Board of Directors, any Non-Statutory Stock Option shall
terminate 10 years after the date it is granted.
(ii) The option price per share shall be determined by the
Board of Directors at the time of grant. The option price may be more or less
than or equal to the fair market value of the shares covered by the
Non-Statutory Stock Option on the date the option is granted. The fair market
value of shares covered by a Non-Statutory Stock Option shall be determined by
the Board of Directors.
6. Vesting of Options. To ensure that the Company will achieve the purpose
and receive the benefits contemplated in this Plan, options granted under this
Plan shall be exercisable according to a vesting schedule or other conditions
established by the Board, except that the Board of Directors may provide that
options may be fully vested and exercisable upon grant, all as the Board of
Directors determines.
7. Stock Bonuses. The Board of Directors may award shares under the Plan
as stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transfer-ability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. If shares are subject to forfeiture, all
dividends or other distributions paid by the Company with respect to the shares
shall be retained by the Company until the shares are no longer subject to
forfeiture, at which time all accumulated amounts shall be paid to the
recipient. The Board of Directors may require the recipient to sign an agreement
as a condition of the award, but may not require the recipient to pay any
monetary consideration other than amounts necessary to satisfy tax withholding
requirements. The agreement may contain any terms, conditions, restrictions,
representations and warranties required by the Board of Directors. The
certificates representing the shares awarded shall bear any legends required by
the Board of Directors. Unless otherwise determined by the Board of Directors,
shares awarded as a stock bonus to an officer may not be sold until six months
after the date of the award. The Company may require any recipient of a stock
bonus to pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
recipient fails to pay the amount demanded, the Company may withhold that amount
from other amounts payable by the Company to the recipient, including salary or
fees for services, subject to applicable law. With the consent of the Board of
Directors, a recipient may deliver Common Stock to the Company to satisfy this
withholding obligation. Upon the issuance
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of a stock bonus, the number of shares reserved for issuance under the Plan
shall be reduced by the number of shares issued.
8. Restricted Stock. The Board of Directors may issue shares under the
Plan for such consideration (including promissory notes and services) as
determined by the Board of Directors. Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board of
Directors. The restrictions may include restrictions concerning transferability,
repurchase by the Company and forfeiture of the shares issued, together with
such other restrictions as may be determined by the Board of Directors. If
shares are subject to forfeiture or repurchase by the Company, all dividends or
other distributions paid by the Company with respect to the shares shall be
retained by the Company until the shares are no longer subject to forfeiture or
repurchase, at which time all accumulated amounts shall be paid to the
recipient. All Common Stock issued pursuant to this Section 8 shall be subject
to a purchase agreement, which shall be executed by the Company and the
prospective recipient of the shares prior to the delivery of certificates
representing such shares to the recipient. The purchase agreement may contain
any terms, conditions, restrictions, representations and warranties required by
the Board of Directors. The certificates representing the shares shall bear any
legends required by the Board of Directors. Unless otherwise determined by the
Board of Directors, shares issued under this Section 8 to an officer may not be
sold until six months after the shares are issued. The Company may require any
purchaser of restricted stock to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the purchaser fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the purchaser,
including salary, subject to applicable law. With the consent of the Board of
Directors, a purchaser may deliver Common Stock to the Company to satisfy this
withholding obligation. Upon the issuance of restricted stock, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued.
9. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock bonuses awarded or previously awarded and (iii) shares sold or previously
sold under the Plan. Cash bonus rights will be subject to rules, terms and
conditions as the Board of Directors may prescribe. Unless otherwise determined
by the Board of Directors with respect to a cash bonus right granted to a person
who is neither an officer nor a director of the Company, each cash bonus right
granted under the Plan by its terms shall be nonassignable and nontransferable
by the holder, either voluntarily or by operation of law, except by will or by
the laws of descent and distribution of the state or country of the holder's
domicile at the time of death or pursuant to a qualified domestic relations
order
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as defined under the Code or Title I of the Employee Retirement Income Security
Act. The payment of a cash bonus shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part. If an optionee purchases shares upon exercise of an option and does not
exercise a related stock appreciation right, the amount of the bonus shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus shall be determined by multiplying the total fair market
value of the shares and cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right shall be determined from time to time by the Board
of Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash
bonus right granted in connection with the purchase of stock pursuant to Section
8 will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to Section 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
10. Performance Units. The Board of Directors may grant performance units
consisting of monetary units which may be earned in whole or in part if the
Company achieves certain goals established by the Board of Directors over a
designated period of
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time, but not in any event more than 10 years. The goals established by the
Board of Directors may include earnings per share, return on shareholders'
equity, return on invested capital, and such other goals as may be established
by the Board of Directors. In the event that the minimum performance goal
established by the Board of Directors is not achieved at the conclusion of a
period, no payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100 percent of the monetary value of the performance
units shall be paid to or vested in the participants. Partial achievement of the
maximum goal may result in a payment or vesting corresponding to the degree of
achievement as determined by the Board of Directors. Payment of an award earned
may be in cash or in Common Stock or in a combination of both, and may be made
when earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined by the
Board of Directors. Unless otherwise determined by the Board of Directors with
respect to a performance unit granted to a person who is neither an Officer nor
a director of the Company, each performance unit granted under the Plan by its
terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of descent and
distribution of the state or country of the holder's domicile at the time of
death or pursuant to a qualified domestic relations order as defined under the
Code or Title I of the Employee Retirement Income Security Act. Each participant
who has been awarded a performance unit shall, upon notification of the amount
due, pay to the Company in cash amounts necessary to satisfy any applicable
federal, state and local tax withholding requirements. If the participant fails
to pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the participant, including salary or fees for
services, subject to applicable law. With the consent of the Board of Directors
a participant may satisfy this obligation, in whole or in part, by having the
Company withhold from any shares to be issued that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the Company
to satisfy the withholding amount. The payment of a performance unit in cash
shall not reduce the number of shares of Common Stock reserved for issuance
under the Plan. The number of shares reserved for issuance under the Plan shall
be reduced by the number of shares issued upon payment of an award.
11. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the Board
of Directors may determine from time to time. The Board of Directors may adopt
such supplements to the Plan as may be necessary to comply with the applicable
laws of such foreign jurisdictions and to afford participants favorable
treatment under such laws; provided, however, that no award shall be granted
under any such supplement with terms which are more beneficial to the
participants than the terms permitted by the Plan.
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12. Nontransferability. Each option granted under the Plan by its terms
shall be nonassignable and nontransferable by the optionee, either voluntarily
or by operation of law. Any purported transfer or assignment in violation of
this provision shall be void.
13. Termination of Employment, Death or Disability.
(a) Termination; Retirement. Unless specified otherwise in the
relevant option agreement, in the case of an optionee who is an employee of the
Company or a parent or subsidiary of the Company, if the optionee's employment
is terminated by retirement or for any reason, voluntarily or involuntarily,
with or without cause, other than in the circumstances specified in Section
13(b) below, any option held by such optionee may be exercised at any time prior
to the earlier of its expiration date or three months after the date of such
termination of employment (or, if such is not a regular business day, on the
last preceding business day), but only if and to the extent the optionee was
entitled to exercise the option on the date of such termination. Subject to such
terms and conditions as the Board of Directors may determine, the Board of
Directors may extend the exercise period any length of time not later than the
expiration date of the option and may increase the portion of the option that
may be exercised on termination, provided that any extension of the exercise
period of an Incentive Stock Option shall be subject to a written acknowledgment
by the optionee that the extension disqualifies the option as an Incentive Stock
Option.
(b) Death or Disability. Unless specified otherwise in the relevant
option agreement, in the case of an optionee who is an employee of the Company
or a parent or subsidiary of the Company, if the optionee's employment is
terminated because of death or disability (as defined below), the option,
including portions not yet exercisable, shall vest fully and be exercisable for
all shares covered thereby during the period up to the earlier of the expiration
of 12 months from the date of death or disability or the expiration of the
option. If such an optionee's employment is terminated by death, any option held
by the optionee shall be exercisable only by the person or persons to whom such
optionee's rights under such option shall pass by the optionee's will or by the
laws of descent and distribution of the state or country of the optionee's
domicile at the time of death. Subject to such terms and conditions as the Board
of Directors may determine, the Board of Directors may extend the exercise
period any length of time not later than the expiration date of the option,
provided that any extension of the exercise period of an Incentive Stock Option
shall be subject to a written acknowledgment by the optionee or the optionee's
personal representative that the extension may disqualify the option as an
Incentive Stock Option. For the purposes of this Plan, "disability" means a
permanent and total disability as defined in Section 22(e)(3) of the Code.
(c) Termination of Option. To the extent that an option held by the
estate of any deceased optionee or by any optionee whose employment is
terminated is
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not exercised within the limited periods provided above, all further rights to
purchase shares pursuant to such option and all other related rights shall
terminate at the end of such periods.
14. Exercise Option and Purchase of Shares. Shares may be purchased or
acquired pursuant to an option granted under the Plan only upon receipt by the
Company of notice in writing from the optionee of the optionee's intention to
exercise, specifying the number of shares as to which the optionee desires to
exercise the option and the date on which the optionee desires to complete the
transaction, which shall not be more than 10 days after receipt of the notice,
and, unless in the opinion of counsel for the Company such a representation is
not required in order to comply with the Securities Act of 1933, as amended,
containing a representation that it is the optionee's present intention to
acquire the shares for investment and not with a view to distribution. Options
may not be exercised for fractional shares. On or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee must
have paid the Company the full purchase price of such shares in cash (including
cash which may be the proceeds of a loan from the Company) or by bank or
certified check of the optionee. The Board of Directors may determine at the
time the option is granted as to Incentive Stock Options, or at any time before
exercise as to Non-Statutory Stock Options, that additional forms of payment
will be permitted (which may include shares of common stock of the Company) and
any terms, conditions or limitations upon such additional forms of payment. No
shares shall be issued until full payment therefor has been made. Each optionee
who has exercised an option shall, upon notification of the amount due, if any,
and prior to or concurrently with delivery of the certificates representing the
shares with respect to which the option was exercised, pay to the Company all
amounts necessary to satisfy any applicable federal, state, and local tax
withholding requirements. If additional withholding is or becomes required
beyond any amount deposited before or after delivery of the certificates, the
optionee shall pay such amount to the Company on demand.
15. Changes in Capital Structure.
(a) Stock Splits, Recapitalization. In the event that the
outstanding shares of Stock of the Company are increased or decreased or changed
into or exchanged for a different number or kind of shares or securities of the
Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split (other than transactions described in
Section 10(b), the Board of Directors shall make an appropriate and
proportionate adjustment in the maximum number and/or kind of securities
allocated to options that have been granted under the Plan with a corresponding
adjustment in the price for each share or other unit of any security covered by
the options.
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(b) Change of Control. Upon the effective date of a Change of
Control of the Company, this Plan and any option granted hereunder shall
terminate unless provisions be made in writing, approved by the Board of
Directors, in connection with such transaction for the continuance of the Plan
and for the assumption of options theretofore granted, or the substitution for
such options of new options covering the shares of a successor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to number and kind
of shares and prices, in which event the Plan and the options granted under it,
or the new options substituted therefor, shall continue in the manner and under
the terms so provided. Nevertheless, in the event a transaction is approved by
the Company's Board of Directors or shareholders which when effective would
constitute a Change of Control, or if such approval is not required then upon
the announcement of a transaction which if effective would constitute a Change
of Control, then all options, including portions not yet exercisable, shall vest
fully and be exercisable for all shares covered by such option and each optionee
shall be entitled, for at least ten days prior to the effective date of any such
transaction constituting a Change of Control of the Company, to purchase the
full number of shares under such option. In addition, if the Board of Directors
has approved a provision for the continuation for the Plan and the assumption of
options theretofore granted, or the substitution for such options of new options
covering the shares of a successor corporation or a parent or subsidiary
thereof, then the optionee also has the election, in the optionee's discretion,
to have his option so continued or substituted.
A "Change of Control" of the Company shall mean (a) any sale,
consolidation, merger or recapitalization, the effect of which is a material
change to the capital structure of the Company, other than such a transaction in
which the holders of the Stock immediately prior to the transaction continue to
hold a majority in interest of the voting stock of the surviving corporation
immediately after that transaction, (b) any sale or other transfer of
substantially all of the assets of the Company, (c) the adoption of any plan or
proposal for liquidation or dissolution of the Company or (d) the consummation
of any other transaction the effect of which is to cause any person not with
power to direct or cause direction of the management or policies of the Company
prior thereto to gain such power.
16. Corporate Acquisitions. The Board of Directors may also grant options
having terms, conditions and provisions which vary from those specified in this
Plan, provided that any options granted pursuant to this Section are granted in
substitution for, or in connection with the assumption of, existing options
granted by another corporation and assumed or otherwise agreed to be provided
for by the Company pursuant to or by reason of a transaction involving a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to which the Company or a subsidiary is a party.
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17. Amendment of the Plan. The Board of Directors may at any time and from
time to time modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in Section 15, however, no change in an award
already issued shall be made without the written consent of the holder of such
award. Furthermore, unless approved by the shareholders of the Company entitled
to vote thereon (by written consent or at an annual or special meeting thereof,
and by such approval as may be required therefor by applicable law and the
Articles of Incorporation and the Bylaws of the Company), no amendment or change
shall be made in the Plan (a) increasing the total number of shares that may be
issued under the Plan, (b) reducing the minimum purchase prices specified in the
Plan, (c) increasing the maximum option periods, or (d) permitting the issuance
of Stock under the Plan to a class of persons other than those presently
eligible to receive Stock under the Plan.
18. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an award or otherwise under the Plan unless such issuance and
delivery of the shares shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange or quotations system upon which the shares may then be
listed or quoted, and shall be further subject to the approval of counsel for
the Company with respect to such compliance. Inability of the Company to obtain
from any regulatory body having jurisdiction authority deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any shares hereunder
shall relieve the Company of any liability for the nonissuance or sale of such
shares. The Company shall not be obliged to register options or Stock granted or
purchased under the Plan.
The Board in its option may require as a condition to the grant and/or
exercise of any option, any action or agreement by an optionee as may from time
to time be necessary to comply with the federal and state securities laws, the
Internal Revenue Code of 1986, as amended, and/or set forth the provisions and
restrictions described in Section 4 and other matters, including restrictions on
transfer and repurchase rights and obligations, all as the Board of Directors
may determine from time to time.
19. Employment Rights. Nothing in the Plan or any award or Stock granted,
issued or sold pursuant to the Plan shall confer upon (i) any employee any right
to be continued in the employment of the Company or any parent or subsidiary of
the Company, or to interfere in any way with the right of the Company or any
parent or subsidiary of the Company by whom such employee is employed to
terminate such employee's employment at any time, for any reason, with or
without cause, or to increase or decrease such employee's compensation, or (ii)
any person engaged by the Company any right to be retained or employed by the
Company or to the continuation, extension,
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renewal or modification of any compensation, contract or arrangement with or by
the Company.
20. Rights as a Shareholder. The holder of an award shall have no rights
as a shareholder with respect to any shares covered by any award until the date
of issue of a stock certificate for such shares. Except as otherwise expressly
provided in the Plan, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.
Date of adoption of the Plan by the Board of Directors: September 25, 1997.
Date of adoption of the Plan by the Shareholders: September 25, 1997.
Date of approval of increases to option pool by the Board of Directors:
May 21, 1998
May 6, 1999
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ONLINE SPECIALTY RETAILING, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Agreement is made as of July 17, 1998, by and among Online Specialty
Retailing, Inc., a Washington corporation (the "Company"), with its principal
office at 2030 First Avenue, Third Floor, Seattle, Washington 98121, and the
investors listed on the Schedule of Purchasers attached as EXHIBIT 1.2 (the
"Purchasers").
The Company and the Purchasers hereby agree as follows:
1. AUTHORIZATION AND SALE OF PREFERRED STOCK
1.1 AUTHORIZATION. The Company will authorize the sale and issuance of up
to 1,142,857 shares of its Series A Convertible Preferred Stock ("Series A
Preferred"), having the rights, restrictions, privileges and preferences as set
forth in the Certificate of Designation, substantially in the form attached
hereto as EXHIBIT 1.1 (the "Certificate of Designation"). The Series A
Preferred to be sold pursuant to this Agreement shall be referred to as the
"Shares."
1.2 SALE OF SERIES A PREFERRED. Subject to the terms and conditions
hereof, the Company will issue and sell to the Purchasers, and the Purchasers
will buy from the Company, the number of Shares set forth opposite each
Purchaser's name on the Schedule of Purchasers attached hereto as EXHIBIT 1.2,
at a purchase price of $1.75 per Share. The Company's agreements with each of
the Purchasers are separate agreements, and the sales of the Shares to each of
the Purchasers are separate sales.
2. CLOSING DATE; DELIVERY
2.1 CLOSING DATE. The initial closing of the purchase and sale of the
Shares hereunder (the "Initial Closing") shall be held following the receipt by
the Company of subscriptions for at least 200,000 Shares (the date of such
Initial Closing being referred to as the "Initial Closing Date"). The place of
the Initial Closing shall be at the offices of Heller Ehrman White & McAuliffe,
6100 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104, or such other
place as the Purchasers and the Company shall agree.
2.2 SUSBSEQUENT CLOSINGS. At any time on or prior to May 31, 1999 the
Company may sell, in one or more transactions, up to the balance of the Shares
authorized to be sold pursuant to this Agreement and not sold at the Initial
Closing (a "Subsequent Closing"). The date of any such Subsequent Closing shall
be referred to herein as a "Subsequent Closing Date." 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 by the Purchasers of Shares in such
Subsequent Closing. Purchasers of Shares sold pursuant to this subsection 2.2
who execute this Agreement as Purchasers shall be deemed to be "Purchasers" for
all purposes under this Agreement. In connection with any Subsequent Closing,
the Company may add the names of additional
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Purchasers to EXHIBIT 1.2, without any action on the part of the Purchasers in
the previous Closings.
2.3 DELIVERY. At the Initial Closing or any Subsequent Closing, as the
case may be, subject to the terms and conditions set forth in this Agreement,
the Company will deliver to each Purchaser a certificate representing the number
of Shares to be purchased by that Purchaser at such Closing (which is set forth
opposite that Purchaser's name on the Schedule of Purchasers) against payment of
the purchase price therefor (which is set forth opposite that Purchaser's name
on the Schedule of Purchasers) by check or wire transfer payable to the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on the Schedule of Exceptions attached hereto as
EXHIBIT 3, (the "Schedule of Exceptions") or as otherwise expressly contemplated
by this Agreement, as of the Initial Closing Date, and as of each Subsequent
Closing Date, the Company hereby represents and warrants to each Purchaser as
follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington. The Company has requisite corporate power to own and operate its
properties and assets and to carry on its business as presently conducted and as
presently proposed to be conducted.
3.2 CORPORATE POWER. The Company has all requisite legal and corporate
power to execute and deliver this Agreement and all agreements to be executed
and delivered by the Company pursuant to the terms of this Agreement
(collectively, the "Ancillary Agreements") to sell and issue the Shares
hereunder, to issue the Common Stock issuable upon conversion of the Shares, and
to carry out and perform its obligations under the terms of this Agreement and
the Ancillary Agreements.
3.3 AUTHORIZATION. All corporate action on the part of the Company, its
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Ancillary Agreements by the Company,
the authorization, sale, issuance and delivery of the Shares (and the Common
Stock issuable upon conversion of the Shares) and the performance of the
Company's obligations under this Agreement and under the Ancillary Agreements
has been taken. Subject to satisfaction of the conditions set forth in
Sections 5 below, this Agreement and the Ancillary Agreements, when executed and
delivered by the Company, shall constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms, except as rights to indemnity and contribution thereunder may be limited
by applicable law and public policy and subject (i) to bankruptcy, insolvency,
reorganization, arrangement, moratorium and other laws of general applicability
relating to or affecting creditors' rights and (ii) to general principles of
equity, whether such enforceability is considered in a proceeding in equity or
at law.
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3.4 CAPITALIZATION. At the time of the Initial Closing, the authorized
capital stock of the Company will consist of 20,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock, 1,142,857 shares of which
will, upon filing of the Certificate of Designation with the Secretary of
State of the State of Washington, be designated Series A Preferred. Without
giving effect to the issuance of the Shares to be issued under this Agreement
at the Initial Closing or any Subsequent Closing, 1,579,164 shares of Common
Stock and no shares of Series A Preferred will be issued and outstanding.
Upon the payment for and issuance of the Shares in accordance with the terms
and conditions of this Agreement, the Ancillary Agreements and the
Certificate of Designation, all issued and outstanding shares of capital
stock of the Company will be duly authorized, validly issued, fully paid and
nonassessable. The Company has reserved (i) 1,142,857 shares of Series A
Preferred for issuance hereunder, (ii) sufficient shares of Common Stock for
issuance upon conversion of the Shares, which upon issuance and delivery in
accordance with this Agreement and the Certificate of Designation, will be
duly authorized, validly issued, fully paid and nonassessable, and (iii)
1,000,000 shares of Common Stock issuable at any time to employees, officers,
directors, consultants and advisors of the Company pursuant the Company's
1997 Stock Incentive Plan (the "Incentive Plan"). The Series A Preferred
shall have the rights, preferences, privileges and restrictions set forth in
the Certificate of Designation.
3.5 FINANCIAL STATEMENTS. The Company has provided to each Purchaser an
unaudited balance sheet as of December 31, 1997 and unaudited statements of
operations, stockholders' equity and cash flows for the year then ended (the
"Financial Statements"). The Financial Statements are complete and correct in
all material respects, and do not omit any material liabilities, fixed or
contingent, of the Company, other than liabilities incurred in the ordinary
course of business subsequent to December 31, 1997.
3.6 PATENTS, TRADEMARKS, ETC. The Company owns or has sufficient legal
right to use all patents, trademarks, service marks, trade names, copyrights,
licenses, trade secrets, information and other proprietary rights necessary to
conduct its business as now conducted and as presently proposed to be conducted
(the "Intellectual Properties") and, the Company has not received any
communications alleging that the Company has violated, infringed upon or
otherwise acted adverse to, or, by conducting its business (as now conducted and
as presently proposed to be conducted) would violate, infringe upon or otherwise
be adverse to any patent, trademark, service mark, trade name, copyright or
trade secret or other proprietary right of any other person or entity.
3.7 COMPLIANCE WITH AGREEMENTS AND LAWS. The Company is not in violation
or default in any material respect of any term or provision of any material
mortgage, indenture, contract, agreement or instrument to which it is a party or
by which it is bound or of any judgment, order, writ or decree applicable to it
and, to its knowledge, is not in violation of any order, statute, rule or
regulation applicable to the Company, which violation reasonably would be
expected to have a material adverse effect on the Company's business, assets,
liabilities, financial condition or operations. The execution, delivery and
performance of and compliance with this
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Agreement and the Ancillary Agreements, and the issuance of the Shares and
the Common Stock issuable upon conversion of the Shares, will not, with or
without the passage of time or giving notice, result in any violation of, or
conflict with, or constitute a default under, or result in the creation of,
any material mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company, or the suspension, revocation,
impairment, forfeiture or non-renewal of any permit, license, authorization
or approval applicable to the Company, its business or operation, or any of
its assets or properties.
3.8 LITIGATION. There are no actions, suits, proceedings or
investigations pending against the Company or its properties before any court
or governmental agency (nor, to the Company's knowledge, is there any written
threat thereof), which, either individually or in the aggregate, reasonably
would be expected to result in any material adverse change in the business or
financial condition of the Company or any of its properties or assets, or in
any material impairment of the right or ability of the Company to carry on
its business as now conducted or as presently proposed to be conducted, or in
any material liability on the part of the Company.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS.
Each Purchaser hereby represents and warrants to the Company and agrees
with respect to his, her or its purchase of the Shares as follows:
4.1 AUTHORIZATION. All acts and conditions necessary for the
authorization, execution, delivery and consummation by such Purchaser of this
Agreement and the Ancillary Agreements and the transactions contemplated herein
and therein have been taken, performed and obtained. This Agreement and the
Ancillary Agreements constitute valid and legally binding obligations of such
Purchaser, enforceable against such Purchaser in accordance with their
respective terms, except as rights to indemnity and contribution thereunder may
be limited by applicable law and public policy and subject, as to enforcement,
(i) to bankruptcy, insolvency, reorganization, arrangement, moratorium and other
laws of general applicability relating to or affecting creditors' rights and
(ii) to general principles of equity, whether such enforceability is considered
in a proceeding in equity or at law.
4.2 INVESTMENT REPRESENTATIONS AND COVENANTS OF THE PURCHASERS.
4.2.1 Each Purchaser acknowledges that this Agreement is made
by the Company with such Purchaser in reliance upon such Purchaser's
representations and covenants made in this SECTION 4. Each Purchaser
represents that the Shares to be received will be acquired for investment for
such Purchaser's own account, not as a nominee or agent, and not with a view
to the sale or distribution of any part thereof, and that such Purchaser has
no present intention of selling, granting any participation in or otherwise
distributing the same. Each Purchaser further represents that such Purchaser
does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Shares or any Common Stock acquired
on conversion or exercise thereof (collectively, "Restricted Securities ").
4
<PAGE>
4.2.2 Each Purchaser understands and acknowledges that the
offering of the Shares pursuant to this Agreement will not, and any issuance of
Common Stock on conversion of the Shares will not, be registered under the
Securities Act or under the securities laws of any jurisdiction, on the ground
that the sale provided for in this Agreement and the issuance of such securities
hereunder is exempt pursuant to Section 4(2) of the Securities Act, and similar
provisions of applicable state securities laws and that the Company's reliance
on such exemptions is predicated on the accuracy of the Purchasers'
representations set forth herein.
4.2.3 Each Purchaser covenants that in no event will he, she or it
make any disposition of any Restricted Securities, except in accordance with
applicable federal and state securities laws.
4.2.4 Each Purchaser represents that such Purchaser is experienced
in evaluating developmental stage companies such as the Company, is able to fend
for himself, herself or itself in transactions such as the one contemplated by
this Agreement, has such knowledge and experience in financial and business
matters that such Purchaser is capable of evaluating the merits and risks of its
prospective investment in the Company, and has the ability to bear the economic
risks of the investment (including possible complete loss of such investment)
for an indefinite period of time. Each Purchaser which is not an individual
confirms that it was not organized for the purpose of acquiring the Restricted
Securities.
4.2.5 Each Purchaser acknowledges and understands that the
Restricted Securities must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available, and that, except as otherwise provided in the Investors' Rights
Agreement, the Company is under no obligation to register the Restricted
Securities.
4.2.6 Each Purchaser acknowledges that in the event the applicable
requirements of Rule 144 under the Securities Act ("Rule 144") are not met,
registration under the Securities Act or compliance with another exemption from
registration will be required for any disposition of the Restricted Securities.
Each Purchaser understands that although Rule 144 is not exclusive, the
Securities and Exchange Commission (the "Commission") has expressed its opinion
that persons proposing to sell restricted securities received in a private
offering other than in a registered offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk.
4.2.7 Each Purchaser agrees to comply in all respects with the
provisions of this SECTION 4. Prior to any proposed sale, assignment, transfer
or pledge of any Restricted Securities, unless there is in effect a registration
statement under the Securities Act covering the proposed transfer, the holder
thereof shall give written notice to the Company of such holder's intention to
effect such transfer, sale, assignment or pledge. Each such notice shall
describe the manner and circumstances of the proposed transfer, sale, assignment
or pledge in sufficient detail and, if the Company reasonably so requests, shall
be accompanied at such holder's expense by an opinion
5
<PAGE>
of legal counsel which shall be reasonably satisfactory to the Company, which
opinion shall be addressed to the Company, to the effect that the proposed
transfer of the Restricted Securities may be effected without registration
under the Securities Act, whereupon the holder of such Restricted Securities
shall be entitled to transfer such Restricted Securities in accordance with
the terms of the notice delivered by the holder to the Company.
4.2.8 Each Purchaser represents that one or more of the following
criteria are applicable to such Purchaser:
(i) The Purchaser is a natural person who has a net worth or
joint net worth with the Purchaser's spouse exceeding $1,000,000 at the
time of purchase; or
(ii) The Purchaser is a natural person who had an individual
income in excess of $200,000 in each of the two most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and who reasonably expects reaching the same income level in the
current year; or
(iii) The Purchaser is either (a) an investment company
registered under the Investment Company Act of 1940 or a business
development company as defined in section 2(a)(48) of such Act, (b) a Small
Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment
Act of 1958 or (c) a private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940; or
(iv) The Purchaser is a corporation, partnership, not-for-profit
organization or entity exempt from income tax under Section 501(c)(3) of
the Internal Revenue Code, not formed for the specific purpose of acquiring
the Shares, with total assets in excess of $5,000,000; or
(v) The Purchaser is a corporation, partnership or trust and
each and every equity owner of such entity meets the qualifications set
forth in subsection (i), (ii), (iii) or (iv) of this SECTION 4.2.8.
4.2.9 Each Purchaser represents that such Purchaser is a resident
of, or if not an individual, has its principal place of business in, the state
set forth below the Purchaser's name on the signature pages hereto.
4.3 LEGEND ON CERTIFICATES. Each Purchaser consents to the placement of a
legend on the certificates for the Shares, and any shares of Common Stock issued
on the conversion of the Shares, in substantially the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED ("SECURITIES ACT"), OR UNDER ANY STATE SECURITIES
LAWS. THESE
6
<PAGE>
SECURITIES 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 ANY OTHER STATE SECURITIES LAWS.
4.4 NO PUBLIC MARKET. Each Purchaser understands that no public market
now exists for any of the securities issued by the Company and that it is
unlikely that a public market will ever exist for the Shares.
4.5 RECEIPT OF INFORMATION. Each Purchaser has received and reviewed this
Agreement (including exhibits), the Ancillary Agreements, the Financial
Statements, and the business plan of the Company dated May, 1998 (the "Business
Plan") and each Purchaser and such Purchaser's attorney, accountant and other
advisers have had access to, and an opportunity to review, all corporate books,
financial statements, records, contracts, documents and other materials
concerning the Company (to the extent such exists), and its offices and
facilities; and have been given an opportunity to ask any and all questions of,
and receive answers from, the Company's officers, employees, agents, accountants
and representatives concerning the Company's proposed business, operations,
financial condition, assets, liabilities, the terms and conditions of the
offering and other relevant matters as they have deemed necessary or appropriate
to verify the accuracy of the information provided and to evaluate the
suitability of an investment in the Shares; and, in evaluating the suitability
of an investment in the Shares and they have not relied upon any representations
or other information (whether oral or written) other than as set forth in the
documents and answers referred to above. Each of the Purchasers further
represents and acknowledges that such Purchaser has been solely responsible for
his, her or its own "due diligence" investigation of the Company and its
management and business, for his, her or its own analysis of the merits and
risks of this investment, and for his, her or its own analysis of the fairness
and desirability of the terms of the investment, that in taking any action or
performing any role relative to the arranging of the proposed investment, each
of the other Purchasers has acted solely in his or its own interest, and that
none of the Purchasers (or any of their agents or employees) has acted as an
agent, employee, partner or fiduciary of any other Purchaser, or as an agent of
the Company, or as an issuer, underwriter, broker, dealer or investment adviser
relative to any security involved in this investment.
4.6 BROKERS OR FINDERS. Each Purchaser has not incurred, and will not
incur directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transactions contemplated hereby. Each Purchaser hereby agrees to indemnify
the Company for any claims, losses, and expenses incurred by the Company as a
result of the representation in this SECTION 4.6 being untrue.
7
<PAGE>
4.7 COMPANY INFORMATION. Each Purchaser acknowledges that the
information regarding the Company disclosed to such Purchaser and the
information provided to such Purchaser pursuant to this Agreement, Ancillary
Agreements and the Business Plan is confidential and/or proprietary to the
Company (the "Confidential Information"). Each Purchaser agrees not to
disclose Confidential Information to any third parties and to keep the
Confidential Information confidential, using the same standard of care in
safeguarding the Confidential Information as a prudent business person would
employ in protecting its own proprietary information which it desires not to
disseminate or publish. Each Purchaser will instruct such Purchaser's
directors, officers, employees, and representatives to so keep such
Confidential Information confidential. Confidential Information does not
include information, technical data or know-how which (a) is in such
Purchaser's possession at the time of disclosure to the such Purchaser as
shown by such Purchaser's files and records immediately prior to the time of
disclosure; (b) before or after it has been disclosed to such Purchaser, is
part of the public knowledge or literature, not as a result of any action or
inaction of such Purchaser; (c) is independently developed by such Purchaser,
as properly documented by such Purchaser; or (d) is approved for release by
written authorization of Company.
5. CONDITIONS TO CLOSING OF PURCHASERS
The Purchasers' obligations to purchase the Shares at the Initial Closing,
or any Subsequent Closing, as the case may be, are, at the option of each
Purchaser, subject to the fulfillment on or prior to the Initial Closing Date,
or any Subsequent Closing Date at which such Shares are purchased, of the
following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by the Company in SECTION 3 shall be true and correct on the
Initial Closing Date or any Subsequent Closing Date, as the case may be, with
the same force and effect as if they had been made on and as of said date,
except for representations and warranties made as of a specific date, which
shall be true and correct as of such date.
5.2 AMENDMENT OF CERTIFICATE OF INCORPORATION AND FILING OF CERTIFICATE OF
DESIGNATION. The Certificate of Incorporation of the Company shall have been
duly amended by the affirmative vote of the requisite percentage of the
outstanding shares of Common Stock to increase the authorized capital of the
Company to 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock, the latter being issuable with such rights, preferences, privileges and
restrictions as may be specified by the Board of Directors of the Company from
time to time (the "Certificate Amendment"), and the Certificate of Designation
shall have been duly filed with the Secretary of State of the State of
Washington.
5.3 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser shall
have executed the Investors' Rights Agreement in substantially the form attached
hereto as EXHIBIT 5.3 (the "Investors' Rights Agreement").
8
<PAGE>
5.4 DUE DILIGENCE. The Purchasers shall have completed, to their
reasonable satisfaction, their due diligence review of the Company.
6. CONDITIONS TO CLOSING BY COMPANY
The Company's obligation to sell and issue the Shares at the Initial
Closing or any Subsequent Closing, as the case may be, is, at the option of the
Company, subject to the fulfillment on or prior to the Initial Closing Date, or
any Subsequent Closing Date at which such Share are sold, of the following
conditions:
6.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties of each Purchaser made in SECTION 4 shall be true and correct when
made, and shall be true and correct on the Initial Closing Date or any
Subsequent Closing Date, as the case may be, with the same force and effect as
though such representations and warranties had been made as of such Closing
Date.
6.2 OTHER CONDITIONS. The conditions set forth at Section 5.2 shall have
been satisfied.
6.3 PAYMENT OF PURCHASE PRICE. Each Purchaser shall have delivered to the
Company in accordance with SECTION 2.3 the purchase price specified in
SECTION 1.2.
6.4 PERFORMANCE. Each Purchaser shall have performed and complied with
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Initial Closing
Date or any Subsequent Closing Date, as the case may be.
7. MISCELLANEOUS.
7.1 NOTICES, ETC. Any notice given under this Agreement shall be in
writing and delivered in person, via facsimile machine, sent by documented
overnight delivery service, or mailed by certified or registered mail, postage
prepaid, to the appropriate party or parties at the addresses referenced below,
or to such other address as the parties may hereinafter designate. Unless
otherwise specified in this Agreement, all such notices and other written
communications shall be effective (and considered received for the purposes of
this Agreement) (a) if delivered in person, upon delivery, (b) if by facsimile
machine during normal business hours upon transmission with confirmation of
receipt by the receiving party's facsimile terminal and if not sent during
normal business hours, then on the next business day, (c) if sent by documented
overnight delivery service, on the date delivered, or (d) if mailed, three (3)
days after mailing. Notices shall be sent (i) if to a Purchaser, at such
Purchaser's address set forth in this Agreement, or at such other address as
such Purchaser shall have furnished to the Company in writing, or (ii) if to the
Company, one copy should be sent to its address set forth on the first page of
this Agreement, or at such other address as the Company shall have furnished to
the Purchasers, and addressed to the attention of Benjamin C. Nourse, and one
copy shall be sent to Heller Ehrman
9
<PAGE>
White & McAuliffe, 6100 Columbia Center, 701 Fifth Avenue, Seattle, Washington
98104, Attn: Thomas S. Hodge.
7.2 GOVERNING LAW AND VENUE. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of Washington
(without giving effect to any choice or conflict of law provision or rule,
whether 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). The venue of any arbitration or action brought on or in connection
with this Agreement shall be in King County, Washington.
7.3 CONSENT TO JURISDICTION. The parties hereto irrevocably submit to the
jurisdiction of any Washington state or federal court sitting in Seattle in any
action or proceeding arising out of or relating to this Agreement, and agree
that all claims in respect of such action or proceeding may be heard and
determined in such Washington state or federal court. Each party hereby waives,
to the fullest extent it may effectively do so, the defense of any inconvenient
forum to the maintenance of such action or proceeding. The parties agree that a
final judgment in any action or proceeding shall be conclusive and may be
enforced in any other manner provided by law.
7.4 COSTS AND ATTORNEY'S FEES. If any action at law or equity is
necessary to enforce or interpret the terms of this Agreement, the mostly
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled, including any such fees, costs and necessary disbursements incurred
in any appellate proceeding.
7.5 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto;
PROVIDED, HOWEVER, that, except as otherwise provided herein, the rights of a
Purchaser to purchase Shares shall not be assignable without the written consent
of the Company.
7.6 THIRD PARTY BENEFICIARIES. This Agreement shall not confer any rights
or remedies upon any person or entity other than the parties and their
respective successors and permitted assigns.
7.7 ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Ancillary
Agreements, the Certificate of Designation and the other documents delivered
pursuant to those agreements constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
thereof, and supersede all prior agreements, contracts or understandings with
respect to the subject matter hereof. This Agreement may be amended or
modified, and the obligations of the Company under Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only upon the written consent of the Company and holders of a
majority of the Shares (treated as if converted and including any Common Stock
into which the Shares have been converted that have not been sold
10
<PAGE>
to the public); any such amendment, modification or waiver shall be binding
on the Company, all holders of any securities purchased under this Agreement
at the time outstanding (including securities into which such securities are
convertible) and each future holder of any such securities. The foregoing
notwithstanding, this Agreement and any term hereof may be amended, waived,
discharged or terminated by a written instrument signed by the party against
whom enforcement of any such amendment, waiver, discharge or termination is
sought.
7.8 INTERPRETATION AND FAIR CONSTRUCTION. This Agreement has been
reviewed and approved by each of the parties. If it should be determined that
any provision of this Agreement is uncertain or ambiguous, the language in all
parts of this Agreement shall be in all cases construed as a whole according to
its fair meaning and not strictly construed for or against either the Company or
the Purchasers.
7.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.10 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
The foregoing Series A Preferred Stock Purchase Agreement is hereby
executed.
COMPANY:
ONLINE SPECIALTY RETAILING, INC.
By:-------------------------------
Benjamin C. Nourse, Chairman
PURCHASERS:
------------------------------
Name:
Address:
Fax:
Tel:
E-mail:
11
<PAGE>
------------------------------
Name:
Address:
Fax:
Tel:
E-mail:
12
<PAGE>
Investor List
<TABLE>
<CAPTION>
PURCHASERS NUMBER OF SHARES PURCHASED
---------- --------------------------
<S> <C>
Tom A. Alberg 28,571
Robert M. Arnold 68,571
Fraser Black & Deirdre Black, JT TEN 5,714
William Cuff 28,571
Thomas L. Gilman 14,285
Heller, Ehrman, White & McAuliffe, a 4,285
partnership of professional corporations
William & Emily Heston 28,571
John W.P. Holt & Susan Trainor Holt, Tenants 3,428
in Common
Laurie Lyford & Charles A. Lyford IV, 28,571
Tenants in Common
Furman C. Moseley & Susan R. Moseley, 600,000
Tenants in Common
Benjamin C. Nourse 7,142
Ralph Pascualy & Lisa Pascualy 28,571
Catherine W. Rush 28,571
R. Stockton Rush 17,142
Ralph K. Davies Trust FBO R.S. Rush III 60,000
Paul W. Skinner 28,571
Daniel D. Syrdal 5,714
Morgan Stanley Dean Witter custodian for 14,285
John S. Teutsch IRA SEP dated 4/14/89
Diane R. Wetherington 28,571
Richard M. Weil 14,285
David E. Wyman & Ann McCall Wyman 56,571
(WYNOT INVESTMENTS)
David E. Wyman 42,857
</TABLE>
13
<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
ONLINE SPECIALTY RETAILING, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This Agreement is made as of March 18, 1999, by and among Online Specialty
Retailing, Inc., a Washington corporation (the "Company"), with its principal
office at 2030 First Avenue, Third Floor, Seattle, Washington 98121, and the
investors listed on the Schedule of Purchasers attached as EXHIBIT 1.2 (the
"Purchasers").
The Company and the Purchasers hereby agree as follows:
1. AUTHORIZATION AND SALE OF PREFERRED STOCK
1.1. AUTHORIZATION. The Company will authorize the sale and issuance of
up to 766,667 shares of its Series B Preferred Stock ("Series B
Preferred"), having the rights, restrictions, privileges and
preferences as set forth in the Certificate of Designation,
substantially in the form attached hereto as EXHIBIT 1.1 (the
"Certificate of Designation"). The Series B Preferred to be sold
pursuant to this Agreement shall be referred to as the "Shares."
1.2. SALE OF SERIES B PREFERRED. Subject to the terms and conditions
hereof, the Company will issue and sell to the Purchasers, and the
Purchasers will buy from the Company, the number of Shares set forth
opposite each Purchaser's name on the Schedule of Purchasers attached
hereto as EXHIBIT 1.2, at a purchase price of $3.00 per Share. The
Company's agreements with each of the Purchasers are separate
agreements, and the sales of the Shares to each of the Purchasers are
separate sales.
2. CLOSING DATE; DELIVERY
2.1. CLOSING DATE. The initial closing of the purchase and sale of the
Shares hereunder (the "Initial Closing") shall be held following the
receipt by the Company of subscriptions for at least 200,000 Shares
(the date of such Initial Closing being referred to as the "Initial
Closing Date"). The place of the Initial Closing shall be at the
offices of Heller Ehrman White & McAuliffe, 6100 Columbia Center, 701
Fifth Avenue, Seattle, Washington 98104, or such other place as the
Purchasers and the Company shall agree.
2.2. SUBSEQUENT CLOSINGS. At any time on or prior to December 31, 1999
the Company may sell, in one or more transactions, up to the balance
of the Shares authorized to be sold pursuant to this Agreement and
not sold at the Initial Closing (a "Subsequent Closing"). The date
of any such Subsequent Closing shall be referred to herein as a
"Subsequent Closing Date." 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 by the Purchasers of Shares
in such Subsequent Closing. Purchasers of Shares sold pursuant to
this subsection 2.2 who execute this Agreement as Purchasers shall be
deemed to be "Purchasers" for all purposes under this Agreement. In
connection with any Subsequent Closing, the Company may add the names
of additional Purchasers to EXHIBIT 1.2, without any action on the
part of the Purchasers in the previous Closings.
- --------------------------------------------------------------------------------
Online Specialty Retailing, Inc. dba GreatFood.com
<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
2.3. DELIVERY. At the Initial Closing or any Subsequent Closing, as the
case may be, subject to the terms and conditions set forth in this
Agreement, the Company will deliver to each Purchaser a certificate
representing the number of Shares to be purchased by that Purchaser
at such Closing (which is set forth opposite that Purchaser's name on
the Schedule of Purchasers) against payment of the purchase price
therefor (which is set forth opposite that Purchaser's name on the
Schedule of Purchasers) by check or wire transfer payable to the
Company.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Schedule of Exceptions attached hereto as EXHIBIT 3,
(the "Schedule of Exceptions") or as otherwise expressly contemplated by this
Agreement, as of the Initial Closing Date, and as of each Subsequent Closing
Date, the Company hereby represents and warrants to each Purchaser as follows:
3.1. ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of
the State of Washington. The Company has requisite corporate power
to own and operate its properties and assets and to carry on its
business as presently conducted and as presently proposed to be
conducted.
3.2. CORPORATE POWER. The Company has all requisite legal and corporate
power to execute and deliver this Agreement and all agreements to be
executed and delivered by the Company pursuant to the terms of this
Agreement (collectively, the "Ancillary Agreements") to sell and
issue the Shares hereunder, to issue the Common Stock issuable upon
conversion of the Shares, and to carry out and perform its
obligations under the terms of this Agreement and the Ancillary
Agreements.
3.3. AUTHORIZATION. All corporate action on the part of the Company, its
directors and shareholders necessary for the authorization,
execution, delivery and performance of this Agreement and the
Ancillary Agreements by the Company, the authorization, sale,
issuance and delivery of the Shares (and the Common Stock issuable
upon conversion of the Shares) and the performance of the Company's
obligations under this Agreement and under the Ancillary Agreements
has been taken. Subject to satisfaction of the conditions set forth
in Sections 5 below, this Agreement and the Ancillary Agreements,
when executed and delivered by the Company, shall constitute valid
and binding obligations of the Company enforceable against the
Company in accordance with their respective terms, except as rights
to indemnity and contribution thereunder may be limited by applicable
law and public policy and subject (i) to bankruptcy, insolvency,
reorganization, arrangement, moratorium and other laws of general
applicability relating to or affecting creditors' rights and (ii) to
general principles of equity, whether such enforceability is
considered in a proceeding in equity or at law.
3.4. CAPITALIZATION. At the time of the Initial Closing, the authorized
capital stock of the Company will consist of 20,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, 1,142,857
shares of which are designated "Series A Preferred Stock" and
1,000,000 shares of which will, upon filing of the Certificate of
Designation with the Secretary of State of the State of Washington,
be designated Series B Preferred. Without giving effect to the
issuance of the Shares to be issued under this Agreement at the
Initial Closing or any Subsequent Closing, 1,579,164 shares of Common
Stock,
- -------------------------------------------------------------------------------
Online Specialty Retailing, Inc. dba GreatFood.com Page 2
<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
1,142,857 shares of Series A Preferred Stock and no shares of Series
B Preferred Stock will be issued and outstanding. Upon the payment
for and issuance of the Shares in accordance with the terms and
conditions of this Agreement, the Ancillary Agreements and the
Certificate of Designation, all issued and outstanding shares of
capital stock of the Company will be duly authorized, validly issued,
fully paid and nonassessable. The Company has reserved (i) 766,667
shares of Series B Preferred for issuance hereunder, (ii) sufficient
shares of Common Stock for issuance upon conversion of the Shares,
which upon issuance and delivery in accordance with this Agreement
and the Certificate of Designation, will be duly authorized, validly
issued, fully paid and nonassessable, (iii) sufficient shares of
Common Stock for issuance upon conversion of the Series A Preferred
Stock, and (iv) 1,000,000 shares of Common Stock issuable at any time
to employees, officers, directors, consultants and advisors of the
Company pursuant the Company's 1997 Stock Incentive Plan (the
"Incentive Plan"). The Series B Preferred shall have the rights,
preferences, privileges and restrictions set forth in the Certificate
of Designation.
3.5. FINANCIAL STATEMENTS. The Company has provided to each Purchaser an
unaudited preliminary estimated balance sheet as of December 31, 1998
and unaudited preliminary estimated statements of operations,
stockholders' equity and cash flows for the year then ended (the
"Financial Statements").
3.6. PATENTS, TRADEMARKS, ETC. The Company owns or has sufficient legal
right to use all patents, trademarks, service marks, trade names,
copyrights, licenses, trade secrets, information and other
proprietary rights necessary to conduct its business as now
conducted and as presently proposed to be conducted (the
"Intellectual Properties") and, the Company has not received any
communications alleging that the Company has violated, infringed upon
or otherwise acted adverse to, or, by conducting its business (as now
conducted and as presently proposed to be conducted) would violate,
infringe upon or otherwise be adverse to any patent, trademark,
service mark, trade name, copyright or trade secret or other
proprietary right of any other person or entity.
3.7. COMPLIANCE WITH AGREEMENTS AND LAWS. The Company is not in violation
or default in any material respect of any term or provision of any
material mortgage, indenture, contract, agreement or instrument to
which it is a party or by which it is bound or of any judgment,
order, writ or decree applicable to it and, to its knowledge, is not
in violation of any order, statute, rule or regulation applicable to
the Company, which violation reasonably would be expected to have a
material adverse effect on the Company's business, assets,
liabilities, financial condition or operations. The execution,
delivery and performance of and compliance with this Agreement and
the Ancillary Agreements, and the issuance of the Shares and the
Common Stock issuable upon conversion of the Shares, will not, with
or without the passage of time or giving notice, result in any
violation of, or conflict with, or constitute a default under, or
result in the creation of, any material mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the
Company, or the suspension, revocation, impairment, forfeiture or
non-renewal of any permit, license, authorization or approval
applicable to the Company, its business or operation, or any of its
assets or properties.
3.8. LITIGATION. There are no actions, suits, proceedings or
investigations pending against the Company or its properties before
any court or governmental agency (nor, to the
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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Company's knowledge, is there any written threat thereof), which,
either individually or in the aggregate, reasonably would be expected
to result in any material adverse change in the business or financial
condition of the Company or any of its properties or assets, or in
any material impairment of the right or ability of the Company to
carry on its business as now conducted or as presently proposed to be
conducted, or in any material liability on the part of the Company.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS
Each Purchaser hereby represents and warrants to the Company and agrees with
respect to his, her or its purchase of the Shares as follows:
4.1. AUTHORIZATION. All acts and conditions necessary for the
authorization, execution, delivery and consummation by such Purchaser
of this Agreement and the Ancillary Agreements and the transactions
contemplated herein and therein have been taken, performed and
obtained. This Agreement and the Ancillary Agreements constitute
valid and legally binding obligations of such Purchaser, enforceable
against such Purchaser in accordance with their respective terms,
except as rights to indemnity and contribution thereunder may be
limited by applicable law and public policy and subject, as to
enforcement, (i) to bankruptcy, insolvency, reorganization,
arrangement, moratorium and other laws of general applicability
relating to or affecting creditors' rights and (ii) to general
principles of equity, whether such enforceability is considered in a
proceeding in equity or at law.
4.2. INVESTMENT REPRESENTATIONS AND COVENANTS OF THE PURCHASERS.
4.2.1. Each Purchaser acknowledges that this Agreement is made by
the Company with such Purchaser in reliance upon such
Purchaser's representations and covenants made in this
Section 4. Each Purchaser represents that the Shares to be
received will be acquired for investment for such
Purchaser's own account, not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof,
and that such Purchaser has no present intention of selling,
granting any participation in or otherwise distributing the
same. Each Purchaser further represents that such Purchaser
does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with
respect to any of the Shares or any Common Stock acquired on
conversion or exercise thereof (collectively, "Restricted
Securities ").
4.2.2. Each Purchaser understands and acknowledges that the
offering of the Shares pursuant to this Agreement will not,
and any issuance of Common Stock on conversion of the Shares
will not, be registered under the Securities Act or under
the securities laws of any jurisdiction, on the ground that
the sale provided for in this Agreement and the issuance of
such securities hereunder is exempt pursuant to Section 4(2)
of the Securities Act, and similar provisions of applicable
state securities laws and that the Company's reliance on
such exemptions is predicated on the accuracy of the
Purchasers' representations set forth herein.
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4.2.3. Each Purchaser covenants that in no event will he, she or it
make any disposition of any Restricted Securities, except in
accordance with applicable federal and state securities laws.
4.2.4. Each Purchaser represents that such Purchaser is experienced
in evaluating developmental stage companies such as the
Company, is able to fend for himself, herself or itself in
transactions such as the one contemplated by this Agreement,
has such knowledge and experience in financial and business
matters that such Purchaser is capable of evaluating the
merits and risks of its prospective investment in the
Company, and has the ability to bear the economic risks of
the investment (including possible complete loss of such
investment) for an indefinite period of time. Each
Purchaser which is not an individual confirms that it was
not organized for the purpose of acquiring the Restricted
Securities.
4.2.5. Each Purchaser acknowledges and understands that the
Restricted Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an
exemption from such registration is available, and that,
except as otherwise provided in the Investors' Rights
Agreement, the Company is under no obligation to register
the Restricted Securities.
4.2.6. Each Purchaser acknowledges that in the event the applicable
requirements of Rule 144 under the Securities Act ("Rule
144") are not met, registration under the Securities Act or
compliance with another exemption from registration will be
required for any disposition of the Restricted Securities.
Each Purchaser understands that although Rule 144 is not
exclusive, the Securities and Exchange Commission (the
"Commission") has expressed its opinion that persons
proposing to sell restricted securities received in a
private offering other than in a registered offering or
pursuant to Rule 144 will have a substantial burden of proof
in establishing that an exemption from registration is
available for such offers or sales and that such persons and
the brokers who participate in the transactions do so at
their own risk.
4.2.7. Each Purchaser agrees to comply in all respects with the
provisions of this Section 4. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities,
unless there is in effect a registration statement under the
Securities Act covering the proposed transfer, the holder
thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment
or pledge. Each such notice shall describe the manner and
circumstances of the proposed transfer, sale, assignment or
pledge in sufficient detail and, if the Company reasonably
so requests, shall be accompanied at such holder's expense
by an opinion of legal counsel which shall be reasonably
satisfactory to the Company, which opinion shall be
addressed to the Company, to the effect that the proposed
transfer of the Restricted Securities may be effected
without registration under the Securities Act, whereupon the
holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the
terms of the notice delivered by the holder to the Company.
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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4.2.8. Each Purchaser represents that one or more of the following
criteria are applicable to such Purchaser:
(i) The Purchaser is a natural person who has a net worth or
joint net worth with the Purchaser's spouse exceeding
$1,000,000 at the time of purchase; or
(ii) The Purchaser is a natural person who had an individual
income in excess of $200,000 in each of the two most recent
years or joint income with that person's spouse in excess of
$300,000 in each of those years and who reasonably expects
reaching the same income level in the current year; or
(iii) The Purchaser is either (a) an investment company registered
under the Investment Company Act of 1940 or a business
development company as defined in section 2(a)(48) of such
Act, (b) a Small Business Investment Company licensed by the
U.S. Small Business Administration under Section 301(c) or
(d) of the Small Business Investment Act of 1958 or (c) a
private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940; or
(iv) The Purchaser is a corporation, partnership, not-for-profit
organization or entity exempt from income tax under Section
501(c)(3) of the Internal Revenue Code, not formed for the
specific purpose of acquiring the Shares, with total assets
in excess of $5,000,000; or
(v) The Purchaser is a corporation, partnership or trust and
each and every equity owner of such entity meets the
qualifications set forth in subsection (i), (ii), (iii) or
(iv) of this SECTION 4.2.8.
4.2.9. Each Purchaser represents that such Purchaser is a resident
of, or if not an individual, has its principal place of
business in, the state set forth below the Purchaser's name
on the signature pages hereto.
4.3. LEGEND ON CERTIFICATES. Each Purchaser consents to the placement of a
legend on the certificates for the Shares, and any shares of Common
Stock issued on the conversion of the Shares, in substantially the
following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR UNDER ANY STATE
SECURITIES LAWS. THESE SECURITIES 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 ANY
OTHER STATE SECURITIES LAWS.
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<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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4.4. NO PUBLIC MARKET. Each Purchaser understands that no public market
now exists for any of the securities issued by the Company and that
it is unlikely that a public market will ever exist for the Shares.
4.5. RECEIPT OF INFORMATION. Each Purchaser has received and reviewed
this Agreement (including exhibits), the Ancillary Agreements, the
Financial Statements, and the business plan of the Company dated
February, 1999 (the "Business Plan") and each Purchaser and such
Purchaser's attorney, accountant and other advisers have had access
to, and an opportunity to review, all corporate books, financial
statements, records, contracts, documents and other materials
concerning the Company (to the extent such exists), and its offices
and facilities; and have been given an opportunity to ask any and all
questions of, and receive answers from, the Company's officers,
employees, agents, accountants and representatives concerning the
Company's proposed business, operations, financial condition, assets,
liabilities, the terms and conditions of the offering and other
relevant matters as they have deemed necessary or appropriate to
verify the accuracy of the information provided and to evaluate the
suitability of an investment in the Shares; and, in evaluating the
suitability of an investment in the Shares they have not relied upon
any representations or other information (whether oral or written)
other than as set forth in the documents and answers referred to
above. Each of the Purchasers further represents and acknowledges
that such Purchaser has been solely responsible for his, her or its
own "due diligence" investigation of the Company and its management
and business, for his, her or its own analysis of the merits and
risks of this investment, and for his, her or its own analysis of the
fairness and desirability of the terms of the investment, that in
taking any action or performing any role relative to the arranging of
the proposed investment, each of the other Purchasers has acted
solely in his, her or its own interest, and that none of the
Purchasers (or any of their agents or employees) has acted as an
agent, employee, partner or fiduciary of any other Purchaser, or as
an agent of the Company, or as an issuer, underwriter, broker, dealer
or investment adviser relative to any security involved in this
investment.
4.6. BROKERS OR FINDERS. Each Purchaser has not incurred, and will not
incur directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with
this Agreement or any transactions contemplated hereby. Each
Purchaser hereby agrees to indemnify the Company for any claims,
losses, and expenses incurred by the Company as a result of the
representation in this Section 4.6 being untrue.
4.7. COMPANY INFORMATION. Each Purchaser acknowledges that the
information regarding the Company disclosed to such Purchaser and the
information provided to such Purchaser pursuant to this Agreement,
Ancillary Agreements and the Business Plan is confidential and/or
proprietary to the Company (the "Confidential Information"). Each
Purchaser agrees not to disclose Confidential Information to any
third parties and to keep the Confidential Information confidential,
using the same standard of care in safeguarding the Confidential
Information as a prudent business person would employ in protecting
its own proprietary information which it desires not to disseminate
or publish. Each Purchaser will instruct such Purchaser's directors,
officers, employees, and representatives to so keep such Confidential
Information confidential. Confidential Information does not include
information, technical data or know-how which (a) is in
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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such Purchaser's possession at the time of disclosure to the such
Purchaser as shown by such Purchaser's files and records immediately
prior to the time of disclosure; (b) before or after it has been
disclosed to such Purchaser, is part of the public knowledge or
literature, not as a result of any action or inaction of such
Purchaser; (c) is independently developed by such Purchaser, as
properly documented by such Purchaser; or (d) is approved for release
by written authorization of Company.
5. CONDITIONS TO CLOSING OF PURCHASERS
The Purchasers' obligations to purchase the Shares at the Initial Closing, or
any Subsequent Closing, as the case may be, are, at the option of each
Purchaser, subject to the fulfillment on or prior to the Initial Closing Date,
or any Subsequent Closing Date at which such Shares are purchased, of the
following conditions:
5.1. REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by the Company in Section 3 shall be true and correct
on the Initial Closing Date or any Subsequent Closing Date, as the
case may be, with the same force and effect as if they had been made
on and as of said date, except for representations and warranties
made as of a specific date, which shall be true and correct as of
such date.
5.2. FILING OF CERTIFICATE OF DESIGNATION. The Certificate of Designation
shall have been duly filed with the Secretary of State of the State
of Washington.
5.3. INVESTORS' RIGHTS AGREEMENT. The Company, each other party to the
Company's existing Investors' Rights Agreement dated July 17, 1998,
and each Purchaser shall have executed the Amended and Restated
Investors' Rights Agreement in substantially the form attached hereto
as EXHIBIT 5.3 (the "Investors' Rights Agreement")..
6. CONDITIONS TO CLOSING BY COMPANY
The Company's obligation to sell and issue the Shares at the Initial Closing or
any Subsequent Closing, as the case may be, is, at the option of the Company,
subject to the fulfillment on or prior to the Initial Closing Date, or any
Subsequent Closing Date at which such Share are sold, of the following
conditions:
6.1. REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties of each Purchaser made in Section 4 shall be true and
correct when made, and shall be true and correct on the Initial
Closing Date or any Subsequent Closing Date, as the case may be, with
the same force and effect as though such representations and
warranties had been made as of such Closing Date.
6.2. OTHER CONDITIONS. The conditions set forth at Section 5.2 shall have
been satisfied.
6.3. PAYMENT OF PURCHASE PRICE. Each Purchaser shall have delivered to
the Company in accordance with Section 2.3 the purchase price
specified in Section 1.2.
6.4. PERFORMANCE. Each Purchaser shall have performed and complied with
all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on
or before the Initial Closing Date or any Subsequent Closing Date, as
the case may be.
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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7. MISCELLANEOUS
7.1. NOTICES, ETC. Any notice given under this Agreement shall be in
writing and delivered in person, via facsimile machine, sent by
documented overnight delivery service, or mailed by certified or
registered mail, postage prepaid, to the appropriate party or parties
at the addresses referenced below, or to such other address as the
parties may hereinafter designate. Unless otherwise specified in
this Agreement, all such notices and other written communications
shall be effective (and considered received for the purposes of this
Agreement) (a) if delivered in person, upon delivery, (b) if by
facsimile machine during normal business hours upon transmission with
confirmation of receipt by the receiving party's facsimile terminal
and if not sent during normal business hours, then on the next
business day, (c) if sent by documented overnight delivery service,
on the date delivered, or (d) if mailed, three (3) days after
mailing. Notices shall be sent (i) if to a Purchaser, at such
Purchaser's address set forth in this Agreement, or at such other
address as such Purchaser shall have furnished to the Company in
writing, or (ii) if to the Company, one copy should be sent to its
address set forth on the first page of this Agreement, or at such
other address as the Company shall have furnished to the Purchasers,
and addressed to the attention of Benjamin C. Nourse, and one copy
shall be sent to Heller Ehrman White & McAuliffe, 6100 Columbia
Center, 701 Fifth Avenue, Seattle, Washington 98104, Attn: Thomas S.
Hodge.
7.2. GOVERNING LAW AND VENUE. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of
Washington (without giving effect to any choice or conflict of law
provision or rule, whether 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). The venue of any
arbitration or action brought on or in connection with this Agreement
shall be in King County, Washington.
7.3. CONSENT TO JURISDICTION. The parties hereto irrevocably submit to
the jurisdiction of any Washington state or federal court sitting in
Seattle in any action or proceeding arising out of or relating to
this Agreement, and agree that all claims in respect of such action
or proceeding may be heard and determined in such Washington state or
federal court. Each party hereby waives, to the fullest extent it
may effectively do so, the defense of any inconvenient forum to the
maintenance of such action or proceeding. The parties agree that a
final judgment in any action or proceeding shall be conclusive and
may be enforced in any other manner provided by law.
7.4. COSTS AND ATTORNEY'S FEES. If any action at law or equity is
necessary to enforce or interpret the terms of this Agreement, the
mostly prevailing party shall be entitled to reasonable attorneys'
fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled, including any such fees,
costs and necessary disbursements incurred in any appellate
proceeding.
7.5. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon,
the successors, assigns, heirs, executors, and administrators of the
parties hereto; provided, however, that, except as otherwise provided
herein, the rights of a Purchaser to purchase Shares shall not be
assignable without the written consent of the Company.
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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7.6. THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person or entity other than the parties
and their respective successors and permitted assigns.
7.7. ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Ancillary
Agreements, the Certificate of Designation and the other documents
delivered pursuant to those agreements constitute the full and entire
understanding and agreement between the parties with regard to the
subject matter hereof and thereof, and supersede all prior
agreements, contracts or understandings with respect to the subject
matter hereof. This Agreement may be amended or modified, and the
obligations of the Company under Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only upon the written consent of the Company and
holders of a majority of the Shares (treated as if converted and
including any Common Stock into which the Shares have been converted
that have not been sold to the public); any such amendment,
modification or waiver shall be binding on the Company, all holders
of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are
convertible) and each future holder of any such securities. The
foregoing notwithstanding, this Agreement and any term hereof may be
amended, waived, discharged or terminated by a written instrument
signed by the party against whom enforcement of any such amendment,
waiver, discharge or termination is sought.
7.8. INTERPRETATION AND FAIR CONSTRUCTION. This Agreement has been
reviewed and approved by each of the parties. If it should be
determined that any provision of this Agreement is uncertain or
ambiguous, the language in all parts of this Agreement shall be in
all cases construed as a whole according to its fair meaning and not
strictly construed for or against either the Company or the
Purchasers.
7.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall
constitute one instrument.
7.10. SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full
force and effect without said provision.
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<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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The foregoing Series B Preferred Stock Purchase Agreement is hereby executed.
COMPANY:
ONLINE SPECIALTY RETAILING, INC.
By: ------------------------------
Benjamin C. Nourse, Chairman
PURCHASER(S):
- ----------------------------------------
Signature
Social Security or Tax ID Number:-------
- ----------------------------------------
Signature
Social Security or Tax ID Number:-------
Name (as it will appear on share certificate):
Full Mailing Address:
Fax:
Telephone:
E-mail address:
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SERIES B PREFERRED STOCK PURCHASE AGREEMENT
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Investor List
<TABLE>
<CAPTION>
PURCHASER NO. OF SHARES PURCHASED
- --------- -----------------------
<S> <C>
Benjamin C. Nourse 5,000
Ralph K. Davies Trust FBO 66,666
Stockton Rush III
David E. Wyman and Ann McCall 33,333
Wyman (WYNOT Investments)
David Uvelli and Suzanne Uvelli-Spencer 5,000
Daniel D. Syrdal 3,333
R. Stockton Rush 16,666
Robert M. Arnold 33,333
D. E. Skinner Trust 66,666
Barrett Gilman & Ziker Investment 19,194
Partnership (1999)
Charles A. Lyford and Laurie Lyford 33,000
John W. P. Holt 1,334
Scott F. Wilson 33,333
Les and Linda Berthy 50,000
Daniel A. Odell and Gayle T. Odell 20,000
TTEES UTD dated 8/21/98
Harman K. Wales 8,333
John and Christina Jacobs 3,333
Fraser Black and Deirdre Black, Tenants in Common 6,666
Teutsch Partners Profit Sharing Plan 8,333
Sara B. Clair 17,000
Furman C. Moseley and Susan R. Moseley, 100,000
Tenants in Common
The Hambrecht 1980 Revocable Trust 58,333
WR Hambrecht & Co., LLC 58,333
Geoffrey T. Barker 8,333
Ralph and Lisa Pascualy 16,666
William and Emily Heston 8,333
Erin and William Cuff, IV 5,000
Donald J. Schade 20,000
</TABLE>
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May 1998 Page 12
<PAGE>
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
DATED AS OF MAY 17, 1999
BY AND AMONG
GREATFOOD.COM, INC.
AND
THE PURCHASERS NAMED HEREIN
<PAGE>
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
May 17, 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
900,000 shares of its Series C 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 and a warrant to
purchase up to an additional 484,615 shares of Preferred Stock (the
"Warrant") in accordance with the warrant agreement attached as Exhibit W-1
hereto.
1.2 PURCHASES AND SALES OF THE PREFERRED STOCK.
At the First and the Second Closings, the Company shall sell to each
Purchaser and, subject to the terms and conditions set forth herein, each
Purchaser shall purchase from the Company, the number of shares of Preferred
Stock set forth on the Schedule of Purchasers attached hereto. The aggregate
purchase price for the Preferred Stock and Warrant purchased and sold at the
First Closing shall be $3,000,000. The aggregate purchase price for the
Preferred Stock purchased and sold at the Second Closing shall be $1,500,000
as set forth in Section 1.3 below.
1.3 THE CLOSINGS.
The purchases and sales of the Preferred Stock and the Warrant at the First
Closing shall take place at the offices of Heller Ehrman White & McAuliffe,
6100 Columbia Center, 701 Fifth Avenue, Seattle, WA 98101, at 9:00 a.m. on
May 14, 1999, or at such other place or on such other date as may be mutually
agreeable to the Company and each Purchaser. The purchases and sales of the
Preferred Stock at the Second Closing shall take place at the same location
as the First Closing on the first practicable business day after the
Purchaser's receipt of written notice from the Company requesting additional
funding in the amount set forth above so long as such notice is received on
or before the first anniversary of the First Closing. At each Closing, the
Company shall deliver to each Purchaser certificates evidencing the Preferred
Stock and Warrant (as applicable) to be purchased by such Purchaser at that
Closing as set forth in the Schedule of
-1-
<PAGE>
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.
Section 2. CONDITIONS OF EACH PARTY'S OBLIGATIONS AT THE CLOSINGS.
2.1 CONDITIONS OF EACH PURCHASER'S OBLIGATIONS AT THE FIRST CLOSING.
The obligations of each Purchaser to purchase and pay for the Preferred Stock
and Warrant at the First Closing are subject to the satisfaction, as of such
Closing, 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 (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 except as set forth in EXHIBIT B hereto.
(c) Registration Rights Agreement.
The Company and the Purchasers shall have entered into a registration rights
agreement in the form attached as EXHIBIT C hereto (the "Registration Rights
Agreement"), and the Registration Rights Agreement shall be in full force and
effect and no material breach by the Company shall have occurred and be
continuing.
(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.
-2-
<PAGE>
Each Purchaser shall have received from Heller Ehrman White & McAuliffe,
counsel for the Company, an opinion in the form attached as EXHIBIT D hereto,
which shall be addressed to each Purchaser, dated the date of such Closing
and in form and substance satisfactory to each Purchaser.
(f) Noncompetition Agreements.
The Company shall have entered into Noncompetition Agreements in the form
attached as EXHIBIT E hereto (each a "Noncompetition Agreement"), with each
of Ben Nourse, Donna Nourse, Bill Cuff and Scott Ellis and such
Noncompetition Agreements shall be in full force and effect and no material
breach by the employees shall have occurred and be continuing.
(g) The Company shall have entered into a Management Services Agreement
with First Analysis Securities Corporation in the form attached as EXHIBIT F
hereto.
(h) Closing Documents.
The Company shall have delivered to each Purchaser 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;
(B) certified copies of the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and
performance of this Agreement, the Registration Rights Agreement, the
Noncompetition Agreements and each of the other agreements contemplated
hereby (collectively, the "Related Agreements"), the adoption and filing
of the Articles of Amendment referred to in Section 2.1(b), the issuance
and sale of the Preferred Stock, the reservation of sufficient shares of
Common Stock for issuance upon conversion of the Preferred Stock and the
consummation of all other transactions contemplated by this Agreement; and
(C) certified copies of the Articles of Amendment and the
Company's bylaws, each as in effect at such Closing.
(i) 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.
(j) Board of Directors.
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The Board of Directors of the Company shall consist of the following members:
Benjamin Nourse, William Cuff, David E. Wyman, Geoffrey Barker, R. Stockton
Rush, III, and one individual to be nominated by the Purchasers pursuant to
the Articles of Amendment.
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 and the Warrant (as applicable) being purchased
by such Purchaser.
Section 3. COVENANTS.
3. 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 number of
shares of Preferred Stock or Underlying Common Stock originally purchased
pursuant to this Agreement:
(a) as soon as available but in any event within 30 days after the end
of each monthly accounting period in each fiscal year, internally generated
unaudited statements of income of the Company for such monthly period and for
the period from the beginning of the fiscal year to the end of such month,
and balance sheets of the Company as of the end of such monthly period,
setting forth in each case comparisons to the annual budget and to the
corresponding period in the preceding fiscal year;
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(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 acceptable to the
Purchasers and accompanied by comparisons to the annual budget in respect of
such fiscal year;
(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 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;
(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 Securities and Exchange Commission 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; and
(g) with reasonable promptness, such other operating information and
financial data concerning the Company as such Purchaser may reasonably
request, provided such Purchaser agrees to hold in confidence and trust all
information so provided that is not generally available to the public.
3.2 INSPECTION OF PROPERTY.
(a) Prior to a Qualified Public Offering, the Company shall permit
representatives designated by any holder of at least 25% of the Underlying
Common Stock, upon reasonable notice, to (i) visit and inspect any of the
properties of the Company, (ii) examine the corporate and financial records
of the Company and make copies thereof or extracts therefrom and (iii)
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discuss the affairs, finances and accounts of the Company with the directors,
officers, key employees and, with the advance consent of the Company, the
independent accountants of the Company, provided such Purchaser agrees to
hold in confidence and trust all information so provided that is not
generally available to the public.
(b) Each holder of Underlying Common Stock that is a "venture capital
operating company" for purposes of Department of Labor Regulation Section
2510.3-101 shall in addition to all other rights granted under this Agreement
have the right to consult with and advise the officers of the Company with
respect to the management of the Company.
3.3 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
Preferred Stock pursuant to the terms of the Articles of Amendment; 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;
(f) enter into the ownership, active management or operation of any
business other than as presently conducted;
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(g) except as expressly contemplated by this Agreement, make any
amendment to the Company's articles of incorporation or the bylaws,
containing any provisions which would increase the number of authorized
shares of the Common Stock or the Preferred Stock or adversely affect or
otherwise impair the rights or relative priority of the holders of the
Preferred Stock or Underlying Common Stock under this Agreement, the
Company's articles of incorporation, the Company's bylaws or the Registration
Rights Agreement (Purchasers hereby expressly consent to the amendments to
the articles of incorporation set forth in EXHIBIT B);
(h) increase the authorized size of its board of directors above seven
members;
(i) incur any funded indebtedness outside of the ordinary course of
business; or
(j) increase the cash compensation of any officer of the Company by
more than 10% in a given year beyond the previously agreed and approved
compensation package for such officer.
3.4 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 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
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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 the key-man life insurance policy referred to in paragraph
3.10 hereof; and
(g) maintain proper books of record and account in accordance with GAAP.
(h) in the event that the Company conducts an equity financing
subsequent to the date hereof and any or all of the Purchasers participate in
such financing (the "Participating Purchasers"), the Participating Purchasers
shall have the right, upon the giving of written notice to the Company, to
apply toward the purchase price of the securities to be purchased in such
financing, the dollar amount of any dividends which have accrued and have not
been paid with respect to the Participating Purchaser's Preferred Stock. In
such event, the Company shall take the actions necessary to ensure that the
accrued and unpaid dividends with respect to the Purchasers' shares are
declared and paid (or otherwise credited to the Purchasers) for use in their
purchase of the securities in the subsequent financing.
3.5 COMPLIANCE WITH AGREEMENTS.
The Company shall perform and observe (i) 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 and (ii) all of its
obligations to each holder of Registrable Securities set forth in the
Registration Rights Agreement.
3.6 CURRENT PUBLIC INFORMATION.
At all times after the Company has filed a registration statement with the
Securities and Exchange Commission pursuant to the requirements of either the
Securities Act or the Securities Exchange Act, the Company shall file all
reports required to be filed by it under the Securities Act and the
Securities Exchange Act and the rules and regulations adopted by the
Securities and Exchange Commission thereunder and shall take such further
action as it deems appropriate to enable such holders to sell Restricted
Securities pursuant to (i) Rule 144 adopted by the Securities and Exchange
Commission under the Securities Act (as such rule may be amended from time to
time) or any similar rule or regulation hereafter adopted by the Securities
and Exchange Commission or (ii) a registration statement on Form S-1 or S-3
or any similar registration form hereafter adopted by the Securities and
Exchange Commission (without undertaking any obligation to file a
registration statement except as set forth in the Registration
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Rights Agreement). Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
3.7 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).
3.8 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 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.
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3.9 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 3.9.
The Company's officers and employees who have entered into Noncompetition
Agreements as set forth in Section 2.1(f) shall devote their full and
complete efforts to the Company's business.
3.10 KEY-MAN LIFE INSURANCE.
Prior to July 31, 1999, the Company shall obtain a key-man life insurance
policy on the life of Benjamin Nourse in the face amount of Three Million
Dollars ($3,000,000). Such insurance policies shall name the Company as
beneficiary and shall provide that such insurance policies may not be
canceled unless the insurance carrier gives at least 30 days' prior written
notice of such cancellation to the beneficiary.
Section 4. TRANSFER OF RESTRICTED SECURITIES.
4.1 GENERAL PROVISIONS.
The parties hereto agree that Restricted Securities are transferable only
pursuant to (i) public offerings registered under the Securities Act, (ii)
Rule 144 or Rule 144A of the Securities and Exchange Commission (or any
similar rule or rules then in force) if such rule is available and (iii)
subject to the conditions specified in Section 4.2 below, any other legally
available means of transfer.
4.2 OPINION DELIVERY.
In connection with the transfer of any Restricted Securities (other than a
transfer described in Section 4.1(i) or (ii) above), the holder thereof shall
deliver written notice to the Company describing in reasonable detail the
transfer or proposed transfer, together with an opinion of counsel
knowledgeable in securities law matters, which opinion shall be reasonably
satisfactory to counsel for the Company, to the effect that such transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. In addition, if the holder of the
Restricted Securities delivers to the Company an opinion of such other
counsel that no subsequent transfer of such Restricted Securities shall
require registration under the Securities Act, the Company shall promptly
upon the completion of such contemplated transfer deliver new certificates
for such Restricted Securities which do not bear the Securities Act legend
set forth in Section 7.3. If the Company is not required to deliver new
certificates for such Restricted Securities not bearing such legend, the
holder thereof shall not transfer the same until the prospective transferee
has confirmed to the Company in writing its agreement to be bound by the
conditions contained in this Section 4.2 and Section 7.3.
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4.3 LEGEND REMOVAL.
Upon the request of any holder of Restricted Securities immediately prior to
the sale or other transfer of Restricted Securities, the Company shall remove
the restricted securities legend from the certificates for such holder's
Restricted Securities, provided that such Restricted Securities are eligible
for sale pursuant to Rule 144(k).
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' special counsel reflect all amendments made
thereto at any time prior to the date of this Agreement and are correct and
complete other than an amendment to change the Company's name from Online
Specialty Retailing, Inc. to GreatFood.com, Inc. or the filing of the
Articles of Amendment.
5.2 CAPITAL STOCK AND RELATED MATTERS.
(a) As of the Closing and immediately thereafter, the authorized capital
stock of the Company shall consist of (a) 5,000,000 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 and 1,384,615 shares of which have been designated as Series C
Preferred Stock, and (b) 20,000,000 shares of Common Stock. As of the
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 as set forth on the attached "Capitalization Schedule." As of the
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 on the Capitalization Schedule or pursuant to the Company's
articles of incorporation. As of the
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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. The Company has complied with all applicable federal and
state securities laws in connection with the offer, sale and issuance of its
capital stock, and assuming that the representations of the Purchasers made
in Section 7.3 hereof are true, the offer, sale and issuance of the Preferred
Stock hereunder do not require registration under the Securities Act or any
applicable state securities laws. Except as contemplated by this Agreement
and the Related Agreements, 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
(a) the rights of the holders of the Company's Series A Preferred Stock as
set forth in the Company's articles of incorporation and (b) 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, the Related
Agreements and the filing of the Articles of Amendment have been duly
authorized by the Company. This Agreement and the Related Agreements each
constitute a valid and binding obligation of the Company, enforceable in
accordance with their 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 Related Agreements and the offering, sale and
issuance of the Preferred Stock hereunder, and the issuance of the Common
Stock upon conversion of the Preferred Stock, the Articles of Amendment 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
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
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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 FINANCIAL STATEMENTS.
The Company has made available to Purchasers or their representatives the
following draft financial statements:
(a) the audited balance sheets of the Company as of December 31, 1997
and December 31, 1998, and the related statements of income and cash flows
(or the equivalent) for the respective twelve-month periods then ended; and
(b) the unaudited balance sheet of the Company as of March 31, 1999
(the "Latest Balance Sheet"), and the related statement of income (or the
equivalent) for the 3-month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, is
consistent with the books and records of the Company (which, in turn, are
accurate and complete in all material respects) and has been prepared in
accordance with GAAP, consistently applied, subject in the case of the
unaudited financial statements to the lack of footnote disclosure and changes
resulting from normal year-end adjustments.
5.6 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 Closing, or any action or
inaction at or prior to the Closing, or any state of facts existing at or
prior to the Closing other than: (i) liabilities set forth on the Latest
Balance Sheet (including any notes thereto), (ii) liabilities and obligations
which have arisen after the date of the Latest Balance Sheet in the ordinary
course of business (none of which is a liability resulting from breach of
contract, breach of warranty, tort, infringement claim or other lawsuit)
(including, without limitation, (a) obligations under contracts for online
advertising and promotional activities, (b) liabilities under capital and
operating leases, (c) obligations arising in connection with the replacement
of the Company's orders processing software platform and related hardware)
and (d) liabilities under contracts listed in the Contracts Schedule, and
(iii) other liabilities and obligations expressly disclosed in or expressly
contemplated by this Agreement.
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5.7 NO MATERIAL ADVERSE CHANGE.
Since the date of the Latest Balance Sheet, there has been no material
adverse change in the financial condition, operating results, assets or
operations of the Company taken as a whole.
5.8 ABSENCE OF CERTAIN DEVELOPMENTS.
(a) Except as expressly contemplated by this Agreement, or as set forth
on the Development Schedule attached hereto, since the date of the Latest
Balance Sheet, 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 options and warrants reflected on
the Capitalization Schedule;
(B) borrowed any amount or incurred or become subject to any
material liabilities, except current liabilities incurred in the ordinary
course of business and 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 current liabilities
paid in the ordinary course of business;
(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;
(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 proposed offering of the
Company's common stock to the public pursuant to a registration under the
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Securities Act of 1933, as amended, 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 $75,000;
(J) entered into any other material transaction other than in the
ordinary course of business (except as already disclosed pursuant to this
Agreement);
(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.
5.9 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 the Latest Balance Sheet or acquired thereafter, free and clear of
all liens, security interests, charges and encumbrances, except for
properties and assets disposed of in the ordinary course of business since
the date of the Latest Balance Sheet and except for liens disclosed on the
Latest Balance Sheet (including any notes thereto) or otherwise disclosed
pursuant to this Agreement and 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.
5.10 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
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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 on the date of the
Latest Balance Sheet; 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 the Latest 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 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.
5.11 CONTRACTS AND COMMITMENTS.
(a) Except as expressly contemplated by this Agreement and the Related
Agreements or as set forth on the attached "Contracts Schedule," as of the
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, or any
contract with any labor union, or any severance agreements;
(B) contract for the employment of any officer, individual employee
or other Person on a full-time, part-time, consulting or other basis
providing annual compensation in excess of $50,000 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;
(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
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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 $25,000;
(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 listed on the Contracts Schedule);
(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.
(b) To the Company's knowledge, all of the contracts, agreements and
instruments set forth on the Contracts Schedule 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 listed on the Contracts
Schedule except to the extent that such breach or non-compliance will not
have a material adverse effect on the
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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.
5.12 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.
5.13 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.
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5.14 BROKERAGE.
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
attorneys' fees and out-of-pocket expenses) arising in connection with any
such claim, for which the Company is responsible.
5.15 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
other agreements contemplated hereby, or the consummation by the Company of
any other transactions contemplated hereby or thereby, except such exemptive
filings, if any, as are required to be made under federal and applicable
state securities laws.
5.16 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.
5.17 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.
5.18 ERISA.
The Company does not have any Employee Benefit Plan as defined in ERISA.
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5.19 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.
5.20 REAL ESTATE.
The Company owns no real estate.
5.21 AFFILIATED TRANSACTIONS.
Except as set forth on the attached "Affiliated Transactions Schedule," 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.
5.22 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.
5.23 DISCLOSURE.
Neither this Agreement nor any other document, certificate or written
statement supplied to any Purchaser by or on behalf of the Company with
respect to the transactions contemplated hereby contain any untrue statement
of a material fact or omit 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 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:
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"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.
"CLOSING" means the First Closing or the Second Closing, as the case may be.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"FIRST 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.
"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.
"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.
"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 $10 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.
"RESTRICTED SECURITIES" means (i) the Preferred Stock issued hereunder, (ii)
the Common Stock issued upon conversion of the Preferred Stock, (iii) the
Warrant issued hereunder, (iv) the shares of Preferred Stock issued upon
exercise of the Warrant, (v) the Common Stock issued upon conversion of the
Preferred Stock issued upon exercise of the Warrant, and (vi) any securities
issued with respect to the securities referred to in clauses (i), (ii), (iv)
or (v) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization,
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merger, consolidation or other reorganization. As to any particular
Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) been distributed to the public through a broker, dealer or
market maker pursuant to Rule 144 under the Securities Act (or any similar
provision then in force) under the Securities Act or (c) been otherwise
transferred and new certificates for them not bearing the Securities Act
legend set forth in Section 7.3 have been delivered by the Company in
accordance with Section 4.2.
"ARTICLES OF AMENDMENT" means the Articles of Amendment as described in
Section 2.1(b), and in the form attached as EXHIBIT A hereto.
"SECOND 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.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental body or agency
succeeding to the functions thereof.
"SERIES C DIRECTOR" means that member of the Company's Board of Directors
which the holders of the Series C Preferred Stock are entitled to elect,
pursuant to Section 4 of the Articles of Amendment.
"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
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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 (a) effectively registered under the Securities Act and disposed of
in accordance with the registration statement covering them or (b)
distributed to the public through a broker, dealer or market maker pursuant
to Rule 144 under the Securities Act (or any similar provision then in force).
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 Purchaser's designated counsel 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 Closing in an amount not to exceed $20,000 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.
7.2 REMEDIES.
Each holder of Preferred Stock and Underlying Common Stock shall have all
rights and remedies set forth in this Agreement, the Articles of Amendment
and Related Agreements 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 acquiring
the Restricted Securities purchased hereunder or acquired pursuant hereto for
its or his own account with the present intention of holding such securities
for purposes of investment; (ii) has no intention of selling such securities
in a public distribution in violation of the federal securities laws or any
applicable state securities laws; provided that nothing contained herein
shall prevent any Purchaser or subsequent holder of Restricted Securities
from transferring such securities in compliance with the provisions of
Section 4 hereof; (iii) is an "accredited investor," as such term is defined
in Rule 501(a) of the Regulation D promulgated under the Securities Act; (iv)
has had a reasonable opportunity to ask questions of and received answers
from the Company concerning the Company and the Restricted Securities and to
verify the accuracy of any representation or information set forth in this
Agreement, and all such questions, if any, have
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been answered to the full satisfaction of such Purchaser; and (v) has
received from the Company, and has reviewed, such information which such
Purchaser considers necessary or appropriate to evaluate the risks and merits
of any investment in the Restricted Securities.
(b) Each Purchaser acknowledges that certificates evidencing Restricted
Securities shall be imprinted with a legend in substantially the following
form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR
UNDER ANY STATE SECURITIES LAWS. THESE SECURITIES 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 ANY OTHER STATE
SECURITIES LAWS.
(c) 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 APPOINTMENT OF DIRECTOR.
The parties hereto agree that the Series C Director shall be appointed by The
Productivity Fund IV, L.P.
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7.6 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.
7.7 DISCLOSURE.
Until Closing and except as and to the extent required by law, without the
prior written consent of the other party, none of the parties hereto shall,
and each shall direct its representatives not to, directly or indirectly,
make any public comment, statement or communication with respect to, or
otherwise disclose or permit the disclosure of the existence of this
Agreement or any of the terms, conditions or other aspects of this Agreement.
7.8 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.
7.9 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.
7.10 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.
7.11 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.
7.12 GOVERNING LAW.
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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.
7.13 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 and to the Company at the addresses indicated below:
To the Company:
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]
To the Purchasers:
c/o First Analysis Corporation
233 South Wacker Drive, Suite 9500
Chicago, Illinois 60606
Attention: Mark Koulogeorge
Fax: 312-258-0278
EMAIL: [email protected]
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With a copy to:
Stoel Rives LLP
One Union Square
600 University Street, Suite 3600
Seattle, Washington 98101-3197
Attention: Ronald Lone
Fax: 206-386-7500
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]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
GREATFOOD.COM, a
Washington corporation
By: /s/ Benjamin C. Nourse
---------------------------------------
Name: Benjamin C. Nourse
--------------------------------
Title: Chief Executive Officer
-------------------------------
RIVERSIDE PARTNERSHIP
By: Riverside L.L.C.
Its Managing General Partner
By: First Analysis Management Company III,
L.L.C., its Manager
By: /s/ Mark Koulogeorge
---------------------------------------
Mark Koulogeorge
/s/ Mark Koulogeorge
------------------------------------------
MARK KOULOGEORGE
/s/ Alex Kim
------------------------------------------
ALEX KIM
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THE PRODUCTIVITY FUND IV, L.P.,
a Delaware limited partnership
By: First Analysis Management Company III, L.L.C.,
A General Partner
By: /s/ Mark Koulogeorge
--------------------------------------
Mark Koulogeorge
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SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Purchase Price for Shares
Number of Shares of Preferred Stock
Name and Address of Preferred Stock Warrants and Warrants
- ---------------- ------------------ -------- ------------
First Second First Second First Second
----- ------ ----- ------ ----- ------
Closing Closing Closing(2) Closing(3) Closing Closing
------- ------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Riverside Partnership(1) 528,000 264,000 284,308 426,461 $2,640,000 $1,320,000
The Productivity Fund IV, L.P. 60,000 30,000 32,308 48,462 300,000 150,000
Mark Koulogeorge(1) 10,000 5,000 5,385 8,077 50,000 25,000
Alex Kim(1) 2,000 1,000 1,077 1,615 10,000 5,000
------- ------- ------- ------- ---------- ----------
Total 600,000 300,000 323,077 484,615 $3,000,000 $1,500,000
</TABLE>
_______________________________
(1) c/o First Analysis Corporation
233 S. Wacker Drive, Suite 9500
Chicago, IL 60606
(2) Upon First Closing, each Warrant shall be exercisable for that number of
shares of Preferred Stock set forth below.
(3) If the Second Closing should occur, each Warrant shall be exercisable
for that number of shares of Preferred Stock set forth below, which number is
inclusive of that number of shares for which each Warrant was exercisable
upon First Closing.
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LIST OF EXHIBITS
Exhibit A - Amendment to Articles of Incorporation
Exhibit B - Article Amendments
Exhibit C - Registration Rights Agreement
Exhibit D - Opinion of Counsel
Exhibit E - Noncompetition Agreement
Exhibit F - Management Services Agreement
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. AUTHORIZATION AND CLOSINGS 1
1.1 AUTHORIZATION OF THE PREFERRED STOCK 1
1.2 PURCHASES AND SALES OF THE PREFERRED STOCK 1
1.3 THE CLOSINGS 1
Section 2. CONDITIONS OF EACH PARTY'S OBLIGATIONS AT THE CLOSINGS 2
2.1 CONDITIONS OF EACH PURCHASER'S OBLIGATIONS AT THE FIRST
CLOSING 2
2.2 CONDITIONS OF THE COMPANY'S OBLIGATIONS 4
Section 3. COVENANTS 5
3.1 FINANCIAL STATEMENTS AND OTHER INFORMATION 5
3.2 INSPECTION OF PROPERTY 6
3.3 RESTRICTIONS 6
3.4 AFFIRMATIVE COVENANTS 7
3.5 COMPLIANCE WITH AGREEMENTS 9
3.6 CURRENT PUBLIC INFORMATION 9
3.7 RESERVATION OF COMMON STOCK 9
3.8 FIRPTA 10
3.9 FUTURE OPPORTUNITIES 10
3.10 KEY-MAN LIFE INSURANCE 10
Section 4. TRANSFER OF RESTRICTED SECURITIES 11
4.1 GENERAL PROVISIONS 11
4.2 OPINION DELIVERY 11
4.3 LEGEND REMOVAL 11
Section 5. REPRESENTATIONS AND WARRANTIES 11
5.1 ORGANIZATION AND CORPORATE POWER 12
5.2 CAPITAL STOCK AND RELATED MATTERS 12
5.3 SUBSIDIARIES; INVESTMENTS 13
5.4 AUTHORIZATION; NO BREACH 13
5.5 FINANCIAL STATEMENTS 14
5.6 ABSENCE OF UNDISCLOSED LIABILITIES 14
5.7 NO MATERIAL ADVERSE CHANGE 14
5.8 ABSENCE OF CERTAIN DEVELOPMENTS 15
5.9 ASSETS 16
5.10 TAX MATTERS 16
5.11 CONTRACTS AND COMMITMENTS 17
5.12 PROPRIETARY RIGHTS 19
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5.13 LITIGATION 19
5.14 BROKERAGE 20
5.15 GOVERNMENTAL CONSENT 20
5.16 INSURANCE 20
5.17 EMPLOYEES 20
5.18 ERISA 21
5.19 COMPLIANCE WITH LAWS 21
5.20 REAL ESTATE 21
5.21 AFFILIATED TRANSACTIONS 21
5.22 REAL PROPERTY HOLDING CORPORATION STATUS 21
5.23 DISCLOSURE 21
Section 6. DEFINITIONS 22
Section 7. MISCELLANEOUS 24
7.1 EXPENSES 24
7.2 REMEDIES 24
7.3 PURCHASERS' REPRESENTATIONS 24
7.4 CONSENT TO AMENDMENTS 25
7.5 APPOINTMENT OF DIRECTOR
7.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; KNOWLEDGE 26
7.7 DISCLOSURE 26
7.8 SUCCESSORS AND ASSIGNS 26
7.9 SEVERABILITY 26
7.10 COUNTERPARTS 26
7.11 DESCRIPTIVE HEADINGS; INTERPRETATION 27
7.12 GOVERNING LAW 27
7.13 NOTICES 27
</TABLE>
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GREATFOOD.COM, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") dated as of May __, 1999
is made between GreatFood.com, Inc., a Washington corporation (the "Company"),
and _________________ ("Indemnitee").
RECITALS
A. Indemnitee is an officer or director of the Company and in such
capacity is performing valuable services for the Company.
B. The Company and Indemnitee recognize the difficulty in obtaining
directors' and officers' liability insurance, the significant cost of such
insurance and the general reduction in the coverage of such insurance.
C. The Company and Indemnitee further recognize the substantial increase
in litigation subjecting officers and directors to expensive litigation risks at
the same time that such liability insurance has been severely limited.
D. The Company's articles of incorporation (the "Articles") provide for
indemnification of the officers, directors, agents and employees of the Company
to the full extent permitted by the Washington Business Corporation Act (the
"Act").
E. The Articles and the Act specifically provide that they are not
exclusive, and thereby contemplate that contracts may be entered into between
the Company and the members of its Board of Directors and its officers with
respect to indemnification of such directors and officers.
F. In order to induce Indemnitee to continue to serve as an officer
and/or director, as the case may be, of the Company, the Company has agreed to
enter into this Agreement with Indemnitee.
AGREEMENT
In consideration of the recitals above, the mutual covenants and agreements
herein contained, and Indemnitee's continued service as an officer and/or
director, as the case may be, of the Company after the date hereof, the parties
to this Agreement agree as follows:
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1. INDEMNITY OF INDEMNITEE
1.1 SCOPE
The Company agrees to hold harmless and indemnify Indemnitee to the full
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by this Agreement, the Company's Articles, the Bylaws of
the Company, the Act or otherwise. As of the date of this Agreement, and
notwithstanding the limitations in 23B.08.510 through 23B.08.550 of the Act, the
Company shall indemnify and hold harmless Indemnitee against any and all Damages
(as defined below) except for Damages arising out of:
(a) Indemnitee's acts or omissions finally adjudged to be intentional
misconduct or a knowing violation of law;
(b) Conduct of Indemnitee finally adjudged to be in violation of RCW
23B.08.310; or
(c) Any transaction in which it is finally adjudged that Indemnitee
personally received a benefit in money, property or services to which Indemnitee
was not legally entitled.
Except as provided in Section 3, the Company shall not indemnify Indemnitee
in connection with a Proceeding (as defined below), or part thereof, initiated
by Indemnitee unless such Proceeding, or part thereof, was authorized by the
Board of Directors of the Corporation.
In the event of any change, after the date of this Agreement, in any
applicable law, statute or rule regarding the right of a Washington corporation
to indemnify a member of its board of directors or an officer, such changes, to
the extent that they would expand Indemnitee's rights hereunder, shall be within
the purview of Indemnitee's rights and the Company's obligations hereunder, and,
to the extent that they would narrow Indemnitee's rights hereunder, shall be
excluded from this Agreement; provided, however, that any change that is
required by applicable laws, statutes or rules to be applied to this Agreement
shall be so applied regardless of whether the effect of such change is to narrow
Indemnitee's rights hereunder.
1.2 NONEXCLUSIVITY
The indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under the Articles,
the Company's Bylaws, any agreement, any vote of shareholders or disinterested
directors, the Act, or otherwise, whether as to action in Indemnitee's official
capacity or otherwise.
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1.3 ADDITIONAL INDEMNITY
If Indemnitee was or is made a party, or is threatened to be made a
party, to or is otherwise involved (including, without limitation, as a
witness) in any Proceeding (as defined below), the Company shall hold
harmless and indemnify Indemnitee from and against any and all losses,
claims, damages, liabilities or expenses (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties, amounts paid in settlement
and other expenses incurred in connection with such Proceeding)
(collectively, "Damages").
1.4 DEFINITION OF PROCEEDING
For purposes of this Agreement, "Proceeding" shall mean any actual,
pending or threatened action, suit, claim or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal, in
which Indemnitee is, was or becomes involved by reason of the fact that
Indemnitee is or was a director, officer, employee or agent of the Company or
that, being or having been such a director, officer, employee or agent,
Indemnitee is or was serving at the request of the Company as a director,
officer, employee, trustee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise (collectively a
"Related Company"), including service with respect to an employee benefit
plan, whether the basis of such proceeding is alleged action (or inaction) by
Indemnitee in an official capacity as a director, officer, employee, trustee
or agent or in any other capacity while serving as a director, officer,
employee, trustee or agent; provided, however, that, except with respect to
an action to enforce the provisions of this Agreement, "Proceeding" shall not
include any action, suit, claim or proceeding instituted by or at the
direction of Indemnitee unless such action, suit, claim or proceeding is or
was authorized by the Company's Board of Directors.
1.5 DETERMINATION OF ENTITLEMENT
Indemnitee shall initially be presumed in all cases to be entitled to
indemnification. Indemnitee may establish a conclusive presumption of any
fact necessary to such a determination by delivering to the Company a
declaration made under penalty of perjury that such fact is true and, unless
the Company shall deliver to Indemnitee written notice of a determination
that Indemnitee is not entitled to indemnification within twenty (20) days of
the Company's receipt of Indemnitee's initial written request for
indemnification such determination shall conclusively be deemed to have been
made in favor of the Company's provision of indemnification and the Company
hereby agrees not to assert otherwise.
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1.6 SURVIVAL
The indemnification provided under this Agreement shall apply to any and
all Proceedings, notwithstanding that Indemnitee has ceased to be a director,
officer, employee, trustee or agent of the Company or a Related Company.
2. EXPENSE ADVANCES
2.1 GENERALLY
The right to indemnification of Damages conferred by Section 1 shall
include the right to have the Company pay Indemnitee's expenses in any
Proceeding as such expenses are incurred and in advance of such Proceeding's
final disposition (such right is referred to hereinafter as an "Expense
Advance").
2.2 CONDITIONS TO EXPENSE ADVANCE
The Company's obligation to provide an Expense Advance is subject to the
following conditions:
2.2.1 UNDERTAKING
If the Proceeding arose in connection with Indemnitee's service as a
director or officer of the Company (and not in any other capacity in which
Indemnitee rendered service, including service to any Related Company), then
Indemnitee or his or her representative shall have executed and delivered to the
Company an undertaking, which need not be secured and shall be accepted without
reference to Indemnitee's financial ability to make repayment, by or on behalf
of Indemnitee to repay all Expense Advances if and to the extent that it shall
ultimately be determined by a final, unappealable decision rendered by a court
having jurisdiction over the parties and the question that Indemnitee is not
entitled to be indemnified for such Expense Advance under this Agreement or
otherwise.
2.2.2 COOPERATION
Indemnitee shall give the Company such information and cooperation as it
may reasonably request and as shall be within Indemnitee's power.
2.2.3 AFFIRMATION
Indemnitee shall furnish, upon request by the Company and if required
under applicable law, a written affirmation of Indemnitee's good faith belief
that he did not engage in conduct which falls within one or more of the
exclusions set forth in Section 1.1 above.
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3. PROCEDURES FOR ENFORCEMENT
3.1 ENFORCEMENT
In the event that a claim for indemnity, an Expense Advance or otherwise
is made hereunder and is not paid in full within sixty days (twenty days for
an Expense Advance) after written notice of such claim is delivered to the
Company, Indemnitee may, but need not, at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim (an
"Enforcement Action").
3.2 PRESUMPTIONS IN ENFORCEMENT ACTION
In any Enforcement Action the following presumptions (and limitation on
presumptions) shall apply:
(a) The Company shall conclusively be presumed to have entered
into this Agreement and assumed the obligations imposed on
it hereunder in order to induce indemnitee to continue as
an officer and/or director, as the case may be, of the
Company;
(b) Neither (i) the failure of the Company (including the
Company's Board of Directors, independent or special legal
counsel or the Company's shareholders) to have made a
determination prior to the commencement of the Enforcement
Action that indemnification of Indemnitee is proper in the
circumstances nor (ii) an actual determination by the
Company, its Board of Directors, independent or special
legal counsel or shareholders that Indemnitee is not
entitled to indemnification shall be a defense to the
Enforcement Action or create a presumption that Indemnitee
is not entitled to indemnification hereunder; and
(c) If Indemnitee is or was serving as a director, officer,
employee, trustee or agent of a corporation of which a
majority of the shares entitled to vote in the election of
its directors is held by the Company or in an executive or
management capacity in a partnership, joint venture, trust
or other enterprise of which the Company or a wholly owned
subsidiary of the Company is a general partner or has a
majority ownership, then such corporation, partnership,
joint venture, trust or enterprise shall conclusively be
deemed a Related Company and Indemnitee shall conclusively
be
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deemed to be serving such Related Company at the request of
the Company.
3.3 ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION
In the event Indemnitee is required to bring an Enforcement Action, the
Company shall indemnify and hold harmless Indemnitee against all of Indemnitee's
fees and expenses in bringing and pursuing the Enforcement Action (including
attorneys' fees at any stage, including on appeal); provided, however, that the
Company shall not be required to provide such indemnity for such attorneys' fees
or expenses if a court of competent jurisdiction determines that each of the
material assertions made by Indemnitee in such Enforcement Action was not made
in good faith or was frivolous.
4. LIMITATIONS ON INDEMNITY; MUTUAL ACKNOWLEDGMENT
4.1 LIMITATION ON INDEMNITY
No indemnity pursuant to this Agreement shall be provided by the Company:
(a) On account of any suit in which a final, unappealable
judgment is rendered against Indemnitee for an accounting
of profits made from the purchase or sale by Indemnitee of
securities of the Company in violation of the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto;
(b) For Damages that have been paid directly to Indemnitee by
an insurance carrier under a policy of officers' and
directors' liability insurance maintained by the Company;
(c) On account of Indemnitee's conduct which is finally
adjudged to fall within one or more of the exclusions set
forth in Section 1.1 above; or
(d) If a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not
lawful.
4.2 MUTUAL ACKNOWLEDGMENT
The Company and Indemnitee acknowledge that, in certain instances, federal
law or public policy may override applicable state law and prohibit the Company
from indemnifying Indemnitee under this Agreement or otherwise. For example,
the Company and Indemnitee acknowledge that the Securities and Exchange
Commission (the "SEC") has taken the position that indemnification is not
permissible for liabilities arising under
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certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Furthermore, Indemnitee
understands and acknowledges that the Company has undertaken or may be
required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of
the Company's right under public policy to indemnify Indemnitee.
5. NOTIFICATION AND DEFENSE OF CLAIM
5.1 NOTIFICATION
Promptly after receipt by Indemnitee of notice of the commencement of
any Proceeding, Indemnitee will, if a claim in respect thereof is to be made
against the Company under this Agreement, notify the Company of the
commencement thereof; but the omission so to notify the Company will not
relieve the Company from any liability which it may have to Indemnitee under
this Agreement unless and only to the extent that such omission can be shown
to have prejudiced the Company's ability to defend the Proceeding.
5.2 DEFENSE OF CLAIM
With respect to any such Proceeding as to which Indemnitee notifies the
Company of the commencement thereof:
(a) The Company may participate therein at its own expense;
(b) The Company, by itself or jointly with any other
indemnifying party similarly notified, may assume the
defense thereof, with counsel satisfactory to Indemnitee.
After notice from the Company to Indemnitee of its election
to assume the defense thereof, the Company shall not be
liable to Indemnitee under this Agreement for any legal or
other expenses (other than reasonable costs of
investigation) subsequently incurred by Indemnitee in
connection with the defense thereof unless (i) the
employment of counsel by Indemnitee has been authorized by
the Company, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between
the Company and Indemnitee in the conduct of the defense of
such action, or (iii) the Company shall not in fact have
employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel shall
be at the expense of the Company. The Company shall not be
entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the
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Company or as to which Indemnitee shall have made the conclusion
provided for in (ii) above;
(c) The Company shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of
any Proceeding effected without its written consent;
(d) The Company shall not settle any action or claim in any
manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent; and
(e) Neither the Company nor Indemnitee will unreasonably
withhold its, his or her consent to any proposed
settlement.
6. SEVERABILITY
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable, as provided in
this Section 6. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
7. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION
(a) This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Washington.
(b) This Agreement shall be binding upon Indemnitee and upon
the Company, its successors and assigns, and shall inure to
the benefit of Indemnitee, Indemnitee's heirs, personal
representatives and assigns and to the benefit of the
Company, its successors and assigns.
(c) No amendment, modification, termination or cancellation of
this Agreement shall be effective unless in writing signed
by both parties.
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IN WITNESS WHEREOF, the parties have executed this Agreement on and as
of the day and year first above written.
GREATFOOD.COM, INC.
____________________________________
INDEMNITEE:
____________________________________
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Great Food Online
www.greatfood.com
2030 First Avenue, Third Floor
Seattle, WA 98121
April 2, 1998
Mr. William Cuff
3531 Blue Lake Circle
Stockton, CA 95219-1745
Dear Bill:
We are pleased to offer you employment with Online Specialty Retailing, Inc.,
dba Great Food Online ("The Company").
1. Position.
You are being offered the position of President and Chief Executive
Officer of the Company, reporting to the Chairman, Benjamin Nourse. You
will be an at-will employee in this position.
2. Salary.
Your initial salary will be $6,666.67 per month, payable in equal amounts
on the 1st and the 15th of the month. Your salary level will be the same
as Mr. Nourse, and will remain the same as Mr. Nourse as long as he shall
remain a full-time employee of the Company.
3. Vacation.
You will be entitled to three (3) weeks of paid vacation per year.
Vacation will accrue proportionally each pay period. Unused vacation will
accrue up to a maximum of three (3) weeks. Your vacation terms will be the
same as Mr. Nourse's, and will remain the same as Mr. Nourse's as long as
he shall remain a full-time employee of the Company.
4. Board of Directors.
You will join the Board of Directors of Online Specialty Retailing, Inc.,
pending a vote of the Shareholders of the Company.
5. Stock Options.
As an incentive for your continued employment, you will be granted stock
options for a total of 500,000 shares of Common Stock of the Company.
Terms of these options will be covered in separate agreements, which are
generally summarized as follows:
a) You will be granted an option for 100,000 shares, at an exercise
price of $0.30 per share. This option will vest ratably each month
over 12 months of your continued employment.
b) You will be granted an option for 100,000 shares, at an exercise
price of $0.30 per share. This option will vest ratably each month
over 36 months of your continued employment.
<PAGE>
c) You will be granted an option for 300,000 shares at an exercise
price equal to the price of Common Stock or Common Stock equivalent
sold in the next equity financing of the company in excess of
$500,000. This option will vest ratably each month over 60 months of
your continued employment.
d) In the event of a sale of a minimum of 75% of the stock or assets of
the company to a single entity, all of the above options shall vest
immediately.
e) The grant date of all options described above will be your first
date of employment.
f) As long as you remain employed by the company, vested options will
have a term of ten (10) years from the date of the initial option
grant.
g) If your employment with the company terminates for any reason other
than death or disability, any vested options must be exercised
within three (3) months of such termination.
h) If your employment with the company terminates for reasons of death
or disability, any vested options must be exercised within twelve
(12) months of such termination.
I) Stock purchased through these options may be subject to restrictions
on transfer and other restrictions per terms of a Shareholder's
Agreement. Terms will be the same as for other Common Stockholders.
6. Investment Enhancement.
To provide additional incentive for your continued employment, the Company
extends to you an offer to invest in the next equity financing of the
company in excess of $500,000. If you choose to invest in this round, we
will grant you warrants to purchase additional shares of Common Stock of
the company, at the same price per share as the base investment
(as-converted to Common Stock), in the amount of 50% of the base
investment. As an example, should you choose to invest $100,000 in the
next financing round, you will receive warrants to purchase additional
$50,000 worth of Common Stock at the same share price as the base
investment in Common Stock or Common Stock equivalent. This investment
offer is subject to the following terms:
This investment offer will expire at the closing of the next equity
financing of the Company in excess of $500,000.
a) As long as you remain employed by the company, warrants purchased
under this agreement will have a term of five (5) years from the
date purchase.
b) If your employment with the company terminates for any reason other
than death or disability, warrants purchased under this agreement
must be exercised within three (3) months of such termination.
c) If your employment with the company terminates for reasons of death
or disability, warrants purchased under this agreement must be
exercised within twelve (12) months of such termination.
j) Stock purchased through these warrants may be subject to
restrictions on transfer and other restrictions per terms of a
Shareholder's Agreement. Terms will be the same as for other Common
Stockholders.
<PAGE>
e) Health and Retirement Benefits.
The Company currently has no health or retirement benefits. We agree to
implement a 401 K savings plan during the next 6 months to facilitate
employee savings. Such plan is not anticipated to include any company
contribution.
7. Start Date.
You will start with the Company no later than April 13, 1998.
Bill, we look forward to your joining to the Company and look forward to your
contributions to its continued success. If the above terms are acceptable,
please sign and return this letter.
Sincerely,
/s/ Benjamin C. Nourse
Benjamin C. Nourse
Chairman
Online Specialty Retailing, Inc.
Accepted and agreed by: /s/ William Cuff on this 3rd day of April 1998.
<PAGE>
LEASE AGREEMENT
ARTICLE I BASIC LEASE PROVISIONS
1.1 "Landlord": Eastlake at Hamlin, LLC, d.b.a. Remi
1.2 "Tenant": Online Specialty Retailing, Inc.,
d.b.a. GreatFood.com
1.3 "Premises": 2731 Eastlake Ave. E., Seattle,
Washington, 98102. The Premises
consists of approximately 2,875 square
feet of office area located within the
Building Complex hereinafter referred
to as "Property". The Property and
Premises are more clearly defined and
legally described on Exhibits A and B.
1.4 "Term": Commencing upon the Commencement Date
(as defined in Article III herein) and
expiring thirty-six (36) months
thereafter.
1.4.1 "Termination Option": Any time after the eighteenth (18th)
month of the initial Lease term. Six
(6) months prior written notice
required.
1.4.2 "Renewal Option": One (1), three (3) year option to
renew. Rent shall be at "market rate,"
subject to annual CPI increases.
1.5 Scheduled "Commencement Date": March 1, 1999
1.6 Scheduled "Termination Date": February 28, 2002
1.7 "Basic Monthly Rent": See Exhibit C.
1.8 "Allowed Use": General office purposes
1.9 "Advance Rent": On signing this Lease, Tenant shall
pay Landlord Four Thousand Three
Hundred Twelve & 50/100 Dollars
($4,312.50) to be applied toward
payment of rent for the first month of
the term of this Lease.
1.10 "Operating Expenses/Utilities": Tenant shall pay for janitorial
service for the Premises and for
electricity used at the Premises,
which shall be separately metered (any
meters, if not existing, shall be
installed at Landlord's expense). (See
Article IV, Section 4.2.)
1.11 "Security Deposit": Four Thousand Three Hundred Twelve &
50/100 Dollars ($4,312.50)
1.12 Notice Address of Tenant: 2731 Eastlake Ave. E.,
Seattle, WA 98102
1.13 Notice Address of Landlord: Eastlake at Hamlin
c/o TEUTSCH PARTNERS
2001 Western Avenue, Suite 330
Seattle, WA 98121
1.14 Date: This Lease is dated, for reference
purposes only, as of 1/25/99.
1.15 Agency Disclosure:
1.15.1 At the time of the signing of this
Agreement, Hans Kemp of Teutsch
Partners LLC represented Tenant, and
John Teutsch of Teutsch Partners LLC
represented Landlord.
<PAGE>
1.15.2 Landlord and Tenant confirm that prior
oral or written disclosure of agency
was provided to them in this
transaction.
1.16 Exhibits Exhibit A: Legal Description of
Property
Exhibit B: Premises
Exhibit C: Base Rent Schedule
Exhibit D: Base Plans
Exhibit E: Work Schedule
ARTICLE II PREMISES
Landlord hereby leases to Tenant and Tenant leases from Landlord for the term,
at the rental, and on all of the terms and conditions of this Lease, the
Premises.
ARTICLE III TERM
3.1.1 Term. The term of this Lease shall commence (the "Commencement Date") on
the date set forth in Section 1.5. The Term shall expire on the Termination Date
as set forth in Article I, unless sooner terminated pursuant to any provision
hereof.
3.1.2 Termination Option. Tenant shall have the option to terminate the Lease
any time after the eighteenth (18th) month of the initial Lease term. Tenant
shall provide Landlord with six (6) months minimum, prior written notice of its
intent to exercise this option. No option to terminate may be assigned by
Tenant, and no assignee or subtenant shall have any right to exercise any such
option.
3.1.3 Renewal Option.
(a) Grant of Option. Provided Tenant is not in default at the time of
notice of exercise of its extension rights or commencement of the
renewal term, Tenant is granted the right to extend the term of this
Lease beyond the expiration date of the initial Lease Term for one
(1) period of thirty-six (36) months (the "Extended Term"). Tenant's
extension rights shall apply to all of the Premises under lease to
Tenant at the time. Tenant's right to extend the term of this Lease
shall be personal and may not be exercised by any assignee or
sublessee. To exercise Tenant's option to extend the Lease Term,
Tenant shall give Landlord written notice of its election to extend
on or before the last day of the thirtieth (30th) month of the Lease
Term. From and after the commencement of an Extended Term, all of
the terms, covenants, and conditions of the Lease shall continue in
full force and effect as written, except that no option to terminate
shall be granted to Tenant, and Base Rent shall be adjusted as
provided in Paragraph (b) of this Section 3.1.3.
(b) Rental Rate. If Tenant exercises an extension right pursuant to
Paragraph (a) of this Section 3.1.3, the Base Rent for the Extended
Term shall be equal to the market rate for a three (3) year term for
comparable space in comparable buildings in the Seattle, Lake Union
submarket ("Fair Market Rent"). Fair Market Rent shall take into
account the value of any benefits to be made available to Tenant
under the Lease. Landlord shall give Tenant notice of Landlord's
estimation of Fair Market Rent not later than four (4) months before
the end of the initial Lease Term. If Tenant disagrees with such
estimate, it shall advise Landlord in writing thereof within fifteen
(15) days of the Tenant's receipt of its notice. If there is a
disagreement on such estimation, the parties shall promptly meet to
attempt to resolve their differences. If the differences as to Fair
Market Rent are not resolved within forty-five (45) days of Tenant's
receipt of its notice, then the parties shall submit the matter to
arbitration in accordance with the terms of Paragraph (c) of this
Section 3.1.3 so that Fair Market Rent is determined no later than
the first day of the Extended Term.
(c) Arbitration. If the parties are unable to reach agreement on Fair
Market Rent during the period specified in Paragraph (b) of this
Section 3.1.3, then within ten (10) days thereafter either party may
notify the other in writing of the name and address of its
arbitrator. The arbitrator shall be qualified as a real estate
appraiser familiar with rental rates in the Seattle, Lake Union
submarket who would qualify as an expert witness. Within ten (10)
days after receipt of such notice from the initiating party (the
"Instigator") designating its arbitrator, the other party (the
"Recipient) shall give notice to Instigator, specifying the name and
address of the person designated by Recipient to act as arbitrator
on its behalf who shall be similarly qualified. If Recipient fails
to notify Instigator of the appointment of its arbitrator, within or
by the time above specified, then the arbitrator appointed by
Instigator shall be the arbitrator and determine the issue. The duty
of the arbitrator(s) shall be to determine the Fair Market Rent
based solely on rental rates in the Lake Union area.
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If the two (2) arbitrators are so chosen the arbitrators so chosen
shall meet within ten (10) days after the second arbitrator is
appointed and, if within ten (10) days after such first meeting the
two arbitrators shall be unable to agree promptly upon a
determination of Fair Market Rent, they, themselves, shall appoint a
third arbitrator, who shall be a competent and impartial person with
qualifications similar to those required of the first two
arbitrators. If they are unable to agree upon such appointment
within five (5) days after expiration of said ten (10) day period,
the third arbitrator shall be selected by the parties themselves, if
they can agree thereon, within a further period of ten (10) days. If
the parties do not so agree, then either party, on behalf of both,
may request appointment of such a qualified person by the then
presiding judge of King County Superior Court. The three (3)
arbitrators shall decide the dispute, if it has not been previously
resolved, by following the procedure set forth in this Section
3.1.3. Where the issue cannot be resolved by agreement between the
two arbitrators selected by Landlord and Tenant or settlement
between the parties during the course of arbitration, the issue
shall be resolved by the three arbitrators in accordance with the
following procedure. The arbitrator selected by each of the parties
shall state in writing his determination of the Fair Market Rent
supported by the reasons therefor with counterpart copies to each
party. The arbitrators shall arrange for a simultaneous exchange of
such proposed resolutions. The role of the third arbitrator shall be
to select which of the two proposed resolutions most closely
approximates his determination of Fair Market Rent. The third
arbitrator shall have no right to propose a middle ground or any
modification of either of the two proposed resolutions. The
resolution he chooses as most closely approximating his
determination shall constitute the decision of the arbitrators and
be final and binding upon the parties. In the event of a failure,
refusal or inability of any arbitrator to act, his successor shall
be appointed by him, but in the case of the third arbitrator, his
successor shall be appointed in the same manner as provided for
appointment of the third arbitrator. The arbitrators shall attempt
to decide the issue within ten (10) days after the appointment of
the third arbitrator. Any decision in which the arbitrator appointed
by Landlord and the arbitrator appointed by Tenant concur shall be
binding and conclusive upon the parties. Each party shall pay the
fee and expenses of its respective arbitrator and both shall share
equally the fee and expense of the third arbitrator, if any, and the
attorneys' fees and expenses of counsel for the respective parties
and of witnesses shall be paid by the respective parties engaging
such counsel or calling such witnesses. The arbitrators shall have
the right to consult experts and competent authorities with factual
information or evidence pertaining to a determination of Fair Market
Rent, but any such consultation shall be made in the presence of
both parties with full right on their part to cross-examination. The
arbitrators shall render their decision and award in writing with
counterpart copies to each party. The arbitrators shall have no
power to modify the provisions of this Lease. Time is of the essence
in this Section 3.1.3.
3.2 Early Possession. If Tenant occupies the Premises before the Commencement
Date of the term, all of Tenant's Lease obligations (including payment of
Operating Expenses, but not Basic Monthly Rent) shall become effective
immediately although such early possession shall not accelerate the Termination
Date of this Lease.
ARTICLE IV RENT
4.1 Basic Monthly Rent. Tenant shall pay to Landlord as rent for the Premises
the Basic Monthly Rent, in advance, on the first day of each month of the term
hereof. Rent for any period during the term hereof which is for less than one
(1) month shall be a pro-rata portion of the monthly installment. Rent shall be
payable without notice or demand and without deduction, offset, or abatement, in
lawful money of the United States of America to Landlord at such address or to
such other persons or at such other places as Landlord may designate in writing.
4.2 Operating Expenses. Tenant shall pay for janitorial service for the Premises
and for electricity used at the Premises, which shall be separately metered (any
meters, if not existing, shall be installed at Landlord's expense). Landlord
shall pay all other operating expenses (defined as the total costs and expenses
in connection with the ownership, operation, maintenance, and repair of the
Property, including, without limitation: taxes, insurance, water, security,
maintenance and repair costs for any building system (such as plumbing, heating,
ventilating, and air conditioning), common area maintenance, roof repair and
replacement, landscaping, common area signage, common area lighting, elevator
maintenance, disposal expenses, and reasonable property management fees. Tenant
shall pay its proportionate share of all increases in operating expenses over
the base year, 1999. Upon Tenant's written request, Landlord shall provide
documentation of any increases.
ARTICLE V SECURITY DEPOSIT
The Security Deposit shall be security for Tenant's full performance of Tenant's
lease obligations. If Tenant fails to pay rent or any other charges due from
Tenant under this Lease, Landlord may elect to apply the Security Deposit toward
the payment of
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such default. If Landlord applies any portion of the Security Deposit, Tenant
shall, on ten (10) days written notice, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to the full amount stated in Article
1; Tenant's failure to do so shall be a default. Landlord may commingle the
Security Deposit with Landlord's other funds and no interest shall be paid or
accrued on the Security Deposit. If Tenant performs all of Tenant's lease
obligations, the Security Deposit (or so much as has not been applied by
Landlord) shall be returned to Tenant (or, at Landlord's option, to the last
assignee, if any, of Tenant's interest under the Lease) within a reasonable
time. Landlord may transfer the security deposit to the purchaser of his
interest in the event of sale and Tenant shall look solely to such purchaser for
return of the deposit.
ARTICLE VI USE
6.1 Allowed Use. The Premises shall be used and occupied only for the Allowed
Use and for no other purpose without prior written consent of Landlord, which
consent may be withheld or conditioned as Landlord deem appropriate within its
sole, unrestricted discretion. The designation of Tenant's Allowed Use shall not
be deemed to be an agreement by Landlord to refrain from leasing other property
to others for a similar use. Tenant shall not use or permit the use of the
Premises in any manner that will tend to create waste or a nuisance, or, if
there shall be more than one (1) tenant of the building containing the Premises,
which shall tend to unreasonably disturb other tenants.
6.2 Compliance with Law. Tenant shall, at Tenant's expense, comply promptly with
all present and future laws and requirements regulating the use of the Premises
by Tenant or Tenant's business together with any laws providing for
accessibility of the Premises, including access by disabled persons (ADA).
Tenant shall not create or allow waste or a nuisance, or unreasonably disturb
any other person.
6.3 Insurance Cancellation. Despite any other provision of this Lease, no use of
the Premises may be made or permitted nor acts done which will adversely affect
or increase the cost of any insurance policy maintained by Landlord.
6.4 Landlord's Rules and Regulations. Tenant shall comply with reasonable
regulations made or changed by Landlord from time to time which regulations
shall not conflict with any express provision of this Lease. Landlord shall not
be responsible to Tenant for the nonperformance of any said rules and
regulations by any other tenants or occupants.
6.5 Exterior Storage. Exterior storage, either permanent or temporary, of any
materials, supplies or equipment in the Common Areas is strictly prohibited.
Should Tenant violate this provision of the Lease, then in such event, Landlord
may, at its option, without notice to Tenant, remove said materials, supplies or
equipment and place such items in storage or dispose of at a refuse facility,
the cost thereof to be reimbursed by Tenant within ten (10) days from receipt of
a statement from Landlord.
6.6 Parking. Tenant shall, for the duration of the Lease term, have the
exclusive use of the two (2) western-most stalls, free of charge, in the upper
level, surface parking area. Tenant acknowledges that the remainder of the upper
level surface parking area shall be reserved on a nonexclusive basis for the
short term use by customers and invitees for those tenants with uses of a
retail, service or consulting nature. Landlord shall provide Tenant with up to
seven (7) additional parking stalls within The Building garage, for which Tenant
shall pay the current market rate, subject to market adjustment not more than
once per year. Employee parking shall be restricted to street parking on the
east and west sides of the Property. Landlord reserves the right, in its sole
discretion, to allocate a portion of the upper level parking lot for employee
parking of certain office tenants. Landlord reserves the right to impose, from
time to time, other reasonable parking regulations for the benefit of all
tenants.
ARTICLE VII MAINTENANCE, REPAIRS AND ALTERATION
7.1 Landlord's Obligation. Except for damage caused or allowed by Tenant, its
agents, representatives, employees, invitees, and/or assigns, Landlord shall
maintain, at Landlord's expense and not as an Operating Expense, the structural
foundations (floor, load-bearing walls), columns, and roof of the Property and
Premises. In this Lease the term "structural foundations" is defined as the
building foundations and footings, and concrete walls.
7.1.1 Common Areas. The term "Common Areas" refers to all areas within the
Property which are made available, from time to time, for general use of all
tenants and Landlord, which areas shall include, but not necessarily be limited
to, parking areas, driveways, sidewalks, landscaped and planted areas, exterior
of the buildings and shared systems on the Property and the like. The Landlord
reserves the right, from time to time, to make changes in the shape, size, and
location and extent of the land and improvements constituting the Common Areas.
During the term of this Lease, Landlord shall operate, manage and maintain the
Common Areas in a neat, clean, and orderly condition, properly lighted and
landscaped, and shall repair any damage to the facilities thereof. Operating
expenses for Common Areas shall include, but not be limited to, all sums
expended in connection with the Common Areas for all general maintenance and
repairs, relocation of facilities, resurfacing, painting of
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the building exterior or common areas, striping, restriping, cleaning, snow
removal, sweeping, janitorial services, maintenance and repair of sidewalks and
curbs, signage, landscaping and irrigation systems, common area lighting and
other utilities; directional signs and other markers and bumpers; and all
maintenance including the repair or patching of the exterior roof, maintenance
and repair of any heating, ventilation and air conditioning system, fire
protection systems, common area lighting systems, storm drainage systems, and
any utility systems; repairs or modifications to the Property for energy or
safety purposes, and replacement of existing capital improvements in the Common
Areas. Except as provided in this Section and as provided in this Lease as to
damage by casualty, Landlord shall have no obligation to make any repair, change
or improvement of the interior of the Premises.
7.2 Tenant's Obligations. Tenant, at Tenant's expense, shall maintain in good
condition and appearance all and every part of the Premises (regardless whether
the damaged portion of the Premises or the means of repairing the same are
directly accessible from the interior of the Premises), including lighting
facilities and equipment within the Premises, fixtures, walls, ceilings, and
glass.
7.3 Construction of Premises. Landlord is, as of the date of this lease,
currently converting the Premises from retail space to office space. Landlord
agrees to complete the construction of the Premises in accordance with the Plans
and Specifications which are attached as Exhibit D (the "Base Plans"). Landlord
has provided an allowance (the "TI Allowance") in the amount of Twenty-Five
Thousand Dollars ($25,000) to improve approximately 2,875 s.f. of ground floor
office. The TI Allowance shall include all costs associated with the
construction of the office improvements including architectural fees, permits
and Washington State sales tax. The office improvements shall be constructed in
accordance with the Base Plans. Any costs associated with the office
improvements in excess of the TI Allowance shall be the responsibility of the
Tenant.
7.3.1 Work Schedule. Attached as Exhibit E is a schedule (the "Work
Schedule") setting forth the estimated timetable for the construction and
completion of the Premises. Landlord shall use its good faith efforts to secure
substantial completion of the work in accordance with the Work Schedule. If
there shall be a delay in substantial completion of the Premises or the issuance
of a Certificate of Occupancy for the same, then the Commencement Date shall be
delayed by the number of days of such delay.
7.3.2 Landlord's Work. Landlord shall construct the Premises substantially
in accordance with the Base Plans. Unless work is shown on the Base Plans as
Landlord's Work or provided to be such herein, Landlord shall have no
responsibility to perform or pay for such work.
7.3.3 Tenant's Work. Tenant shall be responsible for constructing at its
sole cost and expense including all costs for architectural fees, permits, etc.,
any additional improvements to the Premises beyond the improvements identified
as Landlord's Work.
7.3.4 Condition of Premises. Tenant acknowledges that neither Landlord,
nor any agent of Landlord, has made any representation or warranty regarding the
Premises and the Common Areas with respect to their suitability for the conduct
of Tenant's business.
7.4 Surrender. On the Termination Date of this Lease, or on any sooner
termination of this Lease, Tenant shall surrender the Premises to Landlord in
good condition and in accordance with Tenant's maintenance obligations and broom
clean, ordinary wear and tear excepted. Tenant shall patch, fill and paint any
holes resulting from attachment of any of Tenant's trade fixtures, furnishings
and equipment. Lighting, doors, skylights, fixtures, heating, ventilating and
air conditioning systems will all be surrendered in good serviceable condition.
Tenant shall, at Landlord's option, remove any alterations or improvements made
by Tenant without the prior written approval of Landlord.
7.5 Landlord's Rights. If Tenant fails to perform Tenant's maintenance
obligations, Landlord may, at its option (but shall not be required to) enter
the Premises, after ten (10) days prior written notice to Tenant or with no
prior written notice in an emergency, and perform Tenant's maintenance
obligations and Tenant shall immediately, fully reimburse Landlord for such
expense together with interest thereon at the rate of twelve percent (12%) per
annum.
7.6 Alterations and Additions.
7.6.1 Without Landlord's prior written consent, Tenant shall not make any
alterations, improvements or additions to the Premises, except for non-permanent
changes costing less than Ten Thousand Dollars ($10,000) in the aggregate per
year. As a condition of consent, Landlord may require that Tenant be responsible
to remove any such alterations, improvements or additions at the expiration of
the term, and to restore the Premises to the prior condition; Landlord may
impose such other conditions as are reasonable. Tenant shall secure all
governmental permits required in connection with any such work.
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Landlord may, at its sole option, require Tenant, at Tenant's expense, to obtain
for Landlord's benefit a surety bond in an amount equal to the estimated cost of
such work, to insure Landlord and the Property against any liability for liens
arising from such work and to insure completion of the work.
7.6.2 Before commencing any work relating to alterations, additions and
improvements affecting the Premises (none of which are required or requested by
Landlord, nor any obligation of Tenant under this Lease), Tenant shall notify
Landlord in writing of the expected date of commencement thereof Landlord shall
then have the right at any time to maintain on the Premises such notices as
Landlord reasonably deems necessary to protect the Premises and Landlord from
any lien. In any event, Tenant shall pay, when due, all charges incurred by
Tenant. Tenant shall not permit any lien to be asserted against the Premises or
Property for any charge incurred or alleged to have been incurred by Tenant, and
Tenant shall indemnify, defend Landlord against, and hold Landlord harmless from
any and all liability, costs, damages therefrom.
7.6.3 Unless Landlord requires removal, as provided elsewhere in this
Lease, all alterations, improvements or additions which may be made on the
Premises shall become the property of Landlord and remain upon and be
surrendered with the Premises at the expiration of the term; provided Tenant's
machinery, equipment and trade fixtures, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises,
shall remain the property of Tenant and may be removed by Tenant prior to the
end of the term of the Lease and subject to Tenant's obligations to maintain the
Premises.
ARTICLE VIII HAZARDOUS SUBSTANCES
8.1 As used in this Lease, the term "Hazardous Substance" means any substance or
material, the storage, use or disposal of which is or becomes regulated under
any law, now or hereafter in effect.
8.2 Landlord warrants to Tenant that Landlord has not released or deposited on
the Premises any Hazardous Substance, and Landlord has no knowledge of the
presence of any Hazardous Substance on the Premises.
8.3 Without Landlord's prior written consent, Tenant shall not receive, store or
otherwise allow any Hazardous Substance on the Premises or Property, except
Hazardous Materials that are (A) used in Tenant's normal operation of properties
similar to the Premise, provided the same are used, stored, or otherwise managed
and disposed of in compliance in all material respects with applicable
environmental laws, or (B) approved in writing by Landlord. In the event of any
release by Tenant, its agents, representatives, employees, invitees, and/or
assigns of any Hazardous Substances on or about the Premises or Property
occurring on or after the Commencement Date of this Lease, Tenant agrees to
immediately, fully and completely remove (and to dispose of such in accordance
with applicable law) all of such Hazardous Substance from the Premises or
Property even if the quantity or concentration of such Hazardous Substance would
not require remediation under the provisions of law. Tenant further agrees to
defend, indemnify, and hold harmless Landlord, its employees, agents and
contractors and Lender from and against any and all losses, claims, liabilities,
damages, demands, fines, costs, and expenses (including reasonable attorneys'
fees) arising out of or resulting from any release by Tenant, its agents,
representatives, employees, invitees, and/or assigns of any Hazardous Substances
on or about the Premises or Property; the provisions of this sentence shall
survive (and be enforceable after) the termination or expiration of this Lease
and the surrender of the Premises by Tenant. If Tenant becomes aware of the
release or presence on the Premises or Property of any Hazardous Substance,
Tenant shall immediately advise Landlord of such release or presence, and Tenant
further shall provide Landlord with copies of any reports, studies,
recommendations or requirements received by Tenant from any third person
including a governmental agency.
ARTICLE IX INSURANCE; INDEMNITY
9.1 Payment of Premium. "Insurance Premiums " are the actual cost of the
insurance applicable to improvements on the Property and required to be carried
by Landlord by this Lease and include, but are not limited to, requirements of a
Lender. Landlord shall pay the cost of Insurance Premiums.
9.2 Liability Insurance.
9.2.1 Carried by Tenant. Tenant shall, at Tenant's sole cost and expense,
obtain and keep in force during the term of this Lease a commercial
(comprehensive) liability insurance policy protecting Tenant, Landlord and any
Lender(s) whose names have been provided to Tenant in writing (as additional
insureds) against claims for bodily injury, personal injury and property damage
based upon, involving or arising out of the ownership, use, occupancy or
maintenance of the Premises. For the purposes of this Lease, a "Lender" is a
mortgagee under a mortgage or a beneficiary under a deed of trust granted by
Landlord or Landlord's predecessor and which is a lien on the Premises. Such
insurance shall be on an occurrence basis providing single limit coverage in an
amount not less than $1,000,000 per occurrence with an "Additional Insured -
Managers
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or Landlords of Premises" endorsement and contain the "Amendment of the
Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from
a hostile fire. The policy shall not contain any inter-insured exclusions as
between insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an "insured contract" for the performance
of Tenant's indemnity obligations under this Lease. The limits of said insurance
required by this Lease or as carried by Tenant shall not, however, limit the
liability of Tenant nor relieve Tenant of any obligation hereunder. All
insurance to be carried by Tenant shall be primary to and not contributory with
any similar insurance carried by Landlord, whose insurance shall be considered
excess insurance only.
9.2.2 Carried by Landlord. Landlord may also maintain liability insurance
similar to that described in the preceding Section, in addition to and not in
lieu of, the insurance required to be maintained by Tenant. Tenant shall not be
named as an additional insured therein.
9.3 Property Insurance - Building, Improvements and Rental Value.
9.3.1 Building and Improvements. Landlord shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Landlord, with
loss payable to Landlord and to any Lender(s), insuring against loss or damage
to the Premises with such deductible amount as is selected by Landlord. Such
insurance shall be for full replacement cost, as the same shall exist from time
to time, or the amount required by any Lender(s), but in no event more than the
commercially reasonable and available insurable value thereof if, by reason of
the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. If the coverage is available and commercially
reasonable, Landlord's policy or policies may insure against all risks of direct
physical loss or damage (including the perils of flood and/or earthquake),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Premises required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss.
Such policies may also contain an agreed valuation provision in lieu of any
co-insurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
selected by the insurer.
9.3.2 Rental Value. Landlord shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Landlord, with loss
payable to Landlord and any Lender(s), insuring the loss of the full rental and
other charges payable by Tenant to Landlord for one year. Said insurance may
provide that in the event the Lease is terminated by reason of an insured loss,
the period of indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to provide for one
full year's loss of rental revenues from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected payments payable by Tenant for the next 12-month period.
9.4 Tenant's Property Insurance. Tenant, at its sole cost and expense, shall
maintain insurance coverage on all of Tenant's personal property, trade fixtures
and Tenant-owned alterations and improvements in the Premises similar in
coverage to that required by this Lease to be carried by Landlord. Such
insurance shall be full replacement cost coverage with a deductible not to
exceed Five Thousand Dollars ($5,000) per occurrence. The proceeds from any such
insurance shall be used by Tenant for the replacement of personal property,
trade fixtures and the restoration of any Tenant owned improvements. Upon
request from Landlord, Tenant shall provide Landlord with written evidence that
such insurance is in force.
9.5 Insurance Policies. Insurance required hereunder shall be in companies duly
licensed to transact business in the state where the Premises are located, and
maintaining during the policy term a "General Policyholders Rating" of at least
B+, V or such other rating as may be required by a Lender, as set forth in the
most current issue of "Best's Insurance Guide." Tenant shall not do or permit to
be done anything which shall invalidate the insurance policies maintained by
Landlord. Tenant shall cause to be delivered to Landlord, within seven (7) days
after the earlier of the Early Possession Date or the Commencement Date,
certified copies of, or certificates evidencing the existence and amounts of,
the insurance required of Tenant by this Lease. No such policy shall be
cancelable or subject to modification except after thirty (30) days' prior
written notice to Landlord. At least thirty (30) days prior to the expiration of
such policies, Tenant shall furnish Landlord with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Landlord, after notice to
Tenant and a reasonable opportunity for Tenant to cure, may obtain such
insurance and charge the cost thereof to Tenant, which amount shall be payable
by Tenant to Landlord upon demand.
9.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Tenant and Landlord each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under this Lease to the actual extent of
the insurance actually retained. Landlord and Tenant agree to have their
respective insurance companies issuing
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property damage insurance waive any right to subrogation that such companies may
have against Landlord or Tenant, as the case may be, so long as the insurance is
not invalidated thereby.
9.7 Indemnity.
9.7.1 Landlord's Indemnity. Except to the extent of Tenant's comparative
negligence or breach of an express provision of this Lease, Landlord shall
indemnify, protect, defend and hold harmless the Tenant from and against all
claims, loss of rent and damages, costs, liens, judgments, penalties, loss of
permits, attorneys' and consultants' fees, expenses and liabilities arising out
of any act, omission or neglect of Landlord, its agents, contractors, employees
or invitees, and out of any Default or Breach by Landlord in the performance in
a timely manner of any obligation on Landlord's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Tenant) litigated or reduced to
judgment. In case any action or proceeding be brought against Tenant by reason
of any of the foregoing matters, Landlord upon notice from Tenant shall defend
the same at Landlord's expense by counsel reasonably satisfactory to Tenant and
Tenant shall cooperate with Landlord in such defense. Tenant need not have first
paid any such claim in order to be so indemnified. In the event of concurrent
negligence of Landlord and Tenant resulting in injury or damage to persons or
property and which relates to the construction, alterations, repair, addition
to, subtraction from, improvement to or maintenance of the Premises, the
indemnifying parties obligation to indemnify the other party as set forth in
this Section shall be limited to the extent of the indemnifying party's
negligence, and that of its agents, employees, sublessees, invitees, licensees
or contractors.
9.7.2 Tenant's Indemnity. Except to the extent of Landlord's comparative
negligence or breach of an express provision of this Lease, Tenant shall
indemnify, protect, defend and hold harmless the Landlord and its Lenders from
and against all claims, loss of rent and damages, costs, liens, judgments,
penalties, loss of permits, attorneys' and consultants' fees, expenses and
liabilities arising out of, involving, or in connection with, the occupancy of
the Premises by the Tenant, the conduct of the Tenant's business, any act,
omission or neglect of Tenant, its agents, contractors, employees or invitees,
and out of any Default or Breach by Tenant in the performance in a timely manner
of any obligation on Tenant's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Landlord) litigated or reduced to judgment. in case
any action or proceeding be brought against Landlord by reason of any of the
foregoing matters, Tenant upon notice from Landlord shall defend the same at
Tenant's expense by counsel reasonably satisfactory to Landlord and Landlord
shall cooperate with Tenant in such defense. Landlord need not have first paid
any such claim in order to be so indemnified. In the event of concurrent
negligence of Landlord and Tenant resulting in injury or damage to persons or
property and which relates to the construction, alterations, repair, addition
to, subtraction from, improvement to or maintenance of the Premises, the
indemnifying parties obligation to indemnify the other party as set forth in
this Section shall be limited to the extent of the indemnifying party's
negligence, and that of its agents, employees, sublessees, invitees, licensees
or contractors.
9.8 Exemption of Landlord from Liability. Except as provided in Section 9.7.1,
Landlord shall not be liable for injury or damage to the person or property of
Tenant, Tenant's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall
under no circumstances be liable for any loss of income or profit of Tenant's
business or any other consequential damage.
ARTICLE X DAMAGE OR DESTRUCTION
10.1 Partial Damage - Insured. If the Premises or Property are Partially Damaged
and such damage was caused by a casualty covered under an insurance policy
required to be maintained by Tenant or Landlord pursuant to this Lease, Landlord
shall repair such damage as soon as reasonably possible, and this Lease shall
continue in full force and effect. If, however, the insurance proceeds actually
available to Landlord (after deduction of any proceeds required by a Lender to
be applied to reduction of indebtedness) are not sufficient to effect such
repair, Landlord shall not be obligates to make such repairs unless Tenant
elects, without obligation to do so, to contribute, without right of
reimbursement, the required amount. In the event that Landlord is not obligated
and does not voluntarily agree to repair such damage, either Tenant or Landlord
may declare this Lease terminated by thirty (30) days written notice to the
other party.
10.2 Damage - Uninsured. In the event the Premises are damaged or destroyed by a
casualty which is not covered under an insurance policy required to be
maintained by Tenant or Landlord, the Landlord may elect to repair such damage
as soon as reasonably possible, and this Lease shall continue in full force and
effect. If Landlord does not so elect within thirty (30) days
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after the occurrence of the casualty to repair, either Tenant or Landlord may
declare this Lease terminated by ten (10) days written notice to the other
party; provided Tenant may avoid termination of this Lease if Tenant voluntarily
agrees to pay, without right of reimbursement, all of the costs of such repairs
by Landlord.
10.3 Total Destruction. If the Premises are Totally Destroyed by a casualty
covered under an insurance policy required to be maintained by Tenant or
Landlord pursuant to this Lease, this Lease shall automatically terminate as of
the date of such total destruction.
10.4 Damage Near End of Term. If the premises are Partially Damaged during the
last two (2) years of the term of this Lease, Landlord may, at Landlord's
option, cancel and terminate this Lease as of the date of occurrence of such
damage by giving written notice to Tenant of Landlord's election to do so within
thirty (30) days after Landlord receives notice of occurrence of such damage;
provided Landlord shall continue to have all rights to receive the proceeds of
any insurance policy required by the Lease to be maintained by Tenant.
10.5 Abatement of Rent. If the Premises are Partially Damaged, the rent payable
while such damage, repair or restoration continues shall be abated in proportion
to the degree to which Tenant's reasonable use of the Premises is impaired.
Except for abatement of rent, if any, Tenant shall have no claim against
Landlord for any damage suffered by reason of any such damage, destruction,
repair or restoration.
10.6 Definitions. For the purposes of this Lease, the term Partially Damaged
shall be deemed to mean damage to the Premises (excluding any damage to Tenant
owned property or alterations) which is reasonably estimated to cost to repair
less than fifty percent (50%) and Totally Destroyed shall be deemed to mean
damage to the Premises or Property (excluding any damage to Tenant owned
property or alterations) which is reasonably estimated to cost to repair more
than fifty percent (50%) of the reasonable fair market value of the improvements
constituting the Premises (but not the land) calculated immediately prior to the
occurrence of the damage. Cost shall include the cost to rebuild all of the
damaged improvements owned by Landlord including demolition, debris removal,
requirements of applicable building codes and other laws, mitigation
requirements and without regard for depreciation.
ARTICLE XI TAXES
11.1 Taxes. As used herein, the term Taxes shall include any form of required
payment, assessment, license fee, tax on rent, levy, penalty, or tax (other than
Landlord's net income tax and inheritance or estate taxes) imposed by any
authority having the direct or indirect power to tax any legal or equitable
interest of Landlord in the Property or Landlord's right to rent or other income
therefrom.
11.2 Personal Property Taxes. Tenant shall pay prior to delinquency all taxes
assessed against and levied on any leasehold improvements, fixtures,
furnishings, equipment and other property of Tenant. Tenant shall cause such
Tenant property to be assessed separately from Landlord's Property or reimburse
Landlord for the taxes attributable to Tenant within ten (10) days after receipt
of a written statement from Landlord setting forth the taxes applicable to
Tenant's property.
ARTICLE XII UTILITIES
With the exception of electricity, which shall be separately metered for the
Premises, and telephone service, Landlord shall pay for all utilities serving
the Premises, which shall include all water, gas, drainage service, sewer
service, garbage service, and other utilities and services supplied to the
Premises, together with any taxes thereon. If the Landlord shall determine, in
the exercise of Landlord's good faith review, that the Tenant's use of utilities
is in excess of that normally used by a tenant occupying similar space, then
Tenant shall pay Landlord upon demand as additional rent, the cost of such
excess utility usage in addition to any other rent or charge due from Tenant
under this Lease. In no event shall Landlord be liable for an interruption or
failure in the supply of any such utilities to the Premises.
ARTICLE XIII ASSIGNMENT AND SUBLETTING
13.1 Landlord's Consent Required. Tenant shall not voluntarily or by operation
of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all
or any part of Tenant's interest in this lease or the Premises without
Landlord's prior written consent, which consent may be conditioned, in addition
to any other reasonable conditions, on a written assumption by the assignee or
sublessee of the obligations of Tenant, a written guarantee of payment and
performance by Tenant and a consent or reaffirmation of any guarantor of Tenant.
Any purported assignment, transfer, mortgage, encumbrance, or subletting without
consent shall be void and constitute a breach of this Lease. No option to renew
or extend, if any, may be assigned by Tenant and no assignee or subtenant shall
have any right to exercise any such option. The acceptance of rent by
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Landlord from a person other than Tenant shall not be deemed to be a waiver by
Landlord of any provision hereof. Consent to one assignment or subletting shall
not be deemed consent to any subsequent assignment or subletting.
13.2 No Release of Tenant. Regardless of Landlord's consent, no subletting or
assignment shall release Tenant's primary obligation to pay or perform any
obligation under this Lease.
13.3 Assignment Fee. In the event that Landlord shall consent to a sublease or
assignment under Article 13.1, Tenant agrees to reimburse Landlord for the
reasonable out-of-pocket expenses incurred by Landlord in connection with such
consent.
13.4 Assignment by Landlord. Landlord shall be permitted freely to assign all of
its rights and obligations hereunder. In the event of a sale or other transfer
of the Premises, whether by foreclosure or otherwise, in connection with a sale
or financing of the Property the Tenant agrees to attorn to the new owner and to
recognize such owner as the Landlord under this Lease and Tenant shall
thereafter look solely to such transferee for performance of this Lease, with
respect to obligations arising after such transfer. Landlord will notify Tenant
in the event of an assignment, thereby establishing that all future liability
and/or obligations of Tenant under this Lease shall be to assignee.
13.5 Permitted Assignment. Notwithstanding the foregoing, Tenant shall be
permitted without Landlord's consent to assign this lease or sublet the Premises
to any Affiliated Entity. The term "Affiliated Entity" includes any parent,
successor by merger, or subsidiary of the Tenant and any person controlled by or
under the common control with the Tenant, and any partnership of which the
Tenant or any parent, successor by merger, or subsidiary of the Tenant, or any
person controlled by or under common control with the Tenant, is a partner;
provided, however, that Tenant shall not, without Landlord's prior written
consent and approval (which written consent and approval shall not be
unreasonably withheld or delayed) assign or sublet the Premises to any such
partnership unless such partnership has a net worth equal to or surpassing that
of Tenant.
ARTICLE XIV DEFAULTS; REMEDIES
14.1 Defaults. The occurrence of any one or more of the following events shall
constitute a default and breach of this Lease by Tenant:
14.1.1 The vacation or abandonment of the Premises by Tenant.
14.1.2 The failure by Tenant to make any payment required to be made by
Tenant hereunder, as and when due where such failure shall continue for a period
of three (3) days after written notice thereof from Landlord to Tenant.
14.1.3 The failure by Tenant to observe or perform any of the provisions
of this Lease (other than the payment of money) to be observed or performed by
Tenant where such failure shall continue for a period of ten (10) days after
written notice thereof from Landlord to Tenant; provided, however, that if the
nature of Tenant's default is such that more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be deemed to be in
default if Tenant commenced such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion.
14.1.4 The making by Tenant or any guarantor of Tenant of any general
assignment, or general assignment for the benefit of creditors; (ii) the filing
by or against Tenant or any guarantor of Tenant of a petition to have Tenant
adjudged a bankrupt or petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within sixty (60) days; (iii) the appointment of a trustee
or receiver to take possession of substantially all of Tenant's assets located
at the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within ten (10) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where such seizure is not
discharged within ten (10) days.
14.2 Remedies in Default. Subject to applicable law, Upon the occurrence of a
Default by Tenant, Landlord, without notice to Tenant (except where expressly
provided for in this Lease or by applicable law) may do any one or more of the
following:
14.2.1 Elect to terminate this Lease and the tenancy created hereby by
giving notice of such election to Tenant, and reenter the Premises, and remove
Tenant and all other persons and property from the Premises, and may store such
property in a public warehouse or elsewhere at the cost of and for the account
of Tenant without Landlord being deemed guilty of trespass or becoming liable
for any loss or damage occasioned thereby; and
14.2.2 Exercise any other legal or equitable right or remedy which it may
have.
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14.3 Damages. If this Lease is terminated by Landlord pursuant to this section,
Tenant nevertheless shall remain liable for (a) any rents and damages which may
be due or sustained prior to such termination, all reasonable costs, fees and
expenses including, but not limited to, reasonable attorneys' fees, costs and
expenses incurred by Landlord in pursuit of its remedies hereunder, or in
re-letting the Premises to others from time to time until the original
Termination Date of this Lease (all such rents, damages, costs, fees and
expenses being referred to herein as "Termination Damages"), and (b) additional
damages ("Post-Termination Damages"). In the event of Default by Tenant,
Tenant's total liability shall be limited to the remaining gross Lease value.
Post-Termination Damages, at the election of Landlord, shall be either:
14.3.1 an amount equal to the rents which, but for termination of this
Lease, would have become due during the remainder of the Term, less the amount
of rents, if any, which Landlord shall receive during such period from others to
whom the Premises may be rented, in which case such Post-Termination Damages
shall be computed and payable in monthly installments, in advance, on the first
day of each calendar month following termination of the Lease and continuing
until the date on which the Term would have expired but for such termination,
and any suit or action brought to collect any such Post-Termination Damages for
any month shall not in any manner prejudice the right of Landlord to collect any
Post-Termination Damages for any subsequent month by a similar proceeding; or
14.3.2 an amount equal to the present worth (as of the date of such
termination) of rents which, but for termination of this Lease, would have
become due during the remainder of the Term, less the fair rental value of the
Premises, as determined by an independent real estate appraiser named by
Landlord, in which case such Post-Termination Damages shall be payable to
Landlord in one lump sum on demand and shall bear interest at the Default Rate
until paid. For purposes of this section, "present worth" shall be computed by
discounting such amount to present worth at a discount rate equal to one
percentage point above the discount rate then in effect at the Federal Reserve
Bank nearest to the Premises; provided that Tenant may avoid the application of
this section so long as Tenant voluntarily agrees to pay, and, in fact, does pay
all sums due to date under the immediately preceding section within forty-five
(45) days of receipt of notice of Landlord's declaration of the termination of
this Lease and Tenant continues thereafter to pay such amounts monthly until the
Termination Date.
14.4 Miscellaneous. If Landlord elects to terminate this Lease following the
default of Tenant, Landlord may relet the Premises or any part thereof, alone or
together with other premises, for such term or terms (which may be greater or
less than the period which otherwise would have constituted the balance of the
Term) and on such terms and conditions (which may include concessions or free
rent, alterations of the Premises and payment of brokers) as Landlord, in its
sole discretion, may determine, and the costs thereof shall be included in the
total of Landlord's Termination Damages which shall be paid by Tenant. Nothing
contained in this Lease shall limit or prejudice the right of Landlord to prove
for and obtain, in proceedings for the termination of this Lease by reason of
bankruptcy or insolvency, an amount equal to the maximum allowed by any statute
or rule of law in effect at the time when, and governing the proceedings in
which, the damages are to be proved, whether or not the amount be greater, equal
to, or less than the amount of the loss or damages referred to above. The
failure or refusal of Landlord to relet the Premises or any part or parts
thereof shall not release or affect Tenant's liability for damages.
14.5 Default By Landlord. Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event sooner than ten (10) days after written notice by Tenant to Landlord and
any Lender whose name and address shall have been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligation;
provided, however, that the nature of the Landlord's obligation is such that
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performances within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
14.6 Late Charges and Interest. Tenant hereby acknowledges that late payment by
Tenant to Landlord of any sum due under this Lease will cause Landlord to incur
costs not contemplated by this Lease and the amount of which is difficult to
predict in advance. Accordingly, if any sum due from Tenant shall not be
received by Landlord within ten (10) days after that said amount is due, then
Tenant shall pay to Landlord a late charge of five percent (5%) of such overdue
amount. In addition, any amount due to Landlord not paid when due shall bear
interest at twelve percent (12%) per annum ("Default Rate") from the due date.
Payment of such interest or late charge shall not excuse or cure any default by
Tenant under this Lease. In the event that a check from Tenant is returned
unpaid by Tenant's bank, Tenant shall pay an additional returned check charge of
twenty-five dollars ($25) which Tenant agrees is reasonable and which is in
addition to a late charge and interest charges if otherwise applicable.
14.7 Cure by Landlord. Landlord, at any time after Tenant commits a default, may
cure the default at Tenant's cost. If Landlord at any time pays any sum or does
any act that requires the payment of any sum, repayment of the sum paid by
Landlord shall be due immediately from Tenant together with interest at the
Default Rate.
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14.8 Condemnation. If all of the Premises or any portion of the Premises which
is reasonably necessary for the reasonably convenient use of the Premises are
taken under the power of eminent domain, or sold by Landlord under the threat of
the exercise of said power (all of which is in referred to in this Lease as
"condemnation") or if more than twenty-five percent (25%) of the floor area of
all buildings constituting the Premises, or more than fifty percent (50%) of the
parking areas on the Property is taken by condemnation, either Landlord or
Tenant may terminate this Lease as of the date the condemning authority takes
possession by notice in writing of such election within twenty (20) days after
Landlord shall have notified Tenant of the taking, or, in the absence of such
notice, then within twenty (20) days after the condemning authority shall have
taken possession. If this Lease is not terminated by either Landlord or Tenant
then it shall remain in full force and effect as to the portion that the
Premises remaining, provided the Basic Monthly Rent shall be reduced by the
proportion to the floor area of the Premises taken by condemnation bears to the
total floor area of the Premises. All awards for the taking of any part of the
Premises or any payment made under the threat of the exercise of power of
eminent domain shall be the property of Landlord, whether made as compensation
for diminution of value of the leasehold or for the taking of the fee or as
severance damages; provided, however, that Tenant shall be entitled to any
separately made award for moving and relocation expenses, loss of or damage to
Tenant's trade fixtures and removable personal property.
ARTICLE XV GENERAL PROVISIONS
15.1 Reasonableness of Consent. Whenever the consent of Landlord or Tenant is
required by the terms of this Lease, such consent shall not be unreasonably
withheld or delayed although it may be subject to reasonable conditions.
15.2 Payments Are Rent. All payments due to Landlord from Tenant shall be deemed
to be rent due under this Lease.
15.3 Estoppel Certificate.
15.3.1 Each of Landlord and Tenant shall, at any time, on not less than
fifteen (15) days prior written notice from Landlord, sign and deliver to the
other a statement in writing (i) certifying that this Lease is unmodified and in
full force and effect (or, if modified, stating the nature of such modification
and certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent, security deposit, and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to such party's
knowledge, any uncured defaults on the part of Landlord or Tenant under this
lease, or specifying such defaults, if any, which are claimed, and agreeing to
give reasonable written notice to a Lender of any future default. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises.
15.3.2 Tenant's failure to deliver such statement within such time period
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than one (1)
month's rent has been paid in advance.
15.3.3 If Landlord desires to sell, finance or refinance the Property, or
any part thereof, Tenant hereby agrees to deliver to any Lender designated by
Landlord such financial statements of Tenant as may be reasonably required by
such Lender. Such statements shall include the past three (3) years financial
statements of Tenant. All such financial statements shall be received by
Landlord in confidence and shall be used only for the purposes herein set forth.
15.4 Landlord's Interest. The term "Landlord" as used herein shall mean only the
owner or owners at the time in question of the fee title, vendee's interest
under a real estate contract, or a tenant's interest in a ground lease of the
Premises. In the event of any transfer of such title or interest, Landlord
herein named (and in case of any subsequent transfers, the then grantor) shall
be relieved from and after the date of such transfer of all liability as
respects Landlord's obligations thereafter to be performed, provided that any
funds in the hands of Landlord or the then grantor at the time of such transfer,
in which Tenant has an interest, shall be delivered to the grantee. The
obligations contained in this Lease to be performed by Landlord shall be binding
upon Landlord's successors and assigns, only during their respective periods of
ownership.
15.5 Signs. At Tenant's own expense, Tenant may place one or more signs on the
Property so long as (i) Tenant has obtained Landlord's prior written consent for
the specific sign proposed by Tenant, (ii) such sign(s) conform to all
applicable governmental rules and regulations, (iii) Tenant maintains such sign
is good condition and appearance and (iv) at the termination of this Lease,
Tenant shall remove all such signs and repair any damage caused by such sign or
its removal at Tenant's sole expense.
15.6 Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
15.7 Time of Essence. Time is of the essence.
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15.8 Captions. Article and paragraph captions are for convenience only are not a
part of this Lease.
15.9 Incorporation of Prior Agreement; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification.
15.10 Waiver. No waiver by Landlord of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Tenant of
the same or any other provision. Landlord's consent to or approval of any act
shall not be deemed to render unnecessary the obtaining of Landlord's consent to
or approval of any subsequent act by Tenant. The acceptance of rent hereunder by
Landlord shall not be a waiver of any preceding breach by Tenant of any
provision hereof, other than the failure of Tenant to pay the particular rent so
accepted regardless of Landlord's knowledge of such preceding breach at the time
of acceptance of such rent.
15.11 Recording. Tenant shall not record this Lease or allow the filing of a UCC
financing statement containing the legal description of the Property without
Landlord's prior written consent, and such recordation or filing shall, at the
option of Landlord, constitute a noncurable default of Tenant hereunder.
15.12 Holding Over. If Tenant remains in possession of the Premises or any part
thereof after the expiration of the term hereof without the express written
consent of Landlord, such occupancy shall be a tenancy from month to month at a
rental equal to one hundred fifty percent (150%) of the Basic Monthly Rent due
for the last month of the Lease term plus all other charges payable hereunder,
and upon the terms hereof applicable to a month to month tenancy.
15.13 Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive, but shall wherever possible, be cumulative with all other remedies at
law or in equity.
15.14 Covenants and Conditions. Each provision of this Lease performable by
Tenant shall be deemed both a covenant and a condition.
15.15 Binding Effect; Choice of Law; Proration. Subject to any provisions hereof
restricting assignment or subletting by Tenant or as may be expressly provided
in this Lease, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the state where the Premises are located.
15.16 Subordination.
15.16.1 This Lease, at Landlord's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation for security
now or hereafter placed upon the real property of which the Premises are a part
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof. If any
Lender or ground lessor shall elect to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease, and shall give written notice thereof
to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust, or
ground lease, regardless whether this Lease is dated prior or subsequent to such
mortgage, deed of trust or ground lease, or the date of recording thereof.
15.16.2 Provided that the mortgagee or beneficiary, as the case may be,
shall agree to recognize this Lease in the event of foreclosure if Tenant is not
in default at such time subject to such provisions relating to the disposition
or application of insurance or condemnation proceeds as may be contained in such
mortgagee or beneficiary's loan documents, Tenant agrees to execute any
documents required to effectuate such subordination or to make this Lease prior
to the lien of any mortgage, deed of trust or ground lease, as the case may be,
and failing to do so within ten (10) days after written demand, does hereby
make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact
and in Tenant's name, place and stead, to do so.
15.17 Attorneys Fees. If Tenant or Landlord brings an action to enforce the
terms hereof or declare rights hereunder, the prevailing party in any such
action, on trial or appeal, shall be entitled to his reasonable attorneys fees
to be paid by the losing party as fixed by the court.
15.18 Landlord's Access. Landlord and Landlord's agents shall have the right to
enter the Premises at reasonable times for the purpose of inspecting the same,
showing the same to prospective purchasers or Lenders, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Landlord may deem necessary or desirable.
Landlord may at any time place on or about the Premises signs advertising the
availability for sale of the Property or a portion thereof, and, during the last
one hundred twenty (120) days of the term of this Lease, Landlord may place
signs on
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the Premises advertising the availability for lease of the Premises so long as
such signs do not unreasonably obscure Tenant's existing signs identifying its
business.
15.19 Auctions. Tenant shall not advertise or conduct any auction or going out
of business sale in the Premises.
15.20 Corporate Authority. If Tenant is a legal entity, each individual
executing this Lease on behalf of such entity represents and warrants that he or
she is duly authorized to execute and deliver this Lease on behalf of such
entity and that this Lease is binding upon such entity in accordance with its
terms.
15.21 Landlord's Liability. Any claim by Tenant against Landlord shall be
limited to the Landlord's interest in the Property, and Tenant expressly waives
any and all rights to proceed against any other assets of Landlord or any owner
of Landlord.
15.22 Notices. Wherever under this Lease provision is made for any demand,
notice or declaration of any kind, or where it is deemed desirable or necessary
by either party to give or serve any such notice, demand or declaration to the
other party, it shall be in writing and served either personally or sent by
registered or certified United States mail, postage prepaid, addressed to the
address stated at the beginning of this Lease or such subsequent address as may
have been specified for such purpose in a written notice given to the other
party.
15.23 Arbitration. Any dispute or difference which shall arise between the
parties relating to the construction, meaning or effect of this Lease, or of the
rights or liabilities of the parties hereunder, shall be referred to arbitration
by a single arbitrator unless such arbitrator does not have the legal authority
to provide the complete remedy or complete relief sought by the initiating party
or if any person or entity relevant to such dispute or difference cannot be
brought before the arbitrator and bound by the judgment thereof. If the parties
cannot agree, within ten (10) days of demand of a party on the identity of the
arbitrator, the Presiding Judge of the Superior Court for King County, upon an
appropriate request which either party may make, shall appoint the arbitrator.
15.24 Resolutions. Contemporaneously with the signing of this Lease, Tenant
shall provide to Landlord a certified copy of resolutions of its board of
directors authorizing the execution and delivery of this Lease by its specified
representative.
15.25 Broker Commissions. Tenant hereby warrants and represents to Landlord that
Tenant has not engaged or dealt with any broker, finder or other person (other
than the brokers listed in Paragraph 1.15, Agency Disclosure) who would be
entitled to any commission or fees for the negotiation, execution, or delivery
of this Lease. Tenant shall indemnify and hold Landlord harmless against any
loss, cost, liability or expense incurred by Landlord as a result of any claim
asserted by such broker or finder on the basis of any arrangements or agreements
made or alleged to have been made by or on behalf of Tenant. Landlord shall pay
Tenant's agent a standard real estate fee in the amount of five percent (5%) of
the gross lease value, one half due upon lease execution, one half upon lease
commencement.
15.26 Exhibits. The Exhibits as listed in Article I are attached and are a part
of this Lease:
LANDLORD: TENANT:
BY: /s/ Val Thomas BY: /s/ Benjamin C. Nourse
-------------- ----------------------
ITS: Manager ITS: Chairman
-------------- ----------------------
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LANDLORD
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Benjamin C. Nourse, the
person who appeared before me, and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the _________________ of ____________________, to be the free
and voluntary act of such party for the uses and purposes stated therein.
Dated: 03/01/99
Name: /s/ Juanita K. Gardner
----------------------------
NOTARY PUBLIC, state of Washington
My appointment expires 07/28/02
TENANT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Val Thomas, is the
person who appeared before me, and said person acknowledged that he signed this
instrument, on oath stated that he was authorized to execute the instrument and
acknowledged it as the Manager of Eastlake at Hamlin, LLC, to be the free and
voluntary act of such party for the uses and purposes stated therein.
Dated: 03/03/99
Name: /s/ Karla A. Holmes
----------------------------
NOTARY PUBLIC, state of Washington
My appointment expires 11/18/01
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Exhibit "A"
LEGAL DESCRIPTION
LOTS 12, 13 & 14, BLOCK 19 DENNY FURMAN ADDITION TO CITY OF SEATTLE ACCORDING TO
PLAT RECORDED IN VOLUME 7 OF PLATS PAGE 34 RECORDS OF KING COUNTY, WA.
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Exhibit "B"
PREMISES
[diagram]
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Exhibit "C"
BASE RENT SCHEDULE
Months 1 - 36 March 1, 1999 to February 28, 2002 $4,312.50 per month
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Exhibit "D"
BASE PLANS
RIEHL CONSTRUCTION SERVICES, INC.
Scope of Work
December 21, 1998
Revised January 25, 1999
Eastlake and Hamlin
GreatFood.Com
The following scope of work is based on a verbal outline by Carolyn Statler of
Val Thomas Inc.
General Conditions includes the following:
a) A project duration of three weeks
b) Building permit obtained by General Contractor. Cost of permit paid
by owner.
Asbestos Removal includes the following:
a) Asbestos testing and removal, if required, provided by landlord
Continuous and Final Clean includes the following:
a) Continuous clean up of jobsite during construction
b) Final cleaning by landlord
Demolition includes the following:
a) Remove damaged ceiling tile and grid in conference room area
b) Remove pipe stubs in floor
d) Remove approximately 27 LF built in cabinet stem wall
d) Remove mirror trim from two columns
e) Remove steel pedestals mounted in floor
f) Remove miscellaneous debris found in space
g) Remove carpet and pad
h) Dump fees for above debris
Insulation includes the following:
a) Approximately 380 SF insulation
Wood Doors includes the following:
a) One (1) EA 3/0 x 7/0 paint grade wood door with 1 x 2 paint grade
casing
Finish Hardware includes the following:
a) An allowance of $100.00 for a cylindrical lever latch set, 1 1/2
pair hinges, and door stop
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Gypsum Wallboard includes the following:
a) Patch all holes in walls
b) 26 LF new partition at conference room
c) Re-skim columns where mirror removed
d) Finish tape "greenboard" as required
Acoustic Ceiling includes the following:
a) Approximately 160 SF new acoustic ceiling at previous walk-in cooler
b) Approximately 192 SF new acoustic ceiling at conference room
c) Acoustic ceiling soffit at change in elevation
Ceramic Tile includes the following:
a) Grout holes in 12" x 12" tile
b) Install new 4 x 4 white tile where colored tiles and tiles with
holes occur
c) Please note: Infill of 4" ceramic tile on walls is not included
Floor Prep includes the following:
a) Infill holes in floor where plumbing removed with new concrete plugs
b) Infill grout joints of existing tile that remains
c) Infill areas of missing file with topping compound
Carpet includes the following:
a) 254 SY of 28 oz. level loop carpet in a glue down application by an
allowance of $12.10 per SY to include installation
Painting includes the following:
a) Seal and paint wallcovering
b) All new walls to receive 1 coat primer and 1 coat finish
c) New millwork to receive 1 coat primer and 1 coat finish
d) All existing walls to receive 2 coats finish
e) Ceiling deck, mechanical, acoustical ceiling tile and grid and
electrical conduits painted out
f) Plastic laminate "burl" soffit to be sanded and painted to match
ceiling
Fire Protection includes the following:
a) Modify five (5) EA existing heads to new height / location to
provide for code coverage.
Plumbing includes the following:
a) Provide new sink at back wall area
b) Terminate and cap old waste lines
c) Terminate and cap gas lines
d) Cap and fill in floor sinks and drains
HVAC includes the following:
a) Add three (3) EA new supply diffusers
d) Relocate return grill and add one (1) return grill
e) Inspect and verify operation of existing equipment
f) Miscellaneous demolition
g) Simple mechanical permit
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Electrical includes the following:
a) Cap power in removed walls
b) Firecaulk openings where conduit terminated
c) Modify boxes at tiled wall
d) Relocate one (1) 1 EA 2 x 4 fluorescent fixture at new conference
room
e) Add two (2) 1 EA 2 x 4 fluorescent fixture at new conference room
f) Add three (3) 1 EA 2 x 4 fluorescent fixture at old walk in freezer
area
g) Add four (4) EA track heads
h) Label electrical panel
i) Clean up and demolition of abandoned circuits
i) 150 LF of Wiremold 4000 at perimeter walls with 20 EA duplex outlets
k) Ten (10) EA power poles with twenty (20) EA duplex outlets
l) Forty (40) EA outlets wired with Cat 5 cable for phone and data.
Please Note: Terminations at patch panel performed by others.
m) Twenty (20) EA circuits for above outlets
n) Miscellaneous lighting repair
o) Permit for above work
A construction contingency is not included in this proposal.
Other clarifications:
Washington State Sales Tax is not included in this proposal.
No work other than specifically outlined above is included in this proposal.
Additions and alterations due to local building officials and governing
agencies.
All work during regular business hours.
21
<PAGE>
REIHL Construction Services, Inc.
2366 Eastlake Ave. East # 406
Seattle, WA 98102-3366
PROJECT: Eastlake & Hamlin "GreatFood.Com"
Date: December 21, 1998 Revised January 25, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CODE DESCRIPTION QUALIFY LABOR MAT'L SUBS EQUIP MISC TOTAL
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01100 GENERAL CONDITIONS 1260 250 0 0 -- 1510
- ---------------------------------------------------------------------------------------
01060 PERMITS & FEES Owner 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
01400 TESTS & INSPECTIONS Owner 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
01530 BARRICADE/ENCLOSE None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
01710 CONT/FINAL CLEAN 200 125 0 0 -- 325
- ---------------------------------------------------------------------------------------
02050 DEMOLITION 480 250 0 0 -- 730
- ---------------------------------------------------------------------------------------
02080 ASBESTOS REMOVAL Owner -- -- -- -- -- 0
- ---------------------------------------------------------------------------------------
06100 ROUGH CARPENTRY None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
06200 FINISH CARPENTRY None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
06400 CUSTOM CASEWORK None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
07200 INSULATION 0 0 148 0 -- 148
- ---------------------------------------------------------------------------------------
08200 WOOD DRS & FRAMES 100 375 0 0 -- 475
- ---------------------------------------------------------------------------------------
08700 FINISH HARDWARE 25 100 0 0 -- 125
- ---------------------------------------------------------------------------------------
08800 GLASS & GLAZING None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
09250 GYPSUM WALLBOARD 0 0 2172 0 -- 2172
- ---------------------------------------------------------------------------------------
09500 ACOUSTICAL CEILING 0 0 993 0 -- 993
- ---------------------------------------------------------------------------------------
09650 CERAMIC TILE 0 0 481 0 -- 481
- ---------------------------------------------------------------------------------------
09678 RUBBER BASE None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
09680 CARPET 0 0 3099 9 -- 3099
- ---------------------------------------------------------------------------------------
09700 FLOOR PREP 192 175 0 0 -- 367
- ---------------------------------------------------------------------------------------
09900 PAINT 0 0 2886 0 -- 2886
- ---------------------------------------------------------------------------------------
10150 TOILET PARTITIONS None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
10400 SIGNAGE None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
10800 TOILET ACCESSORIES None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
11450 APPLIANCES None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
12500 WINDOW TREATMENT None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
15300 FIRE PROTECTION 0 0 875 0 -- 875
- ---------------------------------------------------------------------------------------
15400 PLUMBING 0 0 1724 0 -- 1724
- ---------------------------------------------------------------------------------------
15500 HVAC 0 0 1679 0 -- 1679
- ---------------------------------------------------------------------------------------
16000 ELECTRICAL Allow 0 0 8114 0 -- 8114
- ---------------------------------------------------------------------------------------
16400 LIFE SAFETY None 0 0 0 0 -- 0
- ---------------------------------------------------------------------------------------
17000 CONTINGENCY None 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------
TOTALS 2257 1275 22171 0 0 25703
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
TOTALS 2257 1275 22171 0 0 25703
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
00610-100 PERFORMANCE BOND N.I.C
- ---------------------------------------------------------------------------------------
W.S.S.T. N.I.C
- ---------------------------------------------------------------------------------------
01000-200 LABOR BURDEN 790
- ---------------------------------------------------------------------------------------
01060-230 B & O Tax 198
- ---------------------------------------------------------------------------------------
00650-100 P/L INSURANCE 160
- ---------------------------------------------------------------------------------------
00650-100 P/D INSURANCE 69
- ---------------------------------------------------------------------------------------
00650-140 BUILDERS RISK INSUR. 53
- ---------------------------------------------------------------------------------------
1270 1270
- ---------------------------------------------------------------------------------------
SUBTOTAL 26973
- ---------------------------------------------------------------------------------------
O & P 2697
- ---------------------------------------------------------------------------------------
TOTAL 29670
- ---------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Exhibit "E"
WORK SCHEDULE
RIEHL CONSTRUCTION SERVICES, INC.
2366 Eastlake Ave. E. #406 Seattle, WA 98102-3366 Prepared By:___________
Sheet ______ of _______
Short Interval Schedule For:
AS OF: ____________________
<TABLE>
<CAPTION>
Dates
- -------------------------------------------------------------------------------------------------------------------
Activity M T W T F W/E M T W T F W/E M T W T F W/E M T W T F
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demolition X X
- -------------------------------------------------------------------------------------------------------------------
Infill Floor X X
- -------------------------------------------------------------------------------------------------------------------
Acoustic
Ceiling X
- -------------------------------------------------------------------------------------------------------------------
HVAC X X
- -------------------------------------------------------------------------------------------------------------------
Sprinklers X X
- -------------------------------------------------------------------------------------------------------------------
Plumbing X X
- -------------------------------------------------------------------------------------------------------------------
Gypsum
Wallboard X X X
- -------------------------------------------------------------------------------------------------------------------
Door/Hardware X
- -------------------------------------------------------------------------------------------------------------------
Paint X X X
- -------------------------------------------------------------------------------------------------------------------
Demo Elect.
- -------------------------------------------------------------------------------------------------------------------
Electrical X X X X X
- -------------------------------------------------------------------------------------------------------------------
Carpet X X
- -------------------------------------------------------------------------------------------------------------------
Rubber Base X
- -------------------------------------------------------------------------------------------------------------------
Final Clean X
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Dates
- ---------------------------------------------
Activity W/E M T W T F W/E
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Demolition
- ---------------------------------------------
Infill Floor
- ---------------------------------------------
Acoustic
Ceiling
- ---------------------------------------------
HVAC
- ---------------------------------------------
Sprinklers
- ---------------------------------------------
Plumbing
- ---------------------------------------------
Gypsum
Wallboard
- ---------------------------------------------
Door/Hardware
- ---------------------------------------------
Paint
- ---------------------------------------------
Demo Elect.
- ---------------------------------------------
Electrical
- ---------------------------------------------
Carpet
- ---------------------------------------------
Rubber Base
- ---------------------------------------------
Final Clean
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
<PAGE>
[LETTERHEAD]
MASTER LEASE AGREEMENT
NUMBER 912385
LESSEE NAME AND ADDRESS
ONLINE SPECIALTY RETAILING, INC. dba GREAT FOOD ONLINE
2030 FIRST AVENUE, 3RD FLOOR
SEATTLE, WA 98121
- -------------------------------------------------------------------------------
TERMS AND CONDITIONS
1. LEASE, LESSOR and LESSEE agree that the terms of this Master Lease
Agreement shall apply to and be incorporated by reference in one or more
Lease Schedules in substantially the form of Exhibit A hereto (which
reference(s) the Master Lease Agreement Number indicated above). The word
"LEASE" shall mean any one of the individual Lease Schedules executed
hereunder, each of which shall incorporate the terms and conditions of this
Master Lease Agreement and shall be evidenced by the original Lease Schedule
and an attached copy of its Master Lease Agreement. The word "EQUIPMENT"
shall mean the equipment which is the subject of any one of the LEASES. Each
Lease Schedule will include an EQUIPMENT description, the EQUIPMENT location,
the minimum lease term and payment and security deposit information. Each
LEASE shall be enforceable upon execution by LESSEE and subsequent
counter-signature by LESSOR indicating acceptance.
2. RENTAL PAYMENTS. Unless otherwise agreed in writing, each regular
periodic payment of rent due during the term of each LEASE shall be due on
the first day of the month (the billing date). The first billing date under
each LEASE shall be the first day of the month following LESSEE's acceptance
of the EQUIPMENT, or, if LESSEE's acceptance occurs after the 20th day of a
month, then the first billing date shall be the first day of the second month
following LESSEE's acceptance. LESSEE shall pay pro rated rent, together with
applicable taxes, from the date of acceptance of the EQUIPMENT until the first
billing date as interim rent. In addition, LESSEE shall pay to LESSOR as
additional interim rent an amount equal to one thirtieth of the proportional
monthly rental payment per day for any amount funded by LESSOR prior to
acceptance of the EQUIPMENT by LESSEE. LESSEE agrees to pay rent for the
minimum term specified above following the interim rent period and until the
EQUIPMENT is returned to LESSOR on expiration or earlier termination of the
LEASE. Each periodic rental installment shall be the sum set forth above or
on an attached schedule plus any applicable sales and/or use taxes, and
shall, at LESSOR'S option, include a pro rata portion of that year's property
tax. Payments shall be made by LESSEE at LESSOR's address set forth herein or
as otherwise directed by LESSOR. LESSEE shall not abate, set off, deduct any
amount or reduce any payment for any reason without the prior written consent
of LESSOR. Payments are delinquent if not in LESSOR's possession by the due
date.
3. COMMENCEMENT AND TERMINATION. The LEASE term shall commence on
acceptance of the EQUIPMENT by LESSEE. The LEASE shall terminate on the
expiration of its minimum term in months as set forth in the Lease Schedule
following the first billing date and the fulfillment of all obligations of
LESSEE thereunder or upon notice by LESSOR in the case of LESSEE default. In
the event LESSEE retains part or all of the EQUIPMENT beyond the term of the
LEASE, then the terms of the LEASE shall stay in effect during such hold-
over period, subject to LESSOR's right on default to terminate the LEASE.
4. NO WARRANTIES BY LESSOR. LESSOR makes no warranty, express, implied or
statutory, as to any matter whatsoever, including the condition of the
EQUIPMENT, its merchantability or its fitness for any particular purpose, and
as to LESSOR, LESSEE leases the EQUIPMENT "as is".
5. CHOICE OF LAW, VENUE AND JURISDICTION. The LEASE shall be deemed to have
been made and shall be construed in accordance with the laws of the State of
Oregon or breach of the LEASE must be instituted and maintained in Multnomah
County, State of Oregon, and LESSEE expressly agrees to submit to personal
jurisdiction in such venue.
6. ASSIGNMENT. Without LESSOR's prior written consent, LESSEE shall not
assign, transfer, pledge,
MASTER LEASE AGREEMENT Page 1 of 5
BCN (initial)
----
<PAGE>
hypothecate or otherwise dispose of the LEASE, any interest therein, or
sublease or loan the EQUIPMENT or permit it to be used by anyone other than
LESSEE or LESSEE's qualified employees. LESSOR may assign the LEASE and/or
grant a security interest in the EQUIPMENT, in whole or in part, to one or
more assignees, without notice to LESSEE. LESSOR's assignee(s) and/or the
secured party(ies) may reassign the LEASE, and/or such security interest
without notice to LESSEE. Each such assignee and/or such secured party shall
have all rights of LESSOR under the LEASE, but no such assignee or secured
party shall be bound to perform any obligation of LESSOR. LESSEE shall
recognize each such assignment and shall not assert against any assignee
and/or secured party any defense, counterclaim or setoff it may have against
LESSOR. LESSEE acknowledges that any assignment or transfer by LESSOR shall
not materially change LESSEE's duties or obligations under the LEASE nor
materially increase the burdens or risks imposed on LESSEE.
7. SELECTION AND ACCEPTANCE OF EQUIPMENT. LESSEE has selected both the
EQUIPMENT and the supplier(s) from whom LESSOR is to purchase the EQUIPMENT.
LESSEE shall arrange for transportation, delivery and installation of the
EQUIPMENT at LESSEE's expense. LESSEE acknowledges that it has examined the
EQUIPMENT as fully as it desires. If the EQUIPMENT is not properly installed,
its delivery is delayed, it does not operate as represented by the
supplier(s) or it is unsatisfactory for any reason, LESSEE shall make no
claim on account thereof against LESSOR. LESSEE authorizes LESSOR to insert
in the LEASE or other documents the serial numbers and other identification
information for the EQUIPMENT as determined by LESSOR.
8. SUPPLIER/BROKER NOT AGENT OF LESSOR. LESSEE understands and agrees that
neither the supplier(s), nor any salesperson or agent of the supplier(s), is
an agent of LESSOR. LESSEE further agrees that if any transaction hereunder is
presented to LESSOR by a lease broker, that such broker is acting as an agent
of LESSEE and is not an agent of LESSOR. No salesperson or agent of the
supplier(s) or broker(s) is authorized to waive or alter any term or
condition of the LEASE, and no representation as to the EQUIPMENT or any
matter by the supplier(s) or broker(s) shall in any way affect LESSEE's duty
to pay rent and perform its other obligations set forth in the LEASE.
9. SECURITY DEPOSIT. Security deposits received by LESSOR are to guarantee
prompt and full payment of rent and the faithful and timely performance of
all provisions of the LEASE by LESSEE. Security deposits secure all
obligations of LESSEE to LESSOR under the LEASE or otherwise. No interest
shall accrue on the security deposit to the account of LESSEE. If LESSEE is
not in default under any agreement with LESSOR, the security deposit shall be
returned to LESSEE at the end of the LEASE term. In the event LESSEE defaults
on any of its obligations to LESSOR, LESSOR shall have the right, but shall
not be obligated, to apply the security deposit to cure such default. LESSEE
shall, within ten (10) days, restore the security deposit to the full amount
held by LESSOR prior to its application to cure such default.
10. CANCELLATION FOR NON-DELIVERY. If, within 30 days after the LEASE is
signed by LESSEE, the EQUIPMENT has not been delivered to and accepted by
LESSEE and if LESSOR has accepted the LEASE by signing, LESSOR, by written
notice to LESSEE, shall have the option at any time thereafter to terminate
LESSOR's obligation, if any, to lease the subject EQUIPMENT to LESSEE.
11. RETURN OF EQUIPMENT. On the expiration or earlier termination of the
LEASE, or on LESSEE default if LESSOR chooses, LESSEE, at its expense,
freight prepaid with full original value declared and insured, shall
immediately return the EQUIPMENT unencumbered to LESSOR in good repair,
condition and working order, ordinary wear and tear resulting from proper use
thereof alone excepted, by properly packing it for shipment and delivering it
to any place designated by LESSOR.
12. OWNERSHIP. The EQUIPMENT shall at all times remain the personal
property of LESSOR. LESSEE will at all times protect and defend, at its own
cost and expense, the OWNERSHIP of LESSOR against all claims, liens and legal
processes of creditors of LESSEE and other persons, and keep the EQUIPMENT
free and clear from all such claims, liens and processes. If the LEASE is
deemed at any time to be one intended as security or should LESSOR agree at
any time to sell the EQUIPMENT to LESSEE, LESSEE agrees that the EQUIPMENT
shall secure, in addition to the indebtedness set forth in the LEASE,
indebtedness at any time owing by LESSEE to LESSOR. Notwithstanding any other
terms and conditions of the LEASE, in the event that the EQUIPMENT includes
computer software, LESSEE agrees that LESSOR has not had, does not have, nor
shall have any title to such computer software. LESSEE may have executed or
may execute a separate software license agreement(s) and LESSEE agrees that
LESSOR is not a party to nor responsible for any performance with regard to
such license agreement(s).
13. LOCATION AND RIGHT OF INSPECTION. The EQUIPMENT shall be kept at the
location specified on the Lease Schedule or, if none is specified, at
LESSEE's address as set forth therein, and shall not be removed therefrom
without LESSOR's prior written consent. LESSOR shall have the right at any
time during normal business hours and upon reasonable notice to inspect the
EQUIPMENT and for that purpose have access to the location of the EQUIPMENT.
14. USE AND OPERATION. LESSEE shall use the EQUIPMENT in a careful manner
and shall comply with all laws relating to its possession, use and
maintenance. LESSEE represents that the EQUIPMENT shall be used in its
business or commercial concern and that no item of EQUIPMENT will be used for
personal, family or household purposes.
15. REPAIRS AND ALTERATIONS. LESSEE shall at its own expense maintain the
EQUIPMENT in good repair, appearance and functional order. LESSEE agrees to
comply with all maintenance schedules and procedures recommended by the
manufacturer of the EQUIPMENT and, if available, purchase or
MASTER LEASE AGREEMENT Page 2 of 5
BCN (initial)
-----
<PAGE>
otherwise enter into and adhere to dealer maintenance contracts. LESSEE shall
not make any alterations, additions or improvements to the EQUIPMENT without
LESSOR'S prior written consent. All alterations, additions or improvements
made to the EQUIPMENT shall belong to LESSOR.
16. LOSS AND DAMAGE. LESSEE shall bear the entire risk of loss, theft,
damage or destruction of the EQUIPMENT from any cause whatsoever and, as
between LESSOR and LESSEE, unless otherwise agreed between the parties,
LESSEE shall bear that risk of loss during transportation and delivery, and
LESSEE shall arrange and pay for transportation and delivery. No loss, theft,
damage or destruction of the EQUIPMENT shall relieve LESSEE of the obligation
to pay rent or to comply with any other obligation under the LEASE. In the
event of damage to any item of EQUIPMENT, LESSEE shall immediately place the
same in good repair at LESSEE's expense. If LESSOR determines that any item
of EQUIPMENT is lost, stolen, destroyed or damaged beyond repair, LESSEE
shall, at LESSEE's option: (a) replace the same with like equipment in good
repair, acceptable to LESSOR; or (b) pay LESSOR a sum equal to (i) all
amounts due by LESSEE to LESSOR under the LEASE up to the date of the loss,
(ii) the unpaid balance of the total rent for the remaining term under the
LEASE which is attributable to said item of EQUIPMENT, and (iii) an amount
equal to eighteen percent (18%) of the original cost of said item of
EQUIPMENT, which the parties agree shall represent the fair market value of
LESSOR's residual interest in said item of EQUIPMENT. The amounts in (ii) and
(iii) shall be discounted to present value at a discount rate of six percent
(6%) per annum.
17. INSURANCE. LESSEE shall provide and maintain primary insurance against
loss, theft, damage or destruction of the EQUIPMENT in an amount not less
than the full replacement value of the EQUIPMENT, with loss payable to
LESSOR. At LESSOR's request, LESSEE also shall provide and maintain primary
comprehensive general all risk liability insurance. Such insurance shall
include, but shall not be limited to, product liability coverage, insuring
LESSOR and LESSEE, with a severability of interest endorsement or its
equivalent, against any and all loss or liability for all damages, either to
persons, property or otherwise, which might result from or happen in
connection with the condition, use or operation of the EQUIPMENT, with such
limits and with an insurer satisfactory to LESSOR. Each policy shall
expressly provide that the insurance as to LESSOR shall not be invalidated by
any act, omission or neglect of LESSEE and cannot be canceled without ten
(10) days written notice to LESSOR. As to each policy, LESSEE shall furnish
to LESSOR a certificate of insurance from the insurer evidencing the
insurance coverage required by this Section. If LESSEE fails to procure or
maintain such insurance, LESSOR shall have the right, but shall not be
obligated, to obtain such insurance as to LESSOR's and/or LESSEE's interests.
In that event, LESSEE shall repay to LESSOR the cost thereof with the next
payment of rent, together with late charges as set forth in Section 23.
LESSEE irrevocably appoints LESSOR as LESSEE's attorney-in-fact to make claim
for, receive payment of, and execute and endorse all documents, checks or
drafts received in payment for loss or damage under such insurance
policy(ies). All obligations of this Section shall extend throughout the term
of the LEASE and until the EQUIPMENT is returned to LESSOR.
18. LIENS AND TAXES. LESSEE shall keep the EQUIPMENT free and clear of all
levies, liens and encumbrances. LESSEE shall pay LESSOR, on or before the due
date, all charges and taxes, local, state or federal, which may now or
hereafter be imposed upon the ownership, leasing, rental, sale, purchase,
possession or use of the EQUIPMENT, excluding, however, all taxes on LESSOR's
income. If LESSEE fails to pay said charges or taxes to LESSOR when due
LESSOR shall have the right, but shall not be obligated, to pay said charges
or taxes, and add the same to the next payment of rent, together with late
charges as set out in Section 23. LESSEE agrees to pay a reasonable fee to
LESSOR for the processing of property tax payments.
19. INDEMNITY. LESSEE shall indemnify LESSOR against, and hold LESSOR
harmless from, any and all claims, actions, proceedings, expenses, damages and
liabilities, including attorney fees, arising in connection with the
EQUIPMENT, including, with limitation, its manufacture, selection, purchase,
delivery, possession, use, operation or return and the recovery of claims
under insurance policies thereon. This indemnity provision shall survive
termination, cancellation or breach of the LEASE.
20. MISCELLANEOUS REPRESENTATIONS OF LESSEE. LESSEE and any guarantor of
the LEASE shall provide LESSOR with such corporate resolutions, financial
statements not less than quarterly, and all other documents regarding the
financial or credit condition of LESSEE or any guarantor which LESSOR may
request from time to time. LESSEE represents and warrants that all credit and
financial information submitted to LESSOR in connection with the LEASE is
true and correct in all respects. LESSEE agrees that LESSOR and/or its
assigns may at any time investigate the credit-worthiness of LESSEE using all
available means.
21. UNIFORM PERSONAL PROPERTY LEASING ACT. To the extent permitted by
applicable law, and to the extent the LEASE is governed by the law of a
jurisdiction which has adopted a version of the Uniform Personal Property
Leasing Act (also known as "Uniform Commercial Code - Leases"), the parties
hereto agree that: (1) the provisions thereof conferring remedies upon a
LESSEE or imposing obligations upon a LESSOR shall not apply to the LEASE,
its interpretation, or its enforcement; and (2) the LEASE is a Finance Lease
as defined by Uniform Commercial Code - Section 2A-103(g). LESSEE
acknowledges that LESSEE has reviewed and approved any written Supply
Contract(s) covering the EQUIPMENT purchased from the Supplier(s) for lease
to LESSEE. LESSEE further acknowledges that LESSOR has informed or advised
LESSEE in writing, either previously or in the LEASE, of the following: (a)
the identity of the Supplier(s); (b) that the LESSEE may have rights under
the Supply Contract(s); and (c) that the LESSEE may contact the Supplier(s)
for a description of any such rights LESSEE may have under the Supply
Contract(s).
MASTER LEASE AGREEMENT Page 3 of 5
BCN (initial)
-----
<PAGE>
22. FINANCING STATEMENTS. At the request of LESSOR, LESSEE will join LESSOR
in executing financing statements pursuant to the Uniform Commercial Code.
Lessee hereby authorizes Lessor or its agents or assigns to execute financing
statements on LESSEE's behalf, and to file such financing statements in all
jurisdictions where such execution and filing is permitted. It is agreed that
a carbon or photocopy of any financing statement may be filed in place of the
original and that a copy hereof may be filed as a financing statement.
23. LATE CHARGES AND INTEREST. If LESSEE fails to pay LESSOR any amount
when due or, in the case of an amount due to one other than LESSOR if LESSOR
pays an amount on LESSEE's behalf, then LESSEE shall pay LESSOR a late charge
of $29, plus five percent (5%) of such amount or $5, whichever is greater,
for each calendar month or part thereof for which rent or other sum shall be
delinquent or shall have been paid by LESSOR on LESSEE's behalf. If LESSEE
fails to pay or fails to perform other LEASE obligations, LESSEE agrees to
pay LESSOR $19 for each contact necessitated because of such failure. LESSEE
also agrees to pay LESSOR the sum of $29 for each check of LESSEE's returned
uncollectable by LESSEE's bank. The amount of any charges assessed hereunder
shall be added to and become part of the next rental payment or shall be
separately invoiced, at LESSOR's option. Interest shall accrue on any unpaid
or unreimbursed amounts at the maximum rate allowable by law or eighteen
percent (18%), whichever is less, from the due date until paid by LESSEE.
24. TIME OF THE ESSENCE. Time is of the essence of the LEASE. This
provision shall not be waived by the acceptance on occasion of late or
defective performance.
25. DEFAULT. LESSEE shall be in default if (a) LESSEE shall fail to pay
rent or any other amount provided for under the LEASE within five (5) days
after the same becomes due and payable, or (b) LESSEE fails to observe, keep
or perform any other provision of the LEASE or of any other agreement with
LESSOR, and such failure shall continue for a period of ten (10) days; or (c)
LESSEE shall abandon the EQUIPMENT; or (d) except as inconsistent with
Federal Bankruptcy Law, any proceeding in bankruptcy, receivership or
insolvency shall be commenced against LESSEE or its property or any guarantor
or such guarantor's property, LESSEE or any guarantor files voluntarily for
bankruptcy or reorganization, or LESSEE or any guarantor makes an assignment
for the benefit of its creditors; or (e) LESSEE or any guarantor makes any
misrepresentation or false statement as to its credit or financial standing
in connection with the execution or the further performance of the LEASE; or
(f) any attachment or execution be levied on any of LESSEE's property; or (g)
LESSEE permits any other entity or person to use the EQUIPMENT without the
prior written consent of LESSOR; or (h) in the business and affairs of LESSEE
or any guarantor there occurs a material change which shall impair the
security of the EQUIPMENT or increase LESSOR's credit risk involved in the
LEASE.
26. REMEDIES. In the event of LESSEE default, LESSOR shall have the right
and option, but shall not be obligated, to exercise any one or more of the
following remedies, which remedies or any of them may be exercised by LESSOR
without notice to LESSEE and without any election of remedies by LESSOR and,
if the obligations of LESSEE are guaranteed by a guarantor or guarantors,
LESSOR shall not be obligated to proceed against any such guarantor or
guarantors before resorting to its remedies against LESSEE under the LEASE:
(a) to the extent permitted under applicable law, LESSOR and/or its agents
may, without notice or legal process, enter onto any premises of or under
control of LESSEE or any agent of LESSEE where the EQUIPMENT may be or is
believed to be located and repossess the EQUIPMENT, disconnecting and
separating all thereof from any other property, using all means necessary or
permitted by law, LESSEE hereby expressly waiving any right of action of any
kind whatsoever against LESSOR arising out of such access to or removal,
repossession or retention of the EQUIPMENT; (b) LESSOR may declare all sums
due and to become due under the LEASE immediately due and payable and
institute litigation to collect the same; (c) LESSOR may institute litigation
to collect all rents and other amounts due as of the date of such default
together with any sums that may accrue up to the date of trial; (d) LESSOR
may institute litigation to specifically enforce the terms of the LEASE; (e)
LESSOR may terminate the LEASE; (f) LESSOR may require LESSEE to return the
EQUIPMENT pursuant to Section II; and/or (g) LESSOR may pursue any other
remedy now, or hereafter, existing in law or equity. However, damages for any
future rentals and/or LESSOR's residual value in the EQUIPMENT shall be
discounted to present value at a discount rate equal to six percent (6%) per
annum. In the event of any default by LESSEE under the LEASE, LESSOR may at
its sole discretion, although it shall not be obligated to do so, sell the
EQUIPMENT at a private or public, cash or credit sale, or may re-let the
EQUIPMENT for a term and a rental which may be equal to, greater than, or
less than provided in the LEASE. Any proceeds of sale or any rental payments
received under the new lease - less LESSOR's expenses of taking possession,
reasonable attorney fees and/or collection fees, storage and/or
reconditioning costs, the costs of sale or re-letting, and less LESSOR's fair
market residual value in the EQUIPMENT - shall be applied to LESSEE's
obligations under the LEASE, and LESSEE shall remain liable for the balance.
LESSEE's liability shall not be reduced by reason of any failure of LESSOR to
sell or re-let.
27. EXPENSES OF ENFORCEMENT, ATTORNEY FEES. In the event of any default,
LESSEE shall pay LESSOR a sum equal to all expenses, including attorney fees,
if any, incurred by LESSOR in connection with the enforcement of any of
LESSOR's remedies and all expenses of repossessing, storing, repairing, and
selling or re-letting the EQUIPMENT together with interest on such amount at
the maximum rate allowable by law or eighteen percent (18%), whichever is
less, from the date such amount is paid by LESSOR. In the event litigation is
instituted to enforce any of the terms of the LEASE, the prevailing party
shall be entitled to recover from the other party such sum as the court may
judge reasonable as attorney fees at trial and upon appeal, in addition to
all other sums provided for by law.
28. SUCCESSOR INTERESTS. Subject to any prohibition against assignment
contained herein, the LEASE
MASTER LEASE AGREEMENT Page 4 of 5
BCN (initial)
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<PAGE>
shall be binding upon and inure to the benefit of the heirs, successors and
assigns of the parties. As used in the LEASE, the term "LESSOR" shall include
any assignee or secured party of LESSOR where appropriate.
29. MULTIPLE LESSEES. If more than one LESSEE is named herein, the
reference to LESSEE refers to each and the liability of each shall be joint
and several.
30. NOTICES. Any written notice or demand under the LEASE may be given to a
party by mail at its address set forth on the Lease Schedule or at such
address as the party may provide in writing from time to time. Notice and
demand so made shall be effective when deposited in the United States mail
duly addressed with postage prepaid.
31. WAIVER. Failure of LESSOR at any time to require performance of any
provision of the LEASE shall not limit any right of LESSOR to enforce that
provision, nor shall any waiver by LESSOR of any breach of any provision be a
waiver of any succeeding breach of that provision or a waiver of that
provision itself or any other provision.
32. NUMBER AND CAPTIONS. As used herein, the singular shall include the
plural, and the plural the singular. All captions used herein are intended
solely for convenience of reference and shall in no way limit or explain any
of the provisions of the LEASE.
33. DUPLICATE ENFORCEABLE AS ORIGINAL. LESSEE hereby consents to the use of
the original Lease Schedule, along with a photocopy of the fully executed
Master Lease Agreement, for all purposes including, but not limited to,
evidence in litigation or any other judicial proceeding.
34. SEVERABILITY. If any provision of the LEASE is held invalid, such
invalidity shall not affect other provisions which can be given effect
without the invalid provision.
35. ENTIRE AGREEMENT. This Master Lease Agreement and the Lease Schedule,
represent the entire, final and complete agreement of the parties pertaining
to the lease of the EQUIPMENT and supersede or replace all written and oral
agreements heretofore made or existing by and between the parties of their
representatives insofar as the lease of the EQUIPMENT is concerned, and no
modification or addition to the LEASE shall be binding unless agreed by a
corporate officer, against whom enforcement is sought.
- -------------------------------------------------------------------------------
- PLEASE REQUEST ANY CHANGES DESIRED -
LESSEE ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS ALL OF THE TERMS AND
CONDITIONS CONTAINED IN THIS MASTER LEASE AGREEMENT AND THAT THESE TERMS AND
CONDITIONS SHALL GOVERN EACH LEASE ENTERED INTO BY THE PARTIES.
----------------------------------------------------------------------------
LESSOR Date 8/27/98 LESSEE Date 8/23/98
FIRST CORP ONLINE SPECIALTY RETAILING, INC.
dba GREAT FOOD ONLINE
---------------------------------------- ---------------------------------
Full Legal Name Of Lessee
BY: Leonard Ludwig, CEO BY: X Benjamin C. Nourse CHAIRMAN
------------------- ------------------------------
BEN NOURSE (TITLE)
THIS MASTER LEASE AGREEMENT WILL NOT BY:
BIND LESSOR OR BECOME EFFECTIVE UNTIL ------------------------------
AND UNLESS LESSOR ACCEPTS IT BY (TITLE)
SIGNING ABOVE.
BY:
------------------------------
(TITLE)
[ILLEGIBLE]
------------------------------
WITNESS
----------------------------------------------------------------------------
MASTER LEASE AGREEMENT Page 5 of 5
BCN (initial)
---
<PAGE>
[LETTERHEAD]
MASTER LEASE AGREEMENT NUMBER 912385
CONTINUING CORPORATE RESOLUTION AUTHORIZING LEASES
Resolution of the Board of Directors of ONLINE SPECIALTY RETAILING, INC. dba
GREAT FOOD ONLINE (the "Corporation").
Recitals
WHEREAS, the jurisdiction of the Corporation's incorporation empowers
corporations to lease real and personal property; and
WHEREAS, the jurisdiction of the Corporation's incorporation expressly
provides that the powers of the Corporation are to be exercised by its Board
of Directors, subject to certain limitations; and
WHEREAS, the Board of Directors of the Corporation deems it to be in the
best interests of the Corporation and its shareholders to enter into a Master
Lease Agreement and one or more Lease Schedules thereunder with LESSOR,
whether now or hereafter, for the lease of certain personal property
described in each such Lease Schedule.
Resolutions
NOW THEREFORE, IT IS RESOLVED, that the Corporation enter into the Master
Lease Agreement and one or more Lease Schedules thereunder, for the lease of
certain personal property described in the Lease Schedules on the terms and
conditions set forth in the Master Lease Agreement and the Lease Schedules,
and that the Corporation consents to the use of original Lease Schedules,
along with a photocopy of the fully executed Master Lease Agreement, and
photocopies of the related documents (includeding this Corporate Resolution
Authorizing Leases), for all purposes including, but not limited to, evidence
in litigation or any other judicial proceeding; and it is further
RESOLVED, that BEN NOURSE, who is the CHAIRMAN of this Corporation, is
authorized and directed to execute and deliver the Master Lease Agreement,
the Lease Schedules, and any other related documents; and it is further
RESOLVED, that BEN NOURSE, who is the CHAIRMAN of this Corporation, is
authorized to appoint an alternative employee or agent of the Corporation,
via telephonic or other communication with LESSOR, to provide verbal
verification of delivery and acceptance of equipment under the Master Lease
Agreement and Lease Schedules. Such appointment and subsequent verification
and acceptance shall be binding upon the Corporation.
CERTIFICATE
I, BEN NOURSE, certify:
That I am the duly elected and acting Secretary of ONLINE SPECIALTY
RETAILING, INC. dba GREAT FOOD ONLINE, a corporation;
That the foregoing Corporate Resolution Authorizing Leases was duly adopted
by the Board of Directors in conformity with the Articles of Incorporation
and Bylaws of the Corporation; and
That the resolution has been neither modified nor rescinded and is, as of the
date of this Certificate, in full force and effect, and will remain in full
force and effect until such time as the Board of Directors terminates the
resolution and notifies LESSOR of such termination in writing. Such
termination shall not affect the Master Lease Agreement and Lease Schedules
executed prior to LESSOR's receipt of the notice of termination.
IN WITNESS WHEREOF, I set my hand this 23rd day of August, 1998
/s/ Benjamin C. Nourse
-----------------------------------
CORPORATE SECRETARY
BEN NOURSE
-----------------------------------
<PAGE>
SECURITY AGREEMENT
- -------------------------------------------------------------------------------
It is hereby agreed this 23rd day of August 1998, by and between ONLINE
SPECIALTY RETAILING, INC. dba GREAT FOOD ONLINE of 2030 FIRST AVENUE, 3RD
FLOOR, SEATTLE, WA 98121 ("Debtor") and FIRSTCORP of 7145 S.W. Varns Street,
Portland, Oregon 97223-8057 ("Secured Party"):
1. To secure the payment, with interest thereon, and the performance
and fulfillment of all Obligations (as hereinafter defined) of Debtor to
Secured Party, Debtor hereby grants to Secured Party a security interest in
all equipment of every kind and nature, together with all proceeds, products
and replacements thereof and substitutions and accessions thereto
(hereinafter collectively called "Property"), wherever located, now or
hereafter belonging to Debtor.
2. The term "Obligations" as used herein shall mean and include any
and all contract or account payables, leases, loans, advances, payments,
extensions of credit, endorsements, guaranties, benefits, and financial
accommodations heretofore and hereafter made, granted, or extended by Secured
Party to Debtor or which Secured Party has or will become obligated to make,
grant or extend to or for the account of Debtor; any and all interest,
commissions, obligations, liabilities, indebtedness, charges, and expenses
heretofore and hereafter chargeable against Debtor by Secured Party or owing
by Debtor to Secured Party or upon which Debtor may be or have become liable
as endorser or guarantor; any and all renewals or extensions of any of the
foregoing, no matter how or when arising and whether under any present or
future agreement or instrument between Debtor and Secured party or otherwise,
and the amount due upon any notes or other instruments or documents given to
or received by Secured Party for or on account of the foregoing; and the
performance and fulfillment by Debtor of all the terms, conditions, promises,
covenants, provisions, and warranties contained in the Agreement and in any
note, instrument, or document secured hereby and in any present or future
agreement or instrument between Debtor and Secured Party.
3. Debtor covenants and warrants to Secured Party that:
(a) Debtor is the lawful owner of the Property and has the sole
right and lawful authority to make this Agreement; the Property and every
part thereof is free and clear of all liens and encumbrances of every kind
and description (except any held by Secured Party); and Debtor will warrant
and defend the Property against all claims and demands of all persons.
Secured Party is hereby authorized to file one or more financing statements,
signed only by Secured Party, and/or a reproduction hereof as a financing
statement in order to perfect its security interest.
(b) Debtor will keep the Property free and clear of all
attachments, levies, taxes, and lien encumbrances of every kind, nature, and
description; Debtor, at its own cost and expense, will maintain and keep the
Property in a good state of repair; and Debtor will not sell, assign,
mortgage, lease, pledge, or otherwise dispose of the Property or any interest
therein without the prior written consent of Secured Party.
(c) Debtor will insure the Property in the name of Secured Party
or its assignee against loss or damage by fire and extended coverage perils,
theft, burglary and pilferage, in amounts and under policies acceptable to
Secured Party, the proceeds to be payable to Secured Party or assignee. All
premiums thereon shall be paid by Debtor. Debtor hereby irrevocably appoints
Secured Party as Debtor's Attorney-in-Fact to make claim for, receive payment
of, and execute and endorse all documents, checks, or drafts received in
payment for any loss or damage under any of said insurance policies.
(d) The Obligations are undertaken for commercial purposes only
and the Property is in the possession of Debtor at its principal place of
business, or, if not, at a location which has been agreed to by Secured Party
prior to the execution hereof. Debtor will not remove the Property from said
location without prior written consent of Secured Party, nor change its
present business location(s) or name(s) without at least thirty days prior
written notice to Secured Party. At all times, Debtor will allow Secured
Party or its representatives free access to and right of inspection of the
Property. At Secured Party's request, Debtor shall furnish its current
financial statements to Secured Party.
(e) Debtor shall comply (so far as may be necessary to protect
the Property and the lien of this Agreement thereon) with all of the terms
and conditions of leases, mortgages, or deeds of trust covering the premises
where the Property, or any portion thereof is located. Debtor shall also
comply with any orders, ordinances, laws, or statutes of any city, state, or
other governmental entity having jurisdiction with respect to the premises or
the conduct of business thereon.
4. Debtor shall be in default upon occurrence of any of the following
(hereinafter referred to as "Event of Default"):
(a) Debtor shall cease doing business, shall become insolvent, or
make an assignment for the benefit of creditors;
(b) Bankruptcy proceedings or proceedings for arrangement or
reorganization under any Bankruptcy Act or proceeding for the appointment of
a receiver, trustee, liquidator, or custodian for Debtor or any of Debtor's
property shall be commenced by or against Debtor;
(c) Debtor shall fail punctually and faithfully to fulfill,
observe, or perform any of the Obligations; or
(d) Any of the warranties, covenants, or representations made to
Secured Party by Debtor are to become untrue or incorrect in any adverse
respect, or if there shall be a substantial change in the management,
ownership, or control of Debtor.
5. If Debtor shall be in default hereunder, Secured Party shall have
the right to pursue any other now, or hereafter, existing in law or equity,
without prior notice or demand, and specially may enforce any one or more of
the following remedies, successively, alternately, or concurrently, without
waiving its right to enforce any other remedy or any Obligation according to
its terms:
(a) To the extent Debtor has failed to perform or fulfill an
Obligation, Secured Party may perform or fulfill the same, or cause the
performance or fulfillment thereof. The costs and expenses of performance or
fulfillment, including reasonable attorney fees, shall be a lien on the
Property, added to the amount of the Obligations, and payable on demand.
<PAGE>
(b) Secured Party may take possession of the Property wherever it
may be, and enter any of the premises of Debtor with or without process of
law, and search for, take possession of, remove, or keep and store the same
in said premises, without liability for trespass nor charge for storage of
the Property, until sold. Debtor expressly waives any right to notice or
hearing in any action to recover possession of any or all of the Property.
(c) Secured Party may sell the Property or any part thereof and all
of Debtor's equity of redemption therein, if any, at public or private sale,
without notice or advertisement (such notice or advertisement being expressly
waived by Debtor), for cash or on credit and on such terms as Secured Party
may in its sole discretion elect. The proceeds of any sale shall be applied
first to pay all costs, expenses, and charges for repossessing, storing,
repairing, selling and/or leasing the Property, including attorney fees, and
second to the payment, partly or entirely, of the Obligations as Secured
Party may in its sole discretion elect. Debtor shall remain liable to
Secured Party for any deficiency.
(d) Secured Party may, upon filing suit to enforce or preserve its
rights under this Agreement or at any time while such suit is pending, apply
for and secure the appointment of a receiver to take possession of and
operate and manage Debtor's business or the Property and the income, rents,
and proceeds therefrom. The receiver may be an employee of Secured Party.
Debtor hereby expressly waives the requirement that Secured Party or the
receiver post bond upon the appointment of such receiver.
(e) Secured Party may appropriate and apply toward the payment of
the Obligations any and all balances, sums, property, credits, deposits,
accounts, reserves, collections, drafts, notes, or checks in or coming into
Secured Party's possession and belonging or owing to Debtor. For such
purposes, Secured Party may endorse the name of Debtor on any such instrument
made payable to Debtor for deposit, discount, or collection.
6. Debtor will indemnify and save Secured Party harmless from all
loss, damage, liability, and expense, including reasonable attorney fees,
that Secured Party may sustain or incur to obtain or enforce payment,
performance, or fulfillment of any of the Obligations; in the enforcement or
foreclosure of this Agreement; or in the prosecution or defense of any action
or proceeding either against Debtor or against Secured Party concerning any
matter growing out of or connected with this Agreement and/or any of the
Obligations or Property.
7. This Agreement cannot be changed or terminated orally. With respect
to Secured Party, only a writing, signed by an officer of Secured Party,
shall be effective to change, modify, waive, or terminate any of the
Obligations, this Agreement, or any other agreement between Debtor and
Secured Party. If Debtor is in default hereunder, and Secured Party fails to
demand full payment, performance, or fulfillment hereunder or fails to
otherwise exercise any right, privilege, remedy or option available to
Secured Party, such shall not be deemed a waiver of any right of Secured
Party. The acceptance by Secured Party of any payments subsequent to such
default shall not be deemed a waiver of any rights of Secured Party.
8. This Agreement may be assigned by Secured Party along with any and
all Obligations without notice to Debtor. Upon such assignment, Debtor agrees
not to assert against any assignee any defense, set-off, recoupment, claim,
counterclaim, or cross-complaint which Debtor may have against Secured Party,
whether arising hereunder or otherwise. All rights, remedies, options,
privileges, and elections given to Secured Party hereunder or otherwise shall
inure to the benefit of Secured Party or any assignee, and their respective
successors and assigns. Debtor may not transfer, pledge, or assign its
interests and obligations hereunder without the prior written approval of
Secured Party.
9. This Agreement shall not adversely affect any rights of Secured
Party under any other security agreement. This Agreement shall not be
construed as a waiver of any of the terms and provisions of any other
agreement, guaranty, or endorsement, all of which remain and continue in full
force and effect.
10. Any notices given or required hereunder shall be in writing, and
shall be delivered in person or shall be mailed to a party at its last known
address. Reasonable notification hereunder shall be any notification given or
sent at least five (5) days prior to the event for which such notification is
sent.
11. If Debtor shall be in default hereunder, Debtor shall pay Secured
Party a sum equal to all expenses, including attorney fees, if any, incurred
by Secured Party in connection with the enforcement of any of Secured Party's
remedies, together with all expenses of repossessing, storing, repairing and
selling and/or leasing the Property. If litigation is instituted to enforce
any of the terms of this Agreement, the prevailing party shall be entitled to
recover such sum as the court may judge reasonable as attorney fees and costs
of litigation, trial, and appeal, in addition to all other sums provided for
by law.
12. It is intended that each and every provision of this Agreement be
fully effective and enforceable according to its terms. If, however, any one
or more provisions hereof are in conflict with any statute or law and
therefore are not valid or enforceable, then each such provision shall be
deemed null and void, but to the extent of such conflict only and without
invalidating or affecting the remaining provisions hereof.
13. The Agreement shall be deemed to have been made and shall be
construed and enforced in accordance with the laws of the State of Oregon.
Any and all suits or actions for any and every breach hereof shall be
instituted and maintained in Multnomah County, Oregon.
IN WITNESS WHEREOF, this Agreement has been executed effective the date first
above-written.
SECURED PARTY: DEBTOR:
FIRSTCORP ONLINE SPECIALTY RETAILING, INC. dba GREAT FOOD
ONLINE
- ------------------------------ -----------------------------------------------
By: Leonard Ludwig By: /s/ BEN NOURSE
-------------------------- --------------------------
BEN NOURSE
Title: CEO Title: CHAIRMAN
----------------------- -----------------------
Date: 8/27/98 Date: 8/23/98
----------------------- -----------------------
<PAGE>
EXODUS COMMUNICATIONS, INC.
INTERNET DATA CENTER SERVICES AGREEMENT
THIS INTERNET DATA CENTER SERVICES AGREEMENT (this "AGREEMENT") is made
effective as of the Submission Date (April 10, 1999) indicated in the initial
Internet Data Center Services Order Form accepted by Exodus, by and between
Exodus Communications, Inc. ("EXODUS") and the customer identified below
("CUSTOMER").
PARTIES:
CUSTOMER NAME: GreatFood.com, Inc.
ADDRESS: 2731 Eastlake Avenue East
Seattle, WA 98102
PHONE: 206-322-7539
FAX: 206-322-7639
Exodus Communications, Inc.
2831 Mission College Blvd.
Santa Clara, CA 95054-1838
PHONE: (408) 346-2200
FAX: (408) 346-2420
1. INTERNET DATA CENTER SERVICES:
Subject to the terms and conditions of this Agreement, during the term of
this Agreement, Exodus will provide to Customer the services described in the
Internet Data Center Services Order Form(s) ("IDC SERVICES ORDER FORM(S)")
accepted by Exodus, or substantially similar services if such substantially
similar services would provide Customer with substantially similar benefits
("INTERNET DATA CENTER SERVICES"). All IDC Services Order Forms accepted by
Exodus are incorporated herein by this reference, each as of the Submission
Date indicated in such form.
2. FEES AND BILLING.
2.1 FEES. Customer will pay all fees due according to the IDC Services
Order Form(s).
2.2 BILLING COMMENCEMENT. Billing for Internet Data Center Services,
other than Setup Fees, indicated in the initial IDC Services Order Form shall
commence on the earlier to occur of (i) the "Installation Date" indicated in
the initial IDC Services Order Form, regardless of whether Customer has
commenced use of the Internet Data Center Services, unless Customer is unable
to install the Customer Equipment and/or use the Internet Data Center
Services by the Installation Date due to the fault of Exodus, then billing
will not begin until the date Exodus has remedied such fault and (ii) the
date the "CUSTOMER EQUIPMENT" (Customer's computer hardware and other
tangible equipment, as identified in the Customer Equipment List which is
incorporated herein by this reference) is placed by Customer in the "CUSTOMER
AREA" (the portion(s) of the Internet Data Centers, as defined in Section 3.1
below, made available to Customer hereunder for the placement of Customer
Equipment) and is operational. All Setup Fees will be billed upon receipt of
a Customer signed IDC Services Order Form. In the event that Customer orders
additional Internet Data Center Services, billing for such services shall
commence on the date Exodus first provides such additional Internet Data
Center Services to Customer or as otherwise agreed to by Customer and Exodus.
2.3 BILLING AND PAYMENT TERMS. Customer will be billed monthly in
advance of the provision of Internet Data Center Services, and payment of
such fees will be due within thirty (30) days of the date of each Exodus
invoice. All payments will be made in U.S. dollars. Late payments hereunder
will accrue interest at a rate of one and one-half percent (1 1/2%) per
month, or the highest rate allowed by applicable law, whichever is lower. If
in its judgment Exodus determines that Customer is not creditworthy or is
otherwise not financially secure, Exodus may, upon written notice to
Customer, modify the payment terms to require full payment before the
provision of Internet Data Center Services or other assurances to secure
Customer's payment obligations hereunder.
2.4 TAXES. All payments required by this Agreement are exclusive of all
national, state, municipal or other governmental excise, sales, value-added,
use, personal property, and occupational taxes, excises, withholding taxes
and obligations and other levies now in force or enacted in the future, all
of which Customer will be responsible for and will pay in full, except for
taxes based on Exodus' net income.
3. CUSTOMER'S OBLIGATIONS.
3.1 COMPLIANCE WITH LAW AND RULES AND REGULATIONS. Customer agrees that
Customer will comply at all times with all applicable laws and regulations
and Exodus' general rules and regulations relating to its provision of
Internet Data Center Services, as updated by Exodus from time to time ("RULES
AND REGULATIONS"). Customer acknowledges that Exodus exercises no control
whatsoever over the content of the information passing through its sites
containing the Customer Area and equipment and facilities used by Exodus to
provide Internet Data Center Services ("INTERNET DATA CENTERS"), and that it
is the sole responsibility of Customer to ensure that the information it
transmits and receives complies with all applicable laws and regulations.
3.2 CUSTOMER'S COSTS. Customer agrees that it will be solely
responsible, and at Exodus's request will reimburse Exodus, for all costs and
expenses (other than those included as part of the Internet Data Center
Services and except as otherwise expressly provided herein) it incurs in
connection with this Agreement.
3.3 ACCESS AND SECURITY. Customer will be fully responsible for any
charges, costs, expenses (other than those included in the Internet Data
Center Services), and third party claims that may result from its use of, or
access to, the Internet Data Centers and/or the Customer Area including but
not limited to any unauthorized use of any access devices provided by Exodus
hereunder. Except with the advanced written consent of Exodus, Customer's
access to the Internet Data Centers will be limited solely to the individuals
identified and authorized by Customer to have access to the Internet Data
Centers and the Customer Area in accordance with this Agreement, as
identified in the Customer Registration Form, as amended from time to time,
which is hereby incorporated by this reference ("REPRESENTATIVES").
3.4 NO COMPETITIVE SERVICES. Customer may not at any time permit any
Internet Data Center Services to be utilized for the provision of any
services that compete with any Exodus services, without Exodus' prior written
consent.
3.5 INSURANCE.
(a) MINIMUM LEVELS. Customer will keep in full force and effect during
the term of this Agreement: (i) comprehensive general liability insurance in
an amount not less than $5 million per occurrence for bodily injury and
property damage; (ii) employer's liability insurance in an amount not less
than $1 million per occurrence; and (iii) workers' compensation insurance in
an amount not less than that required by applicable law. Customer also agrees
that it will, and will be solely responsible for ensuring that its agents
(including contractors and subcontractors) maintain, other insurance at
levels no less than those required by applicable law and customary in
Customer's and its agents' industries.
(b) CERTIFICATES OF INSURANCE. Prior to installation of any Customer
Equipment in the Customer Area, Customer will furnish Exodus with
certificates of insurance which evidence the minimum levels of insurance set
forth above.
(c) NAMING EXODUS AS AN ADDITIONAL INSURED. Customer agrees that prior
to the installation of any Customer Equipment, Customer will cause its
insurance provider(s) to name Exodus as an additional insured and notify
Exodus in writing of the effective date thereof.
4. CONFIDENTIAL INFORMATION.
4.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have
access to certain confidential information of the other party concerning the
other party's business, plans, customers, technology, and products, including
the terms and conditions of this Agreement ("CONFIDENTIAL INFORMATION").
Confidential Information will include, but not be limited to, each party's
proprietary software and customer information. Each party agrees that it will
not use in any way, for its own account or the account of any third party,
except as expressly permitted by this Agreement, nor disclose to any third
party (except as required by law or to that party's attorneys, accountants
and other advisors as reasonably necessary), any of the other party's
Confidential Information and will take reasonable precautions to protect the
confidentiality of such information.
4.2 EXCEPTIONS. Information will not be deemed Confidential
Information hereunder if such information: (i) is known to the receiving
party prior to receipt from the disclosing party directly or indirectly from
a source other than one having an obligation of confidentiality to the
disclosing party; (ii) becomes known (independently of disclosure by the
disclosing party) to the receiving party directly or indirectly from a source
other than one having an obligation of confidentiality to the disclosing
party; (iii) becomes publicly known or otherwise ceases to be secret or
confidential, except through a breach of this Agreement by the receiving
party; or (iv) is independently developed by the receiving party.
5. REPRESENTATIONS AND WARRANTIES.
5.1 WARRANTIES BY CUSTOMER.
(a) CUSTOMER EQUIPMENT. Customer represents and warrants that it owns
or has the legal right and authority, and will continue to own or maintain
the legal right and authority during the term of this Agreement, to place and
use the Customer Equipment as contemplated by this Agreement. Customer
further represents and warrants that its placement, arrangement and use of
the Customer Equipment in the Internet Data Centers complies with the
Customer Equipment Manufacturer's environmental and other specifications.
(b) CUSTOMER'S BUSINESS. Customer represents and warrants that
Customer's services, products, materials, data, information and Customer
Equipment used by Customer in connection with this Agreement as well as
Customer's and its permitted customers' and users' use of the Internet Data
Center Services (collectively, "CUSTOMER'S BUSINESS") does not as of the
Installation Date, and will not during the term of this Agreement operate in
any manner that would violate any applicable law or regulation.
(c) RULES AND REGULATIONS. Customer has read the Rules and Regulations
and represents and warrants that Customer and Customer's Business are
currently in full compliance with the Rules and Regulations, and will remain
so at all times during the term of this Agreement.
(d) BREACH OF WARRANTIES. In the event of any breach, or reasonably
anticipated breach, of any of the foregoing warranties, in addition to any
other remedies available at law or in equity, Exodus will have the right
immediately, in Exodus' sole discretion, to suspend any related Internet Data
Center Services if deemed reasonably necessary by Exodus to prevent any harm
to Exodus and its business.
5.2 Warranties and Disclaimers by Exodus.
EXODUS COMMUNICATIONS, INC. CONFIDENTIAL AND PROPRIETARY (REV 6/98) PAGE 1
<PAGE>
5.2(a) SERVICE LEVEL WARRANTY. In the event Customer experiences any of
the following and Exodus determines in its reasonable judgment that such
inability was caused by Exodus' failure to provide Internet Data Center
Services for reasons within Exodus' reasonable control and not as a result of
any actions or inactions of Customer or any third parties (including Customer
Equipment and third party equipment). Exodus will upon Customer's request in
accordance with paragraph (iii) below, credit Customer's account as described
below:
(i) INABILITY TO ACCESS THE INTERNET (DOWNTIME). If Customer is unable
to transmit and receive information from Exodus' Internet Data Centers (i.e..
Exodus' LAN and WAN) to other portions of the Internet because Exodus failed
to provide the INternet Data Center Services for more than fifteen (15)
consecutive minutes. Exodus will credit Customer's account the pro-rata
connectivity charges (i.e. all bandwidth related charges) for one (1) day of
service, up to an aggregate maximum credit of connectivity charges for seven
(7) days of service in any one calendar (1) month. Exodus' scheduled
maintenance of the Internet Data Centers and Internet Data Center Services,
as described in the Rules and Regulations, shall not be deemed to be a
failure of Exodus to provide Internet Data Center Services. For purposes of
the foregoing, "unable to transmit and receive" shall mean sustained packet
loss in excess of 50% based on Exodus, measurements.
(ii) PACKET LOSS AND LATENCY. Exodus does not proactively monitor the
packet loss or transmission latency of specific customers. Exodus does,
however, proactively monitor the aggregate packet loss and transmission
latency within its LAN and WAN. In the event that Exodus discovers (either
from its own efforts or after being notified by Customer) that Customer is
experiencing packet loss in excess of one percent (1%) ("EXCESS PACKET LOSS")
or transmission latency in excess of 120 milliseconds round trip time (based
on Exodus' measurements) between any two Internet Data Centers within Exodus'
U.S. network (collectively, "EXCESS LATENCY", and with Excess Packet Loss
"EXCESS PACKET LOSS/LATENCY"), and Customer notifies Exodus (or confirms that
Exodus has notified Customer), Exodus will take all actions necessary to
determine the source of the Excess Packet Loss/Latency.
(A) TIME TO DISCOVER SOURCE OF EXCESS PACKET LOSS/LATENCY;
NOTIFICATION OF CUSTOMER. Within two (2) hours of discovering the existence
of Excess Packet Loss/Latency, Exodus will determine whether the source of
the Excess Packet Loss/Latency is limited to the Customer Equipment and the
Exodus equipment connecting the Customer Equipment to Exodus' LAN ("CUSTOMER
SPECIFIC PACKET LOSS/LATENCY"). If the Excess Packet Loss/Latency is not a
Customer Specific Packet Loss/Latency, Exodus will determine the source of
the Excess Packet Loss/Latency within two (2) hours after determining that it
is not a Customer Specific Packet Loss/Latency. In any event, Exodus will
notify Customer of the source of the Excess Packet Loss/Latency within sixty
(60) minutes after identifying the source.
(B) REMEDY OF EXCESS PACKET LOSS/LATENCY. If the Excess Packet
Loss/Latency remedy is within the sole control of Exodus, Exodus will remedy
the Excess Packet Loss/Latency within two (2) hours of determining the source
of the Excess Packet Loss/Latency. If the Excess Packet Loss/Latency is
caused from outside of the Exodus LAN or WAN. Exodus will notify Customer and
will use commercially reasonable efforts to notify the party(ies) responsible
for the source and cooperate with it (them) to resolve the problem as soon as
possible.
(C) FAILURE TO DETERMINE SOURCE AND/OR RESOLVE PROBLEM. In the
event that Exodus is unable to determine the source of and remedy the Excess
Packet Loss/Latency within the time periods described above (where Exodus was
solely in control of the source). Exodus will credit Customer's account the
pro-rata connectivity charges for one (1) day of service for every two (2)
hours after the time periods described above that it takes Exodus to resolve
the problem, up to an aggregate maximum credit of connectivity charges for
seven (7) days of service in any one (1) month.
(iii) CUSTOMER MUST REQUEST CREDIT: To receive any of the credits
described in this section 5.2(a). Customer must notify Exodus within three
(3) business days from the time Customer becomes eligible to receive a
credit. Failure to comply with this requirement will forfeit Customer's right
to receive a credit.
(iv) REMEDIES SHALL NOT BE CUMULATIVE; MAXIMUM CREDIT: In the event that
Customer is entitled to multiple credits hereunder arising from the same
event, such credits shall not be cumulative and Customer shall be entitled to
receive only the maximum single credit available for such event. In no event
will Exodus be required to credit Customer in any one (1) calendar month
connectivity charges in excess of seven (7) days of service. A credit shall
be applied only to the month in which there was the incident that resulted in
the credit. Customer shall not be eligible to receive any credits for periods
in which Customer received any Internet Data Center Services free of charge.
(v) TERMINATION OPTION FOR CHRONIC PROBLEMS: If, in any single calendar
month, Customer would be able to receive credits totaling fifteen (15) or
more days (but for the limitation in paragraph (iv) above) resulting from
three (3) or more events during such calendar month or, if any single event
entitling customer to credits under paragraph 5.2(a)(i) exists for a period
of eight (8) consecutive hours, then, Customer may terminate this Agreement
for cause and without penalty by notifying Exodus within five (5) days
following the end of such calendar month. Such termination will be effective
thirty (30) days after receipt of such notice by Exodus.
THIS WARRANTY DOES NOT APPLY TO ANY INTERNET DATA CENTER SERVICES THAT
EXPRESSLY EXCLUDE THIS WARRANTY (AS DESCRIBED IN THE SPECIFICATION SHEETS FOR
SUCH PRODUCTS). THIS SECTION 5.2(a) STATES CUSTOMER'S SOLE AND EXCLUSIVE
REMEDY FOR ANY FAILURE BY EXODUS TO PROVIDE INTERNET DATA CENTER SERVICES.
(b) NO OTHER WARRANTY. EXCEPT FOR THE EXPRESS WARRANTY SET OUT IN
SUBSECTION (a) ABOVE, THE INTERNET DATA CENTER SERVICES ARE PROVIDED ON AN
"AS IS" BASIS, AND CUSTOMER'S USE OF THE INTERNET DATA CENTER SERVICES IS AT
ITS OWN RISK. EXODUS DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER
EXPRESS AND/OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO WARRANTIES
OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND
TITLE AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE
PRACTICE. EXODUS DOES NOT WARRANT THAT THE INTERNET DATA CENTER SERVICES WILL
BE UNINTERRUPTED, ERROR-FREE, OR COMPLETELY SECURE.
(c) DISCLAIMER OF ACTIONS CAUSED BY AND/OR UNDER THE CONTROL OF THIRD
PARTIES. EXODUS DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM
EXODUS' INTERNET DATA CENTERS AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW
DEPENDS IN LARGE PART ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR
CONTROLLED BY THIRD PARTIES. AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE
THIRD PARTIES CAN PRODUCE SITUATIONS IN WHICH EXODUS' CUSTOMER' CONNECTIONS
TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH
EXODUS WILL USE COMMERCIALLY REASONABLE EFFORTS TO TAKE ACTIONS IT DEEMS
APPROPRIATE TO REMEDY AND AVOID SUCH EVENTS, EXODUS CANNOT GUARANTEE THAT
THEY WILL NOT OCCUR. ACCORDINGLY, EXODUS DISCLAIMS ANY AND ALL LIABILITY
RESULTING FROM OR RELATED TO SUCH EVENTS.
6. LIMITATIONS OF LIABILITY.
6.1 PERSONAL INJURY. EACH REPRESENTATIVE AND ANY OTHER PERSONS VISITING
THE INTERNET DATA CENTERS DOES SO AT ITS OWN RISK AND EXODUS ASSUMES NO
LIABILITY WHATSOEVER FOR ANY HARM TO SUCH PERSONS RESULTING FROM ANY CAUSE
OTHER THAN EXODUS' NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN PERSONAL
INJURY TO SUCH PERSONS DURING SUCH A VISIT.
6.2 DAMAGE TO CUSTOMER EQUIPMENT OR BUSINESS. EXODUS ASSUMES NO
LIABILITY FOR ANY DAMAGE TO, OR LOSS RELATING TO, CUSTOMER'S BUSINESS
RESULTING FROM ANY CAUSE WHATSOEVER. CERTAIN CUSTOMER EQUIPMENT, INCLUDING
BUT NOT LIMITED TO CUSTOMER EQUIPMENT LOCATED ON CYBERRACKS, MAY BE DIRECTLY
ACCESSIBLE BY OTHER CUSTOMERS. EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE TO,
OR LOSS OF, ANY CUSTOMER EQUIPMENT RESULTING FROM ANY CAUSE OTHER THAN
EXODUS' GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. TO THE EXTENT EXODUS IS
LIABLE FOR ANY DAMAGE TO, OR LOSS OF, THE CUSTOMER EQUIPMENT FOR ANY REASON,
SUCH LIABILITY WILL BE LIMITED SOLELY TO THE THEN-CURRENT VALUE OF THE
CUSTOMER EQUIPMENT.
6.3 EXCLUSIONS. EXCEPT AS SPECIFIED IN SECTIONS 6.1 AND 6.2 IN NO EVENT
WILL EXODUS BE LIABLE TO CUSTOMER, ANY REPRESENTATIVE OR ANY THIRD PARTY FOR
ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, CUSTOMER EQUIPMENT,
CUSTOMER'S BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS,
REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, INCIDENTAL
PUNITIVE INDIRECT OR CONSEQUENTIAL DAMAGES. LOSS OF DATA, OR INTERRUPTION OR
LOSS OF USE OF SERVICE OR OF ANY CUSTOMER EQUIPMENT OR CUSTOMER'S BUSINESS,
EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. WHETHER UNDER THEORY OF
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE.
6.4 MAXIMUM LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
AGREEMENT. EXODUS'S MAXIMUM AGGREGATE LIABILITY TO CUSTOMER RELATED TO OR IN
CONNECTION WITH THIS AGREEMENT WILL BE LIMITED TO THE TOTAL AMOUNT PAID BY
CUSTOMER TO EXODUS HEREUNDER FOR THE PRIOR TWELVE (12) MONTH PERIOD.
6.5 CUSTOMER'S INSURANCE. Customer agrees that it will not pursue any
claims against Exodus for any liability Exodus may have under or relating to
this Agreement until Customer first makes claims against Customer's insurance
provider(s) and such insurance provider(s) finally resolve(s) such claims.
6.6 BASIS OF THE BARGAIN; FAILURE OF ESSENTIAL PURPOSE. Customer
acknowledges that Exodus has set its prices and entered into this Agreement
in reliance upon the limitations of liability and the disclaimers of
warranties and damages set forth herein, and that the same form an essential
basis of the bargain between the parties. The parties agree that the
limitations and exclusions of liability and disclaimers specified in this
Agreement will survive and apply even if found to have failed of their
essential purpose.
7. INDEMNIFICATION.
7.1 EXODUS' INDEMNIFICATION OF CUSTOMER. Exodus will indemnify, defend
and hold Customer harmless from and against any and all costs, liabilities,
losses, and expenses (including, but not limited to, reasonable attorneys'
fees) (collectively, "LOSSES") resulting from any claim, suit, action, or
proceeding (each, an "ACTION") brought against Customer alleging (i) the
infringement of any third party registered U.S. copyright or issued U.S.
patent resulting from the provision of Internet Data Center Services pursuant
to this Agreement (but excluding any infringement contributorily caused by
Customer's Business or Customer Equipment) and (ii) personal injury to
Customer's Representatives from Exodus's gross negligence or willful
misconduct.
7.2 CUSTOMER'S INDEMNIFICATION OF EXODUS. Customer will indemnify, defend
and hold Exodus, its affiliates and customers harmless from and against any
and all Losses resulting from or arising out of any Action brought by or
against Exodus, its affiliates or customers alleging: (a) with respect to the
Customer's Business; (i) infringement or misappropriation of any intellectual
property rights; (ii) defamation, libel, slander, obscenity, pornography, or
violation of the rights of privacy or publicity; or (iii) spamming, or any
other offensive harassing or illegal conduct or violation of the Rules and
Regulations; (b) any damage or destruction to the Customer Area, the Internet
Data Centers or the equipment of Exodus or any other customer by Customer or
Representative(s) or Customer's designees; or (c) any other damage arising
from the Customer Equipment or Customer's Business.
7.3 NOTICE. Each party will provide the other party prompt written
notice upon of the existence of any such event of which it becomes aware, and
an opportunity to participate in the defense thereof.
8. TERM AND TERMINATION
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8.1 TERM. This Agreement will be effective for a period of one (1) year
from the Installation Date, unless earlier terminated according to the
provisions of this Section 8. The Agreement will automatically renew for
additional terms of one (1) year each.
8.2 TERMINATION.
(a) FOR CONVENIENCE.
(i) BY CUSTOMER DURING FIRST THIRTY DAYS. Customer may terminate this
Agreement for convenience by providing written notice to Exodus at any time
during the thirty (30) day period beginning on the Installation Date.
(ii) BY EITHER PARTY. Either party may terminate this Agreement for
convenience at any time effective after the first (1st) anniversary of the
Installation Date by providing ninety (90) days' prior written notice to the
other party at any time thereafter.
(b) FOR CAUSE. Either party will have the right to terminate this
Agreement if: (i) the other party breaches any material term or condition of
this Agreement and fails to cure such breach within thirty (30) days after
receipt of written notice of the same, except in the case of failure to pay
fees, which must be cured within five (5) days after receipt of written
notice from Exodus; (ii) the other party becomes the subject of a voluntary
petition in bankruptcy or any voluntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors; or
(iii) the other party becomes the subject of an involuntary petition in
bankruptcy or any involuntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors, if
such petition or proceeding is not dismissed within sixty (60) days of filing.
8.3 NO LIABILITY FOR TERMINATION. Neither party will be liable to the
other for any termination or expiration of this Agreement in accordance with
its terms.
8.4 EFFECT OF TERMINATION. Upon the effective date of expiration or
termination of this Agreement: (a) Exodus will immediately cease providing
the Internet Data Center Services; (b) any and all payment obligations of
Customer under this Agreement will become due immediately; (c) within thirty
(30) days after such expiration or termination, each party will return all
Confidential Information of the other party in its possession at the time of
expiration or termination and will not make or retain any copies of such
Confidential Information except as required to comply with any applicable
legal or accounting record keeping requirement; and (d) Customer will remove
from the Internet Data Centers all Customer Equipment and any of its other
property within the Internet Data Centers within five (5) days of such
expiration or termination and return the Customer Area to Exodus in the same
condition as it was on the Installation Date, normal wear and tear excepted.
If Customer does not remove such property within such five-day period, Exodus
will have the option to (i) move any and all such property to secure storage
and charge Customer for the cost of such removal and storage, and/or (ii)
liquidate the property in any reasonable manner.
8.5 CUSTOMER EQUIPMENT AS SECURITY. In the event that Customer fails to
pay Exodus all amounts owed Exodus under this Agreement when due, Customer
Agrees that upon written notice, Exodus may take possession of any Customer
Equipment and store it, at Customer's expense, until taken in full or partial
satisfaction of any lien or judgment, all without being liable to prosecution
or for damages.
8.6 SURVIVAL. The following provisions will survive any expiration or
termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8 and 9.
9. MISCELLANEOUS PROVISIONS.
9.1 FORCE MAJEURE. Except for the obligation to pay money, neither
party will be liable for any failure or delay in its performance under this
Agreement due to any cause beyond its reasonable control, including act of
war, acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage
or dispute, governmental act or failure of the Internet, provided that the
delayed party: (a) gives the other party prompt notice of such cause, and
(b) uses its reasonable commercial efforts to correct promptly such failure
or delay in performance.
9.2 NO LEASE. This Agreement is a services agreement and is not
intended to and will not constitute a lease of any real or personal property.
Customer acknowledges and agrees that (i) it has been granted only a license
to occupy the Customer Space and use the Internet Data Centers and any
equipment provided by Exodus in accordance with this Agreement, (ii) Customer
has not been granted any real property interest in the Customer Space or
Internet Data Centers, and (iii) Customer has no rights as a tenant or
otherwise under any real property or landlord/tenant laws, regulations, or
ordinances. For good cause, including the exercise of any rights under
Section 8.5 above, Exodus may suspend the right of any Representative or
other person to visit the Internet Data Centers.
9.3 MARKETING. Customer agrees that Exodus may refer to Customer by
trade name and trademark, and may briefly describe Customer's Business, in
Exodus' marketing materials and web site. Customer hereby grants Exodus a
license to use any Customer trade names and trademarks solely in connection
with the rights granted to Exodus pursuant to this Section 9.3.
9.4 GOVERNMENT REGULATIONS. Customer will not export, re-export,
transfer, or make available, whether directly or indirectly, any regulated
item or information to anyone outside the U.S. in connection with this
Agreement without first complying with all export control laws and
regulations which may be imposed by the U.S. Government and any country or
organization of nations within whose jurisdiction Customer operates or does
business.
9.5 NON-SOLICITATION. During the period beginning on the Installation
Date and ending on the first anniversary of the termination or expiration of
this Agreement in accordance with its terms, Customer agrees that it will
not, and will ensure that its affiliates do not, directly or indirectly,
solicit or attempt to solicit for employment any persons employed by Exodus
during such period.
9.6 GOVERNING LAW; DISPUTE RESOLUTION, SEVERABILITY; WAIVER. This
Agreement is made under and will be governed by and construed in accordance
with the laws of the State of California (except that body of law controlling
conflicts of law) and specifically excluding from application to this
Agreement that law known as the United Nations Convention on the
International Sale of Goods. Any dispute relating to the terms,
interpretation or performance of this Agreement (other than claims for
preliminary injunctive relief or other pre-judgment remedies) will be
resolved at the request of either party through binding arbitration.
Arbitration will be conducted in Santa Clara County, California, under the
rules and procedures of the Judicial Arbitration and Mediation Society
("JAMS"). The parties will request that JAMS appoint a single arbitrator
possessing knowledge of online services agreements; however the arbitration
will proceed even if such a person is unavailable. In the event any
provision of this Agreement is held by a tribunal of competent jurisdiction
to be contrary to the law, the remaining provisions of this Agreement will
remain in full force and effect. The waiver of any breach or default of this
Agreement will not constitute a waiver of any subsequent breach or default,
and will not act to amend or negate the rights of the waiving party.
9.7 ASSIGNMENT; NOTICES. Customer may not assign its rights or delegate
its duties under this Agreement either in whole or in part without the prior
written consent of Exodus, except that Customer may assign this Agreement in
whole as part of a corporate reorganization, consolidation, merger, or sale
of substantially all of its assets. Any attempted assignment or delegation
without such consent will be void. Exodus may assign this Agreement in whole
or part. This Agreement will bind and inure to the benefit of each party's
successors and permitted assigns. Any notice or communication required or
permitted to be given hereunder may be delivered by hand, deposited with an
overnight courier, sent by confirmed facsimile, or mailed by registered or
certified mail, return receipt requested, postage prepaid, in each case to
the address of the receiving party indicated on the signature page hereof, or
at such other address as may hereafter be furnished in writing by either
party hereto to the other. Such notice will be deemed to have been given as
of the date it is delivered, mailed or sent, whichever is earlier.
9.8 RELATIONSHIP OF PARTIES. Exodus and Customer are independent
contractors and this Agreement will not establish any relationship of
partnership, joint venture, employment, franchise or agency between Exodus
and Customer. Neither Exodus nor Customer will have the power to bind the
other or incur obligations on the other's behalf without the other's prior
written consent, except as otherwise expressly provided herein.
9.9 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including all
documents incorporated herein by reference, constitutes the complete and
exclusive agreement between the parties with respect to the subject matter
hereof, and supersedes and replaces any and all prior or contemporaneous
discussions, negotiations, understandings and agreements, written and oral,
regarding such subject matter. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together shall constitute one and the same instrument.
Customer's and Exodus' authorized representatives have read the foregoing and
all documents incorporated therein and agree and accept such terms effective
as of the date first above written.
CUSTOMER EXODUS COMMUNICATIONS, INC.
Signature: /s/ Benjamin C. Nourse Signature:
------------------------ -----------------------
Print Name: Benjamin C. Nourse Print Name:
----------------------- -----------------------
Title: Chairman & CEO Title:
------------------------ -----------------------
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NETSCAPE COMMUNICATIONS CORPORATION
PROFESSIONAL SERVICES AGREEMENT
AGREEMENT NO._________________
This Professional Services Agreement (the "Agreement") is entered into
by and between Netscape Communications Corporation, a Delaware corporation
("Netscape"), and Stratman Associates, Inc. ("Customer"), effective as of
the date of Netscape's execution ("Effective Date").
1. DEFINITIONS. For purposes of this Agreement, the terms set forth below
shall have the meanings specified in this Section 1:
(a) The term "Innovations" means all inventions, improvements, works of
authorship and other innovations of any kind, including, without limitation,
any improvements or modifications to the Products, that Netscape, or
personnel working for or through Netscape, may make, conceive, develop or
reduce to practice, alone or jointly with others, in the course of performing
the Services or as a result of such Services, whether or not they are
eligible for patent, copyright, trademark, trade secret or other legal
protection.
(b) The term "Products" means all Netscape proprietary computer software
programs and related materials, documentation and information as the same exist
on the date hereof, and as changed or modified hereafter. Customer's right to
use the Product(s) will be subject to the terms and conditions of the applicable
Netscape license agreement(s) governing the Product(s).
(c) The term "Confidential Information" means information or data,
including, without limitation, computer programs, code, algorithms, names and
expertise of employees and consultants, know-how, formulas, processes, ideas,
inventions (whether patentable or not), schematics and other technical,
business, financial and product development plans, forecasts and strategies,
furnished to one party by the other hereunder. All Confidential Information
disclosed in tangible form shall be marked "confidential" or otherwise contain a
proprietary legend, and all Confidential Information disclosed orally or
otherwise in intangible form shall be designated as confidential at the time of
disclosure.
(d) The term "Services" means those services set forth in a Proposal,
including, without limitation, installation, training, consulting and/or
development services, and any warranty services performed by Netscape pursuant
to Section 7(c) hereof.
(e) The term "Specifications" means those functional and/or technical
specifications, if any, set forth in the applicable Proposal or developed during
the course of performance of Services as to any Innovations to be developed in
connection with the performance of Services.
(f) The term "Proposal" means an addendum to this Agreement, in
substantially the form of Exhibit A attached hereto, that is executed by
Customer and Netscape and sets forth a description of the Services.
2. SERVICES AND STATEMENTS OF WORK. Netscape agrees to use commercially
reasonable efforts to perform or cause to be performed for Customer the Services
described in Proposals that may from time to time be executed by Customer and
Netscape. Each Proposal shall, when executed by Customer and Netscape, form a
part of this Agreement and be subject to the terms and conditions set forth
herein. Customer shall advise Netscape in writing of the individuals with whom
Netscape consultants will interface for each Proposal. Customer and Netscape
shall develop appropriate procedures to assure timely and appropriate
coordination of efforts. Such appropriate procedures shall include, among
other things, detailed task level project plans (including appropriate
milestones and deliverables) accepted in writing by the parties, project
management approach, staffing, escalation
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policy and procedure, project status tracking and reporting, and acceptance and
testing criteria. Customer shall provide such information and assistance as is
reasonably required to permit Netscape to complete each Proposal.
3. PAYMENTS; TAXES. Unless otherwise specified in the applicable Proposal,
all Services shall be provided on a time and materials basis at Netscape's
then current fees and charges therefor. Netscape's standard hourly billing
rates for professional services are set forth in Netscape's published billing
rate schedule and are subject to change without prior notice to Customer. In
addition, Customer shall reimburse Netscape for all out-of-pocket expenses
incurred by Netscape in connection with the performance of the Services,
including, without limitation, travel, lodging, meals and other incidental
expenses. Netscape shall invoice Customer on a monthly basis for all
Services, reimbursements and other payments due under this Agreement and any
Proposal and, unless otherwise specified in the applicable Proposal, Customer
shall pay such invoiced amounts within thirty (30) days of the date of
invoice. Customer agrees to pay interest at the rate of one percent (1%) per
month (or, if less, the maximum amount permitted under applicable law) for
all amounts not paid within thirty (30) days from the date of invoice. In
addition to all charges specified in this Agreement and each Proposal,
Customer shall pay or reimburse Netscape for all federal, state, local, or
other taxes, including, without limitation, sales, use, excise and property
taxes, or any amounts levied in lieu thereof, based on charges set forth in
this Agreement or any Proposal; provided, that Customer shall have no
responsibility for taxes based on Netscape's net income.
4. TERMINATION. Customer or Netscape may terminate this Agreement and/or
any Proposal at any time upon sixty (60) days advance written notice to the
other party. In the event either party shall fail to perform its obligations
pursuant to this Agreement and/or any Proposal and such failure shall
continue for a period of thirty (30) days (or fifteen (15) days with respect
to a breach by Customer of any obligation to pay or reimburse Netscape for
amounts due hereunder and/or any Proposal) following written notice from the
other party, this Agreement and/or any Proposal may be terminated by such
party by its giving a notice of termination to the breaching party. Notice
of termination of any Proposal shall not be considered notice of termination
of this Agreement unless specifically stated in the notice; provided,
however, that any termination of this Agreement shall automatically terminate
all uncompleted Proposals. Customer shall pay Netscape for all services
performed and costs incurred up through the termination date. Termination
shall be Customer's sole and exclusive remedy for delay or failure of
Netscape to complete a Proposal. The provisions of Sections 3, 5, 6, 8, 9
and 10 shall survive any termination of this Agreement and govern any
completed Proposal.
5. PROPRIETARY RIGHTS.
(a) OWNERSHIP OF INNOVATIONS. Customer agrees that all Innovations
shall be the property of Netscape and hereby assigns all of its rights in the
Innovations and in all related patents, patent applications, copyrights, mask
work rights, trademarks, trade secrets, rights of priority and other
proprietary rights to Netscape. Customer acknowledges that Netscape, in its
sole discretion, shall have the right to license any Innovation, and/or
incorporate any Innovation into the Products, for use by other licensees or
customers of Netscape. At Netscape's request and expense, Customer shall
assist and cooperate with Netscape in all reasonable respects and shall
execute documents, give testimony and take further acts as reasonably
requested by Netscape to acquire, transfer, maintain and enforce patent,
copyright, trademark, mask work, trade secret and other legal protection for
the Innovations. Customer hereby appoints the officers of Netscape as in
existence from time to time as its attorneys-in-fact to execute documents on
its behalf for this limited purpose.
(b) LICENSE OF INNOVATIONS. In the event that Netscape is required to
develop or develops Innovations pursuant to any Proposal, Customer shall have
the nonexclusive, royalty-free and nontransferable right to use such
Innovations solely for Customer's own internal use and not for distribution
or resale to third parties. Such license includes the right for Customer to
modify any Innovation solely for the purpose of maintenance and support
thereof.
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6. MAINTENANCE AND SUPPORT. Except as provided in this Section 6, Customer
agrees that Netscape shall be under no obligation to maintain or support any
Innovations. In the event that Netscape shall determine to include and
maintain any Innovation as part of the Products which it licenses and
maintains for its general licenses. Netscape agrees to provide Customer with
maintenance and support as to such Innovation on the same terms and
conditions as Netscape supports the Products for the benefit of its general
licenses. Netscape is not responsible for obsolescence of any Innovation
that may result from changes in Customer's requirements or modifications or
updates to the Products. Netscape assumes no responsibility for the use of
superseded, outdated or uncorrected versions of any Innovation.
7. LIMITED WARRANTY.
(a) LIMITED WARRANTY. Netscape hereby represents and warrants to Customer that
(i) the Services will be performed in a good and workmanlike manner; and (ii)
with respect to any innovation for which Specifications are set forth in the
applicable Proposal, for a period of ninety (90) days commencing on the date
that such Innovation is delivered by Netscape to Customer, such Innovation, when
properly installed and/or used, shall materially conform to the functional
and/or technical criteria set forth in the applicable Specifications.
(b) DEFECTS NOT COVERED BY WARRANTY. Netscape shall have no obligations
under the limited warranty set forth in Section 7(a)(ii) to the extent that
the failure of any Innovation to materially conform to the functional and/or
technical criteria set forth in the applicable Specifications is caused by:
(a) the incorporation, attachment or otherwise engagement of any attachment,
feature, program, or device, other than by Netscape, to such Innovation, or
any part thereof; or (b) accident; transportation; neglect or misuse;
alteration, modification, combination with materials not supplied by
Netscape, or enhancement of such Innovation other than by Netscape; failure
to provide a suitable installation environment; use of supplies or materials
not meeting specifications; use of such Innovation for other than the
specific purpose for which such Innovation is designed; or use of such
Innovation on any systems other than the specified hardware platform for such
Innovation.
(c) SOLE AND EXCLUSIVE REMEDY. Netscape shall, as Customer's sole and
exclusive remedy and Netscape's sole and exclusive obligation under the
limited warranties set forth in Section 7(a), use commercially reasonable
efforts to correct any failure of an Innovation to materially conform to the
functional and/or technical criteria set forth in the applicable
Specifications; provided, that Netscape's obligation to correct any such
failure pursuant to this Section 7(c) is subject to receipt by Netscape from
Customer, within ninety (90) days from the date that such Innovation was
first delivered by Netscape to Customer, of written notice that sets forth
such failure of the Innovation to materially conform to the functional and/or
technical criteria set forth in the applicable Specifications and such other
information as is reasonably necessary to permit Netscape to verify and
reproduce such failure.
(d) NO OTHER WARRANTIES. EXCEPT AS SPECIFICALLY PROVIDED IN THIS SECTION 7,
NETSCAPE MAKES NO OTHER WARRANTIES OR CONDITIONS, EITHER EXPRESS OR IMPLIED, AS
TO ANY OTHER MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE CONDITION OF
THE SERVICES, PRODUCTS OR ANY INNOVATIONS DEVELOPED HEREUNDER, THEIR
MERCHANTABILITY, THEIR FITNESS FOR ANY PARTICULAR PURPOSE, THEIR
NON-INFRINGEMENT OF THIRD PARTY RIGHTS, THAT ANY PRODUCT OR INNOVATION IS
ERROR-FREE OR THAT OPERATION OF ANY PRODUCT OR INNOVATION WILL BE SECURE OR
UNINTERRUPTED.
8. LIMITATION OF LIABILITY. TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE
LAW, NETSCAPE'S AGGREGATE LIABILITY TO CUSTOMER FOR DAMAGES FROM ANY CAUSE
WHATSOEVER AND REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR
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TORT OR OTHERWISE, SHALL BE LIMITED TO THE FEES RECEIVED BY NETSCAPE FROM
CUSTOMER FOR SERVICES RENDERED PURSUANT TO THE PROPOSAL GIVING RISE TO
CUSTOMER'S CLAIM FOR DAMAGES. IN NO EVENT SHALL NETSCAPE BE LIABLE FOR
DAMAGES RESULTING FROM LOSS OF DATA, PROFITS OR BUSINESS, USE OF PRODUCTS OR
INNOVATIONS, FAILURE OF THE PRODUCTS OR INNOVATIONS TO PROVIDE SECURITY, OR
FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES IN CONNECTION
WITH THIS AGREEMENT, THE SERVICES OR ANY INNOVATIONS PROVIDED HEREUNDER EVEN
IF NETSCAPE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND
NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
9. CONFIDENTIALITY.
(a) CONFIDENTIAL INFORMATION. Each party shall (i) hold all Confidential
Information of the other party in confidence and take all necessary
precautions to protect such Confidential Information (including, without
limitation, all precautions such party employs with respect to its own
confidential materials of a similar nature), (ii) not divulge any such
Confidential Information of the other party or any information derived
therefrom to any third person except to its employees or independent
contractors that have a need to know such information to further the
permitted use thereof, that have entered into appropriate written agreements
sufficient to comply with the terms hereof and that are informed of the
non-disclosure obligations contained herein, (iii) not make any use
whatsoever at any time of such Confidential Information of the other party
except to the extent necessary to exercise any right or license granted
under, or perform any obligations pursuant to, Section 5(b), (iv) not remove
or export any such Confidential Information of the other party from the
country of such party, and (v) not copy (except as reasonably necessary to
exercise the rights pursuant to Section 5(b) with respect to Customer and as
reasonably necessary in connection with the performance of the Services with
respect to Netscape) or reverse engineer; reverse compile or attempt to
derive the composition or underlying information of any Confidential
Information of the other party. The foregoing obligations shall survive for
a period of three (3) years from the date of disclosure of the Confidential
Information. Without granting any right or license, the foregoing obligations
shall not apply to the extent that the receiving party can demonstrate that
such Confidential Information of the other party (A) is in the public domain
and is available at the time of disclosure or which thereafter enters the
public domain and is available through no improper action or inaction by the
receiving party or any affiliate agent or employee of the receiving party, or
(B) was in its possession or known by the receiving party prior to receipt
from the disclosing party, or (C) was rightfully disclosed to the receiving
party by another person without restriction, or (D) is independently
developed by the receiving party without access to such Confidential
Information of the disclosing party, or (E) is required to be disclosed
pursuant to any statutory or regulatory authority, provided the disclosing
party is given prompt notice of such requirement and the scope of such
disclosure is limited to the extent possible, or is required to be disclosed
by a court order, provided the disclosing party is given prompt notice of
such order and provided the opportunity to contest it. Information shall not
be deemed known to such party or publicly known for purposes of the above
exceptions (x) merely because it is embraced by more general information in
the prior possession of such party or others, or (y) merely because it is
expressed in public material in general terms not specifically the same as
the Confidential Information. The terms of confidentiality under this
Agreement shall not be constructed to limit either party's right to
independently develop or acquire products without use of the other party's
Confidential Information. Further, either party shall be free to use for any
purpose the residuals resulting from access to or work with such Confidential
Information, provided such party shall maintain the confidentiality of the
Confidential Information as provided herein. The term "residuals" means
information in nontangible form which may be retained by persons who have had
access to the Confidential Information, including ideas, concepts, know-how
or techniques contained therein. Neither party shall have any obligation to
limit or restrict the assignment of such persons or to pay royalties for any
work resulting from the use of residuals. However, the foregoing shall not be
deemed to grant to either party a license under the other party's copyrights
or patents.
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(b) RETURN OF CONFIDENTIAL INFORMATION. Immediately upon the termination or
expiration of the Agreement and/or any Proposal, the receiving party will return
to the disclosing party all Confidential Information of the disclosing party
relating to the termination and all documents or media containing any such
Confidential Information and any and all copies or extracts thereof.
(c) CONFIDENTIALITY OF AGREEMENT. Except (i) to the extent required by law,
(ii) to assert its rights hereunder or (iii) for disclosures to its own
employees and independent contractors on a "need to know" basis, neither
party shall disclose the terms of this Agreement or the subject matter hereof
without the prior written consent of the other party, which consent shall
not be unreasonably withheld or delayed.
(d) INJUNCTIVE RELIEF. Each party expressly agrees that monetary damages would
be inadequate to compensate the other for any breach of any provision of Section
9, that any such breach or threatened breach of Section 9 will cause irreparable
injury to the other party and that, in addition to any other remedies that may
be available, at law or in equity, the other party shall be entitled to obtain
injunctive relief against the threatened breach of any provision of Section 9 or
the continuation of any such breach without the necessity of proving actual
damages.
10. GENERAL
(a) AMENDMENT; WAIVER. Neither this Agreement or any Proposal may be amended
except by a written notice signed by an authorized representative of Netscape
and Customer. No purchase order or instrument issued by Customer in connection
with the Services shall be binding upon Netscape. The waiver by either party of
any of its rights hereunder or under any Proposal shall not be construed as a
waiver of any subsequent breach.
(b) NOTICE. Unless otherwise specifically provided, all notices required or
permitted under this Agreement shall be in writing and in English and may be
delivered personally, or sent by facsimile or air mail, return receipt
requested, addressed as follows and shall be deemed delivered upon receipt:
If to Netscape: Netscape Communications Corporation
501 East Middlefield Road
Mountain View, California 94043
Attention: Legal
Facsimile: 415-528-4123
If to Customer: Sent to the address or facsimile set forth under
Customer's name on the signature page hereto.
(c) SUCCESSORS AND ASSIGNS. All terms and conditions of this Agreement and each
Proposal shall be binding upon and inure to the benefit of the parties hereto,
and to their successors and assigns, except that Customer may not assign or
otherwise transfer any of its rights or obligations under this Agreement or any
Proposal without Netscape's prior written consent.
(d) GOVERNING LAW AND JURISDICTION. This Agreement and each Proposal will be
governed by and construed in accordance with the laws of the State of
California, without reference to conflicts of law principles, except to the
extent that United States federal law preempts California law, in which case
United States federal law (including, without limitation, copyright, patent and
trademark law) will apply. This Agreement shall not be governed by the United
Nations Convention of Contracts for the International Sale of Goods, the
application of which is hereby expressly excluded. In any legal action relating
to this Agreement, Customer agrees (i) to the exercise of jurisdiction over it
by a state or federal court in Santa Clara County, California; and (ii) that if
Customer brings the action, it shall be instituted in one of the courts
specified in (i) above.
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(e) ENTIRE AGREEMENT; COUNTERPARTS. This Agreement contains the entire
understanding of the parties as to the subject matter hereof and supersedes all
prior understandings of the parties, whether oral or written. This Agreement
may be executed in any number of counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. If there is a discrepancy between any
provision of this Agreement and a Proposal, the Proposal shall prevail.
(f) SEVERABILITY. If a court finds any provision of this Agreement invalid or
unenforceable as applied to any circumstance, that provision shall be enforced
to the maximum extent permitted by law, and the other provisions, and that
provision as applied to other circumstances, will remain in full force and
effect.
(g) FORCE MAJEURE. Both parties shall be excused from performance under this
Agreement and any related Proposal for any period to the extent that a party
is prevented from performing any obligation, in whole or in part, as a result
of causes beyond its reasonable control and without its negligent or willful
misconduct, including without limitation, acts of God, natural disasters, war
or other hostilities, labor disputes, civil disturbances, governmental acts,
orders or regulations, third party nonperformance, or failures or
fluctuations in electrical power, heat, light, air conditioning or
telecommunications equipment. In the event that such nonperformance continues
for a period of sixty (60) days or more, either party may terminate either
this Agreement or a related Proposal by giving ten (10) days written notice
to the other. If either party exercises its option to terminate, Customer
shall pay for any Services and/or expenses rendered or incurred by Netscape
prior to the termination date.
(h) RELATIONSHIP OF PARTIES. The parties are independent contractors and are not
employees, agent or legal representatives of the other party. Neither party is
authorized to bind the other party, act as an agent for the other party or
otherwise act in the name of or on behalf of the other party.
(i) U.S. GOVERNMENT RESTRICTED RIGHTS. The Innovations, if any, are provided
with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is
subject to restrictions as set forth in subparagraph (c)(1)(ii) of the
Rights in Technical Data and Computer Software clause at DFARS 252.227-7013
or subparagraphs (c)(1) and (2) of the Commercial Computer
Software-Restricted rights at 48 CFR 5.2227-19, as applicable.
Contractor/manufacturer is Netscape Communications Corporation, 501 East
Middlefield Road, Mountain View, California 94043
(j) NON-SOLICITATION. Customer acknowledges that Netscape provides a valuable
service by identifying and providing personnel to perform the Services.
Customer further acknowledges that Customer would receive substantial additional
value, and Netscape would be deprived of the benefits of its work force, if
Customer were to directly hire Netscape's personnel after they have been
introduced to Customer by Netscape. Without the prior written consent of
Netscape, Customer shall not solicit, employ or otherwise retain the services of
any personnel of Netscape who are or have been assigned to perform Services
hereunder for a period terminating one (1) year after the date of completion of
the most recent Proposal.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by duly authorized representatives, effective as of
the Effective Date.
NETSCAPE COMMUNICATIONS CUSTOMER
CORPORATION
By: /s/ JR Hampton By: /s/ Benjamin C. Nourse
--------------------------- ---------------------------
Signature Signature
Name: JR Hampton Name: Benjamin C. Nourse
--------------------------- ---------------------------
Print or Type Print or Type
Title: VP WWPS Title: President, Stratman Associates, Inc.
------------------------ ---------------------------
Date: 7-30-96 Date: July 8, 1996
--------------------------- ---------------------------
Address: 616 20th Avenue East
---------------------------
Seattle, WA 98112
---------------------------
---------------------------
Facsimile: 206-325-1357
-----------------
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OR
CONVERSION HEREOF (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. NO INTEREST HEREIN OR IN THE SHARES MAY BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR THE COMPANY RECEIVES AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER HEREOF (CONCURRED IN BY COUNSEL FOR THE COMPANY) STATING
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION OR THE COMPANY OTHERWISE
SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
ONLINE SPECIALTY RETAILING, INC.
COMMON PURCHASE WARRANT
Warrant No. 101 March 15, 1997
1. Number and Price of Shares Subject to Warrant. Subject to the terms and
conditions herein set forth, The Cobalt Group, Inc. ("Cobalt") is entitled to
purchase from Online Specialty Retailing, Inc., a Washington corporation (the
"Company"), upon surrender hereof at the principal office of the Company and
payment of the purchase price at said office in cash or by check, 36,000 shares
of common stock of the Company (the "Shares") at a purchase price of $0.20 per
Share. The purchase price of one Share and the number of Shares purchasable upon
exercise of this Warrant are subject to adjustment as hereinafter provided. The
purchase price of one Share payable from time to time upon the exercise of this
Warrant (whether such price be the price specified above or an adjusted price
determined as hereinafter provided) is referred to herein as the "Warrant
Price."
This Warrant is being given in consideration of Cobalt's grant to the
Company of shared usage of its T-1 data connection and server room facilities,
along with unlimited data bandwidth ("Server Colocation Services"), for its
business purposes. This Warrant shall constitute the only consideration paid by
the Company for such Server Colocation Services. The vesting of this Warrant is
subject to continuation of such permitted use as set forth in Section 3 hereof.
This Warrant shall remain exercisable pursuant to the provisions of
Section 6 until the earlier of (a) 5:00 p.m. Pacific Time on March 15, 2002, (b)
the date on which the Company completes a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act covering the offer and sale of
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Common Stock for the account of the Company to the public with aggregate cash
proceeds of not less than $10,000,000 (before deduction of underwriting
commissions and offering expenses), (c) three months following the date the
Company terminates the Server Colocation Services, or (d) the date this Warrant
is terminated under Section 2(b) upon a "Change of Control." Such date shall be
referred to herein as the "Expiration Date."
2. Adjustment of Warrant Price and Number of Shares.
(a) Stock Splits, Recapitalization. In the event that the
outstanding shares of Common Stock of the Company are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of the Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split, the Board of Directors shall make an
appropriate and proportionate adjustment in the number of Shares purchased
hereunder and the Warrant Price per share.
(b) Change of Control. Upon the effective date of a Change of
Control of the Company, this Warrant shall terminate unless provisions be made
in writing, approved by the Board of Directors, in connection with such
transaction for the assumption of the Warrant theretofore granted, or the
substitution for this Warrant of a new Warrant covering the shares of a
successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to number and kind of shares and prices, in which event this
Warrant shall continue in the manner and under the terms so provided. A "Change
of Control" of the Company shall mean (a) any sale, consolidation, merger or
recapitalization, the effect of which is a material change to the capital
structure of the Company, other than such a transaction in which the holders of
the Common Stock immediately prior to the transaction continue to hold a
majority in interest of the voting stock of the surviving corporation
immediately after that transaction, (b) any sale or other transfer of
substantially all of the assets of the Company, (c) the adoption of any plan or
proposal for liquidation or dissolution of the Company or (d) the consummation
of any other transaction the effect of which is to cause any person not with
power to direct or cause direction of the management or policies of the Company
prior thereto to gain such power.
3. Vesting Schedule. This Warrant shall vest ratably over a period of
thirty six (36) months such that this Warrant shall become vested and
exercisable with respect to an additional 1000 shares per month as of the 15th
day of each month following issuance; provided that the Company is continuing to
use the Server Colocation Services. In the event the Company terminates use the
Server Colocation Services, the vesting of this Warrant shall cease as of the
date of such termination.
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4. Other Adjustments. Except as provided in Section 2, no adjustment on
account of distributions with respect to Shares will be made upon the exercise
hereof.
5. No Shareholder Rights. This Warrant shall not entitle its holder to any
of the rights of a shareholder of the Company until this Warrant is exercised.
6. Exercise of Warrant.
(a) Cash Payment. To the extent vested pursuant to Section 3, this
Warrant may be exercised by the registered holder or its permitted registered
assigns, in whole or in part, by the surrender of this Warrant at the principal
office of the Company, accompanied by an executed subscription form in the form
attached hereto and payment in full of the Warrant Price as described above by
certified or cashier's check. Upon partial exercise hereof, a new warrant or
warrants containing the same date and provisions as this Warrant shall be issued
by the Company to the registered holder for the number of Shares with respect to
which this Warrant shall not have been exercised. This Warrant (or any portion
thereof) shall be deemed to have been exercised immediately prior to the close
of business on the date of its surrender for exercise as provided above, and the
person entitled to receive the Shares issuable upon such exercise shall be
treated for all purposes as the holder of such Shares of record as of the close
of business on such date.
(b) Cashless Exercise.
(i) In addition to and without limiting the rights of the
holder of this Warrant under the terms of this Warrant, the holder of this
Warrant shall have the right (the "Conversion Right") to convert the entirety of
the vested portion of this Warrant into Shares ("Converted Warrant Shares") as
provided in this Section 6(b) at any time or from time to time prior to
expiration of this Warrant, subject to the restrictions set forth in Section
6(b)(iii) below. Upon exercise of the Conversion Right, the Company shall
deliver to the holder of this Warrant, without payment by the holder of any
exercise price or any cash or other consideration, that number of Shares equal
to the quotient obtained by dividing the Net Value (as hereinafter defined) of
the vested Shares subject to purchase hereunder (determined in accordance with
Section 3) by the fair market value (as defined in Section 6(b)(iv) below) of a
single Share, determined in each case as of the close of business on the
Conversion Date (as hereinafter defined). The "Net Value" of the Shares shall be
determined by subtraction of the aggregate Warrant Price of the Shares from the
aggregate fair market value of the Converted Warrant Shares. No fractional
Shares shall be issuable upon exercise of the Conversion Right, and if the
number of Shares to be issued in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the holder of this Warrant an
amount in cash equal to the fair market value of the resulting fractional Share.
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(ii) The Conversion Right may be exercised by the holder of
this Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right. Such conversion shall be effective
upon receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion
Date"), but not later than the Expiration Date of this Warrant. Certificates for
the Shares issuable upon exercise of the Conversion Right, together with a check
in payment of any fractional share, shall be issued as of the Conversion Date
and shall be delivered to the holder of this Warrant within seven (7) days
following the Conversion Date.
(iii) If the Conversion Right is reasonably determined by the
Company or its accountants to give rise to a charge to the Company's earnings
for financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment.
(iv) For purposes of this Section 6(b), the "fair market
value" of a Share as of a particular date shall be determined by the Board of
Directors of the Company in good faith.
7. Certificate of Adjustment. Whenever the Warrant Price or the number of
Shares subject to this Warrant is adjusted, as herein provided, the Company
shall deliver to the record holder of this Warrant a notice setting forth the
Warrant Price and number of Shares after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
8. Transfer of Warrant. This Warrant may not be transferred by the holder
without the written consent of the Company (except by operation of law or to a
successor by merger, acquisition or other corporate reorganization) and
compliance with applicable federal and state securities laws to the satisfaction
of the Company.
9. Compliance with Securities Laws.
(a) The holder represents and agrees that this Warrant (and the
Shares, if the warrant is exercised) are purchased only for investment, for the
holder's own account, and without any present intention to sell or distribute
the Warrant or the Shares. The holder further acknowledges that the Shares will
not be issued pursuant to the exercise of this Warrant unless the exercise of
the Warrant and the issuance and delivery of such Shares shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
and other federal and state securities laws.
(b) The holder of this Warrant acknowledges and agrees that this
Warrant and the Shares have not been registered under the Securities Act or the
securities
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laws of any other jurisdiction and accordingly will not be transferable except
as permitted under the various exemptions contained in the Securities Act, or
upon satisfaction of the registration and prospectus delivery requirements of
the Securities Act. Therefore, the Warrant and Shares must be held indefinitely
unless they are subsequently registered under the Securities Act and all other
applicable securities or an exemption from such registration is available. The
holder understands that the certificates, if any, evidencing the Shares will be
imprinted with a legend which prohibits the transfer thereof unless they are
registered or unless the Company receives an opinion of counsel reasonably
satisfactory to the Company that such registration is not required. The holder
understands that a stop transfer instruction may be in effect with respect to
transfer of the Warrant and Shares consistent with the requirements of the
securities laws.
10. Miscellaneous. This Warrant shall be governed solely by the laws of
the State of Washington without regard to the conflicts of laws provisions
thereof to the contrary. The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated except by an instrument in writing signed by the
Company and the registered holder hereof. All notices and other communications
from the Company to the holder of this Warrant shall be delivered in person or
mailed first-class, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing. Each such notice or other communication shall for all
purposes of this Warrant be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail, at the earlier of its
receipt or 72 hours after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
ISSUED this 15th, day of March, 1997.
ONLINE SPECIALTY RETAILING, INC.
By: /s/ Benjamin C. Nourse
-----------------------------
Benjamin C. Nourse
Chairman
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SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
To: Online Specialty Retailing, Inc.
2030 First Avenue, Third Floor
Seattle, WA 98121
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________ shares of Common Stock of Online
Specialty Retailing, Inc. and herewith makes payment of $________________ for
those shares, and requests that any certificates for such shares be issued in
the name of, and delivered to, _________________________, whose address is
_________________________________________.
DATED: __________________, 19__.
WARRANT HOLDER:
----------------------------------
By:
------------------------------
Title:
---------------------------
ADDRESS:
----------------------------------
----------------------------------
----------------------------------
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OR
CONVERSION HEREOF (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. NO INTEREST HEREIN OR IN THE SHARES MAY BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR THE COMPANY RECEIVES AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER HEREOF (CONCURRED IN BY COUNSEL FOR THE COMPANY) STATING
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION OR THE COMPANY OTHERWISE
SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
ONLINE SPECIALTY RETAILING, INC.
COMMON PURCHASE WARRANT
Warrant No. 102 July 20, 1998
1. Number and Price of Shares Subject to Warrant. Subject to the terms and
conditions herein set forth, William Cuff ("Cuff") is entitled to purchase from
Online Specialty Retailing, Inc., a Washington corporation (the "Company"), upon
surrender hereof at the principal office of the Company and payment of the
purchase price at said office in cash or by check, 14,286 shares of common stock
of the Company (the "Shares") at a purchase price of $1.75 per Share. The
purchase price of one Share and the number of Shares purchasable upon exercise
of this Warrant are subject to adjustment as hereinafter provided. The purchase
price of one Share payable from time to time upon the exercise of this Warrant
(whether such price be the price specified above or an adjusted price determined
as hereinafter provided) is referred to herein as the "Warrant Price."
This Warrant is being given in consideration of Mr. Cuff's investment of
$50,000 in the most recent equity financing of the Company, pursuant to the
terms of the Company's employment agreement with Mr. Cuff dated April 3, 1998.
This Warrant shall remain exercisable pursuant to the provisions of
Section 6 until the earlier of (a) 5:00 p.m. Pacific Time on July 20, 2008, (b)
the date on which the Company completes a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act covering the offer and sale of Common Stock for the account of the Company
to the public with aggregate cash proceeds of not less than $10,000,000 (before
deduction of underwriting commissions
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and offering expenses), or (c) the date this Warrant is terminated under Section
2(b) upon a "Change of Control." Such date shall be referred to herein as the
"Expiration Date."
2. Adjustment of Warrant Price and Number of Shares.
(a) Stock Splits, Recapitalization. In the event that the
outstanding shares of Common Stock of the Company are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of the Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split, the Board of Directors shall make an
appropriate and proportionate adjustment in the number of Shares purchased
hereunder and the Warrant Price per share.
(b) Change of Control. Upon the effective date of a Change of
Control of the Company, this Warrant shall terminate unless provisions be made
in writing, approved by the Board of Directors, in connection with such
transaction for the assumption of the Warrant theretofore granted, or the
substitution for this Warrant of a new Warrant covering the shares of a
successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to number and kind of shares and prices, in which event this
Warrant shall continue in the manner and under the terms so provided. A "Change
of Control" of the Company shall mean (a) any sale, consolidation, merger or
recapitalization, the effect of which is a material change to the capital
structure of the Company, other than such a transaction in which the holders of
the Common Stock immediately prior to the transaction continue to hold a
majority in interest of the voting stock of the surviving corporation
immediately after that transaction, (b) any sale or other transfer of
substantially all of the assets of the Company, (c) the adoption of any plan or
proposal for liquidation or dissolution of the Company or (d) the consummation
of any other transaction the effect of which is to cause any person not with
power to direct or cause direction of the management or policies of the Company
prior thereto to gain such power.
3. Other Adjustments. Except as provided in Section 2, no adjustment on
account of distributions with respect to Shares will be made upon the exercise
hereof.
4. No Shareholder Rights. This Warrant shall not entitle its holder to any
of the rights of a shareholder of the Company until this Warrant is exercised.
5. Exercise of Warrant.
(a) Cash Payment. To the extent vested pursuant to Section 3, this
Warrant may be exercised by the registered holder or its permitted registered
assigns, in whole or in part, by the surrender of this Warrant at the principal
office of the Company, accompanied by an executed subscription form in the form
attached hereto and payment in full of the Warrant Price as described above by
certified or cashier's check. Upon
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partial exercise hereof, a new warrant or warrants containing the same date and
provisions as this Warrant shall be issued by the Company to the registered
holder for the number of Shares with respect to which this Warrant shall not
have been exercised. This Warrant (or any portion thereof) shall be deemed to
have been exercised immediately prior to the close of business on the date of
its surrender for exercise as provided above, and the person entitled to receive
the Shares issuable upon such exercise shall be treated for all purposes as the
holder of such Shares of record as of the close of business on such date.
(b) Cashless Exercise.
(i) In addition to and without limiting the rights of the
holder of this Warrant under the terms of this Warrant, the holder of this
Warrant shall have the right (the "Conversion Right") to convert the entirety of
the vested portion of this Warrant into Shares ("Converted Warrant Shares") as
provided in this Section 6(b) at any time or from time to time prior to
expiration of this Warrant, subject to the restrictions set forth in Section
6(b)(iii) below. Upon exercise of the Conversion Right, the Company shall
deliver to the holder of this Warrant, without payment by the holder of any
exercise price or any cash or other consideration, that number of Shares equal
to the quotient obtained by dividing the Net Value (as hereinafter defined) of
the vested Shares subject to purchase hereunder (determined in accordance with
Section 3) by the fair market value (as defined in Section 6(b)(iv) below) of a
single Share, determined in each case as of the close of business on the
Conversion Date (as hereinafter defined). The "Net Value" of the Shares shall be
determined by subtraction of the aggregate Warrant Price of the Shares from the
aggregate fair market value of the Converted Warrant Shares. No fractional
Shares shall be issuable upon exercise of the Conversion Right, and if the
number of Shares to be issued in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the holder of this Warrant an
amount in cash equal to the fair market value of the resulting fractional Share.
(ii) The Conversion Right may be exercised by the holder of
this Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right. Such conversion shall be effective
upon receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion
Date"), but not later than the Expiration Date of this Warrant. Certificates for
the Shares issuable upon exercise of the Conversion Right, together with a check
in payment of any fractional share, shall be issued as of the Conversion Date
and shall be delivered to the holder of this Warrant within seven (7) days
following the Conversion Date.
(iii) If the Conversion Right is reasonably determined by the
Company or its accountants to give rise to a charge to the Company's earnings
for
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financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment.
(iv) For purposes of this Section 6(b), the "fair market
value" of a Share as of a particular date shall be determined by the Board of
Directors of the Company in good faith.
6. Certificate of Adjustment. Whenever the Warrant Price or the number of
Shares subject to this Warrant is adjusted, as herein provided, the Company
shall deliver to the record holder of this Warrant a notice setting forth the
Warrant Price and number of Shares after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
7. Transfer of Warrant. This Warrant may not be transferred by the holder
without the written consent of the Company (except by operation of law or to a
successor by merger, acquisition or other corporate reorganization) and
compliance with applicable federal and state securities laws to the satisfaction
of the Company.
8. Compliance with Securities Laws.
(a) The holder represents and agrees that this Warrant (and the
Shares, if the warrant is exercised) are purchased only for investment, for the
holder's own account, and without any present intention to sell or distribute
the Warrant or the Shares. The holder further acknowledges that the Shares will
not be issued pursuant to the exercise of this Warrant unless the exercise of
the Warrant and the issuance and delivery of such Shares shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
and other federal and state securities laws.
(b) The holder of this Warrant acknowledges and agrees that this
Warrant and the Shares have not been registered under the Securities Act or the
securities laws of any other jurisdiction and accordingly will not be
transferable except as permitted under the various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act. Therefore, the Warrant and Shares must be
held indefinitely unless they are subsequently registered under the Securities
Act and all other applicable securities or an exemption from such registration
is available. The holder understands that the certificates, if any, evidencing
the Shares will be imprinted with a legend which prohibits the transfer thereof
unless they are registered or unless the Company receives an opinion of counsel
reasonably satisfactory to the Company that such registration is not required.
The holder understands that a stop transfer instruction may be in effect with
respect to transfer of the Warrant and Shares consistent with the requirements
of the securities laws.
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9. Miscellaneous. This Warrant shall be governed solely by the laws of the
State of Washington without regard to the conflicts of laws provisions thereof
to the contrary. The headings in this Warrant are for purposes of convenience
and reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated except by an instrument in writing signed by the Company and the
registered holder hereof. All notices and other communications from the Company
to the holder of this Warrant shall be delivered in person or mailed
first-class, postage prepaid, to the address furnished to the Company in writing
by the last holder of this Warrant who shall have furnished an address to the
Company in writing. Each such notice or other communication shall for all
purposes of this Warrant be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail, at the earlier of its
receipt or 72 hours after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
ISSUED this 20th day of July, 1998.
ONLINE SPECIALTY RETAILING, INC.
By: /s/ Benjamin C. Nourse
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Benjamin C. Nourse
Chairman
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SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
To: Online Specialty Retailing, Inc.
2030 First Avenue, Third Floor
Seattle, WA 98121
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________ shares of Common Stock of Online
Specialty Retailing, Inc. and herewith makes payment of $________________ for
those shares, and requests that any certificates for such shares be issued in
the name of, and delivered to, _________________________, whose address is
_________________________________________.
DATED: __________________, 19__.
WARRANT HOLDER:
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By:
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Title:
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ADDRESS:
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<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OR
CONVERSION HEREOF (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. NO INTEREST HEREIN OR IN THE SHARES MAY BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR THE COMPANY RECEIVES AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER HEREOF (CONCURRED IN BY COUNSEL FOR THE COMPANY) STATING
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION OR THE COMPANY OTHERWISE
SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
ONLINE SPECIALTY RETAILING, INC.
COMMON STOCK PURCHASE WARRANT
Warrant No. 103 August 23, 1998
1. Number and Price of Shares Subject to Warrant. Subject to the terms and
conditions herein set forth, First Portland Corporation is entitled to purchase
from Online Specialty Retailing, Inc., a Washington corporation (the "Company"),
upon surrender hereof at the principal office of the Company and payment of the
purchase price at said office in cash or by check, 2,858 shares of common stock
of the Company (the "Shares") at a purchase price of $1.75 per Share. The
purchase price of one Share and the number of Shares purchasable upon exercise
of this Warrant are subject to adjustment as hereinafter provided. The purchase
price of one Share payable from time to time upon the exercise of this Warrant
(whether such price be the price specified above or an adjusted price determined
as hereinafter provided) is referred to herein as the "Warrant Price."
This Warrant shall remain exercisable pursuant to the provisions of
Section 5 until the earlier of (a) 5:00 p.m. Pacific Time on August 23, 2008,
(b) the date on which he Company completes a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act covering the offer and sale of Common Stock for the account of the Company
to the public with aggregate cash proceeds of not less than $10,000,000 (before
deduction of underwriting commissions and offering expenses), or (c) the date
this Warrant is terminated under Section 2(b) upon a "Change of Control." Such
date shall be referred to herein as the "Expiration Date."
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2. Adjustment of Warrant Price and Number of Shares.
(a) Stock Splits, Recapitalization. In the event that the
outstanding shares of Common Stock of the Company are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of the Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split, the Board of Directors shall make an
appropriate and proportionate adjustment in the number of Shares purchased
hereunder and the Warrant Price per share.
(b) Change of Control. Upon the effective date of a Change of
Control of the Company, this Warrant shall terminate unless provisions be made
in writing, approved by the Board of Directors, in connection with such
transaction for the assumption of the Warrant theretofore granted, or the
substitution for this Warrant of a new Warrant covering the shares of a
successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to number and kind of shares and prices, in which event this
Warrant shall continue in the manner and under the terms so provided. A "Change
of Control" of the Company shall mean (a) any sale, consolidation, merger or
recapitalization, the effect of which is a material change to the capital
structure of the Company, other than such a transaction in which the holders of
the Common Stock immediately prior to the transaction continue to hold a
majority in interest of the voting stock of the surviving corporation
immediately after that transaction, (b) any sale or other transfer of
substantially all of the assets of the Company, (c) the adoption of any plan or
proposal for liquidation or dissolution of the Company or (d) the consummation
of any other transaction the effect of which is to cause any person not with
power to direct or cause direction of the management or policies of the Company
prior thereto to gain such power.
3. Other Adjustments. Except as provided in Section 2, no adjustment on
account of distributions with respect to Shares will be made upon the exercise
hereof.
4. No Shareholder Rights. This Warrant shall not entitle its holder to any
of the rights of a shareholder of the Company until this Warrant is exercised.
5. Exercise of Warrant.
(a) Cash Payment. This Warrant may be exercised by the registered
holder or its permitted registered assigns, in whole or in part, by the
surrender of this Warrant at the principal office of the Company, accompanied by
an executed subscription form in the form attached hereto and payment in full of
the Warrant Price as described above by certified or cashier's check. Upon
partial exercise hereof, a new warrant or warrants containing the same date and
provisions as this Warrant shall be issued by the Company to the registered
holder for the number of Shares with respect to which this Warrant shall not
have been exercised. This Warrant (or any portion thereof) shall be deemed to
have been exercised immediately prior to the close of business on the date of
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its surrender for exercise as provided above, and the person entitled to receive
the Shares issuable upon such exercise shall be treated for all purposes as the
holder of such Shares of record as of the close of business on such date.
(b) Cashless Exercise.
(i) In addition to and without limiting the rights of the
holder of this Warrant under the terms of this Warrant, the holder of this
Warrant shall have the right (the "Conversion Right") to convert the entirety of
the vested portion of this Warrant into Shares ("Converted Warrant Shares") as
provided in this Section 5(b) at any time or from time to time prior to
expiration of this Warrant, subject to the restrictions set forth in Section
5(b)(iii) below. Upon exercise of the Conversion Right, the Company shall
deliver to the holder of this Warrant, without payment by the holder of any
exercise price or any cash or other consideration, that number of Shares equal
to the quotient obtained by dividing the Net Value (as hereinafter defined) of
the Shares subject to purchase hereunder by the fair market value (as defined in
Section 5(b)(iv) below) of a single Share, determined in each case as of the
close of business on the Conversion Date (as hereinafter defined). The "Net
Value" of the Shares shall be determined by subtraction of the aggregate Warrant
Price of the Shares from the aggregate fair market value of the Shares. No
fractional Shares shall be issuable upon exercise of the Conversion Right, and
if the number of Shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the holder of this Warrant
an amount in cash equal to the fair market value of the resulting fractional
Share.
(ii) The Conversion Right may be exercised by the holder of
this Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right. Such conversion shall be effective
upon receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion
Date"), but not later than the Expiration Date of this Warrant. Certificates for
the Shares issuable upon exercise of the Conversion Right, together with a check
in payment of any fractional share, shall be issued as of the Conversion Date
and shall be delivered to the holder of this Warrant within seven (7) days
following the Conversion Date.
(iii) If the Conversion Right is reasonably determined by the
Company or its accountants to give rise to a charge to the Company's earnings
for financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment.
(iv) For purposes of this Section 5(b), the "fair market
value" of a Share as of a particular date shall be determined by the Board of
Directors of the Company in good faith.
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(c) Certificate of Adjustment. Whenever the Warrant Price or the
number of Shares subject to this Warrant is adjusted, as herein provided, the
Company shall deliver to the record holder of this Warrant a notice setting
forth the Warrant Price and number of Shares after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
6. Registration Rights.
(a) Company Registration. If (but without any obligation to do so)
the Company proposes to register its common stock under the Securities Act of
1933, as amended (the "Securities Act") in connection with the public offering
of such securities solely for cash (other than registrations relating solely to
employee benefit plans on Form S-8 or any similar form that may be promulgated
in the future, registrations relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms that may be promulgated in the future
or registrations on any form that does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Shares), the Company shall, at each such time, promptly
give the holder of this Warrant written notice of such registration. Upon the
written request of the such holder given within twenty (20) days after the
mailing of such notice by the Company, the Company shall, subject to the
provisions of this Section 6, use its reasonable best efforts to cause to be
registered under the Securities Act all of the Shares that such holder has
requested to be registered. If a the holder of this Warrant decides not to
include all of its Shares in any registration statement filed by the Company,
such holder shall nevertheless continue to have the right to include any Shares
in any subsequent registration statement or registration statements as may be
filed by the Company with respect to offerings of its securities, all upon the
terms and conditions set forth herein. Notwithstanding the provisions of this
Section 6, the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 6 (irrespective of whether any
written request for inclusion of such securities shall have already been made)
to elect not to file any such proposed registration statement, or to withdraw
the same.
(b) Obligations of the Company. Whenever required under this Section
6 to effect the registration of any Shares, the Company shall, as expeditiously
as reasonably possible:
(i) Prepare and file with the SEC a registration statement
with respect, to such Shares and use its reasonable best efforts to cause such
registration statement to become effective, and, upon the request of the holders
of a majority of all securities requested to be registered thereunder, keep such
registration statement effective for up to 90 days, provided, however, that the
Company may cease to keep such registration statement effective if, in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders to do so;
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(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(iii) Furnish to the holder of this Warrant such numbers of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of all securities
covered by such registration statement;
(iv) Use its reasonable best efforts to register and qualify
the securities covered by such registration statement under such other
securities or "Blue Sky" laws of such jurisdictions as shall be reasonably
requested by the holder hereof, provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions;
(v) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering; and
(vi) Notify the holder of any Shares covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing.
(c) Holder's Obligation to Furnish Information. It shall be a
condition precedent to the obligations of the Company to take any action
pursuant to this Section 6, that the holder hereof shall furnish to the Company
such information regarding itself, the Shares held by it and the intended method
of disposition of such securities as shall be reasonably required to effect the
registration of its Shares and to execute such documents in connection with such
registration as the Company may reasonably request.
(d) Expenses of Registration. Except as provided otherwise, all
reasonable expenses other than underwriting discounts and commissions and fees
and expenses of counsel to the holder incurred in connection with the
underwriting, registrations, filings or qualifications pursuant to Section 6,
including, without limitation, all registration, filing and qualification fees,
printing and accounting fees, and the fees and disbursements of counsel for the
Company shall be borne by the Company; provided, however, that the expenses paid
by the Company in connection with exercise of rights to registration pursuant to
this Section 6 shall be limited to those usual and customary
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expenses associated with a nonunderwritten offering. In all cases the selling
holder shall bear the expenses of any underwriting discounts and expenses
relating to its Shares and the fees and disbursements of counsel or other
advisers engaged by such holder in connection with a registration.
Underwriting Requirements. The Company shall not be required under Section 6 to
include any of the holder's securities in an underwritten offering of the
Company's securities unless such holder accepts the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it, assuming
usual and customary underwriting terms. If the total amount of securities
requested by shareholders to be included in such offering exceeds the amount of
securities that the underwriters reasonably believe compatible with the success
of the offering, then the Company shall be required to include in the offering
only that number of such securities which the underwriters reasonably believe
are compatible with the success of the offering. In such event the securities so
included will be apportioned first to the Company, then pro rata among the
selling shareholders according to the total amount of securities otherwise
entitled to be included therein owned by each selling shareholder or in such
other proportions as shall mutually be agreed to by such selling shareholders.
No such reduction shall reduce the securities being offered by the Company for
its own account to be included in the registration and underwriting.
(e) Delay of Registration. The holder hereof shall not have any
right to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Warrant.
(f) Indemnification. In the event any Shares are included in a
registration statement under this Agreement:
(i) To the extent permitted by law, the Company will indemnify
and hold harmless the holder hereof, the partners, officers, agents, employees
and directors of such holder, any underwriter (as defined in the Securities Act)
for such holder and each person, if any, who controls such holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(each a "Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein in light of the
circumstances under which they were made, or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by
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the Company of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange Act or
any state securities law; and the Company will reimburse each such holder,
partner, officer, agent, employee or director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section
6(g)(i) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Company, which consent shall not be unreasonably withheld, nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by, or on behalf of, any
such holder, underwriter or controlling person.
(ii) To the extent permitted by law, the holder hereof shall
indemnify and hold harmless the Company, each of its officers, directors, agents
or employees, each person, if any, who controls the Company within the meaning
of the Securities Act, any underwriter and any other shareholder selling
securities in such registration statement or any of its partners, agents,
employees, directors or officers or any person who controls such shareholder,
against any losses, claims, damages or liabilities (joint or several) to which
the Company or any such director, partner, agent, employee, officer, controlling
person, or underwriter, or such other shareholder or director, officer, partner,
agent, employee or controlling person of such other shareholder may become
subject, under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by, or on behalf of, such
holder; and such holder will reimburse any legal or other expenses reasonably
incurred by the Company or such other shareholder or any such partner, agent,
employee, director, officer, controlling person, or underwriter, in connection
with investigating, preparing or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 6(g)(ii) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the holder against whom indemnity is sought, which
consent shall not be unreasonably withheld; and provided, further, that the
holder shall be liable, under this Section 6(g)(ii) for only that amount of
losses, claims, damages and liabilities as does not exceed the proceeds to such
holder as a result of such registration.
(iii) Promptly after receipt by an indemnified party under
this Section 6(g) of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 6(g),
deliver to the indemnifying party a
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written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly notified, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if, in
the opinion of counsel for the indemnifying party, representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within thirty (30) days of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 6(g) to the extent materially prejudicial to its ability to defend such
action, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 6(g).
(iv) If the indemnification provided for in this Section 6(g)
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any expenses, losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such expense, loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of law by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, that in no event shall any
contribution by a holder hereunder exceed the net proceeds from the offering
received by such holder.
(v) The obligations of the Company and holder under this
Section 6(g) shall survive completion of any offering of Shares in a
registration statement. No indemnifying party, in the defense of any such claim
or litigation, shall, except with the consent of each indemnified party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(vi) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement
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entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(g) Reports Under the Securities Act. With a view to making
available to the holder the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a holder to sell securities of the Company to the public without
registration, the Company agrees to:
(i) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after the effective
date of the first registration statement filed by the Company under the
Securities Act for the offering of its securities to the general public;
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(iii) furnish to the holder hereof, so long as the holder owns
any Shares, forthwith upon request (i) a written statement by the Company as to
its compliance with the reporting requirements of SEC Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing the holder of any rule or regulation of the SEC
which permits the selling of any such securities without registration.
(h) "Market Stand-Off" Agreement. The holder of this Warrant hereby
agrees that it shall not, to the extent requested by the Company as the
representative of the underwriter of Common Stock (or other securities) of the
Company, sell or otherwise transfer or dispose of any Shares for up to 180 days
following the effective date of a registration statement of the Company filed
under the Securities Act. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Shares of the
holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
7. Transfer of Warrant. This Warrant may not be transferred by the holder
without the written consent of the Company (except by operation of law or to a
successor by merger, acquisition or other corporate reorganization) and
compliance with applicable federal and state securities laws to the satisfaction
of the Company.
8. Compliance with Securities Laws.
(a) The holder represents and agrees that this Warrant (and the
Shares, if the warrant is exercised) are purchased only for investment, for the
holder's own account,
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and without any present intention to sell or distribute the Warrant or the
Shares. The holder further acknowledges that the Shares will not be issued
pursuant to the exercise of this Warrant unless the exercise of the Warrant and
the issuance and delivery of such Shares shall comply with all relevant
provisions of law, including, without limitation, the Securities Act and other
federal and state securities laws.
(b) The holder of this Warrant acknowledges and agrees that this
Warrant and the Shares have not been registered under the Securities Act or the
securities laws of any other jurisdiction and accordingly will not be
transferable except as permitted under the various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act. Therefore, the Warrant and Shares must be
held indefinitely unless they are subsequently registered under the Securities
Act and all other applicable securities or an exemption from such registration
is available. The holder understands that the certificates, if any, evidencing
the Shares will be imprinted with a legend which prohibits the transfer thereof
unless they are registered or unless the Company receives an opinion of counsel
reasonably satisfactory to the Company that such registration is not required.
The holder understands that a stop transfer instruction may be in effect with
respect to transfer of the Warrant and Shares consistent with the requirements
of the securities laws.
9. Miscellaneous. This Warrant shall be governed solely by the laws of the
State of Washington without regard to the conflicts of laws provisions thereof
to the contrary. The headings in this Warrant are for purposes of convenience
and reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated except by an instrument in writing signed by the Company and the
registered holder hereof. All notices and other communications from the Company
to the holder of this Warrant shall be delivered in person or mailed
first-class, postage prepaid, to the address furnished to the Company in writing
by the last holder of this Warrant who shall have furnished an address to the
Company in writing. Each such notice or other communication shall for all
purposes of this Warrant be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail, at the earlier of its
receipt or 72 hours after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
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ISSUED this 23rd, day of August, 1998.
ONLINE SPECIALTY RETAILING, INC.
By: /s/ Benjamin C. Nourse
-------------------------------
Benjamin C. Nourse
Chairman
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SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
To: Online Specialty Retailing, Inc.
2030 First Avenue, Third Floor
Seattle, WA 98121
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________ shares of Common Stock of Online
Specialty Retailing, Inc. and herewith makes payment of $________________ for
those shares, and requests that any certificates for such shares be issued in
the name of, and delivered to, _________________________, whose address is
_________________________________________.
DATED: __________________, 19__.
WARRANT HOLDER:
----------------------------------
By:
------------------------------
Title:
---------------------------
ADDRESS:
----------------------------------
----------------------------------
----------------------------------
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OR
CONVERSION HEREOF (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. NO INTEREST HEREIN OR IN THE SHARES MAY BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR THE COMPANY RECEIVES AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER HEREOF (CONCURRED IN BY COUNSEL FOR THE COMPANY) STATING
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION OR THE COMPANY OTHERWISE
SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
ONLINE SPECIALTY RETAILING, INC.
COMMON STOCK PURCHASE WARRANT
Warrant No. 105 April 9, 1999
1. Number and Price of Shares Subject to Warrant. Subject to the terms and
conditions herein set forth, First Portland Corporation is entitled to purchase
from Online Specialty Retailing, Inc., a Washington corporation (the "Company"),
upon surrender hereof at the principal office of the Company and payment of the
purchase price at said office in cash or by check, 1,667 shares of common stock
of the Company (the "Shares") at a purchase price of $3.00 per Share. The
purchase price of one Share and the number of Shares purchasable upon exercise
of this Warrant are subject to adjustment as hereinafter provided. The purchase
price of one Share payable from time to time upon the exercise of this Warrant
(whether such price be the price specified above or an adjusted price determined
as hereinafter provided) is referred to herein as the "Warrant Price."
This Warrant shall remain exercisable pursuant to the provisions of
Section 5 until the earlier of (a) 5:00 p.m. Pacific Time on April 9, 2009, (b)
immediately prior to the date on which the Company completes a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of Common Stock for the
account of the Company to the public with aggregate cash proceeds of not less
than $10,000,000 (before deduction of underwriting commissions and offering
expenses), or (c) the date this Warrant is terminated under Section 2(b) upon a
"Change of Control." Such date shall be referred to herein as the "Expiration
Date."
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2. Adjustment of Warrant Price and Number of Shares.
(a) Stock Splits, Recapitalization. In the event that the
outstanding shares of Common Stock of the Company are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of the Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split, the Board of Directors shall make an
appropriate and proportionate adjustment in the number of Shares purchased
hereunder and the Warrant Price per share.
(b) Change of Control. Upon the effective date of a Change of
Control of the Company, this Warrant shall terminate unless provisions be made
in writing, approved by the Board of Directors, in connection with such
transaction for the assumption of the Warrant theretofore granted, or the
substitution for this Warrant of a new Warrant covering the shares of a
successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to number and kind of shares and prices, in which event this
Warrant shall continue in the manner and under the terms so provided. A "Change
of Control" of the Company shall mean (a) any sale, consolidation, merger or
recapitalization, the effect of which is a material change to the capital
structure of the Company, other than such a transaction in which the holders of
the Common Stock immediately prior to the transaction continue to hold a
majority in interest of the voting stock of the surviving corporation
immediately after that transaction, (b) any sale or other transfer of
substantially all of the assets of the Company, (c) the adoption of any plan or
proposal for liquidation or dissolution of the Company or (d) the consummation
of any other transaction the effect of which is to cause any person not with
power to direct or cause direction of the management or policies of the Company
prior thereto to gain such power.
3. Other Adjustments. Except as provided in Section 2, no adjustment on
account of distributions with respect to Shares will be made upon the exercise
hereof.
4. No Shareholder Rights. This Warrant shall not entitle its holder to any
of the rights of a shareholder of the Company until this Warrant is exercised.
5. Exercise of Warrant.
(a) Cash Payment. This Warrant may be exercised by the registered
holder or its permitted registered assigns, in whole or in part, by the
surrender of this Warrant at the principal office of the Company, accompanied by
an executed subscription form in the form attached hereto and payment in full of
the Warrant Price as described above by certified or cashier's check. Upon
partial exercise hereof, a new warrant or warrants containing the same date and
provisions as this Warrant shall be issued by the Company to the registered
holder for the number of Shares with respect to which this Warrant shall not
have been exercised. This Warrant (or any portion thereof) shall be deemed to
have been exercised immediately prior to the close of business on the date of
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its surrender for exercise as provided above, and the person entitled to receive
the Shares issuable upon such exercise shall be treated for all purposes as the
holder of such Shares of record as of the close of business on such date.
(b) Cashless Exercise.
(i) In addition to and without limiting the rights of the
holder of this Warrant under the terms of this Warrant, the holder of this
Warrant shall have the right (the "Conversion Right") to convert the entirety of
the vested portion of this Warrant into Shares ("Converted Warrant Shares") as
provided in this Section 5(b) at any time or from time to time prior to
expiration of this Warrant, subject to the restrictions set forth in Section
5(b)(iii) below. Upon exercise of the Conversion Right, the Company shall
deliver to the holder of this Warrant, without payment by the holder of any
exercise price or any cash or other consideration, that number of Shares equal
to the quotient obtained by dividing the Net Value (as hereinafter defined) of
the Shares subject to purchase hereunder by the fair market value (as defined in
Section 5(b)(iv) below) of a single Share, determined in each case as of the
close of business on the Conversion Date (as hereinafter defined). The "Net
Value" of the Shares shall be determined by subtraction of the aggregate Warrant
Price of the Shares from the aggregate fair market value of the Shares. No
fractional Shares shall be issuable upon exercise of the Conversion Right, and
if the number of Shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the holder of this Warrant
an amount in cash equal to the fair market value of the resulting fractional
Share.
(ii) The Conversion Right may be exercised by the holder of
this Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right. Such conversion shall be effective
upon receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion
Date"), but not later than the Expiration Date of this Warrant. Certificates for
the Shares issuable upon exercise of the Conversion Right, together with a check
in payment of any fractional share, shall be issued as of the Conversion Date
and shall be delivered to the holder of this Warrant within seven (7) days
following the Conversion Date.
(iii) If the Conversion Right is reasonably determined by the
Company or its accountants to give rise to a charge to the Company's earnings
for financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment.
(iv) For purposes of this Section 5(b), the "fair market
value" of a Share as of a particular date shall be determined by the Board of
Directors of the Company in good faith.
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<PAGE>
6. Certificate of Adjustment. Whenever the Warrant Price or the number of
Shares subject to this Warrant is adjusted, as herein provided, the Company
shall deliver to the record holder of this Warrant a notice setting forth the
Warrant Price and number of Shares after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
7. Transfer of Warrant. This Warrant may not be transferred by the holder
without the written consent of the Company (except by operation of law or to a
successor by merger, acquisition or other corporate reorganization) and
compliance with applicable federal and state securities laws to the satisfaction
of the Company.
8. Compliance with Securities Laws.
(a) The holder represents and agrees that this Warrant (and the
Shares, if the warrant is exercised) are purchased only for investment, for the
holder's own account, and without any present intention to sell or distribute
the Warrant or the Shares. The holder further acknowledges that the Shares will
not be issued pursuant to the exercise of this Warrant unless the exercise of
the Warrant and the issuance and delivery of such Shares shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
and other federal and state securities laws.
(b) The holder of this Warrant acknowledges and agrees that this
Warrant and the Shares have not been registered under the Securities Act or the
securities laws of any other jurisdiction and accordingly will not be
transferable except as permitted under the various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act. Therefore, the Warrant and Shares must be
held indefinitely unless they are subsequently registered under the Securities
Act and all other applicable securities or an exemption from such registration
is available. The holder understands that the certificates, if any, evidencing
the Shares will be imprinted with a legend which prohibits the transfer thereof
unless they are registered or unless the Company receives an opinion of counsel
reasonably satisfactory to the Company that such registration is not required.
The holder understands that a stop transfer instruction may be in effect with
respect to transfer of the Warrant and Shares consistent with the requirements
of the securities laws.
9. Miscellaneous. This Warrant shall be governed solely by the laws of the
State of Washington without regard to the conflicts of laws provisions thereof
to the contrary. The headings in this Warrant are for purposes of convenience
and reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated except by an instrument in writing signed by the Company and the
registered holder hereof. All notices and other communications from the Company
to the holder of this Warrant shall be delivered in person or mailed
first-class, postage prepaid, to the address furnished to the Company in writing
by the last holder of this Warrant who shall have furnished an address to the
Company in writing. Each such notice or other communication shall for all
purposes of
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this Warrant be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
ISSUED this 9th, day of April, 1999.
ONLINE SPECIALTY RETAILING, INC.
By: /s/ Benjamin C. Nourse
----------------------------
Benjamin C. Nourse
Chairman
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<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
To: Online Specialty Retailing, Inc.
2030 First Avenue, Third Floor
Seattle, WA 98121
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________ shares of Common Stock of Online
Specialty Retailing, Inc. and herewith makes payment of $________________ for
those shares, and requests that any certificates for such shares be issued in
the name of, and delivered to, _________________________, whose address is
____________________________.
DATED:__________________, 19__.
WARRANT HOLDER:
____________________________
By: ________________________
Title: _____________________
ADDRESS:
____________________________
____________________________
____________________________
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OR
CONVERSION HEREOF (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. NO INTEREST HEREIN OR IN THE SHARES MAY BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR THE COMPANY RECEIVES AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER HEREOF (CONCURRED IN BY COUNSEL FOR THE COMPANY) STATING
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION OR THE COMPANY OTHERWISE
SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
ONLINE SPECIALTY RETAILING, INC.
COMMON STOCK PURCHASE WARRANT
Warrant No. 104 October 5, 1998
1. Number and Price of Shares Subject to Warrant. Subject to the terms and
conditions herein set forth, Peapod, Inc. ("Peapod") is entitled to purchase
from Online Specialty Retailing, Inc., a Washington corporation (the "Company"),
upon surrender hereof at the principal office of the Company and payment of the
purchase price at said office in cash or by check, 300,000 shares of common
stock of the Company (the "Shares") at a purchase price of $3.00 per Share. The
purchase price of one Share and the number of Shares purchasable upon exercise
of this Warrant are subject to adjustment as hereinafter provided. The purchase
price of one Share payable from time to time upon the exercise of this Warrant
(whether such price be the price specified above or an adjusted price determined
as hereinafter provided) is referred to herein as the "Warrant Price."
This Warrant is being given in consideration of Peapod's entering into a
Marketing Partners Agreement (the "Marketing Agreement"). Provided that the
Marketing Agreement is not terminated on or prior to February 1, 2000, this
Warrant becomes exercisable on February 1, 2000 (the "Exercise Date") and shall
remain exercisable pursuant to the provisions of Section 6 until the earlier of
(a) 5:00 p.m. Pacific Time on December 31, 2001, (b) thirty days following the
receipt by Peapod of written notice from the Company that the Company has
completed on or after December 31, 2000 an issuance and sale for not less than
$500,000 in cash to one or more investors of shares of its capital stock (a
"Financing Transaction"), or (c) the date, if any, on which the Marketing
Agreement is terminated in accordance with its terms prior to its expiration.
Such date shall be referred to herein as the "Expiration Date."
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2. Adjustments to Warrant Price and Number of Shares for Dilutive Events.
(a) Warrant Price. The Warrant Price in effect from time to time,
except as adjusted in accordance with Section 2 and Section 3 hereof, shall be
$3.00 (the "Warrant Price").
(b) Special Definitions. For purposes of this Section 2, the
following definitions shall apply:
(i) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued (or, pursuant to Section 2(c), deemed to be issued) by
the Company after the date hereof, other than:
a. shares of Common Stock issued or issuable upon
conversion of or in exchange for, or as a dividend or distribution on, the
Company's Series A Preferred Stock;
b. shares of Common Stock issued or issuable at any time
to employees, officers or directors of, or consultants or advisors to, the
Company 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 of the Company;
c. shares of Common Stock issued to financial
institutions or lessors in connection with commercial credit arrangements,
equipment financings, or similar transactions;
d. shares of Common Stock issued in connection with a
merger of the Company with or into another corporation or the acquisition
by the Company of another entity;
e. 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
f. 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 written
consent of the holder hereof.
(ii) "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.
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(iii) "Dilutive Event" shall mean any transaction pursuant to
which the Company shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section 2(c))
without consideration or for a consideration (as determined in Section 2(e)) per
share issued less than the Warrant Price in effect on the date of and
immediately prior to such issuance.
(iv) "Fully-Diluted Shares" on the date of any Dilutive Event
shall mean the sum of the following amounts:
a. the number of shares of Common Stock outstanding on
the date of and immediately prior to such Dilutive Event,
b. 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
c. 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 Company or
other grant designated and approved by the Board of Directors.
(v) "Options" shall mean currently exercisable rights, options
or warrants to subscribe for, purchase or otherwise acquire either Common Stock
or Convertible Securities.
(c) Deemed Issuance of Additional Shares of Common Stock.
(i) Options and Convertible Securities. In the event the
Company at any time or from time to time after the date hereof 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 Warrant Price occurs as a result of Additional
Shares of Common Stock deemed to be issued pursuant to this Section 2(c), then
(notwithstanding the foregoing):
a. no further adjustment in the Warrant Price shall be
made (i) upon the subsequent issuance of shares of Common Stock upon the
exercise of such Options or the conversion or exchange of such Convertible
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Securities, or (ii), in the case of Options for the purchase of
Convertible Securities, upon the subsequent issuance of such Convertible
Securities upon exercise of such Options;
b. if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, except as provided
in this Section 2(c)(i)b, for any increase or decrease in the
consideration payable to the Company, or in the number of shares of Common
Stock issuable, upon the exercise, conversion or exchange thereof (a
"Change Event"), the Warrant Price 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
2(b)(iii)), this Section 2(c)(i)b shall be inapplicable and no adjustment
shall be made to the Warrant Price as a result of the Change Event;
c. 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 Warrant Price computed upon the original
issuance thereof, and any subsequent adjustments based thereon, shall,
upon such expiration, be recomputed as if, (i) 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 Company for the issue of all such Options or Convertible Securities,
whether or not exercised, converted, or exchanged, plus the consideration
actually received by the Company upon such exercise, conversion or
exchange, and (ii) 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 Company for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually
received by the Company for the issue of all such Options, whether or not
exercised, plus the consideration deemed to have been received by the
Company upon the issue of the Convertible Securities with respect to which
such Options were actually exercised;
d. no readjustment pursuant to clause (b) or (c) above
shall have the effect of increasing the Warrant Price to an amount which
exceeds the lesser of (i) the Warrant Price on the original adjustment
date, or (ii) the Warrant Price that would have resulted from any other
issuance of Additional
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Shares of Common Stock between the original adjustment date and such
readjustment date; and
e. 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 Warrant 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 Company'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 2, be deemed to have been issued as of such record date
(provided that the Warrant Price so computed shall be recomputed if such Options
or Convertible Securities are not so distributed or issued).
(ii) Stock Dividends. In the event the Company at any time or
from time to time after the date hereof 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 Warrant Price shall be recomputed accordingly.
(d) Adjustment of Warrant Price Upon Issuance of Additional Shares
of Common Stock. If a Dilutive Event shall occur at any time or from time to
time after the date hereof, the Warrant Price shall be reduced, concurrently
with the occurrence of such Dilutive Event, to a price determined by multiplying
the Warrant Price immediately prior to such Dilutive Event by a fraction, the
numerator of which shall be the sum of the number of Shares issuable pursuant to
this Warrant immediately prior to such Dilutive Event plus the number of shares
of Common Stock which could be purchased at such Warrant Price with the
aggregate consideration received by the Company 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 number of Shares
issuable pursuant to this Warrant immediately prior to such Dilutive Event 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 may be
waived in any instance by the written consent of the holder hereof.
(e) Determination of Consideration. For purposes of this Section 2,
the consideration received by the Company for any Additional Shares of Common
Stock shall be computed as follows:
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(i) Cash and Property. Such consideration shall: (a) 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 Company 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; (b) 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 (c) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (a) and (b) above, as
determined in good faith by the Board of Directors of the Company.
(ii) Options and Convertible Securities. The consideration per
share received by the Company for Additional Shares of Common Stock deemed to
have been issued pursuant to Section 2(c), relating to Options and Convertible
Securities, shall be determined by dividing: (x) the total amount, if any,
received or receivable by the Company 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 Company 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.
(iii) Stock Dividends. Any Additional Shares of Common Stock
issued as stock dividends shall be deemed to have been issued for no
consideration.
(f) Rounding of Calculations; Minimum Adjustment. All calculations
under this Section 2 shall be made by rounding downward to the nearest cent. Any
provision of this Section 2 to the contrary notwithstanding, no adjustment in
the Warrant 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 Warrant Price then
in effect.
(g) Adjustment of Number of Shares Issuable Pursuant to this
Warrant. Upon each adjustment of the Warrant Price as a result of the
calculations made in this Section 2, this Warrant shall thereafter evidence the
right to purchase, at the adjusted Warrant Price, that number of shares of
Common Stock (calculated to the nearest one-thousandth) obtained by (i)
multiplying the number of shares of Common Stock covered
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by this Warrant immediately prior to such adjustment by the Warrant Price in
effect immediately prior to such adjustment and (ii) dividing the product so
obtained by the Warrant Price in effect immediately after such adjustment.
Subsequent to any adjustment made to the Warrant Price hereunder, this Warrant
shall evidence the right to purchase, at the adjusted Warrant Price, the number
of shares of Common Stock determined to be purchasable from time to time
hereunder upon exercise of this Warrant, all subject to further adjustment as
provided herein. Irrespective of any adjustment or change in the Warrant Price
or the number of shares of Common Stock issuable upon the exercise of this
Warrant, this Warrant and any Warrants theretofore or thereafter issued in
replacement hereof may continue to express the Warrant Price per share of Common
Stock and the number of shares of Common Stock that were expressed upon the
initial issuance of this Warrant.
3. Additional Adjustments to Warrant Price. In the event that the
outstanding shares of Common Stock of the Company are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of the Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split, the Board of Directors shall make an
appropriate and proportionate adjustment in the number of Shares purchased
hereunder and the Warrant Price per share.
4. Change of Control. In connection with any Change of Control of the
Company (as defined below), the Company shall make provisions for the assumption
of the Warrant theretofore granted, or the substitution for this Warrant of a
new Warrant covering the shares of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to number and kind of shares
and prices, in which event this Warrant shall continue in the manner and under
the terms so provided. A "Change of Control" of the Company shall mean (a) any
sale, consolidation, merger or recapitalization, the effect of which is a
material change to the capital structure of the Company, other than such a
transaction in which the holders of the Common Stock immediately prior to the
transaction continue to hold a majority in interest of the voting stock of the
surviving corporation immediately after that transaction, (b) any sale or other
transfer of substantially all of the assets of the Company, (c) the adoption of
any plan or proposal for liquidation or dissolution of the Company or (d) the
consummation of any other transaction the effect of which is to cause any person
not with power to direct or cause direction of the management or policies of the
Company prior thereto to gain such power.
5. No Shareholder Rights. This Warrant shall not entitle its holder to any
of the rights of a shareholder of the Company until this Warrant is exercised.
6. Exercise of Warrant.
(a) Cash Payment. This Warrant may be exercised by the registered
holder or its permitted registered assigns, in whole or in part, by the
surrender of this
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<PAGE>
Warrant at the principal office of the Company, accompanied by an executed
subscription form in the form attached hereto and payment in full of the Warrant
Price as described above by certified or cashier's check. Upon partial exercise
hereof, a new warrant or warrants containing the same date and provisions as
this Warrant shall be issued by the Company to the registered holder for the
number of Shares with respect to which this Warrant shall not have been
exercised. This Warrant (or any portion thereof) shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
Shares issuable upon such exercise shall be treated for all purposes as the
holder of such Shares of record as of the close of business on such date.
(b) Cashless Exercise.
(i) In addition to and without limiting the rights of the
holder of this Warrant under the terms of this Warrant, the holder of this
Warrant shall have the right (the "Conversion Right") to convert the entirety of
this Warrant into Shares ("Converted Warrant Shares") as provided in this
Section 6(b) at any time at which this Warrant would be exercisable pursuant to
Section 1, subject to the restrictions set forth in Section 6(b)(iii) below.
Upon exercise of the Conversion Right, the Company shall deliver to the holder
of this Warrant, without payment by the holder of any exercise price or any cash
or other consideration, that number of Shares equal to the quotient obtained by
dividing the Net Value (as hereinafter defined) of the Shares subject to
purchase hereunder by the Fair Market Value (as defined in Section 6(b)(iv)
below) of a single Share, determined in each case as of the close of business on
the Conversion Date (as hereinafter defined). The "Net Value" of the Shares
shall be determined by subtraction of the aggregate Warrant Price of the Shares
from the aggregate Fair Market Value of the Shares. No fractional Shares shall
be issuable upon exercise of the Conversion Right, and if the number of Shares
to be issued in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the holder of this Warrant an amount in cash
equal to the fair market value of the resulting fractional Share.
(ii) The Conversion Right may be exercised by the holder of
this Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right. Such conversion shall be effective
upon receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion
Date"), but not later than the Expiration Date of this Warrant. Certificates for
the Shares issuable upon exercise of the Conversion Right, together with a check
in payment of any fractional share, shall be issued as of the Conversion Date
and shall be delivered to the holder of this Warrant within seven (7) days
following the Conversion Date.
(c) For purposes of this Section 6(b), the Fair Market Value of a
Share as of a particular date shall be that value agreed upon by the Company and
the holder hereof, or in the event such holder and the Company do not agree on
the Fair Market
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Value, the Fair Market Value shall be that value determined by an independent
investment banking or valuation firm experienced in valuing companies in an
industry and stage of development similar to that of the Company, mutually
selected by the Company and the holder hereof. Notwithstanding the foregoing, in
the event a Financing Transaction occurs within 30 days before or after notice
of exercise of the Conversion Right, the Fair Market Value of a Share shall be
deemed to be the price per share of Common Stock issued in such Financing
Transaction.
7. Registration Rights.
(a) Company Registration. If (but without any obligation to do so)
the Company proposes to register its common stock under the Securities Act of
1933, as amended (the "Securities Act") in connection with the public offering
of such securities solely for cash (other than registrations relating solely to
employee benefit plans on Form S-8 or any similar form that may be promulgated
in the future, registrations relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms that may be promulgated in the future
or registrations on any form that does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Shares), the Company shall, at each such time, promptly
give the holder of this Warrant written notice of such registration. Upon the
written request of the such holder given within twenty (20) days after the
mailing of such notice by the Company, the Company shall, subject to the
provisions of this Section 7, use its reasonable best efforts to cause to be
registered under the Securities Act all of the Shares that such holder has
requested to be registered. If a the holder of this Warrant decides not to
include all of its Shares in any registration statement filed by the Company,
such holder shall nevertheless continue to have the right to include any Shares
in any subsequent registration statement or registration statements as may be
filed by the Company with respect to offerings of its securities, all upon the
terms and conditions set forth herein. Notwithstanding the provisions of this
Section 7, the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7 (irrespective of whether any
written request for inclusion of such securities shall have already been made)
to elect not to file any such proposed registration statement, or to withdraw
the same.
(b) Obligations of the Company. Whenever required under this Section
7 to effect the registration of any Shares, the Company shall, as expeditiously
as reasonably possible:
(i) Prepare and file with the SEC a registration statement
with respect, to such Shares and use its reasonable best efforts to cause such
registration statement to become effective, and, upon the request of the holders
of a majority of all securities requested to be registered thereunder, keep such
registration statement effective for up to 90 days, provided, however, that the
Company may cease to keep such registration statement effective if, in the good
faith judgment of the Board of Directors of
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<PAGE>
the Company, it would be seriously detrimental to the Company and its
shareholders to do so;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(iii) Furnish to the holder of this Warrant such numbers of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of all securities
covered by such registration statement;
(iv) Use its reasonable best efforts to register and qualify
the securities covered by such registration statement under such other
securities or "Blue Sky" laws of such jurisdictions as shall be reasonably
requested by the holder hereof, provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions;
(v) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering; and
(vi) Notify the holder of any Shares covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing.
(c) Holder's Obligation to Furnish Information. It shall be a
condition precedent to the obligations of the Company to take any action
pursuant to this Section 7, that the holder hereof shall furnish to the Company
such information regarding itself, the Shares held by it and the intended method
of disposition of such securities as shall be reasonably required to effect the
registration of its Shares and to execute such documents in connection with such
registration as the Company may reasonably request.
(d) Expenses of Registration. Except as provided otherwise, all
reasonable expenses, other than underwriting discounts and commissions and fees
and expenses of counsel to the holder, incurred in connection with the
underwriting, registrations, filings or qualifications pursuant to this Section
7, including, without limitation, all registration, filing and qualification
fees, printing and accounting fees, and
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<PAGE>
the fees and disbursements of counsel for the Company shall be borne by the
Company; provided, however, that the expenses paid by the Company in connection
with exercise of rights to registration pursuant to this Section 7 shall be
limited to those usual and customary expenses associated with a nonunderwritten
offering. In all cases the selling holder shall bear the expenses of any
underwriting discounts and expenses relating to its Shares and the fees and
disbursements of counsel or other advisers engaged by such holder in connection
with a registration.
(e) Underwriting Requirements. The Company shall not be required
under this Section 7 to include any of the holder's securities in an
underwritten offering of the Company's securities unless such holder accepts the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, assuming usual and customary underwriting terms. If
the total amount of securities requested by shareholders to be included in such
offering exceeds the amount of securities that the underwriters reasonably
believe compatible with the success of the offering, then the Company shall be
required to include in the offering only that number of such securities which
the underwriters reasonably believe are compatible with the success of the
offering. In such event the securities so included will be apportioned first to
the Company, then pro rata among the selling shareholders according to the total
amount of securities otherwise entitled to be included therein owned by each
selling shareholder or in such other proportions as shall mutually be agreed to
by such selling shareholders. No such reduction shall reduce the securities
being offered by the Company for its own account to be included in the
registration and underwriting.
(f) Delay of Registration. The holder hereof shall not have any
right to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Warrant.
(g) Indemnification. In the event any Shares are included in a
registration statement under this Agreement:
(i) To the extent permitted by law, the Company will indemnify
and hold harmless the holder hereof, the partners, officers, agents, employees
and directors of such holder, any underwriter (as defined in the Securities Act)
for such holder and each person, if any, who controls such holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(each a "Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein in light of the
circumstances under which they were made, or any amendments or supplements
thereto, (ii) the omission or alleged
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<PAGE>
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and the Company will
reimburse each such holder, partner, officer, agent, employee or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 7(g)(i) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by, or on behalf of, any such holder, underwriter or
controlling person.
(ii) To the extent permitted by law, the holder hereof shall
indemnify and hold harmless the Company, each of its officers, directors, agents
or employees, each person, if any, who controls the Company within the meaning
of the Securities Act, any underwriter and any other shareholder selling
securities in such registration statement or any of its partners, agents,
employees, directors or officers or any person who controls such shareholder,
against any losses, claims, damages or liabilities (joint or several) to which
the Company or any such director, partner, agent, employee, officer, controlling
person, or underwriter, or such other shareholder or director, officer, partner,
agent, employee or controlling person of such other shareholder may become
subject, under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by, or on behalf of, such
holder; and such holder will reimburse any legal or other expenses reasonably
incurred by the Company or such other shareholder or any such partner, agent,
employee, director, officer, controlling person, or underwriter, in connection
with investigating, preparing or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 7(g)(ii) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the holder against whom indemnity is sought, which
consent shall not be unreasonably withheld; and provided, further, that the
holder shall be liable, under this Section 7(g)(ii) for only that amount of
losses, claims, damages and liabilities as does not exceed the proceeds to such
holder as a result of such registration.
(iii) Promptly after receipt by an indemnified party under
this Section 7(g) of notice of the commencement of any action (including any
governmental
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action), such indemnified party shall, if a claim in respect thereof is to be
made against any indemnifying party under this Section 7(g), deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if, in the opinion of counsel for the indemnifying
party, representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within thirty (30) days of the commencement of any such
action shall relieve such indemnifying party of any liability to the indemnified
party under this Section 7(g) to the extent materially prejudicial to its
ability to defend such action, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 7(g).
(iv) If the indemnification provided for in this Section 7(g)
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any expenses, losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such expense, loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of law by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, that in no event shall any
contribution by a holder hereunder exceed the net proceeds from the offering
received by such holder.
(v) The obligations of the Company and holder under this
Section 7(g) shall survive completion of any offering of Shares in a
registration statement. No indemnifying party, in the defense of any such claim
or litigation, shall, except with the consent of each indemnified party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
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(vi) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(h) Reports Under the Securities Act. With a view to making
available to the holder the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a holder to sell securities of the Company to the public without
registration, the Company agrees to:
(i) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after the effective
date of the first registration statement filed by the Company under the
Securities Act for the offering of its securities to the general public;
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(iii) furnish to the holder hereof, so long as the holder owns
any Shares, forthwith upon request (i) a written statement by the Company as to
its compliance with the reporting requirements of SEC Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing the holder of any rule or regulation of the SEC
which permits the selling of any such securities without registration.
(i) "Market Stand-Off" Agreement. The holder of this Warrant hereby
agrees that it shall not, to the extent requested by the Company as the
representative of the underwriter of Common Stock (or other securities) of the
Company, sell or otherwise transfer or dispose of any Shares for up to 180 days
following the effective date of a registration statement of the Company filed
under the Securities Act. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Shares of the
holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
(j) Survival. The rights of the holder of this Warrant under this
Section 7 shall survive exercise hereof and continue in effect until the earlier
of (a) the date that all Shares have been registered and sold pursuant to an
effective registration statement under the Securities Act or (b) that date that
such holder may sell such shares without registration under the Securities Act
pursuant to Rule 144 promulgated thereunder.
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<PAGE>
8. Transfer of Warrant. This Warrant may not be transferred by the holder
without the written consent of the Company and compliance with applicable
federal and state securities laws to the satisfaction of the Company.
9. Compliance with Securities Laws.
(a) The holder represents and agrees that this Warrant (and the
Shares, if the Warrant is exercised) are purchased only for investment, for the
holder's own account, and without any present intention to sell or distribute
the Warrant or the Shares. The holder further acknowledges that the Shares will
not be issued pursuant to the exercise of this Warrant unless the exercise of
the Warrant and the issuance and delivery of such Shares shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
and other federal and state securities laws.
(b) The holder of this Warrant acknowledges and agrees that this
Warrant and the Shares have not been registered under the Securities Act or the
securities laws of any other jurisdiction and accordingly will not be
transferable except as permitted under the various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act. Therefore, the Warrant and Shares must be
held indefinitely unless they are subsequently registered under the Securities
Act and all other applicable securities or an exemption from such registration
is available. The holder understands that the certificates, if any, evidencing
the Shares will be imprinted with a legend which prohibits the transfer thereof
unless they are registered or unless the Company receives an opinion of counsel
reasonably satisfactory to the Company that such registration is not required.
The holder understands that a stop transfer instruction may be in effect with
respect to transfer of the Warrant and Shares consistent with the requirements
of the securities laws.
10. Miscellaneous. This Warrant shall be governed solely by the laws of
the State of Washington without regard to the conflicts of laws provisions
thereof to the contrary. The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated except by an instrument in writing signed by the
Company and the registered holder hereof. All notices and other communications
from the Company to the holder of this Warrant shall be delivered in person or
mailed first-class, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing. Each such notice or other communication shall for all
purposes of this Warrant be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail, at the earlier of its
receipt or 72 hours after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
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ISSUED this 5th, day of October, 1998.
ONLINE SPECIALTY RETAILING, INC.
By: /s/ Benjamin C. Nourse
------------------------------
Benjamin C. Nourse
Chairman
ACCEPTED AND AGREED TO BY:
PEAPOD, INC.
By: /s/ John C. Walden
-----------------------------
<PAGE>
SUBSCRIPTION FORM
(To be signed only upon exercise of Warrant)
To: Online Specialty Retailing, Inc.
2030 First Avenue, Third Floor
Seattle, WA 98121
The undersigned, the holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by that Warrant for, and to
purchase under that Warrant, __________ shares of Common Stock of Online
Specialty Retailing, Inc. and herewith makes payment of $________________ for
those shares, and requests that any certificates for such shares be issued in
the name of, and delivered to, _________________________, whose address is
_________________________________________.
DATED: __________________, 19__.
WARRANT HOLDER:
----------------------------------
By:
------------------------------
Title:
---------------------------
ADDRESS:
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<PAGE>
EXHIBIT W-1
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED,
ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS.
GREATFOOD.COM, INC.
SERIES C PREFERRED STOCK PURCHASE WARRANT
This certifies that, in consideration for $100.00 and other value received,
__________________, or registered assigns, is entitled, upon the terms and
subject to the conditions hereinafter set forth, at any time on or after
January 31, 2000, if GreatFood.com, Inc., a Washington corporation (the
"Company"), has not completed a sale in an underwritten public offering under
the Securities Act of 1933, as amended (the "Act"), of shares of its 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 $10.00 per share (the "Trigger
Date"), at or prior to 11:59 pm., Pacific time, on May 17, 2002 (the
"Expiration Time"), to acquire from the Company, in whole or in part, up to
such number of fully paid and nonassessable shares of Series C Preferred
Stock of the Company described on Schedule A hereto ("Warrant Stock") at a
purchase price per share of $0.01 (the "Exercise Price") subject to the terms
set forth in Section 1 below. Notwithstanding the foregoing, should the
Company be sold or acquired on or before January 31, 2000 at an effective
price per share to the Purchasers (as such term is defined in the Series C
Preferred Stock Purchase Agreement (the "Stock Purchase Agreement") between
the Company and the Purchasers of even date herewith) of $10.00, then this
Warrant shall be become null and void, and non-exercisable. Such number of
shares and Exercise Price are subject to adjustment as provided herein, and
all references to "Warrant Stock" and "Exercise Price" herein shall be deemed
to include any such adjustment.
1. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holders hereof, in whole or in part, at any time and from time to
time on or after the Trigger Date and at or prior to the Expiration Time by
the surrender of this Warrant and the Notice of Exercise form attached hereto
duly executed to the office of the Company at 2731 Eastlake Avenue East,
Seattle, WA 98102 (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address
of such holder appearing on the books of the Company), and upon payment of
the Exercise Price for the shares thereby purchased (by cash or by check or
bank draft payable to the order of the Company or by cancellation of
indebtedness of
1
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the Company to the holder hereof, if any, at the time of exercise in an
amount equal to the purchase price of the shares thereby purchased);
whereupon the holders of this Warrant shall be entitled to receive from the
Company stock certificates in proper form representing the number of shares
of Warrant Stock so purchased. This Warrant is exercisable for the number of
shares of Warrant Stock determined according to Schedule A attached hereto.
2. CONVERSION OF WARRANT
The registered holder hereof shall have the right to convert this Warrant, in
whole or in part, at any time and from time to time on or after the Trigger
Date and at or prior to the Expiration Time, by the surrender of this Warrant
and the Notice of Conversion form attached hereto duly executed to the office
of the Company at the address set forth in Section 1 hereof (or such other
office or agency of the Company as it may designate by notice in writing to
the registered holder hereof at the address of such holder appearing on the
books of the Company), into shares of Warrant Stock (determined according to
Schedule A) as provided in this Section 2. Upon exercise of this conversion
right, the holder hereof shall be entitled to receive that number of shares
of Warrant Stock of the Company equal to the quotient obtained by dividing
[(A - B)(X)] by (A), where:
A = the Conversion Price (as defined in the Company's
Articles of Incorporation, as amended) of one share of
Warrant Stock on the date of conversion of this Warrant.
B = the Exercise Price for one share of Warrant Stock
under this Warrant, which initially is $0.01.
X = the number of shares of Warrant Stock as to which
this Warrant is being converted (determined according to
Schedule A).
No fractional shares or script representing fractional shares shall be issued
upon the exercise of this Warrant. In lieu of any fractional share to which
the registered holder would otherwise be entitled, the Company shall make a
cash payment equal to the Exercise Price multiplied by such fraction.
Upon conversion of this Warrant in accordance with this Section 2, the
registered holders hereof shall be entitled to receive certificates for the
number of shares of Warrant Stock determined in accordance with the foregoing.
3. ISSUANCE OF SHARES
Certificates for shares purchased hereunder or issuable upon conversion hereof
shall be delivered to the holder hereof within a reasonable time after the date
on which this Warrant shall have been exercised or converted in accordance with
the terms hereof. The Company hereby represents and warrants that all shares of
Warrant Stock which may be issued upon the exercise and
2
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payment of the Exercise Price, or conversion of this Warrant, will, upon such
exercise or conversion, be duly and validly authorized and issued, fully paid
and nonassessable and free from all taxes, liens and charges in respect of
the issuance thereof (other than liens or charges created by or imposed upon
the holder of the Warrant Stock). The Company agrees that the shares so
issued shall be and be deemed to be issued to such holder as the record owner
of such shares as of the close of business on the date on which this Warrant
shall have been exercised or converted in accordance with the terms hereof.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise or
conversion of this Warrant shall be made without charge to the holder hereof
for any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid
by the Company, and such certificates shall be issued in the name of the
holder of this Warrant.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof to any voting rights or other
rights as a shareholder of the Company prior to the exercise or conversion
hereof.
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the registered
holder at the above-mentioned office or agency of the Company, for a new
Warrant of like tenor and dated as of such exchange. The Company shall
maintain at the above-mentioned office or agency a registry showing the name
and address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer, exercise or conversion, in accordance
with its terms, at such office or agency of the Company, and the Company
shall be entitled to rely in all respects, prior to written notice to the
contrary, upon such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and in case of loss,
theft or destruction of indemnity or security reasonably satisfactory to it,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated,
the Company will make and deliver a new Warrant of like tenor and dated as of
such cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or a Sunday or
shall be a legal holiday, then such action may be taken or such right may be
exercised on the next succeeding day not a legal holiday.
3
<PAGE>
9. RECLASSIFICATION, CONVERSION, ETC.
If the Company at any time shall, by reclassification of securities or
otherwise, change the Warrant Stock into the same or a different number of
securities of any class or classes, including, without limitation, conversion
of the Warrant Stock into Common Stock in accordance with the Articles of
Incorporation upon an initial public offering or otherwise, this Warrant
shall thereafter entitle the holder to acquire such number and kind of
securities as would have been issuable in respect of the Warrant Stock (or
other securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change) as the result of such change if this Warrant had been exercised in
full for cash immediately prior to such change. The Exercise Price hereunder
shall be adjusted if and to the extent necessary to reflect such change. If
the Warrant Stock or other securities issuable upon exercise or conversion
hereof are subdivided or combined into a greater or smaller number of shares
of such security, the number of shares issuable hereunder shall be
proportionately increased or decreased, as the case may be, and the Exercise
Price shall be proportionately reduced or increased, as the case may be, in
both cases according to the ratio which the total number of shares of such
security to be outstanding immediately after such event bears to the total
number of shares of such security outstanding immediately prior to such
event. The Company shall give the holder prompt written notice of any change
in the type of securities issuable hereunder, any adjustment of the Exercise
Price for the securities issuable hereunder, and any increase or decrease in
the number of shares issuable hereunder.
10. TRANSFERABILITY
Prior to the Expiration Time and subject to compliance with applicable laws
by the transferor and transferee (including the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, if such are requested by the Company), this Warrant and all rights
hereunder are transferable by the holder hereof, in whole or in part, at the
office or agency of the Company referred to in Section 1 hereof, to any
affiliate or constituent partner of the holder. Any such transfer shall be
made in person or by the holder's duly authorized attorney, upon surrender of
this Warrant together with the Assignment Form attached hereto properly
endorsed. Notwithstanding the foregoing, no investment representation letter
or opinion of counsel shall be required for any transfer of this Warrant (or
any portion thereof) or any shares of Warrant Stock or Common Stock issued
upon exercise or conversion hereof or thereof (i) in compliance with Rule 144
or Rule 144A of the Act, or (ii) by gift, will or intestate succession by the
Holder to his or her spouse or lineal descendants or ancestors or any trust
for any of the foregoing; provided that in each of the foregoing cases the
transferee agrees in writing to be subject to the terms of this Section 10.
In addition, if the holder of the Warrant (or any portion thereof) or any
Warrant Stock or Common Stock issued upon exercise or conversion hereof or
thereof delivers to the Company an unqualified opinion of counsel that no
subsequent transfer of such Warrant, Warrant Stock or Common Stock shall
require registration under the Act, the Company shall, upon such contemplated
transfer, promptly deliver new documents/certificates for such Warrant,
Warrant Stock or Common Stock that do not bear the legend set forth in
Section 12(b) hereof. In the event that certificates for shares of Warrant
Stock are to be
4
<PAGE>
issued in a name other than the holder of this Warrant, this Warrant when
surrendered for exercise or conversion shall be accompanied by the Assignment
Form attached hereto duly executed by the holder hereof.
11. REGISTRATION RIGHTS
Upon exercise of this Warrant, the registered holder shall have and be
entitled to exercise, together with all other holders of Registrable
Securities possessing registration rights under that certain Registration
Rights Agreement, of even date herewith, by and between the Company and the
parties who have executed the counterpart signature pages thereto or are
otherwise bound thereby (the "Registration Rights Agreement"), the rights of
registration granted under the Registration Rights Agreement to Registrable
Securities. By its receipt of this Warrant, the registered holder agrees to
be bound by the Registration Rights Agreement.
12. COMPLIANCE WITH SECURITIES LAWS
(a) The registered holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the shares of Warrant Stock or Common
Stock to be issued upon exercise or conversion hereof or thereof are being
acquired solely for the holder's own account and not as a nominee for any
other party, and for investment, and that the holder will not offer, sell
or otherwise dispose of this Warrant or any shares of Warrant Stock or
Common Stock to be issued upon exercise or conversion hereof or thereof
except under circumstances that will not result in a violation of the
federal or state securities laws. Upon exercise of this Warrant, the
holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Warrant Stock or Common
Stock so purchased are being acquired solely for the holder's own account
and not as a nominee for any other party, for investment, and not with a
view toward distribution or resale.
(b) The Warrant and all shares of Warrant Stock or Common Stock issued
upon exercise or conversion hereof or thereof shall be stamped or imprinted
with a legend in substantially the following form (in addition to any
legend required by state securities laws):
"THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES
REPRESENTED HEREBY IS SUBJECT TO THE CONDITIONS SPECIFIED IN
THE SERIES C PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF
MAY 17, 1999 BETWEEN THE ISSUER (THE "COMPANY") AND CERTAIN
PURCHASERS, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE
TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED WITH
5
<PAGE>
RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL
BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN
REQUEST AND WITHOUT CHARGE."
13. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Company will
reserve from its authorized and unissued Series C Preferred Stock a
sufficient number of shares to provide for the issuance of Warrant
Stock upon the exercise or conversion of this Warrant;
(b) during the period this Warrant or the Warrant Stock issuable hereunder
is outstanding, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the
issuance of Common Stock upon conversion of the Warrant Stock issuable
upon exercise or conversion of this Warrant;
(c) the issuance of this Warrant shall constitute full authority to the
Company's officers who are charged with the duty of executing stock
certificates, upon exercise of this Warrant, to execute and issue the
necessary certificates for the shares of Warrant Stock issuable upon
exercise or conversion of this Warrant;
(d) the Company has all requisite legal and corporate power to execute and
deliver this Warrant, to sell and issue the Warrant Stock hereunder,
to issue the Common Stock issuable upon conversion of the Warrant
Stock and to carry out and perform its obligations under the terms of
this Warrant; and
(e) all corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Company, the authorization, sale,
issuance and delivery of the Warrant Stock and the Common Stock
issuable upon conversion of the Warrant Stock and the performance of
the Company's obligations hereunder has been taken;
(f) the Warrant Stock and the Common Stock issuable upon conversion of the
Warrant Stock, when issued in compliance with the provisions of this
Warrant and the Company's Articles of Incorporation, as amended, will
be validly issued, fully paid and nonassessable, and free of any liens
or encumbrances, and will be issued in compliance with all applicable
federal and state securities laws; and
(g) the issuance of the Warrant Stock and the Common Stock issuable upon
conversion of the Warrant Stock will not be subject to any preemptive
rights,
6
<PAGE>
rights of first refusal or similar rights except as contemplated by
the Stock Purchase Agreement and the Related Agreements (as defined
in the Stock Purchase Agreement).
14. COOPERATION
The Company will not, by amendment of its Articles or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other action, avoid or seek
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may be necessary or appropriate in order to
protect the rights of the holder of the Warrant against impairment.
15. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the laws
of the State of Washington.
[Rest of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
duly authorized officers.
Dated: May 17, 1999
GreatFood.com, Inc.
By___________________________________
Title________________________________
ACCEPTED: May 17, 1999
By:_________________________________
8
<PAGE>
NOTICE OF EXERCISE
To: GreatFood.com, Inc.
(1) The undersigned hereby elects to purchase ___________shares of Series C
Preferred Stock of GreatFood.com, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said shares of
Series C Preferred Stock in the name of the undersigned or in such other name
as is specified below:
__________________________
(Name)
__________________________
(Address)
(3) The undersigned represents that the aforesaid shares of Series C
Preferred Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares.
________________________________ ___________________________________
(Date) (Signature)
9
<PAGE>
NOTICE OF CONVERSION
To: GreatFood.com, Inc.
(1) The undersigned hereby elects to convert the attached Warrant into such
number of shares of Series C Preferred Stock of GreatFood.com, Inc. as is
determined pursuant to Section 3 of such Warrant, which conversion shall be
effected pursuant to the terms of the attached Warrant.
(2) Please issue a certificate or certificates representing said shares of
Series C Preferred Stock in the name of the undersigned or in such other name
as is specified below:
__________________________
(Name)
__________________________
(Address)
(3) The undersigned represents that the aforesaid shares of Series C
Preferred Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares.
________________________________ __________________________________
(Date) (Signature)
10
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
_____________________________________________________________________________
(Please Print)
whose address is ____________________________________________________________
(Please Print)
Dated: ______________________________
Holder's Signature:__________________
Holder's Address:____________________
_____________________________________
Guaranteed Signature:________________________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as
it appears on the face of the Warrant, without alteration or enlargement or
any change whatever, and must be guaranteed by a bank or trust company.
Officers of corporations and those acting in a fiduciary or other
representative capacity should file proper evidence of authority to assign
the foregoing Warrant.
11
<PAGE>
SCHEDULE A
If a First Closing and Second Closing (as those terms as defined in the
Purchase Agreement of even date herewith) have both occurred on or prior to
exercise of this Warrant, then this Warrant shall be exercisable for
_______shares of Series C Preferred.
If only a First Closing has occurred on or prior to exercise of this Warrant,
then this Warrant is exercisable _______ shares of Series C Preferred.
12
<PAGE>
Investor List
<TABLE>
<CAPTION>
Purchaser Number of Warrants
--------- ------------------
<S> <C>
Riverside Partnership 284,308
The Productivity Fund IV, L.P. 32,308
Mark Koulogeorge 5,385
Alex Kim 1,077
</TABLE>
<PAGE>
EXHIBIT 21.1
List of Subsidiaries of the Registrant
GreatFood.Com Canada, Limited, a Canadian corporation
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 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
May 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 678,096
<SECURITIES> 0
<RECEIVABLES> 500,084
<ALLOWANCES> 2,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,318,450
<PP&E> 99,594
<DEPRECIATION> 54,107
<TOTAL-ASSETS> 1,428,407
<CURRENT-LIABILITIES> 685,307
<BONDS> 0
0
1,964,066
<COMMON> 257,824
<OTHER-SE> (11,608)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,428,407
<SALES> 747,860
<TOTAL-REVENUES> 747,860
<CGS> 605,140
<TOTAL-COSTS> 605,140
<OTHER-EXPENSES> 1,543,771<F2>
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 3,792
<INCOME-PRETAX> (1,370,752)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,370,752)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,370,752)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
<FN>
<F1>Deferred Compensation
<F2>Operating expenses
</FN>
</TABLE>
