<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999
REGISTRATION NO. 333-80981
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SHOPNOW.COM INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 7374 91-1628103
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
411 FIRST AVENUE SOUTH
SUITE 200 NORTH
SEATTLE, WASHINGTON 98101
(206) 223-1996
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
--------------------------
DWAYNE M. WALKER
CHIEF EXECUTIVE OFFICER
411 FIRST AVENUE SOUTH
SUITE 200 NORTH
SEATTLE, WASHINGTON 98101
(206) 223-1996
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
JOHN A. FORE STEVEN C. KENNEDY
PATRICK J. SCHULTHEIS JAMES E. NICHOLSON
PAUL W. HARTZEL W. MORGAN BURNS
Wilson Sonsini Goodrich & Rosati GORDON S. WEBER
Professional Corporation Faegre & Benson LLP
5300 Carillon Point 2200 Norwest Center
Kirkland, Washington 98033-7356 90 South Seventh Street
(425) 576-5800 Minneapolis, Minnesota 55402-3901
(612) 336-3000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
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 HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT
SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES OUR
REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
7,000,000 Shares
[LOGO]
Common Stock
----------------
This is the initial public offering of ShopNow.com Inc. common stock. We
anticipate that the initial public offering price will be between $10.00 and
$12.00 per share. Application has been made to have our common stock listed on
the Nasdaq National Market under the symbol "SPNW" upon completion of this
offering.
-------------------------
PRICE $ PER SHARE
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public offering price.......................... $ $
Underwriting discounts and commissions......... $ $
Proceeds, before expenses, to ShopNow.......... $ $
</TABLE>
The underwriters have a 30-day option to purchase up to 1,050,000 additional
shares of common stock from us to cover over-allotments, if any.
The underwriters expect to deliver the shares against payment in Minneapolis,
Minnesota, on , 1999.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
------------------------
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
WIT CAPITAL CORPORATION
------------------------
, 1999
<PAGE>
[INSIDE FRONT COVER]
[SHOPNOW LOGO]
CONNECTING BUYERS AND SELLERS WORLDWIDE
THE SHOPNOW NETWORK: CONNECTING SHOPPERS AND MERCHANTS
[Picture of the ShopNow.com Home Page]
OVER 30,000 MERCHANTS
OVER 1 MILLION PRODUCTS
THE SHOPNOW.COM SHOPPING CATEGORIES
- -Fashion & Apparel -Travel
- -Fashion Accessories -Food & Beverage
- -Personal Care -Cars & Motorcycles
- -Sports & Recreation -Electronics
- -Books & Magazines -Telecommunications
- -Music & Movies -Computers
- -Home & Garden -Computer Services
- -Parenting -Personal Finance
- -Kids -Career
- -Pets -Small & Home Office
- -Flowers & Gifts -Business Services
- -Select Catalogs -General Services
- -Hobbies -Health Services
- -Auction
<PAGE>
[INSIDE FRONT COVER (CONTINUED)]
SHOPNOW PROVIDES MERCHANTS ACCESS TO AN
E-COMMERCE MARKETPLACE
DIRECT MARKETING SERVICES
ONLINE AND TRADITIONAL SALES AND MARKETING
E-COMMERCE TECHNOLOGY PLATFORM
ORDER AND PAYMENT PROCESSING
FRAUD PREVENTION
ORDER FULFILLMENT AND CALL CENTER
[Picture of a MyShopNow.com Web Page]
MERCHANTS HAVE MORE CHOICES TO ATTRACT SHOPPERS ON THE SHOPNOW NETWORK
[Picture of the ShopNow.com Home Page]
[Pictures of three Merchant Web Sites Designed and Maintained by
ShopNow.]
[SHOPNOW LOGO]
CONNECTING BUYERS AND SELLERS WORLDWIDE
MYSHOPNOW.COM ENABLES EACH SHOPPER TO CREATE A PERSONALIZED SHOPPING SITE
[Picture of an Online Shopper Browsing the ShopNow.com Web Site]
[Picture of Products Sold on ShopNow.com]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. This prospectus is not an offer to sell, nor is
it seeking an offer to buy, these securities in any state where the offer or
sale is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have changed
since that date.
"ShopNow," "TechWave" and "Internet Mall" are trademarks registered to
ShopNow, and we have applied for trademark registration for each of the
following additional marks: "ShopNow.com," "MyShopNow.com" and "CommerceTrust."
This prospectus also contains trademarks of companies other than ShopNow.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 8
Use of Proceeds................................ 21
Dividend Policy................................ 21
Capitalization................................. 22
Dilution....................................... 24
Selected Pro Forma Combined Financial Data..... 25
Selected Consolidated Financial Data........... 26
Management's Discussion and Analysis Of
Financial Condition and Results of
Operations................................... 27
Business....................................... 42
Management..................................... 59
<CAPTION>
PAGE
-----
<S> <C>
Related Transactions with Executive Officers,
Directors and 5% Shareholders................ 67
Principal Shareholders......................... 70
Description of Capital Stock................... 71
Shares Eligible For Future Sale................ 74
Underwriting................................... 77
Legal Matters.................................. 79
Experts........................................ 79
Change in Independent Public Accountants....... 79
Where You Can Find More Information............ 80
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. BEFORE MAKING AN INVESTMENT DECISION YOU SHOULD READ THE ENTIRE
PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS, THE UNAUDITED PRO
FORMA COMBINED FINANCIAL INFORMATION AND RELATED NOTES. THE TERMS "WE" AND
"SHOPNOW" MEAN SHOPNOW.COM INC. AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE
STATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
SHOPNOW.COM INC.
ShopNow provides shoppers and merchants with an online marketplace and
provides merchants with a variety of e-commerce and direct marketing services.
The ShopNow Network, our online marketplace, is comprised of ShopNow.com,
MyShopNow.com and the individual Web sites of merchants that are connected by
hyperlink to the ShopNow Network. The ShopNow.com Web site aggregates more than
1 million products and services from more than 30,000 merchants. ShopNow
receives revenues of $100 or more per year from less than 350 merchants on
ShopNow.com and MyShopNow.com. The remaining merchants receive free promotional
listings on ShopNow.com and MyShopNow.com or pay less than $100 per year. Our
merchant customers are those merchants on the ShopNow Network that have paid us
a fee for services, other than a nominal entry-level listing fee, in the last 12
months. ShopNow.com includes categories of information and lists of stores that
shoppers can browse, sort and rapidly search by category, merchant or product.
MyShopNow.com enables shoppers to create their own personalized shopping Web
sites by selecting the types of products and services offered to them. In July
1999, the ShopNow Network attracted more than 2.0 million visits. We believe
that our online marketplace focused principally on shopping will continue to
attract an increasing number of Internet users who are interested in purchasing
products and services on the Web. As the number of shoppers on the ShopNow
Network increases, we believe that we will attract additional merchants by
providing them with the opportunity to increase online transaction volume.
With the rapid growth in the use of the Internet, many businesses are
engaging in e-commerce, which consists of marketing and selling products and
services directly online. To assist merchants with their online efforts, we
provide e-commerce services ranging from a listing on ShopNow.com to the design,
creation and maintenance of an online store complete with back-end support
services, such as payment and order processing, fraud prevention and customer
order fulfillment. Our online and traditional direct marketing services, which
include merchandising programs, online direct mail promotions, creative
services, four levels of listing on the ShopNow Network and transaction
reporting, enable merchants to promote their brands, products, services and
e-commerce presence through traditional and online direct marketing methods. We
intend to increase our use of the demographic and shopper preference data that
we collect to provide more focused direct marketing services.
We incurred net losses of $24.7 million for the year ended December 31, 1998
and $26.2 million for the six-month period ended June 30, 1999. At June 30,
1999, we had an accumulated deficit of $55.6 million. Although our revenues have
grown significantly in recent quarters, in June 1999 we ceased operation of our
BuySoftware.com business, from which we derived 62.3% of our revenues in 1998
and 62.1% of our revenues in the first six months of 1999. We received more than
80% of our revenues for the six months ended June 30, 1999 (on a pro forma
basis, which excludes the results of our BuySoftware.com business) from
merchants who purchase merchandising and merchant services. We received the
remainder of our revenues for the six months ended June 30, 1999 (on a pro forma
basis) as transactional revenues, which are from consumers who purchase products
from Shop.Now.com and MyShopNow.com. Merchandising revenues are generated from
ShopNow.com and MyShopNow.com advertising, specific merchandising positions on
our sites and from online direct marketing to consumers through electronic mail.
All online advertising and marketing revenues are recorded as merchandising
revenues. Merchant services revenues are generated from custom developed
e-commerce stores, custom traditional direct marketing services, custom creative
services and custom promotional materials.
4
<PAGE>
Revenues from transactions are generated in two ways. First, we sell
products directly to consumers from ShopNow.com and MyShopNow.com. We record as
revenues the full sales price of the product sold and record the full cost of
the product to us as our cost of goods sold. In these cases, we purchase
products from merchants and sell those products directly to consumers. We bear
all of the credit and loss risks associated with these products. In most cases,
these products are shipped directly from the manufacturer, thus eliminating the
need for us to carry significant inventory. Second, we provide the option of
transaction processing services for merchants who choose to sell their products
directly to consumers and record the gross sales and cost of products sold. In
this case, we provide transaction processing services and are paid a transaction
fee only and do not record the gross revenues of these product sales as ShopNow
gross revenues.
Merchants using our online marketplace as one of their methods of
distribution, as well as those using our e-commerce and direct marketing
solutions, represent businesses of all sizes from a wide variety of industries,
including retailers, catalog companies, manufacturers and individuals.
We have entered into a number of key business relationships in order to
expand the range of our products and services for shoppers and merchants,
attract additional shoppers to the ShopNow Network, increase the number of our
merchant customers, establish additional sources of revenue and facilitate our
international expansion. These relationships are discussed below:
- CHASE MANHATTAN BANK. ShopNow and Chase have entered into an agreement to
launch an Internet shopping site on which ShopNow and Chase will be
featured and share revenues. The site was launched on September 15, 1999.
- ABOUT.COM. We have entered into an agreement with About.com under which we
will have a shopping section on About.com that will directly link shoppers
to the ShopNow Network.
- 24/7 MEDIA. We have entered into an agreement with 24/7 Media to promote
our e-commerce and direct marketing services to its network of over 2,500
affiliated Web sites in exchange for our promotion of 24/7 Media's
advertising, representation and e-mail management services to merchants.
- QWEST COMMUNICATIONS. We have entered into a distribution and marketing
agreement with Qwest to offer Qwest's communications services to shoppers
on the ShopNow Network.
- HNC SOFTWARE. We have entered into agreements with HNC to provide us with
a number of e-commerce products at preferential prices, which we can offer
to merchants in connection with the other merchant services we provide.
- ZERON GROUP. We have entered into an agreement with the ZERON Group to
assist us on a contractual, best-efforts basis in establishing alliances
with major companies in Japan that are seeking expansion into e-commerce.
We anticipate that this relationship will enhance our ability to expand
internationally by assisting us with the establishment of ShopNow Japan, a
Japanese language online marketplace.
In addition, Chase, 24/7 Media, HNC and ZERON Group have made equity investments
in ShopNow.
The opportunity presented by the rapid growth in commerce conducted over the
Internet is creating numerous challenges for shoppers and merchants as they
attempt to buy and sell goods and services in an online environment. Shoppers
are being inundated with buying opportunities and merchants are seeking to
develop and maintain effective e-commerce offerings and attract online shoppers.
ShopNow meets these challenges by connecting shoppers and merchants through our
online marketplace, while providing merchants with e-commerce and direct
marketing services that enhance their ability to market and sell their products
and services online.
ShopNow was incorporated in Washington in January 1994. Our executive
offices are located at 411 First Avenue South, Suite 200 North, Seattle,
Washington 98101; our telephone number is
5
<PAGE>
(206) 223-1996; and our main Web site is located at http://www.shopnow.com.
Information contained on our Web sites is not part of this prospectus.
RISK FACTORS
This offering involves a high degree of risk. Since our inception in January
1994, we have incurred significant losses, and as of June 30, 1999, we had an
accumulated deficit of $55.6 million. We expect our operating losses and
negative cash flow to continue for the foreseeable future. In June 1999, we
ceased operation of our BuySoftware.com business, which had provided a majority
of our revenues for the period from January 1, 1998 through June 30, 1999, in
order to focus on the expansion of the ShopNow Network and the execution of our
overall strategy. We face intense competition from other providers of online
shopping services and e-commerce and direct marketing services. You should
carefully consider these risks and uncertainties as well as those other risks
and uncertainties described in "Risk Factors" beginning on page 9 of this
prospectus before deciding whether to invest in shares of our common stock.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............. 7,000,000 shares
Common stock to be outstanding
after this offering............. 33,254,706 shares
Use of proceeds................... For working capital and general corporate purposes,
potential acquisitions and repayment of indebtedness.
See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.......................... SPNW
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of June 30, 1999 and 2,100,000 shares of
common stock issuable upon the conversion of the Series I convertible preferred
stock CB Capital Investors, L.P., an affiliate of Chase Manhattan Bank, received
on July 19, 1999. This calculation includes 18,094,563 shares of common stock to
be issued upon the automatic conversion of all other outstanding shares of our
preferred stock and the exercise and automatic conversion of all warrants to
purchase our Series C convertible preferred stock upon completion of this
offering. This calculation excludes:
- 7,976,451 shares of common stock issuable upon the exercise of options
under our stock option plan consisting of:
- 5,162,108 shares of common stock underlying options outstanding as
of June 30, 1999 at a weighted average exercise price of $3.68 per
share, of which 1,114,237 were exercisable as of June 30, 1999;
- 2,814,343 shares of common stock underlying options available for
future grants;
- 2,000,000 shares of common stock issuable under our employee stock
purchase plan;
- 1,739,470 shares of common stock issuable upon exercise of stock options
outstanding outside of our stock option plan as of June 30, 1999 at a
weighted average exercise price of $1.51 per share, of which 892,853 were
exercisable as of June 30, 1999;
- 4,234,618 shares of common stock issuable upon exercise of warrants
outstanding as of June 30, 1999 to purchase common stock at a weighted
average exercise price of $5.85 per share; and
- the shares of common stock that may be issued if the Lovett Miller 1997
Fund elects to convert into common stock the $1.0 million promissory note
that we issued to the Lovett Miller 1997 Fund as partial consideration for
its shares of capital stock of GO Software upon completion of this
offering, such number of shares would be equal to the quotient of $1.0
million divided by the per share initial public offering price.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
JANUARY 20, PRO FORMA
1994 PRO FORMA SIX MONTHS SIX MONTHS
(INCEPTION) TO YEAR ENDED DECEMBER 31, YEAR ENDED ENDED ENDED
DECEMBER 31, --------------------------------- DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1997 1998 1998(1) 1999 1999(1)
-------------- ------ ------ ------- -------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Transactions and
merchandising............. $ -- $ -- $ -- $ 69 $ 4,211 $ 1,801 $11,630 $ 2,611
Merchant services........... 279 727 993 535 2,943 7,249 4,352 4,176
------ ------ ------ ------- -------- ------------ ------------ ------------
Total revenues............ 279 727 993 604 7,154 9,050 15,982 6,787
------ ------ ------ ------- -------- ------------ ------------ ------------
Cost of revenues:
Transactions and
merchandising............. -- -- -- 159 4,493 221 12,177 1,069
Merchant services........... 127 323 430 356 1,356 4,063 2,506 2,469
------ ------ ------ ------- -------- ------------ ------------ ------------
Total cost of revenues.... 127 323 430 515 5,849 4,284 14,683 3,538
------ ------ ------ ------- -------- ------------ ------------ ------------
Gross profit............ 152 404 563 89 1,305 4,766 1,299 3,249
Total operating expenses...... 332 510 1,323 4,691 26,221 30,219 27,288 26,823
------ ------ ------ ------- -------- ------------ ------------ ------------
Loss from operations.... (180) (106) (760) (4,602) (24,916) (25,453) (25,989) (23,574)
Other income (expense), net... (1) (7) (50) (164) 171 91 (245) (283)
------ ------ ------ ------- -------- ------------ ------------ ------------
Net loss................ $ (181) $ (113) $ (810) $(4,766) $(24,745) $(25,362) $(26,234) $(23,857)
------ ------ ------ ------- -------- ------------ ------------ ------------
------ ------ ------ ------- -------- ------------ ------------ ------------
Basic and diluted net loss per
share......................... $(0.11) $(0.06) $(0.40) $ (1.83) $ (7.01) $ (5.50)
------ ------ ------ ------- -------- ------------
------ ------ ------ ------- -------- ------------
Basic and diluted pro forma net
loss per share(2)............. $ (1.71) $ (1.14)
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(3) ADJUSTED(4)
--------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS):
Cash and short-term investments............................................. $ 6,474 $ 25,374 $ 96,034
Working capital............................................................. (8,766) 10,134 80,794
Total assets................................................................ 64,250 83,150 153,810
Total liabilities........................................................... 27,514 27,514 27,514
Total shareholders' equity.................................................. 36,736 55,636 126,296
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1999 AUGUST 16, 1999
--------------- ------------- ---------------
<S> <C> <C> <C>
OTHER DATA:
Number of merchant customers since January 1, 1999(5)........................ 132 313 422
Average revenue generated per merchant customer since January 1, 1999........ $1,114 $3,242 $4,130
Number of visits to the ShopNow Network since January 1, 1999................ 2,954,000 9,376,000 12,747,000
</TABLE>
- ------------------------------
(1) We acquired The Internet Mall in August 1998, Media Assets in September 1998
and GO Software in June 1999. In addition, in June 1999, we ceased operation
of our BuySoftware.com business. The pro forma statement of operations data
reflects consolidation of the results of operations as if the acquisitions
had occurred on January 1, 1998 and we ceased operation of BuySoftware.com
on the same date. The pro forma information should be read in conjunction
with the Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Unaudited Pro Forma Combined Financial
Information and related Notes appearing elsewhere in this prospectus.
(2) See Note 1 to the Consolidated Financial Statements and Note 2(e) to the
Unaudited Pro Forma Combined Financial Information appearing elsewhere in
this prospectus for a description of the method used to compute basic and
diluted pro forma net loss per share.
(3) The pro forma consolidated balance sheet data gives effect to the receipt of
$18.9 million in proceeds from the closing of the sale of Series I
convertible preferred stock to CB Capital Investors, L.P., an affiliate of
Chase Manhattan Bank, in July 1999.
(4) The pro forma as adjusted balance sheet data gives effect to the sale of the
7,000,000 shares of common stock that we are offering under this prospectus
at an assumed initial public offering price of $11.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
(5) Merchant customers are those merchants on the ShopNow Network that have paid
us a fee for services, other than an entry-level listing fee, in the last 12
months.
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
DECIDING WHETHER TO INVEST IN OUR COMMON STOCK. WHILE WE HAVE ATTEMPTED TO
IDENTIFY ALL RISKS THAT ARE MATERIAL TO OUR BUSINESS, ADDITIONAL RISKS THAT WE
HAVE NOT YET IDENTIFIED OR THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS. THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE DUE TO ANY OF THESE RISKS, IN WHICH CASE YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION IN THIS PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS,
THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION AND RELATED NOTES.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE RECENTLY CHANGED OUR BUSINESS FOCUS, IT IS DIFFICULT TO EVALUATE OUR
BUSINESS AND PROSPECTS
ShopNow was incorporated in January 1994, and operated initially as a
computer services company. In 1996, we changed the focus of our business to
providing e-commerce and direct marketing services. In August 1998, we launched
ShopNow.com, our shopping destination Web site. During 1998 and the first six
months of 1999, 62.3% and 62.1%, respectively, of our revenues came from retail
sales of computer products through our BuySoftware.com online retail store. In
June 1999, we ceased operation of our BuySoftware.com business. Accordingly, the
recent changes in our business focus may make it difficult for you to evaluate
our business and prospects. When making your investment decision, you should
also consider the risks, expenses and difficulties that we may encounter as a
young company in a rapidly evolving market.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES
We incurred net losses of $24.7 million for the year ended December 31, 1998
and $26.2 million for the six-month period ended June 30, 1999. At June 30,
1999, we had an accumulated deficit of $55.6 million. Although our revenues have
grown significantly in recent quarters, in June 1999 we ceased operation of our
BuySoftware.com business, from which we derived 62.3% of our revenues in 1998
and 62.1% of our revenues in the first six months of 1999. As a result, we may
not be able to sustain our recent revenue growth rates or obtain sufficient
revenues to achieve profitability.
We have historically invested heavily in sales and marketing, technology
infrastructure and research and development and expect to do so in the future.
As a result, we must generate significant revenues to achieve and maintain
profitability. We expect that our sales and marketing expenses, research and
development expenses and general and administrative expenses will continue to
increase in absolute dollars and may increase as percentages of revenues. In
addition, we may incur substantial expenses in connection with future
acquisitions.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND WE EXPECT OUR OPERATING RESULTS TO
FLUCTUATE FROM PERIOD TO PERIOD
It is difficult for us to accurately forecast our revenues in any given
period. Our revenues could fall short of our expectations if we experience
declines in shopper traffic or purchases, or if the number of merchants to whom
we provide services decreases. Our business model has only been applied to the
Internet since the mid-1990's, therefore we have limited experience in financial
planning for our business on which to base our planned operating expenses. If
our revenues in a particular period fall short of our expectations, we will
likely be unable to quickly adjust our spending in order to compensate for that
revenue shortfall.
8
<PAGE>
Our operating results are likely to fluctuate substantially from period to
period as a result of a number of factors, such as:
- the amount and timing of operating costs and expenditures relating to
expansion of our operations and
- the mix of products and services that we sell.
In addition, factors beyond our control may also cause our operating results
to fluctuate, such as:
- the announcement or introduction of new or enhanced products or services
by our competitors and
- the pricing policies of our competitors.
Period-to-period comparisons of our operating results are not a good
indication of our future performance. It is likely that our operating results in
some quarters will not meet the expectations of stock market analysts and
investors and this could cause our stock price to decline.
OUR BUSINESS MODEL IS UNPROVEN AND CHANGING
Our business model consists of providing shoppers and merchants with an
online marketplace and e-commerce and direct marketing services. This business
model has only been applied to the Internet since the mid-1990's, is unproven
and will need to continue to develop. Accordingly, our business model may not be
successful, and we may need to change it. Our ability to generate sufficient
revenues to achieve profitability will depend, in large part, on our ability to
successfully market our e-commerce and direct marketing services to merchants
that may not be convinced of the need for an online presence or may be reluctant
to rely upon third parties to develop and manage their e-commerce offerings and
direct marketing efforts.
OUR FUTURE GROWTH WILL DEPEND ON OUR ABILITY TO MAKE ADDITIONAL ACQUISITIONS
Our success depends on our ability to continually enhance and expand our
online marketplace and our e-commerce and direct marketing services in response
to changing technologies, customer demands and competitive pressures.
Consequently, we have acquired complementary technologies or businesses in the
past, and intend to do so in the future. If we are unable to identify suitable
acquisition targets, or are unable to successfully complete acquisitions, our
ability to increase the size of operations will be reduced. This could cause us
to lose business to our competitors and our operating results could suffer
significantly.
ACQUISITIONS INVOLVE A NUMBER OF RISKS
Acquisitions that we make may involve numerous risks, including:
- diverting management's attention from other business concerns;
- being unable to maintain uniform standards, controls, procedures and
policies;
- entering markets in which we have no direct prior experience; and
- improperly evaluating new services and technologies.
In addition, in order to finance any acquisitions, we might need to raise
additional funds through public or private financings. In this event, we could
be forced to obtain equity or debt financing on terms that are not favorable to
us and that may result in dilution to our shareholders.
Future acquisitions may involve the assumption of obligations or large
one-time write-offs and amortization expenses related to goodwill and other
intangible assets. Any of these factors would adversely affect our results of
operations.
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If we are unable to accurately assess and effectively integrate any newly
acquired businesses or technologies, our business would suffer. For example, in
June 1998 we acquired e-Warehouse and CyberTrust. These companies had developed
payment processing technologies that we planned to utilize as part of our
e-commerce and direct marketing services. However, we are not currently
utilizing the acquired technology, and we have determined that the technology
has no other use or value to us. Because we are not using the acquired
technology, we wrote-off substantially all of the $5.4 million aggregate
purchase price for e-Warehouse and CyberTrust in 1998. The separate historical
financial information for the acquisition of e-Warehouse and CyberTrust required
to be presented by Rule 3-05 of the Securities and Exchange Commission's
Regulation S-X or the pro forma financial information under Article 11 of
Regulation S-X is not provided elsewhere in this prospectus, because we do not
have access to the books and records due to disputes surrounding these
transactions and the financial information is not considered meaningful after
the write-off. We may be unable to successfully integrate other businesses,
technologies or personnel that we acquire in the future.
OUR SUCCESS DEPENDS UPON ACHIEVING ADEQUATE MARKET SHARE TO INCREASE OUR
REVENUES AND BECOME PROFITABLE
Our success and profitability is dependent upon achieving significant market
penetration and acceptance of our online marketplace by both shoppers and
merchants. Our online marketplace has achieved only limited market acceptance to
date and we, therefore, do not currently have adequate market share to
successfully execute our business plan. Our ShopNow.com Web site aggregates
products and services from more than 30,000 merchants, but we must continue to
attract new merchants in order to increase our attractiveness to consumers. If
we are unable to attract substantial shopper traffic to our online marketplace,
or if shoppers do not purchase products online in substantial volume, we may be
unable to attract merchants.
In order to attract shopper traffic and increase online purchase volume, we
must:
- create brand awareness;
- have a Web site that is easy to use;
- have a large selection of shopping categories and merchants; and
- create customer confidence in us and our merchants.
IF WE DO NOT INCREASE BRAND AWARENESS OUR SALES MAY SUFFER
Due in part to the emerging nature of the markets for an online marketplace
and e-commerce and direct marketing solutions and the substantial resources
available to many of our competitors, our opportunity to achieve and maintain a
significant market share may be limited. Developing and maintaining awareness of
the ShopNow brand name is critical to achieving widespread acceptance of our
online marketplace and our e-commerce and direct marketing solutions. We
launched our ShopNow.com shopping Web site in August 1998. The importance of
brand recognition will increase as competition in our market increases.
Successfully promoting and positioning the ShopNow brand will depend largely on
the effectiveness of our marketing efforts and our ability to develop reliable
and useful products at competitive prices. If our planned marketing efforts are
ineffective, we may need to increase our financial commitment to creating and
maintaining brand awareness among shoppers and merchants, which could divert
financial and management resources from other aspects of our business, or cause
our operating expenses to increase disproportionately to our revenues. This
would cause our business and operating results to suffer.
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WE FACE SIGNIFICANT COMPETITION
The market for Internet products and services is intensely competitive.
Barriers to entry in Internet markets are not significant, and current and new
competitors may be able to launch new Web sites at a relatively low cost.
Accordingly, we believe that our success will depend heavily upon achieving
significant market acceptance of both our online marketplace and our merchant
services before our competitors and potential competitors introduce competing
services.
ONLINE MARKETPLACE. We compete with various companies for e-commerce
merchants, shoppers, e-commerce transactions, advertisers and other sources of
online revenue. These competitors include:
- online shopping destination Web sites, such as iMall and Shopping.com;
- merchant and product Web site directories and search and information
services, all of which offer online shopping, such as America Online,
Microsoft, Yahoo!, Excite, Lycos and Infoseek; and
- conventional merchants and retailers that offer goods and services
directly over the Web.
The number of companies providing these types of services is large and
increasing at a rapid rate. We expect that additional companies, including media
companies and conventional retailers that to date have not had a substantial
commercial presence on the Internet, will offer services that directly compete
with us.
SERVICES FOR MERCHANTS. We also compete with companies that may offer
alternatives to one or more components of the e-commerce and direct marketing
solutions that we offer to merchants. These competitors include:
- companies offering e-commerce and online direct marketing services, such
as Go2Net, Xoom and DoubleClick;
- companies offering products that address specific aspects of e-commerce,
such as payment and transaction processing and security, such as
CyberSource;
- Web development firms;
- systems integrators;
- Internet service providers;
- other providers of e-commerce outsourcing services, such as Digital River
and USWeb/CKS; and
- traditional media companies.
We expect competition from these sources to intensify in the future.
Many of the current and potential competitors to both our online marketplace
and our merchant services are likely to enjoy substantial competitive advantages
compared to us, including:
- larger customer or user bases;
- the ability to offer a wider array of e-commerce and direct marketing
services;
- greater name recognition and larger marketing budgets and resources;
- substantially greater financial, technical and other resources;
- the ability to offer additional content and other personalization
features; and
- larger production and technical staffs.
In addition, as the use of the Internet and other online services increases,
larger, well-established and well-financed entities may continue to acquire,
invest in or form joint ventures with providers of
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e-commerce and direct marketing solutions, and existing providers of e-commerce
and direct marketing solutions may continue to consolidate. Providers of
Internet browsers and other Internet products and services who are affiliated
with providers of Web directories and information services that compete with our
Web sites may more tightly integrate these affiliated offerings into their
browsers or other products or services. Any of these trends would increase the
competition we face.
To be competitive, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance our products and services, as well as our
sales and marketing channels. Increased competition could result in a decrease
in shopper traffic on our Web sites, fewer merchants listed in our directories,
the obsolescence of the technology underlying our e-commerce and direct
marketing services, a loss of our market share and a reduction in the prices or
margins of our products and services.
IF WE FAIL TO MAINTAIN OUR KEY BUSINESS RELATIONSHIPS AND ENTER INTO NEW
RELATIONSHIPS OUR BUSINESS WILL SUFFER
An important element of our strategy involves entering into key business
relationships with other companies. Our success is dependent on maintaining our
current contractual relationships and developing new relationships. These
contractual relationships typically involve joint marketing, promotional
arrangements or distribution. For example, we have entered into a licensing and
co-marketing agreement with Chase Manhattan Bank, a joint development agreement
with About.com, a cross promotion agreement with 24/7 Media, a distribution and
marketing agreement with Qwest Communications, an agreement with HNC Software
and a strategic advisor agreement with the ZERON Group. Although these
relationships are a key factor in our strategy, in that they are intended to
provide us important marketing and distribution arrangements, the parties with
which we contract may not view their relationships with us as significant to
their own businesses. To date, we have not derived material revenue from these
relationships, and some of these relationships impose substantial obligations on
us. It is not certain that the benefits to us will outweigh our obligations. For
example, our relationship with 24/7 Media requires us to refer to them any
merchant that would benefit from the advertising services offered by 24/7 Media
and makes 24/7 Media the only third party authorized to sell advertising on our
Web site. Several of our significant business arrangements do not establish
minimum performance requirements but instead rely on contractual best efforts
obligations of the parties with which we contract. In addition, most of these
relationships may be terminated by either party with little notice. Accordingly,
in order to maintain our key business relationships we will need to meet our
partners' specific business objectives, including incremental revenue, brand
awareness and implementation of specific e-commerce applications. If our key
business relationships are discontinued for any reason, or if we are
unsuccessful in entering into new relationships in the future, our business and
results of operations may be adversely affected.
IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID GROWTH OF OUR OPERATIONS OUR BUSINESS
WILL SUFFER
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We are increasing the scope of our operations domestically
and internationally, and we have recently increased our headcount substantially.
From December 31, 1997 to June 30, 1999, our total number of employees increased
from less than 50 to 305. This growth has placed and will continue to place a
significant strain on our management systems, infrastructure and resources. We
will need to continue to improve our financial and managerial controls and
reporting systems and procedures, and will need to continue to expand, train and
manage our workforce worldwide. Furthermore, we expect that we will be required
to manage an increasing number of relationships with various customers and other
third parties. Any failure to expand any of the foregoing areas efficiently and
effectively could cause our business to suffer.
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WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL FOR SUCCESSFUL OPERATION OF OUR
BUSINESS
Our success depends on the skills, experience and performance of our senior
management and other key personnel. Our key personnel include Dwayne Walker, our
President and Chief Executive Officer, Jeffrey Haggin, the head of our direct
marketing and creative services business, and Dr. Ganapathy Krishnan, our Chief
Technology Officer. Only Messrs. Walker and Haggin have an employment agreement
with ShopNow. Many of our executive officers have joined us within the past
three years. If we do not quickly and efficiently integrate these new personnel
into our management and culture, our business could suffer. Our business could
also suffer if we do not successfully retain our key personnel.
WE MUST HIRE ADDITIONAL PERSONNEL TO EXPAND OUR OPERATIONS
Our future success depends on our ability to identify, hire, train, retain
and motivate highly skilled executive, technical, managerial, sales and
marketing and business development personnel. We intend to hire a significant
number of personnel during the next year, and as of July 27, 1999 we had
openings for 42 job positions. Competition for qualified personnel is intense,
particularly in the technology and Internet markets. If we fail to successfully
attract, assimilate and retain a sufficient number of qualified executive,
technical, managerial, sales and marketing, business development and
administrative personnel, our ability to manage and expand our business could
suffer.
OUR ABILITY TO DEVELOP AND INTEGRATE E-COMMERCE TECHNOLOGIES IS SUBJECT TO
UNCERTAINTIES
We have limited experience delivering our e-commerce products and services.
In order to remain competitive, we must regularly upgrade our e-commerce
services to incorporate current technology, which requires us to integrate
complex computer hardware and software components. If we do not successfully
integrate these components, the performance of the ShopNow Network and the
ability of our network to accommodate a large number of merchants and consumers
would suffer. While these technologies are generally commercially available, we
may be required to expend considerable time and money in order to successfully
integrate them into our e-commerce services and this may cause our business to
suffer. We must also maintain an adequate testing and technical support
infrastructure to ensure the successful introduction of products and services.
OUR COMPUTER SYSTEMS MAY BE VULNERABLE TO SYSTEM FAILURES
Our success depends on the performance, reliability and availability of our
online marketplace and the technology supporting our e-commerce and online
direct marketing services. Our revenues depend, in large part, on the number of
shoppers and merchants that access our online marketplace and use our e-commerce
and direct marketing services. This depends, in part, upon our actual and
perceived reliability and performance. Any slowdown or stoppage of our online
marketplace could cause us to lose customers and therefore lose revenue.
Substantially all of our computer and communications hardware is located at
leased facilities in Seattle, Washington and Weehawken, New Jersey. Our systems
and operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-in, earthquake and similar events.
Because we presently do not have fully redundant systems or a formal disaster
recovery plan, a systems failure could adversely affect our business. Our
computer systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which may lead to interruptions, delays, loss
of data or inability to process online transactions for our merchant customers.
We may be required to expend considerable time and money to correct any system
failure. If we are unable to fix a problem that arises, we may lose customers or
be unable to conduct our business at all.
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OUR BUSINESS MAY BE HARMED BY DEFECTS IN OUR SOFTWARE AND SYSTEMS
We have developed custom software for our network servers and have licensed
additional software from third parties. This software may contain undetected
errors, defects or bugs. Although we have not suffered significant harm from any
errors or defects to date, we may discover significant errors or defects in the
future that we may or may not be able to fix.
WE MAY NEED TO EXPAND AND UPGRADE OUR SYSTEMS
We must expand and upgrade our technology, transaction-processing systems
and network infrastructure if the volume of traffic on our Web sites or our
merchants' Web sites increases substantially. We could experience periodic
temporary capacity constraints, which may cause unanticipated system
disruptions, slower response times and lower levels of customer service. We may
be unable to accurately project the rate or timing of increases, if any, in the
use of our Web sites or when we must expand and upgrade our systems and
infrastructure to accommodate these increases in a timely manner. Any inability
to do so could harm our business by causing our customers to be unhappy with our
services.
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS
Our e-commerce and direct marketing solutions are available to merchants and
shoppers worldwide. We also plan to make our online marketplace available to
shoppers and merchants on a global basis. In the six months ended June 30, 1999,
international sales constituted 2.6% of total revenue. We are subject to the
normal risks of doing business internationally. These risks include:
- difficulties in managing operations due to distance, language and cultural
differences;
- unexpected changes in regulatory requirements;
- export and import restrictions;
- tariffs and trade barriers and limitations on fund transfers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and problems in collecting accounts receivable;
- potential adverse tax consequences;
- exchange rate fluctuations, as we do not currently hedge our foreign
currency exposures; and
- political risks such as changes in governments and risks that assets in
foreign countries may be nationalized.
In addition, we are subject to risks specific to Internet-based companies in
foreign markets. These risks include:
- delays in the development of the Internet as a commerce medium in
international markets;
- restrictions on the export of encryption technology; and
- increased risk of piracy and limits on our ability to enforce our
intellectual property rights.
We intend to begin developing a Japanese-language online marketplace in the
second half of 1999. In recent periods, the Japanese economy has been in a
recession. If the Japanese economy does not recover, our efforts to develop a
Japanese-language online marketplace and our ability to grow in that market
could be impaired. In addition, the failure to succeed in the Japanese market
could impair our ability to enter other international markets.
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WE MAY REQUIRE ADDITIONAL FUNDING TO SUCCESSFULLY OPERATE AND GROW OUR BUSINESS
Although we believe that, following this offering, our cash reserves,
including the proceeds of this offering, and cash flows from operations will be
adequate to fund our operations for at least the next twelve months, these
resources may be inadequate. Consequently, we may require additional funds
during or after this period. Additional financing may not be available on
favorable terms or at all. If we raise additional funds by selling stock, the
percentage ownership of our then current shareholders will be reduced. If we
cannot raise adequate funds to satisfy our capital requirements, we may have to
limit our operations significantly. Our future capital requirements depend upon
many factors, including, but not limited to:
- the rate at which we expand our sales and marketing operations; and our
product and service offerings;
- the extent to which we develop and upgrade our technology and data network
infrastructure; and
- the occurrence, timing, size and success of acquisitions.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS
We regard our intellectual property rights as critical to our success, and
we rely on trademark and copyright law, trade secret protection and
confidentiality and, or license agreements with our employees, customers and
others to protect our proprietary rights. Despite our precautions, unauthorized
third parties might copy portions of our software or reverse engineer and use
information that we regard as proprietary. We currently have four patents
pending in the United States Patent and Trademark Office covering different
aspects of our product architecture and technology. However, we do not currently
own any issued patents and there is no assurance that any pending or future
patent applications will be granted, that any existing or future patents will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide us with a competitive advantage. The laws of some
foreign countries do not protect proprietary rights to the same extent as do the
laws of the United States, and our means of protecting our proprietary rights
abroad may not be adequate. Any misappropriation of our proprietary information
by third parties could adversely affect our business by enabling third parties
to compete more effectively with us.
OUR TECHNOLOGY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Although we have not received notice of any alleged infringement by us, we
cannot be certain that our technology does not infringe issued patents or other
intellectual property rights of others. In addition, because patent applications
in the United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our software. We may be subject
to legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. Intellectual property litigation
is expensive and time-consuming, and could divert our management's attention
away from running our business.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We rely on proprietary as well as third-party software in the operation of
our business. Our proprietary software, as well as the third-party software on
which we rely, is used in complex network environments, including the Internet,
and directly and indirectly interacts with our customers' hardware
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and software systems. Despite preliminary investigation and testing by us and
our customers, our proprietary software, the third-party software on which we
rely, and the underlying systems and protocols may contain errors or defects
associated with Year 2000 date functions. We are unable to predict to what
extent our business may be affected if the software or the systems that operate
in conjunction with the software, including the Internet, experience a material
Year 2000 failure. Known or unknown errors or defects that affect the operation
of software that we use could result in delays or losses of revenue,
interruptions of Internet communications, cancellations of contracts by our
customers, diversions of our development resources, damage to our reputation,
increased service and warranty costs and litigation costs.
Year 2000 failures of our merchant customers' internal systems may affect
their ability to purchase our products and services. If a significant number of
our current or potential future customers experience Year 2000 failures, our
business could suffer.
Because of the publicity surrounding the Year 2000 issue, consumers may
delay purchasing goods and services online in the last few months of 1999. If
this occurs, our revenues could suffer.
If the performance of our proprietary software is adversely affected by Year
2000 defects in hardware or software with which it interacts, our merchant
customers or their end users may mistakenly believe that these defects occurred
in our proprietary software. These customers and end users could react by
demanding extensive technical support from us or by filing suit against us,
either of which would cause a significant diversion of our management and
financial resources.
The computer systems of governmental agencies, utility companies, Internet
access companies, third-party service providers and others outside of our
control may not be Year 2000 compliant. The failure by such entities to achieve
timely Year 2000 compliance could result in a systemic failure beyond our
control, such as prolonged Internet, telecommunications, or electrical failures.
This could prevent shoppers and merchants from accessing our systems, which
could harm our business, operating results, and financial condition. In
addition, the computer systems of the merchants who are part of the ShopNow
Network may not be Year 2000 compliant. The failure by such entities to achieve
timely Year 2000 compliance could prevent shoppers from consummating
transactions through the ShopNow Network, which could harm our business,
operating results and financial condition.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON CONTINUED INCREASES IN THE USE OF THE INTERNET AS A
COMMERCIAL MEDIUM
Sales of consumer goods using the Internet currently do not represent a
significant portion of overall sales of consumer goods. We depend on the growing
use and acceptance of the Internet as an effective medium of commerce by
merchants and shoppers. Rapid growth in the use of and interest in the Internet
and other online services is a recent development. No one can be certain that
acceptance and use of the Internet and other online services will continue to
develop or that a sufficiently broad base of merchants and shoppers will adopt
and continue to use the Internet and other online services as a medium of
commerce.
The Internet may fail as a commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies, including
security technology and performance improvements. For example, if technologies
such as software that stops advertising from appearing on a Web user's computer
screen gain wide acceptance, the attractiveness of the Internet to advertisers
would be diminished, which could harm our business.
RAPID TECHNOLOGICAL CHANGE COULD NEGATIVELY AFFECT OUR BUSINESS
Rapidly changing technology, evolving industry standards, evolving customer
demands and frequent new product and service introductions characterize the
market for online marketplaces. Our future
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success will depend in significant part on our ability to improve the
performance, content and reliability of our services in response to both the
evolving demands of the market and competitive product offerings. Our efforts in
these areas may not be successful. If a large number of our merchant customers
adopt new Internet technologies or standards, we may need to incur substantial
expenditures modifying or adapting our e-commerce and direct marketing services
to remain compatible with their systems.
THE SECURITY PROVIDED BY OUR E-COMMERCE SERVICES COULD BE BREACHED
A fundamental requirement for e-commerce is the secure transmission of
confidential information over the Internet. Among the e-commerce services we
offer to merchants are security features such as:
- secure online payment services;
- secure order processing services; and
- fraud prevention and management services.
Third parties may attempt to breach the security provided by our e-commerce
services or the security of our merchant customers' internal systems. If they
are successful, they could obtain confidential information about shoppers using
the ShopNow Network, including their passwords, financial account information,
credit card numbers or other personal information. We may be liable to our
merchant customers or shoppers for any such breach in security. Even if we are
not held liable, a security breach could harm our reputation, and the mere
perception of security risks, whether or not valid, could inhibit market
acceptance of our services. We may be required to expend significant capital and
other resources to license encryption or other technologies to protect against
security breaches or to alleviate problems caused by these breaches. In
addition, our merchant customers might decide to stop using our e-commerce
services if their shoppers experience security breaches.
WE RELY ON THE INTERNET INFRASTRUCTURE PROVIDED BY OTHERS TO OPERATE OUR
BUSINESS
Our success depends, in large part, on other companies maintaining the
Internet infrastructure. In particular, we rely on other companies to maintain a
reliable network backbone that provides adequate speed, data capacity and
security and to develop products that enable reliable Internet access and
services. If the Internet continues to experience significant growth in the
number of users, frequency of use and amount of data transmitted, the Internet
infrastructure of thousands of computers communicating via telephone lines,
coaxial cable and other telecommunications systems may be unable to support the
demands placed on it, and the Internet's performance or reliability may suffer
as a result of this continued growth. If the performance or reliability of the
Internet suffers, consumers could have difficulty obtaining access to the
Internet. In addition, data transmitted over the Internet, including information
and graphics contained on Web pages, could reach the consumer much more slowly.
This could result in frustration by consumers, which could decrease shopper
traffic and cause advertisers to reduce their Internet expenditures.
FUTURE GOVERNMENTAL REGULATION AND PRIVACY CONCERNS COULD ADVERSELY AFFECT OUR
BUSINESS
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations,
and it is possible that a number of laws or regulations may be adopted with
respect to the Internet relating to issues such as user privacy, taxation,
infringement, pricing, quality of products and services and intellectual
property ownership. The adoption of any laws or regulations that have the effect
of imposing additional costs, liabilities or restrictions relating to the use of
the Internet by businesses or consumers could decrease the growth in
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the use of the Internet, which could in turn decrease the demand for our
e-commerce and direct marketing services, increase our cost of doing business,
or otherwise have a material adverse effect on our business. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, copyright, trademark, trade secret, obscenity, libel and personal
privacy is uncertain and developing. Any new legislation or regulation, or
application or interpretation of existing laws, could have a material adverse
effect on our business.
The Federal Communications Commission is currently reviewing its regulatory
positions on the privacy protection given to data transmissions over
telecommunications networks and could seek to impose some form of
telecommunications carrier regulation on telecommunications functions of
information services. State public utility commissions generally have declined
to regulate information services, although the public service commissions of
some states continue to review potential regulation of such services. Future
regulation or regulatory changes regarding data privacy could have an adverse
effect on our business by requiring us to incur substantial additional expenses
in order to comply with this type of regulation.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services over the
Internet and certain states have taken measures to tax Internet-related
activities. Foreign countries also may tax Internet transactions. The taxation
of Internet-related activities could have the effect of imposing additional
costs on companies, such as ShopNow, that conduct business over the Internet.
This, in turn, could lead to increased prices for consumers, which could result
in decreased demand for online shopping.
WE COULD FACE LIABILITY FOR MATERIAL TRANSMITTED OVER THE INTERNET BY OTHERS
Because material may be downloaded from Web sites hosted by us and
subsequently distributed to others, there is a potential that claims will be
made against us for negligence, copyright or trademark infringement or other
theories based on the nature and content of this material. Negligence and
product liability claims also potentially may be made against us due to our role
in facilitating the purchase of products, such as firearms. Although we carry
general liability insurance, our insurance may not cover claims of these types,
or may not be adequate to indemnify us against this type of liability. Any
imposition of liability, and in particular liability that is not covered by our
insurance or is in excess of our insurance coverage, could have a material
adverse effect on our reputation and our operating results, or could result in
the imposition of criminal penalties on us.
WE DO NOT CURRENTLY COLLECT SALES TAX FROM ALL TRANSACTIONS
We do not currently collect sales or other similar taxes in respect to
shipments of goods into states other than Washington and California. However,
one or more states or foreign countries may seek to impose sales tax collection
obligations on out-of-state or foreign companies engaging in e-commerce. In
addition, any new operation in states outside Washington and California could
subject shipments into these states to state or foreign sales taxes. A
successful assertion by one or more states or any foreign country that we should
collect sales or other similar taxes on the sale of merchandise could result in
liability for penalties as well as substantially higher expenses incurred by our
business.
RISKS RELATED TO THIS OFFERING
PROVISIONS OF OUR CHARTER DOCUMENTS AND WASHINGTON LAW COULD DISCOURAGE OUR
ACQUISITION BY A THIRD PARTY
Specific provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire
ShopNow, even if doing so would be beneficial to our shareholders.
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Our articles of incorporation and bylaws provide for the establishment of a
classified board of directors, eliminating the ability of shareholders to call
special meetings, the lack of cumulative voting for directors and procedures for
advance notification of shareholder proposals. The presence of a classified
board and the elimination of cumulative voting may make it more difficult for an
acquirer to replace our board of directors. Further, the elimination of
cumulative voting substantially reduces the ability of minority shareholders to
obtain representation on the board of directors.
Upon completion of this offering, our board of directors will have the
authority to issue up to 5,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by our shareholders.
The issuance of preferred stock could have the effect of delaying, deferring or
preventing a change of control of ShopNow and may adversely affect the market
price of the common stock and the voting and other rights of the holders of
common stock.
Washington law imposes restrictions on some transactions between a
corporation and significant shareholders. Chapter 23B.19 of the Washington
Business Corporation Act prohibits a "target corporation," with some exceptions,
from engaging in particular 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 the 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 acquisition. 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.
A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of ShopNow.
The foregoing provisions of our charter documents and Washington law could
have the effect of making it more difficult or more expensive for a third party
to acquire, or could discourage a third party from attempting to acquire,
control of ShopNow. These provisions may therefore have the effect of limiting
the price that investors might be willing to pay in the future for our common
stock. For a more complete discussion of these provisions, see "Description of
Capital Stock."
OUR MANAGEMENT HAS BROAD DISCRETION OVER HOW WE USE THE PROCEEDS OF THIS
OFFERING
Our management has broad discretion over the use of a substantial portion of
the proceeds of this offering. Accordingly, it is possible that our management
may allocate the proceeds differently than investors in this offering would have
desired, or that we will fail to maximize our return on these proceeds.
OUR STOCK PRICE MAY BE VOLATILE
The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which has
often been unrelated to the operating performance of any particular company or
companies. Our stock price could be subject to wide fluctuations in response to
factors such as the following:
- actual or anticipated variations in quarterly results of operations;
- the addition or loss of merchants and consumer traffic;
19
<PAGE>
- announcements of technological innovations, new products or services by us
or our competitors;
- changes in financial estimates or recommendations by securities analysts;
- conditions or trends in the Internet and e-commerce and direct marketing
industries;
- changes in the market valuations of other Internet, online service or
software companies;
- our announcements of significant acquisitions, strategic relationships,
joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of our common stock;
- general market conditions; and
- other events or factors, many of which are beyond our control.
These broad market and industry factors may materially and adversely affect
our stock price, regardless of our operating performance. The trading prices of
the stocks of many technology companies are at or near historical highs and
reflect price to earnings ratios substantially above historical levels. These
trading prices and price-to earnings ratios may not be sustained.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in their stock prices. We may
in the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert our management's time and resources,
which could cause our business to suffer.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
After this offering, a total of 33,254,706 shares of our common stock will
be outstanding. All the shares sold in this offering will be freely tradable.
The remaining shares of our common stock outstanding after this offering will
become available for public sale as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING AFTER
DATE OF AVAILABILITY FOR SALE NUMBER OF SHARES OFFERING
- -------------------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
90 days after the date of this prospectus................................. 95,475 0.3%
At various times after 180 days from the date of this prospectus upon
expiration of lockup agreements......................................... 26,159,231 78.7%
</TABLE>
Many of the shares not currently available for sale are subject to vesting
restrictions and the holding period, volume and other restrictions of Rule 144
under the Securities Act of 1933. These restrictions have the effect of
staggering the dates on which the shares become available for sale and the
number of shares that become available for sale. If our shareholders sell a
substantial number of these shares in the public market during a short period of
time, our stock price could decline significantly.
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 7,000,000
shares of common stock offered by us will be approximately $70.7 million, at an
assumed initial public offering price of $11.00 per share, and after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters' over-allotment option is exercised
in full, we estimate that our net proceeds from this offering will be $81.4
million.
The principal purposes of the offering are to obtain capital to repay
indebtedness and for working capital and general corporate purposes, establish a
public market for our common stock and facilitate future access to public
markets. We intend to use the net proceeds from this offering as follows:
- Approximately $4.2 million of the net proceeds will be used to repay our
outstanding indebtedness to Transamerica Business Credit Corporation. The
indebtedness to be repaid consists of $4.0 million in principal remaining
on a bridge note bearing interest at the rate of 12.0% per annum. The
bridge note is due upon the earlier of December 1, 1999, or the date on
which we receive more than $10.0 million in aggregate proceeds from the
issuance of debt or equity securities. Following repayment of the bridge
note, we will continue to be indebted to Transamerica Business Credit
Corporation for a term loan with a principal amount of $3.5 million and a
$1.0 million line of credit.
- Approximately $1.0 million of the net proceeds will be used to redeem a
$1.0 million promissory note that we issued to the Lovett Miller 1997
Fund, a shareholder of GO Software, when we acquired GO Software in June
1999, if the Lovett Miller 1997 Fund elects not to convert the outstanding
principal amount of the note into common stock upon the closing of this
offering, which common stock will not be registered as part of this
offering. The promissory note bears interest at the rate of 10.0% per
annum and is due upon the effectiveness of the registration statement
relating to this offering.
- The remainder of these net proceeds, or approximately $65.5 million, will
be used for working capital and general corporate purposes. We do not
currently have a specific plan for the use of these proceeds. The amounts
that we actually expend for working capital will vary significantly
depending on a number of factors, including future revenue growth, if any,
and the amount of cash we generate from operations. As a result, we will
retain broad discretion in allocating the net proceeds of this offering.
See "Risk Factors--Our management has broad discretion over how we use the
proceeds of this offering."
In addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses, products and technologies. From time to time, in the
ordinary course of business, we expect to evaluate potential acquisitions of
such businesses, products or technologies. As a result, we will have broad
discretion in the way we use net proceeds.
Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, our existing line of credit and revolving
credit facility with a commercial lender prohibits the payment of dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on an
actual basis, on a pro forma basis to include the issuance of 2,100,000 shares
of Series I convertible preferred stock that CB Capital Investors, L.P., an
affiliate of Chase Manhattan Bank, received on July 19, 1999, and on a pro forma
as adjusted basis to give effect to the automatic conversion of all outstanding
shares of our preferred stock, the exercise and automatic conversion of all
warrants to purchase our Series C convertible preferred stock into 20,194,563
shares of common stock upon completion of this offering, the sale of 7,000,000
shares of common stock at an assumed initial offering price of $11.00 per share
and the application of the estimated net proceeds from the sale of those shares
including the repayment of $5.2 million of debt obligations.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, including current portion................................ $ 15,891 $ 15,891 $ 10,691
Shareholders' equity:
Convertible preferred stock; $0.01 par value; authorized 20,000,000 actual,
30,000,000 pro forma and 5,000,000 pro forma as adjusted; issued and
outstanding 17,927,516 actual, 20,027,516 pro forma and none pro forma as
adjusted...................................................................... 72,510 89,222 --
Common stock; $0.01 par value; authorized 40,000,000 actual, 60,000,000 pro
forma and 200,000,000 pro forma as adjusted; issued and outstanding 6,060,143
actual and pro forma and 33,254,706 pro forma as adjusted..................... 21,839 21,839 181,721
Common stock warrants........................................................... 5,705 7,893 7,893
Deferred compensation........................................................... (3,213) (3,213) (3,213)
Unrealized loss on investments.................................................. (4,508) (4,508) (4,508)
Accumulated deficit............................................................. (55,597) (55,597) (55,597)
-------- ----------- -----------
Total shareholders' equity...................................................... 36,736 55,636 126,296
-------- ----------- -----------
Total capitalization............................................................ $ 52,627 $ 71,527 $136,987
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
This table excludes the following shares:
- 7,976,451 shares of common stock issuable upon the exercise of options
under our stock option plan consisting of:
- 5,162,108 shares of common stock underlying options outstanding as of
June 30, 1999 at a weighted average exercise price of $3.68 per share, of
which 1,114,237 were exercisable as of June 30, 1999;
- 2,814,343 shares of common stock underlying options available for future
grants;
- 2,000,000 shares of common stock issuable under our employee stock
purchase plan;
- 1,739,470 shares of common stock issuable upon exercise of stock options
outstanding outside of our stock option plan as of June 30, 1999 at a
weighted average exercise price of $1.51 per share, of which 892,853 were
exercisable as of June 30, 1999;
- 4,234,618 shares of common stock issuable upon exercise of warrants
outstanding as of June 30, 1999 to purchase common stock at a weighted
average exercise price of $5.85 per share; and
22
<PAGE>
- the shares of common stock that may be issued if the Lovett Miller 1997
Fund elects to convert into common stock the $1.0 million promissory note
that we issued to the Lovett Miller 1997 Fund as partial consideration for
its shares of capital stock of GO Software upon completion of this
offering, such number of shares would be equal to the quotient of
$1,000,000 divided by the per share initial public offering price.
Our board of directors and shareholders have approved an amendment and
restatement of our articles of incorporation, effective upon the closing of this
offering, to increase the number of authorized shares of common stock to
200,000,000 and to decrease the number of authorized shares of preferred stock
to 5,000,000. The amended and restated articles of incorporation also will
decrease the par value of the common stock and the preferred stock to $0.001.
23
<PAGE>
DILUTION
If you invest in our common stock, your interest will be immediately diluted
to the extent of the difference between the public offering price per share of
our common stock and the pro forma net tangible book value per share of common
stock after this offering. Our pro forma net tangible book value as of June 30,
1999 was $54.5 million or $2.08 per share of common stock. Pro forma net
tangible book value per share is determined by dividing the difference between
our total assets excluding goodwill and total liabilities by the pro forma
number of outstanding shares of common stock. Total assets also includes the
$18.9 million in proceeds received from the issuance of Series I convertible
preferred stock to an affiliate of Chase Manhattan Bank in July 1999. After
giving effect to the receipt of the estimated net proceeds from the sale by
ShopNow of the 7,000,000 shares of common stock that we are offering hereby, at
an assumed initial public offering price of $11.00 per share and after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of June 30,
1999, would have been $125.2 million or approximately $3.76 per share. This
represents an immediate increase in pro forma net tangible book value of $1.68
per share to existing shareholders and an immediate dilution in pro forma net
tangible book value of $7.24 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this dilution on
a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 11.00
Pro forma net tangible book value per share as of June 30, 1999............ $ 2.08
Increase per share attributable to new investors........................... 1.68
---------
Pro forma net tangible book value per share after the offering............... 3.76
---------
Dilution per share to new investors.......................................... $ 7.24
---------
---------
</TABLE>
The following table summarizes as of June 30, 1999, the differences between
the number of shares of common stock purchased from ShopNow, the total
consideration paid, and the average price per share paid by existing
shareholders and by investors purchasing shares of common stock in this
offering, before deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us, at an assumed initial public
offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 26,254,706 79.0% $ 111,060,865 59.1% $ 4.23
New investors............................... 7,000,000 21.0 77,000,000 40.9 11.00
------------ ----- -------------- -----------
Total..................................... 33,254,706 100.0% $ 188,060,865 $ 100.0%
------------ ----- -------------- -----------
------------ ----- -------------- -----------
</TABLE>
The foregoing discussion and table are based upon the number of shares of
common stock outstanding as of June 30, 1999, and gives effect to the automatic
conversion of all outstanding shares of our preferred stock, including the
2,100,000 shares of Series I preferred stock received by an affiliate of Chase
Manhattan Bank in July 1999, and the exercise and automatic conversion of all
warrants to purchase our Series C convertible preferred stock into shares of
common stock. This calculation excludes all shares of common stock issuable upon
the exercise of our outstanding stock options and warrants to purchase common
stock, all shares of common stock available for future grants under our stock
option plan, all shares of common stock issuable under our employee stock
purchase plan and the shares of common stock that may be issued if the Lovett
Miller 1997 Fund elects to convert a $1.0 million promissory note, which we
issued as partial consideration for our purchase of its shares of capital stock
of GO Software, into common stock upon completion of this offering. To the
extent any of these options or warrants are exercised, there will be further
dilution to new public investors. See "Capitalization," "Management--Employee
Benefit Plans," "Description of Capital Stock" and Note 11 to the Consolidated
Financial Statements.
24
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following pro forma combined financial data reflects the consolidation
of our results of operations with the results of operations of Media Assets, The
Internet Mall, GO Software and the cessation of our BuySoftware.com business.
The pro forma combined statements of operations data have been prepared as if
each of these acquisitions had been made on January 1, 1998 and BuySoftware.com
had ceased operations on January 1, 1998. The pro forma financial data is
presented for informational purposes only and may not be indicative of the
results of operations had the transactions occurred on January 1, 1998. You
should not rely on the pro forma financial data as being indicative of our
future results of operations. You should read the following pro forma financial
data in conjunction with the Unaudited Pro Forma Combined Financial Information
and the Consolidated Financial Statements and related Notes appearing elsewhere
in this prospectus. We believe that all adjustments necessary to present fairly
such pro forma financial data have been made.
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------
PRO FORMA PRO FORMA
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Transactions and merchandising.............................................. $ 1,801 $ 2,611
Merchant services........................................................... 7,249 4,176
------------ --------
Total revenues............................................................ 9,050 6,787
Cost of revenues:
Transactions and merchandising.............................................. 221 1,069
Merchant services........................................................... 4,063 2,469
------------ --------
Total cost of revenues.................................................... 4,284 3,538
------------ --------
Gross profit............................................................ 4,766 3,249
------------ --------
Operating expenses:
Sales and marketing......................................................... 10,791 15,565
General and administrative.................................................. 4,065 2,558
Research and development.................................................... 3,676 3,106
Amortization of intangible assets........................................... 6,298 3,638
Stock-based Compensation.................................................... 182 1,956
Unusual item--impairment of acquired technology............................. 5,207 --
------------ --------
Total operating expenses.................................................. 30,219 26,823
------------ --------
Loss from operations.................................................... (25,453) (23,574)
Other income (expense), net................................................... 91 (283)
------------ --------
Net loss................................................................ $ (25,362) $ (23,857)
------------ --------
------------ --------
Basic and diluted pro forma net loss per share(1)............................... $ (1.71) $ (1.14)
------------ --------
------------ --------
</TABLE>
- ------------------------------
(1) See Note 1 to the Consolidated Financial Statements and Note 2(e) to the
Unaudited Pro Forma Combined Financial Information appearing elsewhere in
this prospectus for a description of the method used to compute basic and
diluted pro forma net loss per share.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statements of operations data for the years ended December 31, 1996,
1997, and 1998 and for the six months ended June 30, 1999 are derived from our
audited consolidated financial statements appearing elsewhere in this
prospectus. The statements of operations data for the period from January 20,
1994 (inception) to December 31, 1994 and for the year ended December 31, 1995
are derived from audited consolidated financial statements not included in this
prospectus. The pro forma as adjusted balance sheet data give effect to the sale
of the 7,000,000 shares of common stock that we are offering under this
prospectus at an assumed initial public offering price of $11.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
expenses payable by us. We believe that due to the acquisitions in 1998 and in
the first six months of 1999, period-to-period comparisons are not meaningful,
and you should not rely on them as indicative of our future performance. You
should read the following selected consolidated financial data in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JANUARY 20,
1994 SIX MONTHS
(INCEPTION) TO YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, ----------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
-------------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Transactions and
merchandising................ $ -- $ -- $ -- $ 69 $ 4,211 $ 11,630
Merchant services.............. 279 727 993 535 2,943 4,352
-------------- ---------- ---------- ---------- ----------- ------------
Total revenues............... 279 727 993 604 7,154 15,982
-------------- ---------- ---------- ---------- ----------- ------------
Cost of revenues:
Transactions and
merchandising................ -- -- -- 159 4,493 12,177
Merchant services.............. 127 323 430 356 1,356 2,506
-------------- ---------- ---------- ---------- ----------- ------------
Total cost of revenues....... 127 323 430 515 5,849 14,683
-------------- ---------- ---------- ---------- ----------- ------------
Gross profit............... 152 404 563 89 1,305 1,299
-------------- ---------- ---------- ---------- ----------- ------------
Operating expenses:
Sales and marketing............ 116 163 610 1,201 12,183 18,279
General and administrative..... 216 347 656 918 3,549 2,480
Research and development....... -- -- 25 2,436 4,370 2,934
Amortization of intangible
assets....................... -- -- 32 136 730 1,639
Stock-based compensation....... -- -- -- -- 182 1,956
Unusual item--impairment of
acquired technology.......... -- -- -- -- 5,207 --
-------------- ---------- ---------- ---------- ----------- ------------
Total operating expenses..... 332 510 1,323 4,691 26,221 27,288
-------------- ---------- ---------- ---------- ----------- ------------
Loss from operations....... (180) (106) (760) (4,602) (24,916) (25,989)
Other income (expense), net...... (1) (7) (50) (164) 171 (245)
-------------- ---------- ---------- ---------- ----------- ------------
Net loss................... $ (181) $ (113) $ (810) $ (4,766) $ (24,745) $ (26,234)
-------------- ---------- ---------- ---------- ----------- ------------
-------------- ---------- ---------- ---------- ----------- ------------
Basic and diluted net loss per
share(1)......................... $ (0.11) $ (0.06) $ (0.40) $ (1.83) $ (7.01) $ (5.50)
-------------- ---------- ---------- ---------- ----------- ------------
-------------- ---------- ---------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (IN
THOUSANDS):
Cash and short-term investments....... $ 6,474 $25,374 $ 96,034
Working capital....................... (8,766) 10,134 80,794
Total assets.......................... 64,250 83,150 153,810
Total liabilities..................... 27,514 27,514 27,514
Total shareholders' equity............ 36,736 55,636 126,296
</TABLE>
<TABLE>
<CAPTION>
AUGUST 16,
MARCH 31, 1999 JUNE 30, 1999 1999
-------------- ------------- -------------
<S> <C> <C> <C>
OTHER DATA:
Number of merchant customers since
January 1, 1999(4).................. 132 313 422
Average revenue generated per merchant
customer since January 1, 1999...... $1,114 $3,242 $4,130
Number of visits to the ShopNow
Network since January 1, 1999....... 2,954,000 9,376,000 12,747,000
</TABLE>
- ----------------------------------
(1) See Note 1 to the Consolidated Financial Statements for a description of the
method used to compute basic and diluted net loss per share.
(2) The pro forma consolidated balance sheet data gives effect to the receipt of
$18.9 million in proceeds from the closing of the sale of Series I
convertible preferred stock to CB Capital Investors, L.P., an affiliate of
Chase Manhattan Bank, in July 1999.
(3) The pro forma as adjusted balance sheet data gives effect to the sale of the
7,000,000 shares of common stock that we are offering under this prospectus
at an assumed initial public offering price of $11.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
expenses payable by us.
(4) Merchant customers are those merchants on the ShopNow Network that have paid
us a fee for services other than an entry-level listing fee, in the last 12
months.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
OUR SELECTED CONSOLIDATED FINANCIAL DATA, OUR SELECTED PRO FORMA COMBINED
FINANCIAL DATA, OUR UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION AND CERTAIN OTHER PARTS OF THIS PROSPECTUS
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. WORDS SUCH AS "MAY," "COULD," "WOULD," "EXPECT," "ANTICIPATE,"
"INTEND," "PLAN," "BELIEVE," "ESTIMATE," AND VARIATIONS OF SUCH WORDS AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
ARE BASED ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, ARE
NOT GUARANTEES OF FUTURE PERFORMANCE, ARE SUBJECT TO RISKS, UNCERTAINTIES AND
ASSUMPTIONS (INCLUDING THOSE DESCRIBED IN "RISK FACTORS") AND APPLY ONLY AS OF
THE DATE OF THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN THE SECTION ENTITLED "RISK FACTORS," AS WELL AS THOSE DISCUSSED
ELSEWHERE HEREIN. SEE "FORWARD-LOOKING STATEMENTS."
OVERVIEW
ShopNow provides shoppers and merchants with an online marketplace and
provides merchants with a variety of e-commerce and direct marketing services.
We incurred net losses of $24.7 million for the year ended December 31, 1998 and
$26.2 million for the six-month period ended June 30, 1999. At June 30, 1999, we
had an accumulated deficit of $55.6 million. Although our revenues have grown
significantly in recent quarters, in June 1999 we ceased operation of our
BuySoftware.com business, from which we derived 62.3% of our revenues in 1998
and 62.1% of our revenues in the first six months of 1999. We have received more
than 80% of our revenues for the six months ended June 30, 1999 (on a pro forma
basis) from merchants who purchase merchandising and merchant services. We have
received the remainder of our revenues for the six months ended June 30, 1999
(on a pro forma basis) as transactional revenues, which are from consumers who
purchase products from Shop.Now.com and MyShopNow.com. Our merchant customers
are those merchants on the ShopNow Network that have paid us a fee for services,
other than a nominal entry-level listing fee, in the last 12 months.
Merchandising revenues are generated from ShopNow.com and MyShopNow.com
advertising, specific merchandising positions on our sites and from online
direct marketing to our customers through electronic mail. All online
advertising and marketing revenues are recorded as merchandising revenues.
Merchant services revenues are generated from custom developed e-commerce
stores, custom traditional direct marketing services, custom creative services
and custom promotional materials are recorded as merchant services revenues.
Revenues from transactions are generated in two ways. First, we sell
products directly to consumers from ShopNow.com and MyShopNow.com. We record as
revenues the full sales price of the product sold and record the full cost of
the product to us as our cost of goods sold. In these cases, we purchase
products from merchants and sell those products directly to consumers. We bear
all of the credit and loss risks associated with these products. In most cases,
these products are shipped directly from the manufacturer, thus eliminating the
need for us to carry significant inventory. We currently purchase products that
appear on MyShopNow from large and small vendors, manufacturers and distributors
under non-exclusive purchase agreements. These typically have a term of one year
and provide that we pay the vendors an agreed upon fee per product. Second, we
provide the option of transaction processing services for merchants who choose
to sell their products directly to consumers and record the gross sales and cost
of products sold. In this case, we provide transaction processing services and
are paid a transaction fee only and do not record the gross revenues of these
product sales as ShopNow gross revenues.
27
<PAGE>
ShopNow was incorporated in January 1994 and initially operated as a
computer services company. In 1996, we changed the focus of our business to
providing e-commerce and direct marketing services. In August 1998, we launched
ShopNow.com, our shopping destination Web site. In April 1999, we changed our
name from TechWave Inc. to ShopNow.com Inc.
As part of the evolution of our business we have conducted a series of
acquisitions. In January 1997, we acquired Web Solutions and Intelligent
Software Solutions for a purchase price of $341,000. These companies had
electronic delivery systems that we incorporated into our e-commerce products
and service offerings. These delivery systems allow our merchants to sell
certain products, such as software, directly to shoppers as an electronic file
transfer to the shopper rather than shipping the physical product. In order to
accelerate expansion of our online marketplace and e-commerce and direct
marketing services, we acquired The Internet Mall in August 1998 for $2.6
million and Media Assets in September 1998 for $3.3 million. The Internet Mall
operated an online shopping aggregation Web site and provided us with technology
and merchant relationships to assist in the development of our online shopping
aggregation marketplace located at www.shopnow.com. The acquisition of Media
Assets, a direct marketing company, provided us with direct marketing expertise
enabling us to offer expanded direct marketing and e-commerce services to
merchants. In June 1998, we acquired e-Warehouse and CyberTrust, providers of
payment processing technology, for $5.4 million. The technology that we acquired
in these acquisitions is not currently being used by us, and we have determined
that it has no alternative future use or value to our business. As a result, we
have written off substantially all of the $5.4 million aggregate purchase price
for the e-Warehouse and CyberTrust acquisitions. The separate historical
financial information for the acquisition of e-Warehouse and CyberTrust required
to be presented by Rule 3-05 of the Securities and Exchange Commission's
Regulation S-X or the pro forma financial information under Article 11 of
Regulation S-X is not provided elsewhere in this prospectus as we do not have
access to the historical books and records of these companies due to disputes
surrounding these acquisitions. However, we do not consider this historical
financial information meaningful given the write-off of the purchase price as
well as the immateriality of the revenue generated by the acquired companies
during the period before we ceased their operations. In June 1999, we completed
the acquisitions of GO Software for $15.4 million and CardSecure for $3.5
million. GO Software is primarily engaged in the business of developing and
implementing transaction processing software for use in e-commerce and has
existing relationships with more than 10,000 online merchants. CardSecure, a
former subsidiary of 24/7 Media, is a developer of e-commerce-enabled Web sites.
These are Web sites where a merchant can process transactions electronically.
Processing transactions includes establishment of a merchant account and
processing credit card payments. With our acquisition of CardSecure, we acquired
the right to offer the following services, each of which we currently offer:
domain name registration for Web sites, the opportunity to apply for and
establish a merchant bank account, hosting of Web sites and credit card
transaction processing.
In May 1997, we launched BuySoftware.com, an online computer products store.
We generated $4.5 million of revenues through BuySoftware.com in 1998 and $9.9
million of revenues during the first six months of 1999. We ceased operation of
our BuySoftware.com business in June 1999 because it competed directly with some
of our merchants, making them less likely to purchase our other e-commerce and
direct marketing services. The online retail market for computer products is
intensely competitive and has lower margins than our e-commerce services.
Ceasing operation of our BuySoftware.com business will allow us to focus our
financial resources and personnel on the development and expansion of the
ShopNow Network and our e-commerce and direct marketing services rather than
diverting a portion of our limited resources to operating the BuySoftware.com
retail business. Because we continue to be involved in certain retailing
activities, ceasing operation of our BuySoftware.com business did not meet the
criteria for discontinued operations under Accounting Principles Board No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and
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Transactions." Accordingly, the results of our BuySoftware.com business remain
in the results of continuing operations for ShopNow through June 1999.
We enter into agreements with other businesses to expand our product and
service offerings, attract additional visitors to the ShopNow Network, increase
the number of MyShopNow personal stores, enhance our technology, and establish
additional sources of revenue. To date, we have entered into key business
relationships with Chase Manhattan Bank, About.com, 24/7 Media, Qwest
Communications, HNC Software and the ZERON Group.
In July 1999, Chase Manhattan Bank, through one of its affiliates, completed
an $18.9 million equity investment by purchasing 2.1 million shares of our
Series I convertible preferred stock, which will automatically convert into
shares of common stock upon completion of this offering, and entered into an
agreement with ShopNow to launch an Internet shopping site on which ShopNow and
Chase will be featured. Pursuant to this agreement, Chase will pay ShopNow a
licensing fee to use the technology underlying the site. As part of the
agreement, Chase will be a preferred provider of financial services for
ShopNow.com and the exclusive marketer of credit cards featuring the ShopNow
brand. The agreement provides that each party will share in the revenues of the
other party based on the amount of business generated through this relationship.
Specifically, the agreement provides that a party which introduces its merchants
to the other party will receive a percentage of the gross revenues on all
advertising and merchandising received by the other party from that merchant. We
will also pay Chase a percentage of the transactions revenues we receive when we
sell goods or services to Chase consumers or merchants. Additionally, we will
pay Chase a fixed percentage of the gross revenues related to professional
services fees that we receive from Chase consumers and merchants. We believe
that the key advantages that we will derive from our relationship with Chase
include revenues from the licensing fee and the new Internet shopping site. As
part of the agreement, we will participate equally with Chase in a cooperative
marketing fund to promote the services being offered under this agreement. Our
marketing obligations to Chase include placing an advertisement on the
ShopNow.com home page, making direct mailings regarding Chase's merchant
services to merchants on the ShopNow Network and mentioning Chase's merchants in
our own advertising. Our obligation to the fund is to contribute at least $3.0
million annually. The agreement has an initial term of 27 months, with a three-
year renewal period at Chase's option.
In July 1999, we entered into a five-year agreement with About.com, a
leading Internet network of commerce communities. Under this agreement with
About.com and for payment of $2.0 million annually to About.com, we will be the
exclusive generalized shopping directory service on About.com, obtain designated
placement on About.com of a hyperlink to the ShopNow.com Web site and receive a
minimum number of banner ads annually from About.com. This shopping section
gives us access to all visitors to the About.com network, which we believe will
attract additional visitors to the ShopNow Network. According to Media Metrix, a
provider of Internet audience measurement products and services, there were
approximately 8.0 million visitors to About.com in July 1999.
In April 1999, 24/7 Media purchased 4.3 million shares of our Series G
convertible preferred stock, which will automatically convert into shares of
common stock upon completion of this offering, for $30.1 million and entered
into a three-year cross promotion agreement with us. Under the agreement, 24/7
Media promotes our e-commerce and direct marketing services to its networks of
over 2,500 affiliated Web sites in exchange for our promotion of 24/7 Media's
advertising, representation and e-mail management services to merchants. For
example, if 24/7 Media has a client who would benefit from our e-commerce
services, 24/7 Media will refer that client to us. If we have a merchant who
would benefit from the advertising services offered by 24/7 Media, we will refer
that merchant to 24/7 Media. 24/7 Media is primarily a point of distribution for
advertising campaigns that are distributed through banner advertisements on Web
sites or e-mail. Our direct marketing services are oriented towards strategic
planning and creative implementation of online marketing or advertising
campaigns distributed by companies such as 24/7 Media.
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Our agreement entitles each party to share in the revenues of the other
party based on the amount of business generated through this relationship. The
agreement prohibits 24/7 Media from engaging other specifically identified
providers of e-commerce services as co-marketing partners for e-commerce
technologies that we offer. We also have a right of first refusal on any
partnership with 24/7 Media for e-commerce technology or services from other
third parties, assuming we provide similar products and services. We do not
include a link from our site to 24/7 Media's Web site nor do we advertise 24/7
Media on our site. 24/7 Media is the only third party authorized to sell
advertising on our Web site. We also jointly brand 24/7 Media's Click2Buy
transactional banner service with the ShopNow name and receive fees for
processing all Click2Buy transactions. Click2Buy is the process whereby a
shopper can click on a banner advertisement from within a specific Web site and
purchase the product or service in the banner advertisement without having to
leave the Web site where the shopper originally saw the banner advertisement. We
process the transactions through Click2Buy the same as we do the transactions
through our Web site. We believe that this relationship with 24/7 Media will
allow us to establish additional sources of revenues. Under our cross promotion
agreement, we are obligated to purchase at least $1.0 million annually in
shopping traffic from 24/7 Media. Prior to this offering, 24/7 Media
beneficially owned more than 19% of our voting stock, and following this
offering, 24/7 Media will beneficially own more than 15% of our voting stock.
In April 1999, we entered into a three-year distribution and marketing
agreement with Qwest Communications, a telecommunications provider. Our
agreement with Qwest requires us to offer Qwest's communications services,
including residential and business long distance and related services, to
shoppers on the ShopNow Network. Through the agreement we receive a fixed
quarterly payment for 24 months and, in addition, we will also receive a
percentage of the revenues earned by Qwest from Qwest services sold through our
Web sites. We believe that this relationship with Qwest will help us reach a
large number of households and attract additional visitors to the ShopNow
Network. In connection with this agreement, we issued to Qwest warrants to
purchase 100,000 shares of our common stock at an exercise price of $10.00 per
share. Our agreement with Qwest contains a put right that allows Qwest to
require us to purchase the shares at a price of $25.00 per share after June 2001
unless a dollar threshold of revenue transactions has occurred under the
marketing and distribution agreement. Qwest must have exercised the warrants in
order to exercise this right.
In May 1999, HNC Software purchased 333,334 shares of our Series H
convertible preferred stock, which will automatically convert into shares of
common stock upon completion of this offering, for $3.0 million. In addition,
pursuant to our three-year agreements with HNC, HNC will provide us with a
number of e-commerce products at preferential prices, which merchants can use in
connection with the other merchant services we offer and thus allow us to expand
our product and service offerings. The HNC products include targeted marketing,
fraud detection and customer support software. Integration of these products
with our technology platform will allow us to provide merchants with better
tools to manage their customer relationships. The tools will be integrated with
the services we provide to merchants and will not be sold separately to
merchants. In exchange for a license to use HNC's technology, ShopNow agreed to
pay a set-up fee, a monthly fee for the use of HNC's software, a service fee
equal to the greater of a minimum monthly fee or a transaction fee based upon
the number of transactions processed by HNC's software.
In March 1999, the ZERON Group purchased 285,713 shares of our Series G
convertible preferred stock, which will automatically convert into shares of
common stock upon completion of this offering, for $2.0 million, and in April
1999 purchased an additional 428,573 shares of Series G convertible preferred
stock for $3.0 million. Under our agreement, the ZERON Group is assisting us on
a contractual, best-efforts basis in establishing alliances with major companies
in Japan that are seeking expansion into e-commerce as we seek to develop an
international presence in that market. We believe that these alliances will help
us to facilitate our international expansion and will attract additional
visitors to the ShopNow Network. ZERON is not currently referring merchants or
customers to our network. We believe that Japan offers tremendous growth
opportunities for us and allows us the opportunity to aggressively move into
other markets in Asia and throughout the world.
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We generate revenues primarily from transactions, merchandising and merchant
services.
REVENUES FROM TRANSACTIONS. Revenues from transactions are generated in two
ways. First, we sell products directly to consumers from ShopNow.com and
MyShopNow.com. We record as revenues the full sales price of the product sold
and record the full cost of the product to us as our cost of goods sold. In
these cases, we purchase products from merchants and sell those products
directly to consumers. We bear all of the credit and loss risks associated with
these products. In most cases, these products are shipped directly from the
manufacturer, thus eliminating the need for us to carry significant inventory.
We currently purchase products that appear on MyShopNow from large and small
vendors, manufacturers and distributors under non-exclusive purchase agreements.
These typically have a term of one year and provide that we pay the vendors an
agreed upon fee per product. Second, we provide the option of transaction
processing services for merchants who choose to sell their products directly to
consumers and record the gross sales and cost of products sold. In this case, we
provide transaction processing services and are paid a transaction fee only and
do not record the gross revenues of these product sales as ShopNow gross
revenues.
Our gross margin on the products we retail is generally lower than the gross
margins on our other transactions and merchandising services and merchant
services. Revenues and cost of goods sold are recognized when the product has
been shipped or the service has been delivered to the customer. In most cases,
these products are shipped directly from the manufacturers, thus eliminating the
need for us to carry significant inventory.
MERCHANDISING REVENUES. All online advertising and marketing revenues are
recorded as merchandising revenues. Merchandising revenues are generated from
ShopNow.com and MyShopNow.com through advertising, shopper delivery programs,
specific merchandising merchant positions on our sites and from online direct
marketing to our customers through e-mail. We sell to merchants specific
advertising locations, specific placements on our site such as on the home page
or on a category page and e-mails to our customers. Under our shopper delivery
programs to merchants, we commit to deliver a certain level of shopping traffic
to a merchant's site for a fixed fee. Although we do not guarantee a time frame
within which the shopping traffic will be delivered, we generally recognize this
revenue on a straight-line basis based on our estimate for when the traffic will
be delivered. If we do not deliver the required amount of traffic within the
estimated time frame, we extend the term of the agreement until our obligation
have been met. Except for revenues generated from shopper delivery programs,
merchandising revenues are recognized as services are delivered to merchants.
Merchandising agreements typically run for a period of one to four months. Our
credit terms are generally 30 days, with a 2% discount if the full amount is
paid within 10 days. Reserves for potential credit losses are reviewed on an
account by account basis.
REVENUES FROM MERCHANT SERVICES. Merchant services are generated from all
custom developed e-commerce stores, custom traditional direct marketing
services, custom creative services and custom promotional materials. Revenues
from merchant services are recognized on a percentage of completion basis. We
extend credit and bear the full credit risk with respect to sales of
merchandising and merchant services. Our credit terms are generally that the net
amount outstanding is due upon receipt. Reserves for potential credit losses are
reviewed on an account by account basis.
Cost of transactions and merchandising revenues includes the cost to us of
all products and services we sell through our Web sites to shoppers, the cost of
processing transactions, including bank credit card fees and shipping costs,
which are only incurred from retail sales transactions, the portion of the cost
of our Internet telecommunications connections that is directly attributable to
traffic on our Web sites, and the direct labor costs incurred in maintaining and
enhancing our network infrastructure. In order to fulfill our obligations under
our shopper delivery programs, we occasionally purchase shopping traffic from
third parties by placing on their Web sites advertisements that, when clicked on
by a consumer, send the consumer to our Web site. Any shopping traffic that we
purchase from a third party are included as a cost of transactions and
merchandising revenues. Cost of merchant services
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revenues includes all direct labor costs incurred in connection with these
services, as well as fees charged by third-party vendors that have directly
contributed to the design, development and implementation of our merchant
services.
Sales and marketing expenses consist primarily of salaries and commissions
and costs associated with marketing programs such as advertising and public
relations. General and administrative expenses consist primarily of salaries and
other personnel-related costs for executive, financial, human resources,
information services and other administrative personnel, as well as legal,
accounting and insurance costs. Research and development expenses consist
primarily of salaries and related costs associated with the development of new
products and services, the enhancement of existing products and services, and
the performance of quality assurance and documentation activities. Amortization
of intangible assets resulting from acquisitions is primarily related to the
amortization of customer lists, domain names, acquired technology and goodwill.
Stock-based compensation expense is related to the amortization of deferred
compensation resulting from stock option grants to employees with an option
exercise price below the estimated fair market value of our common stock as of
the date of grant. Our impairment of acquired technology relates to our
determination that the technology acquired in the e-Warehouse and CyberTrust
acquisitions has no future use or value to us.
We incurred net losses of $810,000 for the year ended December 31, 1996,
$4.8 million for the year ended December 31, 1997 and $24.7 million for the year
ended December 31, 1998. We also incurred net losses of $26.2 million for the
six months ended June 30, 1999, and had an accumulated deficit of $55.6 million
as of June 30, 1999. As a result of the discontinuation of the BuySoftware.com
business, we expect our transactions and merchandising revenues and cost of
transaction and merchandising revenues to initially decrease for the three
months ended September 30, 1999. However, as a result of our Go Software and
CardSecure acquisitions, we expect our transaction fees and merchant services
revenues to increase thereafter. Financial information reflecting the pro forma
impact of these transactions is included in the Selected Pro Forma Combined
Financial Data located elsewhere in this prospectus. We have entered into
agreements with Chase, About.com and 24/7 Media that require us to make
advertising and marketing expenditures of $6.0 million annually through 2001. We
do not expect to incur significant additional fixed costs in connection with
these agreements or those related to our other key business relationships. We
expect operating losses and negative cash flow to continue for the foreseeable
future. We anticipate our losses will increase significantly from current
levels, as we expect to incur additional costs and expenses related to brand
development, marketing and other promotional activities, deferred compensation
expense, amortization of intangibles resulting from recent acquisitions, the
expansion of our operations, the continued development of the ShopNow Network,
increasing investment in the systems that we use to process customers' orders
and payments, the expansion of our product and service offerings and development
of key business relationships.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues for the six-month period ended June 30, 1999 were $16.0 million
compared to $1.1 million for the six-month period ended June 30, 1998, an
increase of $14.9 million. The increase in revenues was due primarily to
increased product sales from the BuySoftware.com business and from revenues
generated by Media Assets, which we acquired in September 1998. The
BuySoftware.com portion of revenues for the six-month period ended June 30, 1999
were $9.9 million compared to $930,000 for the six-month period ended 1998, an
increase of $9.0 million, or 60.6% of the total increase in revenues for the
period.
TRANSACTIONS AND MERCHANDISING. The transactions and merchandising portion
of revenues for the six-month period ended June 30, 1999 was $11.6 million
compared to $743,000 for the six-month period ended June 30, 1998, an increase
of $10.9 million, or 73.3% of the total increase in revenues. The
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increase in our transactions and merchandising revenues was due primarily to
increased product sales from the BuySoftware.com business. Ceasing the operation
of this business will initially result in a significant decrease in our
transactions and merchandising revenues.
MERCHANT SERVICES. The merchant services portion of revenues for the
six-month period ended June 30, 1999 was $4.4 million compared to $396,000 for
the six-month period ended June 30, 1998, an increase of $4.0 million, or 26.7%
of the total increase in revenues. The increase in our merchant services
revenues was due primarily to revenues generated from Media Assets, which we
acquired in September 1998.
COST OF REVENUES
The cost of revenues for the six-month period ended June 30, 1999 was $14.7
million compared to $1.2 million for the six-month period ended June 30, 1998,
an increase of $13.5 million. The increase in our cost of revenues was due
primarily to increased product sales from the BuySoftware.com business and cost
of revenues of Media Assets, which we acquired in September 1998. The
BuySoftware.com portion of cost of revenues for the six-month period ended June
30, 1999 was $11.2 million compared to $1.1 million for the six-month period
ended June 30, 1998, an increase of $10.1 million, or 74.8% of the total
increase in the cost of revenues.
TRANSACTIONS AND MERCHANDISING. The transactions and merchandising portion
of cost of revenues for the six-month period ended June 30, 1999 was $12.2
million compared to $1.1 million for the six-month period ended June 30, 1998,
an increase of $11.1 million, or 82.4% of the total increase in cost of
revenues. The increase in our transactions and merchandising cost of revenues
was due primarily to increased product sales from the BuySoftware.com business.
Ceasing the operation of this business will initially result in a significant
decrease in our cost of transactions and merchandising revenues.
MERCHANT SERVICES. The merchant services portion of cost of revenues for
the six-month period ended June 30, 1999 was $2.5 million compared to $127,000
for the six-month period ended June 30, 1998, an increase of $2.4 million, or
17.6% of the total increase in cost of revenues. The increase in our merchant
services cost of revenues was due primarily to cost of revenues incurred by
Media Assets subsequent to acquisition.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses for the six-month period
ended June 30, 1999 were $18.3 million compared to $4.5 million for the
six-month period ended June 30, 1998, an increase of $13.8 million. The increase
was due primarily to increased spending as a result of our launch and expansion
of the ShopNow Network in 1998, including additional personnel and nation-wide
print and radio ads. We expect to increase our sales and marketing expenses in
1999 through both online and traditional advertising to promote the ShopNow
Network.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
six-month period ended June 30, 1999 were $2.5 million compared to $1.4 million
for the six-month period ended June 30, 1998, an increase of $1.1 million. The
increase was due primarily to an increase in personnel from internal growth and
acquisitions. We anticipate continued growth in our general and administrative
expenses in 1999. In September 1999, we settled a lawsuit brought by a party
with which we had entered into a contract. Pursuant to the terms of the
settlement, we will pay the other party $1.5 million. As a result of the terms
of this settlement, in the quarter ended September 30, 1999, we expect to
recognize additional general and administrative expenses in the amount of $1.5
million.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
six-month period ended June 30, 1999 were $2.9 million compared to $1.4 million
for the six-month period ended June 30, 1998, an increase of $1.5 million. The
increase was due primarily to the development and enhancement of our technology
platform, as well as to an increase in technology personnel. These employees
focus
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on developing our technology platform as well as building the overall
infrastructure that supports the ShopNow Network. We anticipate continued growth
in our research and development expenses in 1999.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
expense for the six-month period ended June 30, 1999 was $1.6 million compared
to $118,000 for the same period ended June 30, 1998, an increase of $1.5
million. The increase was due primarily to the increase in intangible assets and
related amortization expenses from business acquisitions completed during the
second half of 1998, including Media Assets and The Internet Mall. The
acquisitions of GO Software and CardSecure, as well as possible future business
acquisitions, will result in a significant increase in amortization of
intangible assets expense.
STOCK-BASED COMPENSATION. Stock-based compensation expense for the
six-month period ended June 30, 1999 was $2.0 million compared to $2,000 for the
six-month period ended June 30, 1998, an increase of $2.0 million. The expense
is related to employee stock option grants with option exercise prices below the
estimated fair market value of our common stock as of the date of grant. The
amount of deferred compensation resulting from these grants is generally
amortized over a three-year period as stock-based compensation expense. In May
1999, we granted stock options to certain employees who joined ShopNow as part
of our acquisition of Media Assets. These grants resulted in a one-time stock-
based compensation expense of $830,000 during the second quarter of 1999.
OTHER INCOME (EXPENSE), NET
Other expense, net for the six-month period ended June 30, 1999 was
$245,000, compared to other income, net of $109,000 for the six-month period
ended June 30, 1998, a decrease of $354,000. The decrease was due primarily to
an increase in our debt obligations during the six-month period ended June 30,
1999, which resulted in an increase in interest expense. Other income (expense),
net consists primarily of interest income on cash and cash equivalents and
interest expense on our debt.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Revenues for the year ended December 31, 1998 were $7.2 million compared to
$604,000 for the year ended December 31, 1997, an increase of $6.6 million. The
increase in revenues was due primarily to increased product sales from the
BuySoftware.com business and revenues generated by Media Assets, which we
acquired in September 1998. The BuySoftware.com portion of revenues for the year
ended December 31, 1998 was $4.5 million compared to $69,000 for the year ended
December 31, 1998, an increase of $4.4 million, or 67.0% of the total increase
in revenues for the period.
TRANSACTIONS AND MERCHANDISING. The transactions and merchandising portion
of revenues for the year ended December 31, 1998 was $4.2 million compared to
$69,000 for the year ended December 31, 1997, an increase of $4.1 million, or
63.2% of the total increase in revenues. The increase in our transactions and
merchandising revenues was due primarily to increased product sales from the
BuySoftware.com business.
MERCHANT SERVICES. The merchant services portion of revenues for the year
ended December 31, 1998 was $2.9 million compared to $535,000 for the year ended
December 31, 1997, an increase of $2.4 million, or 36.8% of the total increase
in revenues. The increase in our merchant services revenues was due primarily to
revenues generated from Media Assets, which we acquired in September 1998.
Revenues in 1997 were generated from our previous business of providing computer
services to clients, which was completely phased out in early 1998. These
computer services consisted primarily of providing computer training, consulting
and Web site design to businesses.
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COST OF REVENUES
The cost of revenues for the year ended December 31, 1998 was $5.8 million
compared to $515,000 for the year ended December 31, 1997, an increase of $5.3
million. The increase in our cost of revenues was due primarily to increased
product sales from the BuySoftware.com business and cost of revenues incurred by
Media Assets, which we acquired in September 1998. The BuySoftware.com portion
of cost of revenues for the year ended December 31, 1998 was $4.4 million
compared to $124,000 for the year ended December 31, 1997, an increase of $4.3
million, or 81.2% of the total increase in cost of revenues.
TRANSACTIONS AND MERCHANDISING. The transactions and merchandising portion
of cost of revenues for the year ended December 31, 1998 was $4.5 million
compared to $159,000 for the year ended December 31, 1997, an increase of $4.3
million, or 81.3% of the total increase in cost of revenues. The increase in our
transactions and merchandising cost of revenues was due primarily to increased
product sales from the BuySoftware.com business.
MERCHANT SERVICES. The merchant services portion of cost of revenues for
the year ended December 31, 1998 was $1.4 million compared to $356,000 for the
year ended December 31, 1997, an increase of $1.0 million, or 18.7% of the total
increase in cost of revenues. The increase in our merchant services cost of
revenues was due primarily to cost of revenues incurred by Media Assets, which
we acquired in September 1998. Cost of revenues for 1997 were comprised solely
of direct labor and related costs to provide computer services to clients.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses for the year ended
December 31, 1998 were $12.2 million compared to $1.2 million for the year ended
December 31, 1997, an increase of $11.0 million. The increase was due primarily
to increased spending as a result of the development and expansion of the
ShopNow Network. Substantially all of the selling expenses incurred in 1997 were
in support of our previous computer services business, which was completely
phased out in early 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1998 were $3.5 million compared to $918,000 for the year
ended December 31, 1997, an increase of $2.6 million. The increase was due
primarily to an increase in personnel from internal growth and acquisitions.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 1998 were $4.4 million compared to $2.4 million for the year
ended December 31, 1997, an increase of $2.0 million. The increase was due
primarily to the development of our technology platform and an increase in our
technology personnel as well as building the overall infrastructure that
supports the ShopNow Network.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
expense for the year ended December 31, 1998 was $730,000 compared to $136,000
for the year ended December 31, 1997, an increase of $594,000. The acquisition
of Media Assets and The Internet Mall resulted in $387,000 of this increase. The
remainder of this increase resulted from other purchases of intangible assets
including domain names and customer lists.
STOCK-BASED COMPENSATION. Stock-based compensation expense for the year
ended December 31, 1998 was $182,000 compared to no expense for the same period
ended December 31, 1997, an increase of $182,000. The expenses are related to
employee stock option grants with option exercise prices below the estimated
fair market value of our common stock as of the date of grant. The amount of
deferred compensation resulting from these grants is generally amortized over a
three-year period as stock-based compensation expense.
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UNUSUAL ITEM - IMPAIRMENT OF ACQUIRED TECHNOLOGY. In June 1998, we acquired
e-Warehouse and CyberTrust with the intent of integrating the acquired
technologies with our own e-commerce product offerings. The amount we paid for
these acquisitions was $5.4 million. We are presently not utilizing the acquired
technologies and have determined that they have no alternative future use or
value to us as our technology platform provides superior functionality. As a
result, we wrote-off $5.2 million of the purchase price during the fourth
quarter of 1998.
OTHER INCOME (EXPENSE), NET
Other income, net for the year ended December 31, 1998 was $171,000,
compared to $164,000 of other expense, net for the year ended December 31, 1997,
an increase of $335,000. The increase was due primarily to increased interest
income earned by our increased cash reserves as a result of our financing
activities during 1998 as compared to 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Revenues for the year ended December 31, 1997 were $604,000 compared to
$993,000 for the year ended December 31, 1996, a decrease of $389,000. The
overall decrease was due primarily to the phase out of our computer services
business that began in late 1997.
TRANSACTIONS AND MERCHANDISING. The transactions and merchandising portion
of revenues for the year ended December 31, 1997 was $69,000 compared to no
revenues for the year ended December 31, 1996. All of transactions and
merchandising revenues were attributable to the BuySoftware.com business.
MERCHANT SERVICES. The merchant services portion of revenues for the year
ended December 31, 1997 was $535,000 compared to $993,000 for the year ended
December 31, 1996, a decrease of $458,000 or 117.7% of the total decrease in
revenues. All of merchant services were related to providing computer services
to businesses.
COST OF REVENUES
The cost of revenues for the year ended December 31, 1997 was $515,000
compared to $430,000 for the year ended December 31, 1996, an increase of
$85,000. The overall increase in cost of revenues was due to the cost of
developing the BuySoftware.com business, partially offset by the phase out of
our computer services business.
TRANSACTIONS AND MERCHANDISING. The transactions and merchandising portion
of cost of revenues for the year ended December 31, 1997 was $159,000 compared
to no cost of revenues for the year ended December 31, 1996, an increase of
$159,000, or 187.1% of the total increase in cost of revenues. All of
transactions and merchandising cost of revenues were attributable to the
BuySoftware.com business, which initially incurred higher cost of revenues as
the business was being developed.
MERCHANT SERVICES. The merchant services portion of cost of revenues for
the year ended December 31, 1997 was $356,000 compared to $430,000 for the year
ended December 31, 1996, a decrease of $74,000. The decrease was due primarily
to decreased direct labor and other costs incurred in delivering our previous
business of providing computer services to clients. All of merchant services
were related to providing computer services to businesses.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses for the year ended
December 31, 1997 were $1.2 million compared to $610,000 for the year ended
December 31, 1996, an increase of $591,000. The increase was due primarily to
increased spending as a result of development and expansion of our e-commerce
and direct marketing business. In the year ended December 31, 1997, $644,000 of
the sales
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and marketing expenses were in support of our previous computer services
business compared to $610,000 of such expenses in the year ended December 31,
1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1997 were $918,000 compared to $656,000 for the year
ended December 31, 1996, an increase of $262,000. The increase was due primarily
to an increase in employees to support our growth and transition to an
e-commerce and direct marketing business.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 1997 were $2.4 million compared to $25,000 for the year ended
December 31, 1996, an increase of $2.4 million. The increase was entirely due to
the development of our technology platform, which began in 1997 to support our
growth and transition to an e-commerce and direct marketing business.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
expense for the year ended December 31, 1997 was $136,000 compared to $32,000
for the year ended December 31, 1996, an increase of $104,000. The increase was
due primarily to various acquisitions of Web domain names during 1997, resulting
in an increase in amortization of intangible assets expense recorded from these
transactions.
OTHER (INCOME) EXPENSE, NET
Other expense, net for the year ended December 31, 1997 was $164,000
compared to $50,000 for the year ended December 31, 1996, an increase of
$114,000. The increase was due primarily to increased interest expense from our
various financing activities by means of notes payable and lines of credit with
commercial banks.
NET OPERATING LOSS CARRYFORWARDS
As of June 30, 1999, we had net operating loss carryforwards of
approximately $47.0 million. If not used, the net operating loss carryforwards
will expire at various dates beginning in 2012. The Tax Reform Act of 1986
imposes restrictions on the use of net operating losses and tax credits in the
event that there has been an "ownership change" of a corporation since the
periods in which the net operating losses were incurred. Our ability to use net
operating losses incurred prior to April 1998 is limited to approximately $3.0
million per year due to sales of convertible preferred stock to third parties
that have resulted in an "ownership change." The ownership change related to the
sale of Series D and Series E convertible preferred stock. We have provided a
full valuation allowance on our deferred tax assets because of the uncertainty
regarding their realization. Our accounting for deferred taxes involves the
evaluation of a number of factors concerning the realizability of our deferred
tax assets. In concluding that a full valuation allowance was required,
management considered such factors as our history of operating losses, potential
future losses and the nature of our deferred tax assets. See Note 10 to the
Consolidated Financial Statements appearing elsewhere in this prospectus.
SELECTED CONSOLIDATED PRO FORMA QUARTERLY FINANCIAL DATA
The following table sets forth selected consolidated quarterly financial
data on a pro forma basis for 1998 and the first two quarters of 1999. The
financial data presented below excludes our BuySoftware.com business for all
periods presented and includes the operations of Media Assets, The Internet Mall
and GO Software as if we had acquired them on January 1, 1998. Because our
business has changed significantly due to these acquisitions and ceasing the
operation of the BuySoftware.com business discussed previously, we believe that
the pro forma information provides a better reflection of our existing business
than the historical data provided elsewhere in this prospectus. All data is
unaudited, has been prepared on the same basis as the audited financial
statements and, in the opinion of management, includes all adjustments,
consisting only of normal recurring adjustments, considered
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necessary for a full presentation of such information when read in conjunction
with the financial statements and accompanying notes appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
----------- ----------- ------------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Transactions and merchandising........................ $ 336 $ 411 $ 417 $ 637 $ 775
Merchant services..................................... 1,092 1,975 2,283 1,899 1,729
----------- ----------- ------------- ------------ -----------
Total revenues...................................... 1,428 2,386 2,700 2,536 2,504
----------- ----------- ------------- ------------ -----------
Cost of revenues:
Transactions and merchandising........................ 21 27 36 137 325
Merchant services..................................... 656 1,133 1,289 985 952
----------- ----------- ------------- ------------ -----------
Total cost of revenues.............................. 677 1,160 1,325 1,122 1,277
----------- ----------- ------------- ------------ -----------
Gross profit...................................... 751 1,226 1,375 1,414 1,227
----------- ----------- ------------- ------------ -----------
Operating expenses:
Sales and marketing................................... 1,272 3,129 2,653 3,737 4,453
General and administrative............................ 667 1,090 1,133 1,175 1,264
Research and development.............................. 375 847 1,282 1,172 1,679
Amortization of intangible assets..................... 1,568 1,571 1,570 1,589 1,758
Stock-based compensation.............................. -- 2 35 145 132
Unusual item--impairment of acquired technology....... -- -- -- 5,207 --
----------- ----------- ------------- ------------ -----------
Total operating expenses............................ 3,882 6,639 6,673 13,025 9,286
----------- ----------- ------------- ------------ -----------
Loss from operations.............................. (3,131) (5,413) (5,298) (11,611) (8,059)
Other income (expense), net............................. (10) 67 57 (23) (3)
----------- ----------- ------------- ------------ -----------
Net loss.......................................... $ (3,141) $ (5,346) $ (5,241) $ (11,634) $ (8,062)
----------- ----------- ------------- ------------ -----------
----------- ----------- ------------- ------------ -----------
<CAPTION>
JUNE 30,
1999
---------
<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Transactions and merchandising........................ $ 1,836
Merchant services..................................... 2,447
---------
Total revenues...................................... 4,283
---------
Cost of revenues:
Transactions and merchandising........................ 744
Merchant services..................................... 1,517
---------
Total cost of revenues.............................. 2,261
---------
Gross profit...................................... 2,022
---------
Operating expenses:
Sales and marketing................................... 11,112
General and administrative............................ 1,294
Research and development.............................. 1,427
Amortization of intangible assets..................... 1,880
Stock-based compensation.............................. 1,824
Unusual item--impairment of acquired technology....... --
---------
Total operating expenses............................ 17,537
---------
Loss from operations.............................. (15,515)
Other income (expense), net............................. (280)
---------
Net loss.......................................... $ (15,795)
---------
---------
</TABLE>
The growth in total revenues for the quarter ended June 30, 1999 is
attributable to increasing amounts of transactions and merchandising revenues
from the expansion of our ShopNow Network, as well as increased revenues from
merchant services, derived primarily from Media Assets. When we acquired Media
Assets in September 1998 and launched the ShopNow Web site in August 1998, we
shifted our focus from generating revenues from merchant services to generating
revenues from transactions and merchandising. As a result, revenues from
transactions and merchandising increased significantly from the quarter ended
September 30, 1998, while revenues from merchant services decreased in
subsequent quarters. We anticipate that transactions and merchandising revenues
will continue to increase at a faster rate than revenues from merchant services.
Although we have experienced recent growth in revenues from our current
operations, the number of MyShopNow personal stores, visitors to ShopNow.com and
the number of merchants on the ShopNow Network, these historical growth rates
are not sustainable and are not indicative of future growth rates that we may
achieve. We believe that period-to-period comparisons of our operating results
are not meaningful and that you should not rely on the performance of any period
as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have experienced net losses and negative cash flows from
operations, and as of June 30, 1999 had an accumulated deficit of $55.6 million.
We have financed our activities largely through issuances of common stock and
preferred stock, from the issuance of short-term and long-term obligations and
from capital leasing transactions for certain of our fixed asset purchases.
Through June 30, 1999, our aggregate net proceeds have been $49.7 million from
issuing equity securities and $20.0 million from issuing debt securities. Since
June 30, 1999, we have raised an additional $18.9 million in cash from the sale
of convertible preferred stock. As of June 30, 1999, we had $6.5 million in cash
and short-term investments.
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Net cash used in operating activities was $18.8 million for the six-month
period ended June 30, 1999, compared to net cash used in operating activities of
$6.3 million for the same period of 1998. The increase was due primarily to the
increase in our net loss for the six-month period ended June 30, 1999, of $26.2
million compared to $7.3 million for the same six-month period ended 1998.
Net cash used in investing activities was $10.1 million for the six-month
period ended June 30, 1999, compared to net cash used in investing activities of
$6.6 million for the same period of 1998. The increase was due primarily to the
increase in purchases of property and equipment of $5.3 million for the
six-month period ended June 30, 1999, compared to $1.8 million for the six-month
period ended June 30, 1998.
Net cash provided by financing activities was $25.3 million for the
six-month period ended June 30, 1999, compared to net cash provided by financing
activities of $20.2 million for the six-month period ended June 30, 1998. The
increase was due primarily to proceeds from the issuance of debt of $11.6
million during the six-month period ended June 30, 1999, compared to proceeds
from the issuance of debt of $38,000 during the six-month period ended June 30,
1998, partially offset by the decrease in the amount of net proceeds from
issuances of convertible preferred stock from $14.4 million during the six-month
period ended June 30, 1999 to $22.0 million during the six-month period ended
June 30, 1998.
In March 1999, we entered into a loan and security agreement with
Transamerica Business Credit Corporation for a term loan and line of credit. In
June 1999, the agreement was amended and restated allowing us to borrow up to
$8.5 million at any one time, consisting of a $3.5 million term loan, $4.0
million bridge loan and a line of credit of up to $2.5 million, initially capped
at $1.0 million until the bridge loan is repaid. The current principal amount of
outstanding borrowings with Transamerica consist of a $3.5 million term loan, a
$4.0 million bridge loan and a $1.0 million line of credit. The line of credit
bears interest at the Transamerica Business Credit Corporation's base rate plus
2%, is secured by substantially all of our assets and expires on March 31, 2000.
The interest rate for July 1999 was an annual rate of 10%. The term loan bears
interest at 12%, is secured by substantially all of our assets and matures in
March 2002. The bridge loan bears interest at 12% and is due upon the earlier of
December 1, 1999 or the closing of a debt or equity financing by us exceeding
$10.0 million. At June 30, 1999 we also had a total of $1.6 million outstanding
on two promissory notes issued in business acquisitions. One of the notes, in
the amount of $1.0 million, bearing an interest rate of 10%, is due June 15,
2000 or the effective date of an initial public offering of our common stock, at
which time the note is convertible into shares of common stock. The other note
is to be paid off in quarterly installments of $112,500 through October 1, 2000.
Our capital requirements depend on numerous factors, including the rate of
expansion of the ShopNow Network, the investments we make in our technology
platform, the number of acquisitions, if any, that are completed and the
composition of the consideration between cash and stock for those acquisitions
and the resources we devote to expansion of our sales, marketing and branding
programs. We have also entered into agreements with Chase, About.com and 24/7
Media that require us to make advertising and marketing expenditures of $6.0
million annually through 2001. We believe that existing cash balances and cash
generated from operations, together with the net proceeds from this offering,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures in the short-term (for the next 12 months), and at least
through the next 18 months. After that time, we may be required to raise
additional financing. There can be no assurance that the assumed levels of
revenues and expenses underlying our anticipated cash needs will prove to be
accurate. The sale of additional equity or convertible debt securities could
result in additional dilution to our shareholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, or
even available at all.
We are currently contemplating entering into a new secured credit facility
with terms and interest customary for transactions of this type. We expect the
maximum amount of borrowings available under such new facility to be between $10
million and $30 million. If we enter into this new credit facility,
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some of the borrowings under this credit arrangement will be used to repay all
outstanding indebtedness under the term loan and line of credit with
Transamerica Business Credit Corporation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE." Statement of Position 98-1 is effective
for financial statements for years beginning after December 15, 1998. Statement
of Position 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The implementation of Statement
of Position 98-1 did not have a material impact on our financial position or
operating results.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES."
Statement of Position 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the implementation of Statement of Position 98-5 did not have a
material effect on our financial condition or operating results.
SEASONALITY
We believe that retail transactions and advertising sales in traditional
media, such as television and radio, generally are lower in the first and third
calendar quarters of each year. In addition, Internet usage typically declines
during the summer and certain holiday periods. If our market makes the
transition from an emerging to a more developed market, seasonal and cyclical
patterns may develop in our industry and in the usage of, and transactions on,
our Web sites and those of our merchants. Seasonal and cyclical patterns in
online transactions and advertising would affect our revenues. Those patterns
may also develop on our Web sites. Given the early stage of the development of
the Internet and our company, however, we cannot predict to what extent, if at
all, our operations will prove to be seasonal.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
OVERVIEW. Many currently installed computer systems and software products
are coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in system
failures, delays or miscalculations.
STATE OF READINESS. We rely on proprietary, as well as third-party,
software in the operation of our business. Year 2000 testing of our proprietary
software is part of our on-going, internal quality assurance testing. To date,
we have tested our core proprietary software to determine whether it is Year
2000 compliant. Because our user interface software frequently changes we do not
test each revision to determine if it is Year 2000 compliant. By September 1999,
we expect to have incorporated Year 2000 compliance testing into our user
interface development process. For our third-party software, we have obtained
Year 2000 compliance certificates from the companies from which we license
software that is critical to the day-to-day operation of our business. Through
August 15, 1999, we contacted approximately 80% of our third-party software
suppliers to obtain Year 2000 compliance statements with respect to the software
that we license from such companies. With respect to the companies from which we
obtain critical outsourcing services, or with which we have key business
relationships, we attempt to obtain warranties that such software is Year 2000
compliant. We have received such warranties from the companies from which we
obtain critical outsourcing services and with which we have key business
relationships.
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COSTS. To date, we have incurred less than $250,000 in third-party expenses
as a result of our Year 2000 compliance efforts, which include an on-going
review of our systems by an outside consulting company. If the review uncovers
any Year 2000 problem related to our internal systems, we could incur
substantial costs to remedy the problem. For example, we might have to purchase
additional hardware or software and we could incur additional administrative
costs. The exact costs would depend upon the scope of the problem. The actual
occurrence of a Year 2000 problem could result in delays or losses of revenue,
interruptions of Internet communications, cancellations of contracts by our
customers, diversions of our development resources, damage to our reputation,
increased service and warranty costs and litigation costs.
WORST-CASE SCENARIO. We believe that our worst-case scenario would involve
an unanticipated defect in one or more of our critical hardware or software
systems or those of a critical outsourcing or business partner, resulting in an
inability to maintain and operate our Web sites or process transactions
generated by our Web sites. Such a defect would interrupt our business and
expose us to breach of contract and other claims against us by our customers,
merchants and business affiliates.
RISKS. We are not currently aware of any internal Year 2000 compliance
problem that could reasonably be expected to have a material adverse effect on
our business, operating results or financial condition, without taking into
account our Year 2000 remediation efforts. However, we may discover
unanticipated Year 2000 compliance problems in our computer infrastructure that
will require substantial revisions or replacements. In addition, third-party
software, hardware, or services incorporated into our material systems or other
systems upon which we rely may need to be revised or replaced, which could be
time consuming and expensive.
The computer systems of governmental agencies, utility companies, Internet
access companies, third-party service providers and others outside of our
control may not be Year 2000 compliant. The failure by such entities to achieve
timely Year 2000 compliance could result in a systemic failure beyond our
control, such as prolonged Internet, telecommunications, or electrical failures.
This could prevent shoppers and merchants from accessing our systems, which
could harm our business, operating results, and financial condition. In
addition, the computer systems of the merchants who are part of the ShopNow
Network may not be Year 2000 compliant. The failure by such entities to achieve
timely Year 2000 compliance could prevent shoppers from consummating
transactions through the ShopNow Network, which could harm our business,
operating results and financial condition.
CONTINGENCY PLAN. Because we regularly deploy new software, we believe that
we must regularly test our software and other systems for Year 2000 problems. To
conduct this testing, we have assembled a Year 2000 compliance team, headed by
personnel from our quality assurance department. The compliance team has begun a
phased approach to attempt to mitigate the possible effects of Year 2000 issues.
As part of this initiative, the compliance team periodically implements code
reviews to attempt to identify and isolate Year 2000 issues. Beginning in
September 1999, we will conduct monthly Year 2000 testing by physically setting
the date forward on our computer systems to the year 2000. On December 31, 1999,
we plan to have personnel monitor our systems and software for Year 2000 issues,
which our compliance team will then address.
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BUSINESS
OVERVIEW
ShopNow provides shoppers and merchants with an online marketplace and
provides merchants with a variety of e-commerce and direct marketing services.
The ShopNow Network, our online marketplace, is comprised of ShopNow.com,
MyShopNow.com and the individual Web sites of merchants that are connected by
hyperlink to the ShopNow Network. The ShopNow.com Web site aggregates more than
1 million products and services from more than 30,000 merchants. ShopNow
receives revenues of $100 or more per year from less than 350 merchants on
ShopNow.com and MyShopNow.com. The remaining merchants receive free promotional
listings on ShopNow.com and MyShopNow.com or pay less than $100 per year.
ShopNow.com includes categories of information and lists of stores that shoppers
can browse, sort and rapidly search by category, merchant or product.
MyShopNow.com enables shoppers to create their own personalized shopping Web
sites by selecting the types of products and services offered to them. In July
1999, the ShopNow Network attracted more than 2 million visits. We believe that
our online marketplace focused principally on shopping will continue to attract
an increasing number of Internet users who are interested in purchasing products
and services on the Web. As the number of shoppers on the ShopNow Network
increases, we believe that we will attract additional merchants by providing
them with the opportunity to increase online transaction volume.
With the rapid growth in the use of the Internet, many businesses are
engaging in e-commerce, which consists of marketing and selling products and
services directly online. To assist merchants in their online efforts, we
provide e-commerce services ranging from a listing on ShopNow.com to the design,
creation and maintenance of an online store complete with back-end support
services, such as payment and order processing, fraud prevention and customer
order fulfillment. Our direct marketing services, which include merchandising
programs, online direct mail promotions, creative services, four levels of
listing on the ShopNow Network and transaction reporting, enable merchants to
promote their brands, products, services and e-commerce presence through
traditional and online direct marketing methods. We intend to increase our use
of the demographic and shopper preference data that we collect to provide more
focused direct marketing services.
INDUSTRY BACKGROUND
RAPID GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has grown in less than a decade from a limited research tool
into a global network consisting of millions of computers and users. The
Internet is an increasingly significant medium for communication, information
and commerce. International Data Corporation, or IDC, estimates that at the end
of 1998 there were over 51 million Web users in the United States and over 97
million Web users worldwide and that by the end of 2002 the number of Web users
will increase to over 135 million in the United States and to over 319 million
worldwide.
The rapid growth of the Internet has given both shoppers and merchants the
opportunity to conduct an increasing amount of commerce online. We believe that
online shopping offers numerous advantages to both shoppers and merchants.
Shoppers receive increased selection, access to competitive prices, and the
convenience of being able to shop on the Web at any time from a single location.
The Internet enables merchants to reach a global audience and operate with
limited infrastructure, reduced overhead and greater economies of scale. By
facilitating access to information, the Internet enables merchants to give
shoppers more detailed product information while affording merchants the
opportunity to obtain detailed information about the shoppers purchasing their
products. These advantages are resulting in a dramatic increase in the amount of
commerce conducted over the Internet and the number of merchants advertising and
selling goods and services online. According to IDC, worldwide transactions on
the Internet are expected to increase from approximately $32 billion in
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1998 to approximately $426 billion in 2002, with the number of users that have
bought products and services online rising from approximately 28 million to
approximately 128 million worldwide during the same period.
CHALLENGES FACING ONLINE SHOPPERS
The advantages of online shopping over traditional shopping and the popular
acceptance of early online merchants are making an online presence essential for
many traditional merchants. The resulting increase in merchants selling products
and services online has led to rapid growth in the number of e-commerce
opportunities for shoppers. This rapid growth is creating a number of challenges
for shoppers as they seek to realize the potential benefits of shopping online,
which in turn increases the market for services that assist shoppers in
evaluating online buying opportunities and making online purchases.
PROLIFERATION OF BUYING OPPORTUNITIES. The rapid growth of e-commerce is
inundating shoppers with new buying opportunities. The relatively modest cost of
setting up a Web site enables merchants of all types, including traditional and
online retailers, manufacturers, catalog companies and individual sellers, to
offer their products directly to online shoppers. As these merchants attempt to
create online visibility, shoppers are being exposed to an increasing number of
Web site addresses and buying opportunities through both online and traditional
marketing methods. The confusion caused by these marketing efforts, the number
of new merchants and the limited e-commerce experience of many shoppers often
makes it difficult for shoppers to screen the available information and locate
the online merchants best suited to their needs.
NEED FOR ADDITIONAL ONLINE MARKETPLACES. Shoppers have few solutions to
help them rapidly evaluate the large number of merchants and products marketed
on the Internet in an organized fashion. The Internet search engines offered on
the home pages of Web directories, also known as portal sites, do not cater
principally to online shoppers and often generate hundreds of irrelevant search
results because they search based on content, regardless of whether the content
is e-commerce related. As a result, unless a shopper knows a merchant's specific
Web site address, the shopper may have difficulty locating a specific product or
service on the Internet. In addition, the home pages of these portal sites limit
the space available for shopping-related advertising and direct marketing
promotions that bring appealing e-commerce opportunities to shoppers' attention.
As a result, shoppers need more online marketplaces that focus on e-commerce and
help shoppers rapidly search for merchants and products marketed on the
Internet.
IMPEDIMENTS TO ONLINE TRANSACTIONS. Despite the recent growth in
e-commerce, many shoppers have limited experience buying goods and services over
the Internet. Many Web sites are not user-friendly for shoppers because they are
not formatted in a way that allows shoppers to quickly obtain the information
necessary to complete e-commerce transactions. We believe that this can
frustrate or deter shoppers from making online purchases. The lack of uniformity
in Web site design also hinders the efficiency of online shopping. Many shoppers
lack the technical expertise necessary to determine whether the online security
measures that a merchant employs are satisfactory. Consequently, shoppers may be
reluctant to transact business online due to concerns that they will not receive
their merchandise or that their confidential information will be obtained by an
unauthorized person.
CHALLENGES FACING ONLINE MERCHANTS
Merchants increasingly are determining that they need an online presence to
take advantage of the rapid growth and benefits of e-commerce. The emergence of
e-commerce as a viable means for transacting business represents a paradigm
shift for merchants who can now offer their products twenty-four hours a day to
shoppers anywhere in the world with limited infrastructure. Despite the
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rapid growth in e-commerce, many merchants are facing a number of challenges in
attempting to capitalize on the opportunities presented by conducting business
on the Internet.
RESOURCES REQUIRED TO IMPLEMENT AN EFFECTIVE E-COMMERCE
CAPABILITY. Although the costs required to establish a simple non-commercial
Web site are relatively modest, merchants of all sizes must invest a significant
amount of capital and technical resources to develop and maintain an effective
e-commerce presence, which typically includes multiple components such as
transaction processing, online security measures and customer order fulfillment.
To maximize effectiveness, these components must be seamlessly integrated
through the use of appropriate technology and implemented in a timely manner. In
addition, the rapidly evolving nature of e-commerce technology necessitates
timely upgrades and significant continuing investment in highly-skilled
technical personnel in order to maintain an advanced e-commerce solution.
Merchants who choose to develop and maintain an e-commerce presence internally
typically must divert valuable technical personnel away from other important
tasks. Even those merchants who decide to outsource the development and
maintenance of their e-commerce capability through multiple vendors typically
must devote significant technical expertise to integrate the various components
and interact with the vendors.
VISIBILITY TO SHOPPERS. Due to the growing importance of e-commerce,
merchants need an effective means to communicate with a targeted online audience
for their products and services in a manner that maximizes their brand
recognition. Even traditional merchants with established brands need to create
visibility online to distinguish themselves from the significant number of
sellers marketing products and services over the Internet. Achieving widespread
brand identity in a market where shoppers are being inundated with
Internet-related advertising requires a comprehensive direct marketing strategy
that focuses on attracting the appropriate online shoppers. These direct
marketing efforts often include both online methods, such as banner and other
hyperlink advertisements and e-mail communications, as well as traditional
methods, such as direct mail. To maximize the effectiveness of these direct
marketing efforts, creative services that can effectively position a merchant's
business and its products and services must be employed.
ACQUISITION AND RETENTION OF CUSTOMERS. Even those merchants who have
substantial brand identity among consumers may have difficulty converting this
general visibility into online purchases, as many merchants lack the knowledge
and expertise needed to sell products and services online. Online advertising is
currently concentrated on the home pages of portal Web sites, which are not
principally focused on shopping. As a result, much of the traffic that these
advertisements generate on a merchant's Web site may not be from individuals
interested in making retail purchases. Merchants need strategies to reach
concentrated groups of Internet users and to convert these users into
purchasers. In order to retain these customers, merchants must also continually
improve the process for purchasing products and services through their Web sites
while providing secure, easy-to-use formats for online transactions.
NEED OF SHOPPERS AND MERCHANTS FOR AN EFFECTIVE E-COMMERCE SOLUTION
To take advantage of the opportunities presented by e-commerce, both
shoppers and merchants need an effective solution that addresses the challenges
of buying and selling products and services online. A solution that enables
merchants to easily develop and maintain an effective online presence will allow
more merchants to transact business online, thereby increasing the variety of
products and services offered over the Internet. An increase in the variety of
products and services marketed online will attract more shoppers online,
increasing the pool of potential customers for e-commerce enabled merchants.
THE SHOPNOW SOLUTION
We provide shoppers and merchants with an online marketplace and provide
merchants with a variety of e-commerce and direct marketing services. The
ShopNow Network, our online marketplace,
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is comprised of ShopNow.com, MyShopNow.com and the Web sites of merchants that
are connected by hyperlink to the ShopNow Network. ShopNow.com, our shopping
destination Web site, aggregates more than 1 million products from more than
30,000 merchants of all types. MyShopNow.com enables shoppers to create their
own personalized Web site by allowing them to select the types of products and
services offered to them. The Web sites of merchants are connected by hyperlink
to ShopNow.com to complete our online marketplace. To assist merchants in
marketing and selling their products and services online, we provide a broad
range of e-commerce, direct marketing and creative services. Our direct
marketing and creative services use both traditional and online methods to drive
shoppers to merchants' Web sites, while our e-commerce services, including
custom store development, online store hosting and maintenance, secure payment
and order processing, fraud prevention and customer order fulfillment and call
center management, enable merchants to develop and maintain the ability to
complete online transactions.
BENEFITS FOR SHOPPERS
We provide shoppers with an online marketplace that enables them to search
for buying opportunities in an organized fashion, alleviating the need to sift
through often irrelevant search results. Our Web sites provide shoppers with
multiple ways to search our merchant database in a user-friendly layout that
allows shoppers to easily obtain the information necessary to complete online
transactions. This enables shoppers to rapidly locate merchants that fit their
needs and evaluate product and service offerings from numerous merchants based
on the criteria that are important to them. Because ShopNow.com is focused
principally on shopping, we can highlight new products and services and
high-value offers for our shoppers. The personalization capabilities of
MyShopNow.com enable shoppers to create a unique online shopping experience that
is tailored to their specific interests.
BENEFITS FOR MERCHANTS
We offer merchants an online marketplace and a variety of e-commerce and
direct marketing services that enable them to quickly develop and maintain their
desired e-commerce presence. Our e-commerce services include custom development
of online stores, hosting and maintenance services for online stores, online
payment and order processing services, fraud management services and customer
order fulfillment and call center management. Our direct marketing services
include the placement of merchant and product information on the ShopNow
Network, merchandising programs such as advertisements and e-mail promotions on
the ShopNow Network, online direct mail promotions and other creative services.
We enable merchants to avoid the significant resource drain caused by developing
and maintaining end-to-end e-commerce systems internally or outsourcing to
multiple vendors. Because we regularly re-evaluate and update our e-commerce
services, our merchant customers can easily keep pace with rapidly evolving
e-commerce technology. The ShopNow Network allows merchants to market their
products in an online marketplace where shoppers congregate for the specific
purpose of making purchases. Our direct marketing services enhance the value of
our online marketplace for merchants by providing them with a wide range of
online and traditional marketing methods to increase their brand awareness and
drive shoppers to their Web sites to make online purchases. Our ability to
collect detailed demographic and shopper preference data enables us to offer
targeted direct marketing services to our merchants. Our online marketplace,
together with our e-commerce and direct marketing services, allow merchants to
capitalize on the benefits of e-commerce in a manner that is tailored to their
specific needs.
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STRATEGY
Our objective is to create the leading online marketplace for shoppers and
merchants while providing a variety of e-commerce and direct marketing services
to merchants. Key strategies to achieve this objective include:
INCREASE MARKET AWARENESS AND BRAND RECOGNITION
We will continue to promote the ShopNow brand as synonymous with online
shopping. To accelerate the acceptance and penetration of our brand among
shoppers and merchants, we will continue to advertise the ShopNow brand through
both online and traditional channels. Online efforts include placing banner and
other hyperlink advertisements on portal and other destination Web sites. To
reach a mass audience, we will continue to conduct national advertising
campaigns in traditional media such as radio and newspapers. We will also expand
our efforts to promote the ShopNow brand to merchants through trade publication
advertisements, direct mail and promotional activities, trade shows, media
events and our Web sites.
EXPAND THE SHOPNOW NETWORK
We intend to aggressively expand the ShopNow Network through the following
strategies:
- INCREASE PRODUCTS AND SERVICES. We will aggressively recruit new merchants
to our online marketplace to expand the range of shopping choices on the
ShopNow Network. To increase the services available to shoppers on the
ShopNow Network, we intend to offer additional third-party content
features, which currently include stock quotes, weather reports,
horoscopes and greeting cards. We will continue to enhance the services
available to merchants by developing and acquiring new technologies and by
entering into new, and expanding existing, business relationships. We will
add features to maintain the component-based nature of our services so
that merchants of all sizes can implement an e-commerce presence tailored
to their specific needs.
- EXPAND INTERNATIONALLY. We will seek to leverage the anticipated
international growth in e-commerce to expand the ShopNow Network and
generate additional revenue. We plan to commence our international
expansion with the development of a Japanese online marketplace in the
second half of 1999. We intend to accelerate our international expansion
by entering into strategic alliances with foreign businesses. We also
intend to register our Web sites on international search engines, seek
relationships with foreign portal Web sites and develop foreign language
user interfaces. We believe that these features will enable foreign
shoppers to more easily access our Web sites, expanding the market for
merchants, products and services and significantly increasing the number
of shoppers on the ShopNow Network.
- DEVELOP LOCAL NETWORKS. We intend to develop localized versions of the
ShopNow Network in order to enhance the attractiveness of our network to
both shoppers and merchants in selected markets. We intend to do this
first within selected major metropolitan areas within the United States.
If successful, we expect to create localized versions for additional
metropolitan areas in North America. By aggregating merchants located
within a specific geographic area, we will allow shoppers to do business
with their local merchants at a single site. Localization will provide
merchants with the opportunity to increase transactions through
advertising and merchandising programs focused on local markets.
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INCREASE TRANSACTIONS ON THE SHOPNOW NETWORK
We intend to increase transactions on the ShopNow Network by further
personalizing our services for shoppers and leveraging our direct marketing
capabilities as follows:
- ENHANCE PERSONALIZATION. We intend to aggressively promote the
personalization features of the ShopNow Network, which permit us to target
product and service offerings based on the indicated preferences of
individual shoppers. By increasing the personalization features of our
network, we will be able to improve the shopping experience for our
shoppers while enhancing our data collection capabilities. To increase
shoppers' acceptance of our MyShopNow personal store concept, we offer
shoppers incentives, such as cash-back bonuses, on purchases made through
their MyShopNow personal stores. We plan to continue to enhance the
personalization features of MyShopNow.com by providing access to
additional content and other services.
- LEVERAGE DIRECT MARKETING SERVICES. We will continue to offer merchants a
wide variety of online and traditional direct marketing services to
increase transactions on the ShopNow Network. Our direct marketing
services enable merchants to acquire and retain shoppers in a more
targeted manner. In order to maximize the number of transactions on the
ShopNow Network, we will refine our direct marketing services by
continuing to use the data that we collect from shoppers on our network
while striving to increase the quality and amount of this data. We will
attempt to use our creative services to develop direct marketing materials
that focus merchants, direct marketing efforts by attracting shoppers
interested in purchasing a particular merchant's products and services. We
believe that using our creative services in this way will result in
increased shopper traffic and online purchases for merchants who utilize
these services.
EXPAND SERVICES TO MERCHANT CUSTOMERS
We intend to increase sales to our merchant customers by aggressively
marketing additional features of our suite of e-commerce and direct marketing
services to them. We believe that we will generate incremental revenue from our
merchant customers by regularly updating our technology and services in order to
provide our merchants with advanced e-commerce services. In addition, we believe
that as we demonstrate both the effectiveness of the ShopNow Network and our
ability to collect detailed information regarding online shoppers, our merchant
customers will take increasing advantage of our extensive direct marketing and
creative services.
PURSUE ACQUISITIONS AND LEVERAGE KEY BUSINESS RELATIONSHIPS
To date, we have entered into a number of acquisitions and key business
relationships in order to expand our range of products and services for shoppers
and merchants, generate additional visitors to the ShopNow Network, increase the
number of MyShopNow personal stores, enhance our technology and establish
additional sources of revenue. We believe that our key business relationships
will help us to offer advanced e-commerce services by giving us access to
technology developed by the parties to these relationships. We also believe that
these relationships will assist us in expanding into new domestic and
international markets by providing us with access to expertise and contacts in
these new markets. We believe that our acquisitions and key business
relationships will assist us in rapidly increasing the variety of products and
services offered on the ShopNow Network by giving us access to additional
merchants. We intend to continue making acquisitions and entering into those
types of relationships to enhance the quality of our online marketplace and the
effectiveness of our e-commerce and direct marketing services.
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OUR PRODUCTS AND SERVICES
THE SHOPNOW NETWORK
The ShopNow Network is an online marketplace designed to attract shoppers to
a common online location by providing them with attractive shopping
destinations. The ShopNow Network consists of ShopNow.com, our Internet shopping
portal site, MyShopNow.com, our personalized Internet shopping service, and the
Web sites of merchants that are connected by hyperlink to the ShopNow Network.
We believe that increasing shopper traffic on the ShopNow Network will cause
additional merchants to participate in the network. As the number of
participating merchants grows, ShopNow will have a larger pool of merchants to
whom we can offer our e-commerce and direct marketing services.
SHOPNOW.COM. ShopNow.com is an Internet shopping portal site that offers
shoppers a comprehensive shopping destination by aggregating at one Web site
more than 1 million products and services from more than 30,000 merchants,
including retailers, catalog companies, manufacturers and individuals.
ShopNow.com's directory of merchants lists merchants under 27 different product
categories. To reach a specific merchant's Web site, a shopper clicks on the
directory's hyperlink to that site. Shoppers complete transactions at the
merchant's Web site, which we maintain if the merchant chooses to purchase these
services. By driving shoppers to merchants' Web sites, ShopNow.com enables
merchants to conduct e-commerce under their own brand names. To enable shoppers
to conduct a more focused search, ShopNow.com provides an easy-to-use interface
that enables shoppers to search the directory in a number of ways, including by
category, merchant or product. ShopNow.com provides shoppers with complimentary
access to third-party content, including weather reports and horoscopes.
MYSHOPNOW.COM. MyShopNow.com enables each shopper to easily create a
personalized shopping Web site, based on various shopping themes. Shoppers
indicate their interests to select the types of products and services that they
want offered to them. In addition to the search methods offered by ShopNow.com,
MyShopNow.com offers shoppers an advanced search capability that enables
shoppers to search by price, brand, category and recommendations from our gift
center. Shoppers place orders for products and services using a uniform online
shopping cart regardless of which merchant offers the product. As an added
benefit, shoppers typically receive cash back or other incentives on purchases
that they make through their MyShopNow personal stores. The MyShopNow personal
stores also provide shoppers with special promotional offers. To encourage
shoppers to visit their MyShopNow personal stores, MyShopNow provides shoppers
with complimentary access to third-party content, including sports scores,
weather reports, horoscopes, greeting cards and stock quotes. Since we launched
the MyShopNow personal store concept in September 1998, more than 1.5 million
MyShopNow personal stores have been created. Products sold on MyShopNow.com are
a small subset of the full products sold on ShopNow.com. However, a user of
MyShopNow.com can reach all ShopNow.com merchants by pressing a tab in
MyShopNow.com called "stores". This "stores" tab within MyShopNow.com is an
access point to the entire ShopNow.com site. In essence, customers in
ShopNow.com and MyShopNow.com can automatically switch between these sites by
pressing one button located in both ShopNow.com and MyShopNow.com.
In the case of the MyShopNow.com sites, we purchase products from merchants
and sell those products directly to consumers. In these cases ShopNow bears all
of the credit and loss risks associated with these products. In all cases, the
products offered in MyShopNow.com are also offered in ShopNow.com by pressing a
tab in ShopNow.com called "Products." This "Products" tab within ShopNow.com is
an access point to the entire MyShopNow.com site. We assume all of the same
credit and loss risks for these product sales.
MERCHANTS' WEB SITES. The ShopNow Network includes the Web sites of the
over 30,000 merchants listed on ShopNow.com. These Web sites are connected by
hyperlink to ShopNow.com, and provide
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shoppers with additional information about these merchants and the ability to
purchase their products and services.
MERCHANT SERVICES
E-COMMERCE SERVICES. ShopNow offers merchants a wide variety of e-commerce
services, including:
- CUSTOM STORE DEVELOPMENT. We offer merchants custom creative design and
technical development services for their online stores. We create
e-commerce enabled Web sites that can range from the basic to the highly
customized.
- E-COMMERCE HOSTING AND MAINTENANCE. ShopNow provides services to operate
and maintain online stores on behalf of our merchants. To provide
customers with the performance they require for continuous e-commerce
operations, we use data centers with redundant servers, 24-hour monitoring
and support and high speed Internet connections.
- SECURE PAYMENT AND ORDER PROCESSING. We provide online payment and order
processing services, including customer authentication and authorization,
automated tax and shipping calculations, order tracking and customer
service. Our technology platform supports a variety of payment methods,
including credit cards and purchase orders. For security, we use advanced
encryption methods. To exchange information with shoppers and merchants on
our Web sites, our network servers use software that complies with the
Secure Sockets Layer specification, a leading method for managing the
security of transmissions over a network.
- FRAUD PREVENTION. Our fraud management services use artificial
intelligence programs, a database of historical transactions, and
validation by an authorized financial institution to confirm shoppers'
identities and to assess their credit status. We can adjust the stringency
of the fraud screening process based upon a merchant's requirements and
the nature of the transaction to assist the merchant in maximizing sales
opportunities.
- CUSTOMER ORDER FULFILLMENT AND CALL CENTER MANAGEMENT. We have preferred
supplier agreements with multiple companies that specialize in providing
customer order fulfillment services, including warehousing, packaging and
distribution, and call center services, including telephone and e-mail
customer support services, for companies that lack such capabilities. Our
preferred supplier agreements allow us to obtain pricing discounts and
other favorable terms from these companies by aggregating several of our
merchant clients' order fulfillment and call center activities under one
contract that we enter into and manage on behalf of our merchant
customers. Consequently, our merchant customers enter into agreements with
us, rather than the third-party customer order fulfillment or call center
service companies. We also have relationships with several vendors whose
warehouses we use to fill orders that we take on behalf of our merchant
customers through our Web sites and to deliver the purchased merchandise
directly to shoppers. We have integrated our payment processing and fraud
prevention systems with those of our preferred suppliers to provide our
merchants with an integrated e-commerce platform.
Our various e-commerce services can be purchased separately, allowing
merchants to select only those particular services that they need. Fee
arrangements are based on the specific service purchased and may be computed on
a project basis, a monthly fee basis, a per transaction basis, or a combination
thereof. For example, custom store development is billed on a project basis,
e-commerce hosting and maintenance are billed at monthly rates and the other
e-commerce described above are billed on a fee per transaction basis.
We bill for developing a custom Web site on the same basis. We evaluate the
needs of the client, estimate the amount of time, complexity and technology
needed and provide a fee which may include a
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transaction component. Generally, a monthly fee is charged for hosting services
and is not done on a transactional basis. For custom Web sites, we charge a
transactional fee for each order placed.
DIRECT MARKETING SERVICES. ShopNow's direct marketing services are designed
to enable merchants to enhance their visibility on the ShopNow Network,
facilitate customer acquisition and retention and increase sales for merchants.
Our direct marketing services include:
- JOINING THE SHOPNOW NETWORK. We offer merchants four listing levels to
position their businesses in our merchant database that shoppers access
through ShopNow.com and their MyShopNow.com personal stores. The listing
programs differ based on length of store description, the number of search
engine keywords that refer to the merchants' products, the order in which
a merchant is listed within a product category and availability of certain
promotional listings. For example, the entry level listing program allows
a merchant to provide a brief description of its products and services, to
select the product category under which it wants to be listed in our
merchant database and to select a few search engine keywords that will
cause the merchant's name to be listed when a shopper uses those keywords
to search the database. Our most prominent listing program allows a
merchant to provide a longer business description, display a logo, obtain
a preferential ranking under a product category and enter more keywords in
our merchant database.
- MERCHANDISING ON THE SHOPNOW NETWORK. We offer a range of merchandising
programs, including advertising, e-mail promotions and shopper delivery
programs. Advertisements can be prominently displayed on ShopNow.com,
MyShopNow.com or on the Web site networks of our marketing affiliate, 24/7
Media. From these advertisements, shoppers can hyperlink directly to an
advertiser's Web site, thus enabling the advertiser to directly interact
with an interested shopper. Alternatively, merchants can reach a more
focused audience by sponsoring a specific product category. Our e-mail
promotions allow merchants to alert shoppers to special product offers. We
also offer a shopper delivery program that provides merchants with a
specific number of visits by shoppers to the merchants' Web sites over a
given period of time. If we fail to deliver the specified number of visits
a merchant only pays for the number of shoppers that are delivered.
- ONLINE DIRECT MAIL PROMOTIONS. We offer merchants access to our shoppers,
who have voluntarily registered with ShopNow to receive product and
service offers by e-mail, by providing the merchant the opportunity to
have shoppers receive an e-mail that advertises a product or service
offered by the merchant. We create and generate the e-mail promotions. Our
promotions are specifically designed to allow advertisers to integrate
various forms of online advertising and direct marketing to fully exploit
the reach of our e-commerce services.
- CREATIVE SERVICES. We offer merchants a full range of creative services,
including design and advertisement copy services, image management and
production and account management and maintenance. We also provide online
creative services, including Web store design, as well as direct marketing
services using traditional print and broadcast media.
- TRANSACTION REPORTS. For merchants whose online stores we maintain, we
provide detailed electronic and hard copy reports summarizing the visits
to and the transactions made on their online stores.
The prices for the ShopNow Network's merchant listing services vary based on
the prominence of a merchant's listing on our Web sites. Prices for the four
listing levels range from $19.95 per year, for our entry-level listing programs,
to $3,499 per year, for our most prominent listing program. Merchandising
services are priced based on one of the following criteria: length of the
merchandising period, cost-per-thousand views or cost per click-through. For
example, our "Featured Store" buttons or textlinks on a specific product
category page are sold in weekly increments, banner ads are sold on a
cost-per-thousand views, and our shopper delivery program is priced based on the
number of shoppers
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that we pass along from ShopNow.com to a merchant. The fee arrangements for our
other direct marketing services, which typically include minimum monthly
payments, are individually negotiated with merchants and are based on the range
and extent of customization. We generally charge merchants a merchandising fee
for including their name or their products and services in e-mail promotions
that we send to MyShopNow store owners. We receive transactions revenues when a
MyShopNow store owner purchases products or services from us through his or her
MyShopNow store, which products and services are purchased by us from
third-party vendors.
CUSTOMERS
The following is a list of our top ten merchant customers in terms of
transactions and merchandising revenue and our top ten merchant customers in
terms of merchant services revenue recognized on a pro forma basis for the six
months ended June 30, 1999:
<TABLE>
<CAPTION>
TRANSACTIONS AND MERCHANDISING MERCHANT SERVICES
- -------------------------------------------- --------------------------------------------
<S> <C>
@backup.com American Color
Accounting.Net American Luggage Dealers Association
Alloy Online Birkenstock
Corel Hallmark
Greatfood.com Murad
J. C. Penney Nature Company
Lens Express Self Care
Macy's Service Merchandise
sixdegrees.com Sony
Totally Wireless Southwestern Bell
</TABLE>
Transactions and merchandising revenues are generated from our merchant
customers from transactions that are processed for merchants that use our
payment and order processing, fraud prevention, customer order fulfillment, and
call center management services, as well as our listing, advertising, e-mail
promotion and shopper delivery programs. Fees paid for merchant services include
fees paid for our custom store development, e-commerce store hosting and
maintenance, and traditional direct marketing services. Our top ten merchant
customers in terms transactions and merchandising revenues accounted for 20.1%
of our transactions and merchandising revenues for the six months ended June 30,
1999, while another 303 merchant customers accounted for the remaining 79.9%.
ShopNow receives revenues of $100 or more per year from less than 350 merchants
on ShopNow.com and MyShopNow.com. The remaining merchants receive free
promotional listings on ShopNow.com and MyShopNow.com or pay less than $100 per
year. Our top ten merchant customers in terms of merchant services revenues
accounted for 78.9% of our merchant services revenues for the six months ended
June 30, 1999, while another 11 merchant customers accounted for the remaining
21.1%.
KEY BUSINESS RELATIONSHIPS AND ACQUISITIONS
We have entered into a number of key business relationships and acquisitions
in order to expand the range of our products and services for shoppers and
merchants, attract additional shoppers to the ShopNow Network, increase the
number of our merchant customers, increase the number of MyShopNow personal
stores, enhance our technology, establish additional sources of revenue and
facilitate our international expansion. We intend to evaluate acquisition
opportunities and to seek additional similar relationships with third-party
providers of complementary products and services. Potential benefits to third
parties with which we may enter into business relationships include increased
shopper traffic, branding flexibility, incremental revenue, and integration of
service offerings.
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KEY BUSINESS RELATIONSHIPS
We have key business relationships with the following companies:
CHASE MANHATTAN BANK. In July 1999, Chase Manhattan Bank, through one of
its affiliates, completed an $18.9 million equity investment by purchasing 2.1
million shares of Series I convertible preferred stock, which will automatically
convert into shares of common stock upon completion of this offering, and
entered into an agreement with ShopNow to launch an Internet shopping site on
which ShopNow and Chase will be featured. This site will be part of Chase.com,
Chase's online banking site. The site, ChaseShop.com, will have the same core
functionality as ShopNow.com and MyShopNow.com with the design, color scheme and
branding of Chase.com. Similar to ShopNow.com and MyShopNow.com, consumers will
be able to shop across more than 30,000 merchants as well as shop for particular
products and brands. Sales of advertising and merchandising on the site will be
a joint effort between us and Chase. Pursuant to this agreement, Chase will pay
ShopNow a licensing fee to use the technology underlying the site. As part of
the agreement, Chase will be a preferred provider of financial services for
ShopNow.com and the exclusive marketer of credit cards featuring the ShopNow
brand. The agreement provides that each party will share in the revenues of the
other party based on the amount of business generated through this relationship.
Specifically, the agreement provides that a party which introduces its merchants
to the other party will receive a percentage of the gross revenues on all
advertising and merchandising received by the other party from that merchant. We
will also pay Chase a percentage of the transactions revenues we receive when we
sell goods or services to Chase consumers or merchants. Additionally, we will
pay Chase a fixed percentage of the gross revenues related to professional
services fees that we receive from Chase consumers and merchants. We believe
that the key advantages that we will derive from our relationship with Chase
include increased revenues from the licensing fee and the new Internet shopping
site. As part of the agreement, we will participate equally with Chase in a
cooperative marketing fund to promote the services being offered under this
agreement. Our marketing obligations to Chase include placing an advertisement
on the ShopNow.com home page, making direct mailings regarding Chase's merchant
services to merchants on the ShopNow Network and mentioning Chase's merchants in
our own advertising. Our obligation to the fund is to contribute at least $3.0
million annually. The agreement has an initial term of 27 months, with a three-
year renewal period at Chase's option.
ABOUT.COM. In July 1999, we entered into a five-year agreement with
About.com, a leading Internet network of commerce communities. Under this
agreement and for payment of $2.0 million annually to About.com, we will be the
exclusive generalized shopping directory service on About.com, obtain designated
placement on About.com of a hyperlink to the ShopNow.com Web site and receive a
minimum number of banner ads annually from About.com. This shopping section
gives us access to all visitors to the About.com network which we believe will
attract additional visitors to the ShopNow Network. According to Media Metrix, a
provider of Internet audience measurement products and services, there were
approximately 8.0 million visitors to About.com in July 1999.
24/7 MEDIA. In April 1999, 24/7 Media purchased 4.3 million shares of our
Series G convertible preferred stock, which will automatically convert into
shares of common stock upon completion of this offering, for $30.1 million and
entered into a three-year cross promotion agreement with us. Under the
agreement, 24/7 Media promotes our e-commerce and direct marketing services to
its networks of over 2,500 affiliated Web sites in exchange for our promotion of
24/7 Media's advertising, representation and e-mail management services to
merchants. For example, if 24/7 Media has a client who would benefit from our
e-commerce services, 24/7 Media will refer that client to us. If we have a
merchant who would benefit from the advertising services offered by 24/7 Media,
we will refer that merchant to 24/7 Media. 24/7 Media is primarily a point of
distribution for advertising campaigns that are distributed through banner
advertisements on Web sites or e-mail. Our direct marketing services are
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oriented towards strategic planning and creative implementation of online
marketing or advertising campaigns distributed by companies such as 24/7 Media.
Our agreement entitles each party to share in the revenues of the other
party based on the amount of business generated through this relationship. The
agreement prohibits 24/7 Media from engaging other specifically identified
providers of e-commerce services as co-marketing partners for e-commerce
technologies that we offer. We also have a right of first refusal on any
partnership with 24/7 Media for e-commerce technology or services from other
third parties, assuming we provide similar products and services. We do not
include a link from our site to 24/7 Media's Web site nor do we advertise 24/7
Media on our site. 24/7 Media is the only third party authorized to sell
advertising on our Web site. We believe that this relationship with 24/7 Media
will allow us to expand our product and service offerings. We also jointly brand
24/7 Media's Click2Buy transactional banner service with the ShopNow name and
receive fees for processing all Click2Buy transactions. Click2Buy is the process
whereby a shopper can click on a banner advertisement from within a specific Web
site and purchase the product or service in the banner advertisement without
having to leave the Web site where the shopper originally saw the banner
advertisement. We process the transactions through Click2Buy the same as we do
the transactions through our Web site. We believe that this relationship with
24/7 Media will allow us to establish additional sources of revenues. Under our
cross-promotion agreement, we are obligated to purchase at least $1.0 million
annually in shopping traffic from 24/7 Media. Prior to this offering, 24/7 Media
beneficially owned more than 19% of our voting stock, and following this
offering, 24/7 Media will beneficially own more than 15% of our voting stock.
QWEST COMMUNICATIONS. In April 1999, we entered into a three-year
distribution and marketing agreement with Qwest Communications, a
telecommunications provider. Our agreement with Qwest requires us to offer
Qwest's communications services to shoppers on the ShopNow Network. Through the
agreement we receive a fixed quarterly payment for 24 months and, in addition,
we will also receive a percentage of the revenues earned by Qwest from Qwest
services sold through our Web sites. We believe that this relationship with
Qwest will allow us to reach a large number of households and attract additional
visitors to the ShopNow Network. In connection with this agreement, we issued to
Qwest a warrant to purchase 100,000 shares of our common stock at an exercise
price of $10.00 per share. Our agreement with Qwest contains a put right that
allows Qwest to require us to purchase the shares at a price of $25.00 per share
after June 2001 unless a dollar threshold of revenue transactions has occurred
under the marketing and distribution agreement. Qwest must have exercised the
warrants in order to exercise this right.
HNC SOFTWARE. In May 1999, HNC Software purchased 333,334 shares of our
Series H convertible preferred stock, which will automatically convert into
shares of common stock upon completion of this offering, for $3.0 million. In
addition, pursuant to our three-year agreements with HNC, HNC will provide us
with a number of e-commerce products at preferential prices, which merchants can
use in connection with the other merchant services we offer and thus allow us to
expand our product and service offerings. The HNC products include targeted
marketing, fraud detection and customer support software. Integration of these
products with our technology platform will allow us to provide merchants with
better tools to manage their customer relationships. The tools will be
integrated with the services we provide to merchants and will not be sold
separately to merchants. In exchange for a license to use HNC's technology, we
agreed to pay a set-up fee, a monthly fee for the use of HNC's software, a
service fee equal to the greater of a minimum monthly fee or a transaction fee
based upon the number of transactions processed by HNC's software.
ZERON GROUP. In March 1999, the ZERON Group purchased 285,713 shares of our
Series G convertible preferred stock, which will automatically convert into
shares of common stock upon completion of this offering, for $2.0 million, and
in April 1999 purchased an additional 428,573 shares of Series G convertible
preferred stock for $3.0 million. Under our agreement, the ZERON Group is
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assisting us on a contractual, best-efforts basis in establishing alliances with
major companies in Japan that are seeking to expand into e-commerce as we seek
to develop an international presence in that market. We believe that these
alliances will help us to facilitate our international expansion and will
attract additional visitors to the ShopNow Network. The ZERON group is not
currently referring merchants or customers to our network. We believe that Japan
offers tremendous growth opportunities for us and allows us the opportunity to
aggressively move into other markets in Asia and throughout the world.
Although we view our key business relationships as a important factor in our
overall business strategy, the other parties to these relationships may reassess
their significance at any time. These relationships generally do not establish
minimum performance requirements but instead rely on the contractual best
efforts of the parties. In addition, several of our key business relationships
may be terminated with little notice.
ACQUISITIONS
Key acquisitions include:
WEB SOLUTIONS AND INTELLIGENT SOFTWARE SOLUTIONS. In January 1997, we
acquired Web Solutions and Intelligent Software Solutions. Both Web Solutions
and Intelligent Software were software development companies that had core
transaction processing technologies that we have incorporated into our
e-commerce products.
THE INTERNET MALL. In August 1998, we acquired The Internet Mall, an
Internet retailer of consumer products that was doing business as ShopNow, Inc.
The Internet Mall's technology and Web development work served as the basis for
our online shopping destination site, ShopNow.com. We also gained access to The
Internet Mall's base of listed merchants.
MEDIA ASSETS. In September 1998, we acquired Media Assets, a creative
design and direct marketing firm. The acquisition has enabled us to offer our
merchant affiliates direct marketing and creative services. We also gained
access to Media Assets' existing direct marketing clients as potential customers
for our e-commerce services.
GO SOFTWARE. In June 1999, we acquired GO Software, a company primarily
engaged in the business of developing and implementing transaction processing
software for use in e-commerce. GO Software has existing relationships with more
than 10,000 online merchants.
CARDSECURE. In June 1999, we acquired CardSecure, which had been a
subsidiary of 24/7 Media. CardSecure is a developer of e-commerce-enabled Web
sites and will enhance the e-commerce technologies and services that we offer.
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SALES AND MARKETING
SALES
Our sales and marketing strategy is designed to increase market awareness of
the ShopNow brand, expand the ShopNow Network, increase transactions on the
ShopNow Network and develop additional revenue opportunities by cross-selling
and up-selling additional e-commerce and direct marketing services to our
existing merchant customers.
We sell our merchant services primarily through our direct sales force. Our
sales and marketing organization mainly targets merchants seeking online direct
marketing services and custom e-commerce services. As of June 30, 1999, our
sales and marketing organization consisted of 42 employees. These employees
currently are located at our headquarters in Seattle, Washington. Consistent
with our strategy to expand internationally and develop local ShopNow Networks,
we intend to increase our sales presence by opening field sales offices, which
will depend on our ability to attract additional qualified sales personnel. In
the second half of 1999, we plan to open a sales office in Japan.
MARKETING
We currently employ a variety of traditional and online marketing programs
and business development and promotional activities as part of our marketing
strategy. We place advertisements on high-profile third-party Web sites and our
own Web sites. We also rely on relationship marketing, including word-of-mouth
advertising by shoppers, indirect promotions by merchants with links to our Web
sites and indirect advertising arising through shoppers' use of our services.
Although we have reduced our reliance on traffic promotion agreements as
awareness of the ShopNow brands has increased, we believe that relationship
marketing will continue to generate a substantial amount of additional shopper
traffic and new merchant affiliates. We intend to introduce a number of other
brand awareness and shopper loyalty programs through our Web sites.
To augment our online marketing efforts, we have initiated an aggressive
brand promotion campaign using traditional media, including print, radio,
billboard and television advertising. As part of this campaign, we recently
conducted a nationwide advertising campaign by placing advertisements in USA
TODAY and other newspapers. We also rely on public relations activities,
attendance at industry trade shows and direct mail programs to increase merchant
awareness of our products and services and to generate additional sales. We
intend to continue to participate in joint promotions using online and
traditional advertising media.
TECHNOLOGY AND INFRASTRUCTURE
Our e-commerce and direct marketing services require the development and
deployment of advanced e-commerce technologies and methodologies. Consequently,
we have invested heavily in licensing advanced technologies and in developing a
core set of proprietary technologies. We market these technologies collectively
under our CommerceTrust brand. Our third-party vendors provide relational
databases, such as Oracle and Microsoft SQL server, search technologies, ad
servers, catalog engines and various back-end automation technologies. Our
proprietary technologies include interfaces to customer order fulfillment
systems, payment systems and fraud detection software.
Our software runs on system hardware that is hosted in third-party data
centers located in Seattle, Washington and Weehawken, New Jersey. These data
centers are connected to our headquarters in Seattle, Washington, through high
speed networks. These data centers, as well as the system hardware located at
our headquarters, are connected to back-up generators to maintain uninterrupted
electrical service and to the Internet through multiple Internet service
providers to avoid connectivity problems. Our systems are redundant, and we
maintain multiple clustered high speed routers, multiple clustered load
balancing hardware, multiple Web servers and multiple application and database
servers. Data for
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our networks is stored on dedicated, high speed and redundant disk appliances
that provide continuous access to the data even if individual disk drives,
computers and power supplies fail. Data is backed up regularly and is stored off
site at the third-party data centers to provide for data recovery in the event
of a disaster. We employ extensive automated and manual monitoring to maintain a
high level of network uptime.
We employ several relational databases for product SKUs, transaction data
and tracking multiple resellers or affiliates. Our databases have been designed
for high levels of performance and scalability. Shopper data is maintained in a
profile database that is used for targeted shopper relationship management. The
software architecture has been designed to accommodate our expected growth over
the next 24 months.
We believe that our future success will depend in part on our ability to
license, develop and maintain advanced e-commerce technologies. Consequently, we
expect to invest heavily in developing new technologies and to continue to make
strategic acquisitions to increase our direct control and ownership of
proprietary technology.
RESEARCH AND DEVELOPMENT
Our research and development efforts are directed towards improving the
design and functionality of our Web sites, improving our network systems and
enhancing the technology underlying and the features of our e-commerce and
online direct marketing services. Research and development expenses were $25,000
in 1996, $2.4 million in 1997, $4.4 million in 1998 and $2.9 million in the
first six months of 1999. As of June 30, 1999, ShopNow employed 68 persons in
research and development.
COMPETITION
A large number of Internet companies compete with us for e-commerce
merchants, shoppers, e-commerce transactions, advertisers, and other sources of
online revenue. We also compete with Web development firms, systems integrators,
Internet service providers and traditional media companies that may offer
alternatives to one or more components of our e-commerce and direct marketing
solutions. We expect competition to intensify in the future. Barriers to entry
in the markets in which we compete are not significant, and current and new
competitors may be able to launch competing products and services at a
relatively low cost.
We compete with various companies for e-commerce merchants, shoppers,
e-commerce transactions, advertisers and other sources of online revenue. These
competitors include:
- online shopping destination Web sites, such as iMall and Shopping.com;
- merchant and product Web site directories and search and information
services, all of which offer online shopping, such as America Online,
Microsoft, Yahoo!, Excite, Lycos and Infoseek; and
- conventional merchants and retailers that offer goods and services
directly over the Web.
The number of companies providing these types of services is large and
increasing at a rapid rate. We expect that additional companies, including media
companies and conventional retailers that to date have not had a substantial
commercial presence on the Internet, will offer services that directly compete
with us.
We also compete with companies that may offer alternatives to one or more
components of the e-commerce and direct marketing solutions that we offer to
merchants. These competitors include:
- companies offering e-commerce and online direct marketing services, such
as Go2Net, Xoom and DoubleClick;
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- companies offering products that address specific aspects of e-commerce,
such as payment and transaction processing and security, such as
CyberSource;
- Web development firms;
- systems integrators;
- Internet service providers;
- other providers of e-commerce outsourcing services, such as Digital River
and USWeb/CKS; and
- traditional media companies.
We expect competition from these sources to intensify in the future.
Many of the current and potential competitors to both our online marketplace
and our merchant services are likely to enjoy substantial competitive advantages
compared to us, including:
- larger customer or user bases;
- the ability to offer a wider array of e-commerce and direct marketing
services;
- greater name recognition and larger marketing budgets and resources;
- substantially greater financial, technical and other resources;
- the ability to offer additional content and other personalization
features; and
- larger production and technical staffs.
In addition, as the use of the Internet and other online services increases,
larger, well-established and well-financed entities may continue to acquire,
invest in or form joint ventures with providers of e-commerce and direct
marketing solutions, and existing providers of e-commerce and direct marketing
solutions may continue to consolidate. Providers of Internet browsers and other
Internet products and services who are affiliated with providers of Web
directories and information services that compete with our Web sites may more
tightly integrate these affiliated offerings into their browsers or other
products or services. Any of these trends would increase the competition we
face.
PROPRIETARY TECHNOLOGY
Intellectual property is critical to ShopNow's success, and we rely upon
patent, trademark, copyright and trade secret laws in the United States and
other jurisdictions to protect our proprietary rights and intellectual property.
However, patent, trademark, copyright and trade secret protection may not be
available in every country in which our services are distributed or made
available. Our proprietary software, documentation and other written materials
are provided limited protection by international and United States copyright
laws. In addition, we protect our proprietary rights through the use of
confidentiality and/or license agreements with employees, consultants, and
affiliates.
ShopNow currently has four pending United States patent applications. We do
not have any issued patents.
ShopNow has registered the trademark "ShopNow." We have applied for United
States trademark registrations for the marks "ShopNow.com," "MyShopNow.com" and
"CommerceTrust." Certain of these marks are also protected in other
jurisdictions.
The transaction processing and advertisement serving technology we employ
collects and uses data derived from user activity on our Web sites and those of
our merchants customers that we maintain. This data is intended to be used for
targeted direct marketing and for predicting advertisement performance. Although
we believe that we have the right to use such data, trade secret, copyright or
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other protection may not be available for such information or others may claim
rights to such information.
EMPLOYEES
At June 30, 1999, we had 305 employees, including 125 in merchant services,
42 in sales and marketing, 68 in research and development, 34 in operations and
36 in general and administrative functions. We are not subject to any collective
bargaining agreements and believe that our employee relations are good.
FACILITIES AND SYSTEMS
Our principal executive offices are located in Seattle, Washington, where we
lease approximately 57,000 square feet under a lease that expires in August
2001. We also lease space in various geographic locations for sales and direct
marketing personnel and for our servers. We believe that our current facilities
are adequate to meet our needs through the end of 2000, at which time we may
need to lease additional space.
LEGAL PROCEEDINGS
From time to time ShopNow has been, currently is and expects to continue to
be, subject to legal proceedings and claims in the ordinary course of business.
The Company does not believe that any of its currently pending litigation is
material.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of ShopNow as of August 23, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --------- --------------------------------------------------------------------
<S> <C> <C>
Dwayne M. Walker.................... 38 Chairman, President, Chief Executive Officer and Director
Jeffrey B. Haggin................... 39 Executive Vice President
Alan D. Koslow...................... 41 Executive Vice President, Chief Financial Officer, General Counsel
and Secretary
Ganapathy Krishnan, Ph.D............ 39 Executive Vice President and Chief Technology Officer
Othniel D. Palomino................. 36 Executive Vice President, Corporate Development
William D. Pittman.................. 38 Executive Vice President and Chief Technical Architect
Anne-Marie K. Savage................ 35 Executive Vice President, E-Commerce Services
Joe E. Arciniega, Jr................ 40 Chief Operating Officer
Pascal Stolz........................ 37 Vice President of Marketing
Jacob I. Friesel.................... 50 Director
David M. Lonsdale................... 46 Director
Bret R. Maxwell..................... 40 Director
Mark C. McClure..................... 48 Director
John R. Snedegar.................... 50 Director
Mark H. Terbeek..................... 28 Director
</TABLE>
DWAYNE M. WALKER has been our Chairman since March 1996, our President and
Chief Executive Officer since August 1996, and a director since August 1995.
From April 1995 to April 1996, he was President and Chief Executive Officer of
Integra Technologies, a wireless communications company. From September 1989 to
March 1995, he was a Director for Microsoft Windows NT and Networking Products
and a General Manager of Microsoft Corporation, a software company.
JEFFREY B. HAGGIN has been our Executive Vice President since October 1998.
From October 1993 to September 1998, he was the President of Media Assets, a
direct marketing company. Mr. Haggin received a B.A. in Mass Communications from
the University of California at Berkeley.
ALAN D. KOSLOW has been our Executive Vice President, Chief Financial
Officer, General Counsel and Secretary since June 1998. From May 1997 to June
1998, he was of counsel to Graham & James LLP/Riddell Williams P.S., a law firm.
From February 1990 to April 1997, he was an attorney at Foster Pepper &
Shefelman PLLC, a law firm. Mr. Koslow received a B.A. in Economics and
Accounting from Rutgers University and a J.D. from Rutgers Law School. Mr.
Koslow is a certified public accountant.
GANAPATHY KRISHNAN, PH.D. has been our Executive Vice President and Chief
Technology Officer since January 1997. From March 1996 to December 1996, he was
Chief Executive Officer of Web Solutions, an e-commerce software company. From
September 1991 to December 1996, he was Chief Executive Officer of Intelligent
Software Solutions, an e-commerce software company. Dr. Krishnan received a B.S.
in Technology, Chemical Engineering from IIT Madras in India, an M.S. in
Chemical Engineering from the University of Louisville and an M.S. and Ph.D. in
Computer Science from the State University of New York/Buffalo.
OTHNIEL D. PALOMINO has been our Executive Vice President, Corporate
Development since April 1997. From September 1991 to March 1997, he was a Group
Manager for Microsoft. He received a B.S. in Engineering from Princeton
University and an M.B.A. from Stanford University.
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WILLIAM D. PITTMAN has been our Executive Vice President and Chief Technical
Architect since June 1999. From 1993 to June 1999, he was founder and Chief
Technical Officer of GO Software, a developer of e-commerce payment processing
technologies. Mr. Pittman received a B.S. in Chemical Engineering from the
University of Southern Florida and an M.B.A. from Georgia Southern University.
ANNE-MARIE K. SAVAGE has been our Executive Vice President, E-Commerce
Services since June 1999. From February 1998 to June 1999, she was our Senior
Vice President, Marketing and Business Development, from March 1997 to February
1998, she was our Vice President of Online Stores, and from April 1996 to March
1997, she was our Director of Marketing. From April 1995 to April 1996, she was
the Director of Marketing with Integra Technologies. From April 1994 to April
1995, she was an independent marketing consultant. Ms. Savage received a B.A. in
Hotel and Restaurant Administration from Washington State University.
JOE E. ARCINIEGA, JR. has been our Chief Operating Officer since November
1998. From July 1996 to November 1998, he was Vice President of Operations for
GT Interactive Software, an entertainment software company. From November 1994
to June 1996, he was Vice President of Operations of Humongous Entertainment, a
children's software company. From September 1994 to October 1994, he was the
Operations Consultant for Humongous Entertainment. From October 1991 to July
1994, he served as Director at the Pritikin Longevity Center, a cardio-health
facility.
PASCAL STOLZ has been our Vice President of Marketing since June 1999. From
January 1996 to February 1999, he was Vice President of Worldwide Marketing for
Cobra Golf, a golf club manufacturer. From October 1994 to January 1996, he was
Vice President of Sales and Marketing, Europe for Cobra Golf. From April 1987 to
October 1994, he was Senior Product Marketing Manager for Taylor Made Golf, a
golf products manufacturer. Mr. Stolz received a B.S. in International Business
from EPSCI in France and an M.B.A. from San Diego State University.
JACOB I. FRIESEL has served as a director since August 1999. Since February
1998, he has been the Executive Vice President--Sales and Marketing and a
Director of 24/7 Media, an Internet advertising and direct marketing firm. From
1997 to 1998, he was President of Katz Millennium Marketing, the Internet media
sales division of Katz Media Group, Inc. From 1994 to 1997, he was Vice
President, Strategic Planning for the Katz Television Group. From 1993 to 1994,
he was a Vice President and General Sales Manager of Katz American Television,
an advertising representative of major market television stations. Mr. Friesel
was elected as one of our directors pursuant to a provision of our cross
promotion agreement with 24/7 Media. Mr. Friesel received a B.A. from the City
University of New York.
DAVID M. LONSDALE has served as a director since October 1998. Since
December 1998, he has been President and Chief Executive Officer of Uppercase, a
Xerox subsidiary and software development company. From October 1996 to November
1998, he was the Chief Executive Officer and President of Major Connections, a
software distribution company. From March 1995 to September 1996, he was Vice
President of Worldwide Sales at Integrated Micro Products, a computer
manufacturer. From March 1990 to February 1995, he was President of A.C. Nielsen
Software and Systems, a direct marketing software company delivering software
and solutions for direct marketing. He also serves on the board of directors of
Vizicom. Mr. Lonsdale received a B.S. in Physics and a B.S. in Mathematics from
the University of Leeds in England and an M.B.A. from Cornell University.
BRET R. MAXWELL has served as a director since February 1997. Since June
1982, he has been Vice Chairman of First Analysis, a venture capital firm. Mr.
Maxwell received a B.S. in Engineering and an M.B.A. from Northwestern
University. He serves on the board of directors and is a member of the
compensation committee of Dynamic Healthcare Technologies.
MARK C. MCCLURE has served as a director since August 1998. From January
1979 to December 1996, he was President and Chief Executive Officer of Cobra
Golf, a golf club manufacturer.
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JOHN R. SNEDEGAR has served as a director since September 1998. Since April
1999, he has been President and Chief Executive Officer of Micro General, a
telecommunications and commerce service provider. From September 1991 to March
1999, he was the President of United Digital Network, a long distance telephone
company. He serves on the boards of directors of StarBase Corporation, Star
Telecommunications and Micro General.
MARK H. TERBEEK has served as a director since February 1997. Since August
1997, he has been an independent management consultant. From May 1995 to August
1997, he was an Associate for First Analysis Corporation, a venture capital
firm. From September 1993 to May 1995, he was a business analyst at McKinsey &
Co., a management consulting company. He received a B.A. from DePauw University
and an M.B.A. from Stanford University.
BOARD OF DIRECTORS
Our board of directors currently consists of seven authorized members. Upon
the completion of this offering, the terms of office of the board of directors
will be divided into three classes that will be as nearly equal in number as
possible: Class I consists of Messrs. Friesel, McClure and Terbeek, whose terms
will expire at the annual meeting of shareholders to be held in 2000; Class II
consists of Messrs. Maxwell and Snedegar, whose terms will expire at the annual
meeting of shareholders to be held in 2001; and Class III consists of Messrs.
Lonsdale and Walker, whose terms will expire at the annual meeting of
shareholders to be held in 2002. At each annual meeting of shareholders after
the initial classification, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election and until their successors
have been duly elected and qualified. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of an equal
number of directors. This classification of the board of directors may have the
effect of delaying or preventing a change of control or management of ShopNow.
See "Risk Factors--Provisions of our charter documents and Washington law could
discourage our acquisition by a third party." Pursuant to our cross promotion
agreement with 24/7 Media, 24/7 Media has the right to designate a director. In
connection with Chase's investment in ShopNow, Chase has the right to designate
one nominee to serve as a director. To date, Chase has not designated its
nominee to serve as a director. Each officer serves at the discretion of the
board of directors. There are no family relationships among any of our directors
or executive officers.
BOARD COMMITTEES
We currently have an audit committee and a compensation committee.
The audit committee reviews our financial controls and our accounting, audit
and reporting activities. The audit committee also makes recommendations to our
board of directors regarding the selection of independent auditors, reviews the
results and scope of audit and other services provided by our independent
auditors and reviews the accounting principles and auditing practices and
procedures to be used for the financial statements of ShopNow. Messrs. Lonsdale,
Maxwell and McClure constitute the audit committee.
The compensation committee reviews and recommends to the board of directors
the compensation and benefits for our officers, directors and employees. The
compensation committee also administers our stock option plan and will
administer our employee stock purchase plan upon completion of this offering.
Messrs. Lonsdale, McClure and Snedegar constitute the compensation committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, Mr. Walker served both as our President and Chief
Executive Officer and as a member of the compensation committee. Currently, no
member of the compensation committee is an
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officer or employee of ShopNow. No member of the compensation committee serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from us for their
services as directors or members of committees of our board of directors, but
are reimbursed for their reasonable expenses incurred in attending board of
directors meetings. We are, however, authorized to pay members for attendance at
meetings or a salary in addition to reimbursement for expenses in connection
with attendance at meetings. In the past, we have granted options to purchase
common stock to non-employee members of the board of directors. See "Related
Transactions with Executive Officers, Directors and 5% Shareholders."
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or
paid for services rendered to ShopNow in all capacities for fiscal 1998 by
ShopNow's Chief Executive Officer and the other executive officers of ShopNow
who earned more than $100,000 during fiscal 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- -------------------------------------------------------------------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Dwayne M. Walker ................................................... 1998 $ 182,292 $ 50,000 335,475
Chairman, President and Chief Executive Officer
Ganapathy Krishnan, Ph.D. .......................................... 1998 112,083 13,000 110,475
Executive Vice President and Chief Technology Officer
</TABLE>
OPTION GRANTS. During fiscal 1998, we granted options to purchase a total
of 3,397,379 shares of common stock both outside of and under our stock option
plan to our employees, directors and consultants, including the individuals
listed in the Summary Compensation Table. No stock appreciation rights were
granted during fiscal 1998.
The following table sets forth certain information with respect to stock
options granted to each of the individuals listed in the Summary Compensation
Table in fiscal 1998. In accordance with SEC rules, potential realizable values
for the following table are:
- net of exercise price before taxes;
- based on the assumption that our common stock appreciates at the annual
rate shown, compounded annually, from the date of grant until the
expiration of the term; and
- based on the assumption that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price.
These numbers are calculated based on SEC requirements and do not reflect
our projection or estimate of future stock price growth. Actual gains, if any,
on stock option exercises will be dependent on the future performance of our
common stock.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL FAIR VALUE AT ASSUMED
NUMBER OF OPTIONS MARKET ANNUAL RATES OF
SECURITIES GRANTED TO VALUE ON STOCK APPRECIATION
UNDERLYING EMPLOYEES EXERCISE THE DATE FOR OPTION TERM
OPTIONS IN LAST PRICE OF GRANT EXPIRATION -------------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) ($/SHARE) DATE 0% 5% 10%
- ---------------------- ------------- --------------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dwayne M. Walker...... 25,000 *% $ 2.00 $ 2.00 1/1/07 $ -- $ 27,587 $ 67,959
310,000 9.1 4.00 3.30 8/1/08 -- 427,028 1,415,478
375 * 2.50 3.30 11/30/08 300 1,079 2,275
100 * 4.00 4.00 12/11/08 -- 252 638
Ganapathy Krishnan,
Ph.D................ 10,000 * 2.00 2.00 3/18/00 -- 2,053 4,206
100,000 2.9 2.00 3.30 6/1/08 130,000 337,751 656,606
375 * 2.50 3.30 11/30/08 300 1,079 2,275
100 * 4.00 4.00 12/11/08 -- 252 638
</TABLE>
- ------------------------------
* Less than 1.0% of total options granted to employees in last fiscal year.
FISCAL YEAR-END OPTION VALUES. The individuals named in the Summary
Compensation Table did not exercise any options during fiscal 1998. The
following table presents information about options held by the individuals named
in the Summary Compensation Table and the value of those options as of December
31, 1998. The value of in-the-money options is based on an assumed offering
price of $11.00 per share, net of the option exercise price.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
Dwayne M. Walker......................................... 286,934 509,999 $ 3,007,614 $ 4,319,989
Ganapathy Krishnan, Ph.D................................. 14,475 100,000 134,808 900,000
</TABLE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
ShopNow has entered into a written employment agreement with Mr. Walker
effective as of July 1, 1999. This Agreement may be terminated by either Mr.
Walker or ShopNow at any time, upon written notice to the other. The agreement
provides for an initial annual salary of $400,000 and a yearly bonus of up to
$200,000 based upon the achievement of performance criteria specified by the
compensation committee. Mr. Walker's salary is to be reviewed at the end of each
calendar year by the compensation committee and adjusted at the board's sole
discretion, provided, however, that Mr. Walker's salary may not be adjusted
downward without his consent. Pursuant to the agreement, Mr. Walker will
receive, as of the date of this offering, an option to purchase 500,000 shares
of common stock at an exercise price equal to the initial per share offering
price, which option will vest in four equal semi-annual installments subject to
Mr. Walker's continued employment with ShopNow. After the first year of the
agreement, ShopNow will grant Mr. Walker during each of the next eight quarters
an option to purchase up to 125,000 shares of common stock at an exercise price
equal to the closing price of ShopNow's common stock on the Nasdaq National
Market on the date of grant, which option will vest in four equal semi-annual
installments subject to Mr. Walker's continued employment with ShopNow. Mr.
Walker receives a $400 monthly car allowance and life insurance of $1,000,000.
If Mr. Walker is terminated by ShopNow at any time without cause, or if he
terminates his employment for "good reason" or leaves within six months after a
change of control of ShopNow, ShopNow shall
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pay him a lump-sum amount equal to his annual base salary, ShopNow will pay his
salary for a period of 24 months following termination and all options granted
to him under this agreement shall vest. For purposes of the agreement, "good
reason" means and includes the occurrence without Mr. Walker's consent of a
material reduction in his title, authority, status, or responsibilities or our
material breach of the agreement. If Mr. Walker gives 30 days' notice to us of
his desire to terminate his employment for good reason and we fail to cure, he
may terminate his employment and we must pay his salary for a period of 24
months. ShopNow and Mr. Walker are currently negotiating an amendment to the
agreement.
EMPLOYEE BENEFIT PLANS
401(k) PLAN
In November 1996, we established a discretionary 401(k) tax-qualified
employee savings and retirement plan covering all employees who satisfy certain
eligibility requirements relating to minimum age. Pursuant to our 401(k) plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 15% of their base compensation or the statutorily prescribed annual
limit, currently $10,000, and have the amount of such reduction contributed to
the 401(k) plan. Our 401(k) plan is intended to qualify under Section 401 of the
Internal Revenue Code of 1986, so that contributions, and income earned on the
contributions, are not taxable until withdrawn. The 401(k) plan permits us to
make discretionary contributions based on compensation. To date, we have not
made any contributions to the 401(k) plan.
STOCK OPTION PLAN
In October 1996, we adopted our stock option plan. Our board of directors
amended and restated our stock option plan in June 1999 and, in July 1999, the
amended stock option plan was approved by our shareholders. The amended stock
option plan will be effective upon completion of this offering. The amended
stock option plan provides for the grant to employees of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986 and for
the grant to employees, directors and consultants of nonstatutory stock options
and stock purchase rights. Unless sooner terminated, the amended stock option
plan will automatically terminate in 2009. A total of 8,000,000 shares of common
stock will be reserved for issuance pursuant to the amended stock option plan.
In addition, the amended stock option plan provides for automatic annual
increases equal to the lesser of 750,000 shares, 3% of the outstanding shares
under the plan on such date, or an amount determined by the board of directors.
As of June 30, 1999, options to purchase 23,549 shares of common stock had been
exercised and options to purchase 5,162,108 shares of common stock were
outstanding under the stock option plan with a weighted-average exercise price
of $3.68.
The amended stock option plan may be administered by the board of directors
or a committee of the board of directors, which committee shall, in the case of
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, consist of two
or more "outside directors" within the meaning of Section 162(m). The board of
directors or the committee has the power to determine the terms of the options
granted, including the exercise price, the number of shares subject to the
option, and the exercisability thereof, and the form of consideration payable
upon such exercise. In addition, the board of directors has the authority to
amend, suspend or terminate the amended stock option plan, provided that no such
action may affect any share of common stock previously issued and sold or any
option previously granted under the amended stock option plan.
Options and stock purchase rights granted under the amended stock option
plan are not generally transferable by the optionee, and each option and stock
purchase right is generally exercisable during the lifetime of the optionee only
by such optionee. Options granted under the amended stock option
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plan must generally be exercised within three months following termination of an
optionee's status as an employee, director or consultant of the company or
within 12 months following termination of an optionee by death or disability,
but in no event later than the expiration of the option's 10 year term. In the
case of stock purchase rights, unless the administrator determines otherwise, a
restricted stock purchase agreement shall grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with us for any reason, including death or disability. The purchase
price for shares repurchased pursuant to a restricted stock purchase agreement
shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
shall lapse at a rate determined by the administrator. The exercise price of all
incentive stock options granted under the amended stock option plan must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory stock options granted under the amended stock
option plan is determined by the board of directors or the committee, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m), the exercise price must be
at least equal to the fair market value of the common stock on the date of
grant. The term of all other options granted under the amended stock option plan
may not exceed 10 years.
The amended stock option plan provides that in the event of our merger with
or into another corporation or a sale of all or substantially all of our assets,
each option and stock purchase right will be assumed or substituted for by the
successor corporation. In the event the successor corporation refuses to assume
or substitute for the option or stock purchase right, the optionee shall have
the right to exercise all of the optioned stock, including shares as to which it
would not otherwise be exercisable, for a period of 15 days from the date of
notice from the administrator, after which the option or stock purchase right
will terminate.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan was adopted by the board of directors in
June 1999, and approved by our shareholders in July 1999. The employee stock
purchase plan will be effective upon the completion of this offering. Initially,
a total of 2,000,000 shares of common stock will be reserved for issuance under
the employee stock purchase plan. Additionally, the employee stock purchase plan
provides for an automatic annual increase in the number of shares reserved for
issuance beginning on the first day of our fiscal year 2002 equal to the lesser
of:
- 600,000 shares;
- 2%; or
- an amount determined by the board of directors.
The employee stock purchase plan, which is intended to qualify under Section
423 of the Internal Revenue Code of 1986 will be administered by the board of
directors or by a committee appointed by the board. Our employees, including
officers and employee directors, are eligible to participate in the employee
stock purchase plan if they are employed for at least 20 hours per week and for
more than 5 months in any calendar year. The employee stock purchase plan will
be implemented by consecutive offering periods generally six months in duration.
However, the initial offering period under the employee stock purchase plan will
begin on the effective date of this offering and terminate on or before April
30, 2000. The board of directors may change the timing or duration of the
offering periods.
The employee stock purchase plan permits eligible employees to purchase
shares of common stock through payroll deductions at 85% of the lesser of the
fair market value per share of the common stock on the first day of the offering
period or on the purchase date. Participants generally may not purchase shares
if, immediately after the grant, the participant would own stock or options to
purchase
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shares of common stock totaling 5% or more of the total combined voting power of
all of ShopNow's capital stock, or more than $25,000 of our capital stock in any
calendar year. In addition, a participant may not purchase more than 5,000
shares during any offering period. In the event of a sale of all or
substantially all of our assets or the merger of ShopNow with or into another
corporation, the board of directors may accelerate the exercise date of the
current purchase period to a date prior to the change of control.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Upon the closing of this offering, our articles of incorporation will limit
the liability of directors 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 shall be personally liable to us or our shareholders for monetary
damages resulting from his or her conduct as a director of ShopNow, except
liability for
- acts or omissions involving intentional misconduct or knowing violations
of law,
- unlawful distributions, or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Any repeal of or modification to our articles of incorporation may not adversely
affect any right or protection of a director of ShopNow who is or was a director
at the time of such repeal or modification.
In addition, upon the closing of this offering, our bylaws will provide that
we will indemnify any individual who was, is or is threatened to be made a party
to or is otherwise involved in any threatened, pending or completed action,
suit, claim or proceeding by reason of the fact that he or she is or was a
director or officer of ShopNow. This right to indemnification will continue as
to an individual who has ceased to be a director or officer. Our bylaws will
provide that we may indemnify our other officers and employees and other agents.
We have obtained and maintain directors' and officers' liability insurance,
under which our directors and officers may be indemnified against liability they
incur for serving in their capabilities as directors and officers.
We understand that the current position of the SEC is that any
indemnification of our directors and officers for liabilities arising under the
Securities Act of 1933 is against public policy and is, therefore,
unenforceable.
We believe that the limitation of liability provision in our articles of
incorporation, the indemnification provisions in our bylaws and our liability
insurance will facilitate our ability to continue to attract and retain
qualified individuals to serve as directors and officers.
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RELATED TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND
5% SHAREHOLDERS
In connection with our acquisition of Media Assets in September 1998, Jeff
Haggin, the sole shareholder of Media Assets, joined ShopNow as an executive
officer and he received 600,000 shares of our common stock based upon an
agreed-upon value of $6.00 per share, $300,000 in cash, a convertible promissory
note in the aggregate principal amount of $1,050,000 and options to purchase an
aggregate of 1,120,000 shares of our common stock. These options included an
option to purchase 220,000 shares at an exercise price of $1.00 per share and
performance-based options to purchase 900,000 shares of common stock at an
exercise price of $2.00 per share. The total value of the package Mr. Haggin
received at the time of the acquisition equaled $4,941,500. In May 1999, Mr.
Haggin exchanged his performance-based options for options to purchase 300,000
shares of common stock at an exercise price of $2.00 per share.
In April 1999, we issued to 24/7 Media 4,300,000 shares of Series G
convertible preferred stock at $7.00 per share in exchange for $30.1 million in
consideration, consisting of cash, 466,683 shares of 24/7 Media common stock and
24/7 Media's majority interest in CardSecure. A portion of the shares of Series
G convertible preferred stock and of the warrants were placed in escrow pending
consummation of our acquisition of CardSecure, which occurred on June 15, 1999.
24/7 Media also received warrants to purchase 860,000 shares of common stock at
$7.00 per share. Upon completion of this offering and assuming 33,254,706 shares
of common stock are outstanding, 24/7 Media will beneficially own 15.2% of our
shares of common stock. In connection with the acquisition of CardSecure, we
acquired an additional 9,727 shares of 24/7 Media common stock. As of June 30,
1999, we owned 476,410 shares of 24/7 Media common stock. In connection with
this purchase, we also entered into both a cross promotion agreement and a
mutual promotion agreement with 24/7 Media.
Under the cross promotion agreement, 24/7 Media promotes our e-commerce and
direct marketing services to its network of over 2,500 affiliated Web sites in
exchange for our promotion of 24/7 Media's advertising, representation and
e-mail management services to merchants. This agreement entitles each party to
share in the revenues of the other party based on the amount of business
generated through this relationship. The agreement prohibits 24/7 Media from
engaging other specifically identified providers of e-commerce services as
co-marketing partners for e-commerce technologies that we offer. We also have a
right of first refusal on any partnership with 24/7 Media for e-commerce
technology or services from other third parties, assuming we provide similar
products and services. 24/7 Media is the only third party authorized to sell
advertising on our Web site. Under this agreement, we are obligated to purchase
at least $1.0 million annually in shopping traffic from 24/7 Media. In
connection with 24/7 Media's investment in ShopNow, 24/7 Media has the right to
designate a director of ShopNow. 24/7 Media has designated Jacob Friesel as that
nominee.
Under the mutual promotion agreement, we jointly brand 24/7 Media's
Click2Buy transactional banner service with the ShopNow name and receive fees
for processing all Click2Buy transactions. Click2Buy is the process whereby a
shopper can click on a banner advertisement from within a specific Web site and
purchase the product or service in the banner advertisement without having to
leave the Web site where the shopper originally saw the banner advertisement.
In connection with our acquisition of GO Software in June 1999, William
Pittman joined ShopNow as an executive officer and he received, in exchange for
his shares of capital stock in GO Software, 814,688 shares of our common stock,
$2.0 million in cash, and options to purchase an aggregate of 100,000 shares of
our common stock at an exercise price of $7.00 per share. The total value of the
package Mr. Pittman received at the time of the acquisition equaled $8,517,504.
In June 1999, we entered into a stock purchase agreement with CB Capital
Investors pursuant to which we issued 2,100,000 shares of Series I convertible
preferred stock at $9.00 per share in exchange for $18.9 million in cash. CB
Capital Investors also received warrants to purchase 555,556 shares of
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common stock. Upon completion of this offering and assuming 33,254,706 shares of
common stock are outstanding, CB Capital Investors will beneficially own 7.9% of
our shares of common stock. In July 1999, we entered into a licensing agreement
with Chase Manhattan Capital, an affiliate of CB Capital Investors, which
agreement has been assigned to Chase Manhattan Bank. Pursuant to this agreement,
Chase will pay ShopNow a licensing fee to use the technology underlying the
site. As part of the agreement, Chase will be a preferred provider of financial
services for ShopNow.com and the exclusive marketer of credit cards featuring
the ShopNow brand. The agreement provides that each party will share in the
revenues of the other party based on the amount of business generated through
this relationship. We believe that the key advantages that we will derive from
our relationship with Chase include increased revenues from the licensing fee
and the new Internet shopping site. As part of the agreement, we will
participate equally with Chase in a cooperative marketing fund to promote the
services being offered under this agreement. Our marketing obligations to Chase
include placing an advertisement on the ShopNow.com home page, making direct
mailings regarding Chase's merchant services to merchants on the ShopNow Network
and mentioning Chase's merchants in our own advertising. Our obligation to the
fund is to contribute at least $3.0 million annually. The agreement has an
initial term of 27 months, with a three year renewal period at Chase's option.
In connection with Chase's investment in ShopNow, Chase has the right to
designate one nominee to serve as a director of ShopNow.
On various occasions during 1999 and fiscal 1998, we granted the following
options to purchase shares of our common stock to the following executive
officers and directors:
- On January 8, 1998, August 1, 1998, November 30, 1998 and December 11,
1998, we granted Mr. Walker options to purchase 25,000, 310,000, 375 and
100 shares of common stock, respectively, with exercise prices of $2.00,
$4.00, $2.50 and $4.00, respectively;
- On September 15, 1998, September 30, 1998 and December 11, 1998, we
granted Mr. Haggin options to purchase 300,000, 220,000 and 100 shares of
common stock, respectively, with exercise prices of $2.00, $1.00 and
$4.00, respectively;
- On June 8, 1998, November 30, 1998, December 11, 1998 and December 31,
1998, we granted Mr. Koslow options to purchase 150,000, 375, 100 and
40,000 shares of common stock, respectively, with exercise prices of
$1.75, $2.50, $4.00 and $2.00, respectively;
- On March 18, 1998, June 1, 1998, November 30, 1998 and December 11, 1998,
we granted Dr. Krishnan options to purchase 10,000, 100,000, 375 and 100
shares of common stock, respectively, with exercise prices of $2.00,
$2.00, $2.50 and $4.00, respectively;
- On January 1, 1998, November 30, 1998, December 11, 1998 and December 31,
1998, we granted Mr. Palomino options to purchase 10,000, 375, 100 and
30,000 shares of common stock, respectively, with exercise prices of
$2.00, $2.50, $4.00 and $2.00, respectively;
- On January 1, 1998, November 30, 1998, December 11, 1998 and December 31,
1998, we granted Ms. Savage options to purchase 13,000, 375, 100 and
30,000 shares of common stock, respectively, with exercise prices of
$2.00, $2.50, $4.00 and $2.00, respectively;
- On November 16, 1998 and December 11, 1998, we granted Mr. Arciniega
options to purchase 250,000 and 100 shares of common stock, respectively,
with exercise prices of $4.00;
- On both September 30, 1998 and May 3, 1999, we granted Mr. Lonsdale
options to purchase 50,000 shares of common stock with exercise prices of
$4.00 and $7.00, respectively;
- On May 3, 1999, we granted Mr. Maxwell options to purchase 50,000 shares
of common stock with exercise prices of $7.00;
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- On both September 30, 1998 and May 3, 1999, we granted Mr. McClure options
to purchase 50,000 shares of common stock with exercise prices of $4.00
and $7.00, respectively;
- On both September 30, 1998 and May 3, 1999, we granted Mr. Snedegar
options to purchase 50,000 shares of common stock with exercise prices of
$4.00 and $7.00, respectively;
- On May 3, 1999, we granted Mr. Terbeek options to purchase 50,000 shares
of common stock with exercise prices of $7.00; and
- In June 1999, we granted Mr. Walker, Mr. Koslow, Dr. Krishnan, Mr.
Palomino, Ms. Savage and Mr. Arciniega options to purchase 450,000,
110,000, 35,525, 50,000, 122,675 and 50,000 shares of common stock,
respectively, at an exercise price equal to the low point of the filing
range as indicated in our preliminary prospectus for this offering, or
$10.00 per share. These options vest over a two-year period commencing
after the closing of this offering.
We believe that all of these transactions were made on terms as favorable to
us as we would have received from unaffiliated third parties. Any future
transactions between us and our officers, directors and greater than 5%
shareholders and their affiliates will be approved by a majority of the board of
directors, including a majority of our disinterested, non-employee directors.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information known to ShopNow with respect to
the beneficial ownership of our common stock as of July 27, 1999 by (i) each
shareholder known by ShopNow to own beneficially more than 5% of its common
stock, (ii) each of the individuals listed on the Summary Compensation Table,
(iii) each director of ShopNow, and (iv) all directors and executive officers as
a group.
The percentage ownership in the table below is based on 26,254,706 shares
outstanding as of July 27, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. Shares of
common stock subject to options currently exercisable or exercisable within 60
days of the proposed effective date of the offering are deemed outstanding for
the purpose of computing the percentage ownership of the person holding the
options but are not deemed outstanding for computing the percentage ownership of
any other person. Unless otherwise indicated below, the persons and entities
named in the table have sole voting and sole investment power with respect to
all shares beneficially owned subject to community property laws where
applicable.
The number of shares includes 20,027,516 shares of common stock issuable
upon the automatic conversion of our convertible preferred stock upon
consummation of this offering and the exercise and conversion of all 167,047
warrants to purchase Series C convertible preferred stock. The convertible
preferred stock converts at a ratio of 1 for 1. The percentage of shares
outstanding after the offering assumes the underwriters' over-allotment is not
exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OR GROUP OF BENEFICIAL OWNERS(1) OWNED OFFERING OFFERING
- ---------------------------------------------------------- -------------- ----------- -----------
<S> <C> <C> <C>
24/7 Media, Inc.(2)....................................... 5,168,500 19.1% 15.2%
Bret R. Maxwell(3)........................................ 2,924,630.5 11.1 8.8
Mark H. Terbeek(4)........................................ 2,924,630.5 11.1 8.8
Chase Manhatten Capital, L.P.(5).......................... 2,655,556 9.9 7.9
Dwayne M. Walker(6)....................................... 2,411,020.5 9.0 7.2
Environmental Private Equity Fund II, L.P.(7)............. 1,462,315.25 5.6 4.4
The Productivity Fund III, L.P.(8)........................ 1,462,315.25 5.6 4.4
Ganapathy Krishnan, Ph.D.(9).............................. 879,648 3.3 2.7
Mark C. McClure........................................... 127,711 * *
Jacob I. Friesel.......................................... -- -- --
David M. Lonsdale......................................... -- -- --
John R. Snedegar.......................................... -- -- --
All directors and executive officers as a group (15
persons)(10)............................................ 8,778,429 32.0 26.4
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) The address of 24/7 Media, Inc. and Mr. Friesel is 1250 Broadway, 28th
Floor, New York, NY 10001. The address of Environmental Private Equity Fund
II, L.P., The Productivity Fund III, L.P. and Messrs. Maxwell and Terbeek is
c/o First Analysis Corporation, The Sears Tower, Suite 950, 223 South Wacker
Drive, Chicago, IL 60606. The address of Chase Manhatten Capital, L.P. is 2
Chase Manhatten Plaza, 16th Floor, New York, NY 10081. The address of
Messrs. Walker, Krishnan, McClure, Lonsdale and Snedegar is c/o ShopNow.com,
411 First Avenue South, Suite 200 North, Seattle, Washington 98101.
(2) Includes 860,000 shares issuable pursuant to warrants held by 24/7 Media,
Inc. that are currently exercisable.
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(3) Includes 1,462,315.25 shares held by each of the Environmental Private
Equity Fund II, L.P., and The Productivity Fund III, L.P. Mr. Maxwell is
Vice Chairman of First Analysis Corporation, which is the manager of the
funds. Mr. Maxwell disclaims beneficial ownership of all shares held by the
Environmental Private Equity Fund II, L.P. and the Productivity Fund III,
L.P. except to the extent of his pro rata pecuniary interest therein.
(4) Includes 1,462,315.25 shares held by each of the Environmental Private
Equity Fund II, L.P. and The Productivity Fund III, L.P. Mr. Terbeek was
formerly an Associate with First Analysis Corporation, which is the manager
of the funds. Mr. Terbeek disclaims beneficial ownership of all shares held
by the Environmental Private Equity Fund II, L.P. and the Productivity Fund
III, L.P. except to the extent of his pro rata pecuniary interest therein.
(5) Includes 2,655,556 shares transferred from CB Capital Ivestors, L.P., an
affiliate of Chase Manhatten Bank, on August 11, 1999, of which 555,556
shares are issuable pursuant to a warrant held by Chase Manhatten Capital
L.P. that is currently exercisable.
(6) Includes 523,600 shares held by Mr. Walker that are currently exercisable or
exercisable within 60 days of July 27, 1999.
(7) Includes 6,250 shares issuable pursuant to a warrant held by the
Environmental Private Equity Fund II, L.P. that is currently exercisable.
(8) Includes 6,250 shares issuable pursuant to a warrant held by The
Productivity Fund III, L.P. that is currently exercisable.
(9) Includes 64,475 shares issuable pursuant to options held by Dr. Krishnan
that are currently exercisable within 60 days of July 27, 1999.
(10) Includes 1,218,143 shares issuable pursuant to options held by the
directors and officers that are currently exercisable or exercisable within
60 days of July 27, 1999. Also includes the 1,462,315.25 shares held by each
of the Environmental Private Equity Fund II, L.P. and The Productivity Fund
III, L.P. referenced in footnotes (3) and (4) above.
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, ShopNow's authorized capital stock will
consist of 200,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value. The following description of our
capital stock does not purport to be complete and is subject to and qualified in
its entirety by our articles of incorporation and bylaws, which are included as
exhibits to the registration Statement of which this prospectus forms a part,
and by the provisions of applicable Washington law.
COMMON STOCK
As of June 30, 1999, and including the automatic conversion of all
outstanding shares of our preferred stock into common stock and the exercise and
automatic conversion into common stock of all warrants to purchase our Series C
convertible preferred stock upon the completion of this offering, there were
outstanding 24,154,706 shares of common stock held of record by approximately
400 shareholders and options to purchase 8,206,657 shares of common stock.
The holders of common stock are entitled to one vote on each matter
submitted to a vote of the shareholders. Subject to preferences that may apply
to shares of preferred stock outstanding at the time, the holders of outstanding
shares of common stock shall be entitled to receive ratably dividends at such
times and in such amounts as may be determined by the board of directors. In the
event of any dissolution, liquidation or winding up, the holders of common stock
are entitled to share ratably in all of the assets remaining after payment or
provision for payment of the debts and other liabilities and
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the liquidation preference of any outstanding shares of preferred stock. The
holders of common stock have no preemptive or subscription rights. There are no
conversion rights, redemption rights, sinking fund provisions or fixed dividend
rights with respect to the common stock. The holders of common stock are not
entitled to cumulative voting at any election of directors. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued in the offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon the consummation of this offering, the outstanding shares of Series A,
Series B, Series C, Series D, Series E, Series F, Series G, Series H and Series
I convertible preferred stock will automatically convert into common stock. Upon
completion of this offering, the board of directors will have authority,
pursuant to our articles of incorporation and without further action by the
shareholders, to issue up to 5,000,000 shares of preferred stock in one or more
series. The board of directors may also determine or alter for each series such
voting powers, designations, preferences, and special rights, qualifications,
limitations or restrictions as permitted by law. The board of directors may
authorize the issuance of preferred stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of the
common stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring or preventing a change in
control of ShopNow and may adversely affect the market price of the common stock
and the voting and other rights of the holders of common stock. There will be no
shares of preferred stock outstanding upon the consummation of this offering,
and we have no current plans to issue any shares of preferred stock.
COMMON STOCK WARRANTS
Upon the closing of this offering, we will have warrants outstanding to
purchase an aggregate of 4,234,618 shares of common stock at exercise prices
ranging from $1.00 to $10.00 per share. These warrants contain anti-dilution
provisions providing for adjustments to the exercise price and the number of
shares of common stock underlying these warrants upon the occurrence of
specified events, including any recapitalization, reclassification, stock
dividend, stock split, stock combination or similar transaction.
Additionally, immediately prior to the closing of this initial public
offering, there were warrants outstanding to purchase 167,047 shares of Series C
preferred stock at an exercise price of $1.50 per share. The right to purchase
shares of Series C preferred stock pursuant to such warrants expires with the
closing of an underwritten public offering pursuant to an effective registration
statement.
OTHER EQUITY-BASED AGREEMENTS
From time to time in connection with the negotiation of material agreements,
we may use equity-based arrangements, including warrants to purchase shares of
common stock, as an incentive for a party with which ShopNow has a business
relationship to enter into an agreement with ShopNow.
REGISTRATION RIGHTS
Upon completion of the offering, the holders of an aggregate of 20,194,563
shares of common stock to be issued upon the automatic conversion of our
preferred stock and the exercise and automatic conversion of the warrants to
purchase our Series C convertible preferred stock, 4,234,618 shares issuable
upon exercise of our outstanding warrants and 6,060,143 shares of outstanding
common stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act of 1933. Under the terms of our
registration rights agreement, the holders of more than 50% of the registrable
securities issued and issuable may request, by written notice nine months after
the effective date of the first registration statement filed by ShopNow covering
a public offering of its securities, that ShopNow register any registrable
securities specified in the notice in a public offering with a public
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offering price of at least $5.00 per share of common stock and the anticipated
aggregate proceeds of which would exceed $4.0 million. Also under the terms of
our registration rights agreement, the holders of more than 50% of the
registrable securities issued and issuable may require that ShopNow register its
shares for public resale on Form S-2, Form S-3 or similar short-form
registration, provided that ShopNow is a registrant entitled to use such a form
and that the value of the securities to be registered is at least $750,000.
ShopNow is not obligated to effect any such short-form registration at any time
more than three years after the initial public offering or if it has effected
one such registration during the immediately preceding twelve-month period.
These registration rights are subject to the right of the managing underwriter
to reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration will be borne by
ShopNow. A holder's registration rights will terminate on the closing of the
first company-initiated registered public offering of common stock, or on such
date after such event, if the holder is entitled to immediately sell all of its
shares under Rule 144 of the Securities Act during any 90-day period and the
holders of the registrable stock own less than 1% of the outstanding common
stock.
WASHINGTON ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Washington law and our articles of incorporation and
bylaws could make more difficult the acquisition of ShopNow by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of ShopNow to first negotiate with
us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure ShopNow outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Effective upon the closing of this
offering, our articles of incorporation will provide for the division of our
board of directors into three classes, as nearly as equal in number as possible,
with the directors in each class serving for a three-year term, and one class
being elected each year by our shareholders. The initial term of the Class I
directors expires at our annual meeting of shareholders to be held in 2000; the
initial term of the Class II directors expires at our annual meeting of
shareholders to be held in 2001; and the initial term of the Class III directors
expires at our annual meeting of shareholders to be held in 2002. Thereafter,
the term of each class of directors shall be three years. This system of
electing and removing directors generally makes it more difficult for
shareholders to replace a majority of the members of our board of directors and
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of ShopNow and may have the effect of maintaining the
incumbency of our board of directors.
SHAREHOLDER MEETING. Effective upon the completion of this offering, our
bylaws will provide that, except as otherwise required by law or by our articles
of incorporation, special meetings of the shareholders may only be called
pursuant to a resolution adopted by our board of directors, the Chairman of our
board of directors or our President. These provisions of our articles of
incorporation and bylaws could discourage potential acquisition proposals and
could delay or prevent a change of control. Our intent in using these provisions
is to enhance the likelihood of continuity and stability in the composition of
our board of directors and in the policies formulated by them and to discourage
certain types of transactions that may involve an actual or threatened change of
control. These provisions are designed to reduce our vulnerability to an
unsolicited acquisition proposal and to discourage certain tactics that may be
used in proxy fights. However, these provisions could have the effect of
discouraging others from making tender offers for our shares and, as a
consequence, they could inhibit fluctuations in the market price of our shares
that could result from actual or rumored takeover attempts. Such provisions
could have the effect of preventing changes in our management.
73
<PAGE>
REQUIREMENTS FOR ADVANCE NOTIFICATION OF SHAREHOLDER NOMINATIONS AND
PROPOSALS. Effective upon the completion of this offering, our bylaws will
contain 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.
WASHINGTON ANTI-TAKEOVER LAW. Washington law imposes restrictions on some
transactions between a corporation and certain significant shareholders. Chapter
23B.19 of the Washington Business Corporation Act prohibits a "target
corporation," with some 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 such
acquisition. Such prohibited transactions include, among others 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. A
corporation may not opt out of this statute. This provision may have the effect
of delaying, deterring or preventing a change of control of ShopNow.
SHAREHOLDER ACTION BY WRITTEN CONSENT. Effective upon the closing of this
Offering, our Amended and Restated Articles of Incorporation permit shareholders
to act by written consent without a meeting only with the written consent of all
shareholders entitled to vote on the subject matter.
ELIMINATION OF CUMULATIVE VOTING. Effective upon the closing of this
Offering, our Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws do not provide for cumulative voting in the election of
directors.
UNDESIGNATED PREFERRED STOCK. The authorization of undesignated preferred
stock makes it possible for the Board of Directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of ShopNow. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of ShopNow.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
NASDAQ NATIONAL MARKET LISTING
We will apply for approval for quotation on the Nasdaq National Market under
the symbol "SPNW" for the shares of common stock we are offering.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and no prediction can be made as to the effect, if any, that market sales
of shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public
74
<PAGE>
market, or the perception that such sales could occur, could adversely affect
the market price of the common stock and could impair our future ability to
raise capital through the sale of equity securities. See "Risk Factors--Future
Sales of Our Common Stock May Depress Our Stock Price."
Upon the closing of this offering, we will have an aggregate of 33,254,706
shares of common stock outstanding, based upon shares outstanding as of June 30,
1999 and assuming the automatic conversion of all of our outstanding preferred
stock and the exercise and automatic conversion of all warrants to purchase our
Series C convertible preferred stock into an aggregate of 20,194,563 shares of
common stock upon the completion of this offering, no exercise of the
underwriters' over-allotment option, and no exercise of outstanding options or
warrants. Of the outstanding shares, the 7,000,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act of 1933,
except for any shares purchased by "affiliates" of ShopNow as that term is
defined in Rule 144 under the Securities Act of 1933. Of the remaining
26,254,706 shares of common stock held by existing shareholders, 26,159,231
shares will be deemed "restricted securities" as that term is defined in Rule
144. All of these restricted securities will be subject to lock-up agreements
providing that, with certain limited exceptions, the shareholder will not offer,
sell, contract to sell or otherwise dispose of any securities of ShopNow that
are substantially similar to the common stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, common stock or any such substantially similar securities
(other than pursuant to employee stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities outstanding as
of, the date of the lock-up agreement) for a period of 180 days after the date
of this prospectus without the prior written consent of Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, none of these shares may be sold until 180 days after
the date of this prospectus. At various times after expiration of the lock-up
agreements, these restricted securities will be eligible for sale in the public
market, subject, in some cases, to volume limitations. In addition, as of June
30, 1999, there were outstanding options to purchase 6,901,578 shares of common
stock and warrants to purchase 4,234,618 shares of common stock. Options to
purchase 3,675,983 shares of common stock and warrants to purchase 1,428,056
shares of common stock held by ShopNow's executive officers, directors, and 5%
shareholders will be subject to lock-up agreements. Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 332,000 shares immediately after this
offering) or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed,
subject to restrictions. In addition, a person who is not deemed to have been an
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate, such person's holding period for the purpose of effecting a sale
under Rule 144 commences on the date of transfer from the affiliate.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any employee, officer or director of or
consultant to ShopNow who purchased shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
75
<PAGE>
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this Prospectus before selling
such shares. However, all Rule 701 shares held by ShopNow's executive officers
and directors will be subject to lock-up agreements and will only become
eligible for sale at the earlier of the expiration of the 180-day lock-up
agreements or upon the prior written consent of Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated.
We intend to file one or more registration statements on Form S-8 under the
Securities Act of 1933 to register all shares of common stock issued or issuable
under our stock plans. We expect to file the registration statement covering
shares offered pursuant to our stock option plan and employee stock purchase
plan within 180 days after the date of this prospectus, thus permitting the
resale of such shares by nonaffiliates in the public market without restriction
under the Securities Act.
Also, beginning nine months after the date of this offering, holders of
24,350,756 shares of common stock and holders of warrants to purchase 4,234,618
shares of common stock will be entitled to certain rights with respect to
registration of such shares for sale in the public market. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by affiliates)
immediately upon the effectiveness of such registration to the extent such
shares are not already freely tradable.
76
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, the underwriters named below, for whom Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, U.S. Bancorp Piper Jaffray Inc.,
SoundView Technology Group, Inc. and Wit Capital Corporation are acting as
representatives, have severally but not jointly agreed to purchase from us the
following numbers of shares of common stock listed opposite their names below.
The underwriters purchase the shares directly from us for resale to the public
in this offering. The representatives manage the solicitation of purchasers in
the offering in exchange for a management fee. The underwriters may sell shares
directly to the public, or may sell them to securities dealers for resale to the
public.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Dain Rauscher Incorporated...........................................................................
U.S. Bancorp Piper Jaffray Inc.......................................................................
SoundView Technology Group, Inc......................................................................
Wit Capital Corporation..............................................................................
----------
Total..............................................................................................
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in our business and the receipt of certificates, opinions and letters from us,
our outside counsel, our general counsel and our independent public accountants
making representations regarding our business and the information contained in
this prospectus. Other than those shares covered by the over-allotment option
described below, the underwriters will be obligated to purchase all the shares
of common stock offered by this prospectus if any are purchased. The
underwriting agreement provides that, in the event of a default by an
underwriter, the purchase commitments of nondefaulting underwriters may be
increased or the underwriting agreement may be terminated.
We have granted to the underwriters a 30-day option to purchase up to
1,050,000 shares of common stock at the initial public offering price less the
underwriting discounts and commissions. Such option may be exercised only to
cover over-allotments in the sale of shares of common stock.
The underwriters have advised us that they propose to offer the shares to
the public initially at the public offering price set forth on the cover page of
this prospectus and to securities dealers at such price less a concession not in
excess of $ per share. These concessions may be reclaimed by the underwriters
in certain circumstances if a dealer's client purchases and resells shares sold
in the offering within 30 days of the date of this prospectus and the
underwriters are purchasing shares in the open market. The underwriters and such
dealers may reallow a concession of $ per share on sales to certain other
dealers. After the initial public offering, the representatives may change the
public offering price and concession and discount to dealers.
The following table summarizes the per share and total public offering
price, underwriting discount to be paid to the underwriters by us and the
proceeds before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over allotment
77
<PAGE>
option. The underwriters' compensation was determined through arms-length
negotiation between the representatives and ShopNow.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------- -------------- --------------
<S> <C> <C> <C>
Public offering price................................................. $ $ $
Underwriting discount paid by ShopNow.................................
Proceeds, before expenses, to ShopNow.................................
</TABLE>
The underwriting fee will be an amount equal to the initial public offering
price per share of common stock, less the amount paid by the underwriters to us
per share of common stock. The underwriting fee is currently expected to be
approximately 7%.
We have incurred the following additional expenses related to this offering:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 26,855
NASD filing fee................................................... 10,160
Nasdaq National Market listing fee................................ 90,000
Printing and engraving costs...................................... 165,000
Legal fees and expenses........................................... 450,000
Accounting fees and expenses...................................... 200,000
Transfer Agent and Registrar fees................................. 8,000
</TABLE>
We, our officers and directors, and certain of our shareholders have agreed
that they will not offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act of 1933 relating to any additional shares of common stock or securities
convertible into or exchangeable or exercisable for any shares of common stock
or securities convertible into or exchangeable or exercisable for any of our
shares without the prior written consent of Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, for a period of 180 days after the date of this
prospectus, except in the case of issuances pursuant to the exercise of employee
stock options outstanding on the date of this prospectus.
The underwriters do not intend to confirm sales to any accounts over which
they have discretionary authority.
The underwriters intend to reserve for sale, at the initial public offering
price, up to 350,000 shares of common stock for those directors, officers,
employees (including individuals selected by our directors, officers and
employees) and our business associates who have expressed an interest in
purchasing shares of common stock in this offering. As a result, the number of
shares of common stock available for sale to the general public will be reduced
to the extent such persons purchase the reserved shares. The underwriters will
offer to the general public any reserved shares that are not so purchased, on
the same basis as the other shares to be sold in this offering.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act and liabilities arising
from breaches of representations and warranties contained in the underwriting
agreement, or to contribute to payments which the underwriters may be required
to make in connection with these liabilities.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between the representatives and us. The principal factors to be considered in
determining the public offering price include: the information set forth in this
prospectus and otherwise available to the representatives, the history and the
prospects for the industry in which we compete, the ability of our management,
our prospects for future earnings, the
78
<PAGE>
present state of our development and our current financial condition, the
general condition of the securities markets at the time of this offering, and
the recent market prices of, and the demand for, publicly traded common stock of
generally comparable companies.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format is being made available on a Web site
maintained by Wit Capital. In addition, pursuant to a dealer agreement, all
dealers purchasing shares from Wit Capital in the offering similarly have agreed
to make a prospectus in electronic format available on Web sites maintained by
each of these dealers. Other than the prospectus in electronic format, the
information on these Web sites is not part of this prospectus or the
registration statement of which this prospectus forms a part, has not been
approved or endorsed by us or any underwriter in such capacity and should not be
relied on by prospective investors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Kirkland,
Washington and Palo Alto, California. Certain legal matters will be passed upon
for the underwriters by Faegre & Benson LLP, Minneapolis, Minnesota.
EXPERTS
The audited financial statements for ShopNow.com Inc., Media Assets, Inc.,
and The Internet Mall, Inc. and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The audited financial statements for GO Software, Inc. included in this
prospectus have been audited by Ernst & Young LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Our board of directors has selected Arthur Andersen LLP to serve as
independent public accountants. Arthur Andersen LLP has served as our
independent public accountants since August 1998. On August 7, 1998, we
dismissed Ernst & Young LLP as our independent accountants. Ernst & Young's
report on the Company's consolidated financial statements for the two years
ended December 31, 1997 does not cover the consolidated financial statements of
the Company included in this prospectus. Ernst & Young's reports on the
financial statements for the years ended December 31, 1996 and 1997 did not
contain any adverse opinion or disclaimer of opinion and were not qualified or
79
<PAGE>
modified as to uncertainty, audit scope or accounting principle. The decision to
change independent accountants was approved by the board of directors. During
the years ended December 31, 1996 and 1997 and through August, 1998 there were
no reportable events, as defined in regulations of the Securities and Exchange
Commission, or disagreements with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. Prior to retaining Arthur Andersen LLP, we had not consulted with
Arthur Andersen LLP regarding accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933, that registers the
shares of common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules filed with the registration statement. For more information about us
and the common stock offered hereby, you should review the registration
statement and the exhibits and schedules filed with the registration statement.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, you should review the copy of such contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules filed with the
registration statement may be inspected and copied at the following location of
the Securities and Exchange Commission:
PUBLIC REFERENCE ROOM
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549.
You may also obtain copies of all or any part of the registration statement
from that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
80
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Unaudited Pro Forma Combined Financial Information
Unaudited Pro Forma Combined Statements of Operations.................................................... F-3
Notes to Unaudited Pro Forma Combined Financial Statements............................................... F-5
ShopNow.com Inc.
Report of Independent Public Accountants................................................................. F-7
Consolidated Balance Sheets.............................................................................. F-8
Consolidated Statements of Operations.................................................................... F-9
Consolidated Statements of Comprehensive Loss............................................................ F-10
Consolidated Statements of Shareholders' Equity (Deficit)................................................ F-11
Consolidated Statements of Cash Flows.................................................................... F-12
Notes to Consolidated Financial Statements............................................................... F-14
Media Assets, Inc.
Report of Independent Public Accountants................................................................. F-33
Balance Sheets........................................................................................... F-34
Statements of Operations................................................................................. F-35
Statements of Shareholder's Equity....................................................................... F-36
Statements of Cash Flows................................................................................. F-37
Notes to Financial Statements............................................................................ F-38
The Internet Mall, Inc.
Report of Independent Public Accountants................................................................. F-42
Balance Sheets........................................................................................... F-43
Statements of Operations................................................................................. F-44
Statements of Shareholders' Equity....................................................................... F-45
Statements of Cash Flows................................................................................. F-46
Notes to Financial Statements............................................................................ F-47
GO Software, Inc.
Report of Independent Auditors........................................................................... F-53
Balance Sheets........................................................................................... F-54
Statements of Operations................................................................................. F-55
Statements of Shareholders' Equity (Deficit)............................................................. F-56
Statements of Cash Flows................................................................................. F-57
Notes to Financial Statements............................................................................ F-58
</TABLE>
F-1
<PAGE>
SHOPNOW.COM INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statement of operations of ShopNow.com Inc.
for the year ended December 31, 1998 and for the six months ended June 30, 1999
gives effect to the acquisitions of Media Assets, Inc., The Internet Mall Inc.
and GO Software, Inc. and the disposition of BuySoftware.com as if they occurred
on January 1, 1998.
Separate historical financial information required under Rule 3-05 of
Regulation S-X or pro forma financial information under Article 11 of Regulation
S-X for the acquisition of e-Warehouse and CyberTrust, Inc. is not provided
because we do not have access to the books and records due to disputes
surrounding the acquisitions and the amounts are not considered meaningful since
the Company has written off the majority of the purchase price due to the
impairment of the acquired technology.
The unaudited pro forma combined statements of operations are presented for
informational purposes only and do not purport to represent what the Company's
results of operations for the year ended December 31, 1998 or for the six months
ended June 30, 1999 would actually have been had the acquisitions, in fact,
occurred on January 1, 1998, or the Company's results of operations for any
future period. The unaudited pro forma combined statements of operations should
be read in conjunction with the financial statements and related notes thereto
included elsewhere in this prospectus and the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
F-2
<PAGE>
SHOPNOW.COM INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(JANUARY 1, 1998 (JANUARY 1, 1998
TO TO
AUGUST 8, 1998) SEPTEMBER 17,
SHOPNOW.COM THE INTERNET MALL, 1998) GO SOFTWARE, PRO FORMA
INC. INC. MEDIA ASSETS, INC. INC. ADJUSTMENTS
--------------- ------------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Transactions and
merchandising............. $ 4,211 $ 175 $ -- $1,346 $(3,931)(c)
Merchant services........... 2,943 -- 4,833 -- (527)(c)
--------------- ----- ------ ------ -----------
Total revenues............ 7,154 175 4,833 1,346 (4,458)
--------------- ----- ------ ------ -----------
Cost of revenues:
Transactions and
merchandising............. 4,493 24 -- 55 (4,351)(c)
Merchant services........... 1,356 -- 2,808 -- (101)(c)
--------------- ----- ------ ------ -----------
Total cost of revenues.... 5,849 24 2,808 55 (4,452)
--------------- ----- ------ ------ -----------
Gross profit............ 1,305 151 2,025 1,291 (6)
--------------- ----- ------ ------ -----------
Operating expenses:
Sales and marketing......... 12,183 56 1,365 143 (2,956)(c)
General and
administrative............ 3,549 275 318 1,006 (1,083)(c)
Research and development.... 4,370 114 -- 253 (1,061)(c)
Amortization of intangible
assets.................... 730 -- 1 -- 5,567(a)
Stock-based compensation.... 182 -- -- -- --
Unusual item--impairment of
acquired technology....... 5,207 -- -- -- --
--------------- ----- ------ ------ -----------
Total operating
expenses................ 26,221 445 1,684 1,402 467
--------------- ----- ------ ------ -----------
Income (loss) from
operations.................. (24,916) (294) 341 (111) (473)
Other income (expense), net... 171 (13) 17 41 (125)(b)
--------------- ----- ------ ------ -----------
Loss before provision for
income taxes................ (24,745) (307) 358 (70) (598)
Provision for income taxes.... -- -- -- 17 (17)(d)
--------------- ----- ------ ------ -----------
Net (loss) income....... $ (24,745) $(307) $ 358 $ (53) $ (615)
--------------- ----- ------ ------ -----------
--------------- ----- ------ ------ -----------
Basic and diluted net loss per
share....................... $ (7.01)
---------------
---------------
Weighted average shares
outstanding used to compute
basic and diluted net loss
per share................... 3,532,054
---------------
---------------
Basic and diluted pro forma
net loss per share.......... $ (1.92)
---------------
---------------
Weighted average shares used
to compute basic and diluted
pro forma net loss per
share....................... 12,857,745
---------------
---------------
<CAPTION>
PRO FORMA
COMBINED
TOTAL
-------------
<S> <C>
Revenues:
Transactions and
merchandising............. $ 1,801
Merchant services........... 7,249
-------------
Total revenues............ 9,050
-------------
Cost of revenues:
Transactions and
merchandising............. 221
Merchant services........... 4,063
-------------
Total cost of revenues.... 4,284
-------------
Gross profit............ 4,766
-------------
Operating expenses:
Sales and marketing......... 10,791
General and
administrative............ 4,065
Research and development.... 3,676
Amortization of intangible
assets.................... 6,298
Stock-based compensation.... 182
Unusual item--impairment of
acquired technology....... 5,207
-------------
Total operating
expenses................ 30,219
-------------
Income (loss) from
operations.................. (25,453)
Other income (expense), net... 91
-------------
Loss before provision for
income taxes................ (25,362)
Provision for income taxes.... --
-------------
Net (loss) income....... $ (25,362)
-------------
-------------
Basic and diluted net loss per
share....................... $ (4.61)
-------------
-------------
Weighted average shares
outstanding used to compute
basic and diluted net loss
per share................... 5,505,881
-------------
-------------
Basic and diluted pro forma
net loss per share.......... $ (1.71)
-------------
-------------
Weighted average shares used
to compute basic and diluted
pro forma net loss per
share....................... 14,842,525
-------------
-------------
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
SHOPNOW.COM INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(JANUARY 1, 1999
TO JUNE 15, 1999) PRO FORMA PRO FORMA
SHOPNOW.COM INC. GO SOFTWARE, INC. ADJUSTMENTS COMBINED TOTAL
----------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Transactions and merchandising.............. $ 11,630 $ 728 $ (9,747)(c) $ 2,611
Merchant services........................... 4,352 -- (176)(c) 4,176
----------------- ------ ----------- --------------
Total revenues............................ 15,982 728 (9,923) 6,787
----------------- ------ ----------- --------------
Cost of revenues:
Transactions and merchandising.............. 12,177 45 (11,153)(c) 1,069
Merchant services........................... 2,506 -- (37)(c) 2,469
----------------- ------ ----------- --------------
Total cost of revenues.................... 14,683 45 (11,190) 3,538
----------------- ------ ----------- --------------
Gross profit............................ 1,299 683 1,267 3,249
----------------- ------ ----------- --------------
Operating expenses:
Sales and marketing......................... 18,279 172 (2,886)(c) 15,565
General and administrative.................. 2,480 514 (436)(c) 2,558
Research and development.................... 2,934 182 (10)(c) 3,106
Amortization of intangible assets........... 1,639 -- 1,999(a) 3,638
Stock-based compensation.................... 1,956 -- -- 1,956
Unusual item--impairment of acquired
technology................................ -- -- -- --
----------------- ------ ----------- --------------
Total operating expenses.................. 27,288 868 (1,333) 26,823
----------------- ------ ----------- --------------
Income (loss) from operations (25,989) (185) 2,600 (23,574)
Other income (expense), net................. (245) 12 (50)(b) (283)
----------------- ------ ----------- --------------
Loss before provision for income taxes...... (26,234) (173) 2,550 (23,857)
Provision for income taxes.................. -- 12 (12)(d) --
----------------- ------ ----------- --------------
Net (loss) income....................... (26,234) (161) 2,538 (23,857)
----------------- ------ ----------- --------------
----------------- ------ ----------- --------------
Basic and diluted net loss per share.......... $ (5.50) $ (4.11)
----------------- --------------
----------------- --------------
Weighted average shares outstanding used to
compute basic and diluted net loss per
share....................................... 4,768,405 5,799,028
----------------- --------------
----------------- --------------
Basic and diluted pro forma net loss per
share....................................... $ (1.32) $ (1.14)
----------------- --------------
----------------- --------------
Weighted average shares used to compute basic
and diluted pro forma net loss per share.... 19,868,479 20,899,387
----------------- --------------
----------------- --------------
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
SHOPNOW.COM INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
The unaudited pro forma combined statement of operations for the year ended
December 31, 1998 and for the six months ended June 30, 1999 gives effect to the
acquisitions of Media Assets, Inc., The Internet Mall, Inc., and GO Software,
Inc. and the disposition of BuySoftware.com as if these transactions had
occurred January 1, 1998.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the cash and common stock consideration exchanged by
ShopNow for the fair value of the assets acquired and liabilities assumed.
2. PRO FORMA ADJUSTMENTS:
(a) To record amortization of intangible assets based on the excess purchase
price. As Media Assets, Inc. and The Internet Mall, Inc. were acquired
during 1998 and GO Software was acquired on June 15, 1999, amortization
is based on the actual purchase price allocation and computed for the
period from January 1, 1998 to the respective date of acquisition:
<TABLE>
<S> <C>
Seven months of The Internet Mall, Inc.............................. $ 422
Eight months of Media Assets, Inc................................... 347
Twelve months of GO Software, Inc................................... 4,798
---------
Total 1998 pro forma amortization............................... $ 5,567
---------
---------
Five months of 1999--GO Software, Inc............................... $ 1,999
---------
---------
</TABLE>
All intangible assets are amortized over three years.
(b) To record eight months of interest expense associated with the note
issued as consideration for Media Assets, Inc., totaling $25, and to
record twelve and six months of interest expense associated with the GO
Software, Inc. convertible promissory note totaling $100 and $50,
respectively.
(c) To eliminate the results of operations of BuySoftware.com. Given the
Company's continued involvement in certain retailing activities, the
results of BuySoftware.com will be reflected in continuing operations
through June 30, 1999. The Company ceased operations of BuySoftware.com
in June 1999. However, the Company believes that it is meaningful to
present the disposal as if it had occurred as of January 1, 1998. As
BuySoftware.com was run as a separate business segment, the revenues,
cost of revenues and operating expenses directly attributable to the
business segment were removed.
(d) To eliminate tax benefits recorded by GO Software, Inc., which may not
be realized by the Company.
(e) Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of shares outstanding during the period
assuming that shares issued for acquisitions were outstanding for the
entire period. Pro forma basic and diluted net loss per share is
F-5
<PAGE>
SHOPNOW.COM INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. PRO FORMA ADJUSTMENTS: (CONTINUED)
computed based on the weighted average number of shares outstanding
giving effect to shares issued in acquisitions as if they were
outstanding for the entire period and to the conversion of convertible
preferred stock on an as-if converted basis from the original issuance
date.
3.RECONCILIATION OF HISTORICAL WEIGHTED AVERAGE SHARES TO PRO FORMA
WEIGHTED AVERAGE SHARES:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Historical.................................................. 3,532,054 4,768,405
Internet Mall, January 1, 1998 - August 8, 1998............. 426,024 --
Media Assets, January 1, 1998 - September 17, 1998.......... 424,052 --
Go Software, January 1, 1998 - December 31, 1998; January 1,
1999 - June 15, 1999...................................... 1,123,751 1,030,623
----------------- -------------
Pro forma................................................... 5,505,881 5,799,028
----------------- -------------
----------------- -------------
</TABLE>
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ShopNow.com Inc.:
We have audited the accompanying consolidated balance sheets of ShopNow.com
Inc. (a Washington corporation) and subsidiaries as of December 31, 1997 and
1998 and June 30, 1999, and the related consolidated statements of operations,
comprehensive loss, shareholders' equity (deficit) and cash flows for each of
the years in the three year period ended December 31, 1998 and for the six
months ended June 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether these financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ShopNow.com Inc. and
subsidiaries as of December 31, 1997 and 1998 and June 30, 1999, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1998 and for the six months ended June 30, 1999, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
consolidated financial statements is presented for purpose of complying with the
Securities and Exchange Commission rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Seattle, Washington,
August 24, 1999
F-7
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, PRO FORMA
-------------------- --------------- SHAREHOLDERS'
1997 1998 1999 EQUITY AT JUNE 30,
--------- --------- --------------- 1999
-------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 376 $ 9,820 $ 6,241
Short-term investments.................................. -- 179 233
Accounts receivable, net................................ 146 2,266 3,039
Unbilled services....................................... -- 1,448 241
Prepaid expenses and other.............................. 192 709 1,474
--------- --------- ---------------
Total current assets.................................. 714 14,422 11,228
Property and equipment, net............................... 472 4,185 9,627
Goodwill, net............................................. -- 515 1,098
Other intangible assets, net.............................. 582 3,944 20,407
Investment in marketable equity securities................ -- -- 18,818
Other assets, net......................................... 562 717 3,072
--------- --------- ---------------
Total assets.......................................... $ 2,330 $ 23,783 $ 64,250
--------- --------- ---------------
--------- --------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 1,083 $ 3,551 $ 5,556
Accrued liabilities..................................... 502 1,132 3,507
Line of credit.......................................... 200 238 999
Current portion of notes and leases..................... 1,684 1,133 8,371
Customer deposits....................................... -- 2,155 1,196
Deferred revenue........................................ -- 535 365
--------- --------- ---------------
Total current liabilities............................. 3,469 8,744 19,994
Notes and leases payable, less current
portion................................................. 884 1,837 6,170
Put warrant liability..................................... -- -- 1,350
--------- --------- ---------------
Total liabilities..................................... 4,353 10,581 27,514
Commitments (Note 8)
Shareholders' equity (deficit):
Convertible preferred stock, $0.01 par value--
Authorized shares--20,000,000, issued shares--
3,868,896 in 1997, 12,299,896 in 1998, and
17,927,516 in 1999, preference in liquidation of
$79,853 in 1999....................................... 3,403 35,070 72,510 $ --
Common stock, $0.01 par value: Authorized
shares--40,000,000, issued shares--2,763,055 in
1997, 4,602,573 in 1998, and 6,060,143 in 1999........ (808) 6,559 21,839 94,349
Common stock warrants................................... -- 1,866 5,705 5,705
Deferred compensation................................... -- (930) (3,213) (3,213)
Unrealized loss on investments.......................... -- -- (4,508) (4,508)
Accumulated deficit..................................... (4,618) (29,363) (55,597) (55,597)
--------- --------- --------------- --------
Total shareholders' equity (deficit).................. (2,023) 13,202 36,736 $ 36,736
--------- --------- --------------- --------
--------
Total liabilities and shareholders' equity
(deficit)........................................... $ 2,330 $ 23,783 $ 64,250
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-8
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- ---------
(UNAUDITED)
-----------
<S> <C> <C> <C> <C> <C>
Revenues:
Transactions and merchandising..... $ -- $ 69 $ 4,211 $ 743 $ 11,630
Merchant services.................. 993 535 2,943 396 4,352
--------- --------- --------- ----------- ---------
Total revenues................... 993 604 7,154 1,139 15,982
--------- --------- --------- ----------- ---------
Cost of revenues:
Transactions and merchandising..... -- 159 4,493 1,058 12,177
Merchant services.................. 430 356 1,356 127 2,506
--------- --------- --------- ----------- ---------
Total cost of revenues........... 430 515 5,849 1,185 14,683
--------- --------- --------- ----------- ---------
Gross margin................... 563 89 1,305 (46) 1,299
--------- --------- --------- ----------- ---------
Operating expenses:
Sales and marketing................ 610 1,201 12,183 4,477 18,279
General and administrative......... 656 918 3,549 1,353 2,480
Research and development........... 25 2,436 4,370 1,442 2,934
Amortization of intangible
assets........................... 32 136 730 118 1,639
Stock-based compensation........... -- -- 182 2 1,956
Unusual item--impairment of
acquired technology.............. -- -- 5,207 -- --
--------- --------- --------- ----------- ---------
Total operating expenses......... 1,323 4,691 26,221 7,392 27,288
--------- --------- --------- ----------- ---------
Loss from operations........... (760) (4,602) (24,916) (7,438) (25,989)
Other income (expense), net.......... (50) (164) 171 109 (245)
--------- --------- --------- ----------- ---------
Net loss....................... $ (810) $ (4,766) $ (24,745) $ (7,329) $ (26,234)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Basic and diluted net loss per
share.............................. $ (0.40) $ (1.83) $ (7.01) $ (2.54) $ (5.50)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Weighted average shares outstanding
used to compute basic and diluted
net loss per share................. 2,012,285 2,608,398 3,532,054 2,883,883 4,768,405
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Basic and diluted pro forma net loss
per share.......................... $ (1.92) $ (1.32)
--------- ---------
--------- ---------
Weighted average shares outstanding
used to compute basic and diluted
pro forma net loss per share....... 12,857,745 19,868,479
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------------- ----------------------------
1996 1997 1998 1999
--------- --------- ---------- 1998 -----------
---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............................................ $ (810) $ (4,766) $ (24,745) $ (7,329) $ (26,234)
Unrealized loss on investments...................... -- -- -- -- (4,508)
--------- --------- ---------- ------- -----------
Comprehensive loss.................................. $ (810) $ (4,766) $ (24,745) $ (7,329) $ (30,742)
--------- --------- ---------- ------- -----------
--------- --------- ---------- ------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
---------------------- --------------------- COMMON STOCK
SHARES AMOUNT SHARES AMOUNT WARRANTS
----------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995............................. -- $ -- 1,946,684 $ 246 $ --
Issuance of common stock.............................. -- -- 391,429 80 --
Repurchase of common stock............................ -- -- (342,391) (51) --
Net loss.............................................. -- -- -- -- --
----------- --------- ---------- --------- ------
Balances, December 31, 1996............................. -- -- 1,995,722 275 --
Net loss January 1, 1997 through February 25, 1997.... -- -- -- -- --
Conversion from S Corporation to C Corporation........ -- -- -- (1,252) --
Conversion of shareholder notes into Series A
preferred stock..................................... 699,612 350 -- -- --
Issuance of Series B preferred stock.................. 2,334,079 1,800 -- -- --
Issuance of common stock.............................. -- -- 600,000 90 --
Repurchase of common stock............................ -- -- (10,000) (10) --
Conversion of shareholder notes into Series C
preferred stock..................................... 835,205 1,253 -- -- --
Conversion of shareholder notes into common stock..... -- -- 177,333 89 --
Net loss, February 26, 1997 through December 31,
1997................................................ -- -- -- -- --
----------- --------- ---------- --------- ------
Balances, December 31, 1997............................. 3,868,896 3,403 2,763,055 (808) --
Issuance of Series D preferred stock.................. 4,250,000 13,461 -- -- 673
Common stock, options and warrants issued for
businesses acquired................................. -- -- 1,744,692 6,105 --
Issuance of Series E preferred stock and warrants to
acquire common stock................................ 2,125,000 7,672 -- -- 328
Issuance of Series F preferred stock and warrants to
acquire common stock................................ 2,056,000 10,534 -- -- 865
Exercise of common stock options...................... -- -- 32,499 25 --
Issuance of common stock in consideration for
professional services............................... -- -- 62,327 125 --
Issuance of compensatory stock options................ -- -- -- 1,112 --
Compensation attributable to stock options............ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
----------- --------- ---------- --------- ------
Balances, December 31, 1998............................. 12,299,896 35,070 4,602,573 6,559 1,866
Issuance of Series F preferred stock and warrants to
acquire common stock................................ 280,000 1,400 -- -- --
Issuance of Series G preferred stock and warrants to
acquire common stock................................ 5,014,286 33,200 -- -- 1,900
Issuance of Series H preferred stock and warrants to
acquire common stock................................ 333,334 2,840 -- -- 160
Common stock and options issued for businesses
acquired............................................ -- -- 1,366,787 11,496 --
Issuance of warrants in connection with debt
financings.......................................... -- -- -- -- 569
Issuance of warrants and options to business
partners............................................ -- -- -- -- 1,210
Exercise of common stock options...................... -- -- 209,011 123 --
Issuance of common stock in consideration for customer
lists and services.................................. -- -- 11,000 68 --
Repurchase of common stock............................ -- -- (129,228) (46) --
Issuance of compensatory stock options................ -- -- -- 3,639 --
Compensation attributable to stock options............ -- -- -- -- --
Unrealized loss on investments........................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
----------- --------- ---------- --------- ------
Balances, June 30, 1999................................. 17,927,516 $ 72,510 6,060,143 $ 21,839 $ 5,705
----------- --------- ---------- --------- ------
----------- --------- ---------- --------- ------
<CAPTION>
ACCUMULATED TOTAL
OTHER SHAREHOLDERS'
DEFERRED COMPREHENSIVE ACCUMULATED EQUITY
COMPENSATION LOSS DEFICIT (DEFICIT)
------------ --------------- ------------- --------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995............................. $ -- $ -- $ (294) $ (48)
Issuance of common stock.............................. -- -- -- 80
Repurchase of common stock............................ -- -- -- (51)
Net loss.............................................. -- -- (810) (810)
------------ ------- ------------- --------------
Balances, December 31, 1996............................. -- -- (1,104) (829)
Net loss January 1, 1997 through February 25, 1997.... -- -- (148) (148)
Conversion from S Corporation to C Corporation........ -- -- 1,252 --
Conversion of shareholder notes into Series A
preferred stock..................................... -- -- -- 350
Issuance of Series B preferred stock.................. -- -- -- 1,800
Issuance of common stock.............................. -- -- -- 90
Repurchase of common stock............................ -- -- -- (10)
Conversion of shareholder notes into Series C
preferred stock..................................... -- -- -- 1,253
Conversion of shareholder notes into common stock..... -- -- -- 89
Net loss, February 26, 1997 through December 31,
1997................................................ -- -- (4,618) (4,618)
------------ ------- ------------- --------------
Balances, December 31, 1997............................. -- -- (4,618) (2,023)
Issuance of Series D preferred stock.................. -- -- -- 14,134
Common stock, options and warrants issued for
businesses acquired................................. -- -- -- 6,105
Issuance of Series E preferred stock and warrants to
acquire common stock................................ -- -- -- 8,000
Issuance of Series F preferred stock and warrants to
acquire common stock................................ -- -- -- 11,399
Exercise of common stock options...................... -- -- -- 25
Issuance of common stock in consideration for
professional services............................... -- -- -- 125
Issuance of compensatory stock options................ (1,112 ) -- -- --
Compensation attributable to stock options............ 182 -- -- 182
Net loss.............................................. -- -- (24,745) (24,745)
------------ ------- ------------- --------------
Balances, December 31, 1998............................. (930 ) -- (29,363) 13,202
Issuance of Series F preferred stock and warrants to
acquire common stock................................ -- -- -- 1,400
Issuance of Series G preferred stock and warrants to
acquire common stock................................ -- -- -- 35,100
Issuance of Series H preferred stock and warrants to
acquire common stock................................ -- -- -- 3,000
Common stock and options issued for businesses
acquired............................................ -- -- -- 11,496
Issuance of warrants in connection with debt
financings.......................................... -- -- -- 569
Issuance of warrants and options to business
partners............................................ -- -- -- 1,210
Exercise of common stock options...................... -- -- -- 123
Issuance of common stock in consideration for customer
lists and services.................................. -- -- -- 68
Repurchase of common stock............................ -- -- -- (46)
Issuance of compensatory stock options................ (3,639 ) -- -- --
Compensation attributable to stock options............ 1,356 -- -- 1,356
Unrealized loss on investments........................ -- (4,508) -- (4,508)
Net loss.............................................. -- -- (26,234) (26,234)
------------ ------- ------------- --------------
Balances, June 30, 1999................................. $ (3,213 ) $ (4,508) $ (55,597) $ 36,736
------------ ------- ------------- --------------
------------ ------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Operating activities:
Net loss............................................ $ (810) $ (4,766) $ (24,745) $ (7,329) $ (26,234)
Adjustments to reconcile net loss to net cash used
in operating activities--
Unusual item--impairment of acquired
technology...................................... -- -- 5,207 -- --
Depreciation and amortization..................... 35 277 1,602 237 2,707
Write down of long-term investments............... -- 34 -- -- --
Amortization of deferred compensation............. -- -- 182 2 1,356
Operating expenses paid in stock and warrants..... -- -- 125 125 1,214
Changes in operating assets and liabilities, net
of effect of businesses acquired:
Accounts receivable............................. (15) (51) 2,107 (578) (756)
Prepaid expenses and other current assets....... (22) (189) (77) (788) (895)
Other assets.................................... -- -- -- -- (325)
Unbilled services and customer deposits, net.... -- -- (3,713) -- 249
Accounts payable................................ 218 831 2,303 1,530 1,869
Accrued liabilities............................. 29 417 521 324 2,295
Deferred revenue................................ -- -- 535 152 (300)
--------- --------- ---------- ----------- ----------
Net cash used in operating activities......... (565) (3,447) (15,953) (6,325) (18,820)
--------- --------- ---------- ----------- ----------
Investing activities:
Purchases of property and equipment................. (31) (481) (2,189) (1,810) (5,262)
Purchase of short-term investments, net............. -- -- (179) (500) (54)
Purchase of domain names............................ -- -- -- -- (149)
Investments in common stock and other assets........ -- (943) (147) (278) (635)
Acquisition of businesses, net of cash acquired of
$2,850 in the year ended December 31, 1998 and
$640 in the six-month period ended June 30,
1999.............................................. -- (250) (2,851) (4,000) (3,950)
--------- --------- ---------- ----------- ----------
Net cash used in investing activities......... (31) (1,674) (5,366) (6,588) (10,050)
--------- --------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Financing activities:
Borrowings under bank line of credit........................ $ -- $ 200 $ 38 $ 38 $ 999
Principal payments under bank line of credit................ (1) (78) -- -- (238)
Proceeds from sale of common stock.......................... 80 -- 25 8 123
Common stock repurchased.................................... (51) (10) -- -- (46)
Proceeds from sale of preferred stock and warrants, net of
issuance costs............................................ -- 1,800 33,034 21,957 14,400
Proceeds from convertible subordinated notes................ -- 1,253 -- -- --
Proceeds from long-term debt................................ 603 2,562 3,700 -- 10,632
Payments on long-term debt.................................. (61) (242) (6,034) (1,834) (579)
--------- --------- --------- ----------- ---------
Net cash provided by financing activities............. 570 5,485 30,763 20,169 25,291
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (26) 364 9,444 7,256 (3,579)
Cash and cash equivalents at beginning of period............ 38 12 376 376 9,820
--------- --------- --------- ----------- ---------
Cash and cash equivalents at end of period.................. $ 12 $ 376 $ 9,820 $ 7,632 $ 6,241
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Supplementary disclosure of cash flow information:
Cash paid during the period for interest.................. $ 50 $ 11 $ 232 $ 52 $ 185
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Non-cash investing and financing activities:
Common stock, options and warrants issued as part of
business and technology acquisitions.................... $ -- $ 90 $ 6,105 $ 1,485 $ 11,560
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of note payable and convertible subordinated
debt to preferred stock................................. $ -- $ 1,603 $ 500 $ 500 $ --
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of note payable to common stock................ $ -- $ 89 $ -- $ -- $ --
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Assets acquired under capital leases...................... $ -- $ 125 $ 2,092 $ 1,730 $ 1,378
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
ShopNow.com Inc. (the Company), formerly TechWave, Inc., is an electronic
commerce portal that provides a comprehensive shopping solution to both
consumers and merchants. The Company's offerings include customized transaction
and merchandising services through ShopNow.com, retail computer and accessory
sales and electronic software distribution through BuySoftware.com, and a
variety of merchant services, including technology consulting services and
traditional direct marketing and creative design services through Media Assets,
Inc., which was acquired in September 1998.
In June, 1999 the Company ceased operating the BuySoftware.com retailing
business. Given the Company's continued involvement in certain retailing
activities, the results of BuySoftware.com has been reflected in continuing
operations until the date operations ceased, as the disposal did not meet the
criteria for discontinued operations under Accounting Principles Board (APB) No.
30 "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions".
The Company is subject to the risks and challenges associated with other
companies at a similar stage of development including dependence on key
individuals, successful development and marketing of its products and services,
the continued acceptance of the Internet as a medium for electronic commerce,
competition from substitute products and services and larger companies with
greater financial, technical management and marketing resources. Further, during
the period required to develop commercially viable products, services and
sources of revenues, the Company may require additional funds that may not be
readily available.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements for the six month period ended
June 30, 1998 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
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, the
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.
F-14
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Computation of Earnings Per Share," basic earnings per share is computed
by dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing net loss by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares of common stock issuable upon the conversion of the
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method); common equivalent shares are excluded from the calculation if their
effect is antidilutive. The Company has not had any issuances or grants for
nominal consideration as defined under Staff Accounting Bulletin 98. Diluted net
loss per share for all periods shown does not include the effects of the
convertible preferred stock and shares issuable upon the exercise of stock
options and warrants as the effect of their inclusion is antidilutive during
each period.
Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of convertible preferred stock outstanding that will
automatically convert upon completion of the Company's initial public offering
(using the if-converted method from the original issuance date). Pro forma
diluted net loss per share excludes the impact of stock options and warrants as
the effect of their inclusion would be antidilutive.
REVENUE RECOGNITION
The Company generates revenues primarily from transactions, merchandising
and merchant services. Revenues from transactions are generated from purchases
of products and services. Merchandising revenues are generated from advertising
and merchandising conducted by merchants on the Company's Web sites. Revenues
are recognized when the product has been shipped or the service has been
delivered to the customer. The Company bears the full credit risk with respect
to these sales. Transactional fees paid by merchants are generally recognized at
the time of sale of a product or service using the Company's transaction
processing system. In these transactions, the merchant bears the full credit
risk, and the Company recognizes a transaction fee upon consummation of the
sale. Merchandising revenues are recognized ratably over the term of the
applicable agreement. Merchandising agreements typically run for a period of one
to four months, except for listing agreements which may run for up to twelve
months.
Merchant services revenues from fixed and unit price contracts are
recognized on the percentage of completion method of accounting, based primarily
on the ratio of contract costs incurred to date to total estimated contract
costs. Anticipated losses on these contracts are recorded when identified. To
date, losses have not been material. Contract costs include all direct labor,
material, subcontract and other direct project costs and certain indirect costs,
related to contract performance. Changes in job performance, job conditions and
estimated profitability, including those arising from contract penalty
provisions and final contract settlements that may result in revision to costs
and income, are recognized in the period in which the revisions are determined.
F-15
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Fee revenue from ancillary services provided by the merchant services
division is recognized upon completion of the related job by the applicable
third party vendor.
Unbilled services typically represents amounts earned under the Company's
contracts, but not billed due to timing or contract terms, which usually
consider passage of time, achievement of certain milestones or completion of the
project. Where billings exceed revenues earned on contracts, the amounts are
included in the accompanying consolidated balance sheets as customer deposits,
as the amounts typically relate to ancillary services, whereby the Company is
acting in an agency capacity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of customer lists, domain names,
acquired technology and goodwill related to acquisitions accounted for under the
purchase method of accounting. Amortization of these purchased intangibles is
provided on the straight-line basis over the respective useful lives of the
assets, primarily three years. The Company identifies and records impairment
losses on intangible and other assets when events and circumstances indicate
that such assets might be impaired. The company considers factors such as
significant changes in the regulatory or business climate and projected future
cash flows from the respective asset. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset (See Note 9). Other intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Customer lists................................................... $ -- $ 1,978 $ 2,698
Domain names..................................................... -- 1,533 1,691
Acquired technology.............................................. 379 840 18,128
Other............................................................ 340 386 401
--------- --------- ---------
719 4,737 22,918
Less--Accumulated amortization................................... (137) (793) (2,511)
--------- --------- ---------
$ 582 $ 3,944 $ 20,407
--------- --------- ---------
--------- --------- ---------
</TABLE>
INCOME TAXES
The shareholders of the Company elected to be treated as an S Corporation
under the Internal Revenue Code until February 26, 1997. As a result, taxable
income until that date was included in the taxable income of the individual
shareholders, and no income tax provision was recorded. In addition, in
accordance with Staff Accounting Bulletin Topic 4B, the Company has reclassified
accumulated losses incurred prior to the date of conversion to C Corporation
status from retained earnings to common stock.
F-16
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
The Company terminated its S Corporation status on February 26, 1997
(Termination) and implemented SFAS No. 109, "Accounting for Income Taxes," upon
becoming a taxable entity. Under SFAS No. 109, deferred tax assets and
liabilities are determined based on the differences between financial reporting
and tax bases of assets and liabilities and are measured using the tax rates
that will be in effect when the differences are expected to reverse. Deferred
taxes were not recorded at Termination as the temporary differences between
recognition of income and expense for financial reporting and tax purposes were
not significant.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets purchased under capital
leases are recorded at cost (based on the present value of future minimum lease
payments discounted at the contractual interest rates). Depreciation is computed
using the straight-line method over the assets' estimated useful lives of three
to seven years.
STOCK COMPENSATION
The Company has adopted the disclosure only provisions of the SFAS No. 123,
"Accounting for Stock-Based Compensation", whereby it applies APB No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the market price of the Company's common stock at the date of grant over
the stock option exercise price.
Options and warrants issued to non-employees are accounted for using the
fair value method of accounting as prescribed by SFAS No. 123, utilizing the
Black-Scholes model and volatility factors for comparable public companies.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services.
The Company's accounting policy is to capitalize eligible computer software
development costs upon the establishment of technological feasibility, which the
Company has defined as a completion of a working model. For the years ended
December 31, 1996, 1997 and 1998 and the period ended June 30, 1999, the amount
of eligible costs to be capitalized has not been significant and accordingly,
the Company has charged all software development costs to research and
development in the accompanying consolidated statements of operations.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the years ended
December 31, 1996, 1997 and 1998 and the six month period ended June 30, 1999,
the Company incurred advertising and direct marketing expenses of approximately
$0, $470, $5.7 million and $9.0 million, respectively.
F-17
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding as of the closing date will automatically be
converted into shares of common stock. Unaudited pro forma shareholders' equity
at June 30, 1999, as adjusted for the conversion of preferred stock, is
presented in the accompanying consolidated balance sheet.
STATEMENT OF COMPREHENSIVE LOSS
There were no reclassification adjustments as defined in SFAS 130,
"Reporting Comprehensive Income" or income tax provision related to the
unrealized loss on investments during the six month period ended June 30, 1999.
RECLASSIFICATIONS
Certain information reported in previous years has been reclassified to
conform to the 1999 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the company's financial position or results of
operations.
F-18
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Computer equipment................................. $ 601 $ 3,313 $ 6,030
Furniture and fixtures............................. 14 568 947
Software........................................... 42 759 4,226
Leasehold improvements............................. 2 548 585
--------- --------- ---------
659 5,188 11,788
Less--Accumulated depreciation and amortization.... (187) (1,003) (2,161)
--------- --------- ---------
Property and equipment, net........................ $ 472 $ 4,185 $ 9,627
--------- --------- ---------
--------- --------- ---------
</TABLE>
Property and equipment shown above include assets under capital leases of
approximately $125, $2.2 million and $3.6 million at December 31, 1997 and 1998
and June 30, 1999, with corresponding accumulated amortization of $60 and $270
and 675 at December 31, 1997 and 1998 and June 30, 1999, respectively.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Merchant services contracts....................................... $ -- $ 2,103 $ 1,680
Transaction and merchandising services............................ 169 393 2,136
--------- --------- -----------
169 2,496 3,816
Less--Allowance for doubtful accounts............................. (23) (230) (777)
--------- --------- -----------
$ 146 $ 2,266 $ 3,039
--------- --------- -----------
--------- --------- -----------
</TABLE>
To date, accounts receivable have been derived from revenues earned from
customers located in the United States. The Company performs ongoing credit
evaluations of its customers and generally requires no collateral. The Company
maintains reserves for potential credit losses. At June 30, 1999, one customer
accounted for 21% of the accounts receivable balance.
4. INVESTMENT IN MARKETABLE EQUITY SECURITIES:
As discussed in Note 11, the Company received 466,683 shares of common stock
in 24/7 Media. As of June 30, 1999 the Company holds 476,410 shares. 24/7 Media
is a public company subject to the reporting requirements of the US Securities
and Exchange Commission. The Company classifies the investment as available for
sale and are stated at fair value in accordance with SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." The statement specifies
that available for sale securities are reported at fair value with changes in
unrealized gains and losses recorded directly to shareholders' equity. Fair
value is based on quoted market prices.
F-19
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Accrued compensation and benefits................................. $ 324 $ 576 $ 879
Accrued marketing expenses........................................ -- -- 1,396
Other accrued liabilities......................................... 178 556 1,232
--------- --------- -----------
$ 502 $ 1,132 $ 3,507
--------- --------- -----------
--------- --------- -----------
</TABLE>
6. LINE OF CREDIT:
The Company had a line of credit with a financial institution with a maximum
balance of $300. The line of credit bore interest at prime plus 2% (9.75% at
December 31, 1998), with interest payable monthly. The line of credit expired
and principal balance was paid in February 1999. The line of credit was secured
by substantially all assets of the Company.
In March 1999, the Company entered into a loan and security agreement
(agreement) with a financial institution for a term loan and line of credit. In
May 1999, the agreement was amended allowing the Company to borrow up to $8.5
million at any one time, consisting of a $3.5 million term loan (term loan), a
$4.0 million bridge loan (bridge loan) and a line of credit of up to $2.5
million ($1.0 million until the bridge loan is repaid). The line of credit bears
interest at the financial institution's base rate plus 2%, is secured by
substantially all assets of the Company and expires on March 31, 2000. The term
loan bears interest at 12%, is secured by substantially all assets of the
Company and matures in March 2002. The bridge loan bears interest at 12% and is
due upon the earlier of December 1, 1999 or a debt or equity financing by the
Company surpassing $10.0 million. In conjunction with the agreement, the Company
issued warrants to acquire 72,000 shares of common stock at an exercise price of
$6.25 per share. The warrants are exercisable immediately and expire in March
2006. In May 1999 in connection with the modification, the Company issued
additional warrants to acquire 70,000 shares of common stock at an exercise
price of $7.00 per share. The warrants are exercisable immediately and expire in
June 2006.
F-20
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
7. NOTES AND LEASES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER
-------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Subordinated demand notes payable bearing interest at 9%; in January 1998,
principal converted to preferred stock and interest was paid
in cash.......................................................................... $ 500 $ -- $ --
Notes payable bearing interest at 12%, increasing by 1% per year each 30 days, to a
maximum of 18% per year; principal and interest was paid in January 1998......... 1,775 -- --
Convertible note payable to shareholder, interest at applicable short-term federal
rate, quarterly principal and interest payments totaling $113; final payment due
in October 2000. The note is convertible to common stock at $8.00 per share...... -- 859 626
Convertible note payable to shareholder, interest at 10% with principal due the
earlier of June 15, 2000 or upon effectiveness of an initial public offering, at
which time the note is convertible into common stock at the option of the
holder........................................................................... -- -- 1,000
Bridge note payable with interest at 12% due upon the earlier of December 1, 1999
or the date of certain milestones................................................ -- -- 3,794
Term note payable bearing interest at 12%, maturity date March, 2002............... -- -- 3,500
Capital lease obligations and other notes payable, interest, and principal payable
monthly, interest at rates from 6% to 18% with maturity dates between 1999 and
2003............................................................................. 293 2,111 5,621
--------- --------- -----------
2,568 2,970 14,541
Less--current portion.............................................................. (1,684) (1,133) (8,371)
--------- --------- -----------
$ 884 $ 1,837 $ 6,170
--------- --------- -----------
--------- --------- -----------
</TABLE>
In September 1997, the Company issued 9% Subordinated Demand Notes totaling
$500 to each of two shareholders. In January 1998, the principal amount of these
Demand Notes was converted to 125,000 shares of Series D preferred stock and
interest of approximately $13 was paid in cash.
In November 1997, the Company completed a bridge financing with individual
investors and executed Promissory Notes with principal totaling $1,775. The
interest on this principal was 12% per annum, increasing by 1% per year each 30
days to a maximum of 18% per year. In connection with the closing of the
Company's Series D equity placement in January 1998, the $1,775 plus interest of
$61 was paid in full. The placement agent and the holders of the Promissory
Notes also received warrants to purchase 177,500 and 62,125 shares of the
Company's common stock, respectively, at $1.50 per share. The warrants are
exercisable immediately and expire in October 2000.
In October 1998, the Company completed a bridge financing with individual
investors and executed Promissory notes with principal totaling $3.7 million.
The interest on this principal was 13% per year. In connection with the
Company's Series F equity placement in December 1998, the $3,700 plus interest
of $12 was paid in full. The placement agent and the holders of the promissory
notes also received 129,500 and 129,500 warrants, respectively, to purchase a
total of 259,000 shares of the
F-21
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
7. NOTES AND LEASES PAYABLE: (CONTINUED)
Company's common stock at $4.00 per share. The warrants are exercisable
immediately and expire in October 2001.
Notes and leases payable mature as follows for the periods ending June 30:
<TABLE>
<S> <C>
2000............................................................................ $ 8,371
2001............................................................................ 4,104
2002............................................................................ 1,862
2003............................................................................ 204
----------
$ 14,541
----------
----------
</TABLE>
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair market value of long-term
debt approximates the carrying amount at December 31, 1998.
8. COMMITMENTS:
The Company is obligated under capital and operating leases for its
headquarters and various equipment leases. The leases expire through 2004.
Future minimum lease payments under these leases are as follows for the periods
ending June 30:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
2000..................................................................... $ 2,105 $ 702
2001..................................................................... 3,407 583
2002..................................................................... 842 233
2003..................................................................... 232 --
2004..................................................................... 16 --
--------- -----------
6,602 $ 1,518
-----------
-----------
Less--Amounts representing interest...................................... (1,154)
---------
Net present value of minimum lease payments.............................. $ 5,448
---------
---------
</TABLE>
In 1999, the Company issued 62,400 warrants to purchase common stock at
$6.25 per share to two financial institutions in conjunction with certain leases
included above. The warrants are exercisable immediately and expire between June
2004 and April 2006.
Rental expense for the years ended December 31, 1996, 1997 and 1998 and the
six months ended June 30, 1999 was approximately $95, $127, $225 and $511,
respectively.
The Company has commitments under various business agreements to purchase
advertising totaling approximately $5.5 million in 1999, $6.0 million in 2000
and $3.5 million in 2001.
9. ACQUISITIONS:
In January 1997, the Company formed a wholly owned subsidiary, TechWave
Acquisition, Inc. (TechWave Acquisition). In January 1997, Web Solutions, Inc.
(Web Solutions) and Intelligent Software Solutions, Inc. (Intelligent Software)
merged with and into TechWave Acquisition in exchange for
F-22
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
9. ACQUISITIONS: (CONTINUED)
600,000 shares of the Company's common stock valued at $90, a convertible note
payable for $250 ($226 in principal and $24 in interest), and $25 in cash,
aggregating a total purchase price of $341. The acquisition was accounted for in
accordance with the purchase method of accounting. The excess purchase price was
principally allocated to acquired technology, which is amortized over a five
year life. In November 1997, the unpaid principal balance of $89 was converted
into 177,333 shares of common stock.
Both Web Solutions and Intelligent Software were software development
companies that had core technologies that were incorporated into the Company's
electronic software distribution products. Additionally, the sole shareholder of
Web Solutions and Intelligent Software became an officer of the Company.
In June 1998, the Company acquired e-Warehouse, Inc. and CyberTrust, Inc.,
wholly owned subsidiaries of a publicly traded Canadian company. The sellers had
developed certain payment processing technologies that the Company had planned
to utilize in their e-commerce offerings. Consideration for these acquisitions
consisted of $4.0 million in cash and 422,710 shares of the Company's common
stock (valued at $3.30 per share), with a total value of approximately $5.4
million. The acquisition was recorded using the purchase method of accounting.
The Company is not utilizing the acquired technology and has determined that it
has no alternative future use or value in the Company's transaction processing
systems, as the Company's technology platform provides the enhanced
functionality needed in the Company's business operations. Due to the impairment
of the acquired technology, the Company has written off all of the excess
purchase price, except for value assigned to domain names, in the accompanying
1998 consolidated statement of operations. As a result of the impairment, the
Company commenced legal proceedings in December 1998 against two of the
executives associated with the acquired companies. In January 1999, the two
executives filed a counterclaim against the Company. On August 10, 1999, all
legal proceedings were settled, resulting in an insignificant charge to the
Company.
In August 1998, the Company completed its acquisition of The Internet Mall
which was doing business as ShopNow, Inc. (ShopNow). The Internet Mall, Inc.
operated a shopping aggregation Web site and provided the Company with
technology and merchant relationships to assist in the development of an online
shopping destination. In connection with the Merger, the Company issued 719,915
shares of common stock (the Merger Shares), valued at $3.30 per share, and
warrants to purchase common stock for a total purchase price of approximately
$2.6 million. The acquisition was accounted for using the purchase method of
accounting. Of the total excess purchase price of $2.6 million, approximately
$1.5 million was allocated to customer lists and domain names which are
amortized over a three-year life, with the remainder being allocated to acquired
technology, workforce and goodwill, which are amortized over three-year lives.
In September 1998, the Company entered into a purchase and merger agreement
with Media Assets, Inc. (doing business as The Haggin Group). The Haggin Group
is a creative design and direct marketing firm with an office in Mill Valley,
California. The Company paid The Haggin Group consideration including $300 in
cash, a promissory note for $1.0 million, 600,000 shares of the Company's common
stock, valued at $3.30 per share, and options to acquire common stock for a
total purchase price of approximately $3.3 million. The terms of the promissory
note require payments, by the Company, of eight equal quarterly installments of
$113 on the first day of each quarter
F-23
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
9. ACQUISITIONS: (CONTINUED)
commencing January 1, 1999 (with the exception of April 1, 1999, which shall be
$254) until fully paid on October 1, 2000. The acquisition was accounted for
using the purchase method of accounting. The excess purchase price of
approximately $1.7 million was allocated to customer lists and domain names and
is being amortized over a three-year life. In connection with this acquisition,
three employees were granted a total of 1.2 million options at exercise prices
between $2.00 and $3.00 per share to acquire the Company's common stock. The
vesting of these options was dependent upon the achievement of certain
performance measures related to business unit revenue and customer growth as
defined in the stock option agreements. The performance measures initially
established were well beyond the historical financial results achieved during
prior periods. As such, during the period these options were outstanding, the
thresholds established to trigger vesting were not considered achievable and
were not achieved. Thus, no measurement date for the options occurred since the
price of the options was fixed, the number of shares to be ultimately issued was
not known. Since these thresholds were not considered achievable, these options
were cancelled in May of 1999. The three employees were granted fixed-price
options to purchase 405,000 shares of the Company's common stock with time
vesting provisions not dependent upon performance. These options had the same
strike prices and vesting terms as the original grants. As the grant of the new
options created a new measurement date, the Company recorded $1.9 million of
deferred compensation for the difference between the strike price and the
underlying fair market value of the common stock at May 1999, which was
determined to be $7.22 per share, and recognized a compensation charge of
$831,000 for the immediately vested portion of these grants in the accompanying
consolidated June 30, 1999 financial statements.
In June 1999, the Company acquired GO Software, Inc. (GO). GO develops and
markets transaction processing software for personal computers that can function
on a stand-alone basis or can interface with core corporate accounting systems.
The Company paid GO $4.7 million in cash, issued a $1 million promissory note
bearing interest at 10%, and issued 1,123,751 shares of common stock, valued at
$8.54 per share, for a total purchase price of $15.4 million. The acquisition
was accounted for using the purchase method of accounting. Of the excess
purchase price of approximately $14.4 million, $13.8 million was allocated to
acquired technology and $556 was allocated to goodwill, which are both being
amortized over a three-year life. The note bears interest at 10% and is due on
the earlier of June 15, 2000 or upon the effective date of an initial public
offering, at which time the note becomes convertible to common stock at the
option of the holder at the initial public offering price per share.
In addition, as discussed in Note 11, the Company acquired CardSecure, Inc.
(CardSecure) in June 1999 for a purchase price of approximately $3.5 million.
CardSecure is a developer of e-commerce enabled Web sites. The acquisition was
accounted for using the purchase method of accounting. The excess purchase price
of approximately $3.5 million was allocated to acquired technology and is being
amortized over a three year life.
UNAUDITED PRO FORMA COMBINED RESULTS
The following summarizes the unaudited pro forma results of the Company's
operations for the years ended December 31, 1997 and 1998 and six months ended
June 30, 1999, assuming the Media Assets, Inc., and The Internet Mall, Inc.
transactions occurred as of January 1, 1997 and the GO and CardSecure
transactions occurred as of January 1, 1998. Pro forma information for the
e-Warehouse, Inc. and CyberTrust, Inc. transactions is not presented as it is
not considered meaningful. The pro forma
F-24
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
9. ACQUISITIONS: (CONTINUED)
results are presented for the purposes of additional analysis only and do not
purport to present the results of operations that would have occurred for the
periods presented or that may occur in the future.
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED
DECEMBER 31, SIX MONTHS
--------------------- ENDED
1997 1998 JUNE 30, 1999
--------- ---------- -------------
<S> <C> <C> <C>
Revenues................................................. $ 6,426 $ 13,508 16,710
Net loss before taxes.................................... $ (4,917) $ (24,764) (26,407)
Net loss per share....................................... $ (0.98) $ (4.49) $ (4.55)
</TABLE>
10. INCOME TAXES:
The Company did not provide any current or deferred United States federal,
state or foreign income tax provision or benefit for any of the periods
presented because it has experienced operating losses since inception, and has
provided full valuation allowances on deferred tax assets because of uncertainty
regarding their realizability. Deferred taxes consist primarily of net operating
loss carryforwards, offset by deferred tax liabilities resulting from stock
acquisitions.
The difference between the statutory federal tax rate of 34% and the tax
provision of zero recorded by the Company is primarily due to the Company's full
valuation allowance against its deferred tax assets.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $47.0 million related to U.S. federal, foreign and state
jurisdictions. Utilization of net operating loss carryforwards are subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended due to the Series D and E financing transactions. The Company is limited
to approximately $3.0 million per year on net operating losses incurred prior to
April 1998. These carryforwards will begin to expire at various times commencing
in 2012.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards.............................. $ 1,300 $ 7,500 16,000
Other......................................................... -- 200 200
--------- --------- ---------
Total deferred assets......................................... 1,300 7,700 16,200
Intangible assets............................................. -- (1,300) (7,311)
Valuation allowance for deferred tax assets................... (1,300) (6,400) (8,889)
--------- --------- ---------
Net deferred taxes............................................ $ -- $ -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
11. SHAREHOLDERS' EQUITY:
CONVERTIBLE PREFERRED STOCK
The Company has authorized 20,000,000 shares of convertible preferred stock.
Shares of convertible preferred stock may be issued from time to time in one or
more series, with designations, preferences and limitations established by the
Company's board of directors.
F-25
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
As of June 30, 1999, the Company had designated eight series of convertible
preferred stock (Series A through H). Amounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Series A preferred stock: Issued 699,612 shares in 1997, aggregate liquidation
preference $350............................................................... $ 350 $ 350 $ 350
Series B preferred stock: Issued 2,334,079 shares in 1997, aggregate liquidation
preference $1,800............................................................. 1,800 1,800 1,800
Series C preferred stock: Issued 835,205 shares in 1997, aggregate liquidation
preference $1,253............................................................. 1,253 1,253 1,253
Series D preferred stock: Issued 4,250,000 shares in 1998, aggregate liquidation
preference $17,000............................................................ -- 13,461 13,461
Series E preferred stock: Issued 2,125,000 shares in 1998, aggregate liquidation
preference $8,500............................................................. -- 7,672 7,672
Series F preferred stock: Issued 2,056,000 shares in 1998 and 2,336,000 in 1999,
aggregate liquidation preference $12,850...................................... -- 10,534 11,934
Series G preferred stock: Issued 5,014,286 shares in 1999, aggregate liquidation
preference $35,100............................................................ -- -- 33,200
Series H preferred stock: Issued 333,334 shares in 1999, aggregate liquidation
preference $3,000............................................................. -- -- 2,840
---------- ----------- -----------
$ 3,403 $ 35,070 $ 72,510
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Series A through H preferred stock is convertible into common stock on a
one-for-one basis, at the option of the holder, subject to antidilution
provisions. In the event of an effective registration statement where the total
proceeds exceed $15 million and the minimum price per share is achieved, the
Series A through H preferred stock is automatically converted into common stock.
The Series A through H shareholders have the right to one vote for each
share of common stock into which the stock could be converted. In the event of
liquidation, Series A through H shareholders are entitled to a per-share
distribution in preference to common shareholders equal to the original issue
price. In the event the funds are insufficient to make a complete distribution
to the Series A through H shareholders, then all of the funds available shall be
distributed ratably based on their respective liquidation preferences among the
holders of Series A through H preferred stock.
On February 26, 1997, the Company issued 699,612 shares of convertible
Series A preferred stock (Series A stock) for the cancellation of approximately
$350 of shareholder notes. In February and May of 1997, the Company issued
2,334,079 shares of convertible Series B preferred stock (Series B stock) for
approximately $1.8 million.
In May through July 1997, the Company issued $1.2 million of convertible
subordinated notes. These notes bore interest at an annual rate of 8%. On
October 31, 1997, the outstanding principal under these notes was converted into
835,205 shares of a new series of the Company's preferred stock (Series C
stock). Upon conversion, the holders of the notes also received warrants that
expire on their
F-26
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
sixth anniversary date or the closing of an initial public offering to purchase
167,047 shares of Series C stock exercisable at $1.50 per share.
During the period from January 23 through April 15, 1998, the Company
completed a $25.5 million private equity placement. The Company issued 4.25
million shares of Series D and 2.125 million shares of Series E preferred stock
each at $4.00 per share, for a total of 6.375 million shares. In conjunction
with this sale, the Company issued 637,500 warrants to purchase common stock at
$5.00 per share. The warrants are currently exercisable and expire on their
third anniversary. In addition, the Company issued to the placement agent
625,000 warrants to purchase common stock at $4.40 per share. The warrants are
exercisable immediately and expire on their third anniversary.
During the fourth quarter of 1998 and the first quarter of 1999, the Company
completed a $14.6 million private equity placement. The Company issued 2,336,000
shares of Series F preferred stock at $6.25 per share. In conjunction with this
sale, the Company issued 233,600 warrants to purchase common stock at $7.50 per
share. The warrants are exercisable on the first anniversary of their issuance
and expire on their third anniversary. In addition, the Company issued to the
placement agent 233,600 warrants to purchase common stock at $6.25 per share.
The warrants are exercisable immediately and expire on their third anniversary.
As a condition to the commencement of the Series D private equity placement
described above, the holders of the Series A, Series B, and Series C stock
agreed to an amended and restated Articles of Incorporation that amended and
deleted certain rights of the Series A, Series B, and Series C stock, including
redemption and preferential dividend rights.
In March and April 1999, the Company completed a $5 million private equity
placement. The Company issued 714,286 shares of Series G preferred stock at
$7.00 per share and 35,715 warrants to purchase common stock at $7.50 per share.
The warrants are exercisable immediately and expire on their third anniversary.
In April 1999, the Company entered into a cross promotion agreement and
equity exchange agreement with 24/7 Media. As a part of the equity exchange
agreement, 24/7 Media acquired 4.3 million shares of the Company's Series G
preferred stock at $7.00 per share and 860,000 warrants to acquire common stock
at $7.00 per share in exchange for consideration valued at $30.1 million. The
warrants are exercisable immediately and expire on their third anniversary. The
purchase price consists of three parts: $5.0 million in cash, 466,683 shares of
24/7 Media's common stock, and the right to acquire 24/7 Media's interest in
CardSecure, Inc., a developer of e-commerce enabled Web sites. In June, 1999,
the Company acquired 24/7 Media's interest in CardSecure, Inc. and also acquired
the remaining minority interest from CardSecure's founders and received 9,727
additional shares of 24/7 Media's common stock by issuing 243,036 shares of the
Company's common stock valued at $8.54 per share. The total purchase price for
CardSecure, Inc. was $3.5 million.
In May 1999, the Company completed a $3 million private equity placement.
The Company issued 333,334 shares of Series H preferred stock at $9.00 per share
and 50,000 warrants to purchase common stock at $9.00 per share. The warrants
are exercisable immediately and expire on their third anniversary.
F-27
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
In July 1999 the Company closed a $18.9 million private equity placement
with a financial institution pursuant to the terms of a stock purchase agreement
which had been entered into on June 17, 1999. The closing of the private equity
placement was subject only to shareholder approval of an amendment to the
Company's Articles of Incorporation and the receipt of Hart-Scott-Rodino Act
approval. The Company issued 2,100,000 shares of Series I preferred stock at
$9.00 per share and 555,556 warrants to purchase common stock at $9.00 per
share. The warrants are exercisable immediately and expire on their third
anniversary. The Series I preferred stock contains substantially the same rights
and preferences as the previous series of preferred stock.
In conjunction with the Series I preferred stock, the Company entered into
an agreement with the financial institution and received $6.1 million in cash,
which represents prepaid licensing fees. This amount will be recognized as
revenue on a straight-line basis over 27 months, which represents the term of
the agreement, beginning in August 1999.
STOCK OPTION PLANS
In October 1996, the Company adopted a combined incentive and nonqualified
stock option plan (the Plan) to provide incentive to employees, directors,
consultants and advisors. The Company reserved 5,000,000 shares of common stock
for issuance under the Plan. During 1999, the Company amended the Plan and
increased the shares reserved for issuance under the Plan to 8,000,000. The
Company has granted rights to purchase 1,739,470 shares to Company executives
outside the Plan.
Options under the Plan, as well as outside the Plan, generally expire 10
years from the date of grant. The Board of Directors determines the terms and
conditions of options granted under the Plan, and outside the Plan, including
the exercise price. Options are generally granted at fair market value on the
date of grant and vest immediately or ratably over three years from the date of
grant.
Under APB No. 25, the Company records compensation expense over the vesting
period for the difference between the exercise price and the deemed fair market
value for financial reporting purposes of stock options granted. The fair value
of common stock has been determined by the Company based on factors including,
but not limited to, preferred stock sales, milestones achieved in the
development of the business, comparisons to competitive public companies and
general market conditions. In conjunction with grants made in 1998 and 1999, the
Company recorded approximately $183 and $1,356 as stock compensation expense in
the accompanying 1998 and 1999 consolidated statement of operations.
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation expense been recognized on stock options issued based on the fair
value of the options at the date of
F-28
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
grant and recognized over the vesting period, the Company's net loss would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------ ------------
1996 1997 1998 1999
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss:
As reported........................... $ (810) $ (4,766) $ (24,745) $ (26,234)
Pro forma............................. (810) (4,766) (25,067) (26,635)
Basic and diluted net loss per share:
As reported........................... $ (0.40) $ (1.83) $ (7.01) $ (5.50)
Pro forma............................. (0.40) (1.83) (7.10) (5.58)
</TABLE>
The fair value of each option is estimated using the Black-Scholes option
pricing model that takes into account: (1) the stock price at the grant date,
(2) the exercise price, (3) estimated lives ranging from two to three years, (4)
no dividends, (5) risk-free interest rates ranging from 5.3% to 6.4% and (6)
volatility ranging from 0% through June 18, 1999 to 72.0% subsequent to June 18,
1999. The initial impact on pro forma net loss may not be representative of
compensation expense in future years when the effect of the amortization of
multiple awards would be reflected in results from operations.
A summary of activity related to the option grants inside and outside the
Plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
JUNE 30,
1996 1997 1998 1999
---------------------- ---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period........................ -- $ -- 145,500 $ 0.47 1,793,515 $ 0.54 4,333,566 $ 1.91
Granted....................... 155,500 0.47 1,813,482 0.55 3,087,379 2.60 2,945,835 4.86
Exercised..................... -- -- -- -- (27,499) 0.77 (83,383) 0.99
Canceled...................... (10,000) 0.50 (165,467) 0.60 (519,829) 2.28 (294,440) 2.82
--------- --------- --------- ---------
Outstanding at end of period.... 145,500 0.47 1,793,515 0.54 4,333,566 1.91 6,901,578 3.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Exercisable at the end of the
period........................ 20,000 0.25 436,653 0.68 1,681,026 1.06 2,007,090 1.58
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-29
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
The following information is provided for options outstanding and
exercisable at June 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
--------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
REMAINING -----------------------------
EXERCISE NUMBER WEIGHTED AVERAGE CONTRACTUAL LIFE NUMBER WEIGHTED AVERAGE
PRICE RANGE OF OPTIONS EXERCISE PRICE (YEARS) OF OPTIONS EXERCISE PRICE
- -------------- ---------- ----------------- ------------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.25 to 0.90 1,474,949 $ 0.48 5.2 1,140,322 $ 0.51
0.91 to 1.80 600,777 1.23 8.9 129,768 1.25
1.81 to 2.70 1,137,448 2.01 8.8 403,653 2.03
2.71 to 3.60 573,948 3.00 9.3 19,532 2.89
3.61 to 4.50 1,778,859 4.00 9.4 209,700 4.00
4.51 to 6.30 123,615 5.01 9.9 2,865 5.33
6.31 to 7.20 1,211,982 7.00 9.9 101,250 7.00
---------- ----------
6,901,578 3.14 8.4 2,007,090 1.58
---------- ----------
---------- ----------
</TABLE>
In addition to the shares noted above, the Company has granted 310,000
options outside of the plan at an exercise price of $4.00 that are contingent on
certain performance criteria being met. Achievement of the performance measures
was not ascertainable at June 30, 1999. Accordingly, no amounts have been
recorded in the accompanying consolidated statement of operations relating to
this option grant. In June 1999, the Company granted 995,079 options to certain
executives. The price and vesting of these options is dependent upon the Company
completing an initial public offering of its common stock.
WARRANTS AND OPTIONS ISSUED TO MARKETING PARTNERS
On April 29, 1999 pursuant to a distribution and marketing agreement with a
telecommunications company, the Company issued warrants to purchase 100,000
shares of the Company's common stock at $10 per share. The warrants are
exercisable immediately and expire in April 2002. Simultaneously, the Company
entered into a put agreement, which allows the telecommunications company to put
the shares back to the Company for $25 per share during the period from June
2001 to August 2001. The number of shares subject to the put warrant declines
over time as the Company generates revenue under the marketing and distribution
agreement. In accordance with EITF 96-13, the Company has recorded the fair
value of the put warrant in the accompanying consolidated balance sheet as of
June 30, 1999.
On May 19, 1999, the Company entered into a distribution agreement with a
software manufacturer. As part of this agreement, the Company issued warrants to
purchase 100,000 shares of common stock at $9.00 per share, and options to
purchase 300,000 shares of common stock at $4.80 and 200,000 shares of common
stock at an exercise price of $9.00 per share, respectively.
F-30
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. SHAREHOLDERS' EQUITY: (CONTINUED)
The following shares of common stock were reserved at June 30, 1999:
<TABLE>
<S> <C>
Convertible preferred stock (Series
A-H).................................. 17,927,516
Stock options........................... 7,889,118
Common stock warrants................... 4,234,618
Preferred stock warrants................ 167,047
----------
30,218,299
----------
----------
</TABLE>
12. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during the first quarter of fiscal 1998.
SFAS No. 131 established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision makers, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is comprised of the chief executive
officer and various executive vice presidents of the Company. The Company has
identified three distinct reportable segments: Merchant services, transactions
and merchandising and retail product sales through the BuySoftware.com Web site.
While the decision making group evaluates results in a number of different ways,
the line of business management structure is the primary basis for which it
assesses financial performance and allocates resources. The accounting policies
of the line of business operating segments are the same as those described in
the summary of significant accounting policies.
F-31
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 IS
UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. SEGMENT INFORMATION: (CONTINUED)
The following table represents the Company's segment information for the
years ended December 31, 1996, 1997 and 1998, and the six months ended June 30,
1999:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- ----------
1996 1997 1998 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
Transactions and merchandising (excluding BuySoftware.com)........... $ -- $ 35 $ 280 $ 1,883
Merchant services (excluding BuySoftware.com)........................ 993 500 2,416 4,176
BuySoftware.com...................................................... -- 69 4,458 9,923
--------- --------- ---------- ----------
993 604 7,154 15,982
--------- --------- ---------- ----------
Cost of revenues:
Transactions and merchandising (excluding BuySoftware.com)........... -- 35 142 1,024
Merchant services (excluding BuySoftware.com)........................ 430 356 1,255 2,469
BuySoftware.com...................................................... -- 124 4,452 11,190
--------- --------- ---------- ----------
430 515 5,849 14,683
--------- --------- ---------- ----------
Gross profit:
Transactions and merchandising (excluding BuySoftware.com)........... -- -- 138 859
Merchant services (excluding BuySoftware.com)........................ 563 144 1,161 1,707
BuySoftware.com...................................................... -- (55) 6 (1,267)
--------- --------- ---------- ----------
$ 563 $ 89 $ 1,305 $ 1,299
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Profit Reconciliation:
Gross margin for reportable segments................................. $ 563 $ 89 $ 1,305 $ 1,299
Operating expenses................................................... (1,323) (4,691) (26,221) (27,288)
Other income and expenses............................................ (50) (164) 171 (245)
--------- --------- ---------- ----------
Loss before provision for income taxes............................... $ (810) $ (4,766) $ (24,745) $ (26,234)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
The Company does not track assets by operating segments. Consequently is it
not practicable to show assets by operating segments.
13. SUBSEQUENT EVENT (UNAUDITED)
In September 1999, the Company settled a lawsuit brought by a party with
which the Company had entered into a contract. Pursuant to the terms of the
settlement, the Company will pay the other party $1.5 million. As a result of
the terms of this settlement, in the quarter ended September 30, 1999, the
Company expects to recognize additional general and administrative expenses in
the amount of $1.5 million.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ShopNow.com Inc.:
We have audited the accompanying balance sheets of Media Assets, Inc. as of
June 30, 1997 and 1998, and the related statements of operations, shareholder's
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Media Assets, Inc. as of
June 30, 1997 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 31, 1999
F-33
<PAGE>
MEDIA ASSETS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 17,
-------------------- -------------
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 2 $ 957 $ 1,528
Accounts receivable.......................................................... 864 2,739 4,184
Receivable from shareholder.................................................. 38 123 142
Unbilled services............................................................ 400 456 413
Prepaid expenses and other current assets.................................... 11 8 152
--------- --------- ------
Total current assets....................................................... 1,315 4,283 6,419
Property and equipment, net.................................................... 204 287 271
Other assets................................................................... 21 24 24
--------- --------- ------
Total assets............................................................... $ 1,540 $ 4,594 $ 6,714
--------- --------- ------
--------- --------- ------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable, current portion............................................... $ 16 $ 29 $ 35
Accounts payable............................................................. 386 378 121
Accrued wages and related expenses........................................... 132 134 54
Other accrued expenses....................................................... 43 115 494
Customer deposits............................................................ 788 3,219 4,833
Income taxes................................................................. 38 166 --
--------- --------- ------
Total current liabilities.................................................. 1,403 4,041 5,537
--------- --------- ------
Long-term debt, net of current portion......................................... 34 94 78
--------- --------- ------
Commitments (Note 6)
Shareholder's equity:
Common stock, $.01 par value--authorized; 10,000 shares, issued and
outstanding; 2,000 shares at December 31, 1997 and September 17, 1998...... 1 1 1
Retained earnings............................................................ 102 458 1,098
--------- --------- ------
Total shareholder's equity................................................. 103 459 1,099
--------- --------- ------
Total liabilities and shareholder's equity................................. $ 1,540 $ 4,594 $ 6,714
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-34
<PAGE>
MEDIA ASSETS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
JANUARY 1, 1998
-------------------- THROUGH
1997 1998 SEPTEMBER 17, 1998
--------- --------- -------------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues................................................................... $ 4,086 $ 5,597 $ 4,833
Costs and expenses:
Costs of revenues........................................................ 2,415 3,112 2,808
Selling, general and administrative...................................... 1,497 1,925 1,684
--------- --------- ------
Total operating expenses............................................... 3,912 5,037 4,492
--------- --------- ------
Operating income..................................................... 174 560 341
Other income, net.......................................................... -- 38 17
--------- --------- ------
Income before provision for income taxes................................... 174 598 358
Provision for income taxes................................................. (72) (242) --
--------- --------- ------
Net income........................................................... $ 102 $ 356 $ 358
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
MEDIA ASSETS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, June 30, 1996............................................... 2,000 $ 1 $ -- $ 1
Net income.......................................................... -- -- 102 102
----- --- ----------- ------
Balances, June 30, 1997............................................... 2,000 1 102 103
Net income.......................................................... -- -- 356 356
----- --- ----------- ------
Balances, June 30, 1998............................................... 2,000 1 458 459
Net income.......................................................... -- -- 640 640
----- --- ----------- ------
Balance September 17, 1998 (Unaudited)................................ 2,000 $ 1 $ 1,098 $ 1,099
----- --- ----------- ------
----- --- ----------- ------
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
MEDIA ASSETS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED JUNE 30, 1998 THROUGH
-------------------- SEPTEMBER 17,
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income.................................................................. $ 102 $ 356 $ 358
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation.............................................................. 73 101 120
Changes in assets and liabilities:
Accounts receivable..................................................... (324) (1,960) (2,217)
Unbilled services....................................................... (326) (56) 428
Prepaid expenses and other assets....................................... (12) -- 29
Income taxes............................................................ 38 128 (10)
Accounts payable and accrued expenses................................... 303 66 161
Deposits................................................................ 290 2,431 1,369
--------- --------- -------------
Net cash provided by operating activities............................... 144 1,066 238
--------- --------- -------------
Cash flows from investing activities:
Additions to property and equipment......................................... (102) (184) (16)
--------- --------- -------------
Cash flows from financing activities:
Proceeds on long-term debt.................................................. -- 81 --
Principal repayments of long-term debt...................................... (44) (8) (48)
--------- --------- -------------
Net cash (used in) provided by financing activities..................... (44) 73 (48)
--------- --------- -------------
Net increase (decrease) in cash and cash equivalents.................... (2) 955 174
Cash and cash equivalents, beginning of year.................................. 4 2 1,354
--------- --------- -------------
Cash and cash equivalents, end of year........................................ $ 2 $ 957 $ 1,528
--------- --------- -------------
--------- --------- -------------
Cash paid during the year for:
Interest...................................................................... $ 5 $ 14 $ 11
--------- --------- -------------
--------- --------- -------------
Income taxes.................................................................. $ 38 $ 212 $ 212
--------- --------- -------------
--------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
MEDIA ASSETS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION OF THE COMPANY AND NATURE OF OPERATIONS:
Media Assets, Inc., a California corporation doing business as The Haggin
Group (the Company) provides creative design and direct marketing services to
corporate customers throughout the United States. Additionally, the Company
provides certain ancillary services including color film separations and
printing which are outsourced to vendors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of September 17, 1998 and for
the period from January 1, 1998 through September 17, 1998 have been prepared on
the same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes that the results of operations for the period from January 1,
1998 through September 17, 1998 are not necessarily indicative of the results to
be expected for any future period.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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, the
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.
REVENUE RECOGNITION
The Company recognizes revenue from its fixed and unit price contracts in
process on the percentage of completion method of accounting, based primarily on
the ratio of contract costs incurred to date to total estimated contract costs.
Anticipated losses on these contracts are recorded when identified. Contract
costs include all direct labor, material, subcontract, other direct project
costs and indirect costs, including depreciation, vehicles, and labor related to
contract performance. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements that may result in revision to costs and income, are
recognized in the period in which the revisions are determined.
Unbilled services typically represent amounts earned under the Company's
contracts, but not billed due to timing or contract terms, which usually
consider passage of time, achievement of certain milestones or completion of the
project. Where billings exceed revenues earned on contracts, the amounts are
included in the accompanying balance sheets as customer deposits, as the amounts
typically relate to ancillary services, whereby the Company is acting in an
agency capacity.
F-38
<PAGE>
MEDIA ASSETS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers any
highly liquid short term investments purchased with an original maturity date of
three months or less to be cash equivalents.
The Company maintains its cash in high credit quality financial institutions
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable.
To date, accounts receivable have been derived from revenues earned from
customers located in the United States. The Company performs ongoing credit
evaluations of its customers and generally requires no collateral. Historically,
credit losses have been minor and within management's expectations. At June 30,
1998, one customer accounted for 60% of the accounts receivable balance. This
amount was collected subsequent to June 30.
During the year ended June 30, 1998, 1 customer accounted for 12% of the
Company's net revenues.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life.
Maintenance, repairs and minor renewals are expensed as incurred. Major
renewals and betterments which substantially extend the life of the property are
capitalized. When an asset is sold or retired, the cost and related accumulated
depreciation are removed from the balance sheet and the resulting gain or loss
is included in the results of operations.
INCOME TAXES
The Company recognized deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for the amount of any future benefits which, more likely
than not based on current circumstances, are not expected to be realized.
3. RECEIVABLE FROM SHAREHOLDER:
During 1997 and 1998, the Company made non-interest bearing loans to the
sole shareholder. Subsequent to June 30, 1998, all outstanding amounts were paid
in full.
F-39
<PAGE>
MEDIA ASSETS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
4. PROPERTY AND EQUIPMENT:
The accompanying balance sheets include the following property and equipment
as of June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Computers and office equipment................................................ $ 271 $ 458
Vehicles...................................................................... 65 65
Leasehold improvements........................................................ 67 64
--------- ---------
403 587
Less: Accumulated depreciation and amortization............................... (199) (300)
--------- ---------
Property and equipment--net................................................... $ 204 $ 287
--------- ---------
--------- ---------
</TABLE>
5. DEBT:
Long-term debt is summarized as follows as of June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Equipment loan, interest at index rate + 1.5% due October 2002................ $ 8 $ 90
Notes payable, equipment financing, due in equal monthly installments of
principal and interest, interest at 9% to 10%, to maturity in July 2002..... 42 33
--------- ---------
50 123
Less--current portion......................................................... (16) (29)
--------- ---------
Long-term debt--net........................................................... $ 34 $ 94
--------- ---------
--------- ---------
</TABLE>
The aggregate maturities of long-term debt for the years subsequent to June
30, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1999................................................................................. $ 29
2000................................................................................. 29
2001................................................................................. 29
2002................................................................................. 26
2003................................................................................. 10
-----
$ 123
-----
-----
</TABLE>
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities,
F-40
<PAGE>
MEDIA ASSETS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. COMMITMENTS:
The Company leases its facilities under various operating leases expiring in
October 1999.
At June 30, 1998, future minimum lease payments under operating leases were
as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1999................................................................................. $ 181
2000................................................................................. 60
-----
$ 241
-----
-----
</TABLE>
7. INCOME TAXES:
The provision for income taxes consisted of the following components:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Current:
Federal..................................................................... $ 64 $ 133
State....................................................................... 19 39
--------- ---------
83 172
--------- ---------
Deferred:
Federal..................................................................... (9) 59
State....................................................................... (2) 11
--------- ---------
(11) 70
--------- ---------
Total tax provision........................................................... $ 72 $ 242
--------- ---------
--------- ---------
</TABLE>
The provision for income taxes differs from the amount estimated by applying
the statutory federal income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Provision computed at federal statutory rate: 34.0% 34.0%
State taxes, net of federal tax benefit............................... 6.1 6.1
Other items--net...................................................... 1.3 0.4
--------- ---------
Effective tax rate...................................................... 41.4% 40.5%
--------- ---------
--------- ---------
</TABLE>
Deferred tax liabilities at December 31, 1997 and 1998 consist primarily of
cash to accrual adjustments as the Company filed its tax returns on a cash
basis.
8. ACQUISITION:
On September 17, 1998, the Company was acquired by ShopNow.com Inc.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ShopNow.com Inc.:
We have audited the accompanying balance sheets of The Internet Mall, Inc.
(a Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception (November 13, 1996) to December 31, 1996 and for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Internet Mall, Inc., as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from inception (November 13, 1996) to December 31, 1996 and
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
May 27, 1999
F-42
<PAGE>
THE INTERNET MALL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- AUGUST 8,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 155 $ 240 $ 68
Accounts receivable................................................................ -- 57 33
--------- --------- -----------
Total current assets........................................................... 155 297 101
Property and equipment, net of accumulated depreciation of $1 and $8 and $18......... 10 34 39
Intangible assets, net of accumulated amortization of $10, $78 and $117.............. 190 122 83
--------- --------- -----------
Total assets................................................................... $ 355 $ 453 $ 223
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities........................................... $ -- $ 90 $ 112
Deferred revenue................................................................... -- 48 123
Convertible subordinated promissory note........................................... -- 300 300
--------- --------- -----------
Total current liabilities...................................................... -- 438 535
Commitments
Shareholders' equity:
Convertible preferred stock, 6,000,000 shares authorized--
Series B convertible preferred stock, $0.0001 par value, 2,000,000 shares
designated; none, 1,724,867 and 1,724,867 issued and outstanding at 1996, 1997
and 1998, preference in liquidation of $500.................................... -- 490 490
Series A convertible preferred stock, $0.0001 par value, 4,000,000 shares
designated; 4,000,000 issued and outstanding at 1996 and 1997, 1,951,563 in
1998 preference in liquidation of $1,952....................................... 383 383 363
Common stock, $0.0001 par value; 17,000,000 shares authorized; 7,000,000 issued and
outstanding at 1996, 1997 and 1998, net of subscriptions receivable of $57....... 13 13 13
Accumulated deficit................................................................ (41) (871) (1,178)
--------- --------- -----------
Total shareholders' equity (deficit)........................................... 355 15 (312)
--------- --------- -----------
Total liabilities and shareholders' equity (deficit)........................... $ 355 $ 453 $ 223
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-43
<PAGE>
THE INTERNET MALL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR ENDED JANUARY 1, 1998
(NOVEMBER 13, 1996) TO DECEMBER 31, TO
DECEMBER 31, 1996 1997 AUGUST 8, 1998
----------------------- ------------- -------------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues................................................. $ -- $ 188 $ 175
----- ------ -----
Operating expenses:
Cost of revenue........................................ -- 30 24
Product development.................................... -- 71 114
Sales and marketing.................................... -- 273 56
General and administrative............................. 41 639 275
----- ------ -----
Total operating expenses........................... 41 1,013 469
----- ------ -----
Operating loss................................... (41) (825) (294)
----- ------ -----
Interest expense......................................... -- 5 13
----- ------ -----
Net loss......................................... $ (41) $ (830) $ (307)
----- ------ -----
----- ------ -----
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
THE INTERNET MALL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (NOVEMBER 13, 1996) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B SERIES A
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK TOTAL
------------------- ------------------- ------------------ ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
--------- -------- --------- -------- --------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, November 13, 1996............. -- $ -- -- $ -- -- $ -- $ -- $ --
Sale of common stock to founders at
$0.01 per share in November 1996,
net of subscriptions receivable of
$57................................. -- -- -- -- 5,750,000 1 -- 1
Sale of common and preferred stock at
$0.01 and $0.10 per share,
respectively, in exchange for assets
and cash in November 1996, net of
issuance costs of $5................ -- -- 4,000,000 383 1,250,000 12 -- 395
Net loss.............................. -- -- -- -- -- -- (41) (41)
--------- -------- --------- -------- --------- ------- ----------- -----
Balances, December 31, 1996............. -- -- 4,000,000 383 7,000,000 13 (41) 355
Sale of preferred stock at $0.27 and
$0.35 per share in May and August
1997, respectively, net of issuance
costs of $10........................ 1,724,867 490 -- -- -- -- -- 490
Net loss.............................. -- -- -- -- -- -- (830) (830)
--------- -------- --------- -------- --------- ------- ----------- -----
Balances, December 31, 1997............. 1,724,867 490 4,000,000 383 7,000,000 13 (871) 15
Repurchase of preferred stock at $0.01
per share in January and April 1998... -- -- (2,048,437) (20 ) -- -- -- (20)
Net loss................................ -- -- -- -- -- -- (307) (307)
--------- -------- --------- -------- --------- ------- ----------- -----
Balances, August 8, 1998 (Unaudited).... 1,724,867 $ 490 1,951,563 $ 363 7,000,000 $ 13 $ (1,178) $ (312)
--------- -------- --------- -------- --------- ------- ----------- -----
--------- -------- --------- -------- --------- ------- ----------- -----
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
THE INTERNET MALL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, 1998 TO
PERIOD FROM INCEPTION YEAR ENDED AUGUST 8, 1998
(NOVEMBER 13, 1996) TO DECEMBER 31, -------------------
DECEMBER 31, 1996 1997
----------------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (41) $ (830) $ (307)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................ 11 76 49
Changes in operating assets and liabilities:
Accounts receivable................................ -- (57) 24
Accounts payable and accrued expenses.............. -- 90 22
Deferred revenue................................... -- 48 75
----- ----- -----
Net cash used in operating activities............ (30) (673) (137)
----- ----- -----
Cash flows used in investing activities:
Purchase of property and equipment..................... (11) (32) (15)
----- ----- -----
Cash flows from financing activities:
Net proceeds from preferred and common stock
issuances............................................ 196 490 --
Repurchase of preferred stock.......................... -- -- (20)
Proceeds from convertible subordinated promissory
note................................................. -- 300 --
----- ----- -----
Net cash (used in) provided by financing
activities..................................... 196 790 (20)
----- ----- -----
(Decrease) increase in cash and cash equivalents......... 155 85 (172)
Cash and cash equivalents, beginning of period........... -- 155 240
----- ----- -----
Cash and cash equivalents, end of period................. $ 155 $ 240 $ 68
----- ----- -----
----- ----- -----
Supplemental disclosures of cash flow information:
Common stock issued to founders in exchange for
promissory notes................................... $ 57 $ -- $ --
----- ----- -----
----- ----- -----
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
THE INTERNET MALL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. ORGANIZATION AND NATURE OF OPERATIONS:
The Internet Mall, Inc. (the Company), a Delaware corporation, was
incorporated on November 13, 1996. The Company operated an internet shopping
aggregation Web site and provided links to on-line retailers that offer products
and services.
2. SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of August 8, 1998 and for the
period from January 1, 1998 through August 8, 1998 have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes that the results of operations for the period from January 1,
1998 through August 8, 1998 are not necessarily indicative of the results to be
expected for any future period.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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, the
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.
REVENUE RECOGNITION
The Company's revenue to date has been primarily derived from banner
advertising. Advertising revenue is recognized in the period the advertising
impressions are delivered.
The Company sells one-year mall listings on its site and recognizes revenue
over the term of the listing. Deferred revenue represents residual amounts from
these listings. In addition, the Company earns transaction fees for sales made
through the site which are recorded in the period of the sale.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and
furniture and is stated at cost. Depreciation is computed using an accelerated
method over estimated useful lives, which range from five to seven years.
F-47
<PAGE>
THE INTERNET MALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred and consist primarily of
salaries, travel, materials, supplies and contract services.
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for the amount of any future benefits which, more likely
than not based on current circumstances, are not expected to be realized.
INTANGIBLE ASSETS
Intangible assets consist primarily of technology acquired through the
issuance of Series A preferred stock. Intangible assets are being amortized over
a three year life. Amortization expense totaled $11 and $68 in 1996 and 1997.
STOCK COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its employee stock
benefit plans.
3. INCOME TAXES:
At December 31, 1996 and 1997, a valuation allowance was recognized to
offset the related deferred tax assets due to the uncertainty of realizing the
benefit of the Company's net operating loss carryforward. The need for this
valuation allowance is subject to periodic review. If it is determined in a
future period that it is more likely than not that the tax benefits of the
carryforwards will be realized, the reduction of the valuation allowance will be
recorded as a reduction of the Company's income tax expense.
At 1997, the Company had net operating loss carryforwards of approximately
$780, which expire commencing in 2011. Under current tax law, net operating loss
carryforwards available in any given year may be limited upon the occurrence of
certain events, including significant changes in ownership interests.
The deferred tax assets of approximately $10 and $260 at December 31, 1996
and 1997, respectively, are composed primarily of net operating loss
carryforwards. Because the Company's utilization of these deferred tax assets is
dependent upon future profits that are not assured, a valuation allowance equal
to deferred tax assets has been provided.
F-48
<PAGE>
THE INTERNET MALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
4. CONVERTIBLE SUBORDINATED PROMISSORY NOTE:
In October 1997 the Company issued a convertible subordinated promissory
note in the amount of $300. The note bears interest at 7% and was originally due
in April 1998. Subsequent to December 31, 1997, the note due date was extended
to August 1998 and satisfied in connection with the acquisition discussed in
Note 6.
5. SHAREHOLDERS' EQUITY:
COMMON STOCK
In November 1996, common stock was issued to founders for cash of $1 and
promissory notes of $57. The notes accrued interest at 5.87% per year.
CONVERTIBLE PREFERRED STOCK
The Company has authorized 6,000,000 shares of convertible preferred stock
(preferred stock). The board of directors has the authority to establish and
define, in one or more series, the price, rights, preferences and dividends of
authorized but unissued shares of preferred stock.
The shares outstanding at December 31, 1997 are summarized as follows:
SERIES B--The Company designated 2,000,000 shares as Series B Convertible
Stock (Series B), and issued 1,724,867 shares in May and August 1997, at
prices of $0.27 and $0.35 per share.
SERIES A--The Company designated 4,000,000 shares as Series A Convertible
Preferred Stock (Series A). In November 1996, 4,000,000 shares were issued
in conjunction with 1,250,000 shares of common stock in exchange for cash
and technology rights, at a price of $0.10 per share.
The rights and preferences of the preferred stock are as follows:
DIVIDENDS--Holders of preferred stock are entitled to receive annual
dividends of $0.02 per share for Series B and $0.005 per share for Series A,
when and if declared by the board of directors. Such dividends are not
cumulative. As of December 31, 1997, none has been declared.
CONVERSION--Each share of preferred stock is convertible at the option of
the holder into common stock at the conversion price in effect in such date.
Shares also convert upon a vote of the majority of the shareholders of the
respective series. Each share of the preferred stock automatically converts
into common stock upon the closing of an initial public offering that meets
certain conditions.
LIQUIDATION PREFERENCE--The Series B and Series A shares have liquidation
preferences of $0.29 and $0.10 per share, respectively, plus all declared
but unpaid dividends.
If the value of the Company on liquidation is insufficient to pay the entire
preferential amount, distribution should be made as follows: the first $100
of assets shall be distributed to the holders of Series B and any remaining
amount shall be distributed pro rata to preferred shareholders in proportion
to remaining preferential amount the preferred shareholder is entitled to
receive.
F-49
<PAGE>
THE INTERNET MALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
Any assets remaining after the preferential distribution will be paid to
holders of common stock in proportion to shares held by each.
VOTING RIGHTS--Each holder of preferred stock shall be entitled to the
number of votes equal to the number of shares of common stock into which
such shares could be converted, and have voting rights equal to holders of
common stock.
REPURCHASE RIGHT
Certain shares of common stock outstanding at December 31, 1997 were subject
to a repurchase right by the Company at the original sale price of $0.01 per
share. The number of shares the Company may repurchase was established on the
date of sale and is reduced ratably over the 36-month period ending in November
1999. At December 31, 1997, 2,731,249 shares were subject to repurchase rights.
The Company repurchased 1,545,312 and 503,125 shares of common stock at
$0.01 per share in January 1998 and April 1998, pursuant to the repurchase right
discussed above.
STOCK OPTIONS
On November 13, 1996, the Company adopted the 1996 Stock Option Plan (the
Plan). Under the terms of the Plan, stock options may be granted to employees,
directors, officers and consultants at a price determined by the Board. Options
have a term of up to 10 years and vest over a schedule determined by the Board
of Directors, generally four years.
The Plan is accounted for under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for this program
been determined consistent with SFAS No. 123, the Company's net loss would have
changed to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net loss--as reported......................................................... $ (41) $ (830)
Net loss--pro-forma........................................................... $ (41) $ (831)
</TABLE>
To determine compensation expense under SFAS No. 123 in 1997 and 1996, the
fair value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
- Risk-free interest rates of 6.0%
- Expected lives of 4 years
- Expected dividend yields of 0%
- Expected volatility of 0%
F-50
<PAGE>
THE INTERNET MALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
Option activity under the Plan was as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVAILABLE AVERAGE AVERAGE
FOR FUTURE OUTSTANDING EXERCISE GRANT DATE
GRANT SHARES PRICE FAIR VALUE
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, November 13, 1996..................................... -- -- $ -- $ --
Authorized.................................................... 1,650,000 -- -- --
Granted....................................................... -- -- -- --
Exercised..................................................... -- -- -- --
Cancelled..................................................... -- -- -- --
---------- ----------- ----- ---
Balances, December 31, 1996..................................... 1,650,000 --
Granted....................................................... (332,557) 332,557 0.05 0.01
Exercised..................................................... -- -- -- --
Cancelled..................................................... 37,500 (37,500) 0.05 --
---------- ----------- ----- ---
Balances, December 31, 1997..................................... 1,354,943 295,057 $ 0.05
---------- ----------- -----
---------- ----------- -----
</TABLE>
The options outstanding at December 31, 1997 have an exercise price of
$0.05, and a weighted average remaining contractual life of nine years. 117,929
options were vested at December 31, 1997 with a weighted average exercise price
of $0.05.
SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1997, the Company had reserved shares of its common stock
for the following purposes:
<TABLE>
<S> <C>
Conversion of outstanding preferred stock:
Series A....................................................... 4,000,000
Series B....................................................... 1,725,867
1996 Stock Option Plan........................................... 1,650,000
---------
7,375,867
---------
---------
</TABLE>
6. COMMITMENTS:
OPERATING LEASES
The Company leases office and computer equipment under operating leases with
expiration dates through May 1999.
F-51
<PAGE>
THE INTERNET MALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
6. COMMITMENTS: (CONTINUED)
Minimum lease commitments under noncancellable leases are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 19
1999.................................................................. 5
---
$ 24
---
---
</TABLE>
Rent expense under operating leases totaled $6 and $52 for the period from
inception (November 13, 1996) to December 31, 1996 and the year ended December
31, 1997, respectively.
7. ACQUISITION:
On August 6, 1998, the Company was acquired by ShopNow.com Inc.
F-52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GO Software, Inc.
We have audited the accompanying balance sheets of GO Software, Inc. (the
Company) as of December 31, 1998 and 1997, the related statements of operations,
shareholder's equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GO Software, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Jacksonville, Florida
June 11, 1999
F-53
<PAGE>
GO SOFTWARE, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 15,
-------------------- -----------
1998 1997 1999
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 766 $ 1,047 $ 640
Accounts receivable, net of allowance of $62 in 1999 (unaudited), $49 in 1998
and $55 in 1997.............................................................. 137 56 236
Refundable income taxes........................................................ 33 -- 33
Inventory...................................................................... 11 5 9
Prepaid expenses and other current assets...................................... 36 13 19
--------- --------- -----------
Total current assets............................................................. 983 1,121 937
Property and equipment, at cost:
Computer equipment............................................................. 106 47 123
Office equipment............................................................... 32 22 35
--------- --------- -----------
138 69 158
Accumulated depreciation....................................................... (50) (20) (68)
--------- --------- -----------
Net property and equipment....................................................... 88 49 90
Capitalized software development costs........................................... 28 -- 28
Deferred income tax asset........................................................ 7 2 20
--------- --------- -----------
Total assets..................................................................... $ 1,106 $ 1,172 $ 1,075
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses.................................... $ 66 $ 26 $ 88
Income taxes payable........................................................... -- 20 3
Other taxes payable............................................................ 2 5 --
Deferred revenue............................................................... 21 9 128
--------- --------- -----------
Total current liabilities........................................................ 89 60 219
Deferred income tax liability.................................................... 24 17 24
Series A redeemable preferred stock, $1.39167 par value per share, 664,671 and
700,597 shares authorized and outstanding (liquidation value)................ 1,194 1,043 1,293
Shareholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized and 1,000,000 shares
outstanding.................................................................. 10 10 10
Paid-in capital................................................................ 211 211 211
Retained earnings (deficit).................................................... (422) (169) (682)
--------- --------- -----------
Total shareholders' equity (deficit)............................................. (201) 52 (461)
--------- --------- -----------
Total liabilities and shareholders' equity....................................... $ 1,106 $ 1,172 $ 1,075
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-54
<PAGE>
GO SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, JANUARY 1, 1999
-------------------- TO
1998 1997 JUNE 15, 1999
--------- --------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Net revenues.................................................................... $ 1,346 $ 793 $ 728
Cost of goods sold.............................................................. 55 21 45
--------- --------- -----
Gross profit.................................................................... 1,291 772 683
Selling, general and administrative expenses.................................... 1,149 410 686
Research and development........................................................ 253 130 182
--------- --------- -----
Operating (loss) income......................................................... (111) 232 (185)
Interest income................................................................. 41 17 12
--------- --------- -----
(Loss) income before income taxes............................................... (70) 249 (173)
Benefit (provision) for income taxes............................................ 17 (34) 12
--------- --------- -----
Net (loss) income............................................................... $ (53) $ 215 $ (161)
--------- --------- -----
--------- --------- -----
</TABLE>
See accompanying notes.
F-55
<PAGE>
GO SOFTWARE, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON PAID- IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.............................................. $ 10 $ -- $ 62 $ 72
Net income prior to conversion to C Corporation........................... -- -- 141 141
Conversion from S Corporation to C Corporation............................ -- 203 (203) --
Accretion of Series A redeemable preferred stock dividends................ -- -- (68) (68)
Distributions to shareholders............................................. -- -- (175) (175)
Issuance of options....................................................... -- 8 -- 8
Net income................................................................ -- -- 74 74
----- ----- ----- ---------
Balance at December 31, 1997.............................................. 10 211 (169) 52
Net loss.................................................................. -- -- (53) (53)
Accretion of Series A redeemable preferred stock dividends................ -- -- (200) (200)
----- ----- ----- ---------
Balance at December 31, 1998.............................................. 10 211 (422) (201)
Net loss (unaudited)...................................................... -- -- (161) (161)
Accretion of Series A redeemable preferred stock dividends (unaudited).... -- -- (99) (99)
----- ----- ----- ---------
Balance at June 15, 1999 (unaudited)...................................... $ 10 $ 211 $ (682) $ (461)
----- ----- ----- ---------
----- ----- ----- ---------
</TABLE>
See accompanying notes.
F-56
<PAGE>
GO SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31 JANUARY 1,
-------------------- 1999 TO JUNE
1998 1997 15, 1999
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income................................................................ $ (53) $ 215 $ (161)
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization.................................................. 29 14 18
Issuance of options............................................................ -- 8 --
Changes in operating assets and liabilities:
Increase in accounts receivable, net......................................... (81) (38) (99)
Increase in refundable income taxes.......................................... (33) -- --
Increase (decrease) in inventory............................................. (6) (5) 2
Increase (decrease) in prepaid expenses and other current assets............. (23) (13) 17
Increase (decrease) in deferred income tax liabilities, net.................. 2 15 (13)
Increase in deferred revenue................................................. 12 6 107
Increase in accounts payable and accrued expenses............................ 17 23 22
Increase in income and other taxes payable................................... -- 25 1
--------- --------- -----
Net cash (used in) provided by operating activities.............................. (136) 250 (106)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.............................................. (67) (40) (20)
Capitalized software development costs........................................... (28) -- --
--------- --------- -----
Net cash used in investing activities............................................ (95) (40) (20)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to shareholders.................................................... -- (175) --
Proceeds from issuance of Series A redeemable preferred stock.................... -- 1,000 --
Repurchase of preferred stock.................................................... (50) (25) --
--------- --------- -----
Net cash (used in) provided by financing activities.............................. (50) 800 --
--------- --------- -----
Net (decrease) increase in cash and cash equivalents............................. (281) 1,010 (126)
Cash and cash equivalents, beginning of year..................................... 1,047 37 766
--------- --------- -----
Cash and cash equivalents, end of year........................................... $ 766 $ 1,047 $ 640
--------- --------- -----
--------- --------- -----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for taxes.............................................. $ 33 $ -- $ --
--------- --------- -----
--------- --------- -----
NONCASH FINANCING ACTIVITIES:
Accretion of Series A redeemable preferred stock............................... $ 200 $ 68 $ 99
--------- --------- -----
--------- --------- -----
</TABLE>
See accompanying notes.
F-57
<PAGE>
GO SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND NATURE OF BUSINESS
GO Software, Inc. (the Company) was incorporated in Georgia in 1994.
Initially, the sole shareholder, in exchange for his knowledge in the fields of
software development and credit card processing, along with the rights to
certain software products, received 1,000,000 shares of common stock of the
Company after adjustment for the stock dividend (Note 3). The Company develops
and markets transaction processing software for personal computers that can
function on a stand-alone basis or can interface with core corporate accounting
systems. The Company currently sells its products to businesses in the United
States and Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
REVENUE RECOGNITION
The Company licenses software under license agreements that include multiple
elements including software and maintenance and support services. In accordance
with SOP 97-2, license agreement revenues are allocated to the various elements
based on "vendor-specific objective evidence of fair value." Revenues for the
software element are recognized when a license agreement has been signed,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. Revenues from maintenance agreements are recognized ratably over the
maintenance period.
The Company may bill resellers under which no shipment is made until sales
are made by the reseller to a third-party end user. Revenues from these
arrangements are deferred and recognized upon shipment to the third-party end
user.
INVENTORY
Inventory, consisting of software media, manuals, and related packaging
materials, is stated at the lower of cost, determined on the first-in, first-out
basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three years.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with
maturities of three months or less when purchased to be cash equivalents.
F-58
<PAGE>
GO SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86. Costs incurred prior
to establishment of technological feasibility are expensed as incurred. Software
development costs of $28 and $0 were capitalized as of December 31, 1998 and
1997, respectively.
Amortization of capitalized software costs commences when the software is
available for general release to customers. Amortization is based on the
straight-line method over the estimated economic life of the product, which may
range from three to five years. No amortization was recorded in 1998 as none of
the products for which costs were capitalized were available for general release
by the end of the year.
DEFERRED REVENUE
Deferred revenue represents license fees and maintenance and support which
have been sold and payment received but not earned at year end.
During August 1997, the Company changed its income tax status from a
Subchapter S Corporation, which generally does not provide for income taxes at
the corporate level, to a C Corporation, which does provide for income taxes at
the corporate level. Accordingly, as of 1997, the accompanying financial
statements include a provision for income taxes.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No.
109 requires income taxes to be recognized using the liability method.
Specifically, deferred tax assets and liabilities are determined based on
estimated future tax effects attributable to temporary differences between the
amount of assets and liabilities recognized for financial reporting and income
tax purposes.
CREDIT RISK
The Company extends credit to certain customers, generally resellers.
Exposure to losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses.
ADVERTISING AND PROMOTION
All costs associated with advertising and promoting products are expensed
when incurred. Advertising expense was $143 in 1998 and $69 in 1997.
3. SHAREHOLDER'S EQUITY
Effective January 2, 1997, the Company amended its Articles of Incorporation
to increase the number of authorized shares of no par common stock from 10,000
to 10,000,000. In connection with
F-59
<PAGE>
GO SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
3. SHAREHOLDER'S EQUITY (CONTINUED)
the recapitalization, the Company issued a stock dividend of 999 shares of
common stock for every 1 share of common stock outstanding.
4. SERIES A REDEEMABLE PREFERRED STOCK
On August 22, 1997 (the Closing Date), the Company executed an agreement
with certain private investors (the Investors) to issue 718,563 shares of
convertible preferred stock (the Preferred Stock) to the Investors for cash
consideration of $1,000. During 1998 and 1997, the Company acquired and retired
$50 and $25, respectively, of the outstanding preferred stock at the initial
purchase price (par value) plus a 4% return. The Preferred Stock is convertible
initially on a one-to-one basis into shares of common stock. The Preferred Stock
is automatically convertible into common stock upon an initial public offering
of the Company's common stock meeting certain conditions. The Preferred Stock
has certain anti-dilution features, has voting rights for the number of common
shares into which it is convertible, and has certain demand registration rights.
The Investors may put the Preferred Stock back to the Company at the initial
purchase price plus a 20% rate of return, compounded annually and cumulatively
from the Closing Date, beginning one-third on June 30, 2001, one-third on June
30, 2002, and one-third on June 30, 2003. The Preferred Stock has a liquidation
preference equal to the face value of the Preferred Stock plus a return
compounded annually and cumulatively at 20% per year for the first two years and
40% per year thereafter to the earlier of June 30, 2003 or the date the Company
liquidates, dissolves, or winds up its affairs. As of December 31, 1998 and
1997, returns related to the defined redemption price, which are included in
preferred stock on the accompanying balance sheets were $269 and $68,
respectively.
5. EMPLOYEE STOCK OPTION PLAN
Effective January 2, 1997, the Company adopted the 1997 Stock Incentive Plan
(the Plan). Under the terms of the Plan, the Company may grant incentive stock
options, nonqualified stock options, and restricted stock grants to employees
and other key persons, as defined. The total number of shares of common stock
reserved under the Plan is 277,445. Options are exercisable for a maximum of 10
years from the date of grant and must be granted at an exercise price at least
equal to fair value. Options generally vest on a pro rata basis over four years
from the date of grant.
In accordance with APB 25, the Company records no compensation expense for
its stock options when the exercise price equals or exceeds the fair value of
common sock on the date of grant. Pro forma information regarding net income is
required by FASB Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for the options
were estimated at the date of grant using the minimum value method with the
following weighted-average assumptions for 1998 and 1997: risk-free interest
rate of 5.60%; dividend yield of 0%; and a weighted-average expected life of the
options of 10 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The per share
weighted average fair value of options granted
F-60
<PAGE>
GO SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
5. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
during the year ended December 31, 1998 and 1997 was $.61 and $.00,
respectively. The Company's 1998 and 1997 pro forma information follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(Loss) income before pro forma effect of stock options......................... $ (53) $ 215
Pro forma compensation expense from stock options:
1997 grant................................................................... -- --
1998 grants.................................................................. 19 --
--- ---------
Pro forma net (loss) income.................................................... $ (72) $ 215
--- ---------
--- ---------
</TABLE>
Because options vest over several years and additional option grants are
expected, the effects of these pro forma calculations are not likely to be
representative of similar future calculations.
The following table summarizes option activity for the Company's stock
option plan for the years ended December 31, 1998 and 1997. During 1997, an
employee holding 199,601 options under the Plan resigned from the Company and
forfeited all options held, including vested and unvested options.
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ----------------- ---------------
<S> <C> <C> <C>
Granted.......................................... 208,801 $ .26 to $3.00 $ .38
Exercised........................................ -- -- --
Canceled......................................... 199,601 $ .26 $ .26
---------
Balance, December 31, 1997....................... 9,200 $ 3.00 $ 3.00
Granted.......................................... 215,581 $ 1.39 to $2.00 $ 1.41
Exercised........................................ -- -- --
Canceled......................................... -- -- --
---------
Balance, December 31, 1998....................... 224,781 $ 1.39 to $3.00 $ 1.49
---------
---------
</TABLE>
No options are exercisable at December 31, 1998. Subsequent to December 31,
1998, 39,920 options granted in 1988 were canceled. The pro forma compensation
expense from these options is not included in the pro forma information above.
6. COMMITMENT
LEASE
The Company leases office space under a lease which expired in March 1999
and is continuing on a month-to-month basis. The lease requires 60 days notice
prior to vacating the space. Future lease payments under this lease at December
31, 1998 are approximately $7. Lease expense for 1998 and 1997 was $22 and $12,
respectively.
F-61
<PAGE>
GO SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
7. INCOME TAXES
The provision for income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Current:
Federal.............................................................. $ 15 $ (15)
State................................................................ 5 (5)
--------- ----------
20 (20)
Deferred:
Federal.............................................................. (2) (12)
State................................................................ (1) (2)
--------- ----------
(3) (14)
--------- ----------
$ 17 $ (34)
--------- ----------
--------- ----------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses...................................................... $ 3 $ 2
NOL carryforward...................................................... 4 --
--------- ---------
Total deferred tax assets............................................... 7 2
Deferred tax liabilities:
Capitalized software development costs................................ 7 --
Accelerated depreciation.............................................. 17 17
--------- ---------
Total deferred tax liabilities.......................................... 24 17
--------- ---------
Net deferred tax liabilities............................................ $ 17 $ 15
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards of
approximately $16, which expire in 2013, if not utilized.
Utilization of the net operating loss may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating loss before utilization.
F-62
<PAGE>
GO SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
8. SALE OF BUSINESS
During May 1999, the Company signed a letter of intent to sell all
outstanding stock to a third party for total consideration of approximately $15
million. The transaction is expected to be consummated in June 1999.
9. YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs and other business
systems being written using two digits rather than four digits to represent the
year. An assessment of the Year 2000 exposure has been made by the Company and
the plans to resolve the related issues are being implemented. Most major
systems have already been updated or replaced with applications that are Year
2000 compliant in the normal course of business. The Company believes it will be
able to achieve Year 2000 compliance by the end of 1999 without incurring
significant additional costs.
The Company has also developed a plan of communication with significant
business partners to ensure that the Company's operations are not disrupted
through these relationships and that the Year 2000 issues are resolved timely.
F-63
<PAGE>
[INSIDE BACK COVER]
CUSTOMER FRIENDLY
A BETTER WAY TO SHOP
We provide shoppers with a convenient, one-stop shopping experience.
[PICTURE OF A MYSHOPNOW.COM WEB PAGE]
[PICTURE OF A BOY HOLDING A PRODUCT SOLD ON MYSHOPNOW.COM]
MY FAVORITES
"My Favorites," allows shoppers to create their own lists of frequently visited
merchant stores, as well as e-mail their favorite stores to friends.
[PICTURE OF AN ONLINE MERCHANT STORE ON THE SHOPNOW NETWORK]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,000,000 SHARES
[SHOPNOW LOGO]
COMMON STOCK
-----------------------
PRICE $ PER SHARE
-----------------------
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
WIT CAPITAL CORPORATION
------------------------
, 1999
------------------------
Until , 1999 (25 days after the date of this Prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by ShopNow.com in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 26,855
NASD filing fee................................................... 10,160
Nasdaq National Market listing fee................................ 90,000
Printing and engraving costs...................................... 165,000
Legal fees and expenses........................................... 450,000
Accounting fees and expenses...................................... 200,000
Transfer Agent and Registrar fees................................. 8,000
---------
Total......................................................... $ 950,015
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.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"). Section 5 of the registrant's Amended and Restated Bylaws
(Exhibit 3.2 hereto) provides for indemnification of the registrant's directors,
officers, employees and agents to the maximum extent permitted by Washington
law. 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 omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, 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 10 of the registrant's Amended and Restated Articles of
Incorporation (Exhibit 3.1 hereto), contains provisions implementing, to the
fullest extent permitted by Washington law, such limitations on a director's
liability to the registrant and its shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued and sold unregistered
securities as set forth below.
1. On September 30, 1996, the Registrant issued 300,000 shares of common stock
to Othniel Palomino at $0.15 per share. These securities have been issued in
a transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
2. On January 2, 1997, the Registrant issued to Ganapathy Krishnan a promissory
note in the principal amount of $250,000, which is convertible into 500,000
shares of common stock. These
II-1
<PAGE>
securities have been issued in a transaction exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
3. On January 2, 1997, pursuant to an Acquisition Agreement among the
Registrant, Web Solutions, Inc. and Intelligent Software Solutions, Inc.,
the Registrant issued to the shareholders of Web Solutions, Inc. and
Intelligent Software Solutions, Inc. 600,000 shares of common stock, valued
at $0.15 per share, and a convertible promissory note in the principal
amount of $225,738. These securities have been issued in a transaction
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
4. On February 26, 1997, the Registrant issued 699,612 shares of Series A
convertible preferred stock at $0.50 per share, which are currently
convertible into 699,612 shares of common stock, to Dwayne Walker in
exchange for the cancellation of certain promissory notes issued by the
Registrant to Mr. Walker. These securities have been issued in a transaction
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder.
5. On February 26, 1997 and April 30, 1997, the Registrant issued 2,334,079
shares of Series B convertible preferred stock, which are currently
convertible into 2,334,079 shares of common stock, to four accredited
investors at $0.77 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D thereunder.
6. During the period from May 15, 1997 through July 15, 1997, the Registrant
issued promissory notes in the aggregate principal amount of $1,220,000,
each of which accrued interest at an annual rate of 8% (the "1997 Notes").
These securities have been issued in transactions exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) of the
Securities Act of 1933.
7. During the period from October 21, 1997 through November 12, 1997, the
Registrant issued promissory notes in the aggregate principal amount of
$1,775,000. In connection with this transaction, the Registrant issued to
the investors warrants to purchase an aggregate of 62,125 shares of common
stock at an exercise price of $1.50 per share. Additionally, the Registrant
issued to the placement agent, Madison Securities, Inc., warrants to
purchase 177,500 shares of common stock at an exercise price of $1.50 per
share. These securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2)
of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
8. On October 31, 1997, the Registrant issued 835,205 shares of Series C
convertible preferred stock, which are currently convertible into 835,205
shares of common stock, to 14 investors at $1.50 per share in exchange for
the cancellation of the 1997 Notes. In connection with this transaction, the
Registrant issued to the investors warrants to purchase an aggregate of
167,047 shares of Series C convertible preferred stock at an exercise price
of $1.50 per share. These securities have been issued in transactions exempt
from registration under the Securities Act of 1933 in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.
9. On November 11, 1997, the Registrant issued 177,333 shares of common stock
to Ganapathy and Kalyani Krishnan at $0.50 per share. These securities have
been issued in a transaction exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
10. During the period from January 23, 1998 through April 15, 1998, in a private
placement the Registrant issued, to 163 investors, an aggregate of 4,250,000
shares of Series D convertible preferred stock and warrants to purchase an
aggregate of 425,000 shares of common stock at an exercise price of $5.00
per share and issued, to 111 investors, an aggregate of 2,125,000 shares of
II-2
<PAGE>
Series E convertible preferred stock and warrants to purchase an aggregate
of 212,500 shares of common stock at a exercise price of $5.00 per share. In
connection with this transaction, the Registrant issued to the placement
agent, Madison Securities, Inc., warrants to purchase 625,000 shares of
common stock at an exercise price of $4.40 per share. These securities have
been issued in transactions exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D thereunder.
11. On January 29, 1998, the Registrant entered into a Stock Purchase Agreement
with Trucost, Inc., pursuant to which the Registrant issued to Trucost, Inc.
a warrant to purchase 10,000 shares of common stock at an exercise price of
$5.00. These securities have been issued in a transaction exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2)
of the Securities Act of 1933.
12. On March 23, 1998, pursuant to a development and license agreement between
the Registrant and InstallShield Software Corporation, the Registrant issued
62,327 shares of common stock to InstallShield Software. These securities
have been issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act
of 1933.
13. On June 8, 1998, pursuant to an Acquisition Agreement among the Registrant
and Saturn Solutions, Inc., the Registrant issued 422,710 shares of common
stock to Saturn Solutions, Inc. and 649 shares of common stock to Robert
Gagnon, in each case, valued at $3.30 per share. These securities have been
issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
14. On July 8, 1998, in connection with the purchase of services, the Registrant
issued to The Culligan Group a warrant to purchase 5,000 shares of common
stock at an exercise price of $1.00 per share. These securities have been
issued in a transaction exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
15. On August 6, 1998, pursuant to a Merger Agreement among the Registrant and
The Internet Mall, the Registrant issued to the shareholders of the Internet
Mall 666,667 shares of common stock, valued at $6.00 per share. In
connection with this agreement, the Registrant assumed an outstanding
promissory note in the principal amount of $300,000 issued to the NVCC Fund,
and following such transaction the NVCC Fund converted the note plus accrued
interest into 52,915 shares of common stock and warrants to purchase 10,583
shares of common stock at an exercise price of $4.00 per share. These
securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
16. On September 17, 1998, pursuant to an Agreement and Plan of Merger between
the Registrant and Media Assets, Inc., the Registrant issued to the sole
shareholder of Media Assets, Inc., Jeff Haggin, 600,000 shares of common
stock, a convertible promissory note in the principal amount of $1,050,000
and options to purchase an aggregate of 1,120,000 shares of common stock at
an exercise price of $2.00 per share. In May 1999, Mr. Haggin exchanged
performance-based options to purchase 900,000 shares of common stock for an
option to purchase 300,000 shares of common stock. These securities have
been issued in transactions exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
17. In October 1998, the Registrant completed a Bridge Financing whereby it
issued promissory notes in the aggregate principal amount of $3,700,000 and
warrants to purchase 129,500 shares of common stock at $4.00 per share. In
connection therewith, the Registrant issued to the placement agent, Madison
Securities, Inc., warrants to purchase 129,500 shares of common stock at
$4.00 per share. These securities have been issued in transactions exempt
from registration under the Securities Act of 1933 in reliance upon Section
4(2) of the Securities Act of 1933.
II-3
<PAGE>
18. On October 21, 1998, in connection with the financing of a fixed asset
acquisition, the Registrant issued to Cornerstone Equipment Finance a
warrant to purchase 6,795 shares of common stock at an exercise price of
$6.00 per share. These securities have been issued in a transaction exempt
from registration under the Securities Act of 1933 in reliance upon Section
4(2) of the Securities Act of 1933.
19. During the period from November 24, 1998 through January 19, 1999, the
Registrant issued an aggregate of 2,336,000 shares of Series F convertible
preferred stock to 130 investors at $6.25 per share. In connection with this
transaction, the Registrant issued to the investors warrants to purchase
233,600 shares of common stock at an exercise price of $7.50 per share. In
connection with this transaction, the Registrant issued to the placement
agent, Madison Securities, Inc., warrants to purchase 233,600 shares of
common stock, at an exercise price of $6.25 per share. These securities have
been issued in transactions exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
20. On November 30, 1998, the Registrant issued 10,000 shares of common stock to
Jim Tweeten at $5.00 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
21. On December 15, 1998, the Registrant issued 5,000 shares of common stock to
Steve McClure at $.50 per share pursuant an option exercise. These
securities have been issued in a transaction exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
22. On January 10, 1999, in connection with the purchase of services, the
Registrant issued to the Culligan Group a warrant to purchase 3,400 shares
of common stock at an exercise price of $1.00 per share. These securities
have been issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act
of 1933.
23. On February 3, 1999, pursuant to a licensing agreement between the
Registrant and Interworld Corporation, the Registrant issued to Interworld
Corporation a warrant to purchase 16,000 shares of common stock at an
exercise price of $6.25 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
24. On February 17, 1999, in connection with the purchase of services, the
Registrant issued to Star Telecommunications, Inc. a warrant to purchase
20,000 shares of common stock at an exercise price of $4.68 per share. These
securities have been issued in a transaction exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
25. On March 1, 1999, in connection with the purchase of services, the
Registrant issued to Jim Tweeten a warrant to purchase 15,000 shares of
common stock at an exercise price of $6.25 per share. These securities have
been issued in a transaction exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
26. On March 4, 1999, pursuant to a Loan and Security Agreement between the
Registrant and Transamerica Business Credit Corporation, the Registrant
issued to Transamerica Business Credit Corporation a warrant to purchase
72,000 shares of common stock at $6.25 per share. These securities have been
issued in a transaction exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
27. On March 10, 1999, the Registrant issued 1,000 shares of common stock to
Howard Barokas and Andrew Cullen as a bonus for consulting services
previously rendered to the Registrant. These
II-4
<PAGE>
securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in because no sale occurred for purposes of the
Securities Act of 1933.
28. During March and April 1999, the Registrant issued to the ZERON Group in
exchange for $5,000,000 in cash 714,286 shares of Series G convertible
preferred stock and warrants to purchase 35,715 shares of common stock at an
exercise price of $7.50 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
29. In April 1999, we issued to 24/7 Media 4,300,000 shares of Series G
convertible preferred stock at $7.00 per share in exchange for $30.1 million
in consideration, consisting of cash, shares of 24/7 Media common stock and
24/7 Media's majority interest in CardSecure. A portion of the shares of
Series G convertible preferred stock and of the warrants were placed in
escrow pending consummation of our acquisition of CardSecure, which occurred
on June 15, 1999. 24/7 Media also received warrants to purchase 860,000
shares of common stock at $7.00 per share. These securities have been issued
in transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
30. On April 15, 1999, pursuant to an Asset Purchase Agreement between the
Registrant and Discountjewelry.com, the Registrant issued 8,000 shares of
common stock, valued at $6.25 per share, to Mike Kmet, Discountjewelry.com's
sole proprietor. In connection with the Asset Purchase Agreement, the
Registrant also agreed to issue an aggregate of 8,000 additional shares of
common stock over the next eight months. These securities have been issued
in transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
31. On April 16, 1999, pursuant to a Master Lease Agreement between the
Registrant and Silicon Valley Bank, the Registrant issued to Silicon Valley
Bank warrants to purchase 40,000 shares of common stock at $6.25 per share.
These securities have been issued in transactions exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) of the
Securities Act of 1933.
32. On April 29, 1999, pursuant to a Distributor/Marketing Agreement between the
Registrant and Qwest Communications Corporation, the Registrant issued to
Qwest Communications Corporation warrants to purchase 100,000 shares of
common stock at $10.00 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
33. On May 18, 1999, the Registrant issued 333,334 shares of Series H preferred
stock to HNC Software Inc. at $9.00 per share. In connection with this
transaction, the Registrant issued to HNC warrants to purchase 50,000 shares
of common stock at an exercise price of $9.00 per share. These securities
have been issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act
of 1933.
34. On May 19, 1999, pursuant to a Distribution Agreement between the Registrant
and Corel Corporation, the Registrant issued to Corel Corporation warrants
to purchase 100,000 shares of common stock at an exercise price of $9.00 and
options to purchase 300,000 and 200,000 shares of common stock at $4.80 and
$9.00, respectively. These securities have been issued in a transaction
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
35. In May 1999, pursuant to the First Amendment to Loan and Security Agreement
between the Registrant and Transamerica Business Credit Corporation, the
Registrant issued to each of Transamerica Business Credit Corporation and
Sand Hill Capital LLC a warrant to purchase 35,000 shares of common stock at
an exercise price of $7.00 per share. These securities have been
II-5
<PAGE>
issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
36. On June 8, 1999, in connection with the acquisition of CardSecure, Inc., the
Registrant issued, to 3 shareholders of the acquired company, an aggregate
of 243,036 shares of common stock valued at $7.00 per share. These
securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
37. On June 15, 1999, pursuant to a Acquisition Agreement between the Registrant
and GO Software, Inc., the Registrant issued to the shareholders of GO
Software, Inc., 1,123,751 shares of common stock and to one of these
shareholders a promissory note in the principal amount of $1,000,000,
convertible at the shareholder's option for common stock at a conversion
price equal to the initial public offering price. These securities have been
issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
38. On June 17, 1999, the Registrant entered into the Stock Purchase Agreement
among the Registrant and CB Capital Investors, L.P., to sell 2,100,000
shares of Series I convertible preferred stock and a warrant to purchase
555,556 shares of common stock at an exercise price of $9.00 per share to CB
Capital Investors, L.P. The transaction closed on July 17, 1999. These
securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
39. On April 12, 1999, Merrimac Capital Company, LLC and Leasing Technologies
Inc., made a loan commitment to the Registrant pursuant to which the
Registrant agreed to issue to Merrimac Capital Company, LLC a warrant to
purchase 6,400 shares of common stock at an exercise price of $6.25 per
share and to Leasing Technologies Inc. a warrant to purchase 22,400 shares
of common stock at an exercise price of $6.25 per share. These securities
were issued in a transaction exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
40. On April 20, 1999, in exchange for the cancellation of the Registrant's
obligation to pay a lease brokerage fee to Matt Christian and Tim O'Keefe,
the Registrant agreed to issue to Matt Christian a warrant to purchase
13,182 shares of common stock at an exercise price of $9.00 per share and to
Tim O'Keefe a warrant to purchase 3,600 shares of common stock at an
exercise price of $9.00 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
41. Through June 30, 1999, the Registrant granted, pursuant to its stock option
plan and outside of its stock option plan, options to purchase an aggregate
of 9,307,275. The options granted under the stock option plan were issued to
the Registrant's officers, employees and consultants at exercise prices
ranging from $0.25 to $7.00. The options granted outside of the stock option
plan were granted to its employees and officers at prices ranging from $0.25
to $4.00. A significant portion of these options were issued pursuant to the
Registrant's stock option plan. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Rule 701 promulgated under the Securities Act of 1933. Where
Rule 701 has not been available, the securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
II-6
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1** Second Amended and Restated Registration Rights Agreement dated as of November
30, 1998.
4.2** Amendment No. 1 to Second Amended and Restated Registration Rights Agreement
dated as of June 15, 1999.
4.3** Amendment No. 2 to Second Amended and Restated Registration Rights Agreement
dated as of June 16, 1999.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1** Amended and Restated 1999 Employee Stock Purchase Plan and forms of agreement
thereunder.
10.2** Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan
and form of agreements thereunder.
10.3+ Electronic Distributor Agreement dated as of May 19, 1999, between Corel
Corporation and the Registrant.
10.4**+ Addendum No. 1 Project Agreement to Strategic Alliance Agreement between HNC
Software and the Registrant, dated May 4, 1999.
10.5**+ Distributor/Marketing Agreement dated as of April 29, 1999, between Qwest
Communications Corporation and the Registrant.
10.6** Strategic Alliance Agreement dated as of May 4, 1999, between HNC Software Inc.
and the Registrant.
10.7** Consortium Membership Agreement dated as of May 4, 1999, between HNC Software
Inc. and the Registrant.
10.8** Cross Promotion Agreement dated April 5, 1999, between 24/7 Media, Inc. and the
Registrant.
10.9** Loan and Security Agreement dated as of March 4, 1999, between Transamerica
Business Credit Corporation and the Registrant.
10.10** Letter of Intent agreement dated March 24, 1999, between The ZERON Group and
Registrant.
10.11** Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and
the Registrant.
10.12** Corporate Master Agreement effective as of February 10, 1999, between Vignette
Corporation and the Registrant.
10.13** Agreement dated July 7, 1999, between About.com, Inc. and the Registrant.
10.14**+ Agreement effective as of July 12, 1999, between Chase Manhattan Capital, L.P.
and the Registrant.
16.1** Letter from Ernst & Young LLP, dated September 7, 1999.
21.1** List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Accountants.
23.3** Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney (see page II-6 of the initial filing of this Registration
Statement).
24.2** Power of Attorney (see page II-10 of Amendment No. 2 to this Registration
Statement).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S>
27.1** Financial Data Schedules.
</TABLE>
- ------------------------
* Incorporated by reference to Exhibit 3.1 to Registrant's Form 8-A filed with
the Securities and Exchange Commission on July 14, 1999 (file number
000-26707)
** Previously filed
*** To be filed by amendment.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended.
The omitted portions of this exhibit have been separately filed with the
Commission.
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
registrant has duly caused this Amendment No. 6 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on September 28, 1999.
<TABLE>
<S> <C> <C>
SHOPNOW.COM INC.
By /s/ DWAYNE M. WALKER
-----------------------------------------
Dwayne M. Walker, Chairman, President and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 6 to Registration Statement has been signed by the following
persons in the capacities indicated on September 28, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman, Director,
/s/ DWAYNE M. WALKER President and Chief
- ------------------------------ Executive Officer
(Dwayne M. Walker) (Principal Executive
Officer)
Executive Vice President,
/s/ ALAN D. KOSLOW Chief Financial Officer,
- ------------------------------ and General Counsel
(Alan D. Koslow) (Principal Financial and
Accounting Officer)
*
- ------------------------------ Director
(Jacob I. Friesel)
*
- ------------------------------ Director
(David M. Lonsdale)
*
- ------------------------------ Director
(Bret R. Maxwell)
*
- ------------------------------ Director
(Mark C. McClure)
*
- ------------------------------ Director
(John R. Snedegar)
*
- ------------------------------ Director
(Mark H. Terbeek)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ALAN D. KOSLOW
-------------------------
(Alan D. Koslow)
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
SHOPNOW.COM INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(1) PERIOD
- ---------------------------------------------- ------------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998.................. $ 23 $ 591 $ (384) $ 230
------- ------- ------------- ------------
------- ------- ------------- ------------
Year ended December 31, 1997.................. $ 3 $ 20 $ -- $ 23
------- ------- ------------- ------------
------- ------- ------------- ------------
Year ended December 31, 1996.................. $ 2 $ 3 $ (2) $ 3
------- ------- ------------- ------------
------- ------- ------------- ------------
</TABLE>
- ------------------------
(1) Write-offs, net of bad debt recovery.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1** Second Amended and Restated Registration Rights Agreement dated as of November
30, 1998.
4.2** Amendment No. 1 to Second Amended and Restated Registration Rights Agreement
dated as of June 15, 1999.
4.3** Amendment No. 2 to Second Amended and Restated Registration Rights Agreement
dated as of June 16, 1999.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1** Amended and Restated 1999 Employee Stock Purchase Plan and forms of agreement
thereunder.
10.2** Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan
and form of agreements thereunder.
10.3+ Electronic Distributor Agreement dated as of May 19, 1999, between Corel
Corporation and the Registrant.
10.4**+ Addendum No. 1 Project Agreement to Strategic Alliance Agreement between HNC
Software and the Registrant, dated May 4, 1999.
10.5**+ Distributor/Marketing Agreement dated as of April 29, 1999, between Qwest
Communications Corporation and the Registrant.
10.6** Strategic Alliance Agreement dated as of May 4, 1999, between HNC Software Inc.
and the Registrant.
10.7** Consortium Membership Agreement dated as of May 4, 1999, between HNC Software
Inc. and the Registrant.
10.8** Cross Promotion Agreement dated April 5, 1999, between 24/7 Media, Inc. and the
Registrant.
10.9** Loan and Security Agreement dated as of March 4, 1999, between Transamerica
Business Credit Corporation and the Registrant.
10.10** Letter of Intent agreement dated March 24, 1999, between The ZERON Group and
Registrant.
10.11** Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and
the Registrant.
10.12** Corporate Master Agreement effective as of February 10, 1999, between Vignette
Corporation and the Registrant.
10.13** Agreement dated July 7, 1999, between About.com, Inc. and the Registrant.
10.14**+ Agreement effective as of July 12, 1999, between Chase Manhattan Capital, L.P.
and the Registrant.
16.1** Letter from Ernst & Young LLP, dated September 7, 1999.
21.1** List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Accountants.
23.3** Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney (see page II-6 of the initial filing of this Registration
Statement).
24.2** Power of Attorney (see page II-10 of Amendment No. 2 to this Registration
Statement).
27.1** Financial Data Schedules.
</TABLE>
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* Incorporated by reference to Exhibit 3.1 to Registrant's Form 8-A filed with
the Securities and Exchange Commission on July 14, 1999 (file number
000-26707)
** Previously filed
<PAGE>
*** To be filed by amendment.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended.
The omitted portions of this exhibit have been separately filed with the
Commission.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
SHOPNOW.COM INC.
EFFECTIVE AS OF SEPTEMBER 28, 1999
<PAGE>
TABLE OF CONTENTS
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ARTICLE I CORPORATE OFFICES............................................................................................1
1.1 REGISTERED OFFICE....................................................................................1
1.2 OTHER OFFICES........................................................................................1
ARTICLE II MEETINGS OF SHAREHOLDERS....................................................................................1
2.1 DATE, TIME AND PLACE OF MEETINGS.....................................................................1
2.2 ANNUAL MEETING.......................................................................................1
2.3 SPECIAL MEETING......................................................................................2
2.4 NOTICE OF SHAREHOLDERS'MEETINGS......................................................................2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.........................................................2
2.6 QUORUM...............................................................................................2
2.7 ADJOURNED MEETING; NOTICE............................................................................3
2.8 VOTING; NO CUMULATIVE VOTING.........................................................................3
2.9 WAIVER OF NOTICE.....................................................................................3
2.10 ACTION BY SHAREHOLDERS WITHOUT A MEETING.............................................................3
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS..........................................4
2.12 PROXIES..............................................................................................5
2.13 LIST OF SHAREHOLDERS ENTITLED TO VOTE................................................................5
2.14 ADVANCE NOTICE OF SHAREHOLDER NOMINATIONS............................................................5
2.15 ADVANCE NOTICE OF SHAREHOLDER BUSINESS...............................................................6
ARTICLE III DIRECTORS..................................................................................................6
3.1 POWERS...............................................................................................7
3.2 NUMBER OF DIRECTORS..................................................................................7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS..............................................7
3.4 RESIGNATION; REMOVAL; VACANCIES......................................................................7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.............................................................8
3.6 ANNUAL AND REGULAR MEETINGS..........................................................................8
3.7 SPECIAL MEETINGS; NOTICE.............................................................................8
3.8 ADJOURNED MEETING; NOTICE............................................................................9
3.9 WAIVER OF NOTICE.....................................................................................9
3.10 QUORUM...............................................................................................9
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING......................................................9
3.12 EXECUTIVE AND OTHER COMMITTEES; AUTHORITY; MINUTES..................................................10
3.13 APPROVAL OF LOANS TO OFFICERS.......................................................................10
3.14 FEES AND COMPENSATION OF DIRECTORS..................................................................11
ARTICLE IV OFFICERS...................................................................................................11
4.1 OFFICERS............................................................................................11
4.2 ELECTION OF OFFICERS................................................................................11
</TABLE>
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(CONTINUED)
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4.3 SUBORDINATE OFFICERS................................................................................11
4.4 CONTRACT RIGHT OF OFFICERS..........................................................................11
4.5 REMOVAL AND RESIGNATION OF OFFICERS.................................................................11
4.6 VACANCIES IN OFFICES................................................................................12
4.7 CHAIRMAN OF THE BOARD...............................................................................12
4.8 PRESIDENT...........................................................................................12
4.9 VICE PRESIDENT......................................................................................12
4.10 SECRETARY...........................................................................................12
4.11 TREASURER...........................................................................................13
4.12 ASSISTANT SECRETARY.................................................................................13
4.13 ASSISTANT TREASURER.................................................................................13
4.14 AUTHORITY AND DUTIES OF OFFICERS....................................................................14
ARTICLE V INDEMNITY...................................................................................................14
5.1 RIGHT TO INDEMNIFICATION............................................................................14
5.2 RESTRICTIONS ON INDEMNIFICATION.....................................................................14
5.3 ADVANCEMENT OF EXPENSES.............................................................................15
5.4 RIGHT OF INDEMNITEE TO BRING SUIT...................................................................15
5.5 PROCEDURES EXCLUSIVE................................................................................15
5.6 NONEXCLUSIVITY OF RIGHTS............................................................................15
5.7 INSURANCE...........................................................................................15
5.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION..........................................16
5.9 PERSONS SERVING OTHER ENTITIES......................................................................16
ARTICLE VI RECORDS AND REPORTS........................................................................................16
6.1 MAINTENANCE AND INSPECTION OF RECORDS...............................................................16
6.2 REPRESENTATION OF SHARES OF OTHER CORPORATIONS......................................................17
ARTICLE VII GENERAL MATTERS...........................................................................................18
7.1 CHECKS..............................................................................................18
7.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS....................................................18
7.3 STOCK CERTIFICATES; PARTLY PAID SHARES..............................................................18
7.4 SPECIAL DESIGNATION ON CERTIFICATES.................................................................19
7.5 LOST, STOLEN OR DESTROYED CERTIFICATES..............................................................19
7.6 CONSTRUCTION; DEFINITIONS...........................................................................19
7.7 DIVIDENDS...........................................................................................19
7.8 FISCAL YEAR.........................................................................................19
7.9 SEAL................................................................................................20
7.10 TRANSFER OF STOCK; RESTRICTIONS ON TRANSFER.........................................................20
7.11 STOCK TRANSFER AGREEMENTS...........................................................................20
</TABLE>
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(CONTINUED)
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7.12 REGISTERED SHAREHOLDERS.............................................................................20
ARTICLE VIII AMENDMENTS...............................................................................................21
</TABLE>
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<PAGE>
BYLAWS
OF
SHOPNOW.COM INC.
ARTICLE I
CORPORATE OFFICES
1.1 .REGISTERED OFFICE
The registered office of SHOPNOW.COM INC. (the "CORPORATION") shall at all
times be located in the State of Washington. The name of the registered agent of
the Corporation at such location is the agent named in the Articles of
Incorporation until changed by the Board of Directors of the Corporation (the
"BOARD").
1.2 OTHER OFFICES
The Board may at any time establish other offices at any place or places
where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 DATE, TIME AND PLACE OF MEETINGS
Meetings, annual or special, of the shareholders shall be held at such
place as shall be designated by the Board, or in the absence of such a
designation, at the principal office of the Corporation. Shareholders may
participate in any meeting of shareholders by any means of communication by
which all persons participating in the meeting can hear each other during such
meeting. Participation by such means shall constitute presence in person at such
meeting.
2.2 ANNUAL MEETING
The annual meeting of the shareholders (the "ANNUAL MEETING") of the
Corporation shall be held each year on a date and time designated by the Board.
<PAGE>
At the Annual Meeting, directors shall be elected and any other proper
business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the shareholders (a "SPECIAL MEETING") may be called,
at any time for any purpose or purposes for which such a meeting may lawfully be
called, only by (i) the Chairman of the Board, (ii) a majority of the Board or
(iii) the President of the Corporation.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be given by or at the
direction of the Board, the Chairman of the Board, the President or the
Secretary and shall be in writing and sent or otherwise given in accordance with
Section 2.5 of these Bylaws not less than 10 nor more than 60 days before the
date of the meeting to each shareholder entitled to vote at such meeting;
PROVIDED, HOWEVER, that notice of a meeting to act on an amendment to the
Articles of Incorporation, a plan of merger or share exchange, the sale, lease,
exchange or other disposition of all or substantially all of the Corporation's
assets other than in the regular course of business or the dissolution of the
Corporation shall be given not less than 20 nor more than 60 days before such
meeting. All notices of meetings shall specify the place, date, and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders may be transmitted by mail,
private carrier, personal delivery, telegraph, teletype or communications
equipment that transmits a facsimile of the notice. Notice, if mailed, is
effective when deposited in the United States mail, postage prepaid, directed to
the shareholder at his address as it appears on the current records of the
Corporation. Notice given in any manner other than by mail, is effective when
dispatched to the shareholder's address, telephone number or other number
appearing on the current records of the Corporation. An affidavit of the
Secretary or an assistant secretary or of the transfer agent of the Corporation
that the notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the issued and outstanding shares entitled to
vote, represented in person or by proxy, shall constitute a quorum at a meeting
of shareholders for the transaction of business except as otherwise provided by
the Washington Business Corporation Act (the "ACT") or by the Articles of
Incorporation. If, however, a quorum is not present or represented at any
meeting of shareholders , the chairman of the meeting or the holders of a
majority of the shares present, either in person or by proxy, shall have the
power to adjourn the meeting to such time and place as may be
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<PAGE>
decided upon by the chairman of the meeting or the holders of the majority
of the shares present, without notice other than announcement at the meeting,
until a quorum is present or represented. Any business that might have been
transacted at the meeting as originally noticed may be transacted at a
reconvened meeting, provided that a quorum is present or represented at such
meeting. Once a share is represented for any purpose at a meeting, other than
solely to object to holding the meeting or transacting business, it is deemed
present for quorum purposes for the remainder of such meeting and any
adjournment (unless a new record date is or must be set for the adjourned
meeting), notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
2.7 ADJOURNED MEETING; NOTICE
If a meeting of shareholders is adjourned to a different date, time or
place, unless these Bylaws otherwise require, no notice of the new date, time or
place shall be required if they are announced at the meeting before adjournment.
At the adjourned meeting, the Corporation may transact any business that might
have been transacted at the original meeting. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given to each
shareholder of record entitled to notice of or to vote as of the new record
date.
2.8 VOTING; NO CUMULATIVE VOTING
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these Bylaws.
Except as may be otherwise provided in the Articles of Incorporation, each
shareholder shall be entitled to one vote for each share of capital stock held
by such shareholder. Shareholders of the Corporation are not entitled to
cumulate their votes for directors.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given to any shareholder under the
provisions of these Bylaws, the Articles of Incorporation or the Act, a waiver
in writing, signed by the person or persons entitled to such notice and
delivered to the Corporation, whether before or after the date and time of the
meeting or before or after the action to be taken by consent is effective, shall
be deemed equivalent to the giving of such notice. Further, notice of the time,
place and purpose of any meeting will be deemed to be waived by any shareholder
by attendance in person or by proxy at the meeting, unless such shareholder, at
the beginning of the meeting, objects to holding the meeting or transacting
business at the meeting. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the shareholders need be specified
in any written waiver of notice unless so required by the Articles of
Incorporation or these Bylaws.
2.10 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Unless otherwise provided in the Articles of Incorporation, any action
required or permitted by these Bylaws, the Articles of Incorporation, or the
Act, to be taken at any meeting, annual or special, of shareholders may be taken
without a meeting by unanimous consent if one or more written consents
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<PAGE>
setting forth the action so taken shall be signed by all the shareholders
entitled to vote with respect to the matter. Action may be taken by less than
unanimous consent. Action by less than unanimous consent may be taken if one or
more written consents describing the action taken shall be signed 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. If not otherwise fixed by the Board, the record
date for determining shareholders entitled to take action without a meeting is
the date of the first shareholder consent is signed. A shareholder may withdraw
a consent only by delivering a written notice of withdrawal to the Secretary
prior to the time that consents sufficient to authorize taking the action have
been delivered to the Corporation. Every written consent shall bear the date of
signature of each shareholder who signs the consent. A written consent is not
effective to take the action referred to in the consent unless, within 60 days
of the earliest dated consent delivered to the Corporation, written consents
signed by a sufficient number of shareholders to take action are delivered to
the Corporation. Unless the consent specifies a later effective date, actions
taken by written consent of the shareholders are effective when (a) consents
sufficient to authorize taking the action are in possession of the Corporation
and (b) the period of advance notice required by the Articles of Incorporation
to be given to any nonconsenting or nonvoting shareholders has been satisfied.
If the action requires the filing of a certificate under any section of the Act,
the certificate so filed shall state, in lieu of any statement required by such
section concerning any vote of shareholders, that written notice and consent has
been obtained in accordance with Section 23B.070.040(5). Any such consent shall
be inserted in the minute book as if it were the minutes of a meeting of the
shareholders.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the Corporation may determine the shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board may fix a future date as the record date, which shall not be
more than 70, and, in case of a meeting of shareholders, not less than 10 days,
prior to the date on which the particular action requiring such determination is
to be taken. If the Board does not so fix a record date, the record date shall
be the day immediately preceding the date on which notice of the meeting is
first given to shareholders, or, if notice is waived, at the close of business
on the day immediately preceding the day on which the meeting is held. Such
determination shall apply to any adjournment of the meeting unless the Board
fixes a new record date, which the Board shall do if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting. The
record date for determining shareholders entitled to express consent to
corporate action in writing without a meeting, when no prior action by the Board
is necessary, shall be the day on which the first written consent is signed. The
record date for determining shareholders for any other purpose shall be at the
close of business on the day on which the Board adopts the resolution relating
thereto.
2.12 PROXIES
Each shareholder entitled to vote at a meeting of shareholders, or to
express consent or dissent to corporate action in writing without a meeting, may
authorize another person or persons to act for him by a written proxy, signed by
the shareholder and filed with the Secretary or other officer or agent of the
Corporation authorized to tabulate votes. A proxy shall become invalid 11 months
after the date of its execution, unless a longer period is expressly provided in
the proxy. A proxy shall be deemed signed if the shareholder's name is placed on
the proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the shareholder or his attorney-in-fact. The revocability of a
proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 23B.07.220 of the Act.
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2.13 LIST OF SHAREHOLDERS ENTITLED TO VOTE
At least 10 days before every meeting of shareholders, a complete list of
the shareholders entitled to notice of such meeting shall be made. The list
shall be arranged in alphabetical order and show the address of each shareholder
and the number of shares registered in the name of each shareholder (arranged by
voting group and by each class or series of shares). The list shall be available
for inspection by any shareholder, beginning 10 days prior to the meeting and
continuing through the meeting, at the Corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held. A shareholder is entitled to inspect the list, during regular business
hours and at the shareholders' expense, during the period it is available for
inspection.
2.14 ADVANCE NOTICE OF SHAREHOLDER NOMINATIONS AND PROPOSALS
Nominations of persons for election to the Board and the proposal of
business to be considered by the shareholders may be made at any meeting of
shareholders only (a) pursuant to the Corporation's notice of meeting, (b) by
or at the direction of the Board, or (c) by any shareholder of the Corporation
who was a shareholder of record at the time of giving of notice provided for
in these Bylaws, who is entitled to vote at the meeting and who complies with
the notice procedures set forth in this Section 2.14
In addition to any other applicable legal or regulatory requirements, for
nominations or other business to be properly brought before a shareholders
meeting by a shareholder pursuant to clause (c) of the preceding sentence, the
shareholder must have given timely notice thereof in writing to the Secretary
of the Corporation, and such other business must otherwise be a proper matter
for shareholder action. To be timely, a shareholder's notice must be given
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the Corporation and received by the Secretary not later than 60
days prior to the first anniversary of the date on which notice of the prior
year's annual meeting was first mailed to shareholders. In no event shall the
public announcement of an adjournment of a shareholders meeting commence a new
time period for the giving of a shareholder's notice as described above. Such
shareholder's notice shall set forth (a) as to each person, if any, whom the
shareholder proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or
is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (or any successor thereto) and
Rule 14a-11 thereunder (or any successor thereto) (including such persons'
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected), (b) as to any other business that the
shareholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting, and any material interest in such business of
such shareholder and the beneficial owner, if any, on whose behalf the
proposal is made, and (c) as to the shareholder giving notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such shareholder, as they appear on the
Corporation's books, and of such beneficial owners, and (ii) the class and
number of shares of the Corporation which are owned beneficially and of record
by such shareholder and such beneficial owner. Notwithstanding any provision
herein to the contrary, no business shall be conducted at a shareholders
meeting except in accordance with the procedures set forth in this Section
2.14.
The person presiding over the shareholders meeting shall, if the facts
warrant, determine and declare at the meeting that the nomination was not
properly made or that the business was not properly brought before the
meeting, as the case may be, in accordance with the provisions of this Section
2.14, and, if he should so determine, he shall so declare at the meeting that
any such person not properly nominated shall not be eligible to receive votes
in the election of directors at the meeting or that any such business not
properly brought before the meeting shall not be transacted, as the case may
be.
ARTICLE III
DIRECTORS
3.1 POWERS
All corporate powers shall be exercised by or under the authority of, and
the business and affairs of the Corporation shall be managed under the direction
of, the Board, except as may be otherwise provided in these Bylaws, the Articles
of Incorporation or the Act.
3.2 NUMBER OF DIRECTORS
The number of Directors of the Corporation shall be fixed from time to time
by resolution of the Board. The number of Directors may be changed from time to
time by amendment to these Bylaws, but no decrease in the number of Directors
shall have the effect of removing any Director before his term of office
expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these Bylaws, the directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively. Directors need not be shareholders of the Corporation or residents
of the State of Washington unless so required by the these Bylaws or the
Articles of Incorporation, wherein other qualifications for directors may be
prescribed. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board. Each class shall consist, as
nearly as may be possible, of one-third of the total number of directors
constituting the entire Board. The current term of office of the Class I
directors shall expire at the annual meeting of shareholders in 2000 and Class I
directors shall subsequently be elected for a full term of three years. The
current term of office of the Class II directors shall expire at the annual
meeting of shareholders in 2001 and Class II directors shall
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<PAGE>
subsequently be elected for a full term of three years. The initial term of
office of the Class III directors shall expire at the annual meeting of
shareholders in 2002 and Class III directors shall subsequently be elected for a
full term of three years. Thereafter, the term of office of each class of
directors shall be three years and directors shall hold office until the annual
meeting for the year in which their terms expire and until their successors
shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. If the number
of directors is changed, any increase or decrease in directorships shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class shall hold
office only until next election of directors by the shareholders, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director.
3.4 RESIGNATION; REMOVAL; VACANCIES
Any Director may resign from the Board or any committee of the Board at any
time by delivering either oral tender of resignation at any meeting of the Board
or any committee thereof, or written notice to the Chairman of the Board, the
President, the Secretary or the Board. Any such resignation is effective upon
delivery thereof unless the notice of resignation specifies a later effective
date and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
At a meeting of shareholders called expressly for that purpose, one or more
members of the Board, including the entire Board, may be removed with or without
cause by the holders of the shares entitled to elect the Director or Directors
whose removal is sought if the number of votes cast to remove the Director
exceeds the number of votes cast not to remove the Director.
Unless the Articles of Incorporation provide otherwise, any vacancy
occurring on the Board may be filled by the shareholders, by the Board or, if
the Directors in office constitute fewer than a quorum, by the affirmative vote
of a majority of the remaining Directors. Any vacant office to be held by a
Director elected by holders of one or more authorized classes or series of
shares entitled to vote and be counted collectively thereon shall be filled only
by the vote of the holders of such classes or series of shares. A vacancy that
will occur at a specific later date, by reason of a resignation effective at a
later date or otherwise, may be filled before the vacancy occurs but the new
Director may not take office until the vacancy occurs. A Director elected to
fill a vacancy shall serve only until the next election of Directors by the
shareholders.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The Board may hold meetings, both regular and special, either within or
outside the State of Washington.
Members of the Board, or of any committee thereof, may participate in a
meeting of the Board, or committee, by, or conduct the meeting through the use
of, any means of communication by which all Directors who are participating in
the meeting can hear each other during the meeting. Participation by such means
shall constitute presence in person at the meeting.
3.6 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after and
at the same place as the Annual Meeting. By resolution, the Board, or any
committee thereof, may specify the date, time and place for holding regular
meetings without notice other than such resolution.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the Board, or of any committee thereof, may be
called by or at the request of the Chairman of the Board, the President, the
Secretary or, in the case of special Board meetings, any two (2) Directors and,
in the case of any special meeting of any committee of the Board, by its
Chairman. The person or persons authorized to call special meetings may fix any
place for holding any special Board or committee meeting called by them.
Notice of a special Board or committee meeting stating the date, time and
place of the meeting shall be delivered personally or by telephone to each
Director or sent by first class mail or telegram, charges prepaid, addressed to
each Director at his address as it is shown on the records of the Corporation.
If the notice is mailed, it shall be deposited in the United States mail at
least five (5) days before the time of the holding of the meeting. If the notice
is delivered personally or by telephone or by telegram, it shall be delivered
personally or by telephone or to the telegraph company at least two (2) days
before the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the Board, or of any committee
thereof, then the Directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given to any Director under any
provisions of these Bylaws, the Articles of Incorporation or the Act, a written
waiver thereof, signed by the person entitled to notice and delivered to the
Corporation, whether before or after the date and time of the meeting, shall be
deemed equivalent to the giving of such notice. A Director's attendance at or
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participation in a meeting of the Board, or of any committee thereof, shall
constitute a waiver of notice of such meeting, unless the Director at the
beginning of the meeting, or promptly upon his arrival, objects to holding the
meeting or transacting business at such meeting and does not thereafter vote for
or assent to action taken at the meeting. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the Board, or of any
committee thereof, need be specified in any written waiver of notice unless so
required by these Bylaws or the Articles of Incorporation.
3.10 QUORUM
At all meetings of the Board, or of any committee thereof, a majority of
the authorized number of Directors shall constitute a quorum for the transaction
of business and the act of majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board, or of the committee
thereof, except as the Articles of Incorporation or the Act may otherwise
specifically provide. If a quorum is not present at any meeting of the Board, or
of the committee thereof, then the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action required or permitted to be taken at any meeting of the Board,
or of any committee thereof, may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member, either before or after the action is
taken, and delivered to the Corporation. Action taken by written consent of
Directors without a meeting is effective when the last Director signs the
consent, unless the consent specifies a later effective date. Any such consent
shall be filed with the minutes of proceedings of the Board or committee
meeting.
3.12 EXECUTIVE AND OTHER COMMITTEES; AUTHORITY; MINUTES
The Board, by resolution adopted by the greater of (a) a majority of
the Directors then in office and (b) the number of Directors required to take
action in accordance with these Bylaws, may create standing or temporary
committees, including an Executive Committee, and appoint members from its own
number and invest such committees with such powers as it may see fit, subject to
such conditions as may be prescribed by the Board, these Bylaws, the Articles of
Incorporation and applicable law. Each committee must have two (2) or more
members, who shall serve at the pleasure of the Board. The Board may remove any
member of any committee elected or appointed by the Board but only by the
affirmative vote of the greater of (x) a majority of the Directors then in
office and (y) the number of Directors required to take action in accordance
with these Bylaws.
Each committee shall have and may exercise all the authority of the
Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions adopted in like manner, except that no
such committee shall have the authority to (i) authorize or approve a
distribution except according to a general formula or method prescribed by the
Board, (ii) approve or propose to shareholders actions or proposals required by
the Act to be approved by
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shareholders. (iii) fill vacancies on the Board or any committee thereof,
(iv) amend the Articles of Incorporation pursuant to Section 23B.10.020 of the
Act, (v) adopt, amend or repeal Bylaws, (vi) approve a plan of merger not
requiring shareholder approval, or (vii) authorize or approve the issuance or
sale of contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares except that
the Board may authorize a committee or a senior executive officer of the
Corporation to do so within limits specifically prescribed by the Board.
All committees shall keep regular minutes of their meetings and shall cause
them to be recorded in books kept for that purpose.
3.13 APPROVAL OF LOANS TO OFFICERS
Unless these Bylaws, the Articles of Incorporation or the Act otherwise
specifically provide, the Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiary, including any officer or employee who is a
Director of the Corporation, or its subsidiary, whenever, in the judgment of the
Directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board
shall approve, including, without limitation, a pledge of shares of stock of the
Corporation. Nothing contained in this Section 3.13 shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
3.14 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by these Bylaws or the Articles of
Incorporation, the Board shall have the authority to fix the compensation of
Directors and committee members. By resolution, Directors and committee members
may be paid their expenses, if any, of attendance at each Board or committee
meeting, or a fixed sum for attendance at each Board or committee meeting, or a
stated salary as Director or a committee member, or a combination of any of the
foregoing. No such payment shall preclude any Director or committee member from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV
OFFICERS
4.1 OFFICERS
The officers of the Corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The Corporation may also have, at the
discretion of the Board, a chairman of the Board, one or more assistant vice
presidents, assistant secretaries, assistant treasurers, and any such
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other officers as may be appointed in accordance with the provisions of
Section 4.3 of these Bylaws. Any number of offices may be held by the same
person.
4.2 ELECTION OF OFFICERS
The officers of the Corporation, except such officers as may be appointed
in accordance with the provisions of Sections 4.3 or 4.6 of these Bylaws, shall
be chosen by the Board, subject to the rights, if any, of an officer under any
contract of employment.
4.3 SUBORDINATE OFFICERS
The Board may appoint, or empower the President to appoint, such other
officers and agents as the business of the Corporation may require, each of whom
shall hold office for such period, have such authority, and perform such duties
as are provided in these Bylaws or as the Board may from time to time determine.
4.4 CONTRACT RIGHT OF OFFICERS
The appointment of an officer does not, by itself, create contract rights.
4.5 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board at any regular or special meeting
of the Board or, except in the case of an officer chosen by the Board, by any
officer upon whom such power of removal may be conferred by the Board.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
4.6 VACANCIES IN OFFICES
Any vacancy occurring in any office of the Corporation shall be filled by
the Board.
4.7 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board and exercise and perform such other
powers and duties as may from time to time be assigned to him by the Board or as
may be prescribed by these Bylaws. If there is no president, then the Chairman
of the Board shall also be the Chief Executive Officer of the Corporation and
shall have the powers and duties prescribed in Section 4.8 of these bylaws.
4.8 PRESIDENT
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Subject to such supervisory powers, if any, as may be given by the
Board to the Chairman of the Board, if there be such an officer, the President
shall be the Chief Executive Officer of the Corporation and shall, subject to
the control of the Board, have general supervision, direction, and control of
the business and the officers of the Corporation. He shall preside at all
meetings of the shareholders and, in the absence or nonexistence of a chairman
of the board, at all meetings of the Board. He shall have the general powers and
duties of management usually vested in the office of president of a corporation
and shall have such other powers and duties as may be prescribed by the Board or
these Bylaws.
4.9 VICE PRESIDENT
In the absence or disability of the President, the Vice Presidents, if any,
in order of their rank as fixed by the Board or, if not ranked, a vice president
designated by the Board, shall perform all the duties of the President and when
so acting shall have all the powers of, and be subject to all the restrictions
upon, the President. The Vice Presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board, these Bylaws, the President or the Chairman of the
Board.
4.10 SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive
office of the Corporation or such other place as the Board may direct, a book of
minutes of all meetings and actions of the Board, committees of the Board, and
shareholders. The minutes shall show the time and place of each meeting, whether
regular or special (and, if special, how authorized and the notice given), the
names of those persons present at Board meetings or committee meetings, the
number of shares present or represented at meetings of shareholders, and the
proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal offices of
the Corporation or at the office of the Corporation's transfer agent or
registrar, as determined by resolution of the Board, a share register, or a
duplicate share register, showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates evidencing such shares, and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board required to be given by law or by these
Bylaws. He shall keep the seal of the Corporation, if one be adopted, in safe
custody and shall have such other powers and perform such other duties as may be
prescribed by the Board or by these Bylaws.
4.11 TREASURER
The Treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and
business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained
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earnings, and shares. The books of account shall at all reasonable times be
open to inspection by any Director.
The Treasurer shall deposit all money and other valuables in the name and
to the credit of the Corporation with such depositaries as may be designated by
the Board. He shall disburse the funds of the Corporation as may be ordered by
the Board, shall render to the President and Directors, whenever they request
it, an account of all of his transactions as Treasurer and of the financial
condition of the Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board or these Bylaws.
4.12 ASSISTANT SECRETARY
The Assistant Secretary, or, if there is more than one, the Assistant
Secretaries in the order determined by the shareholders or Board (or if there be
no such determination, then in the order of their election) shall, in the
absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board or the shareholders
may from time to time prescribe.
4.13 ASSISTANT TREASURER
The Assistant Treasurer, or, if there is more than one, the Assistant
Treasurers, in the order determined by the shareholders or Board (or if there be
no such determination, then in the order of their election), shall, in the
absence of the Treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board or the shareholders
may from time to time prescribe.
4.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the Board or the shareholders.
ARTICLE V
INDEMNITY
5.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a party to or is
otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit, claim or proceeding, whether
civil, criminal, administrative or investigative and whether formal or informal
(a "PROCEEDING"), by reason of the fact that he is or was a Director or officer
of the Corporation or, that being or having been such a Director or officer or
an employee of the
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Corporation, he is or was serving at the request of the Corporation as a
Director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise (an
"INDEMNITEE"), whether the basis of a Proceeding is alleged action in an
official capacity or in any other capacity while serving as a Director, officer,
partner, trustee, employee or agent, shall be indemnified and held harmless by
the Corporation against all loses, claims, damages (compensatory, exemplary,
punitive or otherwise), liabilities and expenses (including attorneys' fees,
costs, judgments, fines, ERISA excise taxes or penalties, amounts to be paid in
settlement and any other expenses) actually and reasonably incurred or suffered
by such Indemnitee in connection therewith and such indemnification shall
continue as an Indemnitee who has ceased to be a Director or officer of the
Corporation or a Director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise shall inure to the benefit of the Indemnitee's heirs, executors
and administrators. Except as provided in Section 5.4 with respect to
proceedings seeking to enforce rights to indemnification, the Corporation shall
indemnify any such Indemnitee in connection with a Proceeding (or part thereof)
initiated by such Indemnitee only if a Proceeding (or part thereof) was
authorized or ratified by the Board. The right to indemnification conferred in
this Article 5 shall be a contract right.
5.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such Indemnitee for acts or
omissions of the Indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the Indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Act, for any transaction with respect
to which it was finally adjudged that such Indemnitee personally received a
benefit in money, property or services to which the Indemnitee was not legally
entitled or if the Corporation is otherwise prohibited by applicable law from
paying such indemnification. Notwithstanding the foregoing, if Section
23B.08.560 or any successor provision of the Act is hereafter amended, the
restrictions on indemnification set forth in this Section 5.2 shall be set forth
in such amended statutory provision.
5.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Article 5. shall include the
right to be paid by the Corporation the expenses incurred in defending any
proceeding in advance of its final disposition (an "ADVANCEMENT OF EXPENSES").
An Advancement of Expenses shall be made upon delivery to the Corporation of an
undertaking (an "UNDERTAKING"), by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such Indemnitee is
not entitled to be indemnified.
5.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under Section 5.1 or 5.3 is not paid in full by the Corporation
with 60 days after a written claim has been received by the Corporation, except
in the case of a claim for an Advancement of Expenses, in which case the
applicable period shall be 20 days, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim.
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If successful in whole or in part, in any such suit of in a suit brought by
the Corporation to recover an Advancement of Expenses pursuant to the terms of
an undertaking, the Indemnitee shall be entitled to be paid also the expense of
litigating such suit. The Indemnitee shall be presumed to be entitled to
indemnification under this Article 5 upon submission of a written claim (and, in
an action brought to enforce a claim for an Advancement of Expenses, when 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
Indemnitee is so entitled.
5.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the Act,
the procedures for indemnification and the Advancement of Expenses set forth in
this Article 5 are in lieu of the procedures required by Section 23B.08.550 or
any successor provision of the Act.
5.6 NONEXCLUSIVITY OF RIGHTS
Except as set forth in Section 5.5, the right to indemnification and the
Advancement of Expenses conferred in this Article 5 shall not be exclusive of
any other right that any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation or these Bylaws, general or specific
action of the Board or shareholders, contract or otherwise.
5.7 INSURANCE
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Corporation, or
who, while a director, officer, employee, or agent of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the Act. The Corporation may enter into
contracts with any Director, officer, partner, trustee, employee or agent of the
Corporation in furtherance of the provisions of this Article 5 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 Article 5.
5.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
In addition to the rights of indemnification set forth in Section 5.1, the
Corporation may, by action of the Board, grant rights to indemnification and the
Advancement of Expenses to employees and agents or any class or group of
employees and agents of the Corporation (a) with the same scope and effect as
the provisions of this Article 5 with respect to indemnification and the
Advancement of Expenses of Directors and officers of the Corporation; (b)
pursuant to rights granted or provided by the Act; or (c) as are otherwise
consistent with law.
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5.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the Corporation,
is or was serving (a) as a director, officer, employee or agent of another
corporation of which a majority of the shares entitled to vote in the election
of its directors is held by the Corporation or (b) as a partner, trustee or
otherwise in an executive or management capacity in a partnership, joint
venture, trust, employee benefit plan or other enterprise of which the
Corporation or a [wholly OR majority] owned subsidiary of the Corporation is a
general partner or has a majority ownership shall conclusively be deemed to be
so serving at the request of the Corporation and entitled to indemnification and
the Advancement of Expenses under Sections 5.1 and 5.3.
ARTICLE VI
RECORDS AND REPORTS
6.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal office or at such place or
places as designated by the Board:
(a) Keep as permanent records minutes of all meetings of the Board and
shareholders, a record of all actions taken by the Board or shareholders without
a meeting, and a record of all actions taken by a committee of the Board
exercising the authority of the Board on behalf of the Corporation;
(b) Maintain appropriate accounting records; and
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the name and addresses of all shareholder, in
alphabetical order by class of shares showing the number and class of shares
held by each shareholder.
(d) Keep a copy of the following records at its principal office:
(i) the Article of Incorporation and all amendments thereto as
currently in effect;
(ii) these Bylaws and all amendments thereto as currently in effect;
(iii) the minutes of all meetings of shareholders and records of all
action taken by shareholders without a meeting, for the past three (3) years;
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(iv) the financial statements described in Section 23B.16.200(1) of
the Act, for the past three (3) years;
(v) all written communications to shareholders generally within the
past three (3) years;
(vi) a list of the names and business addresses of the current
Directors and officers; and
(vii) the most recent annual report delivered to the Secretary of
State of the State of Washington.
6.2 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any vice president, the
Treasurer, the Secretary or assistant secretary of this Corporation, or any
other person authorized by the Board or the President or a vice president, is
authorized to vote, represent, and exercise on behalf of this Corporation all
rights incident to any and all shares of any other corporation or
corporations standing in the name of this Corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such
person having the authority.
ARTICLE VII
GENERAL MATTERS
7.1 CHECKS
From time to time, the Board shall determine by resolution which person
or persons may sign or endorse all checks, drafts, other orders for payment
of money, notes or other evidences of indebtedness that are issued in the
name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
7.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The Board, except as otherwise provided in these Bylaws, may authorize
any officer or officers, or agent or agents, to enter into any contract or
execute any instrument in the name of and on behalf of the Corporation; such
authority may be general or confined to specific instances. Unless so
authorized or ratified by the Board or within the agency power of an officer,
no officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
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7.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a Corporation shall be represented by certificates,
provided that the Board may provide by resolution or resolutions that some or
all of any or all classes or series of its stock shall be uncertificated
shares. Any such resolution shall not apply to shares represented by a
certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the board of directors,
every holder of stock represented by certificates and upon request every
holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the Chairman or Vice Chairman
of the Board, or the President or Vice President, and by the Treasurer or an
assistant treasurer, or the Secretary or an assistant secretary of the
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be
issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
Corporation shall declare a dividend upon partly paid shares of the same
class, but only upon the basis of the percentage of the consideration
actually paid thereon.
7.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate that the
Corporation shall issue to represent such class or series of stock; provided,
however, that, except as otherwise provided in Section 23B.06.270 of the Act,
in lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the Corporation shall issue to represent such
class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
7.5 LOST, STOLEN OR DESTROYED CERTIFICATES
Except as provided in this Section 7.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter
is surrendered to the Corporation and cancelled at the same time. The
Corporation may issue a new certificate of stock or uncertificated shares in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or
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his legal representative, to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate or uncertificated shares.
7.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Act shall govern the construction of
these Bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both an individual and an entity, as those terms are
defined in the Act.
7.7 DIVIDENDS
The Board, subject to any restrictions contained in the Articles of
Incorporation, may declare and pay dividends upon the shares of its capital
stock pursuant to the Act. Dividends may be paid in cash, in property, or in
shares of the Corporation's capital stock.
The Board may set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose and may
abolish any such reserve. Such purposes shall include but not be limited to
equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
7.8 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
Board and may be changed by the Board.
7.9 SEAL
The Board may provide for a corporate seal that shall consist of the
name of the Corporation, the state of its incorporation, and the year of its
incorporation.
7.10 TRANSFER OF STOCK; RESTRICTIONS ON TRANSFER
Upon surrender to the Corporation or its transfer agent of a certificate
for shares duly endorsed or accompanied by proper evidence of succession,
assignation or authority to transfer, it shall be the duty of the Corporation
to issue a new certificate to the person entitled thereto, cancel the old
certificate, and record the transaction in its books.
Except to the extent that the Corporation has obtained an opinion of
counsel acceptable to the Corporation that transfer restrictions are not
required under applicable federal and state securities laws, all certificates
representing shares of the Corporation shall bear a legend on the face of the
certificate, or on the reverse of the certificate if a reference to the
legend is contained on the face thereof, which reads substantially as follows:
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"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. SUCH
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER AND
ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT AND
ANY STATE SECURITIES LAWS."
7.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not
prohibited by the Act.
7.12 REGISTERED SHAREHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the
State of Washington.
ARTICLE VIII
AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board, except that the Board may not amend or repeal any Bylaw
that the shareholders have expressly provided, in amending or repealing such
Bylaw, may not be amended or repealed by the Board. The shareholders may also
alter, amend and repeal these Bylaws or adopt new Bylaws. All Bylaws made and
adopted by the Board may be amended, repealed, altered or modified by the
shareholders.
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CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS
OF
SHOPNOW.COM, INC.
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of ShopNow.com Inc. (the "CORPORATION") and that the
foregoing Bylaws, comprising 20 pages, were adopted as the Bylaws of the
Corporation on June 15, 1999, by the Board of Directors of the
Corporation, to be effective as of the date the Securities and Exchange
Commission declares the Corporation's Registration Statement on Form S-1
relating to the initial public offering of the Corporation's Common Stock
effective.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Adoption on September 28, 1999.
/s/ Alan D. Koslow
------------------------------------------
Alan D. Koslow
Executive Vice President, Chief Financial
Officer, General Counsel and Secretary
<PAGE>
ELECTRONIC DISTRIBUTOR AGREEMENT
This Agreement made as of this 19th day of May, 1999 (the "Effective
Date"), by and between Corel Corporation having its principal place of
business at 1600 Carling Avenue, Ottawa, Ontario, K1Z 8R7 and its
wholly-owned subsidiary Corel Corporation Limited having its principal place
of business at Europa House, Harcourt Street, Dublin 2, Ireland (together
"COREL") and ShopNow.com Inc. ("Distributor"), having its principal place of
business at 411 First Avenue South, Suite 200N, Seattle, WA 98104.
BACKGROUND:
1. COREL desires to secure electronic distribution of certain of its
software through an on-line store;
2. Distributor desires to obtain certain software from COREL for electronic
distribution through an online store which it develops and operates and
in connection with which it provides services.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein the parties agree as follows:
1. INTERPRETATION
1.01 DEFINITIONS. As used herein:
(a) "Affiliate" means a third party affiliate as defined in Section
2.01(v) of this Agreement.
(b) "Agreement" means this agreement and any Schedule attached hereto.
(c) "Authorized COREL Distributor" means a distributor who has entered
into a distributor agreement with COREL to distribute
shrink-wrapped software and who remains in good standing under
such agreement.
(d) "COREL Database" means the database defined in Section 5.10 of
this Agreement.
(e) "COREL Marks" means the trade names and trade-marks related to
COREL and the Software.
(f) "COREL Materials" means any graphics, text or materials provided
by COREL to Distributor in connection with the Store, including,
but not limited to the Software and Products.
(g) "Customer" means any person or entity who purchases Software,
Products, Merchandise, Technical Support Products and/or
Distributor Products through Distributor System from Distributor
and/or Reseller for its own personal or business use and not for
resale.
(h) "Customer Information" means any information relating to Customers
and/or end users obtained by Distributor during the term of this
Agreement, including without limitation, names, telephone numbers,
addresses, e-mail addresses or information that may otherwise be
used to identify Customer in any manner whatsoever.
(i) "Customer Information Processing" means any method of gathering,
storage, retrieval, dissemination and transfer of Customer
Information whatsoever used by Distributor in the course of
carrying out its obligations under this Agreement.
(j) "Decryption Key" means the key provided to Customers by
Distributor which will permit Customers to unlock and access the
Software.
(k) "Development" means those development services, including, but not
limited to functionality development, look and feel development
and web page development, provided by Distributor to COREL as set
forth in this Agreement and in the Market Requirements Document
("MRD") attached hereto as Schedule "H"
(l) "Distributor Database" means the database as defined in Section
5.11 of this Agreement.
(m) "Distributor Products" means those third party products approved
by COREL and offered for distribution by Distributor from the
Store and listed in Schedule "P", which shall not include products
that compete with any of the Software and Merchandise.
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO PORTIONS OF
THIS EXHIBIT
<PAGE>
2
(n) "Distributor System" means the system used by Distributor for
the receipt and delivery of on-line orders for the Software and
processing of credit card information for all Software,
Merchandise and/or Technical Support Product orders by Customers.
(o) "Distributor Web Site" means the web site used by Distributor to
permit customers to access the Store.
(p) "Electronic Distributor Materials" means Distributor provided
computer readable materials which have received prior written
approval from COREL to be included in a Product.
(q) "Electronic Software Distribution" (or "ESD") means the
electronic delivery of Products, using on line services, the
Internet, phone lines, cable systems, servers, satellite, or
other public or private access network or electronic
communication media.
(r) "End User License Agreement (or "EULA")" means COREL's end user
license as modified by COREL from time to time.
(s) "Marketing Services" means those marketing services provided by
Distributor to COREL as set forth in this Agreement and Schedule
"J" attached hereto.
(t) "Merchandise" means those COREL products listed in Schedule "E".
(u) "Merchandise Prices" means the amount payable by Distributor
pursuant to Section 7 of this Agreement and according to the
pricing schedule set out in Schedule "E" for each unit of the
Merchandise which is distributed by Distributor.
(v) "Product" means a copy of the Software and End User License
Agreement packaged in computer readable form for Electronic
Software Distribution in accordance with the terms of this
Agreement.
(w) "Professional Services" means those services provided by
Distributor to COREL as set forth in this Agreement and in
Schedule "K" hereto.
(x) "Reseller" means any electronic reseller who has entered into an
agreement with Distributor, who remains in good standing under
such agreement and who offers Schedule "A" Software for resale to
Customers.
(y) "Software" means collectively, the object code version of the
COREL electronic software products listed in Schedule
"A"("Schedule "A" Software"), the object code version in any form
or format of any of the Hard Good software products listed in
Schedule "B" ("Schedule "B" Software") and the object code version
in any form or format of any of the COREL Premium software
products listed in Schedule "C" ("Schedule "C" Software"). In
those instances where the term "Software" is used, such reference
shall include Schedule "A" , Schedule "B" and Schedule "C"
software. In those instances where only Schedule "A", Schedule "B"
or Schedule "C" Software is indicated, such reference shall refer
only to that software so specified.
(z) "Software Prices" means the amount payable by Distributor pursuant
to Section 7 of this Agreement and according to the pricing
schedule set out in Schedule "A" , Schedule "B" and/or Schedule
"C" for each copy of the Software which is distributed by
Distributor.
(aa) "Store" means an online store prepared as part of the Development
and branded with the COREL name that resides on the Distributor's
System, that appears to the Customer as COREL's web site and from
which Distributor shall distribute Software, Merchandise and
Technical Support Products to Customers.
(bb) "Technical Support Products" means those COREL technical support
products listed in Schedule "I".
(cc) "Technical Support Products Prices" means the amount payable by
Distributor pursuant to Section 7 of this Agreement and according
to the pricing schedule set out in Schedule "I" for each Technical
Support Product distributed by Distributor.
(dd) "Territory" means worldwide, subject to Section 5.07 herein.
(ee) "Web Pages" means those web pages provided by COREL to Distributor
during the term of this Agreement, including any modifications
thereto, and all web pages developed by Distributor for the Store
during the term of this Agreement including the user interface
layer which includes the HTML, ASP, Java code, CGI scripts and all
other code and images contained therein.
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3
1.02 SCHEDULES. The following Schedules are appended to and form part of this
Agreement.
Schedule "A" - Electronic Software and Software Prices
Schedule "B" - Hard Goods Software and Software Prices
Schedule "C" - Premium Software and Software Prices
Schedule "D" - Shrink-wrap Software and Suggested List Prices
Schedule "E" - Merchandise and Merchandise Prices
Schedule "F" - Distributor Reports, Services and Sample Letter of
Destruction
Schedule "G" - Guidelines for Using COREL Trade Marks and COREL Logos
Schedule "H" - MRD
Schedule "I" - Technical Support Products and Technical Support Product
Prices
Schedule "J" - Marketing Services
Schedule "K" - Professional Services
Schedule "L" - Designated Project Team
Schedule "M" - Privacy Policy
Schedule "N" - Technical Architecture
Schedule "O" - Waiver of Moral Rights
Schedule "P" - Distributor Products
Schedule "Q" - Guidelines for Using Distributor Trademarks and
Distributor Logos
Schedule "R" - Customer Service
Schedule "S" - Stock Balancing
2. APPOINTMENT
2.01 LICENSE AND APPOINTMENT. Subject to the terms and conditions hereof,
COREL hereby grants to Distributor and Distributor accepts from COREL:
(i) a non-exclusive license to reproduce and digitally encrypt the
EULA, Schedule "A" Software and Schedule "C" Software only in
computer readable form for the purposes of distribution only
through Electronic Software Distribution as part of a Product as
permitted under this Agreement;
(ii) a non-exclusive right to distribute the EULA, Schedule "A"
Software and Schedule "C" Software as part of a Product only
through Electronic Software Distribution and only from the Store
to Customers within the Territory. Distributor agrees not to
distribute the EULA or Schedule "A" Software or Schedule "C"
Software other than in computer readable form as part of a
Product;
(iii) a non-exclusive license to distribute the Schedule "B" Software,
the Merchandise and the Technical Support Products only through
the Distributor System to Customers within the Territory;
(iv) a non-exclusive right to distribute the Schedule "A" Software as
part of a Product only though Electronic Software Distribution to
Customers who have purchased such products from Resellers within
the Territory. Distributor agrees not to distribute the Schedule
"A" Software other than in computer readable form as part of a
Product.
(v) a non-exclusive right to authorize those third party affiliates
("Affiliates") which have entered into an agreement with
Distributor to create a link provided by Distributor from
Affiliate's web site to the Store.
2.02 COREL INTELLECTUAL PROPERTY. Distributor acknowledges that COREL is the
owner of all intellectual property, including, without limitation,
patents and copyright, relating to the Software and the trade-marks used
in association with the Software. Distributor shall have no rights in
respect of such intellectual property, patents or copyright other than to
act as a distributor of the Software and to deliver the Software subject
to the EULA.
To the extent that Distributor may have any right or interest in the Web
Pages, Distributor hereby sells, transfers and irrevocably assigns all
such right and interest to COREL worldwide and in perpetuity. Distributor
agrees that all agents, employees, sub-contractors or any individuals
involved with such Web Pages and all modifications, adaptations,
derivations and changes thereto, shall execute the Waiver of Moral Rights
as set out in Schedule "0" attached hereto. Copies of such Waiver of
Moral Rights shall be made available to COREL, upon COREL's request.
2.03 DISTRIBUTOR INTELLECTUAL PROPERTY. Subject to Section 2.02, COREL agrees
that Distributor is the owner of all intellectual property, including,
without limitation, patent, copyright and trade marks relating to
Distributor's System and any component thereof included but not limited
to any code (including any code of Distributor's licensors which may be
included therein) and all other software and proprietary processes and
content of Distributor and its licensors used in or in connection with
the hosting or distribution of Software, Products, Merchandise or
Technical Support Products on or from the Store (collectively,
"Distributor Technology"). COREL shall have no rights in respect of
such intellectual property. All right, title and interest including
<PAGE>
4
copyright and any other intellectual property interest, in and to all
Development, except Web Pages remain the property of the Distributor.
Notwithstanding the foregoing, to the extent that this section 2.03 and
the Agreement does not vest all right, title and interest in the Web
Pages in Corel, Distributor hereby assigns all right, title and interest
in the Web Pages to Corel.
2.04 END USER LICENSE AGREEMENT. Distributor shall ensure that each copy of
the Software distributed to Customers shall be accompanied by a copy of
the EULA in accordance with Section 5.04.
2.05 DEVELOPMENT AND ON-LINE STORE. Distributor agrees that for the term of
this Agreement it shall not provide any technology developed for COREL as
part of the Development but to which it retains ownership pursuant to
Section 2.03 to any direct competitor of COREL. For purposes of this
Agreement, a direct competitor shall mean; (i) Adobe and its affiliates;
(ii) Microsoft and its affiliates; (iii) the Learning Company and its
affiliates: (iv) IMSI and its affiliates including Art Today; (v)
Eyewire; and (vi) Xoom.com. For purposes of this Section 2.05, affiliate
shall mean a party that controls, is controlled by or is under common
control with another party.
2.06 DISTRIBUTOR AGREEMENTS. All Resellers of Distributor must be subject to
binding written agreements with Distributor that include provisions
consistent with the material substance of Sections 2, 3, 4, 5.04, 5.07,
8, 9, 10, 11, 12 and 13 of this Agreement, and such agreements must be
materially no less protective of COREL's rights in the Software than are
the terms and conditions of this Agreement.
3. TRADEMARKS
3.01 COREL MARKS. During the term of this Agreement, COREL grants Distributor
a non-exclusive license to display the COREL Marks only for the
distribution and marketing of the Software as part of a Product through
ESD.
3.02 NON-ALTERATION. Distributor agrees not to alter the COREL Marks,
copyright notices or designs of any Software. Distributor acknowledges
and agrees that COREL retains all of its right, title and interest in the
COREL Marks, and all use of the COREL Marks by Distributor shall inure to
the benefit of COREL.
3.03 MARK POLICIES AND STANDARDS. Distributor shall display the COREL Marks in
accordance with the Guidelines for Using COREL Trade-marks and COREL Logos
set forth in Schedule "G" or otherwise in effect from time to time. COREL
retains the right to specify and approve the quality and standards of all
materials on which the COREL Marks are displayed and to inspect samples
of such materials from time to time. Failure of Distributor to adhere to
such standards of quality shall be grounds for COREL to terminate
Distributor's rights to use such COREL Marks and to terminate this
Agreement. In order to enable COREL to protect its rights in the COREL
Marks, Distributor will advise COREL in writing of every country in which
it markets or distributes the Software or uses the COREL Marks.
3.04 VALIDITY AND ENFORCEABILITY OF MARKS. Distributor shall not at any time
during or after the term of this Agreement assert any claim or interest
in or to any of the COREL Marks or institute any proceeding reasonably
calculated to adversely affect the validity or enforceability of any of
the COREL Marks. Distributor shall not register, seek to register, or
cause to be registered any of COREL's trade-marks, logos, copyrights,
including the COREL Marks without COREL's prior written consent.
Distributor shall not adopt or use such trade-marks, trade names, logos
or insignia or any confusingly similar work or symbol, as part of
Distributor's company or partnership name.
3.05 INFRINGEMENT AND FURTHER ASSURANCES. Distributor agrees to report all
infringement or improper or unauthorized use of COREL's trade-marks,
trade names, logos or insignia, including the COREL Marks which come to
the attention of Distributor. Distributor further agrees to execute all
documents and further assurances required by COREL to register or protect
COREL's rights.
3.06 DISTRIBUTOR MARKS. During the term of this Agreement, Distributor grants
COREL a non-exclusive license to display the trade names, trademarks,
logos, service marks and product designations of Distributor and its
licensors (collectively, the "Distributor Marks").
3.07 NON-ALTERATION. COREL agrees not to alter the Distributor Marks. COREL
acknowledges and agrees that Distributor retains all of its right, title
and interest in the Distributor Marks, and all use of the Distributor
Marks by COREL shall inure to the benefit of Distributor.
3.08 MARK POLICIES AND STANDARDS. COREL shall display the Distributor Marks in
accordance with the Guidelines for Using Distributor Trade-marks and
Distributor Logos set forth in Schedule "Q" or otherwise in effect from
time to time. Distributor retains the right to specify and approve the
quality and standards of all materials on which the Distributor Marks are
displayed and to inspect samples of such materials from time to time.
Failure of COREL to adhere to such standards of quality shall be grounds
for Distributor to terminate COREL'S rights to use such Distributor Marks
and to terminate this Agreement.
<PAGE>
5
3.09 VALIDITY AND ENFORCEABILITY OF MARKS. COREL shall not at any time during
or after the term of this Agreement assert any claim or interest in or to
any of the Distributor Marks or institute any proceeding reasonably
calculated to adversely affect the validity or enforceability of any of
the Distributor Marks. COREL shall not register, seek to register, or
cause to be registered any of Distributor's trade-marks, logos,
copyrights, including the Distributor Marks without Distributor's prior
written consent. COREL shall not adopt or use such trademarks, trade
names, logos or insignia or any confusingly similar work or symbol, as
part of COREL's company or partnership name.
3.10 INFRINGEMENT AND FURTHER ASSURANCES. COREL agrees to report all
infringement or improper or unauthorized use of Distributor's
trade-marks, trade names, logos or insignia, including the Distributor
Marks which come to the attention of COREL. COREL further agrees to
execute all documents and further assurances required by Distributor to
register or protect Distributor's rights.
3.11 DISTRIBUTOR MARKS. COREL agrees that Distributor shall be permitted to
display the Distributor Marks in the form of a static graphic on the
Store which is not hyperlinked, upon prior written approval by COREL, to
indicate that the Store is developed and maintained by Distributor, to
indicate Distributor Products, and to otherwise identify Distributor in
connection with the Store. Such static graphic shall be no more than 80 x
60 pixels on the main page of the Store and no more than 80 x 30 pixels
on any other page of the Store. Distributor acknowledges and agrees that
such rights of display of the Distributor Marks on the Store shall in no
way confer to Distributor any right, title or interest in or to the Web
Pages or any modification thereof.
4. TERM OF AGREEMENT
4.01 EFFECTIVE DATE. This Agreement shall be effective as of the Effective
Date.
4.02 INITIAL TERM. The initial term of this Agreement shall commence upon the
Effective Date and shall continue, subject to Section 14, for a period of
twelve (12) months from such date.
4.03 RENEWAL. Subject to Section 14, this Agreement shall be renewed for
subsequent periods of twelve (12) months at the end of the prior twelve
(12) month term unless either party notifies the other prior to the
expiry of the term that it does not wish to renew the Agreement for a
further twelve (12) month term.
5. RESPONSIBILITIES OF DISTRIBUTOR
5.01 DEVELOPMENT. Distributor agrees to provide COREL the Development as
further described in Schedule "H" attached hereto. In addition,
Distributor agrees to provide COREL with forty (40) hours of user
interface redesign Development which includes a complete or significant
overhaul of the look and feel Development in each three (3) month period
of this Agreement at no additional cost to COREL. Distributor agrees that
COREL is the sole and exclusive owner of all right, title and interest in
the Web Pages and any web pages provided by COREL to Distributor under
this Agreement including but not limited to any modification thereof.
Distributor agrees that COREL may request, at any time, additional
functionality Development for the Store which has not been included
herein. Implementation of any such additional functionality Development
and deadlines relating thereto will be agreed in writing by both parties
prior to Distributor commencing any such functionality Development. COREL
shall pay Distributor for any additional Development in accordance with
Section 7.02 and Schedule "K".
5.02 PROFESSIONAL SERVICES. Distributor agrees to provide COREL the
Professional Services as further described in Schedule "K" attached
hereto.
5.03 MARKETING SERVICES. Distributor agrees to provide COREL the Marketing
Services as further described in Schedule "J" attached hereto.
5.04 ACCEPTANCE OF EULA. Distributor shall display to Customer the applicable
EULA as provided by COREL for the Software prior to download and/or
purchase of the Software by Customer. Distributor shall require all
Customers to either accept or reject the terms and conditions of the EULA
via a point and click mechanism or other mechanism acceptable to COREL
prior to download and/or purchase and, in the event Customer rejects the
EULA, Customer shall not be permitted to download or purchase the
Software. Distributor agrees that the mechanism used by Distributor to
require Customers to accept or reject the EULA shall be in a form which
will record and store all Customers acceptance of the EULA for future
reference.
5.05 RESTRICTIONS. Distributor shall distribute the Software only as permitted
under this Agreement and shall not alter the Software, Software packaging
or EULA or any part thereof. Distributor shall not rent the Software or
Products or knowingly distribute or resell to anyone who rents same or
infringes COREL's rights. Distributor shall immediately discontinue all
access to Distributor System and distribution of Software or Products to
Customers who rent same or infringe COREL's rights. Distributor shall
impose this same restriction on all Customers, other than end users, who
purchase Products or Software from Distributor.
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5.06 ENCRYPTION. Distributor shall be entitled to encrypt the EULA and
Software for ESD as part of Product provided that the additions in no way
alter the features or functionality of the Software or EULA or create any
obligations, warranties or representations on behalf of COREL.
5.07 COMPLIANCE WITH LAWS. Distributor shall comply with all laws, rules,
regulations and industry standards existing with respect to the Software,
the Merchandise, the Technical Support Products and the performance by
Distributor of its obligations hereunder, including without limitation,
data protection and Customer Information Processing, existing in the
jurisdictions where Distributor carries on activities under this
Agreement and where Software, the Merchandise and/or the Technical
Support Products is resold or distributed from time to time. In
particular, Distributor shall not export or re-export the Software, the
Merchandise and/or the Technical Support Products, either directly or
indirectly, to countries to which the United States has prohibited
export, including, but not limited to, Cuba, Iran, Iraq, Libya, Syria and
North Korea.
5.08 UPGRADES. In the distribution by Distributor of any Software upgrade
products, Distributor shall comply with all requirements on the resale of
such upgrades which COREL generally imposes on other distributors of
Software upgrades. Distributor shall impose this same restriction on all
Customers, who purchase Software from Distributor.
5.09 PAYMENT AND CREDIT CARD PROCESSING. Distributor shall be responsible for
processing all Customer orders and payment transactions using payment
methods mutually agreed to by the parties as provided in Schedule "H".
5.10 COREL DATABASE. Distributor shall develop and maintain a database which
shall contain all Customer Information relating to the Software and
Products collected by Distributor ("COREL Database"). Distributor agrees
that: (i) all information collected by Distributor identifying Products,
Serial Numbers, Customers or particulars about Customers is the
Proprietary Information of COREL and shall be governed by Section 8
herein; (ii) upon termination or expiration of this Agreement,
Distributor shall immediately provide all Customer Information contained
on the COREL Database, and any other Customer Information under the
possession or control of Distributor, to COREL provided that Distributor
may retain a copy of the COREL Database for verification purposes
regarding this Agreement; (iii) Distributor may maintain compilations of
data regarding Customers or Products with other data for business
purposes only provided that such compilations do not specifically
identify Customers or Products; (iv) Distributor shall not distribute,
sell or otherwise deal with the Customer Information other than to use
the database information to provide reports to COREL; and (v) COREL is in
no way restricted in the use of the COREL Database. Distributor agrees to
provide COREL with a copy of the COREL Database upon fourteen (14) days
written notice to Distributor in a form specified by COREL.
Notwithstanding any other limitations in this Agreement, the restrictions
on Distributor's ability to disclose or use any information in the COREL
Database shall not apply to information that Distributor obtained
independently from this Agreement.
5.11 DISTRIBUTOR DATABASE. Distributor shall develop and maintain a database
which shall contain all Customer Information relating to the Distributor
Products distributed pursuant to this Agreement and any Software,
Products, Merchandise and Technical Support Products distributed by
Distributor from any of its properties and collected by Distributor
("Distributor Database"). Distributor agrees that: (i) all information
collected by Distributor identifying Distributor Products, Customers or
particulars about Customers is the Proprietary Information of Distributor
and shall be governed by Section 8 herein; (ii) COREL shall have a
non-exclusive, worldwide, perpetual right to use, copy, publish and
distribute the Distributor Database and that COREL shall in no way be
restricted in its use of the Distributor Database; and (iii) upon
termination or expiration of this Agreement, Distributor shall
immediately provide all Customer Information contained on the Distributor
Database, and any other Customer Information under the possession or
control of Distributor, to COREL. Distributor agrees to provide COREL
with a copy of the Distributor Database upon fourteen (14) days written
notice to Distributor in a form specified by COREL.
5.12 REPORTS. Distributor shall provide COREL with reports as further
described in Schedule "F" hereto.
5.13 PROMOTION. Unless discontinued by COREL pursuant to Section 7.03 herein
or as otherwise agreed to by the parties, Distributor shall make all
Software available for purchase by Customers from Distributor at all
times.
5.14 ACCOUNT MANAGER. The parties agree to assign a dedicated account manager
as the point of contact for the other party regarding this Agreement.
Such account managers shall have the authority to approve any look and
feel Development modifications proposed by the other party in accordance
with Section 17.02.
5.15 DISTRIBUTOR SYSTEM AND WEB SITE. Distributor represents that it has a
fully functional Distributor System and Distributor Web Site as of the
Effective Date and that Distributor shall use best efforts to maintain
Distributor System and Distributor Web Site sufficient to enable
Customers to access, purchase and download Products. Distributor shall
provide all Customer, Reseller and/or Affiliates support for use of
Distributor System and Distributor Web Site including, but not limited
to, credit card processing and downloading of Products on Customer's hard
disk.
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5.16 DISTRIBUTOR SYSTEM OR WEB SITE FAILURE. In the event Distributor System
or Distributor's Web Site ceases to be available to Customers by reason
of some failure of equipment or services (whether or not caused by
Distributor or constituting force majeure as described in Section 17.05),
Distributor will use its best efforts to restore the Distributor System
and/or Distributor Web Site to normal operating condition as soon as is
reasonably practical. Distributor shall immediately advise COREL of any
such failure and provide failure reports as more fully described in
Schedule "F" hereto. In the event of any such failure for reasons
other than reasons constituting force majeure and for reasons other than
those within Distributor's control, including but not limited to the
performance or non-performance of Distributor's contractors including
Internet service providers ("ISPs") and/or subcontractors, Distributor
shall incur and pay to COREL those downtime charges as set forth in
Schedule "F" hereto. In addition, Distributor agrees that in the event
Distributor's Web Site or the Store is down and unavailable for Customers
to access and purchase for a total of eight (8) hours or more in any
month of this Agreement for reasons other than reasons constituting force
majeure and for reasons other than those within Distributor's control,
including but not limited to the performance or non-performance of
Distributor's contractors including ISPs) and/or subcontractors, COREL
shall be entitled to terminate this Agreement in accordance with Section
14.01.2.
5.17 DISTRIBUTOR SYSTEM MAINTENANCE. Distributor shall provide twenty four
(24) hours notice to COREL of any planned interruption of Distributor
System, Distributor Web Site or Store for maintenance or any other
purpose. However, during any maintenance period, Distributor shall ensure
that the Store continues to operate in the normal course of business.
5.18 SECURITY. Distributor represents it shall provide a secure system for all
Customer transactions, including, but not limited to, customer and credit
card information entry, using industry standard security technology and
shall update such technology on a regular basis. In the event Customer
Information is unable to be entered in a secure environment, Distributor
shall provide Customer with Distributor's Customer Service number. In
addition, Distributor agrees to display on the Store a security guarantee
disclaimer approved by COREL in writing. Such security guarantee shall
certify to Customers that any Customer transactions on the Store are done
in a secure manner in accordance with industry standard security
practices. Schedule "N" describes more fully the Distributor's security
technology.
5.19 VIRUS SCAN. Distributor shall scan all Products prior to distribution to
Customers for the presence of viruses.
5.20 PRESS RELEASES. Each party agrees that all information released to the
media or the general public regarding this Agreement or the other party,
including press releases, shall require prior written approval by the
other party.
5.21 SERIAL NUMBERS. COREL shall provide Distributor with an initial block of
serial numbers for the Software ("Serial Numbers"). Thereafter,
Distributor shall request subsequent blocks of Serial Numbers from COREL
as required. Distributor shall ensure that each copy of the Software
distributed to Customer is assigned a Serial Number specific to each copy
of the Software, as provided to Distributor by COREL and that each Serial
Number is assigned to only one copy of the Software.
5.22 NO DISTRIBUTION OF COUNTERFEITS. Distributor agrees that (i) it shall not
engage in the manufacture or knowingly engage in the use of
counterfeited, pirated or illegal Software; (ii) it shall not knowingly
engage in the distribution, supply or transfer of counterfeit, pirated or
illegal Software; and (iii) it shall not knowingly supply any Software to
Customers who engage in the use, manufacture, distribution or other
supply or transfer of counterfeit, pirated or illegal software.
5.23 ANTI-PIRACY EFFORTS. Distributor agrees report all occurrences of
counterfeited, pirated or illegal Software of which it becomes aware and
to provide reasonable assistance to COREL in the investigation of
counterfeit, pirated or illegal Software.
5.24 CONNECTION SUPPORT. Distributor shall provide connection support and
agrees that the minimum system requirements for browsing by Customer
shall be as provided in Schedule "H".
5.25 AFFILIATES. Distributor agrees that all Affiliates that have been
authorized by Distributor in accordance with Section 2.01 (v) shall be
required to either accept or reject the terms and conditions of the
Affiliate Agreement via a point and click mechanism or other mechanism
acceptable to COREL prior to Distributor providing such Affiliate with
permission to create a link to the Store and, in the event Affiliates
rejects the Affiliate Agreement, Affiliate shall not be permitted to
access to page which allows Affiliates to create a link to the Store.
Distributor agrees that the mechanism used by Distributor to require
Affiliates to accept or reject the Affiliate Agreement shall be in a form
which will record and store all Affiliates acceptance of the Affiliate
Agreement for future reference. Distributor shall ensure that the
Affiliates shall not modify the COREL graphics in any manner whatsoever.
In the event that Distributor receives notice and/or becomes aware that
an Affiliate has modified the COREL graphics in any manner whatsoever or
that an Affiliate has misrepresented COREL or COREL software products,
Distributor agrees to instruct the Affiliate to immediately remove the
COREL graphics and/or any such misrepresentation from such Affiliate's
web site
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and, if Affiliates fail to do so, terminate its agreement with such
Affiliate. In the event that COREL, acting reasonably, requests that
Distributor terminates its agreement with any Affiliate, Distributor,
acting reasonably, shall comply with such request and shall terminate the
Affiliate.
5.26 DISTRIBUTOR PRODUCTS. Distributor agrees that it shall be responsible for
obtaining all third party authorizations required to distribute any
Distributor Products on the Store. In addition, Distributor shall display
a disclaimer on the Store wherever Distributor Products are offered to
Customers specifically identifying all such Distributor Products as being
third party products which are not endorsed or promoted by COREL.
5.27 SHRINK-WRAP PRODUCTS. Distributor agrees that it shall offer all COREL
shrink-wrap products listed in Schedule "D" for sale to Customers on the
Store. Distributor shall order all such shrink-wrap products from a
COREL Authorized Distributor and ensure that it has a system in place to
allow Customers to receive shrink-wrap products in a timely manner.
5.28 SSL NOTICE. Distributor shall provide a notice to Customers prior to any
input of Customer Information that those Customers without browsers
containing Secure Socket Layer technology are advised that they also have
the option to phone in all Software orders.
5.29 PRIVACY NOTICE. Distributor shall ensure that it complies with COREL's
privacy policy as set out in Schedule "M" or as otherwise provided from
time to time. Distributor agrees that all Web Pages requesting Customer
Information from Customers shall display a privacy notice approved by
COREL.
5.30 QUARTERLY MEETINGS. Unless otherwise agreed between the parties, the
parties agree to meet once every three (3) month period of this Agreement
to discuss issues related to this Agreement, including, but not limited
to sales targets, marketing and development, for the following three (3)
month period. Such meeting shall alternate between each party's location
or another location as mutually agreed by the parties. The meeting shall
be attended by Distributor's Vice President of Strategic Development and
Vice President of Engineering, COREL's Manager of Internet Sales, the
parties' respective account managers and/or such other individuals as the
parties shall mutually agree.
6. RESPONSIBILITIES OF COREL
6.01 SUPPORT FOR CUSTOMERS. COREL shall be responsible for providing
maintenance and technical support for the Software to Customers in
accordance with COREL's standard procedures as they may be changed by
COREL from time to time. Such maintenance and technical support shall in
no way apply to: (i) Electronic Software Distribution and download
support for the Software; (ii) Customer use of the Distributor System;
and (iii) Distributor Products.
6.02 PREPARATION OF SOFTWARE FOR DISTRIBUTION. COREL agrees to provide
assistance as is commercially reasonable to Distributor to assist
Distributor to prepare Software for Electronic Software Distributor,
including the provision of EULA, or other electronic documentation as
provided by COREL, in COREL's sole discretion.
6.03 WARRANT AGREEMENT. The parties agree to enter into a warrant agreement
for the provision of Distributor warrants to COREL within thirty (30)
days of execution of this Agreement.
7. PAYMENTS
7.01 AMOUNTS PAYABLE BY DISTRIBUTOR. Distributor shall pay to COREL the
following:
7.01.1 For Schedule "A" Software:
(i) an amount equal to [ * ] of COREL's suggested list price
as listed in Schedule "A" for each copy of the Schedule
"A" Software distributed to Customers through Distributor
System by Distributor in each [ * ] period;
(ii) an amount equal to [ * ] of COREL's suggested list price
as listed in Schedule "A" for each copy of the Schedule
"A" Software distributed to Customers by Distributor
though an Affiliate in each [ * ] period; and
(iii) an amount equal to [ * ] of COREL's suggested list price
as listed in Schedule "A" for each copy of the Schedule
"A" Software distributed to Customers by Distributor
through a Reseller in each [ * ] period.
7.01.2 For Schedule "B" Software, an amount equal to the Schedule "B"
Software Price multiplied by the number of copies of Schedule
"B" Software shipped to Distributor by COREL.
7.01.3 For Schedule "C" Software:
* CONFIDENTIAL TREATMENT REQUESTED.
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9
(i) an amount equal to [ * ] of COREL's suggested list price
as listed in Schedule "C" for each copy of the Schedule
"C" Software distributed to Customers through Distributor
System by Distributor in each [ * ] period; and
(ii) an amount equal to [ * ] of COREL's suggested list price
as listed in Schedule "C" for each copy of the Schedule
"C" Software distributed to Customers by Distributor
though an Affiliate in each [ * ] period.
7.01.4 For Merchandise, an amount equal to the Merchandise Price
multiplied by the number of units of the Merchandise shipped by
COREL to Distributor;
7.01.5 For Distributor Products, an amount equal to [ * ] of the price
paid by Customers to Distributor for each copy of the
Distributor Products distributed to such Customers in each [ * ]
period; and
7.01.6 For Technical Support Products, an amount equal to the
Technical Support Product Price multiplied by the number of
Technical Support Products distributed by Distributor to
Customers in each [ * ] period.
All such amounts will be payable by Distributor to COREL within ten (10)
business days of the end of each two (2) week period. Distributor
acknowledges and agrees that COREL shall in no way be responsible for any
costs incurred by Distributor for any Schedule "B" Software, shrinkwrap
products listed in Schedule "D", Merchandise and Technical Support
Products offered by Distributor through Affiliates and/or Resellers.
7.02 AMOUNTS PAYABLE BY COREL. Within forty five (45) days after COREL's
receipt of an invoice from Distributor for Professional Services, COREL
shall pay Distributor the amounts set forth in Schedule "K" for such
Professional Services.
7.03 NOTICE OF CHANGES. During the term of this Agreement, COREL shall have
the right to change the Software Prices for any of the Software, the
Merchandise Prices for any of the Merchandise and/or the Technical
Support Product Prices for any of the Technical Support Products. COREL
shall be entitled to: (i) increase the Software Prices, Merchandise
Prices and/or Technical Support Product Prices or discontinue any
Software, Merchandise Prices and/or Technical Support Product Prices at
any time upon thirty (30) days prior written notice to Distributor; and
(ii) decrease the Software Prices, Merchandise Prices and/or Technical
Support Product Prices or add new Software, Merchandise and/or Technical
Support Products at any time upon notice to Distributor. In all such
cases COREL shall provide Distributor with a revised Schedule "A",
Schedule "B", Schedule "C", Schedule "E" and/or Schedule "I". In the
event that COREL raises: (i) the Software Prices for any Schedule "B"
Software, all orders for such Schedule "B" Software placed prior to the
effective date of the increase shall be invoiced to Distributor at the
lower amount; or (ii) the Merchandise Prices for any Merchandise, all
orders for such Merchandise placed prior to the effective date of the
increase shall be invoiced to Distributor at the lower amount. In the
event that COREL lowers: (i) the Software Prices for any Schedule "B"
Software, COREL shall, subject to the terms of this Section 7.03, grant
to Distributor a credit equal to the difference between the Software
Prices paid by Distributor for such Schedule "B" Software and the reduced
Software Prices for each unit of such Schedule "B" Software purchased by
Distributor within thirty (30) days prior to the date the reduced price
is first offered and remaining in the inventory of Distributor on the
date the reduced price is first offered; or (ii) the Merchandise Prices
for any Merchandise, COREL shall, subject to the terms of this Section
7.03, grant to Distributor a credit equal to the difference between the
Merchandise Prices paid by Distributor for such Merchandise and the
reduced Merchandise Prices for each unit of such Merchandise purchased by
Distributor within thirty (30) days prior to the date the reduced price
is first offered and remaining in the inventory of Distributor on the
date the reduced price is first offered. In the event COREL discontinues
any Software, Merchandise and/or Technical Support Products, Distributor
shall immediately remove all discontinued Software, Merchandise and/or
Technical Support Products from Distributor's Web Site and Distributor's
server and erase or destroy any Schedule "A" Software and/ or any
Schedule "C" Software contained on Distributor computers, any storage
media and/or computer diskettes in its possession or under its control.
7.04 SHIPMENT. COREL will ship the Schedule "B" Software and/or Merchandise to
Distributor pursuant to purchase orders placed by Distributor with COREL.
The Schedule "B" Software and/or Merchandise will be shipped to
Distributor, F.O.B. one of COREL's shipping locations, and transportation
will be made freight and insurance collect, which charges will be billed
to Distributor. Distributor will pay any applicable duties, import taxes
or other government charges assessed on any shipment, exclusive of any
tax upon COREL'S net income. Amounts payable by Distributor under this
section shall be paid by Distributor within thirty (30) days of the
shipment to which they relate.
7.05 TAXES. Distributor shall pay, in addition to all amounts specified in
this Agreement, all duties and foreign, federal, state, provincial,
county or local income taxes, value added taxes, use, personal, property,
sales taxes and other taxes whatsoever, or amounts in lieu thereof, and
interest thereon, paid or payable or collectible by
* CONFIDENTIAL TREATMENT REQUESTED.
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10
COREL (exclusive of taxes based on COREL's net income) and levied or
based on amounts chargeable to or payable by Distributor pursuant to this
Agreement. In the event any payments required to be made by Distributor
under this Agreement are subject to applicable withholding tax that
Distributor is required to deduct from such payments, Distributor shall
promptly deliver to COREL receipts issued by appropriate government
authorities for all such taxes withheld or paid by Distributor and
Distributor shall fully and promptly cooperate with COREL to provide such
information and records as COREL may require in connection with any
application by COREL to obtain available tax credits. Unless otherwise
agreed to by the parties, the parties agree to discuss, in approximately
six (6) months after the Effective Date of this Agreement, issues
relating to the remittance of taxes or withholding taxes under this
Agreement. Such meeting shall be held in conjunction with the quarterly
meetings set forth in Section 5.31 of this Agreement.
7.06 LATE PAYMENT. If Distributor is more than thirty (30) days in arrears
under this Agreement, COREL will give written notice to Distributor that
Distributor is responsible for payment of all outstanding amounts and
finance charges. If the outstanding amounts are not paid within ten (10)
days of such notice, COREL has the right to terminate this Agreement.
Late payments will be assessed a 1% finance charge per month (12% per
annum) or the highest finance charge permitted by applicable law,
whichever is less. Distributor shall pay all costs including reasonable
attorney's fees, incurred by COREL in collecting overdue amounts. In
addition, if Distributor is in arrears to any extent under this
Agreement, COREL may hold further shipments until all arrears have been
paid.
7.07 U.S. CURRENCY. All payments to COREL pursuant to this Agreement shall be
made in the lawful currency of the United States of America and all
amounts referred to in this Agreement are in the lawful currency of the
United States of America.
7.08 AUDITS. Distributor agrees to maintain complete and accurate records
relating to its promotion, marketing, use and distribution of the
Software, Merchandise and/or Technical Support Products. COREL shall have
the right no more often than once each twelve (12) month period, and upon
ten (10) days notice, to appoint a nationally recognized auditing firm to
examine Distributor's books and records in order to verify Distributor's
compliance with the promotion, marketing, use, distribution, payment and
reporting terms of this Agreement. Any such audit shall be at the expense
of COREL unless the audit reveals a material non-compliance by
Distributor with the promotion, marketing, use, distribution, payment and
reporting terms of this Agreement, or an underpayment by Distributor of
five percent (5%) or more of amounts paid or payable to COREL, in which
case the audit shall be at the expense of Distributor, in addition to
paying any deficit to COREL.
7.09 SET-OFF. COREL shall be entitled to set off any amounts owing to
Distributor by COREL pursuant to this Agreement against any amounts owing
to COREL by Distributor under this or any other agreement with COREL, its
subsidiaries or affiliates and Distributor.
7.10 STOCK BALANCING. Distributor may return Merchandise and/or Schedule "B"
Software to COREL from time provided that all such returns are in
accordance with COREL's Stock Balancing Guidelines attached hereto as
Schedule "S".
8. CONFIDENTIALITY
8.01 PROPRIETARY INFORMATION. "Proprietary Information" means, in the case of
information disclosed to Distributor by COREL, (i) the terms and
conditions of this Agreement; (ii) any information provided to Distributor
by COREL to enable Distributor to perform the Electronic Software
Distribution, including, but not limited to technical and financial
information; (iii) all binary code, inventions, information, know-how and
ideas, including but not limited to, the Software, provided to
Distributor; and (v) any information with respect to COREL which it has
received or may in the future receive in connection with this Agreement
which is not otherwise available to the general public without
restriction. "Proprietary Information" means, in the case of information
disclosed to COREL by Distributor, (i) the terms and conditions of this
Agreement; (ii) all COREL Database and Customer Information as more fully
described in Sections 5.10 and 5.11 herein; and (iii) any information
with respect to Distributor which COREL has received or may in the future
receive in connection with this Agreement which is not otherwise
available to the general public without restriction. In the case of
information received by either COREL or Distributor, excluding the
Customer Information, the obligations of confidentiality do not apply to
information that: (i) prior to or after the time of disclosure becomes
part of the public domain through no breach of this Agreement; (ii) is
disclosed to the receiving party by a third party under no legal
obligation to maintain the confidentiality of such information; or (iii)
is in the possession of the receiving party at the time of disclosure
without any obligation of confidentiality. Proprietary Information shall
be treated confidentially by the receiving party and its employees and
contractors and shall not be disclosed by the receiving party without the
disclosing party's prior written consent.
8.02 TREATMENT OF PROPRIETARY INFORMATION. The parties agrees to hold all
Proprietary Information of the other in trust and confidence for the
other and not to use the same other than as expressly authorized under
and to carry out the purposes of this Agreement. The receiving party
shall not duplicate all or any part of the disclosing party's Proprietary
Information, except in accordance with the terms and conditions of this
Agreement. Each
<PAGE>
11
party shall have an appropriate agreement with each of its employees and
contractors having access to the other party's Proprietary Information
sufficient to enable that party to comply with all the terms of this
Agreement. Each party agrees to protect the other party's Proprietary
Information with the same standard of care and procedures which it uses
to protect its own trade secrets and confidential or proprietary
information of like importance and, in any event, shall adopt or maintain
procedures reasonably calculated to protect such Proprietary Information.
8.03 VIOLATION OF TERMS OF SECTION 8. Each party shall promptly report to the
other any actual or suspected violation of the terms of this Section 8,
and shall take all reasonable steps to prevent, control or remedy such
violation.
8.04 EQUITABLE RELIEF. In recognition of the unique and proprietary nature of
the information disclosed by each party, it is agreed that each party's
legal remedy for breach by the other party of its obligations under this
section 8 shall be inadequate and the disclosing party shall, in the
event of such breach, be entitled to equitable relief, including without
limitation, injunctive relief and specific performance, in addition to
any other remedies provided hereunder or available at law.
9. COREL WARRANTIES AND OTHER REPRESENTATIONS
9.01 WARRANTY. The Software storage medium is warranted against defects in
workmanship and materials for a period of ninety (90) days from the date
it is delivered to Distributor. In the event that the storage medium is
defective COREL will replace it free of charge with another copy of the
Software. Replacement of the storage medium shall be COREL's sole
obligation and Distributor's sole remedy for a breach of the warranty in
this section.
9.02 LIMITATION. EXCEPT AS OTHERWISE PROVIDED IN SECTION 9.01, THE SOFTWARE,
STORAGE MEDIA, MERCHANDISE AND TECHNICAL SUPPORT PRODUCTS ARE PROVIDED
AND LICENSED BY COREL TO DISTRIBUTOR ON AN "AS IS" BASIS AND THERE ARE NO
WARRANTIES, REPRESENTATIONS OR CONDITIONS, EXPRESSED OR IMPLIED, WRITTEN
OR ORAL, ARISING BY STATUTE, OPERATION OF LAW, USAGE OF TRADE, COURSE OF
DEALING OR OTHERWISE, REGARDING THEM OR ANY OTHER PRODUCT OR SERVICE
PROVIDED BY COREL HEREUNDER OR IN CONNECTION HEREWITH BY COREL. COREL
DISCLAIMS ANY IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABLE QUALITY,
SATISFACTORY QUALITY, MERCHANTABILITY, DURABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. NO REPRESENTATION OR OTHER AFFIRMATION OF FACT,
INCLUDING BUT NOT LIMITED TO STATEMENTS REGARDING PERFORMANCE OF THE
SOFTWARE, OR STORAGE MEDIA, WHICH IS NOT CONTAINED IN THIS AGREEMENT,
SHALL BE DEEMED TO BE A WARRANTY BY COREL.
9.03 NO VARIATION. NO AGREEMENTS VARYING OR EXTENDING THE TERMS OF SECTION
9.02 WILL BE BINDING ON COREL UNLESS IN WRITING AND SIGNED BY AN
AUTHORIZED SIGNING OFFICER OF COREL.
9.04 DISTRIBUTOR NOT TO BIND. Distributor will give and make no warranties or
representations on behalf of COREL as to quality, satisfactory quality,
merchantability, merchantable quality, fitness for a particular use or
purpose or any other features of the Software, Merchandise and/or
Technical Support Products; and Distributor shall not incur any
liabilities, obligations or commitments on behalf of COREL, including
without limitation, a variation of the End User License.
10. DISTRIBUTOR WARRANTIES
10.01 YEAR 2000 COMPLIANCY. Distributor warrants that all hardware, software
and firmware products used by Distributor or in Distributor's System
shall be able to accurately process date data (including but not limited
to calculating, comparing and sequencing) from, into, and between the
twentieth and twenty-first centuries, including leap-year calculations.
10.02 ENCRYPTION WARRANTY. Distributor warrants that the Distributor System
shall receive and transmit all Customer information in encrypted format.
Distributor shall continue to update the Distributor System with
encryption technology reasonably suited and intended for this application
as it is shown to be effective and will use best efforts to provide the
most current encryption technology available. Subject to the
Distributor's encryption warranty set forth in this Section 10.02,
Distributor shall not be responsible or liable to Customer for
unauthorized activities of third parties involving Customer Information.
10.03 SERVICE WARRANTY. Distributor warrants and represents to COREL that it
shall perform the Development Services, Professional Services and
Marketing Services in a professional manner using only properly trained
and competent personnel.
<PAGE>
12
11. INFRINGEMENT
11.01 DEFENSE AND SETTLEMENT. If notified promptly in writing of any action
(and all prior related claims) brought against Distributor alleging that
Distributor's resale, distribution or other disposition of the Software
and/or Merchandise under this Agreement infringes any valid copyright,
trademark or United states or Canadian patent, COREL will defend that
action at its expense and will pay the costs and damages finally awarded
against Distributor in the action, provided: that Distributor provides
COREL with prompt written notice of such claim(s); that COREL shall have
sole control of the defense of any such action and all negotiations for
its settlement or compromise; that Distributor, and where applicable,
those for whom Distributor is in law responsible, cooperate fully with
COREL in its defense of the action; and that COREL shall have no
liability if (a) the action results from (i) the use of the Software for
purposes or in an environment for which it was not designed; (ii)
modification of the Software and/or Merchandise by anyone other than
COREL or bundling of the Software with Distributor Product(s); (iii)
distribution of any Software and/or Merchandise or display or use of any
COREL Mark after COREL's notice to Distributor that it should cease
distribution or use of such Software, Merchandise and/or COREL Mark due
to a possible infringement; or (iv) Electronic Software Distribution
provided by Distributor; or (b) the infringement claim arises as a result
of Distributor's breach of the terms and conditions of this Agreement.
11.02 OPTIONS WHERE CLAIM. If a final injunction is obtained in such action
against Distributor's distribution of the Software and/or Merchandise or
if in COREL's opinion the Software and/or Merchandise is likely to become
the subject of a claim of infringement, COREL may at its sole option and
expense either procure for Distributor the right to distribute the
Software and/or Merchandise or replace or modify the Software and/or
Merchandise so that it becomes non-infringing .
11.03 ENTIRE LIABILITY. The foregoing states the entire liability of COREL and
the sole and exclusive remedy of Distributor with respect to any
intellectual or industrial property infringement.
12. LIMITATION OF LIABILITY
12.01 LIMITATION. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INCIDENTAL,
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, OR ANY DAMAGES WHATSOEVER
RESULTING FROM LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF EITHER PARTY,
THE SOFTWARE, STORAGE MEDIA, MERCHANDISE, TECHNICAL SUPPORT PRODUCTS, OR
OTHER MATERIAL WHETHER SUCH ACTION IS BASED IN CONTRACT OR IN TORT,
INCLUDING BUT NOT LIMITED TO NEGLIGENCE, AND WHETHER OR NOT SUCH PARTY
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR SUCH DAMAGES ARE
FORESEEABLE. NOTWITHSTANDING THE FOREGOING: (i) DISTRIBUTOR ACKNOWLEDGES
AND AGREES THAT IN NO EVENT SHALL THIS SECTION 12.01 APPLY TO
DISTRIBUTOR'S OBLIGATIONS UNDER SECTIONS 2.02,2.04,3.03, 3.04, 5.04,
5.05, 5.07, 5.22, 5.24, 7, 8, 9.04, AND 13.01; and (ii) COREL
ACKNOWLEDGES AND AGREES THAT IN NO EVENT SHALL THIS SECTION 12.01 APPLY
TO COREL'S OBLIGATIONS UNDER SECTIONS 2.03, 3.08, 3.09 AND 8.
12.02 COREL'S AGGREGATE LIABILITY. Other than as provided in Section 11.01 and
13.02, COREL's aggregate liability to Distributor whether for negligence,
breach of contract, misrepresentation or otherwise shall in respect of a
single occurrence, or a series of occurrences, in no circumstances exceed
the Software Prices, Merchandise and/or Technical Support Product Prices
paid by Distributor to COREL over the twelve (12) month period preceding
the claim by Distributor.
12.03 DISTRIBUTOR'S AGGREGATE LIABILITY. Other than as provided in Section
13.01, Distributor's aggregate liability to COREL whether for negligence,
breach of contract, misrepresentation or otherwise shall in respect of a
single occurrence, or a series of occurrences, in no circumstances
exceed: (i) gross sales of all COREL Software, Merchandise and Technical
Support Products on the Store by Distributor over the twelve (12) month
period preceding the claim by COREL; or (ii) an amount of four million
dollars ($4,000,000.00 USD) whichever is greater.
INDEMNIFICATION
13.01 DISTRIBUTOR INDEMNIFICATION. Except as set forth in Section 11, if
notified promptly in writing of any action (and all prior related claims)
brought against COREL by Distributor's Customers or any third party
relating to: (i) Distributor's performance or non-performance of its
obligations hereunder; including, but not limited to negligence; (ii)
Distributor's distribution of the Software, Merchandise and/or Technical
Support Products through Distributor's System; (iii) Distributor's
distribution of the Schedule "A" Software through Resellers; (iv) the
maintenance, performance, non-performance or functionality of the
Distributor System and/or Distributor Web Site; (v) breach of Section 10
warranties; (vi) misuse of any Customer Information or credit card
information submitted to Distributor; (vii) Distributor Products or
Distributor's distribution thereof; (viii) claims by a third party from
whom Distributor has not received authorization to distribute such third
party's
<PAGE>
13
Distributor Product; (ix) for the acts or omissions of the Affiliates or
links created by the Affiliates; or (x) Distributor's security guarantee,
Distributor will defend that action at its expense and will pay the
costs (including reasonable attorney's fees) and damages finally awarded
against COREL in the action, provided: that COREL provides Distributor
with prompt written notice of such claim(s); that Distributor shall have
sole control of the defense of any such action and all negotiation for
its settlement or compromise; and that COREL, and where applicable, those
for whom COREL is in law responsible, cooperate fully with Distributor in
its defense of the action, at Distributor's expense. Notwithstanding
the right for Distributor to control the defense of any action, and all
negotiation for its settlement or compromise, Distributor agrees that it
shall not enter into any final settlement with respect to any claims
involving COREL's intellectual property without prior written
authorization from COREL.
13.02 COREL INDEMNIFICATION. If notified promptly in writing of any action (and
all prior related claims) brought against Distributor by Customers,
relating to the Software, Merchandise and/or Technical Support Products,
COREL will defend that action at its expense and will pay the costs
(including reasonable attorney's fees) and damages finally awarded
against Distributor in the action, provided: that Distributor provides
COREL with prompt written notice of such claim(s); that COREL shall have
sole control of the defense of any such action and all negotiations for
its settlement or compromise; that Distributor, and where applicable,
those for whom Distributor is in law responsible, cooperate fully with
COREL in its defense of the action, at COREL's expense; and that COREL
shall have no liability to the extent the action results from (i) the use
of the Software for purposes or in an environment for which it was not
designed; (ii) modification of the Software, Merchandise and/or Technical
Support Products; (iii) distribution of any Software, Merchandise and/or
Technical Support Products by Distributor after COREL's notice to
Distributor that it should cease distribution of such Software,
Merchandise and/or Technical Support Products; or (iv) breach by
Distributor of the terms and conditions of this Agreement.
14. TERMINATION
14.01 TERMINATION. This Agreement will terminate in the event of any of the
following:
14.01.1 written notice of termination from COREL, effective
immediately, under Section 7.06;
14.01.2 on the thirtieth (30th) day after one party gives the other
written notice of breach by the other of any material term or
condition of this Agreement unless the breach is cured before
that day;
14.01.3 written notice of termination by one party, effective
immediately, after a receiver has been appointed in respect of
the whole or a substantial part of the other's assets or a
petition in bankruptcy or for liquidation is filed by or
against that other or if the other has been dissolved or
liquidated or is insolvent;
14.01.4 written notice of termination, effective immediately, by the
non-defaulting party, if Distributor or COREL has breached its
obligations under Section 8; or
14.01.5 upon the expiry of: (i) ninety (90) days following receipt by
Distributor of written notice from COREL terminating this
Agreement for convenience; or (ii) one hundred and eighty
(180) days following receipt by COREL of written notice from
Distributor terminating this Agreement for convenience,
provided that this right is not exercised by Distributor for
the first six (6) months of this Agreement.
14.02 NO COMPENSATION. Distributor acknowledges and agrees that it has no
expectation that its business relationship with COREL will continue for
any minimum period of years or that Distributor shall obtain any
anticipated amount of profits by virtue of this Agreement. The parties
agree that the termination provisions herein, in terms of both notice and
default events are reasonable and agree not to contest same by way of
wrongful termination proceedings or otherwise.
15. EFFECT OF TERMINATION
15.01 DISTRIBUTOR. In the event of expiration or termination Distributor shall:
15.01.1 perform with respect to COREL all payment and other obligations
of Distributor under this Agreement within thirty (30) days of
termination or expiration;
15.01.2 immediately cease to use the COREL Marks in any matter
whatsoever; immediately cease to act as a Distributor of the
Software, Merchandise and Technical Support Products and to
represent itself as such; and immediately within two (2)
business days from the date of termination or expiration,
return all gold masters for the Schedule "A" Software and
Schedule "C" Software to COREL at Distributor's sole cost and
expense;
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
14
15.01.3 immediately remove all Software, Merchandise and Technical
Support Products from Distributor's Web Site and Distributor's
server and erase or destroy any Schedule "A Software and
Schedule "C" Software contained on Distributor computers and/or
computer diskettes and/or other storage media in its possession
or under its control;
15.01.4 within two (2) business days from the date of termination or
expiration, transfer to COREL the COREL Database within its
possession or under its control;
15.01.5 within two (2) business days from the date of termination or
expiration, transfer to COREL a copy of the Distributor
Database within its possession or under its control;
15.01.6 within two (2) business days from the date of termination or
expiration, provide to COREL all backup copies of all Web
Pages and all copies of Wavier of Moral Rights as they relate
to the Web Pages and a minimum of ten (10) hours of assistance
to help COREL to implement the Web Pages on COREL's server or
other server as designated by COREL; and
15.01.7 for a period of thirty (30) days from the date of termination
or expiration, maintain a single static HTML page that
redirects visitors attempting to access the Store to a URL
specified by COREL.
15.02 SURVIVAL. Sections 2.02, 2.03, 3.02, 3.04, 3.07, 3.09, 5.07, 5.12, 6.01,
7.01, 7.05 to 7.09 inclusive, 8, 9, 11, 12, 13, 14.02, 15, 16 and 17
shall survive the termination of this Agreement.
15.03 NO PREJUDICE. Except as provided in Section 14.02, termination hereunder
shall be without prejudice to any other right or remedy to which either
party may be entitled hereunder in law.
15.04 DESTROY OR DELIVER UP. COREL shall have the option to require Distributor
to destroy and certify that it has destroyed or to deliver to COREL, any
property of COREL then in its possession or under its control.
16. DISPUTE RESOLUTION
16.01 DISPUTE RESOLUTION PROCESS. In the event of a dispute between COREL and
Distributor in relation to this Agreement, the parties agree that they
shall participate in good faith in the following dispute resolution
process, and the parties agree that except for the provisions of Sections
2.02, 2.03, 8.04, 9.04 and 13 legal remedies cannot be resorted to until
such time that each step of this process has been followed:
(i) A dispute shall be formalized, by the party raising the dispute,
when the issues relating to the dispute are placed in writing and
submitted to the other party with adequate backup material, in the
submitting party's reasonable judgment, to substantiate the
dispute. The submittal in writing shall delivered to the other
party as required under Section 17.09 and to each party's account
representative;
(ii) The dispute shall be handled by resolution by the two (2)
designated account representatives within thirty (30) days from
submittal. The parties must mutually agree to the resolution;
(iii) Failing resolution under (ii) above, the dispute, including all
supporting documentation and the positions of the parties from
paragraph (ii) above, shall be submitted for resolution to the
Internet Sales Manager in the case of COREL and to Distributor's
designate, within thirty (30) days from submittal. The parties
must mutually agree to the resolution; and
(iv) Failing resolution under (iii) above, the dispute, including all
supporting documentation and the positions of the parties under
paragraph (iii) above, shall be submitted for resolution to the
Executive Vice President of Sales in the case of COREL and to
Distributor's designate, within thirty (30) days from submittal.
The parties must mutually agree to the resolution.
Either party shall be entitled to change Representatives provided that such
party provides written notice to the other in accordance with Section 17.09.
Failure to take any action on the part of either or both parties under any step
of this dispute resolution process for the specified thirty (30) day period
shall automatically move the dispute process to the next step in the process.
After having given notice in accordance with (i) above for the first step of
this process, the completion of the thirty (30) day time period in each step
shall be deemed to constitute notice to initiate the next step of the process.
17. MISCELLANEOUS
17.01 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties concerning the subject matter and supersedes all prior
statements, representations, discussions, negotiations and agreements,
both oral
<PAGE>
15
and written, including all pre-printed terms and conditions appearing on
Distributor's order forms, COREL's acknowledgment of order forms and
COREL's invoice forms.
17.02 AMENDMENT OR WAIVER. COREL expressly reserves the right to modify
Schedules "A" to "E", inclusive, Schedule "G" and Schedule "M" from time
to time upon notice to Distributor and distributor expressly reserves the
right to modify Schedule "Q" from time to time upon notice to COREL.
Except as specifically provided for herein, this Agreement may not be
amended or modified except in a writing signed by authorized officers of
both parties. No order, invoice or similar document will affect this
Agreement even if accepted by the receiving party. Notwithstanding the
foregoing, the parties agree that any modification to the look and feel
Development shall not require an amendment to this Agreement signed by
authorized officers of both parties. However, any such modification
shall require the written approval of each parties' respective account
representative.
17.03 ILLEGAL OR UNENFORCEABLE PROVISIONS. If any one or more of the provisions
of this Agreement shall be found to be illegal or unenforceable, this
Agreement shall nevertheless remain in full force and effect, and such
term or provision shall be deemed severed.
17.04 INDEPENDENT CONTRACTORS. The parties to this Agreement are independent
contractors. No relationship of principal to agent, master to servant,
employer to employee or franchisor to franchisee is established hereby
between the parties. Neither party has the authority to bind the other or
incur any obligation on its behalf.
17.05 FORCE MAJEURE. Unless continuing for a period of ninety (90) consecutive
days, or unless involving the payment of amounts due under this
Agreement, no default, delay or failure to perform on the part of either
party shall be considered a breach of the Agreement if such default,
delay or failure to perform is shown to be due entirely to an event of
force majeure, or to causes beyond the reasonable control of the
defaulting party including without limitation, strikes, riots, civil
disturbances, actions or inaction concerning governmental authorities,
epidemics, war, embargoes, severe weather, fire, earthquakes, acts of God
or the public enemy or default of a common carrier, always provided that
the party so relieved of its obligations shall take reasonable steps to
prevent, correct or amend such act or event which renders such
obligations impossible.
17.06 NO WAIVER. Neither of the party's rights to enforce provisions of this
Agreement shall be affected by any prior course of dealing, waiver,
delay, omission or forbearance.
17.07 ASSIGNMENT. This Agreement and the rights granted hereunder shall not be
assigned, encumbered by security interest or otherwise transferred by
Distributor without the prior written consent of COREL, which shall not
be unreasonably withheld. An amalgamation or merger of Distributor or
COREL with any person who is not a party to this Agreement shall be
deemed to result in an assignment of this Agreement. COREL may assign
this Agreement at any time upon notice to this effect to Distributor.
17.08 INUREMENT. This Agreement shall inure to the benefit of and be binding
upon the parties and their respective successors and permitted assigns.
17.09 NOTICES. Any notice or other communication to the parties shall be sent
to the addresses set out above, or such other places as they may from
time to time specify by notice in writing to the other party. All such
notices from Distributor to COREL shall be directed to the COREL Legal
Department and all such notices from COREL to Distributor shall be
directed to the attention of Distributor's General Counsel. Any such
notice or other communication shall be in writing, and, unless delivered
to a responsible officer of the addressee, shall be given by registered
mail, facsimile or telex and shall be deemed to have been given when such
notice should have reached the addressee in the ordinary course, provided
there is no strike by postal employees in effect or other circumstances
delaying mail delivery, in which case notice shall be delivered or given
by facsimile or telex.
17.10 FURTHER ASSURANCES. The parties agree to do all such things and to
execute such further documents as may reasonably be required to give full
effect to this Agreement.
17.11 TIME. Time shall be of the essence.
17.12 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington, excluding that body
of law applicable to choice of law and excluding the United Nations
Convention on Contracts for the International Sale of Goods and any
legislation implementing such Convention, if otherwise applicable. The
parties hereby consents and attorns to the jurisdiction of the courts of
such state. If either party employs attorneys to enforce any rights
arising out of or relating to this Agreement, the prevailing party shall
be entitled to recover reasonable attorney's fees. Each party waives any
right, and agrees not to apply to have any disputes under this Agreement
tried or otherwise determined by a jury, except where required by law.
<PAGE>
16
17.13 NON-CONFLICT. No Director or Officer of Corel Corporation (and/or its
subsidiaries and affiliates) shall be admitted to any share or part of
this Agreement or to any benefit arising therefrom.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date first above written.
SHOPNOW.COM INC.
PER: /s/ Othniel D. Palomino
------------------------------
Name: Othniel Palomino
Title: EVP
COREL CORPORATION
PER:
------------------------------
Name:
Title:
COREL CORPORATION LIMITED
PER:
------------------------------
Name:
Title:
<PAGE>
17
SCHEDULE "A"
ELECTRONIC SOFTWARE AND SOFTWARE PRICES
<TABLE>
<CAPTION>
ONLINE
DESCRIPTION COREL SKU SUGG. PRICE
<S> <C> <C>
Xara 2.0 CORELXARA2 109.95
Xara 2.0 Upgrade CORELXARA2UPGRADE 84.95
Netperfect English Full Product - Esd 11126-00001 199.95
Netperfect English Upgrade Product - Esd 11126-00002 99.95
Stock Photo Image (384 X 256) 8.95
Stock Photo image (768 X 512) 19.95
Stock Photo Image (1536 X 1024) 29.95
Stock Photo Image (3072 X 2048) 39.95
Vector Clipart Pack: Aircraft - Pc 11112(-)00001 9.95
Vector Clipart Pack: Aircraft - Mac 11112(-)00002 9.95
Vector Clipart Pack: Alphabet Fancies - Pc 11112(-)00003 9.95
Vector Clipart Pack: Alphabet Fancies - Mac 11112(-)00004 9.95
Vector Clipart Pack: Astrology - Pc 11112(-)00005 9.95
Vector Clipart Pack: Astrology - Mac 11112(-)00006 9.95
Vector Clipart Pack: Awards - Pc 11112(-)00007 9.95
Vector Clipart Pack: Awards - Mac 11112(-)00008 9.95
Vector Clipart Pack: Color Me - Pc 11112(-)00009 9.95
Vector Clipart Pack: Color Me - Mac 11112(-)00010 9.95
Vector Clipart Pack:Computer - Pc 11112(-)00011 9.95
Vector Clipart Pack: Computer - Mac 11112(-)00012 9.95
Vector Clipart Pack: Environment - Pc 11112(-)00013 9.95
Vector Clipart Pack: Environment - Mac 11112(-)00014 9.95
Vector Clipart Pack: Flags - Pc 11112(-)00015 9.95
Vector Clipart Pack: Flags - Mac 11112(-)00016 9.95
Vector Clipart Pack: Flowers - Pc 11112(-)00017 9.95
Vector Clipart Pack: Flowers - Mac 11112(-)00018 9.95
Vector Clipart Pack: Games - Pc 11112(-)00019 9.95
Vector Clipart Pack: Games - Mac 11112(-)00020 9.95
Vector Clipart Pack: Gardening - Pc 11112(-)00021 9.95
Vector Clipart Pack: Gardening - Mac 11112(-)00022 9.95
Vector Clipart Pack: Leisure - Pc 11112(-)00023 9.95
Vector Clipart Pack: Leisure - Mac 11112(-)00024 9.95
Vector Clipart Pack: Medical - Pc 11112(-)00025 9.95
Vector Clipart Pack: Medical - Mac 11112(-)00026 9.95
Vector Clipart Pack: People - Pc 11112(-)00027 9.95
Vector Clipart Pack: People - Mac 11112(-)00028 9.95
Vector Clipart Pack: Arrows - Pc 11112(-)00029 9.95
Vector Clipart Pack: Arrows - Mac 11112(-)00030 9.95
Vector Clipart Pack: Victorian - Pc 11112(-)00031 9.95
Vector Clipart Pack: Victorian - Mac 11112(-)00032 9.95
Vector Clipart Pack: Wedding Accessories - Pc 11112(-)00033 9.95
Vector Clipart Pack: Wedding Accessories - Mac 11112(-)00034 9.95
Vector Clipart Pack: Wedding Decorations - Pc 11112(-)00035 9.95
Vector Clipart Pack: Wedding Decorations - Mac 11112(-)00036 9.95
Vector Clipart Pack: Wedding People - Pc 11112(-)00037 9.95
Vector Clipart Pack: Wedding People - Mac 11112(-)00038 9.95
Vector Clipart Pack: Wedding Reception - Pc 11112(-)00039 9.95
Vector Clipart Pack: Wedding Reception - Mac 11112(-)00040 9.95
Vector Clipart Pack (B&W): Animal Symbols - Pc 11116(-)00001 9.95
Vector Clipart Pack (B&W): Animal Symbols - Mac 11116(-)00002 9.95
Vector Clipart Pack (B&W): Building Symbols - Pc 11116(-)00003 9.95
Vector Clipart Pack (B&W): Building Symbols -Mac 11116(-)00004 9.95
Vector Clipart Pack (B&W): Chinese Bullets - Pc 11116(-)00005 9.95
Vector Clipart Pack (B&W): Chinese Bullets - Mac 11116(-)00006 9.95
Vector Clipart Pack (B&W): Electronic Symbols - Pc 11116(-)00007 9.95
Vector Clipart Pack (B&W): Electronic Symbols - Mac 11116(-)00008 9.95
Vector Clipart Pack (B&W): Festive Symbols - Pc 11116(-)00009 9.95
Vector Clipart Pack (B&W): Festive Symbols - Mac 11116(-)00010 9.95
Vector Clipart Pack (B&W): Food Symbols - Pc 11116(-)00011 9.95
Vector Clipart Pack (B&W): Food Symbols - Mac 11116(-)00012 9.95
Vector Clipart Pack (B&W): Furniture Symbols - Pc 11116(-)00013 9.95
Vector Clipart Pack (B&W): Furniture Symbols - Mac 11116(-)00014 9.95
Vector Clipart Pack (B&W): Home Planning Symbols - Pc 11116(-)00015 9.95
Vector Clipart Pack (B&W): Home Planning Symbols - Mac 11116(-)00016 9.95
Vector Clipart Pack (B&W): Household Symbols -Pc 11116(-)00017 9.96
Vector Clipart Pack (B&W): Household Symbols - Mac 11116(-)00018 9.95
Vector Clipart Pack (B&W): Hygiene Symbols - Pc 11116(-)00019 9.95
Vector Clipart Pack (B&W): Hygiene Symbols - Mac 11116(-)00020 9.95
Vector Clipart Pack (B&W): Japanese Bullets - Pc 11116(-)00021 9.95
Vector Clipart Pack (B&W): Japanese Bullets - Mac 11116(-)00022 9.95
Vector Clipart Pack (B&W): Korean Bullets - Pc 11116(-)00023 9.95
Vector Clipart Pack (B&W): Korean Bullets - Mac 11116(-)00024 9.95
Vector Clipart Pack (B&W): Military Symbols - Pc 11116(-)00025 9.95
Vector Clipart Pack (B&W): Military Symbols - Mac 11116(-)00026 9.95
Vector Clipart Pack (B&W): Music Symbols - Pc 11116(-)00027 9.95
Vector Clipart Pack (B&W): Music Symbols - Mac 11116(-)00028 9.95
<PAGE>
18
Vector Clipart Pack (B&W): Plant Symbols - Pc 11116(-)00029 9.95
Vector Clipart Pack (B&W): Plant Symbols - Mac 11116(-)00030 9.95
Vector Clipart Pack (B&W): Science Symbols - Pc 11116(-)00031 9.95
Vector Clipart Pack (B&W): Science Symbols - Mac 11116(-)00032 9.95
Vector Clipart Pack (B&W): Sign Symbols - Pc 11116(-)00033 9.95
Vector Clipart Pack (B&W): Sign Symbols - Mac 11116(-)00034 9.95
Vector Clipart Pack (B&W): Space Symbols - Pc 11116(-)00035 9.95
Vector Clipart Pack (B&W): Space Symbols -Mac 11116(-)00036 9.95
Vector Clipart Pack (B&W): Sports Equipment Symbols - Pc 11116(-)00037 9.95
Vector Clipart Pack (B&W): Equipment Clipart Pack - Mac 11116(-)00038 9.95
Vector Clipart Pack (B&W): Sports Symbols Clipart Pack - Pc 11116(-)00039 9.95
Vector Clipart Pack (B&W): Sports Symbols Clipart Pack - Mac 11116(-)00040 9.95
Webart Clipart Pack: Ancient - Pc 11117(-)00001 9.95
Webart Clipart Pack: Ancient - Mac 11117(-)00002 9.95
Webart Clipart Pack: Arts & Crafts - Pe 11117(-)00003 9.95
Webart Clipart Pack: Arts & Crafts - Mac 11117(-)00004 9.95
Webart Clipart Pack: Business - Pc 11117(-)00005 9.95
Webart Clipart Pack: Business - Mac 11117(-)00006 9.95
Webart Clipart Pack: Culinary - Pc 11117(-)00007 9.95
Webart Clipart Pack: Culinary - Mac 11117(-)00008 9.95
Webart Clipart Pack: Fantasy - Pc 11117(-)00009 9.95
Webart Clipart Pack: Fantasy - Mac 11117(-)00010 9.95
Webart Clipart Pack: Finance - Pc 11117(-)00011 9.95
Webart Clipart Pack: Finance - Mac 11117(-)00012 9.95
Webart Clipart Pack: Funky - Pc 11117(-)00013 9.95
Webart Clipart Pack: Funky- Mac 11117(-)00014 9.95
Webart Clipart Pack: Funky - Pc 11117(-)00015 9.95
Webart Clipart Pack: Garden - Mac 11117(-)00016 9.95
Webart Clipart Pack: High Tech - Pc 11117(-)00017 9.95
Webart Clipart Pack: High Tech - Mac 11117(-)00018 9.95
Webart Clipart Pack: Industry - Pc 11117(-)00019 9.95
Webart Clipart Pack: Industry - Mac 11117(-)00020 9.95
Webart Clipart Pack: Legal - Pc 11117(-)00021 9.95
Webart Clipart Pack: Legal - Mac 11117(-)00022 9.95
Webart Clipart Pack: Medical - Pc 11117(-)00023 9.95
Webart Clipart Pack: Medical - Mac 11117(-)00024 9.95
Webart Clipart Pack: Music - Pc 11117(-)00025 9.95
Webart Clipart Pack: Music - Mac 11117(-)00026 9.95
Webart Clipart Pack: Nature - Pc 11117(-)00027 9.95
Webart Clipart Pack: Nature - Mac 11117(-)00028 9.95
Webart Clipart Pack: Retro - Pc 11117(-)00029 9.95
Webart Clipart Pack: Retro - Mac 11117(-)00030 9.95
Webart Clipart Pack: Seasons - Pc 11117(-)00031 9.95
Webart Clipart Pack: Seasons - Mac 11117(-)00032 9.95
Webart Clipart Pack: Space - Pc 11117(-)00033 9.95
Webart Clipart Pack: Space - Mac 11117(-)00034 9.95
Webart Clipart Pack: Sports - Pc 11117(-)00035 9.95
Webart Clipart Pack: Sports - Mac 11117(-)00036 9.95
Webart Clipart Pack: Transportation - Pc 11117(-)00037 9.95
Webart Clipart Pack: Transportation - Mac 11117(-)00038 9.95
Webart Clipart Pack: Victorian - Pc 11117(-)00039 9.95
Webart Clipart Pack: Victorian - Mac 11117(-)00040 9.95
</TABLE>
<PAGE>
19
SCHEDULE "B"
HARD GOODS SOFTWARE AND SOFTWARE PRICES
This page was intentionally left blank
<PAGE>
20
SCHEDULE "C"
PREMIUM SOFTWARE AND SOFTWARE PRICES
<TABLE>
<CAPTION>
ONLINE
DESCRIPTION COREL SKU SUGG. PRICE
<S> <C> <C>
Premium Photos (393 X 259) 39.95
Premium Photos (2310 X 1524) 69.95
Premium Photos (3903 X 2553) 99.95
Illustrations 79.95
Design Bits (Low) 3.95
Design Bits (Medium) 5.95
Design Bits (High) 7.95
</TABLE>
<PAGE>
21
SCHEDULE "D"
SHRINK WRAP SOFTWARE AND SUGGESTED LIST PRICES
<TABLE>
<CAPTION>
ONLINE
DESCRIPTION COREL SKU SUGG. PRICE
<S> <C> <C>
WordPerfect Office 2000 Professional WP2KPENGO 389.95
WordPerfect Office 2000 Professional Upgrade WP2KPUGENG0 209.95
WordPerfect Office 2000 Voice Powered WP2KVENGO 339.95
WordPerfect Office 2000 Voice Powered Upgrade WP2KVUGENGO 159.95
WordPerfect Office 2000 WP2KENGO 299.95
WordPerfect Office 2000 Upgrade WP2KUGENGO 109.95
WordPerfect Suite 8 Standard WPS280ENGO 309.95
WordPerfect Suite 8 Standard Upgrade WPS28OUGENGO 84.95
WordPerfect Suite 8 Alpha/Nt WPS80DAENGO 309.95
WordPerfect Suite 8 Alpha/Nt Upgrade WPS80DAUGENGO 84.95
WordPerfect Suite 8 W/ Dragon WPSD80ENGO 319.95
WordPerfect Suite 8 W/ Dragon Upgrade WPSD80UGENGO 109.95
WordPerfect Suite 8 Legal Ed. W/ Dragon WPS80LENGO 309.95
WordPerfect Suite 8 Legal Ed. W/ Dragon Upgrade WPS80LUGENGO 219.95
WordPerfect Language Module #2 LM2MULTI0B 49.95
WordPerfect Suite 8 Professional WPSP80ENG0 369.95
WordPerfect Suite 8 Professional Upgrade WPSP80UGENG0 159.95
WordPerfect 8 Unix WP80UNIXENGO 339.95
WordPerfect 8 Unix Upgrade WP80UNIXUGENGO 234.95
Microphone Kit For Voice Powered WordPerfect PARROTT 27.95
Paradox 8 PDX80ENGO 109.95
Paradox V8.0 Runtime PDX80RTENGOJC 299.95
Print Office PO10ENGO 69.95
Graphics Pack V2.0 GP20ENGO 109.95
CorelDRAW 9 90ENGO 469.95
CorelDRAW 9 Upgrade 9OUGENGO 209.95
CorelDRAW 8 Professional Publisher 80PROENGO 609.95
CorelDRAW 8 Professional Publisher Upgrade 80PROUGENG0 299.95
CorelDRAW 8 80ENGO 469.95
CorelDRAW 8 Upgrade 8OUGENGO 249.95
CorelDRAW 8 Alpha/Nt Upgrade 80DAUGENG0 249.95
CorelDRAW 8 Alpha/Nt 80DAENG0 469.95
CorelDRAW Select Edition 70SEENGO 109.95
Photo Paint 9 PP90ENGO 339.95
Photo Paint 9 Upgrade PP90UGENGO 109.95
Photo Paint 8 PP80-ENGO 339.95
Photo Paint 8 Upgrade PP80UGENGO 109.95
Printhouse Magic 4 PH40ENGO 32.95
Printhouse Magic 4 Premium PHP40ENGO 42.95
Printhouse Magic PH30ENGO 32.95
Printhouse Magic Deluxe PHD30ENGO 52.95
Printhouse Magic Wizard Of Oz Edition PHOZ40ENGO 39.95
Printhouse Magic Wedding Addition PH30WEDENGOJC 19.95
Xara 2.0 Full CX20ENGOJC 129.95
Xara 2.0 Upgrade CX20UGENGOJC 104.95
Ventura 8 CV80ENGO 479.95
Ventura 8 Upgrade CV80UGENGO 209.95
Gallery 2 For The Mac SWCG20-MAC-ENGO 52.95
WordPerfect 3.5 For Mac CWWP351-MAC-ENGO 174.95
WordPerfect 3.5 Mac Ug CWWP351MACUGENGO 89.95
Printhouse For The Mac SWPH-MAC-ENGO 29.95
Mega Gallery For Mac SWMGM-10-ENGO 52.95
CorelDRAW 8 For The Mac 80MENGO 469.95
CorelDRAW 8 Upgrade For The Mac 80MUGENGO 154.95
Photopaint 8 For The Mac (Full Version) PP80MENG0 349.95
Photopaint 8 For The Mac (Upgrade Version) PP80MUGENG0 109.95
WordPerfect 8 For Linux Personal Edition WP80LINUXPENGO 54.95
Stock Music Library RFMUSICLIB10PACK 209.95
Gallery Magic 65,000 Edition CG65ENGO 22.95
Gallery Magic 200,000 Edition CG200ENGO 52.95
Gallery 1 Million CG30ENGO 109.95
Photo CD - Sunsets & Sunrises SWPCD-1000 39.95
Photo CD - Mountains Of America SWPCD-2000JC 39.95
Photo CD - Wild Animals SWPCD-6000JC 39.95
Photo CD - Patterns SWPCD-11000JC 39.95
Photo CD - Lakes & Rivers SWPCD-26000JC 39.95
Photo CD - Candy Backgrounds SWPCD-96000 39.95
Photo CD - Bald Eagles SWPCD-135000JC 39.95
Photo CD - Textures SWPCD-137000JC 39.95
Photo CD - Autumn SWPCD-150000 39.95
Photo CO - Wildlife Babies SWPCD-159000JC 39.95
Photo CD - Landscapes SWPCD-176000 39.95
Photo CD - Nature Scenes SWPCD-178000JC 39.95
Photo CO - Beverages SWPCD-275000JC 39.95
</TABLE>
<PAGE>
22
<TABLE>
<S> <C> <C>
Photo CO - Dolphins & Whales SWPCD-314000JC 39.95
Photo CD - Fabulous Fruit SWPCD-332000 39.95
Photo CD - Cuisine SWPCD-333000JC 39.95
Photo CD - Cats & Kittens SWPCD-336000JC 39.95
Photo CD - Marble Textures SWPCD-349000 39.95
Photo CD - The Masters Ii SWPCD-358000JC 39.95
Photo CD - Fruits & Vegetables SWPCD-91000JC 39.95
Photo CD - Everyday Objects SWPCD-373000JC 39.95
Photo CD - Women In Vogue SWPCD-388000JC 39.95
Photo CD - The Masters Iv SWPCD-402000JC 39.95
Photo CD - Colors & Textures SWPCD-403000JC 39.95
Photo CD - Textures Ii SWPCO-404000JC 39.95
Photo CD - Light Textures SWPCD-406000JC 39.95
Photo CD - African Wildlife SWPCD-408000JC 39.95
Photo CD - Exotic Tropical Flowers SWPCD-410000JC 39.95
Photo CD - Pedigree Dogs SWPCD-415000JC 39.95
Photo CD - Abstracts & Pattems SWPCD-423000JC 39.95
Photo CD - Food Objects SWPCD-437000JC 39.95
Photo CO - Food Textures SWPCD-449000JC 39.95
Photo CD - Office Interiors SWPCD-457000JC 39.95
Photo CD - Pedigree Cats SWPCD-458000JC 39.95
Photo CD - Dawn & Dusk SWPCD-460000JC 39.95
Photo CD - Animals Close-Up SWPCD-471000JC 39.95
Photo CD - Beautiful Roses SWPCD-476000JC 39.95
Photo CD - Color Backgrounds SWPCD-483000JC 39.95
Photo CD - Alien Landscapes SWPCD-510000JC 39.95
Photo CD - Fabulous Flowers SWPCD-514000JC 39.95
Photo CD - Photographic Borders SWPCD-537000JC 39.95
Photo CD - Doors Of Paris SWPCD-549000JC 39.95
Photo CD - Nostalgia Pastimes: National Archives Of SWPCD-556000JC 39.95
Canada
Photo CD - Still Life SWPCD-577000JC 39.95
Photo CD - Fine Dining SWPCD-5870OWJC 39.95
Photo CO - Decorative Hand-Painted Scenes SWPCD-620000JC 39.95
Photo CD - Household Objects SWPCD-643000JC 39.95
Photo CD - Dinosaur Illustrations SWPCD-644000JC 39.95
Photo CD - Show Dogs SWPCD-659000JC 39.95
Photo CD - Prehistoric World SWPCD-684000JC 59.95
Photo CD 1OPack - Great Works Of Art RFART-10PACK
Photo CD 1OPack - Animals RFANIMALS-10PACK 59.95
Photo CD 1OPack - Textures RFTEXTURES10PACK 59.95
Photo CD IOPack - Textures Ii RFTEXTURES210PAK 59.95
CorelDRAW Art & Artistry 32974 49.95
Artshow 7 Book & Cd 503-7 39.95
WordPerfect 8 Timebomb DEMOCDWP8ENG NO CHG
CorelDRAW 8 - Timebomb TB80ENGRV NO CHG
Ventura 8 Timebomb TBCV80ENGORV NO CHG
CorelDRAW 8 Mac Timebomb TB80MENGORV NO CHG
Print Office Timebomb TBPO10ENG0RV NO CHG
CorelDRAW 7 Clipart Manual SWQ046-UNI-70 29.95
CorelDRAW 7 User Manual Volume.#1 SW137-1-ENG70 29.95
CorelDRAW 7 User Manual Volume.#2 SW137-2-ENG70 29.95
CoreIDRAW Select Ed V7.0 User Manual 137DRAWSEENG70 29.95
CorelDRAW 8 User Manual 137DRAWENG80 29.95
CorelDRAW 8.0 Pwrmac User Manual 137DRAWMENG80 29.95
Photopaint 8 User Manual 137PPENG80 29.95
Photo Paint V8.0 Pwrmac User Manual 137PPMENG8O 29.95
Printhouse Premium 4 User/Clipart Manual 137PHPENG40 29.95
Print Office V1.0 User Manual 137POENG10 29.95
WordPerfect Office 2000 User Manual 137WPENG2K 29.95
WordPerfect Office 2000 Clipart User Manual 46WPUN12K 29.95
WordPerfect Suite 8.0 User Manual 137WPSENG8O 29.95
WordPerfect Suite Legal Ed V8.0 User Manual 137WPSLENG80 29.95
WordPerfect Suite Legal Ed V7.0 User Manual 504WPSLENG70 29.95
WordPerfect Suits 8.0 Pro User Manual 137WPSPENGQO 29.95
WordPerfect For Unix V8.0 User Manual 137WPSSUNIXENG80 29.95
WordPerfect 8 Clipart And Font Manual 46WPSUN18O 29.95
WordPerfect 8 For Unix Installation Manual 504WPSUNIXRNGO 29.96
WordPerfect Mac 3.51 User Manual W/Clipart CW137-WPM-ENG351 29.95
WordPerfect Unix 6.0/5.2 User Manual CW137UNIXENG6052 29.95
Ventura 8 User Manual 137CVENG80 29.95
Paradox 8: Guide To Object Pal 137PDX1ENG8O 29.95
Paradox 8: Object Pal Reference Guide 137PDX2ENG80 29.95
Wp8 Macros Manuals (Set Of 2) 137MENG80 65.95
CorelDRAW 8 80CANFO 469.95
CorelDRAW 8 Upgrade 80UGCANFO 249.95
WordPerfect Suite 8 WPS80CANFREO 309.95
WordPerfect Suite 8 Upgrade WPS80UGCANFREO 84.99
Photopaint 8 PP80CANF0 339.95
Photopaint 8 Upgrade PP80UGCANF0 109.95
</TABLE>
<PAGE>
23
SCHEDULE "E"
MERCHANDISE AND MERCHANDISE PRICES
<TABLE>
<CAPTION>
ONLINE
DESCRIPTION COREL SKU SUGG. PRICE DISTI PRICE
<S> <C> <C> <C>
Promotional Corel Linux-Tshirt (For Techwave) 38OWPLXPENG80TSP 0.00 0.00
Corel Linux-Tshirt (For Techwave) 8OWPLXPENG80TS 12.95 8.00
</TABLE>
<PAGE>
24
SCHEDULE "F"
REPORTS, SERVICES AND SAMPLE LETTER OF DESTRUCTION
A. DISTRIBUTOR REPORTS*:
1. Distributor shall provide monthly reports to COREL in electronic format
within ten (10) days of the end of each month which shall capture the
following information, all information with respect to reporting as set
forth in Schedule "H" and Schedule "R" or information as reasonably
requested by COREL from time to time. In addition, Distributor agrees to
make all such reports available to COREL online in real time in
accordance with Schedule "H" and Schedule "R".
(i) summary of all Products sold or distributed by Distributor, including,
but not limited to orders, subscriptions, downloads, revenues, break
down of Products, top selling products, regional distribution of sales,
cancellations and returns;
(ii) summary of all returns processed by Distributor in accordance with
COREL's return policy;
(iii) any and all data compiled by Distributor regarding Customer use of the
Distributor System or Web Site, including, but not limited to, Customer
name, address, telephone number, e-mail address, fax number (if
provided) all Software purchased by Customer, and date of purchase;
(iv) system failures including, cause of interruption or failure of
Distributor System or Distributor's Website; duration of the
interruption or failure; and methods used to resolve the interruption or
failure; and
(v) any breach of the encryption protocol; the cause of said breach; the
duration of the breach and the methods used to resolve the breach;
(vi) summary of all traffic reports (ie. the number of hits on the Store,
number of page views, visits, unique visitors).
(vii) summary of performance reports, including, but not limited to call
centre statistics, order processing, common Customer issues, Customer
satisfaction survey;
(viii) Merchandising, Customer and financial reports;
(ix) Customer Service reports as outlined in Schedule "R"
2. Distributor shall provide a report to COREL immediately upon equipment
or service failure or upon any breach of the encryption protocol which
shall capture the following information, in addition to any information
which Distributor should otherwise provide to COREL to enable COREL to
evaluate the quality of the Distributor System:
(i) cause of interruption or failure of Distributor System or Distributor's
Web;
(ii) duration of the interruption or failure;
(iii) methods used to resolve the interruption or failure.
All Failure Reports and Encryption Protocol Reports are to be: (i) faxed
to COREL immediately; and (ii) provided in electronic format to COREL
within five (5) business days after the occurrence of each failure or
interruption. COREL can request reasonable changes in the format of the
report upon thirty (30) days notice.
*COREL can request reasonable changes in the format of the report upon thirty
(30) days notice.
B. SERVICES:
1. Security Requirements
Upon transfer of the Software by COREL to Distributor, Distributor shall be
responsible for the security of the EULA, Software and Products to authenticate
the EULA and Software and ensure integrity and confidentiality of the Products
during any transmission. The Distributor System shall contain the following
security controls:
<PAGE>
25
1. Physical security controls which isolate the Distributor System from
physical access by anyone not directly authorized to manage the
Distributor System;
2. Logical access controls that enforce positive control over access to the
Products, the applications, and operating systems functions that
interact with the Products;
3. Code integrity controls that verify the integrity of the Product
immediately prior to any packaging;
4. Connectivity controls that ensure that all network connections to the
Distributor System are under the positive control of those personnel
with direct responsibility for the security of the Products;
5. All security controls over Products generate effective audit trails that
are secure from modification; and
6. All cryptographic keys that support security functionality for Products
are stored and used operationally completely within secure dedicated
software.
2. Encryption Processes and Bundling Restrictions
All Software encryption shall take place in a secure, restricted systems
environment. No cleartext Software, including, but not limited to the EULA and
Letter of Destruction, shall be transmitted by Distributor outside the secure
system other than in encrypted format.
Bundling of the Software with non-COREL software within a single file is
prohibited. Distributor shall not present, nor authorize others to present,
non-COREL software as COREL Software.
3. Provision of Key to Customers
Distributor shall provide the executable code decryption key to Customers in a
secure manner such that the executable code decryption key cannot be determined
by a third party. Executable code decryption mechanisms must be single use,
allowing only one decryption of the executable code from a data archive. The
decryption process must alter the data archive with the customer information in
such a way that any subsequent decryption process would force display of the
prior customer's information.
All executable code delivered to Customer's shall be digitally signed by
Distributor. Distributor shall provide the Customer with instructions on how to
verify this authenticity.
4. Payment
Distributor shall provide a secure, electronic method for Customer payment.
5. Software Lists
Distributor shall maintain a list of all Software SKUs that are valid for
on-line distribution that are secured from unauthorized access and modification.
6. Post-Sale Reinstalling or Replacing Software
Distributor shall provide a reinstall and electronic master replacement service
to Customers with valid requests for such Services. All reinstall services must
be noted in the Distributor EULA database.
7. Returns
Distributor shall accept all approved money back guarantee returns from
Customers as follows:
(i) Proof of Purchase Validation
Only one return per EULA record shall be allowed. All returns transactions
require validation of the EULA and Distributor digital signature as proof of
purchase. Distributor shall validate each individual return request by reviewing
<PAGE>
26
the End User License Agreement database, Customer proof of purchase, and the
Customer letter of destruction. Distributor shall archive these documents.
(ii) Proof of Destruction
Customers requesting the return must provide a completed and signed letter of
destruction in the format as provided in this Schedule "F" hereto.
Alternatively, destruction can be verified by a Distributor-certified
de-installation routing monitored or administered by a revenue-neutral service
provider run on the Distributor system. The application should provide
electronic notice of de-installation.
(iii) Return Validation
Upon validation and completion of a legitimate return, Distributor will update
the EULA database.
(iv) Customer Confirmation
Upon revocation of rights from the EULA database, an e-mail or written
communication shall be sent automatically by the Distributor to the Customer.
Such communication shall confirm the return.
8. Customer Support
Distributor shall be responsible for providing customer service and support to
customers up through, but not limited to, the successful delivery of an
installable Product on the customer's hard disk.
9. Current and Prior Product Versions
Distributor shall always provide the most current Software version as provided
by Corel in Products distributed by Distributor, unless otherwise requested by
Corel.
10. Account Manager
Distributor agrees to assign a dedicated Corel account manager as the point of
contact for Corel.
C. FAILURE CHARGES
[ * ]
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
27
[ * ]
5. Corel and Distributor agree to meet in person or by conference
telephone, up to and in no event later than seven (7) days prior to an
agreed upon release date for a new version of Schedule "H", to discuss
and modify, if necessary, by mutual agreement of both parties the
deliverables described in the new version of Schedule "H".
D. SAMPLE LETTER OF DESTRUCTION
THIS AGREEMENT (the "Agreement") is made and entered into by and between [insert
corporate name] (hereinafter "Distributor") and [Customer's Name] (hereinafter
"Customer").
The Customer agrees to take the necessary measures to delete and destroy the
intellectual property described as [insert Product description], 111111 (order
#), and licensed to the Customer for use under the terms of COREL's End User
license agreement.
(Distributor] shall refund the purchase price of the Product to the Customer and
report the Product as "destroyed" to the software vendor once this letter has
been executed by the Customer and received at [Distributor].
By Customer
Signature:
Name:
Address:
City/State/Province/Postal Code:
Email Address:
Reason for Return:
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
28
SCHEDULE "G"
GUIDELINES FOR USING COREL LOGOS & TRADEMARKS
Corel permits you to use its logos and trademarks in both plain word and
stylized form (the "Marks") for the purpose of promoting and advertising
Corel products or services, provided you comply with the following guidelines:
i) The Marks may only be used in relation to Corel products or
services. This means that you may not display the Marks on any
non-Corel product or service including any associated
packaging, documentation, advertising or other materials in a
manner that suggests that such product or service is a Corel
product or service, that Corel or any of the Marks are
associated with such product or service or that Corel is
affiliated with, endorses or sponsors you or any of such
products or services. Use of Corel partner program logos and
trademarks, such as the Corel Solutions Partner and Corel
Training Partner logos, are subject to the terms and
conditions of the respective partner program and no permission
to use such logos is granted herein. Please contact a Corel
representative or visit corel.com for further details.
ii) Corel will provide you with the artwork for the Marks. This
artwork may not be altered in any way.
iii) When displayed, the Marks must be substantially less prominent
than your trademark, trade name, logo or product name. The Marks
may not be used as, or as part of, a company name.
iv) When displayed, the Marks must stand alone. A minimum amount of
empty space must be left between the Marks and any other object
such as type, photography, borders, edges, etc. The required
border of empty space around the Marks must be 1/2x wide where x
is the height of the Mark.
v) You may not combine the Marks with any other feature
including, but not limited to, other logos, words, graphics,
photos, slogans, numbers, design features, or symbols.
Further, you may not display your own logos or marks or other
text or graphics in the same or similar get-up, graphics,
look, or trade-dress as the Marks.
vi) The Marks must not be used in a manner that, in Corel's judgment,
may diminish or otherwise damage Corel's goodwill in the Marks,
including but not limited to uses which could be deemed to be
obscene, pornographic, or otherwise in poor taste or unlawful, or
which purpose or objective is to encourage unlawful activities.
vii) You must place an asterisk (*) or similar notation mark beside
the first use of a Mark and include the following attribution
statement on the materials in which the Marks are featured.
" * Trademark(s) of Corel Corporation or Corel Corporation
Limited"
<PAGE>
29
SCHEDULE "H"
MRD
[THIS PAGE INTENTIONALLY LEFT BLANK. THE MRD IS APPENDED HERETO]
<PAGE>
COREL ESTORE AND STUDIO 1.0
MARKET REQUIREMENTS DOCUMENT
Document Version: 6.20 (COREL)
Document Date: 5/14/99
Original Draft of Document by: Chris Noble
TECHWAVE CONFIDENTIAL INFORMATION. INTERNAL USE ONLY.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
EXECUTIVE SUMMARY 3
1. AVAILABILITY 3
1.1. Uptime 3
1.2. Load Time 3
1.3. Web Server Scalability 3
1.4. Transaction Server Scalability 4
1.5. Hardware requirements 4
1.6. System Requirements 4
1.7. Database Server Scalability 5
2. BASIC SHOPPING 5
2.1. Simple Search 5
2.2. Advanced Search 5
2.3. Categories 7
2.4. Product Pages 8
2.5. Top X lists 10
2.6. WaterMarkPages 10
2.7. Floating Cart 11
2.8. Shopping Cart 12
2.9. EULA Page 14
2.10. Checkout: Billing and shipping 14
2.11. Checkout: Review Order 17
2.12. Physical & ESD Support 18
2.13. Shipping status 18
2.14. Cross-sell/ upsell 19
2.15. Special offers & coupons 19
3. PAYMENT PROCESSING 20
4. ORDER CONFIRMATION PAGE 21
5. ODER CONFIRMATION E-MAIL 21
6. DATA TRANSFER FROM COREL TO DISTRIBUTOR 21
7. SITE ADMINISTRATION 23
8. REPORTING 26
9. BIZ RULES AND GROUPS 29
10. NEW USER INTERFACE 29
11. E-MAIL FUNCTIONALITY 30
12. NETGREETING SUPPORT 30
13. PARTNERS SUPPORT: RESELLERS AND AFFILIATES AND TRACKING SALES 30
14. OTHER DEVELOPMENT 31
</TABLE>
<PAGE>
EXECUTIVE SUMMARY
This is a requirement document is written for COREL and Distributor Staff. It is
intended to describe all the required functionality for a Distributor built
COREL Studio and online store.
PRIORITY KEY
1.0: REQUIRED ON OR BEFORE MAY 30th, 1999 ("LAUNCH"). This means that the
functionality must be made available on the Store by Distributor for the
Launch.
1.1: REQUIRED ON OR BEFORE JUNE 14th, 1999. This means that the functionality
must be made available on the Store by Distributor on or before June 14th, 1999.
1.2: REQUIRED ON OR BEFORE JULY 12th, 1999. This means that the functionality
must be made available on the Store by Distributor on or before July 12th, 1999.
FUNCTIONAL REQUIREMENTS
1. AVAILABILITY
1.1. UPTIME
1.1.1. The Store shall be live and fully functional twenty
four (24) hours a day, seven (7) days a week. However,
Distributor shall be permitted a maximum of [ * ] of
downtime each month. This shall mean that Distributor
shall ensure that the Store is live and fully
functional at a minimum of [ * ] of the time. The URL
and all linked URLs for the Store must be available to
Customers at a minimum of [ * ] of the time. Individual
servers may go offline either for scheduled maintenance
or due to unscheduled failure, but the Store hosted for
COREL must remain available. Remain available means not
only that the home page comes up but that the major
functionality (outlined in the Basic and Advanced
Shopping sections below) are functional.
PRIORITY: 1.0
1.2. LOAD TIME
1.2.1. Distributor shall ensure that the main home page and
the Studio home page on the Store shall load in [ * ]
or less with a 33.6K modem.
PRIORITY: 1.0
1.2.2 Distributor shall ensure that all search results for
the Store shall load in [ * ] or less with a 33.6K modem
PRIORITY: 1.0
1.2.3. Distributor shall ensure that all other pages on the
Store shall load in [ * ] or less with a 33.6K modem
connection
PRIORITY: 1.0
1.3. WEB SERVER SCALABILITY
1.3.1. Distributor shall ensure that all Site web servers
accommodate a minimum of [ * ] Page views at any one
(1) time each day with no increase in load time
compared to when only a single user is on the server(s).
PRIORITY: 1.0
1.3.2. Distributor shall ensure that all Site web servers
accommodate at a minimum of [ * ] Page views at any one
(1) time each day with no more than a [ * ] increase in
load times compared to when is only a single user on
the server(s)
PRIORITY: 1.0
3
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
1.3.3. Distributor shall ensure that for downloads, web
servers must accommodate a minimum of [ * ] downloads
each day with the typical size of those downloads being
1.0 MB each.
PRIORITY: 1.0
1.3.4. Distributor shall ensure that the Bandwidth burst
estimate is scalable within [ * ].
PRIORITY: 1.0
1.4 TRANSACTION SERVER SCALABILITY
1.4.1. Distributor shall ensure that the Store shall process a
minimum of [ * ] purchases each day with no errors,
performance or security issues.
PRIORITY: 1.0
1.4.2. Distributor shall ensure that the Store shall process a
peak order volume of [ * ] transactions per second for
a period of at least [ * ].
PRIORITY: 1.0
1.4.3. Distributor shall ensure that the Bandwidth burst
estimate is scalable within [ * ].
PRIORITY: 1.0
1.5. HARDWARE REQUIREMENTS
1.5.1. Distributor shall ensure that the hardware used by
Distributor to host the Store shall contain and serve
up images according to the following distribution of
images:
Premium Images - [ * ] SKU's @ 7mb each
Stock Images - [ * ] SKU's @ 7mb each
Illustration - [ * ] SKU's @ 15mb each
Design bits - [ * ] SKU's @ 5mb each (estimate -
probably less space required)
Distributor agrees that COREL may provide Distributor
with updated content and collections of images from
time to time. COREL may also request deletion of images
from time to time. Distributor shall ensure that all
hardware used by Distributor will support no less than
[ * ] of storage. The parties agree that any data over
[ * ] of storage may be added by COREL providing
four (4) weeks prior notice to Distributor. However,
any such incremental hardware acquisition by
Distributor shall be at no cost to COREL.
PRIORITY: 1.0
1.6. SYSTEM REQUIREMENTS
Distributor agrees that the minimum system requirements for browsing
by Customer shall be as follows:
Netscape 3.02 and IE 3.02
640 by 480 resolution*
*Studio will default at 80OX600 however you can adjust "cart" and
view 64Ox480
Must Support Frames (html - screen split 2 areas)
Must Support LINUX version of Netscape browser
Must Support MacIntosh version of above browsers
Must Support AOL's 3.x+ releases of their browser
Must Support all levels of Web TV Network's services
PRIORITY: 1.0
Distributor shall support audio and video servers. Distributor
agrees to host any multimedia demo's of the Software, provided by
COREL to Distributor, on the Store to promote sales of Software
(features in action). In the event an incremental Real Server is
required by Distributor to support extra volume, COREL agrees to
share the cost of such server with Distributor provided that
Distributor has provided prior written notice to COREL of such
purchase and COREL has provided Distributor with provided
Distributor with
4
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
its written consent.
DESIGN GUIDELINES
Distributor shall ensure that none of COREL's Competitor html tags are
included on any page whatsoever on the Store.
Distributor agrees to include meta tags on all estore pages to assist with
the promotion of the Store.
1.7. DATABASE SERVER SCALABILITY
1.7.1. Distributor shall ensure that the Store database shall
hold a minimum of [ * ] unique Customer records. In
addition, such Database must be scalable beyond [ * ]
records. Notice will be required if more than [ * ]
incremental records will be added.
PRIORITY: 1.0
1.7.2. Distributor shall ensure that the Store database must be
able to contain and quickly search through a minimum of
[ * ] Software SKU's, of which approximately [ * ] are
images.
PRIORITY: 1.0
1.7.3 Distributor shall ensure that the Store database must be
able to contain and quickly search through a minimum of
[ * ] Software SKU's.
PRIORITY: 1.0
2. BASIC SHOPPING
2.1. SIMPLE SEARCH
2.1.1. Distributor shall ensure that the Store has simple search
string with up to [ * ] searchable keywords, not
including booleans up to a maximum of [ * ] characters.
PRIORITY: 1.0
2.1.2. Distributor shall ensure that Customers may search by
wildcard (string plus * or * string plus).
PRIORITY: 1.0
2.1.3. Distributor shall ensure that Customers may search by
file number for images (with or without extensions).
PRIORITY: 1.0
2.1.4. Distributor shall ensure that in the event two (2) or
more search terms are entered in the simple search box
such terms shall be considered to be logically joined by
an "AND" operator.
PRIORITY: 1.0
2.2. ADVANCED SEARCH
2.2.1. Distributor shall ensure that the Store shall have an
advanced search capability which allows the Customer to
search by Keywords, sub-categories and categories (of up
to two hundred and fifty five (255 characters in length),
including but not limited to: words in the Software
title, words in the Software description, COREL name,
COREL SKU, media type, platform and price range.
PRIORITY: 1.0
2.2.2. Distributor shall ensure that search results for studio
shall include image thumbnails which shall display, if
any, a reference to any Photo CD Software or other studio
physical Software
5
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
on which they are available. Customer may then have the
option to click and go directly to the product page for
that Photo CD Software.
PRIORITY: 1.0
2.2.3. Distributor shall ensure that Customer may perform
searches by classification, including, but not limited
to: premium photo, stock photo, illustrations, clip-art
or any combination of the above, expandable to include
new elements (i.e. allow the Customer to select which
type of images to search on by check boxes).
PRIORITY: 1.0
2.2.4. Distributor shall ensure that the Boolean capabilities
("and", "or", "not") are available to Customers. (i.e. on
the front page of the studio, allow search for CAT not
BLACK, in the classifications of premium photos only, or
in premium photos and illustrations, or in all
categories, etc.)
PRIORITY: 1.0
2.2.5. Distributor shall ensure that Customers have the option
to further refine a search (already searched on animals,
further refine search to puppy). Distributor shall write
such terms to a log. In addition, such ability to refine
the search must be available from any page on the Store
that displays thumbnails.
PRIORITY: 1.0
2.2.6. Distributor shall ensure that any search returns results
in [ * ] or less, and load within [ * ] with a 33.6K
modem. subject to the size of the empirical results.
Priority: 1.0
2.2.7. Distributor shall ensure that all search results are
comprised of thumbnail, name, filename, price,
classification, category, available on photo CD, New
Image/Software Flag, also links to watermark, and add to
cart. International delivery flag will be apparent on
product page, and in search results also, if Customer's
user interface permits.
PRIORITY: 1.0
2.2.8. Distributor shall ensure that all search results are
returned for searches across classifications, unless
otherwise specified by Customer, with the information
specified in 2.2.7. In addition, the images shall be
properly labeled with the category they are included in
(including the price listed beneath it) and (hot linked
keywords).
PRIORITY: 1.0
2.2.9. Distributor shall ensure that in the event search results
cannot be retrieved from a global search, a message,
approved in writing by COREL, shall appear and direct
Customers to a Customer feedback form which shall be
forwarded by Distributor to COREL. Distributor shall
display different messaging for Studio and for eStore.
PRIORITY: 1.0
2.2.10. In the event that there are more than two hundred (200)
search results for a Customer's search, Distributor shall
provide Customer with the first (20) search results and a
message, to be approved in writing by COREL, to refine
their search. Distributor shall display different
messaging for Studio and for eStore.
PRIORITY: 1.0
2.2.11. In the event that search results cannot be retrieved for
a search phrase given for particular classification (e.g.
premium photos), Distributor shall display a return
message, approved in writing by COREL, to Customer, which
shall provide the following options: links to a broader
search or a question to ask Customer if they would like
to search all collections. Such search box shall defaults
to all options. Distributor shall display different
messaging for Studio and for eStore.
PRIORITY: 1.0
6
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
2.2.12. In the event search results cannot be retrieved for a
search phrase given for particular classification (e.g.
premium photos), there will be a trigger to search on all
other images in the library or product in category on
same search terms.
PRIORITY: 1.1
2.2.13. Distributor shall ensure that any search will provide the
option for Customers to search using word parts, and have
ability in refined or advanced search to have exact word
match. Search user interface shall contain a check box
allowing Customer to search by exact match or to select
any of the types of image categories for specific search.
PRIORITY: 1.0
2.2.14. Distributor shall ensure that search terms may be
weighted by COREL using the following criteria: Category,
product, new images (date of creation), image
classification, price, and number of times that such
product has been purchased.
[ * ]
PRIORITY: 1.1
2.2.15. Distributor shall ensure that any search allows Customers
to define the number of thumbnails (10, 25, 50, 100) that
they want returned to them in the search results. In the
event Customer does not choose one of the options
provided, Distributor shall return ten (10) thumbnails on
each page.
PRIORITY: 1.0
2.2.16. Basic search results will be broken into groups of 10- 25
(see test note above), with a maximum of 200.
PRIORITY: 1.0
2.2.17. Search results page shall have a navigation control to
ensure that Customer can move between pages. Navigation
shall be as follows: Page numbers may go from a minimum
of two (2) to a maximum of twenty (20); Page numbers are
clickable; and Customer may navigate between pages by
clicking on the page number, or clicking next or back.
PRIORITY: 1.0
2.2.18. Customer may reorder search results to display thumbnail
results in order of popularity, new releases and/or
quality
PRIORITY: 1.2
2.2.19. Refine search or New search option shall be available on
every search results page.
PRIORITY: 1.0
2.2.20. Customer shall have the ability to add to the shopping
cart from any search results page.
PRIORITY: 1.0
2.2.21. Keywords are hot-linked to new search results page for
such key word.
PRIORITY: 1.0
2.2.22. Dataload from the Image search engine index must be
passed to Corel engineers so they can modify Sherlock.
PRIORITY: 1.0
2.3. CATEGORIES
2.3.1. Store shall support the assignment of Software into
categories, subcategories, sub subcategories, up to ten
(10) sub-categories.
PRIORITY: 1.0
7
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
2.3.2. The platform shall support the creation of new
categories, and subcategories, up to ten (10)
sub-categories.
PRIORITY: 1.0
2.3.3. The platform will support category sets, meaning that
multiply ways of organizing the same database of
information though different categories will be
supported. Only one category set can be active at a time,
but multiple ways of organizing the data can exist.
PRIORITY: 1.0
2.3.4. A category, subcategory or SKU may be made inactive or
active by Distributor at Distributor's site or remotely
by COREL.
PRIORITY: 1.0
2.3.5. There shall be no inherent limit in the number of
categories, subcategories or SKUs that may be created on
the Store platform.
PRIORITY: 1.1
2.3.6. Software in Store may be assigned up to nine hundred and
ninety nine (999) categories.
PRIORITY: 1.0
2.4. PRODUCT PAGES
2.4.1. Software has a COREL defined SKU's. Software may include
items that are freely distributed by COREL, so the price
associated with a given SKU may be zero.
PRIORITY: 1.0
2.4.2. Each Software SKU shall be stored as a separate SKU in
the product database.
PRIORITY: 1.0
2.4.3. For images - each SKU will be comprised of 1-7 Items -
the watermark, the two thumbnails, and the 4 resolutions.
PRIORITY: 1.0
2.4.4 Each Software in the database will have an associated
product page. Many products may be associated with one
product page.
PRIORITY: 1.0
2.4.5. The product pages will support cross-selling. See 2.2.14
below.
PRIORITY: 1.0
2.4.6. Each category page will have an "Add to Cart" button
which adds the currently named product to the customer's
shopping cart; shows the price; provides short
description and fulfillment type (ESD, box).
PRIORITY: 1.0
2.4.6.a. Each category page will also have a flag for product
availability status: in stock versus back ordered, and
flag for international delivery.
PRIORITY: 1.1
2.4.7. Each of the first six (6) items on a category page will
have an area set aside for a thumbnail image.
PRIORITY: 1.0
2.4.8. The product detail page in the eStore will clearly show
the price of each item, as well as the following where
applicable: name, sku, language, boxshot, fulfillment
(ESD, box) method category, new product flag, add to
cart, cross selling related terms, rebate indication and
instock
8
<PAGE>
PRIORITY: 1.0
2.4.8.a. The product detail page in the eStore will also show in
stock status flag and international delivery
availability.
PRIORITY: 1.1
2.4.8.b. The watermark page in the Studio will clearly show the
price of each item, as well as the following where
applicable: name, file name, sku, resolution (hotlinked)
keywords, category, subcategory, classification,
fulfillment (ESD, box), available on photo CD flag, new
image/product flag, also links to watermark, add to cart.
PRIORITY: 1.0
2.4.8.c. The watermark page in the Studio shall also include an
instock flag where appropriate.
PRIORITY: 1.1
2.4.9. [ * ]
2.4.10. Each category page will support both short (256
characters or less) and long (257 characters or more)
product descriptions.
PRIORITY: 1.0
2.4.11. Products may have one (1) or more attributes associated
with them such as size, resolution, etc. (give-away
t-shirts). For example products such as t-shirts which
have attributes that may vary such as size. Each
attribute shall have a separate field within the product
page to enable Customer to choose which attributes best
suits their purchase.
PRIORITY: 1.1
2.4.12. Product pages will have a "more info" link. When a
Customer clicks this link in a particular product
description, a new browser will launch and point to the
appropriate Corel.com product description page on the
Store.
PRIORITY: 1.0
2.4.13. Products will have the following attributes:
Filename (SKU)
Keywords (Studio)
Descriptions (Studio)
Descriptions (Estore)
Classification (Premium, etc.)
Studio Category (People, etc.)
Studio Subcategories
Date Implemented
File Path
Cart Thumbnail
Thumbnail (or Box Shot)
Watermark
Media (Download or CD) (If download available on CD specific only to
Studio)
Royalty
Weight (Popularity, Quality)
EStore Keywords
Estore Category
Prices/Resolutions
Related products
File Size
Platform
Active/Inactive/Pending
Specials
9
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Search results by category
Product weight (physical)
Language (i.e., German, French etc.)
Export Restrictions/Rules
Free (Product ID of Bundled Free Product)
Color Profiles (ICC ... what palate scanned in etc.)
Subscription (Multiple Models)
Associated EULA
Alternate Pricing associated with SKU
A different SKU is used internationally for each product.
File Size (K size)
PRIORITY: 1.0
2.4.14. Each SKU may have up to nine hundred and ninety nine
(999) keywords associated to it.
PRIORITY: 1.0
2.5. TOP X LISTS
2.5.1. The home page of Site will support the inclusion of a
"Top products" list.
PRIORITY: 1.0
2.5.2. [ * ]
2.5.3. [ * ]
2.5.4 The number of products for the top products list shall be
between three (3) and twenty (20). COREL will determine
the number of products to be shown for each category
area. The entire list selected by COREL shall be shown at
all times unless otherwise indicated by COREL.. For
launch, a list of six (6) products will be shown for each
category area.
PRIORITY: 1.0
2.5.5. Each top product list level category (i.e. office,
business and graphics products) may have its own top
product list with a unique number of products.
PRIORITY: 1.1
2.5.6. Top X product list may be suppressed on any category page
PRIORITY: 1.0
2.5.7. Text for top X may be edited, at COREL's request, by
Distributor Staff at Launch.
PRIORITY: 1.0
2.5.8 Top X list may be edited remotely by COREL.
PRIORITY: 1.1
2.6. WATERMARK PAGES
2.6.1. Each product on the Store database will have an
associated product page. One product page
10
* CONFIDENTIAL TREATMENT REQUESTED.
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may have multiple products pointing to it.
PRIORITY: 1.0
2.6.2. Distributor has recommended optimal pixel size for
watermarks, thumbnails, and cart thumbnails as follows:
Watermark 600 x 400 pixels @ 72dpi
Thumbnail 120 x 80 pixels @ 72dpi
Cart thumbnail 72x48 pixels @ 72dpi
PRIORITY: 1.0
2.6.3. Watermark page shall display large watermarked version of
each SKU or product detail page.
PRIORITY: 1.0
2.6.4. Distributor shall be responsible for all watermarking.
COREL shall provide, if applicable, script and procedure
to Distributor in a reasonable time frame.
PRIORITY: 1.0
2.6.5. All watermark pages and product detail pages (Note: this
section deals specifically with watermarks) shall support
cross-selling. Cross selling shall be made available for
any product SKU.
PRIORITY: 1.0
2.6.6. Each watermark page on the Studio shall clearly show the
price of each product, with a drop down for information
on resolution (quality) and price options. Price and
resolution (quality) must be displayed together. Default
price to the 1.1est available.
PRIORITY: 1.0
2.7. FLOATING CART
Distributor shall ensure that:
2.7.1. [ * ]
2.7.2. The floating cart shall display the Product, Product
price, Product name, quantity and total cost of items in
the floating cart. Distributor shall give Customers the
option to: (i) checkout; (ii) hide the cart; or (iii) to
change order click here. In the event Customer chooses
option (i) Distributor shall direct Customer to the main
checkout screens. In the event Customer chooses option
(ii) Distributor shall hide the floating cart. In the
event Customer chooses option (iii), Distributor shall
direct Customer to the main checkout screen.
PRIORITY: 1.1
2.7.3. The total costs of all items in the floating cart are
displayed to Customer. Such cost shall not include the
cost of shipping.
PRIORITY: 1.1
11
* CONFIDENTIAL TREATMENT REQUESTED.
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2.7.4. The floating cart has a smaller thumbnail (72 x 48 pixels
@72 dpi) than the search function or the regular cart.
PRIORITY: 1.1
2.7.8. Customer shall have the option not to have the floating
cart display. Customer will be able to configure the cart
once and their preference will be stored and used the
next time they log in.
PRIORITY: 1.2
2.7.9. Customers shall have the option to add more than one copy
of a Product (including images) in the floating cart.
PRIORITY: 1.1
2.8. SHOPPING CART
Distributor shall ensure that:
2.8.1. The shopping cart shall accommodate up to nine hundred
and ninety nine (999) items.
PRIORITY: 1.0
2.8.2. The shopping cart shall display the following fields:
Product SKU, Product name, Product price, Product
classification, attributes (editable pull down), remove
item, quantity, fulfillment, (ESD, box), thumbnail, text
leading to the cross-sell < those who buy (product name)
also buy >, for product just added cross-sell products
< SKU, name (link to product display)>, color or size,
update cart, short description, add to cart.
PRIORITY: 1.0
2.8.2.a. The shopping cart shall display the following fields:
"international shipping available" flag, instock status;
for each product added
PRIORITY: 1.1
2.8.3. The shopping cart thumbnails shall be the same size as
the search thumbnails. The thumbnails that display in the
actual shopping cart are 120 X 80 pixels.
PRIORITY: 1.0
2.8.4. The Product attributes and quantity of Products shall be
editable from within the shopping cart.
PRIORITY: 1.0
2.8.5. The shopping cart shall have a "remove item" and a
"continue shopping" button.
PRIORITY: 1.0
2.8.6. The shopping cart shall provide Customer the option to
proceed to the checkout process at all times.
PRIORITY: 1.0
2.8.7. [ * ]
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* CONFIDENTIAL TREATMENT REQUESTED.
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[ * ]
2.8.8. Customer shall have the option within the shopping cart,
to save or send shopping cart to a third party to review
proofs prior to purchase, etc. Distributor shall also
provide Customer the ability to send notes with the
shopping cart permitting Customer to annotate email with
comments.
PRIORITY: 1.0
2.8.9. The shopping cart shall display cross-selling and
upselling options for the item last added to the cart.
PRIORITY: 1.0
2.8.10. [ * ]
2.8.11. The shopping cart shall support both United States and
Canadian currencies.
PRIORITY: 1.1
2.8.11.a The shopping cart shall support Euro currencies [ * ]
after Launch and Asian currency [ * ] after Launch.
PRIORITY: 1.2
2.8.12. Customer shall have the option, upon login, to save or
send the shopping cart. For all registered Customer's
shopping carts, Distributor shall send an e-mail to
Customer after fifteen (15) days which language shall be
approved by COREL, reminding Customer that it's shopping
cart has been saved, but the items in the shopping cart
have not been purchased.
PRIORITY: 1.0
2.8.13. When Customer adds any image to their shopping cart and
such image is also available as a Photo CD-ROM Product,
Distributor shall display in the shopping cart: (i) a
reference to the Photo CD-ROM Product to make Customer
aware of the availability of such Photo CD-ROM Product;
and (ii) an option to add such Photo CD-ROM Product to
their shopping cart.
PRIORITY: 1.0
2.8.14. Language is displayed in the shopping cart notifying
Customer of Distributor's secure ordering process.
PRIORITY: 1.0
2.8.15. For each image added to the shopping cart, it shall also
add a free downloadable color profile into the shopping
cart, labeled free.
PRIORITY: 1.0
2.8.16. Customers shall have the option to add more than one copy
of a Product (including images) in the cart.
13
* CONFIDENTIAL TREATMENT REQUESTED.
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PRIORITY 1.0
2.9. EULA PAGE
2.9.1. COREL will provide a EULA for each type of
Product; i.e. ESD product, box product,
subscription.
PRIORITY: 1.0
2.9.2. Distributor shall ensure that it displays the
applicable EULA for each Product as provided by
COREL.
PRIORITY: 1.0
2.10. CHECKOUT: BILLING AND SHIPPING
Distributor shall ensure that:
2.10.1. The checkout screen provides Customer with the
option to backup to the shopping cart page.
Priority: 1.0
2.10.2. The checkout process shall use the following
fields to gather information
A. FOR CREDIT CARD CUSTOMERS:
1. Company name
2. Location identifier (i.e. for a multinational company - there may be a
geographic id) (Rev. 1.1)
3. First name
4. Last name
5. Street address, including apartment number if applicable (billing)
6. Province/state (billing)
7. Postal code/Zip (billing)
8. Country (billing)
9. Street address, including apartment number if applicable (shipping)
10. Province/state (shipping)
11. Postal code/Zip (shipping)
12. Country (shipping)
13. Area code for phone number
14. Phone number
15. Area code for fax number
16. Fax number.
17. Email
18. Credit card type
19. Credit card number
20. Expiry
21. Login name (members)
22. Password (members)
23. Type of customer (i.e. Home, Business under 50, etc.) (Rev. 1.1)
24. Notes: i.e.: Special Orders- Customer Service inquiries, Fraudulent accounts
(Rev. 1.1)
25. Kind of user (anonymous or member) (Rev. 1.1)
PRIORITY: 1.0 ( UNLESS NOTED AS REV. 1.1 ITEMS)
14
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B. FOR PURCHASE ORDER CUSTOMERS (PERSONAL AND CORPORATE ORDERS):
1. Invoice order number (unique order ID)
2. Account ID (1. from Account Information Database)
3. SKU(s) purchased (listed in separate fields)
4. SKU price(s) (listed in separate fields)
5. Company name
6. Location ID
7. Title
8. Date ordered
9. Date fulfilled
10. Total amount of order (including tax)
11. Tax
12. Shipping Provider
13. Shipping waybill number
14. PO #
15. PIN Number (Corporate Accounts)
16. Login Name
17. Password
PRIORITY: 1.1
C. RESELLER DATA: (EX. PHOTOSETC, IMSI SOFT, OUTPOST....)
1. Account number
2. Company name
3. Contact name
4. Street address, including apartment number if applicable (billing)
5. Province/state
6. Postal code/Zip
7. Country
8. Area code for phone number
9. Phone number
10. Area code for fax number
11. Fax number
12. Email
13. URL
14. Order Information Database for each reseller (use section b) as reference
for fields required)
15 Notes: i.e.: Special discounts, Promotions.
PRIORITY: 1.1
2.10.3. All information gathered by Customers in the checkout
process shall also operate for international Customers
with the exception of those Customers using double byte
fonts. Distributor shall ensure that information
gathered by Customer in the checkout process shall
operate for international Customers for double byte
input.
PRIORITY: 1.2
2.10.4. A check box is displayed for Customer to indicate whether
the shipping and billing addresses are the same.
PRIORITY: 1.0
15
* CONFIDENTIAL TREATMENT REQUESTED.
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2.10.5. Customer shall have the option to view its order
(including shipping costs) prior to entering any payment
information.
PRIORITY: 1.0
2.10.6. The checkout process allows Customers to enter payment
information for the following credit card types: Visa,
MasterCard, American Express, Discover.
PRIORITY: 1.0
2.10.6.a Distributor shall ensure that the following alternate
payment methods are implemented by Distributor:
Cyber-Cash.
PRIORITY: 1.1
2.10.7. The form used by Distributor to process payment
information shall validate card numbers to ensure that
the credit card information has been entered correctly.
PRIORITY: 1.0
2.10.8. The form shall display a flag indicating that the
physical Product ordered by Customer is either in stock
or on backorder.
PRIORITY: 1.1
2.10.9. The payment information form used by Distributor must
validate expiration dates, including four (4) digit years
and years including and beyond the year 2000.
PRIORITY: 1.0
2.10.10. The payment information form provides Customer with the
following payment options: wire transfer, bank cheque and
purchase order (default to become a member).
PRIORITY: 1.1
2.10.11. Customer has the option to choose: (i) a time frame for
shipping of its orders (next day, 2nd day, 3rd day, ground
delivery); (ii) carrier supported (UPS and FedEx for
US/Canada - DHL for international including Canada)
Distributor shall ensure that the prices for each option
are displayed to Customer.
PRIORITY: 1.0
2.10.12. The shipping page supports the capability to gather
Customer profile information. (ie. graphics user,
marketing, etc.). COREL will define profile.
PRIORITY: 1.0
2.10.13. A radio button requiring Customer to select is displayed
giving Customer the option to have its name included on
mailing list updates in accordance with COREL's privacy
standards, in effect from time to time. In the event that
Customer does not check any box, Customer shall receive
all information.
PRIORITY: 1.0
2.10.14. In the event that a credit card is rejected, a message
shall be sent back to the Customer with an explanation
for the rejection and the option to resubmit its payment
information. In the event that a credit card is rejected
twice, Customer shall be direct to Distributor's customer
service page.
PRIORITY: 1.1
16
<PAGE>
2.10.14.a For launch, just one page with "try again or call
customer service" message.
PRIORITY: 1.0
2.10.15. Drop downs requiring Customer to select an option shall
be displayed to Customer for all credit card payment
options.
PRIORITY: 1.0 All other payment options: PRIORITY 1.1
2.10.16. The Store shall be in compliance with all privacy laws
and with COREL privacy policy.
PRIORITY: 1.0
2.10.17. [ * ]
2.10.18. Upon completion of a Customer order, Distributor shall
display a survey on the order confirmation page.
PRIORITY: 1.1
2.10.19. After launch, research and support eCharge.
PRIORITY: 1.1
2.10.20. The shopping cart shall provide the following: (i)
calculation of number of items in the shopping cart; and
(ii) offer messaging, including, but not limited to: " You
have x number of Products in your shopping cart, if you
buy y number more Products, you are entitled to shipping
at no charge".
PRIORITY: 1.1
2.10.21. The shopping cart shall support pricing design bits by
$.xx per K size added to cart.
PRIORITY: 1.1
2.10.22. The check out shall calculate the add on costs for
fulfillment across international boundaries.
PRIORITY: 1.1
2.10.23. The Store shall only display options relevant to a
Customer based on such Customer's selling region, billing
location and shipping location, provided that the
Customer is logged on and such information is available
to Distributor.
PRIORITY: 1.2
2.10.24. All other business rules must be supported in the cart.
PRIORITY: 1.0
2.11. CHECKOUT: REVIEW ORDER
Distributor shall ensure that:
2.11.1. The "review order" form shall calculate tax and shipping
rates based on the "shipping and billing" form completed
by Customer.
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* CONFIDENTIAL TREATMENT REQUESTED.
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PRIORITY: 1.0
2.11.2. Taxes are charged to Customer in accordance with the laws
of Washington and California.
PRIORITY: 1.0
2.11.3. The functionality exists to charge Customers tax based on
merchants nexus.
PRIORITY: 1.2
2.11.4. The "review order" form shall display Customer's complete
order and all costs, including tax and shipping.
PRIORITY: 1.0
2.11.5. The "review order" form shall permit Customer to enter
payment information.
PRIORITY: 1.0
2.12. PHYSICAL & ESD SUPPORT
Distributor shall ensure that:
2.12.1. The shopping cart shall support both physically delivered
and electronically delivered Products.
PRIORITY: 1.0
2.12.2. All electronically delivered Products shall be downloaded
to the Customer after the monetary transaction is
complete.
PRIORITY: 1.0
2.12.3. The electronically delivered Products purchased by
Customer shall be available to such Customer for download
at any time as an archived backup and history of its
purchases. This will apply to both the eStore and Studio.
PRIORITY: 1.0
2.12.5. In the event that a try and buy technology is utilized by
COREL, Distributor shall ensure that while Customer is
downloading its Product purchase, the download manager
(archive) shall contain advertising space (ie. Banners),
at COREL's sole discretion.
PRIORITY: 1.1
2.13. SHIPPING STATUS
Distributor shall ensure that:
2.13.1. The home page of the Store shall provide Customers with
an "order Tracking" link which shall forward Customers to
the "Shipping Status" page when clicked by Customer.
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.13.2. The "Shipping Status" page allows Customer to enter an
order number and to receive information on the status of
its order, including, but not limited to: order shipped,
order on back order, order in warehouse, after shipped,
refer to shipping method and link to UPS etc. ETA, etc....
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
18
<PAGE>
2.13.3. The "Shipping Status" page shall notify Customer when an
incorrect order number has been entered by Customer.
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.13.4. The "Shipping Status" page shall allow Customer to enter
its account information and view all orders that it has
placed.
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.13.5. In the event that Customer enters a correct order number,
Distributor shall display the shipping status of all
items within such Customer's order. Valid shipping
statuses are Shipped and Not Shipped. Back Order, credit
hold.
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.13.6. For Customer orders with a status of "Shipped", Customer
shall be presented with an airbill or waybill number to
allow tracking of its package or an 1 800 number to call
for more information
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.13.7. All airbill or waybill tracking numbers shall be an
active hyperlink to the shipper's tracking page.
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.3.17.a By clicking this link, Customer shall be linked to that
page and hotload the airbill number into the form.
PRIORITY: 1.0 (MEMBERS) PRIORITY: 1.1 (ANONYMOUS USERS)
2.13.8 All Customer order tracking shall be done on
Distributor's site without a referral to carrier's sites
PRIORITY: 1.2
2.14. CROSS-SELL/ UPSELL RECOMMENDATION
Distributor shall ensure that:
2.14.1. [ * ]
2.14.2. [ * ]
2.14.3. [ * ]
2.15. SPECIAL OFFERS & COUPONS
19
* CONFIDENTIAL TREATMENT REQUESTED.
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Distributor shall ensure that:
2.15.1. [ * ]
2.15.2. [ * ]
2.15.3. [ * ]
2.15.4. [ * ]
2.15.5. [ * ]
2.15.6. [ * ]
2.15.7. [ * ]
3. PAYMENT PROCESSING
Distributor shall ensure that:
3.1. It shall take credit card numbers, purchase orders, cheques,
pre-authorize in Real Time to determine balance available & Fraud
Screen. Also Charge card when shipment is Confirmed by distribution
partner. For physical goods, the shipment must be confirmed to
charge the credit card account. For ESD goods, the credit card can
be charged after download.
PRIORITY: 1.0
It shall take purchase orders and cheques
PRIORITY: 1.1
3.2. It shall take input from web form check-out page. Pass to
Distributor providing credit card authorization and Fraud Screen
supported by Platform.
PRIORITY: 1.0
3.3. RSA security will be used for credit card processing when sent via
the internet.
PRIORITY: 1.0
3.4. Maximum wait time to process credit card online is thirty (30)
seconds for 33.6k modems. Users, where the actual credit card
transmission takes less than 10 seconds.
20
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
PRIORITY: 1.0
3.5. Fraud screening can be lower for ESD Studio content. Up to $499 in
basket, lower level of screening, over $499, same level as eStore.
PRIORITY: 1.1
3.6. All account creation and other sensitive data must have appropriate
security procedures in place (SSL - Verisign)
PRIORITY: 1.0
4. ORDER CONFIRMATION PAGE
4.1. [ * ]
5. ORDER CONFIRMATION EMAIL
Distributor shall ensure that:
5.1. [ * ]
5.2. [ * ]
6. DATA TRANSFER FROM COREL TO DISTRIBUTOR
[ * ]
21
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
Thumbnails & Watermarks - Corel shall re-size, at COREL's sole option, upon
Distributor's request.
Photo CD-ROM Products (900 Cd's, approximately 50,000 files)
Classification (Stock) (Corel does not have, but requires) - COREL will
provide "Titles" to be used as temporary sub-categories, Distributor shall
incorporate each sub-category into one of the following temporary
categories: ANIMALS & PEOPLE, PLACES, THINGS or BACKGROUNDS
Price/Resolutions
Multiple Categories
PREMIUM/ILLUSTRATION/DESIGN BITS -
Spreadsheet (w/filename, description, keywords, categories, sub-categories,
classification, file size compressed)
Thumbnails/Watermarks -
Premium - 3 Files
Illustration - 2 Files
Design Bit - 1 File
COREL PRODUCT CONTENT (ESTORE ITEMS) -
SKU's, Product Description, Buy Lines, Box Shots, Pricing
Keywords
Recommend Cross Sell
Categories
OTHER -
To get from current Studio
FAQ
File Spec.
Help
EULA
DATA FIELDS -
Filename (SKU)
Keywords (Studio)
Descriptions (Studio)
Descriptions (eStore)
Classification (Premium, etc.)
Studio Category (People, etc.)
Studio Subcategories
Date Implemented
File Path
Thumbnail (or Box Shot)
Watermark
Media (Download or CD) (If download avail on CD specific only to
Studio)
Royalty (indicates ownership) (NOT STUDIO SPECIFIC, this field should
indicate the ownership of the product. i.e. Music library)
Weight (Popularity, Quality)
EStore Keywords
Estore Category
22
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Prices/Resolutions
Related products
File Size
Platform
Active/Inactive/Pending
Specials
Ranking
Product weight (physical)
Language
Export Restrictions/Rules
Royalty
Free (Product ID of Bundled Free Product)
Media Type
Color Profiles (ICC... what palate scanned in etc.) (create SKU to use in
recommendation engine to prompt in cart)
Subscription (Multiple Models)
Recommended cross sell SKU
Special EPP SKU or EPP Price (noble find out)
Access level (i.e. Paid subscription, Free subscription, Etc.)
CUSTOMER INFORMATION-
Name
Address
State/Province
Zip code
Country
Phone #
Email address
Desire mailing list
Corel only mailing list
Unsubscribe mailing list
Password
Account ID
Purchase history
FILE SIZE ISSUES-
Premium Stock - ~1000 @ 7mb each 5 files
Stock - ~50,000@7mb each 6 files
Illustration - ~ 30 @ 15mb each 4 files
Design bits - No specs., but NEED for launch ~1000 (small)
Stock Images - Thumbnails and Watermarks.
Premium
Illustrations (Vector) -
Design Bits (Clip Art) -
7. SITE ADMINISTRATION
23
<PAGE>
Note: For this section 7 all work, times and deliverables are subject to
Distributor's normal business hours defined as Monday to Friday from 8:00
am to 5:00 pm Pacific Time. For example, changes requested Friday PM would
(if applicable) be made on Monday. In addition, Distributor shall ensure
that it has a dedicated Web master representative available for Customers
and COREL twenty four (24) hours a day seven (7) days a week.
7.1. CHANGING SITE CONTENT THROUGH WORKPLACE
Distributor shall ensure that:
7.1.1. COREL Staff is provided access to tools that will enable
them to remotely administer Product SKUs, including, but
not limited to, making them active, inactive, on hold,
changing pricing, keywords, description, copy and name of
product either in a batch or individual mode.
PRIORITY: 1.1
7.1.2. COREL Staff is provided with access to tools which enable
them to remotely administer Customer Information.
PRIORITY: 1.1
7.1.3. COREL is provided with access remotely to the staging
server to make changes to site content, including but not
limited to, FAQs, the look and feel the Web Pages, EULA,
Product brochures, top X Product listings, add
promotions. Distributor shall post any changes make by
COREL to the Store on the live server within twelve (12)
hours of COREL posting the changes on the development
server.
PRIORITY: 1.1
7.1.4. COREL is provided with access to remotely post changes
from the staging server to the production server.
PRIORITY: 1.1
7.1.4.a Distributor agrees to make the Estore available for
previewing to Corel staff on the staging server (monitor
progress, legal check, security and audit)
PRIORITY: 1.1
7.1.5. COREL is provided with the ability to remotely add and
upload ESD Product skus (Products, images, patches etc).
PRIORITY: 1.2
7.1.5.a Work flow will be added to administration tools so that
COREL can manage changes. Need to work out approval
levels and work flow with COREL based on post Launch
requests for changes. By tracking what changes COREL
needs and the approvals necessary to affect them,
Distributor can build work flow and approvals into the
administration process. The parties need to determine
specific method for communication and what instances
trigger sign off or notification events.
PRIORITY: 1.2
7.1.6. COREL is provided with the option to password protect its
ability to change and modify the Store on the development
server. In addition, COREL shall provide Distributor with
the names of those COREL staff members authorized to make
such changes and modifications to the Store on the
development server.
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* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
PRIORITY: 1.2
7.1.7. The database will be structured for easy data transfers,
in a format acceptable to COREL.
PRIORITY: 1.1
7.2. CHANGING SITE CONTENT THROUGH DISTRIBUTOR PROFESSIONAL SERVICES
Distributor shall ensure that:
7.2.1. Distributor Staff updates Product SKU and Product
Category content provided by COREL to Distributor within
twenty four (24) hours (i.e. modifications received by
Distributor from COREL before 10am shall be made by
Distributor by 10am the following day)
PRIORITY: 1.0
7.2.2. Distributor Staff updates advertisements and banners
provided by COREL within twenty four (24) hours.
PRIORITY:1.0
7.2.3. COREL may submit site updates, changes and or deletions
at any time. Distributor shall process updates, changes
and/or deletions as follows:
COPY/TEXT/GRAPHICS CHANGE ORDERS. Change Orders shall be
submitted by COREL to Distributor by e-mail to
Distributor. New copy additions, deletions or changes
submitted by COREL to Distributor shall be live on the
Store within twenty four (24) hours of such request.
PRIORITY: 1.0
7.2.4. Distributor Staff adds new content classifications to the
Store within one week of COREL's request. Classifications
1.0 all necessary data upon initiation of project.
PRIORITY: 1.0
7.2.5. NON-GRAPHICAL CHANGE ORDERS Requests for Changes in site
non-graphical elements can be submitted at any time.
Minor changes (those requiring thirty (30) minutes or
less by Distributor) shall be live in twenty four (24)
hours. Medium changes (those requiring between thirty one
(31) and eighty nine (89) minutes of work by
Distributor) shall be live by Distributor within forty
eight (48) to seventy two (72) hours. Major changes
(those requiring ninety (90) minutes or more work by
Distributor) will be on a case by case basis as agreed
upon by both parties.
PRIORITY: 1.0
GRAPHICAL CHANGES TO BE DONE BY DISTRIBUTOR shall be made
on the following schedule:
<TABLE>
<S> <C>
1 to 4 graphical elements Submit by 10:00am, Live in 48 hours
5 to l0 graphical elements Submit by 10:00am, Live in 72 hours
PRIORITY: 1.0
</TABLE>
NOTE: Distributor reserves the right to allocate
additional time in processing any change orders which are
not purely graphical changes, if agreed upon by both
parties.
25
<PAGE>
7.2.6. Photo updates - Distributor Staff shall have the ability
to bulk update COREL photos from mdb. Distributor shall
provide time estimates for such maintenance. MDB must be
live within twenty four (24) hours.
PRIORITY: 1.0
7.2.7. All COREL requested changes will be posted by Distributor
on the staging server. COREL shall have access to approve
changes made by Distributor prior to any such changes
going live to the Store.
PRIORITY: 1.0
7.2.8. Updates to the live server shall be made by Distributor
once daily at 12pm Monday to Friday. Changes initiated by
Distributor shall require COREL's prior approval.
PRIORITY: 1.0
7.2.9. Immediate required changes shall be determined by the
parties. Distributor shall use all commercially
reasonable measures to make the changes live immediately
regardless of any regular update schedule.
PRIORITY: 1.0
7.3. POSTING OF NEW ESD SKUS
7.3.1. Posting of new ESD SKUs shall be done via a process an
procedure to be mutually agreed upon by COREL and
Distributor on or before May 18, 1999.
PRIORITY: 1.0
8. REPORTING
Note: for this section 8 all work, times and deliverables are subject to
Distributor's normal business hours defined as Monday to Friday from 8:00
am to 5:00 pm Pacific Time. For example, changes requested Friday PM would
(if applicable) be made on Monday
8.1. SALES REPORTS
Distributor shall ensure that:
8.1.1. COREL appointed staff shall have access to reporting to
enable such COREL staff to view aggregate sales
information (gross and net to COREL), the number of
visitors to the Store (number of unique visitors), number
of shoppers (number of baskets created), number of
Customers (number of baskets checked out), and the
aggregate amount purchased on the Store.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.1.2. Reports of sales made by Distributor on the Store shall
be made available to COREL by Distributor online. Each
electronic transaction shall be reported to COREL within
one (1) hour of the purchase, and each physical
transaction shall be reported by Distributor immediately
after Customer's credit card is processed.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.1.3. Reporting shall display the top selling Product SKU's in
aggregate form, by entire Store, or category.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
26
<PAGE>
B. ON LINE REPORTING:
PRIORITY: 1.1
8.1.4. Sales reports are available to COREL twenty four (24)
hours a day, seven (7) days a week.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.1.5. The following reports will be generated by Distributor in
a format agreed upon by COREL and shall include, at a
minimum, the following information:
- number of hits to the Store
- number of visitors to the Store
- flow of traffic on the Store each week, month and
quarter, per promotion, by geographic location
- sell through by SKU, product category (shrinkwrap
Products vs. ESD Products vs. photo Products vs.
clip-art Product etc), stacked by revenue or
number of units, both and/or by geographic region
in North America
- top one hundred (100) viewed Products and the top
one hundred (100) purchased images, subcategories,
categories, classifications, resolutions report of
which are being purchased
- demographics report
- average order stats, number of products, revenue
value
- customer service metrics, topics, summary reports
- delivery record
- promotion success tracking: Cost of promotion
versus sales of promotion (if promotion is free
shipping, mail-in rebate, etc)
- Merchandising: outline where the sale came from
(from front page offer, category or search on
keyword, etc)
- inventory
- number of attempted free downloads
- monthly reporting tying the cheque into reports
- top searched on keywords
- trial versions
- registrations
- subscriptions
- number of personal stores, sales by each personal
store, top stores
- ESD key delivery reports
- comparative historical reports generated for the
previous electronic distributor's orders
All such reporting shall be in United States currency (even when
multiple currencies are accepted). Distributor shall break down
sales by type of currency and geographic region.
Distributor shall break out reports by minute, hour, and day to the
best of Distributor's ability.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.2. TRAFFIC REPORTS
Distributor shall ensure that:
8.2.1. Traffic reports are served by mediahouse or equivalent
functionality, and include the number of hits by page,
the most popular pages requested, the browser type,
clickthrough, session data captured from web logs, web
traffic and log files. COREL reserves the rights to
modify the Mediahouse (live stats) software..
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.2.2. Traffic logs are scanned by Distributor for competitor
activity on the Store. Distributor shall ensure that
visitors' stats are accessible via the browser in
Real-time Live
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.3. UPTIME & SECURITY REPORTS
Distributor shall ensure that:
8.3.1. Distributor submits monthly uptime reports to COREL
during the first week of each month
27
<PAGE>
which shall detail the uptime on COREL sites during the
previous month.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.3.2. Distributor submits monthly security reports which shall
update COREL on any breaches of the download security.
Breaches are to be reported to COREL within twenty (24).
hours.
PRIORITY: 1.0
8.4. FINANCIAL REPORTS
Distributor shall ensure that:
8.4.1. Distributor reports gross and net amount of sales by
Distributor to COREL. Such report must detail the amounts
deducted from gross sales to obtain the net sales amount
payable to COREL by Distributor. Such report shall also
detail the breakdown of electronic sales by Distributor,
Corel Studio, Shrinkwrap, techsupport, and third party
revenue.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.4.2. Distributor shall provide COREL Estore/Studio order
information in a format acceptable to COREL which shall
be integrated into COREL's order entry system and which
shall be uploaded several times each day.
PRIORITY: 1.1
8.5. INVENTORY REPORTS (ONLY IF APPLICABLE)
Distributor shall provide COREL with monthly Inventory reports for
any products warehoused by Distributor. Distributor shall provide
COREL with monthly reconciliation of inventory to sales by
Distributor.
PRIORITY: 1.0
8.6. CUSTOMER REPORTS
Distributor shall provide COREL with a monthly report of the
Customer Information indicating to COREL at a minimum the following
fields: subscribe/unsubscribe to e-mail list, location of Customer
(i.e. North America/International Split), kind of products purchased
split.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.7. SECURITY OF REPORTING
Distributor shall ensure that all reports submitted to COREL shall
be transferred using industry standard means of encryption and that
access to such reports will be restricted to on-line reports by
password and user name.
A. MANUALLY CALCULATED REPORTS ONCE PER DAY:
PRIORITY: 1.0
B. ON LINE REPORTING:
PRIORITY: 1.1
8.8. ESTORE PORTAL (HTML PAGE) FOR CEO AND VP'S.
Distributor shall ensure that reports are made available in real
time to the parties' CEOs and VPs using a password protected
location. Such reports shall include the following fields:
- Sales- today, week, month : by main product categories: Studio,
Clip-art, ESD, shrink, etc
- Visitors. day, week, month
- stats on free downloads stuff
- number of new accounts/subscriptions created, day, week, month.
- Top selling SKUS
PRIORITY: 1.1
28
<PAGE>
8.9. CUSTOMER SERVICE REPORTS
Distributor shall log all customer service calls using the following
fields: time call placed, inbound, outbound, total received, total
answered, total abandonment, answer speed, cue delay, length of
call, topic, top 20 issues logged each month (e-mail, telephone,
etc), summary of all issues logged in a month, reports on number of
requests for foreign language support (list languages), report of
delivery fulfillment record: number of orders that arrived on time,
late (number of days late), corporate leads, items that should be
changed/expanded on, added to FAQ to improve buy experience) and
Number of employees staffing the centre: dedicated, shared.
9. BIZ RULES AND GROUPS
Note: both the completion and implementation schedule of all deliverables
in this section 9 are dependent upon Distributor and COREL's timely
completion of all tasks. Distributor will inform COREL in a timely manner
of the deliverables required by Distributor and the deadlines by which
those deliverables are required. Provided that COREL meets the deadlines
agreed upon by both parties Distributor shall complete the tasks set forth
in this section 9 in accordance with the priority deadlines.
[ * ]
10. NEW USER INTERFACE
[ * ]
29
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
11. E-MAIL FUNCTIONALITY
11.1. E-MAIL SIGN-UP
Must take email for specials mailing list. Input and design like
BuySoftware today meaning, an input field must exist for Customer to
type their email address. Customer email addresses must be stored by
Distributor in order to allow Distributor to notify such Customers
about store specials
PRIORITY: 1.0
11.2. EMAIL MAILINGS
Distributor will have the ability to send emails to customers based
upon: product purchase history, geography, etc if requested by COREL.
PRIORITY: 1.1
12. NETGREETING SUPPORT
Distributor shall return search results and allow Customer to send an
electronic post card to a third party containing the image chosen by
Customer.
PRIORITY: 1.1
13. PARTNERS SUPPORT: RESELLERS AND AFFILIATES AND TRACKING SALES
13.1. Resellers are online retailers that may want to distribute COREL
photos in addition to their current on-line offerings in a branded
manner (reseller does not point to COREL Site.)
PRIORITY: 1.0
13.1.1 Distributor will build a standard reseller template which
allows resellers to provide their users access to a keyword
search of stock photos and a browse by category of stock
photos (if possible). The template will be "tied" into the
existing database of COREL products. This standard template
will provide basic reseller branding which may be a top
banner with their logo. Subsequent search results pages
would have similar branding. Please refer to
www.masterphotos.com to see implementation of a standard
template for IMSI.
PRIORITY: 1.0
13.1.2 Turn around time for new resellers added will be [ * ]
provided no incremental hours for customization for the
template is required.
PRIORITY: 1.0
13.1.3 Resellers will have the ability to offer stock photos.
PRIORITY: 1.0
13.1.4 Additionally, Resellers will have the ability to offer
images, ESD products, if permitted by COREL, but will not
have access to distribute premium photos, design bits,
fonts, music, technical support and other designated
content.
PRIORITY: 1.1
13.1.5 [ * ]
13.2 Affiliates - The sales Affiliates refer to the Store are tracked and
Distributor shall pay such Affiliates a [ * ] referral fee.
13.2.1 Distributor will provide functionality similar to the "my
shop now" stores to COREL for the
30
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
COREL personal stores Affiliates program. This shall
include page layout and wording, describing the benefits
of being and Affiliate partner with easy sign-up,
creation of the startup set of banners for the Affiliates
to direct traffic from their sites to the personal store,
etc. Distributor shall have a procedure to sign up
Affiliates such that the user accepts or rejects the
terms and conditions of the program. Distributor shall
store Affiliates acceptance of such terms and conditions.
Upon acceptance of the terms and conditions by the
Affiliates, Distributor shall provide the Affiliates
access to the link/banner/URL to place on their home
page, or advertise and print media etc.
PRIORITY: 1.1
13.2.2. A standard template will exist that for Affiliates such
as in "my shop know" that they can customize in terms of
color modification, product selection/exclusion, shop
title modification, etc. Affiliates will also have the
ability to place a logo somewhere on the site but such
Affiliate shall not have the ability to modify the COREL
Marks.
PRIORITY: 1.1
13.2.3. [ * ]
13.2.4. [ * ]
13.3. TRACKING SALES
Situations where COREL requires the ability to track sales from a
specific source or promotion for which Distributor does not pay any
Affiliate or referral fee. A special incentive may be provided
(would be defined on a case by case basis).
13.3.1. PC CHIPS:
- Distributor will have the ability to track sales
link from a specific URL;
- Distributor will not pay an Affiliate fee to PC
CHIPs
- Distributor will provide a form for customer to
register their product from this
promotion. COREL will provide fields for
registration.
- Distributor will provide a free image to every
customer that registers through this site.
- Distributor will provide a discount of [ * ]
to a customer's subsequent purchase for
registering (this is in addition to the free
image that they will receive).
PRIORITY: 1.0
13.3.2. GRAPHIC TRADESHOW SALES:
Graphic Tradeshow Sales will be tracked through a
specific URL. Reporting of these sales will be provided
to COREL. A tradeshow special of a free image from Studio
will be provided to customers.
PRIORITY: 1.0
14. OTHER DEVELOPMENT
14.01. CANADIAN STORE
A version of the entire store will be replicated with Canadian Pricing.
(Canadian shoppers click here) Canadian
31
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
SKU's exist with Techdata Canada and can be fulfilled by them for only
Canadian Orders. Canadian customers will be presented with only shipping
options relevant to them.
PRIORITY: 1.1
14.02. THIRD PARTY COMMERCE ENABLING
Distributor shall have the capability to permit third parties to post
plug-ins and images on their own personal stores to distribute on the
Store.
PRIORITY: 1.2
14.03. TECH SUPPORT SALES
COREL shall provide Distributor with a SKU for Tech Support incidents
for each Product for which it applies. Distributor shall provide COREL
with a way of verifying those Customers which have purchased Tech
Support incidents.
PRIORITY: 1.0
14.03.a TECH SUPPORT THROUGH DISTRIBUTOR
Verification by sending a copy of the order confirmation email
to COREL at the same time such verification is sent to Customer.
14.03.b Distributor shall notify COREL's technical support department
of such verification in a batch format to be mutually agreed
upon between the parties.
PRIORITY: 1.1
14.4. REFERENCE STORES: BOOKS/TRAINING
[ * ]
14.5. ECOMMERCE ENABLING PRODUCT PAGES AND COMMUNITY SITES
Distributor shall provide COREL with the ability to place a BUY
NOW button on any of COREL properties that immediately puts the
product in question into the shopping cart.
PRIORITY: 1.0
14.6. E-COMMERCE ENABLING OF POSTER SALES
Integrate ability to sell posters from Studio of Studio Images
including acceptance of payment, remittance of payment to
COREL, fulfillment and third party services.
PRIORITY: TO BE DETERMINED
14.7. AFFINITY (COREL POINTS) PROGRAM
Distributor shall assist COREL in implementing and maintaining a
Corel points program.
PRIORITY: 1.1
14.8. REBATES
32
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
When mail in rebates exist for a Product SKU, Distributor will
show the text and post a note to Customer saying "Free after
mail in rebate" or "$xxxxx after mail in rebate".
PRIORITY: 1.0
Product Price shall be net of rebate
PRIORITY: 1.1
14.9. DEVELOPMENT REQUIREMENTS
Distributor will work with COREL to implement the following
functionality:
14.9.1. [ * ]
14.9.2. Distributor shall also give Customers the ability to
shop for images from within the application. This may
require drag and drop functionality or right click
functionality for purchasing images. This may or may
not require special development by the Store host.
PRIORITY: TO BE DETERMINED
14.9.3. Similar functionality as mentioned above may be needed
for purchasing plugins; from estore.
PRIORITY: TO BE DETERMINED
14.10. INCENTIVE
[ * ]
14.11. LOCALIZATION OF STORES (REQUIREMENTS AND PRIORITY TO BE DETERMINED)
14.12. CUSTOMER REQUIREMENTS DOCUMENT
The Customer requirements document ("CRD") shall be appended to
this Schedule "H" when it is mutually agreed upon by both parties.
33
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
SCHEDULE "I"
TECHNICAL SUPPORT PRODUCTS AND TECHNICAL SUPPORT PRODUCT PRICES
<TABLE>
<CAPTION>
ONLINE
DESCRIPTION COREL SKU SUGG. PRICE DISTI PRICE
<S> <C> <C> <C>
Classic Lifetime Support Upgrade From Classic 30 Day Installation Only CLSUG 60.00 [ * ]
Classic Support Single Incident CS1I 15.00 [ * ]
US Priority 1 Incident WP (11X5) PRI1IWPUS 25.00 [ * ]
US Priority 5 Incident WP (11X5) PRI5IWPUS 99.00 [ * ]
US Priority 10 Incident Pack WP (11X5) PRI10IWPUS 189.00 [ * ]
One-Single Priority Credit for Wordperfect 7X24 Support US PRI17X24WPUS 40.00 [ * ]
Priority 5 Pack WP 24X7 US PRI5PACKWPUS24X7 145.00 [ * ]
Priority 10 Pack WP 24X7 US PRI10PACKWPUS24X7 280.00 [ * ]
US Priority 1 Incident Graphics PRI1IGUS 25.00 [ * ]
US Priority 5 Incident Pack Graphics PRI5IGUS 99.00 [ * ]
US Priority 10 Incident Pack Graphics PRI10IGUS 199.00 [ * ]
Priority 1 Incident Unix/Linux Server Edition USA PRI1IUXLNXSEUS 50.00 [ * ]
Priority 5 Incident Unix/Linux Server Edition USA PRI5IUXLNXEUS 225.00 [ * ]
Priority 10 Incident Unix/Linux Server Edition USA PRI10IUXLNXSEUS 399.00 [ * ]
Priority 1 Incident Linux Workstation Edition USA PRI1IUXLNWEUS 50.00 [ * ]
Priority 5 Incident Linux Workstation Edition USA PRI5IUXLNWEUS 225.00 [ * ]
Priority 10 Incident Linux Workstation Edition USA PRI10IUXLNWEUS 399.00 [ * ]
Priority 1 Incident Linux Workstation Edition USA (7X24) PRI1IUXLNWEUS724 40.00 [ * ]
Priority 5 Incident Linux Workstation Edition USA (7X24) PRI5IUXLNWEUS724 149.00 [ * ]
Priority 10 Incident Linux Workstation Edition USA (7X24) PRI10IUXLNWUS724 249.00 [ * ]
Paradox Priority Personal 1 Incident US PDXPER1IUS 50.00 [ * ]
Paradox Priority Standard 1 Incident US PDXSTD1IUS 75.00 [ * ]
Paradox Priority Plus 1 Incident US PDXPLUS1IUS 150.00 [ * ]
Paradox Personal 5 Incident Pack US PDXPER5IUS 225.00 [ * ]
Paradox Personal 10 Incident Pack US PDXPER10IUS 400.00 [ * ]
Paradox Personal 25 Incident Pack US PDXPER25IUS 1,250.00 [ * ]
Paradox Standard 5 Incident Pack US PDXSTD5IUS 355.00 [ * ]
Paradox Standard 10 Incident Pack US PDXSTD10IUS 675.00 [ * ]
Paradox Standard 25 Incident Pack US PDXSTD25IUS 1,600.00 [ * ]
Paradox Plus 5 Incident Pack US PDXPLUS5IUS 700.00 [ * ]
Paradox Plus 10 Incident Pack US PDXPLUS10IUS 1,350.00 [ * ]
Paradox Plus 25 Incident Pack US PDXPLUS25IUS 3,200.00 [ * ]
Priority E-Mail Support For Graphic Applications PRIANSPEFGRAPH 9.95 [ * ]
Priority E-Mail Support For Wordperfect Business Applications PRIANSPEFWP 9.95 [ * ]
Priority E-Mail Support For Linux/Unix PRIANSPEFLNXUNX 9.95 [ * ]
Priority E-Mail Support For Consumer Applications PRIANSPERFCONSUM 9.95 [ * ]
Support Option - Premium Light US PREMLITEUS 3,750.00 [ * ]
Support - Premium Services Ultra Lite (25 Incident) US PREMULITEUS 1,825.00 [ * ]
Premium Graphics Ultra Lite 24X7 US PREMGULITEUS 2,375.00 [ * ]
Support Option - Premium Standard US PREMSTANUS 18,999.00 [ * ]
Support Option - Premium Plus US PREMPLUSUS 22,399.00 [ * ]
Support Option - Premium Elite US PREMELITEUS 25,499.00 [ * ]
Additional Premium Support Contact US PREMCUS 3,000.00 [ * ]
Sam US PREMSAMUS 1,300.00 [ * ]
Primary Premium Support Technician US PREMPTUS 25,000.00 [ * ]
Dedicated On-Site Premium Support Technician US PREMDTUS 100,000.00 [ * ]
</TABLE>
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
31
SCHEDULE "J"
MARKETING SERVICES
Distributor shall provide the following Marketing Services to COREL at no
charge, during the first twelve (12) calendar months after the Effective Date.
Distributor shall provide additional marketing services for any subsequent
twelve (12) month period of this Agreement as agreed in writing by both parties
three (3) months prior to the renewal date and any such services shall be of
equivalent value to those provided by Distributor in the previous twelve (12)
month period. The programs are subject to change and replacement with programs
of equal value upon mutual written agreement between the parties .
The marketing services are broken into two segments:
- - Ongoing -marketing programs intended to drive traffic and attention to COREL,
and Corel products throughout the term of the Agreement.
- - Launch - special considerations provided to coincide with the launch of the
Store with Distributor, and the Corel "Personal Store" program.
ONGOING PROGRAMS
1) ShopNow.com Personal Stores
More than 1 million personal stores online currently, with plan to reach 10
million personal stores by December 1999.
Corel Studio installed as the exclusive Image Gallery in Personal Stores
A Corel Estore Specialty shop will be included in the Computers area of all
personal stores
Corel gets the top slot to make an offer in the Personal Store newsletter
mailed to all Store owners once per quarter.
One front page sweepstakes program that runs in all Personal Stores (value
of prize must exceed $2,000)
LIST VALUE:
Exclusive Category Sponsorship (Images) [ * ]
Specialty Shop in Computer area [ * ]
Newsletter offer once/quarter (1 million names) [ * ]
Front page sweepstakes sponsorship [ * ]
SHOPNOW.COM PERSONAL STORE TOTAL VALUE (12 MONTHS)
Exclusive Category Sponsorship (Images) [ * ]
Specialty Shop in Computer area [ * ]
Newsletter offer once/quarter (1 million names) [ * ]
Front page sweepstakes sponsorship [ * ]
TOTAL VALUE [ * ]
BuySoftware.com
Corel Specialty Shop link on Front page of BuySoftware.com
Corel featured products in BuySoftware.com Graphics Software category
Corel Products and Images featured in BuySoftware.com Download shop
Corel the top slot to make an offer in the BuySoftware.com E-alert
newsletter once per quarter (200,000 subscribers)
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
32
LIST VALUE:
Specialty Shop link - Front page BuySoftware.com [ * ]
Featured product in Graphics Software category [ * ]
Corel Products & Images featured in download shop [ * ]
Quarterly top slot in BuySoftware.com E-alert [ * ]
BUYSOFTWARE.COM TOTAL (12 MONTHS)
Specialty Shop link - Front page BuySoftware.com [ * ]
Featured product in Graphics Software category [ * ]
Corel Products & Images featured in download shop [ * ]
Quarterly top slot in BuySoftware.com E-alert [ * ]
TOTAL VALUE [ * ]
ShopNow.com
Corel E-store and Studio would be given premiere merchant listings on
ShopNow.com in the Technology Center.
ShopNow.com gets more than 1 million unique monthly visitors
LIST VALUE:
ShopNow.com Premiere Merchant Listing Corel Estore [ * ]
ShopNow.com Premiere Merchant Listing Corel Studio [ * ]
SHOPNOW.COM TOTAL (12 MONTHS)
ShopNow.com Premiere Merchant Listing Corel Estore [ * ]
ShopNow.com Premiere Merchant Listing Corel Studio [ * ]
TOTAL VALUE [ * ]
4) NetGreeting.com
Distributor will integrate the thumbnails for all Corel Studio images and
photos into its NetGreeting web site as free electronic greeting cards.
Corel will be the exclusive image supplier for NetGreeting.com
Every NetGreeting sent, will be tagged with copy crediting Corel (i.e.
Images exclusively from Corel Studio)
Copy stating Corel's sponsorship of NetGreeting, and links to Corel offers
will be included on the page thanking senders for using NetGreeting, as
well on the page where recipients receive their card.
This version of NetGreeting will be integrated into:
All ShopNow.com Personal Stores
BuySoftware.com
ShopNow.com
NETGREETING INTEGRATION VALUE:
Within six (6) months from the Effective Date of this Agreement,
Distributor shall provide COREL with the value of the NetGreeting
Integration. By integrating the Studio images and photos into the
ShopNow.com Network, it offers Corel an outstanding, unique branding
opportunity, and another chance to promote its products.
The NetGreeting program we run today has been extremely well received by
users, and is a great example of
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
33
viral marketing. Users often pass cards on to friends, and with the simple
reply function, they can quickly select their own image and send one back.
ONGOING PROGRAMS TOTAL VALUE (12 MONTHS):
ShopNow.com Personal Stores Value [ * ]
BuySoftware.com Value [ * ]
ShopNow.com Value [ * ]
Total Ongoing Program Value [ * ]
Pricing for Personal Stores, BuySoftware.com and ShopNow.com based on
current traffic/sign up levels. These prices would increase monthly based
on the trend at which traffic is currently increasing through these
properties.
LAUNCH PROGRAM
The goal of the launch program is to announce the re-launch of Corel's Store
and Studio, drive traffic and sales through the Store, and help Corel reach
out to current Corel product users and take steps toward establishing an
ongoing relationship with them.
This launch should run during a one to two month period and start after the
Corel Store and Studio, and Corel Personal Stores program have launched with
Distributor.
Theme: A Grand re-opening of Corel's E-Store. Much like when a brick and
mortar store has a Grand Opening, this launch campaign should focus on
driving traffic to the Store.
Concept: Using inventory through Distributor's network, and inventory on other
high traffic sites that Distributor controls, drive traffic to the new
Corel Store. The program will utilize special Grand Opening offers
from Corel to convert traffic to purchases. This would also be a great
opportunity to launch Corel's Personal Store program, and give
shoppers the chance to get free product or images for signing up.
In addition to online media to drive traffic, Corel should consider a
direct mail campaign to its user base to drive their business online,
and get them to sign up for their Personal Store (or just pick them up
if we pre-build them). Distributor, through its Direct Marketing
Agency division, (the "Haggin Group") can assist with creative
direction for a direct mail piece. If Corel elects to use this service
for launch, the Haggin Group will provide the creative at no cost to
COREL.
ONLINE MARKETING:
Distributor will contribute the following to the Launch program:
Yahoo! Impressions. Distributor currently has a presence as a premiere merchant
integrated in the Yahoo site and can provide some targeted visibility to Corel's
Store launch through this program, specifically links from search results on
Yahoo for keywords like graphics software, etc.
Distributor Contribution for Launch :
[ * ]
PC World Impressions. Distributor also has presence throughout PC World. Their
community of computer users a great audience for Corel.
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
34
Distributor Contribution for Launch
[ * ]
TOTAL LAUNCH PROGRAM CONTRIBUTION VALUE
[ * ]
[ * ]
[ * ]
TOTAL VALUE [ * ]
OTHER STRATEGIC PARTNER PROGRAMS
Additionally as a Strategic Partner, the standard Anchor Tenant program will be
expanded to include:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PROGRAM ESTIMATED IMPRESSIONS
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Creation of an exclusive sponsorship of the Web Page Estimate of [ * ] impressions per month.
Designers Floor
http://www.shopnow.com/technology/web_designers/ - and
in services - for Design Services. Graphic in nature and to be
mutually agreed upon for scope and placement.
- -----------------------------------------------------------------------------------------------------------------
One week per month as a "Feature Store" (88 x 31 logo Estimate of [ * ] impressions per month - 8%
button at the top of a floor) for the Technology Floor of all shoppers on ShopNow.com go this section.
(http://www.shopnow.com/technology) Will increase with targeted shopper promotions
for Corel and Technology in general using 3rd
party ad-buys targeted to this section.
- -----------------------------------------------------------------------------------------------------------------
One product or store announcement in our Minimum of [ * ] impressions.
ClubShopNow.com e-newsletter - to over 75,000 online
shoppers - every quarter. Will link to a special offer page to
track response
- -----------------------------------------------------------------------------------------------------------------
One "Smart Tip" link and 25 word tip per month in our Brand - new feature - launched 3/17. Used by
Merchant Center e-Commerce Guide Tip section - perfect over 17,000 merchants and all tips e-mailed to
place to promote Designer.com or Studio. merchant membership list.
http://www.shopnow.com/merchant_center/guides_tips.html
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL VALUE [ * ]
TOTAL DISTRIBUTOR MARKETING CONTRIBUTION
Ongoing Program Total Value [ * ]
Launch Program Total Value [ * ]
TOTAL VALUE [ * ]
Other Marketing Assistance
Distributor will work with Corel to set up the sale of advertising banners from
Corel's Store, the Studio and Corel's corporate website located at corel.com
through existing ad sale relationships Distributor has established at no cost to
COREL.
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
35
BANNER ADVERTISING. Distributor will be responsible for the concept, design,
production, and account management for all animated banners. Distributor shall
develop animated banner solutions based on the unique selling proposition of the
Software being promoted, the desire to build a brand and Customer loyalty, or
gear the animated banners toward the third party site on which such animated
banner shall be placed. COREL shall have prior approval of all such banners.
COREL agrees to pay Distributor [ * ] for each animated banner provided.
Animated banners created and used for the site of an Affiliate shall be
provided free of charge by Distributor to COREL.
ANCHOR TENANT LISTING. From June 1st, 1999 until June 30th, 1999, the Store
shall be an Anchor Tenant on Distributor's "ShopNow" and "MyShopNow"
properties. In addition, from July 1st, 1999 until January 1st, 2000, subject
to mutual agreement of the parties as to the specific dates, the Store shall
be an Anchor Tenant for two (2) additional months on Distributor's "ShopNow"
and "MyShopNow" properties.
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
36
SCHEDULE "K"
PROFESSIONAL SERVICES
The following is a list of various services available from the Distributor to
COREL. The services are provided to COREL at no charge as indicated. Other
services are available to COREL on either an hourly basis (at an hourly rate of
$150/hr.) or on a project basis. At COREL's request, Distributor shall draft a
proposal for such additional service.
COREL shall pay all amounts due to Distributor for Professional Services in
accordance with Section 7.02 of this Agreement.
The services provided to Corel at no charge include the following:
Web Site Development - Development of the COREL Store is provided by the
Distributor at no charge. The specification for the Development is outlined in
the MRD attached to the Agreement as Schedule H.
Catalog and Inventory Management - Distributor shall provide COREL at no charge,
catalogue and remote SKU management services for Corel products on the Store and
Distributor's properties that will enable COREL to manage catalog and inventory.
As soon as they are available, Distributor will provide to COREL, at no charge,
software tools to manage catalog, inventory and applicable reports. The
specifications for these services are outlined in Schedule H.
ORDER PROCESSING AND FULFILLMENT - Distributor will provide COREL the Order
Processing and Fulfillment Services outlined in Schedule H at no charge.
PAYMENT PROCESSING - Distributor will provide COREL the Payment Processing
services outlined in Schedule H at no charge.
PERFORMANCE MEASUREMENT - Distributor will provide the Performance Measurement
services outlined in Schedule H at no charge.
CUSTOMER SERVICE - Distributor shall provide Customer with the customer service
outlined in Schedule R at no charge to COREL.
MAINTENANCE TOOLS - Distributor will provide COREL access to use the software
tools to maintain the Store at no charge as outlined in Section 7 of Schedule H.
HOSTING - Distributor will provide COREL hosting services outlined in Schedule H
at no charge.
USABILITY SERVICES - Distributor will provide COREL the Usability Services
described in Schedule H at no charge to COREL at times to be mutually agreed
upon by the parties, but in no event more frequently than once in any three (3)
month period. Distributor's staff of usability, documentation, and design
professionals can provide development teams to work with COREL to select the
right methodology for COREL's particular needs, based on COREL's usability
requirements and where COREL is in the product development cycle. Distributor's
customers would participate in the actual generation of the study. Services
range from simpler usability reviews to complete competitive analysis.
Deliverables can be in report form or even video tape format.
ACCOUNT MANAGEMENT - Distributor will provide COREL, at no charge, a dedicated
Account Manager. The Account Manager shall be responsible for managing external
communications regarding the entire project and shall act as the liaison between
Distributor's team and COREL. Any and all contacts should go through the Account
Manager with the exception of technical requests that will go directly to the
Program Manager (discussed below). The Account Manager should always be kept
apprized of any issues. The Account Manager will assist COREL with any concerns
regarding the Distributor's performance.
<PAGE>
37
PROGRAM MANAGEMENT - Distributor will provide COREL a dedicated Program Manager
at no charge. The Program Manager shall be responsible for internal
communication with the project team. The Program Manager shall provide periodic
time lines and updates to COREL and the Account Manager as to the status of the
project.
ESD - ELECTRONIC SOFTWARE DELIVERY - Distributor will provide the ESD services
described in Schedule "H", Schedule "F", and Schedule "N" to COREL at no charge.
FREE DOWNLOADS - Distributor will provide, at no charge to COREL, free download
service to Customer for any promotional items such as software, content or
screen savers as approved by COREL.
COPY - Copy editing services relating to the Store and the sending of e-mail to
Customers shall be provided at no charge to COREL.
REPORTING - Distributor shall provide the reports as set out in Schedule "H",
Schedule "F", and Schedule "N" at no charge to COREL. Distributor can assist
COREL in monitoring store performance and to create actionable information.
Distributor can provide site statistics reporting including: the number of
visitors to your site, impressions per visitor, page views per visitor, exit
points, entry points and shopping behavior. Detailed analysis helps to evolve
your site creative, expand areas of interest, and merchandise according to what
types of products are selling, and test new products prior to large inventory
commitments. Such reporting assistance provided by Distributor shall also be
provided at no charge to COREL.
The following services are available to COREL at an amount agreed upon between
the parties:
HAGGIN GROUP SERVICES
Haggin Group operates on a project basis. For specific pricing information,
Corel will need to obtain a custom quotation for the following Haggin Group
services. Haggin Group will meet with COREL to provide design review services at
times to be mutually agreed upon by the parties, but in no event more frequently
than once in any three month period. Such services offered by Haggin.com include
the following:
DESIGN AND CONTENT DEVELOPMENT. INCLUDES:
PHOTOGRAPHY
IMAGE COMPRESSION
COPY
ANIMATION
VIDEO/AUDIO
MARKETING AND ADVERTISING. INCLUDES:
MEDIA PLANNING
BANNER CREATIVE
ADVERTISING ANALYSIS
E-MAIL PROMOTIONS
SEARCH ENGINE REGISTRATION
SEASONAL CENTERS
PROMOTIONAL PACKAGES AND FEATURE PROGRAMS
SPONSORSHIP PROGRAM
<PAGE>
38
SCHEDULE "L"
DESIGNATED PROJECT TEAM
<TABLE>
<CAPTION>
DEVELOPMENT TEAM ASSIGNMENT
<S> <C>
1) Phil Hadviger DBE Full-time until June 15 (Full-time replacement after May 15)
2) Vince Tanakas Verity Full-time until June 15
3) Richard Brunson UI Full-time until May 15 (Full-time replacement after May 15)
4) Brian Carnes UI Full-time until June 15
5) Bob F. Data Full-time until May 30
6) Scott Oyler C++ Full-time until May 15
7) John Hubbard API Full-time until May 30
8) Dominick Dev. Lead Full-time until May 30
9) Paul UI Full-time until May 30
10) Sanjeev Process Full-time until May 30 (Full-time replacement after May 15)
11) Amar Process Full-time until May 30
12) Boris Process / Check-out Full-time until May 30
13) Raphael Component Integration Full-time until May 30
DEDICATED TEAM AFTER LAUNCH (VERSION 1.1) - SPECIFIC INDIVIDUALS TBD.
Glenn Godden* VP of Strategic Business Unit Full-time on-going basis
Program Manager
Account Manager
Development engineer
Development engineer
MANAGEMENT TEAM
1) Glenn Godden* VP of Strategic Business Unit Full-time on-going basis
2) Brian Rose Sr. Director Business Development Part-time on-going basis
3) Ranjit Mulgaonkar VP Professional Services Part-time on-going basis
4) Chris Noble VP Products Part-time on-going basis
IT
Tuan Luynh 7X24 the IT team (includes others)
QA / USABILITY
Greg O As needed on-going
QA1
QA2
QA3
Eileen Rendon Usability study as needed
Raina Brody Usability study as needed
* Project Team Leader
OPERATIONS
Gary Bunker As needed (7X24)
LEGAL
- -------------------------
<PAGE>
39
Pete Wenzel As needed
FINANCE
Bryan Sherman Replacement part-time on-going basis
</TABLE>
The parties will mutually agree as to the number of dedicated individuals
involved on the project. Distributor will promptly inform Corel of any personnel
changes above and will consult with Corel prior to making any changes in the
Project Team Leader. Distributor agrees that COREL shall have a web monitor
available 24 hours a day, seven days a week, at (206) 223-2160 or such other
designated telephone number agreed to by the parties. Distributor further agrees
that COREL shall have the right to request changes to the COREL designated team
members and that it shall make all reasonable changes requested by COREL.
<PAGE>
40
SCHEDULE "M"
COREL CORPORATION
PRIVACY POLICY
At Corel we recognize that our customers are concerned about the privacy of the
information that we collect from our customers and our plans for using this
information. Our goal is to ensure that we only gather information about you
that you want us to have and that we only use this information after we have
told you how it will be used and have given you the opportunity to consent to
its use.
The following is an overview of why Corel collects customer information; what we
do with Customer information; and how you can control access to and distribution
of the information that you provide to Corel.
Why We Collect Customer Information
One of the ways Corel ensures that it is developing products that meet the needs
of our customers is to gather information directly from them. We like to know
who are customers are; what types of products they use, and what their product
expectations are. Through market research projects, customer feedback and
registration we are able to explore what is or is not attractive about our
products.
Sometimes we are required by law to request certain information, for example,
when you enter a contest; purchase products from Corel e Store-TM- or download
files, patches or fixes from our web or FTP sites.
As well, we require user information to keep our records up to date and to be
able to properly identify you, such as when you register a product on-line or
request technical support.
It is always our objective to collect only that information necessary for us to
achieve the purposes for which we are collecting information. For example, we
will not ask you for credit card information unless you are purchasing a product
or service from us. Whenever we ask for information we will also inform you as
to what use we will make of it before or at the time we collect the information
and you will be offered the choice as to whether or not you wish to provide
information to us. For example, if we are using the information solely for
marketing and research purposes we will advise you of that.
Please note that in some instances such as product registration and purchases,
there is some information that we are required to collect to enable us to
accurately register or support your product and we may not be able to allow you
to register or purchase products without that information. Corel may also be
required by law to disclose certain information. For example, the geographical
location of customers who download products containing high-level encryption.
Corel Customer Lists and Third Party Co-Marketing Activities
From time to time we undertake co-marketing arrangements with third parties who
offer similar products or services. As a registered Corel customer, you may
receive news and special offers from these third parties. In those instances
where your name and contact information will be placed on a list that may be
made available to a third party, we will advise you of that and offer you the
opportunity to have your name marked "private" in our database. If your name is
marked "private", we will not use your name for marketing or e-mail campaigns
and will not provide your name to any third parties.
Marking Your Name 'Private' After You Register With Us
If you choose to register with us, and then later decide that you no longer want
to receive email or information from Corel, or you no longer wish to have your
name provided to third parties, you may contact us at:
Customer Service
Corel Corporation,
<PAGE>
41
1600 Carling Avenue
Ottawa, Ontario Canada K1Z 8R7
Telephone: (001) 613 728-8200
Fax: (001) 613 761-9176
Attention: Privacy
Additions, corrections or other changes to customer information will usually
take 4 to 6 weeks.
Deleting Your Name From Our Customer List Entirely
If you decide that you no longer wish to have your name on our Customer list at
all, please contact us at the address above. Deletion of your information will
usually take 4 to 6 weeks.
Please note that if you are a registered Corel product user and you delete
your name from our customer list, you will no longer receive e-mail or other
notices regarding technical support of your product, such as notices of
patches and fixes available.
Updating or Correcting Your Information
If your information changes or you become aware that there is an error in your
information, please contact us at the address above. Correction or updates of
your information will usually take 4 to 6 weeks.
Sometimes It Happens
From time to time there may be instances where a customer's designation as
"private" is inadvertently removed and the customer may receive e-mail or other
marketing materials from Corel. If you think this may have happened to you
please let us know by contacting Customer Service and we will correct the
problem. Please keep in mind that if you have submitted a request to have your
name marked private or removed from our Customer List or you have requested that
your information be updated or corrected, there is a 4 to 6 week period during
which you may receive information from us while we are updating or deleting your
information.
Security of Your Information When Purchasing Products from Corel e Store-TM-
Corel offers both electronic and shrinkwrap products on line from Corel e
Store-TM-.
Corel e Store uses Secure Socket Layer (SSL) Protocol for browsers that
support 128-bit encryption (such as Netscape-Registered Trademark- Navigator
version 2.0 or greater, or Microsoft Internet Explorer version 2.1 or
greater). SSL encrypts information as it travels between the customer and
Corel so that your purchase information cannot be read as it travels over the
Internet.
If you are not using a browser which adheres to SSL Protocol and does not
support 128 bit encryption, the information you provide may not be secure and we
recommend that you contact Corel directly by phone to order products.
A change in the URL from http:// to https:// notifies you that you are using
SSL. If the URL on a page asking you to provide personal information remains as
http://, beware: this may result in an insecure transmission.
When processing credit card purchases over the Internet, our third party service
provider will verify your credit card information with the appropriate financial
institution prior to processing your purchase. Our third party service provider
will not supply this information to Corel or to any other third party.
Links to Other Sites
Corel.com offers links to many other web sites. Please note that we are not
affiliated with these sites and are not responsible for their privacy practices
or policies.
<PAGE>
42
SCHEDULE "N"
TECHNICAL ARCHITECTURE OF THE STORE
WEBMONITOR PROCEDURES
Distributor's Web Monitor shall perform the following tasks:
[ * ]
ESCALATION PROCEDURE
If the Store goes down because of any of the following:
- - Cannot establish connection
- - Connection times out
- - Any type of VBScript or ODBC/OLE DB error
- - Any HTTP error (ie: HTTP Server Too Busy)
- - Any IWProcessserver error
The Web Monitor shall follow this procedure:
[ * ]
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
43
[ * ]
SITE SECURITY
[ * ]
ESD WRAPPING TECHNOLOGY
Wrappers consist of two components: a client builder and a corresponding ESD
server. The client builder is used to encrypt digital content using a symmetric
key algorithm similar to DES or RC5. After the wrapping process, the digital
content is unusable. In the commonly used "pay after you download" model, the
wrapped content has attached to it a small executable that communicates with the
ESD server. This executable obtains payment information from the client and then
sends it to the ESD server. The ESD server validates the payment information and
then transmits the secret key back to the executing program, which then unwraps
the digital content. The security of a wrapper depends on the following:
- The size of the symmetric encryption key used to wrap digital content.
- The key exchange algorithm used in exchanging symmetric secret keys.
Wrappers do not require source code modification. Instead, executable
content/software can be wrapped using a client builder application. Wrappers are
also extremely simple to implement since they utilize standard
encryption/decryption algorithms.
[ * ]
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
PREVIEW.SHOP.COREL.COM
<TABLE>
<S><C>
[ * ]
</TABLE>
* CONFIDENTIAL TREATMENT REQUESTED.
<PAGE>
44
SCHEDULE "O"
WAIVER OF MORAL RIGHTS
I, ____________________, an individual residing at ____________________________,
and the author of the rights in the Web Pages, hereby irrevocably waive all my
moral rights in the Web Pages, in favour of Corel Corporation, the owner of the
copyright in the Web Pages. This waiver includes, without limitation, a waiver
of my right to be associated by name with the Web Pages, the right to restrain
the distortion, mutilation or modification of the Web Pages, the right to
restrain the use of the Web Pages in association with a product, service, cause
or institution and the right to exercise any remedies for breach of such moral
rights, whether by way of injunction, damages, accounts, delivery up or any
further or other remedies that are or may be conferred by law for the
infringement of a right. This waiver shall operate as a waiver of all my moral
rights or similar rights vested in me pursuant to any legislation worldwide.
Dated this _______ day of _____________, 1999.
---------------------------------
author
---------------------------------
witness
<PAGE>
45
SCHEDULE "P"
DISTRIBUTOR PRODUCTS
<PAGE>
<TABLE>
<CAPTION>
STOREID SEDATE ORDNO QTY ITEM
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4 04/20/1999 198153 101 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20
100004 04/23/1999 198153 99 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20
100004 04/27/1999 198153 99 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20
100004 04/28/1999 198153 99 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20*
100004 04/29/1999 198153 99 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20
100004 04/06/1999 448405 36 VIKING - 8MB MEM MODULE (70NS)-OEM EQUIV # 141685-001
100004 04/06/1999 032272 32 WEB / SNMP MNGT CARD 10BASET ETH AP9606
262 04/15/1999 ?51626A 20 DESKJET DESKWRITER 400 500 BLK CART.
100004 04/01/1999 24166 15 1PK DL 4MM 120M DAT TAPE CART
100004 04/05/1999 78345 15 MICROSAVER CABLE & LOCK MASTER-KEYED * DIRECT SHIP ONLY
100004 04/06/1999 166307 15 CD JEWEL CASES - 10-PK
695 04/01/1999 ?CE100BTXSX0 12 100BTX TO 100BSX CONVRT MOD 1RJ45 AUTO LTD RANGE
4 03/08/1999 54381 10 3PIN CHASSIS FAN FOR TX MBD H/W MONITORING
416 04/08/1999 115916 10 500SHT DRWR OPTRA S 1250 1255 1625 1855 2455
677 04/06/1999 182769 10 DIMAGE QUEST (NIMH) CHARGER W/4 RECHARGEABLE BATTERIES
100004 03/01/1999 64569 10 TELECHECK MINI-TESTER
100004 03/24/1999 202552 10 BARBIE TALK WITH ME CD WIN/W95
100004 04/01/1999 89530 10 MO DISK CART LIMDOW 5.25 512 2.6GB
100004 04/13/1999 183107 10 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20
100004 04/20/1999 252952 10 PALM V 2MB PDA W/HOTSYNC CRADLE
100004 04/22/1999 620701 10 USB CONNECTOR FOR TYAN SYSTEM BOARDS
100004 04/30/1999 198153 10 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE - DESKJET 20
100004 04/30/1999 262049 8 EPSON STYLUS COLOR 440, 640, 740 - TRI-COLOR
207 04/14/1999 215237 7 BARBIE TALK WITH ME CD WIN/W95
100004 03/24/1999 219265 7 CD R RECORDABLE MEDIA 10 PACK
100004 04/01/1999 452223 7 BARBIE TALK WITH ME CD WIN/W95
100004 05/05/1999 256976 7 PRO 7RCPTL SURPRO 85V LT LIFEWTY $10K INS
160 04/01/1999 804552 6 SLINGO CE CD W9X/WCE
209 04/22/1999 252951 6 PALM IIIX 4MB PDA W/ HOTSYNC CRADLE
100004 03/15/1999 ?C-370 6 GAMING STEREO HEADSET/BOOM MIC
100004 03/18/1999 150814 6 NETGEAR FA310TX FETH PCI ADPT
100004 03/26/1999 198153 6 HEWLETT-PACKARD 51626A PRINTER INKJET CARTRIDGE
100004 04/06/1999 046622 6 IRON ON TRANSFER FOR MICRO DRY
100004 04/27/1999 262049 6 25PK CDR MEDIA 74MIN 650MB
<PAGE>
4 04/12/1999 406917 5 ULTRASTAR 9LP 9.1GB ULTRA SCSI HD 7200RPM
323 04/06/1999 20380 5 NU-FORM 105-KEY ERGO KEYBOARD AT W/ PS/2 ADAPTER
708 04/13/1999 VIKII7317 5 VIKING - 32MB SO DIMM
100004 03/03/1999 104342 5 RETAIL KIT 1.44MB INT FD PS/2 WHITE BEZEL
100004 03/15/1999 135978 5 VIKING - 2MB 5 VOLT FLASH ATA CARD - OEM EQUIV #
100004 03/22/1999 166124 5 IBM PREFERRED KEYBOARD PEARL WHITE
100004 03/26/1999 205205 5 CALENDAR CREATOR DLX V6.0 CD W9X/NT
100004 04/06/1999 106337 5 7 CDR RECORDER MEDIA AND 3 CD-RW REWRITABLE MEDIA COMBO PA
100004 04/06/1999 166309 5 CD JEWEL CASES - 10-PK
100004 04/06/1999 211446 5 ETH FETH 1BTX MOD FOR ES2027 AND EM2527
4 03/08/1999 ?NPF-550 4 BATTERY FOR MVC-FD5, MVC-FD7, AND DKC-ID1PRO CAMERA
4 04/01/1999 183059 4 DVD 5.2GB DOUBLE-SIDED REWRITABLE CARTRIDGE (TYPE1) ME
188 04/22/1999 183059 4 DVD 5.2GB DOUBLE-SIDED REWRITABLE CARTRIDGE (TYPE1) ME
207 03/23/1999 82125 4 BARBIE TALK WITH ME CD WIN/W95
209 04/22/1999 252951 4 PALM IIIX 4MB PDA W/ HOTSYNC CRADLE
222 03/10/1999 143163 4 TWIN COOLING FANS 3.5 HD IN 5.25 DRIVEBAY
289 03/18/1999 222197 4 VIKING - 16MB MEM MODULE
416 04/06/1999 115940 4 OPTRA S 2455N 24PPM LASERPR 16MB 1200DPI ETH
591 03/02/1999 197520 4 FLAT PNL 15IN VIS 1024X7 DIGITAL STEALTH GRAY
591 03/03/1999 46527 4 8MB 2X36 60NS 72PIN PARITY GOLD
100004 03/01/1999 132231 4 CYBER PARALLEL DUAL PCI, 2-DB25 IEEE1284 ECP/EPP, IRQ SHARIN
100004 03/01/1999 25446 4 NETGEAR EN108TP ETH 10BT 8PT HUB W/O AUI/BNC
100004 03/15/1999 98090 4 RANGELAN2 ISA WIRELESS ADPTR MODEL 7100
100004 03/16/1999 7944 4 BATT PACK HIGH CAPACITY - LIBRETTO
100004 03/19/1999 124842 4 PRECISE MOUSING SURFACE MOUSE PAD BLUE
100004 03/22/1999 104320 4 12X/4X RECORDER SCSI TRAY INT W/CD-STOMPER RETAIL PK W/O CTL
100004 03/22/1999 104320 4 17IN/15.7V 25MM 1600X1280 60HZ 78D MPRII DDC OSD DIAMONDTRON
100004 03/24/1999 124846 4 PRECISE MOUSING SURFACE MOUSE PAD PURPLE
100004 03/25/1999 10855 4 HL 1040 1050 1060 1070 TONER CART
100004 04/01/1999 11072 4 32MB ECC PROSIGNIA 200 5/166
100004 04/01/1999 11072 4 4.55GB SCSI ULTRA WIDE 9.5MS 3.5LP 7200RPM MEDALIST PRO
100004 04/01/1999 11072 4 64MB ECC PROSIGNIA 200 5/166
100004 04/01/1999 11072 4 SCORPION DAT 8GB INT TAPE DRIVE 5.25HH 1MB
100004 04/01/1999 200632 4 BAY-COOL HARD DRIVE COOLER
100004 04/01/1999 279538 4 3PIN FAN FOR CELERON
<PAGE>
100004 04/05/1999 781180 4 VIKING-256MB ECC REGISTERED DIMM-OEM EQUIV # 313616-B21
100004 04/05/1999 VIKIH4137 4 VIKING-16MB EDO MEM MODULE-OEM EQUIV #C4137A
100004 04/06/1999 211675 4 3PK TR3 TRAVAN 3.2GB MINICART TAPE CART
100004 04/14/1999 256336 4 RARE VERMONT MAPLE SYRUP
100004 04/15/1999 31454 4 VP STANDARD PRINT PACK 50 SHEETS + RIBBON
100004 04/16/1999 138712 4 4.55GB SCSI ULTRA 3.5LP 9.5MS 7200RPM MEDALIST PRO
100004 04/28/1999 164329 4 MACINTOSH 64MB DIMM 60NS 5V
100004 04/30/1999 150557 4 MULTIMODEM II EXT 9.6 2LL D/F ASYNC SYNC MODEM
100004 04/30/1999 262049 4 EPSON STYLUS COLOR 740-BLACK
100004 05/03/1999 264102 4 VIKING-128MB ECC DIMM COMPAQ EQUIV-271909-001
03/03/1999 130256 3 DC260 COL DIGTLCAM PC 1536X1024 8MB 2IN LCD
4 03/08/1999 192961 3 PRINTER INK CARTIDGE FOR MD-SERIES BLACK
4 04/14/1999 183059 3 DVD 5.2GB DOUBLE-SIDED REWRITABLE CARTIDGE (TYPE1) ME
4 04/22/1999 3203 3 BX-3 INK CART FAXPHONE B640 B540 B550 C2500
207 04/05/1999 VIKISSFDC3/8 3 VIKING-8MB SMART MEDIA-3.3 VOLT-
239 04/05/1999 155648 3 CD STOMPER LABEL REFILLS
239 04/05/1999 155648 3 CD STOMPER PRO CD JEWEL CASE INSERTS REFILL
312 04/02/1999 187243 3 SYMPHONY CORDLESS ISA CARD PNP
312 04/05/1999 187243 3 SYMPHONY CORDLESS ISA CARD PNP
574 04/01/1999 149941 3 GRAPHICS STUDIO PICTURE IT V3.0 CD W9X/NT
591 03/12/1999 13358 3 COLOR JETPRINTER 3000 600X300DPI NT, OS/2 UNIX
645 04/13/1999 262891 3 HS01 HEADSET SINGLE EAR W/MICROPHONE
654 04/22/1999 261844 3 IMATION SUPERDISK FOR IMAC
100004 03/01/1999 132231 3 QUICKEN HOME & BUSINESS 99 SINGLE 1-DOC
100004 03/01/1999 23684 3 SINGLE DITTO MAX 10GB TAPE CART IN POS
100004 03/01/1999 69986 3 PHOTO PAPER LETTER SIZE 20 SHEETS
100004 03/02/1999 193464 3 ZIP DISK 100MB IBM PFM
100004 03/03/1999 198726 3 PHOTOSMART GLOSS 4X6 PHOTO PAP
100004 03/10/1999 187243 3 SYMPHONY CORDLESS ISA CARD PNP
100004 03/12/1999 163892 3 MVC-FD71 DIGTL MAVICA FD CAM
100004 03/12/1999 21456 3 64MB SDRAM DIMM
100004 03/12/1999 21456 3 PCMCIA 2-SLOT ISA ADAPTER FOR ADDING PCMCIA TO PC TYPE1-3 SW
100004 03/15/1999 ?7MXLA300200 3 Maxpowr G3-L2 300Mhz 750 With 1Mb Backside Cache At 200Mhz
100004 03/15/1999 66130 3 SNAZZI LAV-8000 VIDEO/AUDIO EDIT INT PCI MPEG1
100004 03/16/1999 136000 3 VIKING - 8MB SMART MEDIA-3.3 VOLT-
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
100004 03/16/1999 183059 3 5.2GB DBL SIDED REWRTABL CART
100004 03/17/1999 49 3 PHOTOSMART POSTCARD 4 x 6 1-SIDE
100004 03/18/1999 101718 3 BATT MAVICA
100004 03/18/1999 141498 3 PATCH CABLE 25FT 4PR RJ45 BLU LEVEL 5
100004 03/18/1999 146649 3 ULTRASTAR 9ES 4.5GB ULTRA 2 SCSI 7200RPM 68 PIN LP
100004 03/19/1999 10855 3 HL 1040 1050 1060 1070 TONER CART
100004 03/19/1999 124842 3 PRECISE MOUSING SURFACE MOUSE PAD GREY
100004 03/19/1999 124842 3 PRECISE MOUSING SURFACE MOUSE PAD PURPLE
100004 03/19/1999 258144 3 ALTON BBNS MTW MATX S7 CD FDD HDMR 3DAGP VID SND
100004 03/22/1999 138713 3 MEDALIST PRO 4.55 ULTRA WIDE SCSI 7200RPM 3YR WTY
100004 03/22/1999 59695 3 6FT SCSI CABLE DB68 VHDCI M MICRO DB68M
100004 03/24/1999 131546 3 7FT PATCH CABLE ORANGE FAST CAT 5
100004 03/24/1999 131546 3 7FT PATCH CABLE WHT FAST CAT 5
100004 03/25/1999 224484 3 HP CDRW REWRITABLE MEDIA 1PK 4X
100004 04/01/1999 182769 3 8Mb Smartmedia Card, 3.3 Volt
100004 04/01/1999 203910 3 TRANSPARENCIES FOR MICRO DRY PRINTER 30 FILMS
100004 04/01/1999 203910 3 VPHOTO PRINT FILM 8.5X11 (20 SHEETS)
100004 04/01/1999 23119 3 99 KEY KYBD W/4-BUTTON TRACKBALL
100004 04/06/1999 106337 3 7 CDR RECORDER MEDIA AND 3 CD-RW REWRITABLE MEDIA COMBO PA
100004 04/06/1999 211267 3 GAMEPAD PRO USB MARCH 1999
100004 04/06/1999 256161 3 1PK TR4 TRAVAN CART
100004 04/08/1999 113345 3 640MB REWRITABLE OPTICAL MEDIA 5PK UNFORMATTED
100004 04/08/1999 182769 3 DIMAGE QUEST (NIMH) CHARGER W/4 RECHARGEABLE BATTERIES
100004 04/08/1999 664093 3 CABLE USB DUAL PORT MBD TYPE A 10PIN SER EXT
100004 04/13/1999 54383 3 IRDA CONNECTOR
100004 04/14/1999 18049 3 MULTIMODEM 56K/ITU GERMAN EXT D/F V.34 MODEM V.90
100004 04/14/1999 200142 3 DEXXA MOUSE 2-BTN PS/2 WIN 3.1/95
100004 04/20/1999 104552 3 AAVID PENTIUM II CPU SMART FAN
100004 04/20/1999 192960 3 RAGE FURY AGP2X 32MB SDRM 19X12 3D GRAPHACCEL
100004 04/20/1999 252952 3 PALM V 2MB PDA W/HOTSYNC CRADLE
100004 04/22/1999 192681 3 USB HUB TO SERIAL PORT CONVERTER
100004 04/22/1999 938018 3 USR 56K V.90 ISA D/F MODEM W/JUMPERS
100004 04/26/1999 97856 3 FASTTRAK RAID CONTROLLER FOR EIDE DRVS RETAIL BOX
100004 05/04/1999 259099 3 ADR 3PK 30GB ADR CART FOR DIGITAL DRV S
03/03/1999 209868 2 16MB SMARTMEDIA CARD(3.3)VOLT
<PAGE>
<S> <C> <C> <C> <C>
03/03/1999 211446 2 RIO PMP 300 PRTBL MUSIC PLAYER 32MB
03/09/1999 149967 2 VISUAL STUDIO ENT V6.0 CD W9X/NT
04/08/1999 219265 2 CD R RECORDABLE MEDIA 10 PACK
1 04/23/1999 193989 2 TRISTAR HEADSET W/NOISE CANCELING MICROPHONE & VISTA AM
4 03/04/1999 105595 2 Q71 OPTIQUEST 17IN 16VIS .27MM 12X10 FST COLMON
4 03/09/1999 198587 2 SPECTRA 2500 16MB AGP NVIDA RIVA TNT PROCESSOR 2D/3D PERF
4 03/16/1999 185393 2 ATX MBD PII 440BX 4PCI 2ISA 1AGP 4DM LM78
4 03/16/1999 185393 2 CASE ATX MT MID 235W 3 5.25 4 3.5 BGE CE FCC
4 03/24/1999 792803 2 CIVILIZATION II MULTIPLAYER GOLD
4 04/01/1999 187243 2 SYMPHONY CORDLESS ISA CARD
4 04/21/1999 164337 2 64MB MUSHKIN PC100 SDRAM 8X64
4 04/21/1999 164337 2 BAT MBD PENT MVP3 4PCI 4ISA 1AGP 2SM 3DM
4 04/22/1999 3203 2 STD COL INK CART4076 150C 1020 2030 2050 2055 1000
207 04/26/1999 266427 2 VIKING - 4MB MEMORY MODULE ZENITH EQUIV - ME-100
209 04/07/1999 164319 2 16MB MUSHKIN 72PIN SIMM 4X32 FAST PAGE MODE (NON PARITY)
209 04/12/1999 142588 2 46MM PAP CART FOR DIGTLCAM PRINTER
209 04/22/1999 252951 2 PALM IIIX 4MB PDA W/ HOTSYNC CRADLE
209 04/29/1999 238767 2 64MB MUSHKIN CAS2 PC100 SDRAM
209 05/03/1999 252951 2 PALM IIIX 4MB PDA W/ HOTSYNC CRADLE
213 04/02/1999 202135 2 SOUTH PARK
213 04/06/1999 182769 2 DIMAGE QUEST (NIMH) CHARGER W/4 RECHARGEABLE BATTERIES
222 03/02/1999 195284 2 128MB MODULE FOR HP OMNIBOOK 7100 SERIES
305 03/01/1999 97313 2 CD STOMPER LABEL REFILLS
311 03/01/1999 108679 2 4 COLOR INK CARTRIDGE PACK FOR MD-1300, MD-2300, MD-5000
337 04/26/1999 179859 2 ETHERPOWER PCI COMBO
416 04/06/1999 115940 2 OPTRA S 2455N 24PPM LASERPR 16MB 1200DPI ETH
416 04/13/1999 115940 2 OPTRA S 2455N 24PPM LASERPR 16MB 1200DPI ETH
418 03/18/1999 130256 2 DC260 COL DIGTLCAM PC 1536X1024 8MB 2IN LCD
418 04/13/1999 16252 2 64MB COMPAQ PROF. WORKSTA 6000 6300 5100 8001 ARMA
519 03/01/1999 108544 2 40X INT ATAPI CD-ROM 128KB 75MS 8900RPM
519 03/01/1999 108544 2 56K PCI CONTROLLER INTERNAL FAX MODEM WITH VOICE/SPEAKER PHO
519 03/01/1999 108544 2 CASE BGE ATX MID 250W 4 5.25 3 3.5 W/FDD FCC
519 03/01/1999 108544 2 DYNAMIC TNT NVIDIA RIVA TNT 16MB SDRAM AGP WHT BO
519 03/01/1999 108544 2 INTERNET WIN95 KEYBOARD W/ 17 INTERNET BUTTONS AND WRIST RES
519 03/01/1999 108544 2 NETMOUSE PRO 3BTN PS/2 400DPI
<PAGE>
<S> <C> <C> <C> <C>
575 03/01/1999 ?100-416067 2 RAGE MAGNUM 32MB AGP *WHITE BOX*128BIT BUILT-IN HARDWAREDVD
581 04/08/1999 331005 2 WEBRACER PS2/SER MOUSE W/SCROLL PAD 8FT CORD
591 04/01/1999 129434 2 64MB MUSHKIN CAS2 PC100 SDRAM
591 04/01/1999 129434 2 BLASTER CD 48X INT CD-ROM IDE
591 04/01/1999 129434 2 CASE ATX MT MID 235W 3 5.25 4 3.5 BGE CE FCC
591 04/01/1999 129434 2 DESKSTAR 10GP 10.1GB UMDA HD 5400RPM 3.5LP
591 04/01/1999 258318 2 EXPERT 9.1GB UDMA ATA /66 7200RPM HD 3.5IN 8.5MS
591 04/06/1999 406975 2 CD R RECORDABLE MEDIA 10 PACK
591 04/29/1999 125417 2 BOXED CELERON 400MHZ CPU W/ 128K IN PPGA PACKAGE
596 03/15/1999 ?60011 2 Black Ink Cartridge For Epson
599 03/22/1999 195320 2 ULTRASTAR 9ES 9.1GB ULTRA SCSI HD 7200RPM
619 03/22/1999 55081 2 GLOSSY PHOTO QUALITY BUSINESS CARDS FOR INK JET PRINTERS
634 03/24/1999 141131 2 CAVIAR 6.4GB ULTRA EIDE HD TWO-PLATTER
637 04/06/1999 181398 2 PARASHARE 95 STARTER KIT PC & PRNTR ADPTR,CBLS,PWR SUP,S
638 04/16/1999 083642 2 RAGE FURY AGP2X 32MB SDRM 19X12 3D GRAPHACCEL
645 04/13/1999 262891 2 HIGH OUTPUT ELECTRIC MICROPHONE
654 03/01/1999 22697 2 UNIV POWER SUPPLY FOR JAZ DRIVE
654 03/25/1999 135970 2 VIKING - COMPACT FLASH ADAPTER
654 04/01/1999 452223 2 USB FOR EFA MBD
654 04/06/1999 203789 2 TDK COMPACT FLASH MEMORY CARD 32MB
654 04/08/1999 135964 2 VIKING - 32MB COMPACT FLASH-OEM EQUIV #
672 03/26/1999 ?000550A 2 Artec Am 12S PCI SCSI Flatbed Scanner
685 03/18/1999 164767 2 32BIT PCI IO HIGH SPEED 1PORT IEE 1284EPP SPP PS2
695 04/01/1999 ?CE100BTXSX0 2 16Slot Convrt Chassis Opt Red Pwr SNMP
695 04/01/1999 ?CE100BTXSX0 2 Opt Redun Pwr Supply For Convrt Chassis
695 04/01/1999 ?CE100BTXSX0 2 Opt SNMP Mgmt Mode 1Db-9 1RJ45
100004 03/01/1999 ?6710051201 2 E-CAM VIDEO E-MAIL CAMERA SNGLE FULL MOTION,COLOR VIDEO,E-MA
100004 03/01/1999 141319 2 15IN/13.8V 28MM 1024X768 60HZ 5E EPA DIGITAL
100004 03/01/1999 149684 2 VISUAL C++ PRO V6.0 CD W9X/NT
100004 03/01/1999 160196 2 ACK-501-50E CBL KT(98) EXT CABL CONVERTOR ULTRA SCSI AND 2 I
100004 03/01/1999 160196 2 IEEE 1284 A-B PAR CABLE GOLD 6FT DC25M TO CENT36M DBLSH TP P
100004 03/01/1999 180266 2 EPSON 400/600/800/1520 STYLUS PRINTER INKJET CARTRIDGE - COL
100004 03/01/1999 180266 2 EPSON 800/1520 STYLUS PRINTER INKJET CARTRIDGE - BLACK
100004 03/01/1999 198002 2 MULTIVOIP 2 VOICE CHANNEL VOICE OVER IP G.723
100004 03/01/1999 211268 2 AVA-2906 SCSI ADAPTER KIT 32BIT PCI FSCS12
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
100004 03/01/1999 25028 2 LWP LAN WORKPLACE PRO UPG 10U TO 10U
- -----------------------------------------------------------------------------------------------------------------
100004 03/02/1999 129452 2 10.10GB EIDE ULTRA ATA/33 3.5LP 7200RPM 9.5MS DESKSTAR GXP
- -----------------------------------------------------------------------------------------------------------------
100004 03/02/1999 79831 2 PHOTO PRINT CART 3200 5700 7000 JETPRINTER
- -----------------------------------------------------------------------------------------------------------------
100004 03/03/1999 104342 2 EXPRESS 3D 8MB AGP GRAPHICS CARD
- -----------------------------------------------------------------------------------------------------------------
100004 03/03/1999 136000 2 INTW SAA 3.0 UPG 250U FRM V2.2 250U ENG
- -----------------------------------------------------------------------------------------------------------------
100004 03/03/1999 160303 2 LASERJET 3100XI MLTFUNC PRINT/FAX/COPY/SCAN
- -----------------------------------------------------------------------------------------------------------------
100004 03/03/1999 198726 2 PHOTOSMART GLOSS A SIZE PHOTO PAP
- -----------------------------------------------------------------------------------------------------------------
100004 03/04/1999 217500 2 16MB SMARTMEDIA CARD FITS D220L,D320,D400L,D500L,D620L,D1
- -----------------------------------------------------------------------------------------------------------------
100004 03/10/1999 147598 2 HIGH YIELD BLK INK CART OPTRA COLOR 45
- -----------------------------------------------------------------------------------------------------------------
100004 03/10/1999 147598 2 HIGH YIELD COL INK CART OPTRA COLOR 45
- -----------------------------------------------------------------------------------------------------------------
100004 03/10/1999 173428 2 AC ADPTR PDR-ACM1A
- -----------------------------------------------------------------------------------------------------------------
100004 03/10/1999 226140 2 STYLUS COLOR 900 BLK INK CART
- -----------------------------------------------------------------------------------------------------------------
100004 03/11/1999 135198 2 PDRN-SM8
- -----------------------------------------------------------------------------------------------------------------
100004 03/11/1999 238767 2 64MB MUSHKIN CAS2 PC100 SDRAM
- -----------------------------------------------------------------------------------------------------------------
100004 03/12/1999 193831 2 ACCELERAID 200 NO SCSI IF SCSI TO PCI RAID CONTR
- -----------------------------------------------------------------------------------------------------------------
100004 03/12/1999 224431 2 32MB EDO DIMM MOD GATEWAY P5 EDO 5/133;5/166;5/200
- -----------------------------------------------------------------------------------------------------------------
100004 03/15/1999 141131 2 TR3 BOLT CART 5-10 GB
- -----------------------------------------------------------------------------------------------------------------
100004 03/15/1999 185077 2 RAGE FURY AGP2X 32MB SDRM 19X12 3D GRAPHACCEL
- -----------------------------------------------------------------------------------------------------------------
100004 03/16/1999 129452 2 DESKSTAR 10GXP 10.1GB UDMA 7200RPM HD 3.5LP
- -----------------------------------------------------------------------------------------------------------------
100004 03/16/1999 209733 2 LANDWARE GOTYPE! KB FOR 3COM PALM
- -----------------------------------------------------------------------------------------------------------------
100004 03/16/1999 217500 2 M-16PU SMARTMEDIA
- -----------------------------------------------------------------------------------------------------------------
100004 03/16/1999 222866 2 INFOVIEW VIDEO CONFENC'G
- -----------------------------------------------------------------------------------------------------------------
100004 03/16/1999 7944 2 BATT CHARGER LIBRETTO
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 125218 2 168 Pin - 128Mb Ecc-100Mhz- Unbuffered- CI3
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 135996 2 VIKING - 2MB SMART MEDIA-3.3 VOLT-
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 182468 2 MARBLE MOUSE TRACKB 2BTN PS2/SER
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 188993 2 GAMEPAD PRO USB MARCH 1999
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 189163 2 DESKSTAR 10GP 10.1GB UDMA HD 5400RPM 3.5LP
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 252951 2 PALM IIIX 4MB PDA W/ HOTSYNC CRADLE
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 49 2 HP MATTE PHOTO PAP A-SIZE
- -----------------------------------------------------------------------------------------------------------------
100004 03/17/1999 49 2 PHOTOSMART GLOSS A SIZE PHOTO PAP
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 101718 2 8MB HP LASERJET 4P 4MP 6MP
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 117716 2 BLANK CHECKS TAN 3-UP CCC PERSONAL
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 139730 2 PDR SM16
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 147468 2 NIMH NICAD BATT CHRG W/ 4AA NIMH BATT
- -----------------------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 186172 2 FETH 5RJ45 SA HUB
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 203823 2 110CT 5/233 MMX 32MB 4.3GB 7.1FT W98
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 204977 2 WEBRACER PS2/SER MOUSE W/SCROLL PAD 8FT CORD
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 258343 2 PC-DVD ENCORE 5X/DXR3 VARPAK BROWN BOX
- -----------------------------------------------------------------------------------------------------------------
100004 03/18/1999 5408 2 UNI 24 24DBI DIR ANT FOR BREEZECOM D MODEL
- -----------------------------------------------------------------------------------------------------------------
100004 03/19/1999 146641 2 V.90 MODEM INTERNET KIT
- -----------------------------------------------------------------------------------------------------------------
100004 03/19/1999 180980 2 PC GAMEPAD PRO AND EA SPORTS MADDEN FOOTBALL '97 BUNDLE
- -----------------------------------------------------------------------------------------------------------------
100004 03/19/1999 203789 2 TDK COMPACT FLASH MEMORY CARD 32MB
- -----------------------------------------------------------------------------------------------------------------
100004 03/19/1999 218514 2 CASE ATX MT MID 235W 3 5.25 4 3.5 BGE CE FCC
- -----------------------------------------------------------------------------------------------------------------
100004 03/19/1999 238767 2 64MB MUSHKIN CAS2 PC100 SDRAM
- -----------------------------------------------------------------------------------------------------------------
100004 03/19/1999 31133 2 ZIP DISK 100MB IBM PFM
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 146357 2 WAVE LINK RF REMOTE TRANSMITTER/RECEIVER
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 146649 2 10/20GB TR5 INTERNAL IDE TAPE DRIVE
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 163388 2 NINO PREMIER TRAVELING CASE LEATHER CASE
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 187243 2 SYMPHONY CORDLESS ISA CARD PNP
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 191574 2 VIKING - 16MB EDO MEM MODULE-OEM EQUIV # C4137A
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 193466 2 48MB COMPACTFLASH FLCARD MEM
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 194467 2 IPC34080B 5BAY 4U HEIGHT 7 LONG RACKMOUNT ATX CHASSIS BLACK
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 209733 2 LANDWARE GOTYPE! KB FOR 3COM PALM
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 217642 2 17IN/16V 27MM 1280X1024 85HZ ULTRA 75B TCO92 OSD BLACK HOUSI
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 2977 2 DYNAMITE 128/VIDEO ET6000 2MB MDRAM PCI
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 54383 2 IRDA CONNECTOR
- -----------------------------------------------------------------------------------------------------------------
100004 03/22/1999 63037 2 DT8000 TR4 4/8GB QIC3095 FOR T4000 1PK
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 129452 2 DESKSTAR 10GXP 10.1GB UDMA 7200RPM HD 3.5LP
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 129452 2 VELOCITY 4400 AGP 16MB SDRAM RETAIL
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 131546 2 7FT PATCH CABLE GRN FAST CAT 5
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 131546 2 NETGEAR 10/100 2PAR PSVR
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 138324 2 LR600 600VA LINE CONDITIONER
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 163883 2 1PK TRAVAN TR4 4/8 GB CART
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 181435 2 IEEE 1284 PAR PR A/A 6FT DB25M DB25F
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 252933 2 BARBIE TALK WITH ME CD WIN/W95
- -----------------------------------------------------------------------------------------------------------------
100004 03/24/1999 252933 2 PALMV HARD CASE FOR PALM V ONLY
- -----------------------------------------------------------------------------------------------------------------
100004 03/25/1999 195139 2 MONSTER 3D II PCI 12MB VIDACCEL ADD-IN X100
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 135996 2 VIKING - 2MB SMART MEDIA-3.3 VOLT-
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 136000 2 VIKING - 8MB SMART MEDIA-3.3 VOLT-
<PAGE>
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 150489 2 MULTIMODEM ZDX EXT 19.2 D/F ASYNC MODEM
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 197959 2 20PK 13.6GB UDMA HD 3.5LP 5400RPM DIAMONDMAX 3400
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 211446 2 RIO PMP 300 PRTBL MUSIC PLAYER 32MB
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 223391 2 MOBILEPRO 770 H/PC PDA
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 238767 2 64MB MUSHKIN CAS2 PC100 SDRAM
- -----------------------------------------------------------------------------------------------------------------
100004 03/26/1999 52014 2 XTERMINATOR
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 025024 2 CASE BGE ATX MID 250W 4 5.25 3 3.5 W/ FDD FCC
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 046613 2 MICRO DRY CYAN CART
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 046613 2 MICRO DRY MAGENTA CART
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 046613 2 MICRO DRY YELLOW CART
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 080651 2 3PIN CHASSIS FAN FOR TX MBD H/W MONITORING
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 108964 2 CASE BGE ATX MT 230W W/ 3.5 FD
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 139903 2 4MBX32-70NS 16MB SODIMM 72 PIN INDUSTRY STANDARD
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 150668 2 SS870 TONER MOD FOR USE W/SS870 LASER
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 182769 2 DIMAGE QUEST NIMH BATTERY - SET OF 4
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 192602 2 1PK 10GB TAPE CART FOR SUPERSTATION DRV ONLY
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 194453 2 ECONOBLACK INK CARTRIDGE FOR MD-5000 (REVERSIBLE 20 TIME
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 198149 2 EPSON 400/500/600/700 PHOTO STYLUS PRINTER INKJET CARTRIDGE
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 200142 2 MICRO TERMINATOR 2-BTN JOYSTICK BLACK W/ TURBO-FIRE & TRIM C
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 226378 2 128MB DELL INSPIRON
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 239029 2 48MB COMPACTFLASH FLCARD MEM
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 279529 2 CREATIVE PC DVD ENCORE6X W/ DXR3 DECODER
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 279529 2 NVIDIA TNT AGP VID CARD 16MB W/TV OUTPUT
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 436451 2 25FT CATEGORY 5 UTP CABLE
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 452223 2 BARBIE TALK WITH ME CD WIN/W95
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 4848 2 VIKING - 72 PIN - 32MB NON-PARITY MEMORY MODULE 70NS GOLD LE
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 664197 2 3FT CABLE PR DB25M C36M PAR IEEE 1284
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 664351 2 6FT VGA SVGA COAX CABLE HDDB15M HDDB15M
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 966328 2 MOBILEPRO 770 H/PC PDA
- -----------------------------------------------------------------------------------------------------------------
100004 04/01/1999 VAN 10177 2 EPSON 400/600/800/1520 STYLUS PRINTER INKJET CARTRIDGE - COL
- -----------------------------------------------------------------------------------------------------------------
100004 04/02/1999 97313 2 CD STOMPER LABEL REFILLS
- -----------------------------------------------------------------------------------------------------------------
100004 04/05/1999 182769 2 DIMAGE QUEST (NIMH) CHARGER W/4 RECHARGEABLE BATTERIES
- -----------------------------------------------------------------------------------------------------------------
100004 04/05/1999 202337 2 48X READER EIDE BLASTER CD
- -----------------------------------------------------------------------------------------------------------------
100004 04/05/1999 31900 2 640MB REWRITABLE OPTICAL MEDIA 5PK UNFORMATTED
- -----------------------------------------------------------------------------------------------------------------
100004 04/05/1999 463118 2 PRECISE MOUSING SURFACE MOUSE PAD PURPLE
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
100004 04/05/1999 664351 2 6FT VGA SVGA COAX CABLE HDDB15M HDDB15M
- ---------------------------------------------------------------------------------------
100004 04/05/1999 VIKIH3578NP 2 VIKING - 32MB MEM MODULE-OEM EQUIV # D3578A
- ---------------------------------------------------------------------------------------
100004 04/05/1999 VIKISSFDC3/8 2 VIKING - 8MB SMART MEDIA-3.3 VOLT-
- ---------------------------------------------------------------------------------------
100004 04/06/1999 069881 2 64MB MUSHKIN CAS2 PC100 SDRAM
- ---------------------------------------------------------------------------------------
100004 04/06/1999 105197 2 TWIN COOLING FANS 3.5 HD IN 5.25 DRIVEBAY
- ---------------------------------------------------------------------------------------
100004 04/06/1999 110785 2 MONSTER 3D II PCI 12MB VIDACCEL ADD-IN X100
- ---------------------------------------------------------------------------------------
100004 04/06/1999 110787 2 RIO PMP 300 PRTBL MUSIC PLAYER 32MB
- ---------------------------------------------------------------------------------------
100004 04/06/1999 152653 2 AC ADAPTER EH-30 FOR THE COOLPIX 900
- ---------------------------------------------------------------------------------------
100004 04/06/1999 166307 2 CDR DOUBLE JEWEL CASE - 10-PK
- ---------------------------------------------------------------------------------------
100004 04/06/1999 186199 2 QUICKCAM VC - USB
- ---------------------------------------------------------------------------------------
100004 04/06/1999 200804 2 2MB NEC MODEL 95
- ---------------------------------------------------------------------------------------
100004 04/06/1999 202551 2 5005 DREAM HOME PLANS
- ---------------------------------------------------------------------------------------
100004 04/06/1999 211446 2 ETH FETH 10BTX 100BTX MOD SWCH MOD TO ES3508A 4RJ4
- ---------------------------------------------------------------------------------------
100004 04/06/1999 211446 2 ETH SWCH 25PT 10B5 AUI 2PT FETH
- ---------------------------------------------------------------------------------------
100004 04/06/1999 211675 2 PRO/100 SMART FETH PCI RJ45 SVR NIC 10/100
- ---------------------------------------------------------------------------------------
100004 04/06/1999 224468 2 50X READER IDE DRIVE KIT W/MANUAL,AUDIO&DATA CABLE
- ---------------------------------------------------------------------------------------
100004 04/06/1999 226140 2 STYLUS COLOR 900 COLOR INK CART
- ---------------------------------------------------------------------------------------
100004 04/06/1999 243680 2 DREAMWEAVER V2.0 FIREWORKS V2.0 CD W9X/NT
- ---------------------------------------------------------------------------------------
100004 04/06/1999 36 2 1FT IBM THINKPAD Y CABLE 6PIN MINI DIN M 2 6PIN MI
- ---------------------------------------------------------------------------------------
100004 04/06/1999 448405 2 KNE20BT ETH ISA RJ45 BNC NIC 6-PK PNP
- ---------------------------------------------------------------------------------------
100004 04/06/1999 52014 2 XTERMINATOR
- ---------------------------------------------------------------------------------------
100004 04/06/1999 640132 2 FASTTRAK RAID CONTROLLER FOR EIDE DRVS RETAIL BOX
- ---------------------------------------------------------------------------------------
100004 04/06/1999 VIKIMVPCI/1 2 VIKING - 1MB VIDEO MODULE-OEM EQUIV # M3787LL/A
- ---------------------------------------------------------------------------------------
100004 04/07/1999 101765 2 1PK 8MM 160M DAT TAPE CART EXABYTE 8505
- ---------------------------------------------------------------------------------------
100004 04/07/1999 161044 2 USB CABLE 2 METER (6FT) A - B 24 GUAGE
- ---------------------------------------------------------------------------------------
100004 04/07/1999 252969 2 ARTEC ACD-40X IDE INTERNAL CD-ROM DRIVE
- ---------------------------------------------------------------------------------------
100004 04/07/1999 252969 2 SOUNDMAKER 3DX FULL DUP PNP SC W/CRYSTAL CHIPST
- ---------------------------------------------------------------------------------------
100004 04/08/1999 196629 2 48MB COMPACTFLASH CARD COMPACTFLASH STORAGE
- ---------------------------------------------------------------------------------------
100004 04/08/1999 212384 2 ACTIUS LONG LIFE BATTERY FOR USE WITH ALL ACTIUS
- ---------------------------------------------------------------------------------------
100004 04/09/1999 135725 2 64MB MUSHKIN PC100 SDRAM 8X64
- ---------------------------------------------------------------------------------------
100004 04/09/1999 135725 2 CASE ATX MT MID 235W 3 5.25 4 3.5 BGE CE FCC
- ---------------------------------------------------------------------------------------
100004 04/09/1999 135725 2 DESKSTAR 10GP 10.1GB UMDA HD 5400RPM 3.5LP
- ---------------------------------------------------------------------------------------
100004 04/09/1999 145918 2 MAC3045SP 4.5GB WSCSI HD 3.5 LP 7.5MS 10000 RPM
- ---------------------------------------------------------------------------------------
100004 04/09/1999 145918 2 ULTRASTAR 9ES 4.5GB ULTRA 2 SCSI 7200RPM 68 PIN LP
- ---------------------------------------------------------------------------------------
100004 04/09/1999 252951 2 PALM IIIX 4MB PDA W/ HOTSYNC CRADLE
- ---------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------
100004 04/13/1999 16804 2 OMNIVIEW CABLE KIT 3 CABLES
- ---------------------------------------------------------------------------------------
100004 04/13/1999 193791 2 EASIDOCK PORT REPL W/ETH TPAD 770 SERIES
- ---------------------------------------------------------------------------------------
100004 04/13/1999 MUSH12023 2 32MB COMPACT FLASH MEMORY CARD
- ---------------------------------------------------------------------------------------
100004 04/14/1999 ?6710051201 2 E-CAM VIDEO E-MAIL CAMERA SNGLE FULL MOTION,COLOR VIDEO,E-MA
- ---------------------------------------------------------------------------------------
100004 04/14/1999 18702 2 1MB MEMORY MODULE HP EQUIV - C2024A
- ---------------------------------------------------------------------------------------
100004 04/14/1999 193473 2 DAYTIMERS ORGANIZER 2000 WINDOWS - 5 USER
- ---------------------------------------------------------------------------------------
100004 04/14/1999 194502 2 ATX MBD PENT ALI1541 5PCI 2ISA AGP 3DM PCISND
- ---------------------------------------------------------------------------------------
100004 04/14/1999 200142 2 MICRO TERMINATOR 2-BTN JOYSTICK BLACK W/ TURBO-FIRE & TRIM C
- ---------------------------------------------------------------------------------------
100004 04/14/1999 200898 2 VIKING - 256MB REGISTERED ECC CL2 DIMM
- ---------------------------------------------------------------------------------------
100004 04/14/1999 78348 2 MOUSE IN A BOX - SCROLL
- ---------------------------------------------------------------------------------------
100004 04/16/1999 142374 2 3L-1 LIGHTNING ARRESTOR FOR BREEZENET ANT
- ---------------------------------------------------------------------------------------
100004 04/16/1999 142374 2 UNI 13P 13DBI DIR ANT FOR BREEZECOM D MODEL
- ---------------------------------------------------------------------------------------
100004 04/16/1999 198148 2 EPSON 400/600/800/1520 STYLUS PRINTER INKJET CARTRIDGE - COL
- ---------------------------------------------------------------------------------------
100004 04/16/1999 198148 2 EPSON 800, 800N, 850,/1520 STYLUS PRINTER INKJET CARTRIDGE -
- ---------------------------------------------------------------------------------------
100004 04/16/1999 258319 2 EXPERT 18.0GB UDMA ATA/66 7200RPM HD 3.5IN 8.5MS
- ---------------------------------------------------------------------------------------
100004 04/20/1999 104552 2 KYBD 107KEY WIN98 BIEGE PS/2 SOFT TOUCH WNT4.0
- ---------------------------------------------------------------------------------------
100004 04/20/1999 146188 2 ATX MBD PII 440BX DCPU 4PCI 3ISA AGP 4DM LDCM
- ---------------------------------------------------------------------------------------
100004 04/20/1999 162488 2 1PK SUPERDISK MAC LS-120 DISK MAC FORMAT
- ---------------------------------------------------------------------------------------
100004 04/20/1999 164322 2 32MB MUSHKIN 72PIN EDO SIMM 8X32
- ---------------------------------------------------------------------------------------
100004 04/20/1999 195139 2 64MB MUSHKIN CAS2 PC100 SDRAM
- ---------------------------------------------------------------------------------------
100004 04/20/1999 198149 2 EPSON 400/500/600/700, PHOTO STYLUS, PRINTER INKJET CARTRIDG
- ---------------------------------------------------------------------------------------
100004 04/20/1999 198149 2 EPSON 400/600/800/1520 STYLUS PRINTER INKJET CARTRIDGE - COL
- ---------------------------------------------------------------------------------------
100004 04/20/1999 198653 2 LUCENT PCI V.90 56K DFV ASYNC PC MODEM WIN
- ---------------------------------------------------------------------------------------
100004 04/20/1999 205142 2 DREAMWEAVER V2.0 CD W9X/NT
- ---------------------------------------------------------------------------------------
100004 04/20/1999 226893 2 EASYPARALLEL 16BIT ISA PARALLEL ADPT IEEE 1284
- ---------------------------------------------------------------------------------------
100004 04/20/1999 226893 2 PALM CABLE PCHOTSYNC ACCESSORY(FOR PALM&XXX)
- ---------------------------------------------------------------------------------------
100004 04/20/1999 226893 2 STYLUS COLOR 900 COLOR INK CART
- ---------------------------------------------------------------------------------------
100004 04/20/1999 226893 2 STYLUS COLOR 900 DOUBLE BLK INK CART
- ---------------------------------------------------------------------------------------
100004 04/20/1999 252952 2 PALM V 2MB PDA W/HOTSYNC CRADLE
- ---------------------------------------------------------------------------------------
100004 04/20/1999 VIKIH3133 2 VIKING - 8MB MEM MODULE-OEM EQUIV # C3133A
- ---------------------------------------------------------------------------------------
100004 04/21/1999 191709 2 PRINT CART FOR MFC970MC 750MC 770MC 870MC
- ---------------------------------------------------------------------------------------
100004 04/21/1999 217536 2 BRIDGE CONNECT TO PPGA FOR SLOT 1 MOTHERBOARDS
- ---------------------------------------------------------------------------------------
100004 04/21/1999 225548 2 CDRW 4X/4X/16X EXT SCSI
- ---------------------------------------------------------------------------------------
100004 04/21/1999 238767 2 64MB MUSHKIN CAS2 PC100 SDRAM
- ---------------------------------------------------------------------------------------
100004 04/21/1999 242659 2 3DFX VOODOO 3 3000 AGP 16MB SDRAM W/TV OUT
- ---------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------
100004 04/21/1999 252952 2 PALM V 2MB PDA W/HOTSYNC CRADLE
- ---------------------------------------------------------------------------------------
100004 04/21/1999 77407 2 INFOTALK IT3000 INET TELEPHONY DEVICE
- ---------------------------------------------------------------------------------------
100004 04/22/1999 126177 2 NIC ETH PCCARD RJ45 BNC PCMCIA NIC
- ---------------------------------------------------------------------------------------
100004 04/22/1999 134601 2 THE OPERATIONAL ART OF WAR
- ---------------------------------------------------------------------------------------
100004 04/22/1999 136000 2 VIKING - 8MB SMART MEDIA-3.3 VOLT-
- ---------------------------------------------------------------------------------------
100004 04/22/1999 181439 2 10FT CISCO CAB-V35MT DB60M TO V.35M
- ---------------------------------------------------------------------------------------
100004 04/22/1999 224681 2 MOUSEMAN WHEEL USB/PS2 4BTN
- ---------------------------------------------------------------------------------------
100004 04/22/1999 259099 2 SC30 30GB INT SCSI DIGITL 5.25HH DRV
- ---------------------------------------------------------------------------------------
100004 04/22/1999 442669 2 MOUSEMAN WHEEL USB/PS2 4BTN
- ---------------------------------------------------------------------------------------
100004 04/22/1999 74884 2 IBM WTY SERVICEPAC PC 3YR 9X5 NEXT BUS DAY M-F
- ---------------------------------------------------------------------------------------
100004 04/23/1999 172083 2 INTERNAL SCSI-2 DVD RAM KIT
- ---------------------------------------------------------------------------------------
100004 04/23/1999 209196 2 19IN/18.0V 26MM 1600X1200 75HZ 9GLRS VESA DDC1/2B
- ---------------------------------------------------------------------------------------
100004 04/23/1999 217956 2 CDR 650MB 74MIN RED,GREEN,ORANG YELLOW, 100-PK SPINDLE, 1X,2
- ---------------------------------------------------------------------------------------
100004 04/29/1999 18728 2 VIKING - 16MB MEMORY MODULE (3.3 VOLT) AST EQUIV - 501392-0
- ---------------------------------------------------------------------------------------
100004 04/30/1999 150557 2 USB CAMERAMATE COMPACT FLASH AND SMARTMEDIA READER
- ---------------------------------------------------------------------------------------
100004 04/30/1999 17416 2 64MB MEM COMPAQ LTE5000/5100/5200
- ---------------------------------------------------------------------------------------
100004 04/30/1999 279636 2 VIKING - 8MB SSFDC - 3.3VOLT -
- ---------------------------------------------------------------------------------------
100004 05/03/1999 ?452223V 2 Talk With Me Barbie
- ---------------------------------------------------------------------------------------
100004 05/03/1999 136000 2 STYLUS COLOR 900 900N COLOR INK CART
- ---------------------------------------------------------------------------------------
100004 05/03/1999 136000 2 VIKING - 8MB SSFDC - 3.3 VOLT
- ---------------------------------------------------------------------------------------
100004 05/03/1999 188993 2 GAMEPAD PRO USB MARCH 1999
- ---------------------------------------------------------------------------------------
100004 05/04/1999 172144 2 APIC MOD FOR DUAL PII FOR M720 MBD
- ---------------------------------------------------------------------------------------
100004 05/04/1999 17416 2 VIKING - FAX/MODEM 56K PC CARD MODEM -
- ---------------------------------------------------------------------------------------
100004 05/04/1999 939523 2 PALMV 2MB PDA W/ HOTSYNC CRADLE PALM
- ---------------------------------------------------------------------------------------
100004 05/05/1999 102607 2 256KB CACHE APTIVA 510 2168-62P 530 2144-66P
- ---------------------------------------------------------------------------------------
100004 05/05/1999 142374 2 AP-10D PRO.11 D MODEL ACCESS POINT ETH BRG
- ---------------------------------------------------------------------------------------
100004 05/05/1999 142374 2 SA-10 PRO.11 1-PORT WLS ETH STA ADPT 2DB W/ANT
- ---------------------------------------------------------------------------------------
100004 05/05/1999 142374 2 SA-10D PRO.11D MODEL 1 STATION BRG
- ---------------------------------------------------------------------------------------
100004 05/05/1999 191718 2 CISCO 1005 SPECIAL
- ---------------------------------------------------------------------------------------
100004 05/05/1999 209674 2 4PK ZIP MAC 250 DISK FOR MAC
- ---------------------------------------------------------------------------------------
100004 05/05/1999 22691 2 ZIP PLUS 100MB PPT FOR PC OR MAC W/ AUTODETECT
- ---------------------------------------------------------------------------------------
1004426 03/09/1999 125872 2 USB 3-BTN MOUSE FOR USB PCS, COMPAT W/WIN 98
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
46
SCHEDULE "Q"
GUIDELINES FOR USING DISTRIBUTOR TRADEMARKS AND DISTRIBUTOR LOGOS
Distributor permits COREL to use its logos and trademarks in both plain word and
stylized form (the "Distributor Marks") for the purpose of promoting and
advertising Distributor's products or services, provided COREL complies with the
following guidelines:
(i) The Distributor Marks may only be used in relation to Distributor's
products or services. This means that COREL may not display the
Distributor Marks on any non-Distributor product or service including
any associated packaging, documentation, advertising or other materials
in a manner that suggests that such product or service is a Distributor
product or service, that Distributor or any of the Distributor Marks are
associated with such product or service or that Distributor is
affiliated with, endorses or sponsors COREL or any of such products or
services.
(ii) Distributor will provide COREL with any artwork or graphics for the
Distributor Marks. The artwork or graphics may not be altered in any
way.
(iii) When displayed, the Distributor Marks must stand alone. A minimum amount
of empty space must be left between the Distributor Marks and any other
object such as type, photography, borders, edges, etc. The required
border of empty space around the Distributor Marks must be 1/2x wide
where x is the height of the Mark.
(iv) You may not combine the Distributor Marks with any other feature
including, but not limited to, other logos, words, graphics, photos,
slogans, numbers, design features, or symbols. Further, you may not
display your own logos or marks or other text or graphics in the same or
similar get-up, graphics, look, or trade-dress as the Distributor Marks.
(v) The Marks must not be used in a manner that, in Distributors's judgment,
may diminish or otherwise damage Distributor's goodwill in the
Distributor Marks, including but not limited to uses which could be
deemed to be obscene, pornographic, or otherwise in poor taste or
unlawful, or which purpose or objective is to encourage unlawful
activities.
(vi) You must place an asterisk (*) or similar notation mark beside the first
use of a Distributor Mark and include the following attribution
statement on the materials in which the Distributor Marks are featured.
"* Trademark(s) of ShopNow.com Inc."
<PAGE>
47
SCHEDULE "R"
CUSTOMER SERVICE
A. SERVICES
1. Distributor shall provide all Customer, Reseller and/or Affiliates support
for use of Distributor System and Distributor Web Site including, but not
limited to, credit card processing and downloading of Products on
Customer's hard disk. All Customer inquiries relating to the Software, the
system and/or the store that existed prior to the Distributor System and
the Store ("COREL Support") shall be directed to the number mutually agreed
upon by the parties and such inquiries shall also be documented in an
e-mail message and sent to COREL Customer service. Distributor's
representatives shall direct all requests that fall within Corel Support to
Corel according to methods agreed to by the parties. In addition, in the
event a Customer becomes irate or requests to be transferred to a COREL
customer service center, Distributor shall immediately transfer such
Customer to the COREL customer service center designated by COREL. Upon
delivery of Version 1.2 of the Store (as defined in Schedule H), or such
other time as the parties shall mutually agree, such transfer shall occur
without such Customer having to make an additional call.
2. Distributor shall establish an 800 telephone line and fax line available to
Customers worldwide which are dedicated to customer service for the
Distributor System and the Store. Upon delivery of Version 1.2 of the Store
(as defined in Schedule H), or such other time as the parties shall
mutually agree, such lines shall be transferable and/or assignable to COREL
upon termination or expiration of this Agreement. Distributor shall ensure
that the IVR is customized to indicate to Customers that they have called
for customer service relating to the Distributor System and/or the Store.
In addition, Distributor shall establish an e-mail address for Customers to
contact Distributor representatives for customer service. Distributor shall
also provide an automated e-mail response system within four (4) months of
the Effective Date unless otherwise agreed to by the parties. All e-mails
relating to Corel Support shall be forwarded to the Corel Account Manager.
3. Distributor shall perform customer service twenty four (24) hours per day,
seven (7) days a week in English, French and Spanish. Additional foreign
language services may be provided by Distributor upon mutual written
agreement between the parties.
4. Distributor shall receive and respond to Customer telephone, fax and e-mail
inquiries within twenty-four (24) hours of Customer's initial inquiry to
Distributor.
5. Distributor shall develop an internal escalation process whereby a Customer
can contact a designated representative within Distributor should it be
necessary for problem escalation. In the event Distributor cannot
satisfactorily resolve a Customer inquiry, Distributor shall escalate such
Customer inquiry to COREL's Account Manager and shall provide COREL's
Account Manager with all details regarding the escalated Customer inquiry.
Distributor shall use its best efforts, which in no event shall be less
than the Customer's reasonable expectations, to resolve Customer issues.
Upon escalation to COREL by Distributor, COREL shall assume responsibility
for the resolution of the escalated call; document the problem and its
resolution. Upon delivery of Version 1.2 of the Store (as defined in
Schedule H), or such other time as the parties shall mutually agree,
Distributor shall ensure that it has the ability to transfer Customers both
internally and externally to COREL customer service representatives without
requiring Customers to place an additional call or without having to call
back the Customers (i.e. a Hot Transfer). In addition, Distributor shall
use best efforts to ensure that Customers are not required to repeat their
request upon transfer.
6. COREL shall assume responsibility for the resolution of the escalated
calls only for those escalated calls under paragraph 5 that have not
previously been escalated to COREL and resolved by COREL. In other
words, once COREL has resolved a Customer issue and documented such
resolution in COREL's knowledge base or other resource provided by COREL
to Distributor, it is expected that Distributor shall thereafter be able
to resolve this Customer issue without escalation to COREL.
<PAGE>
48
7. Distributor shall ensure that when Customers are in the hold queue a
promotional message is played. Such promotional message shall be provided
to Distributor by COREL from time to time.
8. Distributor shall have the ability to upsell and cross-sell COREL products
and may do so upon COREL'S consent. Scripts for upselling and cross-selling
shall be provided to Distributor by COREL.
9. At all times, Distributor shall have a minimum of fourteen (14) customer
service personnel, of which a minimum of six (6) shall be dedicated only to
COREL and the Store. In the event that the call volume increases and it is
agreed to by the parties that additional customer service personnel are
required, Distributor shall ensure that such additional customer service
personnel are appointed according to terms mutually agreed upon. For the
first three (3) month period of this Agreement, Distributor shall have one
(1) additional COREL dedicated customer service personnel available at all
times to assist the transition team for all issues arising as a result of
the re-opening of the Store.
10. Distributor shall ensure that all customer service personnel have adequate
telephone skills, are given proper telephone training before they provide
customer service to Customers and have received the appropriate training to
upsell and cross-sell COREL products. In addition, Distributor shall ensure
that a minimum of one (1) senior customer service representative is
technically knowledgeable about the visual content industry and the use and
application of the products available in the Corel studio and that such
person is available at all times.
11. Distributor shall on a weekly basis, send a post-shipment email survey,
approved in writing by COREL, to a minimum of ten percent (10%) of
Customers who have purchased Software and/or Merchandise from the Store in
the previous seven (7) day period (up to a maximum of one hundred (100)
Customers) regarding their purchase experience on the Store. Upon COREL's
consent, for those Customers who purchased by telephone, Distributor shall
administer the post-shipment survey to Customers by telephone.
12. Distributor shall ensure that it has the ability to process Customer
product returns. In the event that a Customer returns a product that was
not purchased from Distributor, Distributor shall direct such Customers to
COREL's customer service center. Distributor shall accept Software returns
in accordance with COREL's return policy in effect from time to time.
13. Distributor shall send an e-mail message to the list of Customers provided
by COREL, informing them of the re-opening of the Store. Such message shall
require the prior written approval of COREL.
B. GUIDELINES
1. Distributor is to provide Customers with answers to customer service
questions relating to the Software using information provided by COREL and
information learned by Distributor.
2. Each Distributor employee performing customer service shall identify their
name and state "COREL On-Line Store, < name > speaking, how may I help
you", or some other language that is mutually agreeable to the parties, at
the start of each call with a Customer.
3. Distributor shall adhere to the following minimum performance guidelines:
- Abandoned customer service calls shall not exceed 5% of total calls
on a monthly basis.
- Eighty-six percent (86%) of calls shall be answered within 15
seconds and the average speed of answer per call shall not exceed
thirty (30) seconds.
<PAGE>
49
- E-mails received before 4:00 p.m. EST will be answered the same
day. E-mails received after 4:00 p.m. EST will be answered within
24 hours.
- The average hold time (time Customer is put on hold) per call shall
not exceed forty (40) seconds.
4. Distributor shall adhere to the following call queuing process:
(i) Queue call to Corel skill group - Check for available agents
(ii) Caller hears one ring cycle (approx. 6 seconds)
(iii) Wait time approx. 12 seconds hearing music
(iv) 1st announcement
(v) Wait approx. 30 seconds hearing music
(vi) 2nd announcement
(vii) Wait approx. 30 seconds hearing music
(viii) Re-play 2nd announcement.
(ix) Wait approx. 15 seconds hearing music
(X) Go to voice mail box for caller to leave message
ANNOUNCEMENTS:
1ST ANNOUNCEMENT: "Thank you for calling "COREL ONLINE STORES" all of our
agents are currently busy assisting other callers. Please hold, and your call
will be answered by the next available agent."
2ND ANNOUNCEMENT: "Please continue to hold, your call is important to us, and
will be answered in the order it was received."
VOICE MAIL ANNOUNCEMENT: "Thank you for calling Corel Online Stores. Due to
unusually high call volume, we were unable to answer your call at this time.
Please leave your name, telephone number, and a brief message and we will return
your call shortly."
NETWORK ANNOUNCEMENTS:
High call volume: "Thank you for calling Corel Online Stores. We apologize that
we are unable to answer your call at this time due to extreme call volume.
Please try your call again later."
These customer service guidelines shall be subject to reasonable changes by
COREL, at COREL's sole discretion, from time to time.
C. CUSTOMER SERVICE MATERIALS
COREL shall provide Distributor with COREL's standard customer service policies
and historical purchase data for the Store no later than the Effective Date.
In addition, COREL shall provide Distributor with response scripts and
escalation guidelines when available.
D. REPORT
Distributor shall provide to COREL a monthly report no later than the tenth
(10th) day after the end of the month for which the report is being provided
which shall capture the following information or other information as reasonably
requested by COREL:
Inbound Customer calls
(i) Number of calls received;
<PAGE>
50
(ii) Number of calls answered;
(iii) Number of calls abandoned;
(iv) Average waiting time per call;
(v) Type of call received;
(vi) Average talk time per call;
(vii) Number of calls which result in the sale of COREL product at the time of
the call;
(viii) Number of e mails received;
(ix) Number of e mails answered; and
(x) Response provided to e mails answered.
Outbound Customer calls (calls made to Customer, which calls shall be made only
as a result of a Customer request or if COREL has given its prior consent)
(i) Number of calls made;
(ii) Type of calls;
(iii) Length of Call; and
(iv) Number of calls which result in the sale of COREL product at the time of
the call.
Additional Information:
Distributor shall provide the following additional information:
(i) company name, Customer's name, address, city, state or province, zip
code or area code, telephone number, fax number and electronic email
address;
(ii) summaries of questions asked and answers provided by Distributor;
(iii) the duration of the call;
(iv) the call reference number;
(v) the customer service person's name;
(vi) the date of the call;
(vii) Customer identification number;
(viii) calls escalated to COREL;
(ix) number of requests for additional foreign language customer service
and which languages;
(x) Customer feedback from the follow-up purchase surveys;
(xi) any site, shopping, process or process related Customer complaints;
(xii) questions relating to the Store or ESD services received by Customer
prior to the date of execution of this Agreement; and
(xiii) feedback on previous Customer experiences
Note: Any support incident escalated to COREL must be reported whether
or not the issue has been resolved at the time of reporting.
E. SHIPPING
Distributor shall ship to the locations listed below. This list is subject to
export shipment restrictions:
Australia Germany Japan
Austria Great Britain Korea
Belgium Greece Liechtenstein
Canada Hong Kong Luxembourg
Denmark Iceland Monaco
Finland Ireland Netherlands
France Italy New Zealand
<PAGE>
51
Norway Spain United Kingdom
Portugal Sweden United States
Singapore Switzerland
South Africa Taiwan
Shipping prices are dependent on the shipper's pricing policies and are subject
to change.
Shipping - Domestic (Continental) U.S.
<TABLE>
<CAPTION>
Shipping Carriers Initial Cost Per Pound Delivery time
<S> <C> <C> <C>
Standard Ground shipping ---- ---- 4-7 business days + processing
2nd day or blue label $12.50+ $1.45 2 business days + processing
Next day, express, red $19.00+ $1.85 1 business day + processing
SHIPPING - CANADIAN *
Shipping Carriers Initial Cost Per Pound Delivery time
Standard Ground shipping $9.95+ $0.50 4-7 business days + processing
Next day, express, red $19.00+ $1.85 1 business day + processing
<CAPTION>
INTERNATIONAL SHIPPING * (EXCLUDING CANADA)
<S> <C> <C> <C>
Shipping Carriers Initial Cost Per Pound Delivery time
Express $21.95+ $4.50 48-72 hrs. + processing
APO/FPO SHIPPING
Shipping Carriers Initial Cost Per Pound Delivery time**
USPS Express $16.95+ $1.85 24-48 hours+processing
</TABLE>
* ALL INTERNATIONAL ORDERS may be subject to import taxes in addition to cost
of the order
** Delivery time to U.S. military collection point
<PAGE>
52
SCHEDULE "S"
STOCK BALANCING GUIDELINES AND STOCK BALANCING FEES
The following Stock Balancing Guidelines (the "Guidelines") shall apply to all
Merchandise and Schedule "B" Software returned to COREL by Distributor. COREL
will grant a credit equal to the Merchandise Price and/or Schedule "B" Software
Prices paid by Distributor for Merchandise and Schedule "B" Software returned in
accordance with these Guidelines less any credits issued against the Merchandise
and Schedule "B" Software under Section 7.03 of this Agreement ( the "Return
Price").
Failure to follow these Guidelines will result in either rejection of an RMA
request and/or return of any Merchandise and Schedule "B" Software received by
COREL from Distributor at Distributor's sole cost and expense.
1. STOCK BALANCING GUIDELINES
1.1 Merchandise and Schedule "B" Software may be returned to COREL once
per each COREL quarter (Q1 December 1st to February 28th (or
February 29th) inclusive Q2 - March 1st to May 31st inclusive; Q3 -
June 1st to August 31st inclusive; Q4 - September 1st to
November 30th inclusive).
1.2 All returns shall be at Distributor's sole cost and expense.
1.3 Prior to any Merchandise and Schedule "B" Software return,
Distributor must provide written notice to COREL specifying the
Merchandise and Schedule "B" Software Distributor wishes to return
and requesting a Return Material Authorization ("RMA"). This notice
must be received by COREL no later than the fourteenth (14th) day
after the end of the quarter for which the RMA is requested.
1.4 The aggregate Return Price for Merchandise and Schedule "B"
Software returns in any COREL quarter can not exceed an amount
equal to three and three quarters percent (3.75%) of the total
aggregate Merchandise Prices for Merchandise and Schedule "B"
Software Prices for Schedule "B" Software delivered to Distributor
by COREL during the immediately preceding four (4) COREL quarters
less any credits issued against the Merchandise and Schedule "B"
Software under Section 7.03 of this Agreement ("Return Price
Limit").
1.5 All Merchandise and Schedule "B" Software for which an RMA has been
issued must be shipped to COREL by Distributor within thirty (30)
days of the date of the RMA.
1.6 No Merchandise or Schedule "B" Software may be returned by
Distributor without a valid RMA from COREL.
1.7 The acceptance of any Merchandise and Schedule "B" Software
returned to COREL by Distributor pursuant to a valid RMA, and
issuance of a credit for such returned Merchandise and Schedule "B"
Software, shall be subject to review and inspection of the returned
Merchandise and Schedule "B" Software by COREL upon receipt of such
returned Merchandise and Schedule "B" Software at COREL's
warehouse. Notwithstanding the issuance of an RMA by COREL, RMA
credits shall only be provided for Merchandise and Schedule "B"
Software actually received and approved by COREL For example, and
without limiting the generality of this paragraph 1.7, COREL shall
not provide the full RMA credit which may have been issued for
partial returns or for Merchandise and Schedule "B" Software which
is specified by Distributor under paragraph 1.3 as 'full retail'
product but is determined upon inspection to be upgrade product.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 11, 1999, with respect to the 1998 and 1997
financial statements of GO Software, Inc. included in Amendment No. 6 to the
Registration Statement (Form S-1 No. 333-80981) and related Prospectus of
ShopNow.com Inc.
/s/ Ernst & Young LLP
September 22, 1999
Jacksonville, Florida
<PAGE>
EXHIBIT 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Seattle, Washington
September 27, 1999
