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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 000-26707
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SHOPNOW.COM INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON 91-1628103
(State or other jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
411 FIRST AVENUE SOUTH
SUITE 200 NORTH 98104
SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 223-1996
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
(None) (None)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $544,623,410 as of December 31, 1999, based on the closing sale
price of such stock on the Nasdaq National Market on that date.
There were 43,947,409 shares of common stock outstanding as of February 7, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth
herein, is incorporated herein by reference from the registrant's definitive
proxy statement relating to the annual meeting of shareholders to be held in
2000, which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this Report relates.
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PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS MAY,
WILL, SHOULD, EXPECT, PLAN, INTEND, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY
CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED IN THE "FACTORS AFFECTING
OPERATING RESULTS, OUR BUSINESS AND OUR STOCK PRICE" BELOW. THESE FACTORS MAY
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENT.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY OTHER PERSON
ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE FORWARD-LOOKING
STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS
AFTER THE DATE OF THIS ANNUAL REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL
RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
OVERVIEW
ShopNow offers businesses a tailored end-to-end solution that addresses the
challenges associated with implementing a successful e-commerce strategy. We
offer access to the ShopNow network and a comprehensive suite of products and
services ranging from custom application and online store development to online
and traditional sales and marketing services and transaction processing. The
ShopNow marketplace, which includes the ShopNow.com portal and its affiliate and
syndication sites, allows merchants to target specific groups of shoppers. Our
recently launched business-to-business marketplace, b2bNow.com, allows
businesses to buy, sell and exchange goods and services with one another. This
combination of products, services and marketplace access enables businesses to
create online stores and custom web sites, access customers and transact
business efficiently. ShopNow was incorporated in Washington in January 1994. As
used in this annual report, the terms "we" and "ShopNow" mean ShopNow.com Inc.
and its subsidiaries.
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 62 million web users in the United States and over 142 million web
users worldwide and that by the end of 2003 the number of web users will
increase to 177 million in the United States and to over 502 million worldwide.
The rapid growth of the Internet has given businesses, merchants and shoppers
the opportunity to conduct an increasing amount of commerce online. We believe
that e-commerce offers numerous advantages to businesses, merchants and
shoppers. Shoppers receive increased selection, competitive prices and the
convenience of being able to shop on the Internet 24 hours a day, 7 days a week
from the location of their choice. The Internet enables merchants to reach a
global audience and operate with limited infrastructure, reduced overhead and
greater economies of scale. Merchants can customize web site content to match
the needs and preferences of individual shoppers by transparently personalizing
content for each shopper. By facilitating access to information, the Internet
enables merchants to give customers more detailed product information while
affording merchants the opportunity to obtain detailed information about the
purchasers of their products. In addition, online merchants can reduce selling
costs by reducing or eliminating investments in physical retail locations and
automating much of the interaction with their customers. These advantages are
resulting in a dramatic increase in the amount of commerce conducted over the
Internet and the number of businesses and merchants advertising and selling
goods and services online. According to IDC, worldwide transactions on the
Internet are expected to increase from approximately $111 billion in 1999 to
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approximately $1.3 trillion in 2003, with the total number of users who purchase
products and services online increasing from approximately 48 million to
approximately 182 million worldwide during the same period.
CHALLENGES TO CONDUCTING COMMERCE OVER THE INTERNET
Businesses and merchants increasingly are determining that they need an online
presence to take advantage of the rapid growth and benefits of e-commerce. To
conduct commerce online effectively and efficiently, however, businesses and
merchants must address a number of challenges:
- WEB SITE PLANNING AND STOREFRONT DESIGN: Businesses and merchants must
design and implement the look and feel of their online stores and custom
web sites in a way that provides a rich, easy-to-use and generally
satisfying end-user experience that fosters buying and repeat visits.
Storefront design must promote the merchants' brands, identities and
product information through the use of graphics, images and text content.
- VISIBILITY AND CUSTOMER ACQUISITION: Merchants need to effectively
communicate with their targeted online audience to maximize the number of
visits to, and purchases from, their web sites. Both online merchants
seeking to establish a brand and traditional merchants with established
brands need to create visibility online and to distinguish themselves from
the significant number of competitors selling products and services on the
Internet. Achieving widespread brand recognition and customer loyalty in a
crowded market where consumers are inundated with Internet-related
advertising requires a comprehensive and focused marketing strategy to
reach the desired audience. These efforts require a broad range of both
online and traditional techniques ranging from banner and hyperlink
advertisements or e-mail communications to traditional methods, such as
direct mail. In order to attract the highest number of desired online
shoppers, merchants need to employ creative marketing solutions that
position their products and services more effectively than those of their
many competitors.
- TRANSACTION PROCESSING: Businesses and merchants must implement solutions
that enable them to efficiently and effectively process orders once they
are placed. Online transaction processing is complex and involves a number
of elements including secure, dependable, automated real-time payment
authorization, calculation of tax and shipping charges, order tracking and
customer service. Online orders for physical goods must be transmitted to
fulfillment centers, distributors or merchant-owned distribution centers
for shipment of the goods.
In light of these challenges, businesses and merchants who choose to internally
develop and maintain an e-commerce presence must invest a significant amount of
capital and technical resources. E-commerce technology evolves rapidly,
necessitating timely implementation and upgrades. The lengthy and often
cost-prohibitive nature of in-house development and maintenance has caused an
increasing number of businesses and merchants to outsource some or all of their
e-commerce capability development to third-party service providers. Outsourced
solutions offer convenience and savings but most service providers specialize in
specific, limited aspects of an Internet merchant's business. Merchants who
outsource their e-commerce capability development typically must devote
significant technical expertise and other resources to coordinate multiple
vendors and integrate the various components.
As e-commerce solutions evolve and online businesses and merchants proliferate,
need and demand increase for outsourced e-commerce solutions that seamlessly
integrate every aspect of an online business from storefront development to
marketing services, transaction processing and fulfillment.
THE SHOPNOW SOLUTION
We are an end-to-end developer and provider of e-commerce enabling solutions for
businesses and merchants. We provide a comprehensive suite of products and
services that enable businesses and merchants to create, support and grow an
efficient, scaleable and reliable online presence. Our marketing services use
both traditional and online methods to bring businesses, merchants and shoppers
together, while our other e-commerce products and services enable businesses and
merchants to develop and complete online transactions. Our e-commerce platform
includes custom application and online store development and design, hosting and
maintenance, fraud prevention, payment processing and order fulfillment. We
provide customers with a wide variety of supporting technologies in order to
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meet their specific needs. Our sales and marketing services include merchant and
product listing on our online marketplaces, advertisements and e-mail promotions
and other creative services. We also operate the ShopNow marketplace, a
distributed network of web sites comprised of the ShopNow.com portal and more
than 4,000 affiliate and syndication shopping sites, which together provide
access to more than 45,000 merchants offering over five million products. In
addition, we operate b2bNow.com, our business-to-business portal and online
marketplace.
Key benefits of our solution include:
- END-TO-END INTEGRATED SOLUTION. We believe that we provide all of the
critical capabilities required to enable businesses and merchants to
conduct commerce online. We offer businesses and merchants a comprehensive
suite of e-commerce products and services and access to online
marketplaces. Our marketing services include advertising, merchandising
and e-mail services on our ShopNow marketplace and on our b2bNow.com
marketplace. Our end-to-end solution minimizes the time, complexity,
inconvenience and cost ordinarily associated with a multi-vendor or
internally developed solution.
- QUICK TIME TO MARKET. The pace of change and the rate of growth of the
Internet require greater speed in implementation of e-commerce solutions.
Our extensive experience in web site planning and storefront development
allows us to create commerce-enabled web sites for our clients - ranging
from the basic to the highly customized - in less time than such tasks
typically require of an in-house developer.
- IMMEDIATE AND LONG-TERM SAVINGS. We enable businesses and merchants to
improve their return on investment by allowing them to avoid the
significant diversion or investment of resources required to develop and
maintain e-commerce capabilities internally or to integrate a multi-vendor
solution. Because we regularly reevaluate and update our merchant services
and network offerings, our clients can easily keep pace with rapidly
evolving e-commerce technology.
- FACILITATE CUSTOMER ACQUISITION. ShopNow.com allows merchants to market
their products and services in an established online marketplace where
shoppers congregate for the specific purpose of making purchases. We
enable shoppers to search for products and services in an organized manner
and to evaluate offerings from numerous merchants based on a variety of
criteria. Unlike content and community-oriented portals, ShopNow.com is
focused principally on, and identified with, shopping. As a result, we can
attract visitors who are more likely to buy a product or service at our
clients' sites. Our ability to utilize detailed demographic and shopper
preference data enables us to offer targeted marketing services to our
merchant customers. The ShopNow marketplace, together with our merchant
marketing services, allows merchants to quickly and efficiently attract a
targeted group of customers.
- COMPREHENSIVE TECHNOLOGY PLATFORM. We provide a flexible scaleable
technology platform from which we can tailor solutions to meet the
changing needs of our clients. Our platform is a combination of
third-party technologies and technologies that we have developed. We also
have serving and hosting capabilities that enable our clients to outsource
the storage and transmission functions of their e-commerce operations.
This technology provides merchants a high level of reliability, 24 hours a
day, 7 days a week. Using data centers with redundant servers, continuous
monitoring and high speed Internet connections, we can provide clients
with the performance they require for uninterrupted e-commerce operations.
STRATEGY
Our goal is to be the leading e-commerce enabling company for businesses and
merchants. We plan to achieve this goal through the following strategies:
- EXPAND OUR BUSINESS-TO-BUSINESS PORTAL. Through our recently launched
business-to-business portal and online marketplace, b2bNow.com, we provide
e-commerce enabling solutions for businesses and merchants seeking to
transact business with one another online. Currently, b2bNow.com includes
the following features: a request for quotation/request for proposal
search engine, a business directory, online store building tools, sales
and marketing services and information and content relevant to businesses.
We intend to further expand b2bNow.com by adding features such as a
procurement system, by entering into additional key relationships
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and by encouraging merchants on the ShopNow marketplace to participate in
b2bNow.com. Upon completion of the acquisition of Ubarter.com, we plan to
integrate Ubarter's online barter marketplace into b2bNow.com. In
addition, we plan to offer our suite of merchant services on b2bNow.com.
- EXPAND THE SHOPNOW MARKETPLACE. We intend to aggressively expand the
ShopNow marketplace primarily by using the technology and services
acquired through our recent acquisitions to broaden the range of features
available to listed merchants. We will continue to promote a high volume
of shopper traffic on our network and attempt to increase the number of
quality customer leads generated for listed merchants. We plan to rapidly
expand the number of new ShopNow affiliate and syndication shopping sites
to increase revenues and make the ShopNow marketplace more visible and
accessible. In addition, we are currently exploring the use of
technologies and applications relating to commerce transactions over
wireless communication devices. We also intend to enrich shoppers'
experiences on the ShopNow marketplace through applications that take
advantage of broadband technologies.
- ENHANCE AND EXTEND OUR SUITE OF E-COMMERCE ENABLING PRODUCTS AND
SERVICES. We intend to continue to add new features to our suite of
e-commerce enabling solutions. We believe that, for little incremental
cost, we can easily integrate into our suite new features that will
contribute additional revenues from lead generation, advertising,
upselling merchant services and licensing and syndication. For example, we
are attempting to expand our merchant marketing services by updating our
technology to increase the quality and amount of data provided by shoppers
on the ShopNow marketplace. To provide additional and better quality leads
to merchants, we recently expanded the tools available to shoppers to
include price search engines and merchant rating systems.
- PROMOTE BRAND VISIBILITY. We will continue to promote the ShopNow.com and
b2bNow.com brands as the best means for conducting business on the
Internet. To accelerate the acceptance and penetration of our brands among
businesses, merchants and shoppers, we will continue to advertise our
brands through both online and traditional channels such as radio and
newspapers. 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. We will also expand our efforts to promote our brands
through trade publication advertisements, direct mail and promotional
activities, trade shows and media events.
- PURSUE ACQUISITIONS AND STRATEGIC BUSINESS RELATIONSHIPS. We intend to
make acquisitions and enter into business relationships that enhance the
effectiveness of our products and services and the quality of our online
marketplaces. To date, we have focused on acquisitions and strategic
business relationships that provide us access to improved technology, new
domestic and international markets and prospective clients. In the future,
we expect to focus principally on acquisitions and strategic business
relationships that will enhance and grow b2bNow.com.
- EXPAND INTERNATIONALLY. We will seek to leverage the anticipated global
growth in e-commerce by expanding our online marketplaces internationally.
We plan to commence our international expansion with the development of
business opportunities in Japan in the first half of 2000. We intend to
accelerate our international expansion by entering into strategic
alliances with foreign businesses. We also plan 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 international shoppers to more easily access
our online marketplaces, thereby increasing the number of participants on
the ShopNow network.
OUR PRODUCTS AND SERVICES
MERCHANT SERVICES
We offer businesses and merchants a wide variety of enabling products and
services, including:
- SECURE PAYMENT AND ORDER PROCESSING. We provide online payment and order
processing software and services. Our software and services assist our
merchant clients with credit card authorization, address verification,
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automated tax and shipping calculations, order tracking and customer
service. Our payment processing system currently interacts with 21 credit
card processors. For security, we use advanced encryption methods. To
exchange information with merchants and shoppers on our web sites, our
network servers use software that complies with the Secure Sockets Layer
specification, the predominant method for managing the security of
transmissions over a network.
- FRAUD PREVENTION. Our fraud prevention 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. Under an agreement with HNC Software, we have licensed the
right to use their eFalcon fraud management system.
- E-COMMERCE HOSTING AND MAINTENANCE. We provide services to operate and
maintain online stores on behalf of our listed merchants. We use data
centers with redundant servers, 24-hour monitoring and support and
high-speed Internet connections to provide customers with continuous
e-commerce operations. We also provide merchants with detailed electronic
and hard copy reports summarizing visits to and transactions made on their
online stores.
- CUSTOM APPLICATION AND ONLINE STORE DEVELOPMENT. We provide businesses and
merchants with design and technical development services for their web
sites and online stores, including design and advertisement copy services
and image management and production. We create commerce-enabled web sites
ranging from the basic to the highly customized.
- MARKETING AND CUSTOMER ACQUISITION SERVICES. Our marketing services are
designed to enable merchants to enhance their visibility on the ShopNow
marketplace, facilitate customer acquisition and retention, and increase
sales. We offer a range of online advertising and listing services, e-mail
promotions and lead delivery programs for merchants. We offer merchants a
variety of listing positions in our merchant database, which shoppers
access through ShopNow.com. The merchant listing positions differ by
length of store description, number of search engine keywords that refer
to the merchant's products, order in which the merchant is listed within a
product category and availability of certain promotional listings.
Advertisements can be prominently displayed on ShopNow.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, enabling the advertiser to directly interact with an interested
shopper. Merchants can also reach a more focused audience by sponsoring a
specific product category or, alternatively, a wider audience by marketing
to visitors on our affiliate and syndication shopping sites. Our e-mail
promotions enable merchants to alert shoppers registered with us to
special merchant product or service offerings. We also offer a lead
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, the contractual term is
extended until we have delivered the required number of leads.
- CUSTOMER ORDER FULFILLMENT AND CALL CENTER MANAGEMENT. We have preferred
supplier agreements with several companies that specialize in providing
customer order fulfillment services for merchants that lack such
capabilities. These services include warehousing, packaging and
distribution and call center services. Our preferred supplier agreements
allow us to obtain pricing discounts and other favorable terms from these
companies by aggregating several of our clients' order fulfillment and
call center activities under one contract that we enter into and manage on
behalf of our clients. We also have relationships with several vendors
whose warehouses we use to fill orders that we take on behalf of our
clients through our web sites and to deliver the purchased merchandise
directly to shoppers. We have integrated our order processing, payment
processing and fraud prevention systems with those of our preferred
suppliers to provide our merchants with an integrated e-commerce platform.
Our various merchant services can be purchased as an integrated suite or
individually, which allows businesses and merchants to tailor their service
package to their particular needs. Fee arrangements are based on the specific
service
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purchased and may be computed on a project basis, a monthly fee basis, a per
transaction basis or a combination thereof.
THE SHOPNOW MARKETPLACE
The ShopNow marketplace aggregates merchants and shoppers over a distributed
network of web sites. The ShopNow marketplace consists of ShopNow.com, our
shopping portal, and more than 4,000 affiliate and syndication sites. Our
marketplace aggregates more than five million products and services offered by
more than 45,000 merchants, including retailers, catalog companies,
manufacturers and individuals. The ShopNow.com directory lists merchants under
28 different product categories. Our web site provides shoppers with multiple
ways to search our merchant database. To reach a specific merchant's web site, a
shopper clicks on the hyperlink to that site. Shoppers complete transactions
directly at a merchant's web site, allowing merchants to conduct e-commerce
under their own brand names. In some cases, we act as the merchant-of-record and
offer products directly to consumers from the ShopNow marketplace. These
products usually are shipped directly from the manufacturer or distributor. We
principally offer these products to drive traffic to the ShopNow marketplace.
During the last quarter of 1999, we completed three acquisitions to enhance the
ShopNow marketplace. They were the acquisition of the SpeedyClick community web
site, the bottomdollar.com comparison shopping engine and the Cortix merchant
rating system. The acquired businesses also provide additional means for
shoppers to access our merchants' web sites. We believe that these enhancements
will generate additional consumer traffic on the ShopNow marketplace, which in
turn will attract additional participating merchants to whom we can cross-sell
our e-commerce enabling products and services.
We recently launched eBuy, our proprietary transactional banner service. eBuy
allows a shopper to click on a banner advertisement from within any web site and
purchase the product or service in the banner advertisement without leaving the
site where the shopper originally saw the banner advertisement. We have licensed
the eBuy technology to 24/7 Media, GiftSpot.com, AthleteNow.com, ChickClick.com
and ArtGalleryLive.com. The private label version of eBuy for 24/7 Media is
marketed as Click2Buy.
b2bNow.com
b2bNow.com is a global business-to-business portal that enables businesses to
buy, sell and promote their products and services to other businesses in a
single online marketplace. Launched in January 2000, b2bNow.com's e-commerce
features currently include a request for quotation/request for proposal search
engine, enhanced business listings and placements, business web hosting,
business web store building tools, business headlines, financial news, targeted
newsletters, stock quotes, site traffic reports and other sales and marketing
services. In addition, following completion of our proposed acquisition of
Ubarter.com, we plan to integrate Ubarter.com's online barter marketplace into
b2bNow.com. We believe barter provides a valuable and flexible alternative to
cash transactions for businesses wishing to exchange goods and services without
disadvantaging their distribution partners. The availability of an online barter
marketplace will allow our clients to better manage sales of business assets,
excess inventory, surplus production and other goods and services.
Our advertising and merchandising revenues are subject to seasonality, and our
online marketplaces and the other components of our solution may develop
seasonal and cyclical patterns as our market becomes more developed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Seasonality" contained in Part II, Item 7 of this
annual report.
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CUSTOMERS
The following is a list of our top ten customers in terms of revenues from
merchant services and revenues from our top ten advertising and merchandising
customers on the ShopNow marketplace for the year ended December 31, 1999:
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Merchant Services ShopNow Marketplace
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ArtGalleryLive.com Accounting.net
AthleteNow.com AuctioNet.com
Birkenstock Damark
Hallmark Cards eBay
The Nature Company ephones.com
Palm Computing FashionMall.com
SelfCare iWin.com
Service Merchandise MVP.com
Snowball.com Perfumania.com
Sony Social Net
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Our top ten merchant services customers accounted for 19% of our total revenues
for the year ended December 31, 1999. Our top ten advertising and merchandising
customers on the ShowNow marketplace accounted for 8% of our total revenues for
the year ended December 31, 1999.
RECENT ACQUISITIONS
We have acquired a number of businesses that expand the range of our e-commerce
enabling products and services, enhance our technology and facilitate our
international expansion. We intend to continually evaluate acquisition
opportunities. In the future, we expect to focus principally on acquisitions
that will enhance and grow b2bNow.com.
Since January 1999, we have acquired seven companies that possess attributes
complementary to our products and services for an aggregate consideration of
approximately $132 million in common stock (valued as of the date of each
acquisition) and $19 million in cash. The companies acquired include:
SPEEDYCLICK. On November 12, 1999, we acquired SpeedyClick, Corp., one of the
fastest growing web communities for women. SpeedyClick is highly targeted, with
a special focus on creating a fun, interactive and commerce-oriented community
for women. Of the sites specifically targeted to women, SpeedyClick has had the
first or second largest number of hits from women Internet users in each of the
seven months between June and December 1999, according to PC Data Online.
SpeedyClick is headquartered in Glendale, California.
CORTIX (20-20CONSUMER.COM). On December 3, 1999, we acquired Cortix Inc., an
operator of comparison-shopping services, which include online reviews and
ratings of commerce oriented businesses, merchants and products. Cortix's
independent and unbiased online comparison-shopping service saves online
shoppers time and money and generates qualified leads for merchants. The service
tracks prices and information on thousands of products. Shoppers can comparison
shop and retrieve and post ratings of Internet merchants using Cortix
technology. We believe that this technology will enhance the shopping experience
on ShopNow.com.
WEBCENTRIC (BOTTOMDOLLAR.COM). On December 17, 1999, we acquired
WebCentric, Inc., a developer of e-commerce integration technology and
applications, including bottomdollar.com. Bottomdollar.com is a comparison
shopping engine that provides shoppers with comparisons of products offered by
Internet merchants in the United States, the United Kingdom, France and Canada.
The bottomdollar.com shopping engine also provides comparison services on
affiliate web sites.
In addition, in January 2000 we entered into a definitive agreement to acquire
Ubarter.com Inc., a business-to-business barter marketplace. We believe that the
availability of an online barter marketplace will allow
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our clients to better manage sales of business assets, excess inventory, surplus
production and other goods and services. We expect to complete this acquisition
in the second quarter of 2000.
STRATEGIC BUSINESS RELATIONSHIPS
We have entered into strategic business relationships with the following
companies:
PRIVASEEK. On January 5, 2000, we announced a strategic alliance with
PrivaSeek, Inc., a developer of permission marketing and privacy management
solutions. We intend to jointly launch Persona, PrivaSeek's suite of identity
and permission management tools, by the end of 2000. Persona will allow shoppers
and merchants to conveniently exchange and effectively manage shopper
information, permissioning and usage online across the ShopNow marketplace.
Currently, an online shopper's personal information is stored on individual web
sites, and use of the information is determined by the web sites' operators.
After we launch Persona, shoppers visiting the ShopNow marketplace will
experience personalized advertisements or special offers relevant to their
interests or personal life events.
TRADEX TECHNOLOGIES. On January 27, 2000, we entered into a strategic
relationship with TRADEX Technologies, Inc., a platform provider for
business-to-business marketplaces which enables businesses to exchange goods,
services and information over the Internet. We intend to integrate the TRADEX
platform on b2bNow.com to enable the businesses using our business-to-business
portal to simplify their procurement and trading processes. We expect to receive
transaction fees from businesses that buy or sell products or services in the
b2bNow marketplace using this and other online trading technologies. We expect
that this integration will be complete by the end of the second quarter of 2000.
On December 16, 1999, TRADEX and Ariba Inc. announced the execution of a
definitive agreement for Ariba's acquisition of TRADEX. We believe that our
strategic relationship with TRADEX and Ariba will allow the businesses on
b2bNow.com to satisfy their procurement needs in a competitive e-commerce
marketplace while enabling such businesses to buy and sell more efficiently.
ESCROW.COM. On October 25, 1999, we entered into a three-year agreement to
serve as the exclusive payment processing service provider to escrow.com, Inc.,
a developer of e-commerce processing and fulfillment for buyer and seller sites,
including online auctions, online business-to-business sites and online
business-to-consumer sites. As part of the agreement, we will receive a fee for
each escrow transaction processed by escrow.com through our payment processing
technology.
CHASE MANHATTAN BANK. In July 1999, we entered into an agreement with Chase
Manhattan Bank, through one of its affiliates, to launch an Internet shopping
site featuring Chase and ShopNow. This site, ChaseShop.com, was launched in
October 1999 and is part of Chase's online banking site. It possesses the same
core functionality as ShopNow.com with the design, color scheme and branding of
Chase.com. Similar to ShopNow.com, visitors can shop at the sites of over 45,000
merchants, as well as shop for particular products and brands. We jointly sell
advertising and merchandising on the site. Pursuant to this agreement, Chase
pays us a licensing fee to use the technology underlying the site. Chase is a
preferred provider of financial services for ShopNow.com and the exclusive
marketer of credit cards featuring the ShopNow brand. Each party shares in the
revenues of the other based on the amount of business generated through the
agreement. The agreement has an initial term of 27 months, with a three-year
renewal at Chase's option.
ABOUT.COM. In July 1999, we entered into an agreement with About.com, Inc., a
leading Internet network of commerce communities. Under this agreement, we
became the exclusive generalized shopping directory service on About.com,
obtained designated placement on About.com of a hyperlink to the ShopNow.com
site and are guaranteed to 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 our
online marketplaces. The agreement has a five-year term, and each party has the
right to terminate upon 90 days notice after April 1, 2000.
HNC SOFTWARE. In May 1999, we entered into a three-year agreement with HNC
Software, Inc. Under the agreement, HNC will provide us with a number of
e-commerce products including marketing, fraud detection and
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customer support software at preferential prices. Integration of these products
with our technology platform will allow us to provide merchants with better
tools to manage their customer relationships.
24/7 MEDIA. In April 1999, we entered into a three-year cross promotion
agreement with 24/7 Media, Inc., an online advertising network. Under the
agreement, 24/7 Media promotes our e-commerce and marketing services to its
network of affiliated web sites in exchange for our promotion of 24/7 Media's
advertising, representation and e-mail management services to our merchant
customers. 24/7 Media is primarily a point of distribution for advertising
campaigns that serve banner advertisements on web sites or by e-mail. Our
marketing services are oriented toward strategic planning and creative
implementation of the online marketing or advertising campaigns distributed by
companies such as 24/7 Media.
Although we view our business relationships as an 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 strategic business
relationships may be terminated with little notice.
SALES AND MARKETING
SALES
Our sales strategy is designed to increase market awareness of the ShopNow.com
and b2bNow.com brands, expand the ShopNow and b2bNow marketplaces, and develop
additional revenue opportunities by cross-selling and upselling additional
e-commerce and marketing services to our existing clients.
We sell our merchant services primarily through our direct sales force. Our
sales organization targets businesses and merchants seeking online marketing
services and custom e-commerce services. These employees are currently located
at our headquarters in Seattle, Washington. We intend to increase our sales
presence by opening field sales offices. Our success in doing so will depend on
our ability to attract additional qualified sales personnel.
MARKETING
We currently employ a variety of traditional and online marketing programs,
business development and promotional activities as part of our marketing
strategy. We place advertisements on high-profile third-party web sites and on
our own web sites. We also rely on relationship marketing, including
word-of-mouth advertising by merchants and shoppers, indirect promotions by
merchants with links to our web sites and indirect advertising arising through
use of our services. Although we have reduced our reliance on traffic promotion
agreements as awareness of the ShopNow brand has increased, we believe that
relationship marketing will continue to generate a substantial number of new
merchant customers and additional shopper traffic. We intend to introduce a
number of other brand awareness and customer 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. 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 enabling products and services and online marketplaces 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 technologies. 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 and payment systems. We provide fraud prevention software
through a proprietary interface with HNC Software.
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Our software runs on system hardware that is hosted in leased and third-party
data centers located in Seattle, Washington and Sterling, Virginia. 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 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 to collect product stock keeping unit
transaction data and to track multiple resellers or affiliates. Our databases
have been designed for high levels of performance and scaleability. 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.
INTELLECTUAL PROPERTY
Intellectual property is critical to our 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 products and 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 license agreements with employees, consultants and
affiliates.
We currently have five pending United States patent applications. We do not have
any issued patents.
We have registered the trademark "ShopNow." We have applied for United States
trademark registrations for the marks "ShopNow.com" and "b2bNow.com." These
marks may also be protected in other jurisdictions.
Our transaction processing and advertisement serving technology 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
marketing and for predicting advertisement performance. Although we believe that
we have the right to use such data, trade secret, copyright or other protection
may not be available for such information or others may claim rights to such
information.
In December 1999, we acquired WebCentric, operator and creator of
bottomdollar.com, a proprietary search engine capable of aggregating large
amounts of product data and information (i.e. price, delivery times) from
participating web sites.
RESEARCH AND DEVELOPMENT
Our research and development efforts are directed towards improving the design
and functionality of our online marketplaces, improving our network systems and
enhancing the technology underlying the features of our e-commerce products and
services. Research and development expenses were $2.4 million in 1997,
$4.4 million in 1998 and $8.9 million in 1999.
COMPETITION
The market for e-commerce enabling solutions and online marketplaces is new,
intensely competitive, highly fragmented and rapidly changing. Barriers to entry
are not significant and we expect competition to intensify in the
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future. Although we believe no one company currently offers a range of
e-commerce enabling solutions as comprehensive as our suite of products and
services, many companies offer alternatives to one or more of our products and
services. These companies include InfoSpace, Go2Net, Yahoo! and Cybersource.
The number of companies providing products and services that compete with ours
is large and increasing at a rapid rate. Many of our competitors and potential
competitors have substantially greater financial, technical, marketing and other
resources. We expect that additional companies which to date have not had a
substantial commercial presence on the Internet or in our markets, will offer
competing products and services. In addition, as the use of the Internet and
online products and services increases, larger well-established and
well-financed entities may continue to acquire, invest in or form joint ventures
with providers of e-commerce products and services and existing providers of
e-commerce 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 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.
EMPLOYEES
At December 31, 1999, we had 476 employees, including 208 in merchant services
and b2bNow.com, 229 in the ShopNow marketplace, and 39 in general and
administrative functions. We are not subject to any collective bargaining
agreements and believe that our employee relations are good.
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FACTORS AFFECTING OUR OPERATING RESULTS, OUR BUSINESS AND OUR STOCK PRICE
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS ANNUAL REPORT. 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 ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION IN THIS ANNUAL REPORT, INCLUDING THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES.
RISKS RELATED TO OUR BUSINESS
OUR RAPID GROWTH AND EVOLUTION MAY MAKE IT DIFFICULT TO EVALUATE OUR BUSINESS
AND PROSPECTS
ShopNow was incorporated in January 1994 and operated initially as a computer
services company. In 1996, we began to change the focus of our business to
conducting commerce over the Internet. In August 1998, we launched our first
online marketplace, ShopNow.com. In recent months, particularly with the launch
of b2bNow.com, our business-to-business marketplace, we have increasingly
focused on developing and providing products and services to enable businesses
to conduct online commerce. The recent shifts in our business focus may make it
difficult for you to evaluate our business and prospects. 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
$75.9 million for the year ended December 31, 1999. At December 31, 1999, we had
an accumulated deficit of $105.3 million. We have historically invested heavily
in sales and marketing, technology infrastructure and research and development
and expect to continue 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 a percentage 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
Our business model has only been applied to the Internet since the mid-1990's
and continues to evolve. Therefore we have limited experience in planning the
financial needs and operating expenses of our business. It is difficult for us
to accurately forecast our revenues in any given period. We may not be able to
sustain our recent revenue growth rates or obtain sufficient revenues to achieve
profitability. 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.
Our operating results are likely to fluctuate substantially from period to
period as a result of a number of factors, such as:
- declines in the number of businesses and merchants to which we provide our
products and services;
- 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.
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Period-to-period comparisons of our operating results are not a good indicator
of our future performance. It is likely that our operating results in some
quarters may 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 businesses and merchants with
e-commerce enabling solutions. We have limited experience as a company and,
additionally, the Internet, on which our business model relies, is still
unproven as a business medium. 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 products and services to businesses and
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 marketing efforts.
OUR FUTURE GROWTH WILL DEPEND ON OUR ABILITY TO MAKE AND SUCCESSFULLY INTEGRATE
ADDITIONAL ACQUISITIONS
Our success depends on our ability to continually enhance and expand our
e-commerce enabling products and services and our online marketplaces 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. We have entered into a definitive
agreement to acquire Ubarter.com, subject to the approval of Ubarter.com's
shareholders. The acquisition of Ubarter.com is intended to expand our
capability to enable businesses to exchange business products and services. If
we are unable to identify suitable acquisition targets, or if we are unable to
successfully complete acquisitions and successfully integrate the acquired
businesses, technologies and personnel, our ability to increase product and
service offerings will be reduced. This could cause us to lose business to our
competitors, and our operating results could suffer.
ACQUISITIONS INVOLVE A NUMBER OF RISKS
We actively seek to identify and acquire companies with attributes complementary
to our e-commerce products and services. Since October 1, 1999, we have acquired
five companies. In addition, as described above, we recently agreed to acquire
Ubarter.com.
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;
- improperly evaluating new services and technologies or otherwise being
unable to fully exploit the anticipated opportunity; and
- being unable to successfully integrate the acquired businesses,
technologies and other assets.
If we are unable to accurately assess any newly acquired businesses or
technologies, our business could 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 products and
services. However, we are not currently utilizing the acquired technologies, and
we have determined that the technologies have no other use or value to us.
Because we are not using the acquired technologies, we wrote off substantially
all of the $5.4 million aggregate purchase price for e-Warehouse and CyberTrust
in 1998. 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 the factors listed above would adversely affect our
results of operations.
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In addition, in order to finance any future acquisition, we may 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.
OUR SUCCESS DEPENDS UPON ACHIEVING ADEQUATE MARKET SHARE TO INCREASE OUR
REVENUES AND BECOME PROFITABLE
Our success depends upon achieving significant market penetration and acceptance
of our e-commerce enabling products and services. We have only recently begun to
expand our business-to-business initiatives designed to enable businesses to
maximize their e-commerce opportunities, and our online marketplaces have
achieved only limited market acceptance to date. We may not currently have
adequate market share to successfully execute our business plan. If we are
unable to reach and retain substantial numbers of businesses, merchants and
shoppers, our business model may not be sustainable.
To successfully market and sell our e-commerce enabling products and services we
must:
- become recognized as a leading provider of end-to-end enabling solutions;
- enhance existing products and services;
- add new products and services;
- complete projects on time;
- increase the number of businesses and merchants using our e-commerce
products and services and online marketplaces; and
- continue to increase the attractiveness of the ShopNow marketplace to
shoppers.
IF WE DO NOT INCREASE BRAND AWARENESS OUR SALES MAY SUFFER
Due in part to the emerging nature of the markets for e-commerce enabling
products and services and online marketplaces, together with 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.com and b2bNow.com brand names is critical in achieving
widespread acceptance of our e-commerce enabling products and services and our
online marketplaces. We launched the ShopNow marketplace in August 1998 and we
have only recently begun to expand our business-to-business initiatives designed
to enable businesses to maximize their e-commerce opportunities. The importance
of brand recognition will increase as competition in our markets increases.
Successfully promoting and positioning our brands will depend largely on the
effectiveness of our marketing and sales efforts and our ability to develop
reliable and useful products and services at competitive prices. If our planned
marketing and sales efforts are ineffective, we may need to increase our
financial commitment to creating and maintaining brand awareness among
businesses, merchants and shoppers, 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 could cause our business and
operating results to suffer.
WE FACE SIGNIFICANT COMPETITION
The market for e-commerce enabling products and services and online marketplaces
is highly competitive, and we expect competition to intensify in the future.
Barriers to entry are not significant. Our failure to compete effectively could
result in the following:
- fewer businesses and merchants relying upon our enabling solutions;
- the obsolescence of the technology underlying our products and services;
- fewer businesses and merchants listed in our directories;
- a decrease in shopper traffic on our web sites; and
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- a reduction in the prices of or profits on our products and services.
The number of companies providing e-commerce enabling products and services is
large and increasing at a rapid rate. We expect that additional companies which
to date have not had a substantial commercial presence on the Internet or in our
markets will offer competing products and services. Although we believe no one
company currently offers a range of e-commerce enabling solutions as
comprehensive as our suite of products and services, companies such as
InfoSpace, Go2Net, Yahoo! and Cybersource offer alternatives to one or more of
our products and services.
Many of our competitors and potential competitors have substantial competitive
advantages as compared to us, including:
- larger customer or user bases;
- the ability to offer a wider array of e-commerce products and solutions;
- 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.
These advantages may enable our competitors to adapt more quickly to new
technologies and customer needs, devote greater resources to the promotion or
sale of their products and services, initiate or withstand substantial price
competition, take advantage of acquisition or other opportunities more readily
or develop and expand their product and service offerings more quickly.
In addition, as the use of the Internet and online products and services
increases, larger well-established and well-financed entities may continue to
acquire, invest in or form joint ventures with providers of e-commerce enabling
solutions, and existing providers 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
products and services 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.
IF WE FAIL TO MAINTAIN OUR STRATEGIC BUSINESS RELATIONSHIPS AND ENTER INTO NEW
RELATIONSHIPS OUR BUSINESS WILL SUFFER
An important element of our strategy involves entering into business
relationships with other companies. Our success is dependent on maintaining our
current contractual relationships and developing new strategic relationships.
These contractual relationships typically involve joint marketing, licensing or
promotional arrangements. For example, we have entered into a licensing and
co-marketing agreement with Chase Manhattan Bank, a marketing agreement with
About.com, a cross promotion agreement with 24/7 Media and a software license
agreement with HNC Software. Although these relationships are an important
factor in our strategy because they enable us to enhance our product and service
offerings, 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 business 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 strategic
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 strategic 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
harmed.
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IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID GROWTH OF OUR OPERATIONS OUR BUSINESS
WILL SUFFER
Our ability to successfully offer e-commerce enabling 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 December 31, 1999, our total number of
employees increased from less than 50 to 476. 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.
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
Chairman and Chief Executive Officer, Joe Arciniega, our President and Chief
Operating Officer, Alan Koslow, our Chief Financial Officer, and Dr. Ganapathy
Krishnan, our Chief Technology Officer. Only Mr. Walker has 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 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,
business development and administrative personnel. We intend to hire a
significant number of personnel during the next year, and as of December 31,
1999 we had openings for 67 job positions. Competition for qualified personnel
is intense, particularly in the technology and Internet markets. If we fail to
successfully attract 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 and
operating online marketplaces. In order to remain competitive, we must regularly
upgrade our e-commerce products and 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 quality
and performance of our online offerings may be reduced. In addition, the ability
of our online marketplaces to accommodate an increasing number of businesses,
merchants and shoppers 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 products and 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 the
technology supporting our e-commerce products and services and our online
marketplaces. Our revenues depend, in large part, on the number of businesses
and merchants that use our products and services and the number of shoppers that
access the ShopNow marketplace. This depends, in part, upon our actual and
perceived reliability and performance. Any inability to provide our products and
services or any slowdown or stoppage of our online marketplaces could cause us
to lose clients and therefore lose revenue. Substantially all of our computer
and communications hardware is located at
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leased and third-party facilities in Seattle, Washington and Sterling, Virginia.
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 clients. 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 clients or be unable to
conduct our business at all.
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 or defects. 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 be unable to fix in a timely or cost-effective manner.
WE WILL NEED TO EXPAND AND UPGRADE OUR SYSTEMS IN ORDER TO MAINTAIN CUSTOMER
SATISFACTION
We must expand and upgrade our technology, transaction processing systems and
network infrastructure if the number of businesses and merchants using our
e-commerce products and services and online marketplaces, or the volume of
traffic on our web sites or our clients' web sites, increases substantially. We
could experience periodic 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 products or services or 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.
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS
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.
In addition, we intend to begin developing business opportunities in Japan in
the first half of 2000. We may be unable to develop sufficient relationships in
Japan to take advantage of business opportunities there. In recent periods, the
Japanese economy has experienced weakness. If the Japanese economy continues to
exhibit weakness, our efforts to develop business opportunities in Japan 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.
WE MAY REQUIRE ADDITIONAL FUNDING TO SUCCESSFULLY OPERATE AND GROW OUR BUSINESS
Although we believe that our cash reserves 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.
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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 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 five 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 patent application will result in an
issued patent, or that any future patent will not be challenged, invalidated or
circumvented, or that the rights granted under any patent will provide us with a
competitive advantage. The laws of some 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.
IF THE SECURITY PROVIDED BY OUR E-COMMERCE SERVICES IS BREACHED WE MAY BE LIABLE
TO OUR CLIENTS AND OUR REPUTATION COULD BE HARMED
A fundamental requirement for e-commerce is the secure transmission of
confidential information of businesses, merchants and shoppers 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
products and services or the security of our clients' internal systems. If they
are successful, they could obtain confidential information about businesses and
shoppers using our online marketplaces, including their passwords, financial
account information, credit card numbers or other personal information. We may
be liable to our clients or to shoppers for any 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 products and services. We may be required to expend
significant capital and other resources to license additional encryption or
other technologies to protect against security breaches or to alleviate problems
caused by these breaches. In addition, our clients might decide to stop using
our e-commerce products and services if their customers experience security
breaches.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Prior to January 1, 2000 we devoted substantial resources in an effort to ensure
that our proprietary software, the third-party software on which we rely, and
the underlying systems and protocols did not contain errors or defects
associated with Year 2000 date functions. Since January 1, 2000, we have not
experienced any disruption to our business as the result of any Year 2000
problems or otherwise. If problems do arise, they could adversely affect our
business.
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RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON CONTINUED INCREASES IN THE USE OF THE INTERNET AS A
COMMERCIAL MEDIUM
We depend on the growing use and acceptance of the Internet by businesses,
merchants and shoppers as a medium of commerce. Rapid growth in the use of and
interest in the Internet and online products and services is a recent
development. No one can be certain that acceptance and use of the Internet and
online products and services will continue to develop or that a sufficiently
broad base of businesses, merchants and shoppers will adopt and continue to use
the Internet and online products and 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 e-commerce products and services and online marketplaces. Our future
success will depend in significant part on our ability to improve the
performance, content and reliability of our products and services in response to
both the evolving demands of the market and competitive product and service
offerings. Our efforts in these areas may not be successful. If a large number
of our clients adopt new Internet technologies or standards, we may need to
incur substantial expenditures modifying or adapting our e-commerce products and
services to remain compatible with their systems.
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 service. 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,
Internet users 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 Internet users much more slowly. This could
result in frustration of Internet users, which could decrease online 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 the use of
the Internet, which could in turn decrease the demand for our products and
services, decrease traffic on our online marketplaces, 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,
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<PAGE>
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 products and services, which
could result in decreased demand for our solutions.
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 some products, for example 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 on products sold by us
and delivered into states other than Washington, California, Georgia, Arizona,
Kansas, New York, Tennessee and Kentucky. 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 the states for which we currently collect sales tax 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 or services could result
in liability for penalties as well as substantially higher expenses incurred by
our business.
RISKS RELATED TO AN INVESTMENT IN OUR STOCK
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 us, even if doing
so would be beneficial to our shareholders.
Our articles of incorporation and bylaws establish a classified board of
directors, eliminate the ability of shareholders to call special meetings,
eliminate cumulative voting for directors and establish 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.
Our board of directors has 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
20
<PAGE>
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; 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.
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 shopper traffic;
- 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, e-commerce and marketing industries;
- changes in the market valuations of other Internet or 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.
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<PAGE>
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
We have filed a registration statement relating to a proposed offering in the
first quarter of 2000 of 10,000,000 shares of our common stock, plus up to
1,500,000 additional shares subject to the underwriters' over-allotment option.
Of these shares, we propose to sell 8,550,000, plus the additional 1,500,000
shares subject to the underwriters' over-allotment option, and certain selling
shareholders propose to sell the other 1,450,000 shares. After the offering, a
total of approximately 51,568,035 shares of our common stock will be
outstanding. All the 10,000,000 shares sold in the offering will be freely
tradable. Of the remaining 41,568,035 outstanding shares, 33,107,310 are
unregistered restricted shares and are or will become available for public sale
as follows:
<TABLE>
------------
Number of
Date of Availability for Sale Shares
- ------------------------------------------------------------ ------------
<S> <C>
Currently available for sale................................ 974,913
On March 27, 2000, upon the expiration of our initial public 10,299,088
offering lock-up period.....................................
Ninety days after the date of the prospectus related to our 9,544,622
proposed offering...........................................
At various times upon expiration of one-year holding 12,288,687
periods.....................................................
</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.
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<PAGE>
ITEM 2. PROPERTIES
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
marketing personnel and for our servers. We also lease space in San Francisco,
California; Glendale, California; Phoenix, Arizona; Savannah, Georgia; and
Wichita, Kansas for the operations of various subsidiaries. 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. In December 1999, we executed
a new lease for our principal executive offices in Seattle, Washington. This
lease covers approximately 100,000 square feet and has a ten year term. We
expect to move into our new offices in February 2001. This move could cause a
disruption in our operations and unexpected costs, which would adversely affect
our business.
ITEM 3. LEGAL PROCEEDINGS
From time to time we have been, currently are and expect to continue to be,
subject to legal proceedings and claims in the ordinary course of business. We
do not believe that any of our currently pending litigation is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during our fourth
quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since our initial public offering on September 28, 1999, our common stock has
traded on the Nasdaq Stock National Market under the symbol SPNW. The following
table shows the range of high and low closing sales prices of our common stock
for the periods indicated, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
4th Quarter 1999 (from September 28, 1999).................. $25.13 $10.94
</TABLE>
DIVIDENDS
We have never declared or paid any dividends on our common stock. We currently
expect to retain future earnings, if any, for use in the expansion and
operations of our business and do not anticipate paying any cash dividends in
the foreseeable future.
HOLDERS
As of February 8, 2000, there were 794 holders of record of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
Between October 1, 1999 and December 31, 1999, we issued and sold unregistered
securities as set forth below:
- On October 1, 1999, in connection with the provision of consulting
services, we issued warrants to purchase 30,000 shares of common stock at
$7.50 to Woodstock Group International, LLC.
- On October 5, 1999, in connection with the provision of professional
services, we issued warrants to purchase 10,000 shares of common stock at
$10.00 to StairMaster Corp.
- On October 9, 1999, in connection with a prior private placement, we
issued warrants to purchase 7,000 shares of common stock at $4.00 to Jim
Saunders Wood Specialties.
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- On October 28, 1999, in connection with a prior private placement, we
issued warrants to purchase 7,000 shares of common stock at $4.00 to Jason
Bank.
- On October 28, 1999, pursuant to a Stock Purchase Agreement between
ShopNow.com Inc. and escrow.com, Inc., we issued 208,334 shares of common
stock at $12.00 per share to escrow.com in exchange for 50% of
(i) 500,000 shares of escrow.com's common stock at purchase price of $0.25
per share and (ii) 2,000,000 shares of Series A Preferred Stock at a
purchase price of $2.44 per share.
- On November 11, 1999, we issued warrants to purchase 129,500 and 35,050
shares of common stock at $4.00 and $6.25, respectively, to 20 investors
pursuant to a private placement between December 1997 and January 1999.
- On November 11, 1999, we issued warrants to purchase 2,000 and 1,000
shares of common stock at $4.00 and $6.25, respectively, to Brian Staubus
pursuant to a private placement between December 1997 and January 1999.
Mr. Staubus exercised these warrants in full on November 16, 1999, under
the cashless exercise terms, for net 1,440 and 563 shares, respectively.
- On November 12, 1999, pursuant to an Agreement and Plan of Merger between
ShopNow.com Inc., Racer Acquisition, Inc. and SpeedyClick, Corp., we
issued 3,799,237 shares of common stock at $12.31 per share to
shareholders of SpeedyClick, Corp. in exchange for all equity securities
of SpeedyClick, Corp.
- On December 6, 1999, pursuant to an Agreement and Plan of Merger between
ShopNow.com Inc., Cardinals Acquisition, Inc. and Cortix, Inc., we issued
711,435 shares of common stock at $16.85 per share to shareholders of
Cortix, Inc. in exchange for all equity securities of Cortix, Inc.
- On December 8, 1999, in connection with the provision of services, we
issued warrants to purchase 7,500 and 2,500 shares of common stock at
$12.00 to Intec Inc. and e-solutions Inc., respectively.
- On December 14, 1999, we issued 17,730 shares of common stock to
GiftSpot.com in exchange for 174,825 shares of Series A Preferred Stock at
$1.43 per share.
- On December 17, 1999, pursuant to an Agreement and Plan of Merger between
ShopNow.com Inc., Chiefs Acquisition, Inc. and WebCentric, Inc., we issued
2,161,904 shares of common stock at $21.61 per share to WebCentric, Inc.
in exchange for all equity securities of WebCentric, Inc..
- On December 22, 1999, we issued 264,199 shares of common stock at $18.93
per share to PrivaSeek, Inc. in exchange for 1,262,626 shares of the
Series C Preferred Stock of PrivaSeek at $3.96 per share.
No underwriters were engaged in connection with these issuances and sales. These
securities were issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
Between October 1, 1999 and December 31, 1999, we issued 8,792 shares of common
stock in conjunction with the exercise of options granted under our stock option
plans. The options granted under the stock option plan were issued to our
officers, employees and consultants at exercise prices ranging from $1.00 to
$4.00. No options were granted outside of our stock option plans. These
securities were 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 was not available, the securities were
issued in transactions exempt from registration under the Securities Act of 1933
in reliance upon Section 4(2) of the Securities Act of 1933.
USE OF PROCEEDS
On September 28, 1999, our registration statement on Form S-1, file number
333-80981, became effective. The offering date was September 28, 1999. All
shares offered in the final prospectus (filed with the Securities and Exchange
Commission on September 29, 1999) were sold, thus terminating our offering. The
managing underwriters were Dain Rauscher Wessels, U.S. Bancorp Piper Jaffray,
SoundView Technology Group and Wit Capital Corporation. The offering consisted
of 7,250,000 shares of ShopNow.com Inc. common stock issued in September 1999
and an
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additional 1,087,500 shares of common stock subject to the underwriter's
over-allotment option, which was exercised on October 28, 1999. The aggregate
price of the shares offered and sold was $100.0 million. Proceeds to us, after
accounting for $7.0 million in underwriting discounts and commissions and $1.9
million in other expenses, were $91.1 million.
Since our initial public offering, we used approximately $5.2 million of the net
offering proceeds to repay indebtedness, approximately $19.4 million for working
capital paid directly or indirectly to third parties, approximately
$3.9 million for the purchase or installation of software and equipment,
approximately $5.0 million in connection with the acquisitions of SpeedyClick,
Corp., Cortix, Inc. and WebCentric, Inc., approximately $6.6 million for the
purchase of equity securities of various e-commerce companies and approximately
$51.5 million for the net purchase of temporary investments consisting of cash,
cash equivalents and short-term, interest-bearing, investment-grade securities.
We have not used any of the net offering proceeds for the construction of plant,
building or facilities or purchases of real estate. The use of proceeds from our
initial public offering does not represent a material change in the use of
proceeds described in the registration statement relating to the offering.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly, to directors,
officers or general partners of ShopNow or their associates, persons owning 10%
or more of any class of our securities, or affiliates of ShopNow.com Inc.
ITEM 6. SELECTED FINANCIAL DATA
Due to the acquisitions effected in 1998 and 1999, we believe that
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 annual
report.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
January 20,
1994
(Inception) to Year Ended December 31,
December 31, ----------------------------------------------------
1994 1995 1996 1997 1998 1999
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:................................................ $ 279 $ 727 $ 993 $ 604 $ 7,154 $ 36,955
Cost of revenues:........................................ 127 323 430 515 5,849 27,329
------------ ------- ------ ------- -------- --------
Gross profit........................................... 152 404 563 89 1,305 9,626
------------ ------- ------ ------- -------- --------
Operating expenses:
Sales and marketing.................................... 116 163 610 1,201 12,183 55,072
General and administrative............................. 216 347 656 918 3,549 8,342
Research and development............................... -- -- 25 2,436 4,370 8,885
Amortization of intangible assets...................... -- -- 32 136 730 8,805
Stock-based compensation............................... -- -- -- -- 182 7,216
Unusual item - write-off of acquired technology........ -- -- -- -- 5,207 --
------------ ------- ------ ------- -------- --------
Total operating expenses............................... 332 510 1,323 4,691 26,221 88,320
------------ ------- ------ ------- -------- --------
Loss from operations................................. (180) (106) (760) (4,602) (24,916) (78,694)
Nonoperating income (expense), net....................... (1) (7) (50) (164) 171 2,751
------------ ------- ------ ------- -------- --------
Net loss............................................. $ (181) $ (113) $ (810) $(4,766) $(24,745) $(75,943)
============ ======= ====== ======= ======== ========
Basic and diluted net loss per share(1).................. $ (0.11) $ (0.06) $(0.40) $ (1.83) $ (7.01) $ (5.80)
============ ======= ====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
------------------
December 31, 1999
DOLLARS IN THOUSANDS ------------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................. $ 10,660
Working capital........................................... 43,431
Total assets.............................................. 274,174
Total liabilities......................................... 44,961
Total shareholders' equity................................ 229,213
</TABLE>
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<TABLE>
<CAPTION>
------------------------------------------
As of and for the three months ended
------------------------------------------
June 30, Sept. 30, Dec. 31,
1999 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Other Data(2):
Number of advertising and merchandising clients on the
ShopNow marketplace....................................... 181 336 514
Number of merchants listed on the ShopNow marketplace....... 33,841 37,099 45,522
Number of shopper visits to the ShopNow marketplace......... 6,422,000 7,485,000 21,461,497
</TABLE>
(1) See Note 2 to the Consolidated Financial Statements for a description of the
method used to compute basic and diluted net loss per share.
(2) The number of advertising and merchandising clients represents the number of
clients that purchased an advertising/merchandising package during the
applicable quarter; the number of merchants listed represents the number of
merchants as of the last day of the applicable quarter; the number of
shopper visits represents the total number of shopper visits to the ShopNow
marketplace during the applicable quarter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS MAY,
WILL, SHOULD, EXPECT, PLAN, INTEND, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY
CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED IN THE "FACTORS AFFECTING
OPERATING RESULTS, OUR BUSINESS AND OUR STOCK PRICE" SECTION IN PART I, ITEM 1.
OVERVIEW
ShopNow provides an end-to-end solution that enables businesses to engage in
e-commerce with other businesses, merchants and shoppers. Our end-to-end
solution consists of access to online marketplaces combined with a comprehensive
suite of e-commerce enabling products and services. These products and services
include custom application and online store development and design, hosting and
maintenance, sales and marketing services and transaction processing. The
ShopNow marketplace aggregates merchants and shoppers over a distributed network
of web sites. Our recently launched business-to-business portal and marketplace,
b2bNow.com, is designed to enable businesses to conveniently engage in online
transactions with one another.
We were incorporated in January 1994 and initially operated as a computer
services company. In 1996, we began to change the focus of our business to
conducting commerce over the Internet. In May 1997, we launched BuySoftware.com,
an online computer products store. During 1998, we completed three acquisitions,
including the acquisition of Media Assets, Inc., a direct marketing company,
launched ShopNow.com and began offering merchants e-commerce enabling products
and services. In April 1999, we changed our name from TechWave Inc. to
ShopNow.com Inc. In June 1999, we ceased operation of BuySoftware.com because we
determined it was inconsistent with our evolving strategy. We consummated three
acquisitions in the fourth quarter of 1999 and two acquisitions in
January 2000, and we recently launched our business-to-business portal,
b2bNow.com.
We currently derive substantially all of our revenues from merchant services and
the ShopNow marketplace. With the recent launch of b2bNow.com, we expect to
derive additional revenues from the purchase, sale and exchange of goods and
services through that portal.
Revenues from merchant services are generated principally through development
fees, hosting fees and sales and marketing services. Our merchant services can
be purchased as a complete end-to-end suite of services or separately, allowing
businesses and merchants to select only those services they desire. We recognize
revenues from development of custom applications and online stores and marketing
projects on a percentage of completion basis over the period of development or
the period of the marketing project. These projects generally range from two to
five months. Hosting contracts typically have a term of one year, with fees
charged on a monthly basis.
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Revenues from the ShopNow marketplace, exclusive of BuySoftware.com, are
generated primarily from advertising and merchandising fees paid by merchants,
leads and orders delivered to merchants, as well as transaction processing and
licensing fees. Advertising consists of the sale of impressions on the
ShopNow.com site and merchandising consists of the sale of specific positions or
category sponsorships on the site. These agreements typically have a term of one
to four months. We generate transaction processing and licensing fees from our
payment processing and fraud prevention products and services.
In limited circumstances, we offer products directly to shoppers on the ShopNow
marketplace. We principally offer these products to increase the number of leads
we generate for merchants on the ShopNow marketplace. In these instances where
we act as merchant-of-record, 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
revenues. These sales revenues represented approximately 20% of our pro forma
(excluding BuySoftware.com) revenues in 1999, and we anticipate that this
percentage will decrease in 2000 and thereafter. Our gross profit on the
products we sell is generally lower than the gross profit on our other revenues.
We expect to derive revenues from transactions, advertising, merchandising and
services fees from b2bNow.com, our business-to-business portal and online
marketplace. In addition, in January 2000 we entered into a definitive agreement
to acquire Ubarter.com, which operates an online business-to-business barter
marketplace. We plan to incorporate the barter marketplace as an additional
feature of b2bNow.com to provide businesses with an alternative way to conduct
transactions with each other. As of December 31, 1999, we had not recorded any
revenues from b2bNow.com.
Cost of revenues generated from merchant services includes all direct labor
costs incurred in connection with the provision of services, as well as fees
charged by third-party vendors that have directly contributed to the design,
development and implementation of our merchant services. Cost of revenues
generated from the ShopNow marketplace consists primarily of the portion of our
Internet telecommunications connections that are directly attributable to
traffic on the ShopNow marketplace and the direct labor costs incurred in
maintaining and enhancing our network infrastructure. In order to fulfill our
obligations under our lead and order delivery programs, we occasionally purchase
shopping traffic from third parties by placing on their web sites advertisements
that, when clicked on by a visitor, send the visitor to the ShopNow marketplace.
Any shopping traffic that we purchase from a third party that is used to fulfill
these obligations is included as cost of revenues. Cost of revenues on the
products that we sell as merchant-of-record includes the cost of the product,
credit card fees and shipping costs.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues for the year ended December 31, 1999 were $37.0 million compared to
$7.2 million for the year ended December 31, 1998, an increase of
$29.8 million. The increase in revenues was due primarily to the expansion of
the ShopNow marketplace and increased demand for merchant services, including
the services of Media Assets, which we acquired in September 1998. The
BuySoftware.com portion of revenues for the year ended December 31, 1999 was
$9.9 million compared to $4.5 million for the year ended December 31, 1998, an
increase of $5.4 million, or 18.3% of the total increase in revenues for the
year.
SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and
transaction processing portion of revenues for the year ended December 31, 1999
was $25.8 million compared to $4.2 million for the year ended December 31, 1998,
an increase of $21.6 million. The BuySoftware.com portion of these revenues was
37.7% for the year ended December 31, 1999, compared to 93.4% for the year ended
December 31, 1998. During 1999 we experienced a significant increase in our
merchant listings, shopper traffic and affiliate and syndication shopping sites,
which resulted in an increase in merchandising and advertising revenues,
transaction processing fees and sales of products to shoppers, exclusive of
BuySoftware.com.
27
<PAGE>
MERCHANT SERVICES. The merchant services portion of revenues for the year ended
December 31, 1999 was $11.1 million compared to $2.9 million for the year ended
December 31, 1998, an increase of $8.2 million. The increase in our merchant
services revenues was due primarily to increased demand for merchant services,
including the services of Media Assets.
COST OF REVENUES
The cost of revenues for the year ended December 31, 1999 was $27.3 million
compared to $5.8 million for the year ended December 31, 1998, an increase of
$21.5 million. The increase in our cost of revenues was due primarily to
increased product sales from the ShopNow marketplace and cost of revenues for
merchant services, including the services of Media Assets. The BuySoftware.com
portion of cost of revenues for the year ended December 31, 1999 was
$11.2 million compared to $4.5 million for the year ended December 31, 1998, an
increase of $6.7 million, or 31.4% of the total increase in the cost of
revenues.
SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and
transaction processing portion of cost of revenues for the year ended
December 31, 1999 was $20.2 million compared to $4.5 million for the year ended
December 31, 1998, an increase of $15.7 million. The BuySoftware.com portion of
these cost of revenues was 55.3% for the year ended December 31, 1999, compared
to 96.8% for the year ended December 31, 1998. The increase in our ShopNow
marketplace and transaction processing cost of revenues, exclusive of
BuySoftware.com, was due primarily to increased merchandising revenues and
product sales from the ShopNow marketplace.
MERCHANT SERVICES. The merchant services portion of cost of revenues for the
year ended December 31, 1999 was $7.2 million compared to $1.4 million for the
year ended December 31, 1998, an increase of $5.8 million. The increase in our
merchant services cost of revenues was due primarily to increased demand for
merchant services, including the services of Media Assets.
GROSS PROFIT. Gross profit for the year ended December 31, 1999 was $9.6
million, compared to a gross profit of $1.3 million for the year ended
December 31, 1998, an increase of $8.3 million. This increase in gross profit
was due primarily to the increase in revenues from advertising and merchandising
over the ShopNow marketplace and merchant services, which contribute greater
gross profits than revenues generated on the sales of products over the ShopNow
marketplace. Discontinuing the BuySoftware.com business in June 1999 also had a
positive effect on our overall gross profit. The BuySoftware.com business had
historically operated with minimal or negative gross profits. We expect that any
future sales of products on the ShopNow marketplace will be sold at minimal or
negative gross profits.
SALES AND MARKETING. Sales and marketing expenses consist primarily of costs
associated with marketing programs such as advertising and public relations, as
well as salaries and commissions. Sales and marketing expenses for the year
ended December 31, 1999 were $55.1 million compared to $12.2 million for the
year ended December 31, 1998, an increase of $42.9 million. This increase was
due primarily to increased spending as a result of the expansion of our merchant
services and of the ShopNow marketplace, including additional personnel and
nationwide print, radio and television advertisements. We expect to continue to
increase our sales and marketing expenses in 2000 to promote our merchant
services offerings and the ShopNow network.
GENERAL AND ADMINISTRATIVE. 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. General and
administrative expenses for the year ended December 31, 1999 were $8.3 million,
compared to $3.5 million for the year ended December 31, 1998, an increase of
$4.8 million. This increase was due primarily to an increase in personnel from
internal growth and acquisitions. We anticipate continued growth in our general
and administrative expenses at least through 2000. In September 1999, we settled
a lawsuit brought by a party with which we had entered into a contract. As a
result of the terms of this settlement, in the quarter ended September 30, 1999,
we recognized additional general and administrative expenses in the amount of
$1.5 million.
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<PAGE>
RESEARCH AND DEVELOPMENT. 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. Research and
development expenses for the year ended December 31, 1999 were $8.9 million,
compared to $4.4 million for the year ended December 31, 1998, an increase of
$4.5 million. This increase was due primarily to the development and enhancement
of our technology platform and to an increase in technology personnel. These
employees focus on developing our technology platform as well as building the
overall infrastructure that supports our merchant services and the ShopNow
marketplace. We anticipate continued growth in our research and development
expenses at least through 2000.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets resulting
from acquisitions is primarily related to the amortization of customer lists,
domain names, acquired technology, proprietary concepts and goodwill.
Amortization of intangible assets expense for the year ended December 31, 1999
was $8.8 million, compared to $730,000 for the year ended December 31, 1998, an
increase of $8.1 million. This increase was due primarily to the increase in
intangible assets and related amortization expenses from business acquisitions
completed during 1999, including the acquisitions of GO Software, Inc.,
SpeedyClick, Corp., Cortix, Inc. and Webcentric, Inc. We expect continued growth
in our amortization of intangible assets expense resulting from future business
acquisitions.
STOCK-BASED COMPENSATION. 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. Stock-based compensation expense for
the year ended December 31, 1999 was $7.2 million, compared to $182,000 for the
year ended December 31, 1998, an increase of $7.0 million. The amount of
deferred compensation resulting from these grants is generally amortized over a
three-year vesting period. During the fourth quarter of 1999, the contingent
performance criteria relating to a stock option grant for 310,000 shares of the
Company's common stock with an exercise price of $4.00 were satisfied.
Accordingly, a stock-based compensation charge of approximately $3.3 million was
recognized in the fourth quarter of 1999.
GAIN ON SALE OF MARKETABLE EQUITY SECURITIES. Gain on sale of marketable equity
securities consists primarily of the gains recognized from the sale of our
investment in 110,000 shares of common stock of FreeShop.com in the fourth
quarter of 1999. There were no gains on sales of marketable equity securities in
1998.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily of
interest income on cash and cash equivalents and interest expense on our
outstanding debt obligations. Other expense, net for the year ended
December 31, 1999 was $127,000, compared to other income, net of $171,000 for
the year ended December 31, 1998, a decrease of $298,000. Although interest
income in 1999 increased due to the increase in our cash and short-term
investments realized from our initial public offering, the amount of additional
interest charges from our notes and leases payable, as well as the amortization
of debt financing costs incurred during 1999, resulted in an overall other
expense, net position for the year ended 1999.
NET LOSS. Net loss for the year ended December 31, 1999 was $75.9 million,
compared to a net loss of $24.7 million for the year ended December 31, 1998, an
increase of $51.2 million. This increase was due primarily to an increase in our
operating expenses, most significantly sales and marketing expenses, partially
offset by our increase in gross profit during the same period. We expect to
incur additional net losses in 2000.
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, 1997, an increase of $4.4 million, or 67.0% of the total increase
in revenues for the year.
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SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and
transaction processing 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. The increase in our ShopNow marketplace and
transaction processing 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. The increase in our merchant
services revenues was due primarily to revenues generated from Media Assets.
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 Internet site design to businesses.
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. 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.
SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and
transaction processing 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. The increase in our ShopNow
marketplace and transaction processing 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. The increase in our
merchant services cost of revenues was due primarily to cost of revenues
incurred by Media Assets. Cost of revenues for 1997 was comprised of direct
labor and related costs to provide computer services to clients.
GROSS PROFIT. Gross profit for the year ended December 31, 1998 was $1.3
million compared to $89,000 for the year ended December 31, 1997, an increase of
$1.2 million. This increase in gross profit was due primarily to the positive
gross profit contributed from Media Assets.
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 marketplace. Substantially all of the selling expenses incurred in 1997
were in support of our previous computer services business, which was
discontinued 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, an increase in our technology
personnel and expansion of the overall infrastructure that supports the ShopNow
marketplace.
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.
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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. 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.
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 and service 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 an increase in interest income earned by our increased cash reserves as a
result of our financing activities during 1998 as compared to 1997.
NET LOSS. Net loss for the year ended December 31, 1998 was $24.7 million,
compared to a net loss of $4.8 million for the year ended December 31, 1997, an
increase of $19.9 million. This increase was due primarily to an increase in our
operating expenses, most significantly sales and marketing expenses, partially
offset by our increase in gross profit during the same period.
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 beginning in late 1997 of our
computer services business.
SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and
transaction processing 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
ShopNow marketplace and transaction processing 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. All of merchant services revenues
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 expanding the
BuySoftware.com business, partially offset by the phase out of our computer
services business.
SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and
transaction processing 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. All of ShopNow marketplace and transaction processing
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 the merchant services
cost of revenues was related to providing computer services to businesses.
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GROSS PROFIT. Gross profit for the year ended December 31, 1997 was $89,000
compared to $563,000 for the year ended December 31, 1996, a decrease of
$474,000. This decrease in gross profit was due primarily to the decrease in
revenues from the phase out of our computer services business and the
introduction and operation of the BuySoftware.com business, which had
historically operated at a minimal or negative gross profit level.
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 online
computer products store. In the year ended December 31, 1997, $644,000 of the
sales 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 online computer
products store.
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 due entirely to
the development of our technology platform, which began in 1997 to support our
growth and transition to an online computer products store.
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 an increase in interest
expense from our various financing activities by means of notes payable and
lines of credit with commercial banks.
NET LOSS. Net loss for the year ended December 31, 1997 was $4.8 million,
compared to a net loss of $810,000 for the year ended December 31, 1996, an
increase of $4.0 million. This increase was due primarily to an increase in our
operating expenses, most significantly research and development and sales and
marketing expenses, as well as our decrease in gross profit during the same
period.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, we had net operating loss carryforwards of
approximately $76.4 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 July 1999 is limited to an aggregate of
approximately $14.3 million per year due to sales of Series D and Series E
convertible preferred stock to third parties in April 1998 and the sale of
Series I convertible preferred stock to Chase Manhattan Bank in July 1999, which
resulted in ownership changes. 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have experienced net losses and negative cash flows from
operations. As of December 31, 1999, we had an accumulated deficit of $105.3
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 December 31, 1999, our aggregate net proceeds
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have been $161.4 million from issuing equity securities and $21.8 million from
issuing debt securities. As of December 31, 1999, we had $62.8 million in cash
and short-term investments. During the fourth quarter of 1999, we closed our
initial public offering of 8,337,500 shares of common stock and received net
proceeds of $91.1 million.
Net cash used in operating activities was $48.0 million for the year ended
December 31, 1999, compared to $16.0 million for the year ended December 31,
1998. The increase was due primarily to the increase in our net loss for the
year ended December 31, 1999, to $75.9 million compared to $24.7 million for the
year ended December 31, 1998.
Net cash used in investing activities was $82.0 million for the year ended
December 31, 1999, compared to $5.3 million for the year ended December 31,
1998. The increase was due primarily to the net increase in purchases of
short-term investments of $52.0 million during 1999, compared to $150,000 during
1998, and due to the increase in purchases of property and equipment of $13.5
million during 1999, compared to $2.2 million during 1998.
Net cash provided by financing activities was $130.8 million for the year ended
December 31, 1999, compared to $30.8 million for the year ended December 31,
1998. The increase was due primarily to net proceeds from the issuance of common
stock of $92.8 million during 1999, compared to $25,000 during 1998, and to the
increase in the amount of proceeds from issuances of debt of $12.4 million
during 1999, compared to $3.7 million during 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 May 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, a $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 was repaid. The line of credit bears interest at
Transamerica Business Credit Corporation's base rate plus 2%, is secured by
substantially all of our assets and was amended in January 2000 to expire on
March 31, 2001. The term loan bears interest at 12%, is secured by substantially
all of our assets and matures in March 2002. The bridge loan bore interest at
12% and was repaid in October 1999 after the closing of our initial public
offering.
Our capital requirements depend on numerous factors, including the rate of
expansion of the b2bNow.com and ShopNow marketplaces, the investments we make in
our technology platform, the number of acquisitions that are completed and the
composition of the consideration between cash, debt and stock for any future
acquisitions, and the resources we devote to expansion of our sales, marketing
and branding programs. We have also entered into agreements with Chase Manhattan
Bank, About.com and 24/7 Media, which together require us to make aggregate
advertising and marketing expenditures of approximately $6.0 million in 2000,
decreasing annually to $1.0 million in 2004. We believe that existing cash
balances and cash generated from operations, together with the net proceeds from
our initial public offering (excluding the proceeds from our proposed public
offering), will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures at least through the next 12 months. After that
time, we may be required to raise additional financing. We cannot be sure 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. We
cannot be sure that financing will be available in amounts or on terms
acceptable to us, if at all.
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SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth our unaudited selected consolidated quarterly
financial data for the years ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended 1998 Three Months Ended 1999
------------------------------------------------ -------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA
Revenues................... $ 399 $ 740 $ 1,858 $ 4,157 $ 7,568 $ 8,414 $ 7,555 $ 13,418
Cost of revenues........... 431 753 1,629 3,036 7,140 7,543 4,811 7,835
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............. (32) (13) 229 1,121 428 871 2,744 5,583
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing...... 1,345 3,133 3,212 4,493 5,472 12,808 15,265 21,527
General and
administrative........... 509 699 1,069 1,272 960 1,521 3,012 2,849
Research and
development.............. 459 983 1,560 1,368 1,600 1,334 2,433 3,518
Amortization of
intangible assets........ 57 61 223 389 558 1,080 2,096 5,071
Stock-based
compensation............. -- 2 35 145 133 1,822 592 4,669
Unusual item--write-off
of
acquired technology.... -- -- -- 5,207 -- -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................. 2,370 4,878 6,099 12,874 8,723 18,565 23,398 37,634
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations... (2,402) (4,891) (5,870) (11,753) (8,295) (17,694) (20,654) (32,051)
Nonoperating income
(expense), net........... 12 97 68 (6) 15 (260) (360) 3,356
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss............... $(2,390) $(4,794) $(5,802) $(11,759) $(8,280) $(17,954) $(21,014) $(28,695)
========= ========== ========== ========== ========== ========== ========== ==========
Basic and diluted pro forma
net loss per share (1)... $ (0.28) $ (0.37) $ (0.41) $ (0.75) $ (0.48) $ (0.80) $ (0.82) $ (0.77)
========= ========== ========== ========== ========== ========== ========== ==========
Weighted average shares
used to calculate pro
forma basic and diluted
net loss per share (1)... 8,639,544 13,022,436 14,017,673 15,661,418 17,168,592 22,538,696 25,776,927 37,313,691
========= ========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) Basic and diluted pro forma net loss per share is computed based on the
weighted average number of shares outstanding, giving effect to the
conversion of convertible preferred stock on an as-if converted basis from
the original issuance date.
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 on 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.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS," to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. We believe our revenue recognition
practices are in conformity with the guidelines prescribed in SAB No. 101.
34
<PAGE>
SEASONALITY
We believe that our advertising and merchandising revenues on the ShopNow
marketplace are subject to seasonality changes as 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
Prior to January 1, 2000, we devoted substantial resources in an effort to
ensure that our proprietary software, the third-party software on which we rely,
and the underlying systems and protocols did not contain errors associated with
Year 2000 date functions. Since January 1, 2000, we have not experienced any
disruption as a result of any Year 2000 problems or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have instruments sensitive to market risk relating to exposure to
changing interest rates and market prices. We do not enter into financial
instruments for trading or speculative purposes and do not currently utilize
derivative financial instruments. Our operations are conducted primarily in the
United States and as such are not subject to material foreign currency exchange
rate risk.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. All of the potential changes noted above are based on
sensitivity analyses performed on our investment portfolio balances as of
December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
35
<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, 1998 and 1999,
and the related consolidated statements of operations, comprehensive loss,
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 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 to
consolidated financial statements and Financial Statement Schedules 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,
January 19, 2000
36
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------
As of December 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 9,849 $ 10,660
Short-term investments.................................... 150 52,172
Accounts receivable, net of allowance for doubtful
accounts of $230 in 1998 and $291
in 1999................................................. 2,266 6,591
Unbilled services......................................... 1,448 2,102
Prepaid expenses and other................................ 709 5,559
------------ ------------
Total current assets.................................... 14,422 77,084
Property and equipment, net................................. 4,185 19,385
Goodwill, net............................................... 515 23,860
Other intangible assets, net................................ 3,944 104,713
Investments in marketable equity securities................. -- 30,884
Other assets, net........................................... 717 18,248
------------ ------------
Total assets............................................ $ 23,783 $ 274,174
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 3,551 $ 8,330
Accrued liabilities....................................... 1,132 8,778
Line of credit............................................ 238 --
Current portion of notes and leases....................... 1,133 8,565
Customer deposits......................................... 2,155 2,194
Deferred revenue.......................................... 535 5,786
------------ ------------
Total current liabilities............................... 8,744 33,653
Notes and leases payable, less current portion.............. 1,837 5,409
Put warrant liability....................................... -- 1,388
Deferred tax liabilities.................................... -- 4,511
------------ ------------
Total liabilities....................................... 10,581 44,961
------------ ------------
Commitments (Note 11)
Shareholders' Equity:
Convertible preferred stock, $0.001 par value: Authorized
shares - 20,000,000 in 1998 and 5,000,000 in 1999;
issued shares - 12,299,896 in 1998 and none in 1999,
preference in liquidation of $41,753 in 1998............ 35,070 --
Common stock, $0.001 par value: Authorized
shares - 200,000,000; issued shares - 4,602,573 in 1998
and 42,923,035 in 1999.................................. 6,559 325,502
Common stock warrants..................................... 1,866 8,260
Deferred compensation..................................... (930) (6,713)
Accumulated other comprehensive income.................... -- 7,470
Accumulated deficit....................................... (29,363) (105,306)
------------ ------------
Total shareholders' equity................................ 13,202 229,213
------------ ------------
Total liabilities and shareholders' equity................ $ 23,783 $ 274,174
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
37
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------------------------
For the Year Ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
ShopNow marketplace and transaction processing........ $ 69 $ 4,211 $ 25,841
Merchant services..................................... 535 2,943 11,114
------------ ------------ ------------
Total revenues...................................... 604 7,154 36,955
------------ ------------ ------------
Cost of Revenues:
ShopNow marketplace and transaction processing........ 159 4,493 20,169
Merchant services..................................... 356 1,356 7,160
------------ ------------ ------------
Total cost of revenues.............................. 515 5,849 27,329
------------ ------------ ------------
Gross profit............................................ 89 1,305 9,626
------------ ------------ ------------
Operating Expenses:
Sales and marketing................................... 1,201 12,183 55,072
General and administrative............................ 918 3,549 8,342
Research and development.............................. 2,436 4,370 8,885
Amortization of intangible assets..................... 136 730 8,805
Stock-based compensation.............................. -- 182 7,216
Unusual item - impairment of acquired technology...... -- 5,207 --
------------ ------------ ------------
Total operating expenses............................ 4,691 26,221 88,320
------------ ------------ ------------
Loss from operations.............................. (4,602) (24,916) (78,694)
------------ ------------ ------------
Nonoperating Income (Expense):
Gain on sale of marketable equity securities.......... -- -- 2,878
Interest income (expense), net........................ (164) 171 (127)
------------ ------------ ------------
Total nonoperating income (expense)................. (164) 171 2,751
------------ ------------ ------------
Net loss................................................ $ (4,766) $ (24,745) $ (75,943)
============ ============ ============
Basic and diluted net loss per share.................... $ (1.83) $ (7.01) $ (5.80)
============ ============ ============
Weighted average shares outstanding used to compute
basic and diluted net loss per share.................. 2,608,398 3,532,054 13,095,893
============ ============ ============
Basic and diluted pro forma net loss per share.......... $ (2.95)
============
Weighted average shares outstanding used to compute
basic and diluted pro forma net loss per share........ 25,754,882
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
38
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------
For the Year Ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss................................................ $ (4,766) $ (24,745) $ (75,943)
Unrealized gain on marketable equity securities......... -- -- 7,470
------------ ------------ ------------
Comprehensive loss...................................... $ (4,766) $ (24,745) $ (68,473)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
39
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Convertible Preferred
Stock Common Stock Common
---------------------- ---------------------- Stock Subscription Deferred
Shares Amount Shares Amount Warrants Receivable Compensation
----------- -------- ---------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- (1,112)
Compensation attributable to
stock options vesting......... -- -- -- -- -- -- 182
Net loss........................ -- -- -- -- -- -- --
----------- -------- ---------- -------- -------- ----------- ------------
Balances, December 31, 1998....... 12,299,896 35,070 4,602,573 6,559 1,866 -- (930)
<CAPTION>
-------------------------------------------
Accumulated
Other Total
Comprehensive Accumulated Shareholders'
Income Deficit Equity
------------- ----------- -------------
<S> <C> <C> <C>
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....................... -- -- --
Compensation attributable to
stock options vesting......... -- -- 182
Net loss........................ -- (24,745) (24,745)
------------- ----------- ------------
Balances, December 31, 1998....... -- (29,363) 13,202
</TABLE>
40
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Convertible Preferred
Stock Common Stock Common
---------------------- ---------------------- Stock Subscription Deferred
Shares Amount Shares Amount Warrants Receivable Compensation
----------- -------- ---------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuances 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 -- --
Issuance of Series I preferred
stock and warrants to acquire
common stock.................. 2,100,000 16,621 -- -- 2,188 -- --
Exercise of Series C preferred
stock warrants................ 161,545 220 -- -- -- -- --
Preferred stock converted to
common stock upon closing of
initial public offering....... (20,189,061) (89,351) 20,189,061 89,351 -- -- --
Common stock issued upon closing
of initial public offering,
net of issuance costs......... -- -- 8,337,500 91,084 -- -- --
Common stock issued for
businesses acquired........... -- -- 8,039,363 116,345 -- -- --
Issuance of warrants for loan
origination fees.............. -- -- -- -- 588 -- --
Issuance of options and warrants
to marketing partners......... -- -- -- 46 2,041 -- --
Exercise of common stock
options....................... -- -- 800,347 1,541 -- (390) --
Exercise of common stock
warrants...................... -- -- 576,156 994 (483) -- --
Issuance of common stock in
consideration for professional
services...................... -- -- 7,000 4 -- -- --
Issuance of common stock in
consideration for investing
activities.................... -- -- 500,263 7,669 -- -- --
Repurchase of common stock...... -- -- (129,228) (46) -- -- --
Issuance of compensatory stock
options....................... -- -- -- 12,345 -- -- (12,183)
Compensation attributable to
stock options vesting......... -- -- -- -- -- -- 6,400
Unrealized gain on
investments................... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
----------- -------- ---------- -------- -------- ----------- ------------
Balances, December 31, 1999....... -- $ -- 42,923,035 $325,892 $ 8,260 $ (390) $ (6,713)
=========== ======== ========== ======== ======== =========== ============
<CAPTION>
-------------------------------------------
Accumulated
Other Total
Comprehensive Accumulated Shareholders'
Income Deficit Equity
------------- ----------- -------------
<S> <C> <C> <C>
Issuances 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
Issuance of Series I preferred
stock and warrants to acquire
common stock.................. -- -- 18,809
Exercise of Series C preferred
stock warrants................ -- -- 220
Preferred stock converted to
common stock upon closing of
initial public offering....... -- -- --
Common stock issued upon closing
of initial public offering,
net of issuance costs......... -- -- 91,084
Common stock issued for
businesses acquired........... -- -- 116,345
Issuance of warrants for loan
origination fees.............. -- -- 588
Issuance of options and warrants
to marketing partners......... -- -- 2,087
Exercise of common stock
options....................... -- -- 1,151
Exercise of common stock
warrants...................... -- -- 511
Issuance of common stock in
consideration for professional
services...................... -- -- 4
Issuance of common stock in
consideration for investing
activities.................... -- -- 7,669
Repurchase of common stock...... -- -- (46)
Issuance of compensatory stock
options....................... -- -- 162
Compensation attributable to
stock options vesting......... -- -- 6,400
Unrealized gain on
investments................... 7,470 -- 7,470
Net loss........................ -- (75,943) (75,943)
------------- ----------- ------------
Balances, December 31, 1999....... $ 7,470 $ (105,306) $ 229,213
============= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
41
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------
For the Year Ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net loss.............................................. $ (4,766) (24,745) $ (75,943)
Adjustments to reconcile net loss to net cash used in
operating activities -
Unusual item - impairment of acquired
technology...................................... -- 5,207 --
Depreciation and amortization..................... 277 1,602 13,180
Write down of long-term investments............... 34 -- --
Amortization of deferred compensation............. -- 182 6,562
Operating expenses paid in stock and warrants..... -- 125 2,041
Changes in operating assets and liabilities,
excluding effect of businesses acquired:
Accounts receivable............................. (51) 2,107 (3,389)
Prepaid expenses and other current assets....... (189) (77) (4,640)
Other assets.................................... -- -- (1,559)
Unbilled services and customer deposits, net.... -- (3,713) (615)
Accounts payable................................ 831 2,303 4,453
Accrued liabilities............................. 417 521 7,222
Deferred revenue................................ -- 535 4,676
------------ ------------ ------------
Net cash used in operating activities................... (3,447) (15,953) (48,012)
------------ ------------ ------------
Investing Activities:
Purchases of property and equipment................... (481) (2,189) (13,457)
Purchase of short-term investments.................... -- (150) (101,734)
Sale of short-term investments........................ -- -- 49,712
Sale of marketable equity securities.................. -- -- 112
Investments in equity securities and other assets..... (943) (147) (7,251)
Acquisition of businesses, net of cash acquired of
$2,850 in 1998 and $711 in 1999..................... (250) (2,851) (9,387)
------------ ------------ ------------
Net cash used in investing activities................... (1,674) (5,337) (82,005)
------------ ------------ ------------
</TABLE>
42
<PAGE>
SHOPNOW.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------
For the Year Ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Financing Activities:
Borrowings under bank line of credit.................. $ 200 $ 38 $ 1,000
Principal payments under bank line of credit.......... (78) -- (1,238)
Proceeds from convertible subordinated notes.......... 1,253 -- --
Proceeds from debt obligations........................ 2,562 3,700 12,410
Payments on debt obligations.......................... (242) (6,034) (7,544)
Proceeds from sale of preferred stock and warrants,
net of issuance costs............................... 1,800 33,034 33,429
Proceeds from sale of common stock, net of issuance
costs............................................... -- 25 92,817
Common stock repurchased.............................. (10) -- (46)
------------ ------------ ------------
Net cash provided by financing activities............... 5,485 30,763 130,828
------------ ------------ ------------
Net increase in cash and cash equivalents............... 364 9,473 811
Cash and cash equivalents at beginning of period........ 12 376 9,849
------------ ------------ ------------
Cash and cash equivalents at end of period.............. $ 376 $ 9,849 $ 10,660
============ ============ ============
Supplementary disclosure of cash flow information:
Cash paid during the period for interest.............. $ 11 $ 232 $ 962
============ ============ ============
Non-cash investing and financing activities:
Conversion of note payable and convertible
subordinated debt to preferred stock.............. $ 1,603 $ 500 $ --
============ ============ ============
Conversion of note payable to common stock.......... $ 89 $ -- $ --
============ ============ ============
Preferred stock issued as part of investment in
marketable equity securities...................... -- -- 25,100
============ ============ ============
Common stock, options and warrants issued and
liabilities
assumed as part of business and technology
acquisitions...................................... $ 90 $ 6,105 $ 129,825
============ ============ ============
Assets acquired under capital leases................ $ 125 $ 2,092 $ 4,607
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
43
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND BACKGROUND:
THE COMPANY
ShopNow.com Inc. (the Company), formerly TechWave, Inc., provides an end-to-end
solution that enables businesses to engage in e-commerce with other businesses,
merchants and shoppers. The Company's end-to-end solution consists of access to
online marketplaces combined with a suite of e-commerce enabling products and
services, referred to as merchant services. These merchant services include
custom application and online store development and design, hosting and
maintenance, sales and marketing services and transaction processing. The
Company also maintains an online marketplace, referred to as the ShopNow
marketplace, which aggregates merchants and shoppers over a distributed network
of web sites. In January 2000, the Company launched a business-to-business
portal and marketplace, located at b2bNow.com, which is designed to enable
businesses to engage in online transactions with other businesses.
In June, 1999 the Company ceased operating its BuySoftware.com business. Given
the Company's continued involvement in certain retailing activities over the
ShopNow marketplace, the results of BuySoftware.com have 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
management personnel, 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 from companies with
greater financial, technical management and marketing resources and risks
associated with recent acquisitions. Further, during the period required to
develop or enhance commercially viable products, services and sources of
revenues, the Company may require additional funds that may not be readily
available.
INITIAL PUBLIC OFFERING
On October 4, 1999, the Company closed its initial public offering (IPO) of
7,250,000 shares of common stock at $12.00 per share, for proceeds net of
underwriters' fees and commissions of $80.9 million. At closing, all of the
Company's issued and outstanding shares of convertible preferred stock were
converted into shares of common stock on a one-for-one basis. On November 2,
1999, the underwriters of the IPO exercised their over-allotment option and sold
an additional 1,087,500 shares at $12.00 per share, for proceeds net of
underwriters' fees and commissions of $12.1 million. The combined net proceeds
to the Company, less additional offering costs of approximately $1.9 million,
were $91.1 million. In addition, a $1 million promissory note in connection with
the Company's acquisition of GO Software, Inc. (GO) and a $4 million bridge loan
with a financial institution plus accrued interest were repaid.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include 100% of the assets,
liabilities and results of operations of all subsidiaries in which the Company
has a controlling ownership interest of greater than 50%. Equity investments in
which the Company holds less than a 20% ownership interest are recorded at cost
and are included in other assets,
44
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
net in the accompanying consolidated balance sheets. All significant
intercompany transactions and balances have been eliminated.
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 automatically
converted upon completion of the Company's initial public offering (using the
if-converted method from the original issuance date) during the fourth quarter
of 1999 (See Note 2). Pro forma diluted net loss per share excludes the impact
of stock options and warrants as the effect of their inclusion would be
antidilutive.
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.
REVENUE RECOGNITION
The Company derives substantially all of its revenues from the ShopNow
marketplace and from providing merchant services to businesses.
Revenues from the ShopNow marketplace are generated from advertising and
merchandising paid by merchants, leads and orders delivered to merchants, as
well as transaction processing and licensing fees. Advertising consists of the
sale of impressions on one or more of the Company's network of web sites;
merchandising consists of the sale of specific positions or category
sponsorships on the sites. These agreements typically have a term of one to four
months. Advertising and merchandising revenues are recognized ratably over the
term of the applicable agreement. The Company generates transaction processing
and licensing fees from its payment processing and fraud prevention products and
services. In these cases, the merchant bears the full credit risk and the
Company recognizes a transaction fee upon the consummation of the sale. In
addition, the Company offers products directly to shoppers over the ShopNow
marketplace. In these instances where the Company acts as merchant-of-record,
the Company records as revenue the full sales price of the product sold and
records the full cost of the product to the Company as cost of revenues, upon
shipment of the product. Revenues generated from the Company's BuySoftware.com
business are included in ShopNow marketplace and transaction processing revenues
in the accompanying consolidated statements of operations through June 1999, at
which point management ceased operations of BuySoftware.com.
Revenues from merchant services are generated principally through development
fees, hosting fees and sales and marketing services. Merchant services can be
purchased as a complete end-to-end suite of services or separately. The Company
recognizes revenues from development of custom applications and online stores
and marketing projects on a percentage of completion basis over the period of
development or the period of the marketing project. These projects generally
range from two to five months. Hosting contracts typically have a term of one
year, with fees charged on a monthly basis. The Company bears full credit risk
with respect to these sales. Anticipated losses on these contracts are recorded
when identified. To date, losses have not been significant. 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. Unbilled services typically represent amounts earned
under the Company's
45
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
contracts 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 related to ancillary services, whereby the Company is acting
in an agency capacity. 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. Deferred revenue consists primarily of
prepaid licensing fees which are being amortized over their contract life (see
Note 13).
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.
SHORT-TERM INVESTMENTS AND MARKETABLE EQUITY SECURITIES
The Company classifies these securities 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." This statement specifies that available for sale
securities are reported at fair value with changes in unrealized gains and
losses recorded directly to shareholders' equity, which are reflected in
accumulated other comprehensive income in the accompanying consolidated balance
sheets. Fair value is based on quoted market prices. The Company's short-term
investments consist of corporate notes and bonds, commercial paper, municipal
notes and bonds, auction preferreds and US government securities and are stated
at cost, which approximates fair value. Marketable equity securities consist
solely of investments in the common stock of publicly-traded companies and are
recorded at fair value. Unrealized holding gains and losses, net of tax effect,
on available-for-sale securities are excluded from earnings and are reported as
a separate component of other comprehensive income until realized. Realized
gains and losses from the sale of available-for-sale securities are determined
on a specific identification basis. Dividend and interest income are recognized
as earned.
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 two to
seven years, or in the case of leasehold improvements, three years or the life
of the lease, whichever is shorter. Betterments are capitalized. Repairs and
maintenance expenditures are expensed as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of acquired technology, proprietary
concepts, customer lists, domain names 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 3).
46
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST-BASIS INVESTMENTS
The Company's cost-based equity investments, which consist primarily of
investments in the equity securities of certain early-stage technology
companies, were approximately $43,000 and $14.6 million at December 31, 1998 and
1999, respectively, and are classified as other assets, net in the accompanying
consolidated balance sheets. The Company monitors its cost-basis investments for
impairment. There can be no assurance that the Company's investments in these
early-stage technology companies will be realized.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the years ended
December 31, 1997, 1998 and 1999, the Company incurred advertising and direct
marketing expenses of approximately $470,000, $5.7 million and $29.1 million,
respectively.
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, 1997, 1998 and 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.
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of the SFAS No. 123,
"Accounting for Stock-Based Compensation", and instead 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 over the stock option
exercise price at the date of grant. Options and warrants issued to
non-employees are accounted for using the fair value method of accounting as
prescribed by SFAS No. 123.
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.
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.
47
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 2. 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 common 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.
STATEMENTS OF COMPREHENSIVE LOSS
There were no reclassification adjustments as defined in SFAS 130, "Reporting
Comprehensive Income" or income tax provision related to the unrealized gain on
investments during the year ended December 31, 1999.
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.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.
RECLASSIFICATIONS
Certain information reported in previous periods has been reclassified to
conform to the current period presentation.
NOTE 3. 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)
48
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 3. ACQUISITIONS: (CONTINUED)
merged with and into TechWave Acquisition in exchange for 600,000 shares of the
Company's common stock valued at approximately $90,000, a convertible note
payable for $250,000 ($226,000 in principal and $24,000 in interest), and
$25,000 in cash, aggregating a total purchase price of $341,000. 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 $89,000 was converted into 177,333 shares of common stock. Both Web Solutions
and Intelligent Software were software development companies with 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 never fully utilized the acquired technology and had
determined that it had no alternative future use or value in the Company's
transaction processing systems, as the Company's existing technology platform
provided the enhanced functionality needed in the Company's business operations.
Due to the impairment of the acquired technology, the Company wrote 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 portal. In connection with this acquisition, the Company issued 719,915
shares of common stock, 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 offices in California. The
Company paid The Haggin Group consideration including $300,000 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
approximately $113,000 on the first day of each quarter commencing January 1,
1999 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
49
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 3. ACQUISITIONS: (CONTINUED)
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. As no measurement date for the options occurred and 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. The Company also recognized a compensation
charge of $831,000 for the immediately vested portion of these grants in the
accompanying consolidated December 31, 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 $556,000 was allocated to goodwill, which are both being
amortized over a three-year life. The note bore interest at 10% and was repaid
in full upon completion of the Company's IPO.
Also in June 1999, the Company acquired CardSecure, Inc. (CardSecure) 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 (see Note 3).
On November 12, 1999, the Company acquired SpeedyClick, Corp. (SpeedyClick), a
California corporation, for $55.6 million of cash, common stock and common stock
options. SpeedyClick, a privately held company, maintains an Internet web site
that focuses on entertainment and interactivity. Upon effectiveness of the
acquisition, a total of 3,799,237 shares of common stock valued at $13.31 per
share were issued to the owners of SpeedyClick. Options to purchase SpeedyClick
common stock were assumed by the Company and converted into 157,537 options to
purchase the Company's common stock. The Company also paid cash consideration of
$3.0 million to the owners of SpeedyClick. The Company accounted for this
transaction as a purchase. Of the $55.6 million in consideration paid,
approximately $27.9 was allocated to proprietary concepts, $14.7 million to
customer lists and $13.0 million to goodwill. These intangible assets are being
amortized over a three-year life.
On December 3, 1999, the Company acquired Cortix, Inc. (Cortix), an Arizona
corporation doing business as 20-20Consumer.com, for $14.4 million of cash and
common stock. Cortix, a privately held company, is an operator of comparison
shopping services including online reviews and ratings for commerce-oriented
businesses, merchants and products. Upon effectiveness of the acquisition,
711,435 shares of common stock valued at $18.81 per share were issued to the
owners of Cortix. The Company also paid cash consideration of $1.0 million to
the owners of Cortix. The Company accounted for this transaction as a purchase.
Of the $14.4 million in consideration paid, approximately $11.4 million was
allocated to acquired technology, $1.6 million to customer lists and
$1.3 million to goodwill. These intangible assets are being amortized over a
three-year life.
50
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 3. ACQUISITIONS: (CONTINUED)
On December 17, 1999, the Company acquired WebCentric Inc., (WebCentric) a
Kansas corporation doing business as bottomdollar.com, for $40.2 million of
common stock, common stock options and including approximately $1.4 million of
cash. WebCentric, a privately held company, develops e-commerce integration
technology and applications, including a comparison shopping engine that allows
consumers to search and compare the products and services of several leading
Internet merchants. Upon effectiveness of the acquisition, a total of 2,161,904
shares of common stock valued at $16.89 per share were issued to the owners of
WebCentric. In addition, the Company issued replacement stock options to
purchase an aggregate of 121,544 shares of the Company's common stock to certain
employees and owners of WebCentric. The Company accounted for this transaction
as a purchase. Of the $40.2 million in consideration paid, approximately
$31.8 million was allocated to acquired technology, $3.3 million to customer
lists and $4.6 million to goodwill. These intangible assets are being amortized
over a three-year life.
In January 2000, the Company entered into a definitive agreement to acquire
Ubarter.com, Inc. (Ubarter), for approximately $45 million of common stock,
common stock options and common stock warrants. Ubarter, a publicly traded
company, is an e-commerce company specializing in online business-to-business
barter exchange. The acquisition is expected to close in the second quarter of
2000 subject to the Company's effectiveness of a registration statement on
Form S-4 with the Securities and Exchange Commission and the approval of the
shareholders of Ubarter.
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, 1998 and 1999, assuming the
Media Assets, Inc., and The Internet Mall, Inc. transactions occurred as of
January 1, 1997 and the GO, CardSecure, SpeedyClick, Cortix and WebCentric
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 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>
-------------------------------
Year Ended December 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Revenues.................................................... $ 6,426 $ 14,202 $ 40,144
Net loss.................................................... $(4,917) $(61,542) $(114,209)
Net loss per share.......................................... $ (0.98) $ (4.88) $ (5.79)
</TABLE>
51
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 4. SHORT-TERM INVESTMENTS:
Short-term investments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
-------------------
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Auction preferreds.......................................... $ -- $14,647
Municipal notes and bonds................................... -- 13,453
Commercial paper............................................ -- 11,452
Corporate notes and bonds................................... -- 6,298
U.S. government securities.................................. -- 6,172
Certificate of deposit...................................... 150 150
---- -------
Total short-term investments................................ $150 $52,172
==== =======
</TABLE>
Included in the U.S. government securities category is $2.6 million pledged as a
letter of credit for certain of the Company's office facilities.
NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
-------------------
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Equipment................................................... $ 3,313 $11,065
Software.................................................... 759 10,645
Furniture and fixtures...................................... 568 1,618
Leasehold improvements...................................... 548 817
------- -------
5,188 24,145
Less - Accumulated depreciation and amortization............ (1,003) (4,760)
------- -------
Property and equipment, net................................. $ 4,185 $19,385
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $186,000, $816,000 and $3.6 million, respectively.
Property and equipment shown above include assets under capital leases of
approximately $2.2 million and $6.9 million at December 31, 1998 and 1999, with
corresponding accumulated amortization of approximately $270,000 and
$1.0 million at December 31, 1998 and 1999, respectively.
52
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 6. OTHER INTANGIBLE ASSETS:
Other intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
-------------------
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Acquired technology......................................... $ 840 $ 61,297
Proprietary concept......................................... -- 27,910
Customer lists.............................................. 1,978 22,297
Domain names................................................ 1,533 1,775
Other....................................................... 386 402
------ --------
4,737 113,681
Less - Accumulated amortization............................. (793) (8,968)
------ --------
$3,944 $104,713
====== ========
</TABLE>
NOTE 7. INVESTMENTS IN MARKETABLE EQUITY SECURITIES:
At December 31, 1999, the Company held 476,410 shares of 24/7 Media and 85,122
shares of FreeShop.com, Inc. (FreeShop), both of which are publicly traded
companies subject to the reporting requirements of the Securities and Exchange
Commission. During the fourth quarter of 1999, the Company sold 110,000 of its
original 195,122 shares of FreeShop for a recognized gain of $2.4 million. The
Company's cost basis in these investments was $200,000 and $23.4 million as of
December 31, 1998 and 1999, respectively, resulting in net unrealized holding
gains of zero and $7.5 million, for the years ended December 31, 1998 and 1999,
respectively.
NOTE 8. ACCRUED LIABILITIES:
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
-------------------
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued compensation and benefits........................... $ 576 $4,422
Accrued marketing expenses.................................. -- 2,145
Other accrued liabilities................................... 556 2,211
------ ------
$1,132 $8,778
====== ======
</TABLE>
NOTE 9. LINE OF CREDIT:
The Company had a line of credit with a financial institution with a maximum
balance of $300,000. 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 the principal balance was paid in February 1999. The line of credit was
secured by assets of the Company.
53
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 9. LINE OF CREDIT: (CONTINUED)
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 and restated 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, initially capped at $1.0 million until the bridge loan was 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 was amended in
January 2000 to expire on March 31, 2001. The term loan bears interest at 12%,
is secured by substantially all assets of the Company and matures in
March 2002. The bridge loan bore interest at 12% and was repaid in October 1999
after the closing of the Company's initial public offering. 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.
NOTE 10. NOTES AND LEASES PAYABLE:
Notes and leases payable consist of the following (in thousands):
<TABLE>
<CAPTION>
-------------------
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Convertible note payable to shareholder, interest at
applicable short-term federal rate, quarterly principal
and interest payments totaling $113,000; final payment due
in October 2000. The note is convertible to common stock
at $8.00 per share........................................ $ 859 $ 437
Term note payable bearing interest at 12% per year,
principal and interest payments payable monthly, final
payment due in March 2002................................. -- 3,086
Capital lease obligations and other notes payable, interest,
and principal payable monthly, interest at rates from 6%
to 18% with maturity dates between 2000 and 2005.......... 2,111 10,451
------- -------
2,970 13,974
Less - current portion...................................... (1,133) (8,565)
------- -------
$ 1,837 $ 5,409
======= =======
</TABLE>
In September 1997, the Company issued 9% Subordinated Demand Notes totaling
$500,000 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 $13,000 was paid in cash.
In November 1997, the Company completed a bridge financing with individual
investors and executed Promissory Notes with principal totaling $1.8 million.
The interest on this principal was 12% per year, 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 $1.8 million plus
interest of approximately $61,000 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
54
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 10. NOTES AND LEASES PAYABLE: (CONTINUED)
Company's Series F equity placement in December 1998, the $3.7 million plus
interest of approximately $12,000 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 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 December 31,
1999 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 8,565
2001........................................................ 4,115
2002........................................................ 1,204
2003........................................................ 82
2004........................................................ 6
Thereafter.................................................. 2
-------
$13,974
=======
</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, 1999.
NOTE 11. COMMITMENTS:
The Company is obligated under capital and operating leases for various
equipment leases and its office facilities. The leases expire through 2011.
Future minimum lease payments under these leases are as follows for the period
ending December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
--------------------
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
2000........................................................ $ 7,498 $ 2,968
2001........................................................ 3,064 6,219
2002........................................................ 925 5,694
2003........................................................ 98 5,609
2004........................................................ 9 5,453
Thereafter.................................................. 2 32,785
------- -------
11,596 $58,728
=======
Less - Amounts representing interest........................ (1,200)
-------
Net present value of minimum lease payment.................. $10,396
=======
</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, 1997, 1998 and 1999 was
approximately $127,000, $225,000 and $1.3 million, respectively.
55
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 11. COMMITMENTS: (CONTINUED)
The Company has commitments under various business agreements to purchase
advertising totaling approximately $6.0 million in 2000, decreasing to
$1.0 million in 2004.
NOTE 12. 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
historically provided full valuation allowances on deferred tax assets because
of uncertainty regarding their realizability. In December 1999, the Company's
valuation allowance was reduced to zero due to the increase in deferred tax
liabilities recognized from business acquisitions, which as of December 31,
1999, exceed the amount of deferred tax assets recognized by the Company.
Deferred tax assets consist primarily of net operating loss carryforwards,
stock-compensation expense not recognized for tax purposes and deferred revenue
recognized immediately for tax purposes during 1999. Deferred tax liabilities
consist primarily of intangible assets not recognized for tax purposes and
accelerated tax depreciation deductions exceeding the amounts recognized by the
Company in its consolidated financial statements.
The difference between the expected income tax rate of 38% (federal statutory
rate of 34% plus a blend of state income tax rates, net of the federal benefit)
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 through the
end of 1999.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $76.4 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. Our ability to use net operating losses incurred prior to July 1999 is
limited to an aggregate of approximately $14.3 million per year due to sales of
Series D and Series E convertible preferred stock to third parties in April 1998
and the sale of Series I convertible preferred stock to Chase Manhattan Bank in
July 1999, which resulted in ownership changes. These carryforwards will begin
to expire at various times commencing in 2012.
56
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 12. INCOME TAXES: (CONTINUED)
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 (in thousands):
<TABLE>
<CAPTION>
-------------------
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 7,500 $ 29,021
Stock-based compensation.................................. 62 2,730
Deferred revenue.......................................... -- 1,889
Other..................................................... 138 311
Valuation allowance for deferred tax assets............... (6,400) --
------- --------
Total deferred assets....................................... 1,300 33,951
------- --------
Deferred tax liabilities:
Intangible assets......................................... (1,281) (38,398)
Property and equipment.................................... (19) (64)
------- --------
Total deferred liabilities.................................. (1,300) (38,462)
------- --------
Net deferred tax liabilities................................ $ -- $ (4,511)
======= ========
</TABLE>
NOTE 13. SHAREHOLDERS' EQUITY:
CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the Company had authorized 200,000,000 shares of common
stock and 5,000,000 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. As of
57
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED)
December 31, 1999, the Company had designated nine series of convertible
preferred stock (designated Series A through I). Amounts outstanding were as
follows:
<TABLE>
<CAPTION>
-----------------------
December 31,
-----------------------
1998 1999
---------- ----------
(dollars in thousands)
<S> <C> <C>
Series A preferred stock: Issued 699,612 shares in 1997,
aggregate liquidation preference $350,000................. $ 350 $ --
Series B preferred stock: Issued 2,334,079 shares in 1997,
aggregate liquidation preference $1,800,000............... 1,800 --
Series C preferred stock: Issued 996,748 shares in 1997,
aggregate liquidation preference $1,473,000............... 1,253 --
Series D preferred stock: Issued 4,250,000 shares in 1998,
aggregate liquidation preference $17,000,000.............. 13,461 --
Series E preferred stock: Issued 2,125,000 shares in 1998,
aggregate liquidation preference $8,500,000............... 7,672 --
Series F preferred stock: Issued 2,056,000 shares in 1998
and 2,336,000 in 1999, aggregate liquidation preference
$12,850,000............................................... 10,534 --
--------- ---------
$ 35,070 $ --
========= =========
</TABLE>
Shareholders of convertible preferred stock have the right to one vote for each
share of common stock into which the preferred stock could be converted. In the
event of liquidation, preferred 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 preferred shareholders, then all of the funds available shall be
distributed ratably based on their respective liquidation preferences among the
holders of preferred stock. All series of the Company's outstanding preferred
stock were converted into common stock on a one-for-one basis upon completion of
the Company's IPO during the fourth quarter of 1999.
During the period from January 23, 1998 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
58
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED)
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. In June, 1999, the Company acquired 24/7 Media's interest in
CardSecure 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.
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.
In July 1999 the Company closed an $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 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. These prepaid
fees are being recognized as revenue over a 27-month period on a straight-line
basis, which represents the term of the agreement.
STOCK OPTION PLANS
The Company adopted a combined incentive and nonqualified stock option plan (the
Plan) to provide incentive to employees, directors, consultants and advisors.
The Company originally 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 options to purchase 2,331,733 shares to Company executives outside the
Plan. In December 1999, the Company adopted a nonexecutive officer stock option
plan (the NOE Plan) to provide incentive to certain employees and consultants.
The Company reserved 1,000,000 shares of common stock for issuance under the NOE
Plan, which also allows for automatic increases in the number of shares issuable
based on certain events, up to a maximum number of 4,000,000 shares. In
December 1999, in connection with our acquisition of SpeedyClick, Corp., the
Company assumed the SpeedyClick 1999 Stock Incentive Plan (the SpeedyClick
Plan). The SpeedyClick Plan was designed to provide incentive to employees,
directors, consultants and advisors. The Company has reserved 157,537 shares of
common stock for issuance under the SpeedyClick Plan. There are 375,000 shares
of common stock reserved for issuance under the SpeedyClick Plan, however the
Company does not intend to make further grants of options under this Plan.
59
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED)
Options under the Plan, the NOE Plan, the SpeedyClick Plan and options granted
outside of the Plan (the Plans) generally expire 10 years from the date of
grant. The Board of Directors determines the terms and conditions of options
granted under the Plans, including the exercise price. Options are generally
granted at fair market value on the date of grant and generally vest ratably
over a three-year period 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. Prior to the
Company's IPO, the fair value of common stock had been based on factors
including, but not limited to, preferred stock sales, milestones achieved in the
development of the Company, comparisons to competitive public companies and
general market conditions. Subsequent to the IPO, fair value has been determined
using the Company's closing stock price as quoted in the public market. In
conjunction with grants made in 1997, 1998 and 1999, the Company recorded zero,
$182,000 and $6.6 million as stock compensation expense in the accompanying
December 31, 1997, 1998 and 1999 consolidated statements of operations,
respectively.
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 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,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported............................................... $(4,766) $(24,745) $(75,943)
Pro forma................................................. (4,766) (25,067) (83,443)
Basic and diluted net loss per share:
As reported............................................... $ (1.83) $ (7.01) $ (5.80)
Pro forma................................................. (1.83) (7.10) (6.37)
</TABLE>
The fair value of each option is estimated using the Black-Scholes option
pricing model that takes into account: (1) the fair value 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
6.5% and (6) volatility ranging from 0% through June 18, 1999, 72.0% subsequent
to June 18, 1999 through September 30, 1999, and 88.3% subsequent to
September 30, 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.
60
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED)
A summary of activity related to stock option grants under the Plans follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
December 31,
-------------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- ---------- --------
<S> <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................................. 1,813,482 0.55 3,087,379 2.60 7,409,430 6.83
Exercised............................... -- -- (27,499) 0.77 (672,004) 2.09
Canceled................................ (165,467) 0.60 (519,829) 2.28 (758,009) 4.06
--------- --------- ----------
Outstanding at end of period.............. 1,793,515 0.54 4,333,566 1.91 10,312,983 5.28
========= ========= ==========
Exercisable at the end of the period...... 436,653 0.68 1,681,026 1.06 3,231,952 2.17
========= ========= ==========
</TABLE>
The following information is provided for all stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Outstanding Exercisable
------------------------------------------ --------------------------
Weighted
Average
Weighted Remaining Weighted
Number of Average Contractual Number of Average
Exercise Price Range Options Exercise Price Life (Years) Options Exercise Price
- -------------------- ---------- -------------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
$0.00 to $2.24...................... 2,993,280 $ 1.07 6.9 2,190,418 $ 0.97
$2.25 to $6.73...................... 2,513,008 3.81 8.8 826,637 3.79
$6.74 to $8.96...................... 1,159,460 7.00 9.3 144,733 7.00
$8.97 to $11.21..................... 2,292,946 9.58 9.6 54,678 9.04
$11.22 to $17.93.................... 1,078,289 12.97 9.8 10,236 13.41
$17.94 to $22.42.................... 276,000 21.25 10.0 5,250 21.25
---------- ------ ---- --------- ------
10,312,983 $ 6.08 8.6 3,231,952 $ 2.17
========== ====== ==== ========= ======
</TABLE>
During the fourth quarter of 1999, the contingent performance criteria relating
to a stock option grant made outside of the Plan for 310,000 shares of the
Company's common stock with an exercise price of $4.00 were satisfied.
Accordingly, a stock-based compensation charge of approximately $3.3 million was
recognized in the accompanying December 31, 1999 consolidated statement of
operations.
At December 31, 1999, 1,554,974 shares of common stock were available for future
grants under the Plans. Also, 11,867,957 shares of common stock were authorized
but unissued relating to outstanding and available stock option grants under the
Plans.
WARRANTS AND OPTIONS ISSUED TO BUSINESS 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
61
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED)
agreement, which allows the telecommunications company to put the shares back to
the Company for $25.00 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 recorded the fair value of the put
warrant in the accompanying consolidated balance sheet as of December 31, 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, options to purchase
300,000 shares of common stock at $4.80 per share and 200,000 shares of common
stock valued at $9.00 per share.
During the third and fourth quarters of 1999, the Company granted warrants to
purchase 183,782 shares of the Company's common stock to certain marketing
partners at exercise prices ranging from $9.50 to $18.94. These warrants were
immediately exercisable when granted and expire between 1 and 5 years from the
date of grant.
EMPLOYEE STOCK PURCHASE PLAN
During 1999, the Company's Board of Directors and shareholders approved and
adopted an employee stock purchase plan (the ESPP). A total of 2,000,000 shares
of common stock have been reserved for issuance under the ESPP, which allows for
future increases. During two six-month purchase periods each year, eligible
employees may withhold up to 10% of their salary, plus commissions, to purchase
common stock at a price equal to 85% of the lesser of the fair market value of
the Company's common stock on the first or the last day of the applicable six
month purchase period. The ESPP will continue for a term of 10 years, unless
terminated earlier by the Company's Board of Directors. As of December 31, 1999,
no shares had been sold to employees under the ESPP. The first sale of shares to
employees is scheduled to occur on April 30, 2000.
The following shares of common stock were reserved at December 31, 1999:
<TABLE>
<S> <C>
Convertible preferred stock................................. --
Stock options............................................... 11,867,957
Common stock warrants....................................... 3,806,281
Employee stock purchase plan................................ 2,000,000
----------
17,674,238
==========
</TABLE>
NOTE 14. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during the first quarter of 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, evaluated regularly by
the chief operating decision makers, or a 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 and general managers of the Company. The
Company has identified three distinct reportable segments: merchant services,
the ShopNow
62
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 14. SEGMENT INFORMATION: (CONTINUED)
marketplace and transaction processing 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.
The following table represents the Company's segment information for the years
ended December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
------------------------------
December 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
ShopNow marketplace and transaction processing (excluding
BuySoftware.com).......................................... $ 35 $ 280 $ 16,094
Merchant services (excluding BuySoftware.com)............... 500 2,416 10,938
BuySoftware.com............................................. 69 4,458 9,923
------- -------- --------
604 7,154 36,955
------- -------- --------
Cost of revenues:
ShopNow marketplace and transaction processing (excluding
BuySoftware.com).......................................... 35 142 9,016
Merchant services (excluding BuySoftware.com)............... 356 1,255 7,123
BuySoftware.com............................................. 124 4,452 11,190
------- -------- --------
515 5,849 27,329
------- -------- --------
Gross profit:
ShopNow marketplace and transaction processing (excluding
BuySoftware.com).......................................... -- 138 7,078
Merchant services (excluding BuySoftware.com)............... 144 1,161 3,815
BuySoftware.com............................................. (55) 6 (1,267)
------- -------- --------
$ 89 $ 1,305 $ 9,626
======= ======== ========
Profit reconciliation:
Gross profit for reportable segments........................ $ 89 $ 1,305 $ 9,626
Operating expenses.......................................... (4,691) (26,221) (88,320)
Nonoperating expenses, net.................................. (164) 171 2,751
------- -------- --------
Net loss.................................................... $(4,766) $(24,745) $(75,943)
======= ======== ========
</TABLE>
The Company does not track assets by operating segments. Consequently is it not
practicable to show assets by operating segments.
NOTE 15. RELATED PARTY TRANSACTIONS:
During 1999, the Company purchased approximately $3.5 million in marketing and
advertising from 24/7 Media, a significant shareholder of the Company. Also
during 1999, the Company recognized approximately $539,000 in merchant services
revenues from Art Gallary Live (AGL), in which the Company also owns a minority
investment.
63
<PAGE>
SHOPNOW.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONTINUED)
NOTE 16. SUBSEQUENT EVENTS:
On January 18, 2000, the Company acquired AXC Corporation, (AXC) a Washington
corporation, for $16.0 million of total consideration, including common stock,
common stock options, approximately $1.5 million of cash and $3.7 million in
deferred tax liabilities. AXC, a privately held company, provides e-commerce
consulting services to businesses. Upon effectiveness of the acquisition, a
total of 540,296 shares of common stock valued at $17.60 per share were issued
to the owners of AXC. In addition, the Company issued replacement stock options
to purchase an aggregate of 72,089 shares of the Company's common stock to
certain employees and owners of AXC. The Company accounted for this transaction
as a purchase. Of the $16.0 million in consideration paid, approximately
$7.2 million was allocated to assembled workforce, $4.9 million to customer
lists and $3.8 million to goodwill. These intangible assets are being amortized
over a three-year life.
On January 13, 2000, the Company, through its wholly owned subsidiary 3037952
Nova Scotia Company, a Nova Scotia Company, acquired Pronet Enterprises Ltd., a
Canadian company, for approximately $3.2 million in cash and $9.1 million in
common stock and common stock options. Pronet, a privately held company,
operates a business-to-business portal and marketplace that aggregates
businesses that seek to transact with one another. Upon effectiveness of the
acquisition, a total of 162,508 shares of common stock, valued at $17.60 per
share, were issued to the shareholders Pronet. In addition, the Company issued
options to purchase 351,666 shares of common stock to the two principals of
Pronet. The Company accounted for this transaction as a purchase. Allocations of
the excess purchase price of this acquisition has not yet been determined. All
intangible assets acquired in the purchase are expected to be amortized over a
three-year estimated useful life.
64
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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 LLP's report on our consolidated
financial statements for the two years ended December 31, 1997 does not cover
our consolidated financial statements included in this annual report. Ernst &
Young LLP'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 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.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information called for by Part III, Item 10, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held May 22, 2000, and is
incorporated herein by reference. The information appears in the Proxy Statement
under the captions "Election of Directors" and "Executive Officers." The Proxy
Statement will be filed within 120 days of December 31, 1999, our fiscal year
end.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Part III, Item 11, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held on May 22, 2000, and
is incorporated herein by reference. The information appears in the Proxy
Statement under the caption "Executive Compensation." The Proxy Statement will
be filed within 120 days of December 31, 1999, our fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Part III, Item 12, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held on May 22, 2000, and
is incorporated herein by reference. The information appears in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management." The Proxy Statement will be filed within 120 days of December 31,
1999, our fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Part III, Item 13, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held on May 22, 2000 and is
herein incorporated by reference. The information appears in the Proxy Statement
under the caption "Certain Relationships and Related Transactions." The Proxy
Statement will be filed within 120 days of December 31, 1999, our fiscal year
end.
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page
--------
<S> <C>
ShopNow.com Inc.
Report of Independent Public Accountants.................. 36
Consolidated Balance Sheets............................... 37
Consolidated Statements of Operations..................... 38
Consolidated Statements of Comprehensive Loss............. 39
Consolidated Statements of Shareholders' Equity........... 40
Consolidated Statements of Cash Flows..................... 42
Notes to Consolidated Financial Statements................ 44
Schedule II -- Valuation and Qualifying Accounts..........
</TABLE>
REPORTS ON FORM 8-K
On November 24, 1999, we filed a Form 8-K, as amended by Form 8-K/A on December
3, 1999, reporting the acquisition of SpeedyClick, Corp.
On December 29, 1999, we filed a Form 8-K, as amended by Form 8-K/A on January
7, 2000, reporting the acquisition of WebCentric, Inc.
On December 30, 1999, the Company filed a Form 8-K under Item 5 reporting a
Letter of Intent into which we entered to acquire Ubarter.com Inc.
66
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 ++ Amended and Restated Articles of Incorporation of the
registrant.
3.2 ++ Amended and Restated 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.
10.1 ++ Amended and Restated 1999 Employee Stock Purchase Plan and
form of agreement thereunder.
10.2 ++ Amended and Restated 1996 Combined Incentive and
Nonqualified Stock Option Plan and form of agreements
thereunder.
10.3 * Amended and Restated 1999 Nonofficer Employee Stock Option
Plan and form of agreements thereunder.
10.4 + ++ Electronic Distributor Agreement dated as of May 19, 1999,
between Corel Corporation and the registrant.
10.5 + ++ Addendum No. 1 Project Agreement to Strategic Alliance
Agreement between HNC Software and the registrant, dated May
4, 1999.
10.6 + ++ Distributor/Marketing Agreement dated as of April 29, 1999,
between Quest Communications Corporation and the registrant.
10.7 ++ Strategic Alliance Agreement dated as of May 4, 1999,
between HNC Software Inc. and the registrant.
10.8 ++ Consortium Membership Agreement dated as of May 4, 1999,
between HNC Software and the registrant.
10.9 ++ Cross Promotion Agreement dated April 5, 1999, between 24/7
Media, Inc. and the registrant.
10.10 ++ Loan and Security Agreement dated as of March 4, 1999,
between Transamerica Business Credit Corporation and the
registrant.
10.11 ++ Letter of Intent Agreement dated March 24, 1999, between the
ZERON Group and the registrant.
10.12 ++ Employment Agreement effective as of July 1, 1999, between
Dwayne M. Walker and the registrant.
10.13 ++ Corporate Master Agreement effective as of February 10,
1999, between Vignette Corporation and the registrant.
10.14 + ++ Agreement dated July 7, 1999, between About.com, Inc. and
the registrant.
10.15 + ++ Agreement effective as of July 12, 1999, between Chase
Manhattan Capital, L.P. and the registrant.
10.16 # Agreement and Plan of Merger dated as of November 10, 1999,
among Racer Acquisition, Inc., SpeedyClick, Corp., the
Principal Shareholders of SpeedyClick, Corp. and the
registrant.
10.17 # Employment Agreement, dated as of November 12, 1999, between
Farid Tabibzadeh and the registrant.
10.18 # Employment Agreement, dated as of November 12, 1999, between
Shahab Emrani and the registrant.
10.20 ## Agreement and Plan of Merger dated as of December 16, 1999,
among Chiefs Acquisition, Inc., WebCentric, Inc., the
Stockholders of WebCentric, Inc. and the registrant.
10.21 ### Letter of Intent, dated December 20, 1999, between
Ubarter.com Inc., Steven White, New Horizons L.P. and the
registrant.
10.22 #### Office Building Lease, dated September 21, 1999, between CEP
Investors XII LLC and the registrant.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.23 *# Office Lease, dated December 13, 1999, between Benaroya
Capital Company, LLC and the registrant.
10.24 *# Promissory Note, dated September 28, 1999, from Alan Koslow
to the registrant.
10.25 * Agreement and Plan of Merger dated January 20, 2000 between
Ubarter.com Inc., Shamu Acquisition, Inc. and the
registrant.
21.1 * List of Subsidiaries
23.1 * Consent of Arthur Andersen LLP, Independent Accountants.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* Filed herewith
+ Portions of these exhibits have been omitted based upon a
request for confidential treatment. The omitted portions of
the exhibits have been filed separately with the Securities
and Exchange Commission.
++ Incorporated by reference to the Registration Statement on
Form S-1 (No. 333-80981) filed by the registrant on
September 28, 1999, as amended.
# Incorporated by reference to the Current Report on Form 8-K
(File No. 000-26707) filed by the registrant on November 24,
1999, as amended.
## Incorporated by reference to the Current Report on Form 8-K
(File No. 000-26707) filed by the registrant on December 29,
1999, as amended.
### Incorporated by reference to the Current Report on Form 8-K
(File No. 000-26707) filed by the registrant on December 30,
1999.
#### Incorporated by reference to Quarterly Report on Form 10-Q
(File No. 000-26707) filed by the registrant on November 9,
1999.
##### Incorporated by reference to Registration Statement on Form
S-8 (File No. 333-92533) filed by the registrant on December
10, 1999.
*# Incorporated by reference to the Registration Statement on
Form S-1 (File No. 333-95085) filed by the registrant on
January 20, 2000, as amended.
</TABLE>
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SHOPNOW.COM INC.
(REGISTRANT)
By: /s/ DWAYNE M. WALKER
-----------------------------------------
Dwayne M. Walker
Chief Executive Officer
</TABLE>
Dated: February 10, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chief Executive Officer and
/s/ DWAYNE M. WALKER Chairman of the Board
------------------------------------------- (Principal Executive February 10, 2000
Dwayne M. Walker Officer)
Executive Vice President,
Chief Financial Officer,
/s/ ALAN D. KOSLOW General Counsel and
------------------------------------------- Secretary (Principal February 10, 2000
Alan D. Koslow Financial and Accounting
Officer)
/s/ JACOB I. FRIESEL
------------------------------------------- Director February 10, 2000
Jacob I. Friesel
/s/ DAVID M. LONSDALE
------------------------------------------- Director February 10, 2000
David M. Lonsdale
/s/ BRET R. MAXWELL
------------------------------------------- Director February 10, 2000
Bret R. Maxwell
/s/ MARK C. MCCLURE
------------------------------------------- Director February 10, 2000
Mark C. McClure
/s/ JOHN R. SNEDEGAR
------------------------------------------- Director February 10, 2000
John R. Snedegar
/s/ MARK H. TERBEEK
------------------------------------------- Director February 10, 2000
Mark H. Terbeek
/s/ EYTAN J. LOMBROSO
------------------------------------------- Director February 10, 2000
Eytan J. Lombroso
</TABLE>
<PAGE>
SHOPNOW.COM INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to costs Balance at
Description beginning of period and expenses Deductions(1) end of period
----------- ------------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999.................... $ 230 $ 678 $ (617) $ 291
================= =============== ============= ============
Year ended December 31, 1998.................... $ 23 $ 591 $ (384) $ 230
================= =============== ============= ============
Year ended December 31, 1997.................... $ 3 $ 20 $ -- $ 23
================= =============== ============= ============
</TABLE>
- ------------------------
(1) Write-offs, net of bad debt recovery.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 ++ Amended and Restated Articles of Incorporation of the
registrant.
3.2 ++ Amended and Restated 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.
10.1 ++ Amended and Restated 1999 Employee Stock Purchase Plan and
form of agreement thereunder.
10.2 ++ Amended and Restated 1996 Combined Incentive and
Nonqualified Stock Option Plan and form of agreements
thereunder.
10.3 * Amended and Restated 1999 Nonofficer Employee Stock Option
Plan and form of agreements thereunder.
10.4 + ++ Electronic Distributor Agreement dated as of May 19, 1999,
between Corel Corporation and the registrant.
10.5 + ++ Addendum No. 1 Project Agreement to Strategic Alliance
Agreement between HNC Software and the registrant, dated
May 4, 1999.
10.6 + ++ Distributor/Marketing Agreement dated as of April 29, 1999,
between Quest Communications Corporation and the
registrant.
10.7 ++ Strategic Alliance Agreement dated as of May 4, 1999,
between HNC Software Inc. and the registrant.
10.8 ++ Consortium Membership Agreement dated as of May 4, 1999,
between HNC Software and the registrant.
10.9 ++ Cross Promotion Agreement dated April 5, 1999, between 24/7
Media, Inc. and the registrant.
10.10 ++ Loan and Security Agreement dated as of March 4, 1999,
between Transamerica Business Credit Corporation and the
registrant.
10.11 ++ Letter of Intent Agreement dated March 24, 1999, between the
ZERON Group and the registrant.
10.12 ++ Employment Agreement effective as of July 1, 1999, between
Dwayne M. Walker and the registrant.
10.13 ++ Corporate Master Agreement effective as of February 10,
1999, between Vignette Corporation and the registrant.
10.14 + ++ Agreement dated July 7, 1999, between About.com, Inc. and
the registrant.
10.15 + ++ Agreement effective as of July 12, 1999, between Chase
Manhattan Capital, L.P. and the registrant.
10.16 # Agreement and Plan of Merger dated as of November 10, 1999,
among Racer Acquisition, Inc., SpeedyClick, Corp., the
Principal Shareholders of SpeedyClick, Corp. and the
registrant.
10.17 # Employment Agreement, dated as of November 12, 1999, between
Farid Tabibzadeh and the registrant.
10.18 # Employment Agreement, dated as of November 12, 1999, between
Shahab Emrani and the registrant.
10.20 ## Agreement and Plan of Merger dated as of December 16, 1999,
among Chiefs Acquisition, Inc., WebCentric, Inc., the
Stockholders of WebCentric, Inc. and the registrant.
10.21 ### Letter of Intent, dated December 20, 1999, between
Ubarter.com Inc., Steven White, New Horizons L.P. and the
registrant.
10.22 #### Office Building Lease, dated September 21, 1999, between CEP
Investors XII LLC and the registrant.
10.23 *# Office Lease, dated December 13, 1999, between Benaroya
Capital Company, LLC and the registrant.
10.24 *# Promissory Note, dated September 28, 1999, from Alan Koslow
to the registrant.
10.25 * Agreement and Plan of Merger dated January 20, 2000 between
Ubarter.com Inc., Shamu Acquisition, Inc. and the
registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
21.1 * List of Subsidiaries
23.1 * Consent of Arthur Andersen LLP, Independent Accountants.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* Filed herewith
+ Portions of these exhibits have been omitted based upon a
request for confidential treatment. The omitted portions of
the exhibits have been filed separately with the Securities
and Exchange Commission.
++ Incorporated by reference to the Registration Statement on
Form S-1 (No. 333-80981) filed by the registrant on
September 28, 1999, as amended.
# Incorporated by reference to the Current Report on Form 8-K
(File No. 000-26707) filed by the registrant on November 24,
1999, as amended.
## Incorporated by reference to the Current Report on Form 8-K
(File No. 000-26707) filed by the registrant on December 29,
1999, as amended.
### Incorporated by reference to the Current Report on Form 8-K
(File No. 000-26707) filed by the registrant on December 30,
1999.
#### Incorporated by reference to Quarterly Report on Form 10-Q
(File No. 000-26707) filed by the registrant on November 9,
1999.
##### Incorporated by reference to Registration Statement on Form
S-8 (File No. 333-92533) filed by the registrant on December
10, 1999.
*# Incorporated by reference to the Registration Statement on
Form S-1 (File No. 333-95085) filed by the registrant on
January 20, 2000, as amended.
</TABLE>
<PAGE>
SHOPNOW.COM INC.
AMENDED AND RESTATED 1999 NONOFFICER EMPLOYEE
STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1999 Nonofficer
Employee Stock Option Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to certain Employees and
Consultants, and
- to promote the success of the Company's business.
Awards granted under the Plan may be Stock Awards and
Nonstatutory Stock Options only.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its
Committees as shall be administering the Plan or one or more senior executive
officers authorized by the Board to grant Awards, in accordance with Section
4 of the Plan.
(b) "Applicable Laws" means the requirements relating to
the administration of stock option plans under U. S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Awards are, or
will be, granted under the Plan.
(c) "Award" means an award or grant made pursuant to the
Plan, including, without limitation, awards or grants of Stock Awards and
Options, or any combination of the foregoing.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as
amended.
(f) "Committee" means a committee of Directors appointed by
the Board in accordance with Section 4 of the Plan.
(g) "Common Stock" means the common stock of the Company.
(h) "Company" means ShopNow.com Inc., a Washington
corporation.
- 1 -
<PAGE>
(i) "Consultant" means any person, including an advisor,
engaged by the Company or a Parent or Subsidiary to render services to such
entity.
(j) "Director" means a member of the Board.
(k) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. A Service Provider shall not cease to be an Employee in the case of
(i) any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any Subsidiary,
or any successor. Neither service as a Director nor payment of a director's
fee by the Company shall be sufficient to constitute "employment" by the
Company.
(m) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(n) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as quoted on
such exchange or system for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high
bid and low asked prices for the Common Stock on the last market trading day
prior to the day of determination, as reported in THE WALL STREET JOURNAL or
such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value shall be determined in good faith by
the Administrator.
(o) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
(p) "NONSTATUTORY STOCK OPTION" means an Option not
intended to qualify as an Incentive Stock Option.
(q) "NOTICE OF GRANT" means a written or electronic notice
evidencing certain terms and conditions of an individual Award grant. The
Notice of Grant is part of the Option or Stock Award Agreement.
- 2 -
<PAGE>
(r) "OFFICER" means a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules
and regulations promulgated thereunder.
(s) "OPTION" means a Nonstatutory Stock Option granted
pursuant to the Plan.
(t) "OPTION AGREEMENT" means an agreement between the
Company and a Participant evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(u) "OPTIONED STOCK" means the Common Stock subject to an
Option.
(v) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(w) "PARTICIPANT" means the holder of an outstanding Award
granted under the Plan.
(x) "PLAN" means this 1999 Nonofficer Employee Stock Option
Plan.
(y) "SERVICE PROVIDER" means an Employee or Consultant.
(z) "SHARE" means a share of the Common Stock, as adjusted
in accordance with Section 13 of the Plan.
(aa) "STOCK AWARD" means shares of Common Stock or units
denominated in Common Stock granted under Section 11, the rights of ownership
of which may be subject to restrictions prescribed by the Administrator.
(bb) "STOCK AWARD AGREEMENT" means an agreement between the
Company and a Participant evidencing the terms and conditions of an
individual Award grant. The Stock Award Agreement is subject to the terms and
conditions of the Plan.
(cc) "SUBSIDIARY" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section
13 of the Plan, the maximum number of Shares which are available for issuance
under the Plan is
(a) 2,500,000 Shares; plus
(b) an automatic increase to be added on the first day of the fiscal
quarter beginning on January 1, 2000 equal to 10,000 Shares multiplied by the
number of individuals who began employment or services at the Company, a
Parent or a Subsidiary in the preceding fiscal quarter in connection with the
Company's acquisition of any corporation or business entity in such quarter;
plus
- 3 -
<PAGE>
(c) an automatic increase to be added on the first day of each month
beginning on or after March 1, 2000 equal to 10,000 Shares multiplied by the
number of individuals who began employment or services at the Company, a
Parent or a Subsidiary in the immediately preceding month;
provided, however, that the maximum number of Shares which may be issued
under the Plan may not exceed 4,000,000 Shares. The Shares may be authorized,
but unissued, or reacquired Common Stock.
No more than 30% of the Shares authorized for issuance
under the Plan may be issued to officers who are not subject to Section 16 of
the Exchange Act.
Any Shares that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment
of the Award to the extent it is exercised for or settled in vested and
nonforfeitable Shares) shall again be available for issuance in connection
with future grants of Awards under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) Procedure.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan
may be administered by different Committees with respect to different groups
of Service Providers. In addition, to the extent consistent with applicable
law, the Board may authorize one or more senior executive officers to grant
Awards to specified classes of Service Providers, within the limits
specifically prescribed by the Board.
(ii) OTHER ADMINISTRATION. Other than as
provided above, the Plan shall be administered by (A) the Board or (B) a
Committee, which committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions
of the Plan, and in the case of a Committee or executive officer, subject to
the specific duties delegated by the Board to such Committee or officer, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom
Awards may be granted hereunder;
(iii) to determine the number of shares of
Common Stock to be covered by each Award granted hereunder;
(iv) to approve forms of agreement for use under
the Plan;
(v) to determine the terms and conditions,
not inconsistent with the terms of the Plan, of any Award granted hereunder.
Such terms and conditions include, but are
- 4 -
<PAGE>
not limited to, the exercise price, the time or times when Awards may be
exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Award or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vi) to construe and interpret the terms of
the Plan and Awards granted pursuant to the Plan;
(vii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax
treatment under foreign tax laws;
(viii) to modify or amend each Award (subject to
Section 16(b) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(ix) to allow Participants to satisfy
withholding tax obligations by electing to have the Company withhold from the
Shares to be issued upon exercise of an Option or the grant of a Stock Award
that number of Shares having a Fair Market Value equal to the amount required
to be withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by a Participant to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(x) to authorize any person to execute on
behalf of the Company any instrument required to effect the grant of an Award
previously granted by the Administrator;
(xi) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Participants and any other holders of Awards.
5. ELIGIBILITY. Awards may be granted to Service Providers selected
by the Administrator who are not, at the time the Award is granted, Officers
or Directors of the Company.
6. LIMITATIONS.
(a) Neither the Plan nor any Award shall confer upon a
Participant any right with respect to continuing the Participant's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Participant's right or the Company's right to terminate
such relationship at any time, with or without cause.
- 5 -
<PAGE>
7. TERM OF PLAN. The Plan shall become effective upon its adoption
by the Board. The Plan shall have no fixed expiration date.
8. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement or, if not stated in the Option Agreement, shall be ten (10)
years from the date of grant.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be determined by
the Administrator.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an
Option is granted, the Administrator shall fix the period within which the
Option may be exercised and shall determine any conditions that must be
satisfied before the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall
determine the acceptable form of consideration for exercising an Option,
including the method of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) to the extent permitted by the Plan
Administrator in the Option Agreement, other Shares which (A) in the case of
Shares acquired upon exercise of an option, have been owned by the
Participant for more than six months on the date of surrender, and (B) have a
Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which said Option shall be exercised;
(iv) consideration received by the Company
under a cashless exercise program implemented by the Company in connection
with the Plan;
(v) any combination of the foregoing methods
of payment; or
(vi) such other consideration and method of
payment for the issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any
Option granted hereunder shall be exercisable according to the terms of the
Plan and at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement. Unless the Administrator
provides otherwise, vesting of Options granted hereunder shall be tolled
during any unpaid leave of absence. An Option may not be exercised for a
fraction of a Share.
- 6 -
<PAGE>
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Participant or, if
requested by the Participant, in the name of the Participant and his or her
spouse. Until the Shares are issued (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the Company),
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner for vested and
nonforfeitable Shares shall decrease the number of Shares thereafter available,
both for purposes of the Plan and for sale under the Option, by the number of
Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If a
Participant ceases to be a Service Provider, other than upon the Participant's
death or Disability, the Participant may exercise his or her Option within such
period of time as is specified in the Option Agreement to the extent that the
Option is vested on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement). In
the absence of a specified time in the Option Agreement, the Option shall remain
exercisable for three (3) months following the Participant's termination. If, on
the date of termination, the Participant is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Participant does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF PARTICIPANT. If a Participant ceases to be a
Service Provider as a result of the Participant's Disability, the Participant
may exercise his or her Option within such period of time as is specified in the
Option Agreement to the extent the Option is vested on the date of termination
(but in no event later than the expiration of the term of such Option as set
forth in the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Participant's termination. If, on the date of termination, the Participant
is not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Participant does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) DEATH OF PARTICIPANT. If a Participant dies while a
Service Provider, the Option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the expiration of
the term of such Option as set forth in the Option
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Agreement), by the Participant's estate or by a person who acquires the right to
exercise the Option by bequest or inheritance, but only to the extent that the
Option is vested on the date of death. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12) months
following the Participant's termination. If, at the time of death, the
Participant is not vested as to his or her entire Option, the Shares covered by
the unvested portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Participant's
estate or, if none, by the person(s) entitled to exercise the Option under the
Participant's will or the laws of descent or distribution. If the Option is not
so exercised within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer
to buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Participant at the time that such offer is made.
11. Stock Awards.
(a) The Administrator is authorized to make Awards of Common
Stock or Awards denominated in units of Common Stock on such terms and
conditions and subject to such restrictions, if any (which may be based on
continuous service with the Company or the achievement of performance goals), as
the Administrator shall determine, in its sole discretion, which terms,
conditions and restrictions shall be set forth in the instrument evidencing the
Award. The terms, conditions and restrictions that the Administrator shall have
the power to determine shall include, without limitation, the manner in which
Shares subject to Stock Awards are held during the periods they are subject to
restrictions and the circumstances under which forfeiture of the Stock Award
shall occur by reason of termination of the Participant's employment or service
relationship.
(b) Upon the satisfaction of any terms, conditions and
restrictions prescribed in respect to a Stock Award, or upon the Participant's
release from any terms, conditions and restrictions of a Stock Award, as
determined by the Administrator, the Company shall release, as soon as
practicable, to the Participant or, in the case of the Participant's death, to
the personal representative of the Participant's estate or as the appropriate
court directs, the appropriate number of Shares.
(c) Notwithstanding any other provisions of the Plan, the
Administrator may, in its sole discretion, waive the forfeiture period and any
other terms, conditions or restrictions on any Stock Award under such
circumstances and subject to such terms and conditions as the Administrator
shall deem appropriate
12. NON-TRANSFERABILITY OF AWARDS. Unless determined otherwise by the
Administrator, an Award may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Participant, only by the Participant. If the Administrator
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makes an Award transferable, such Award shall contain such additional terms and
conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Award, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Shares have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Award, as well as the price per share of Common Stock covered
by each such outstanding Award, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Award.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Participant as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for a Participant
to have the right to exercise his or her Option until ten (10) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option or forfeiture
provision applicable to any Award shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action. To the extent a repurchase option or forfeiture provision applicable to
a Stock Award has not been waived by the Administrator, the Stock Award shall be
forfeited automatically immediately prior to the consummation of the proposed
action.
(c) MERGER OR ASSET SALE. Unless otherwise described in the
instrument evidencing the Award, in the event of a merger of the Company with or
into another corporation, or the sale of all or substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option, the Participant shall fully vest in and
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall
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notify the Participant in writing or electronically that the Option shall be
fully vested and exercisable for a period of fifteen (15) days from the date of
such notice, and the Option shall terminate upon the expiration of such period.
For the purposes of this paragraph, the Option shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
Unless otherwise described in the instrument evidencing the
Award, in the event of a merger of the Company with or into another corporation,
or the sale of all or substantially all of the assets of the Company, the
vesting of Shares subject to Stock Awards shall accelerate, and the repurchase
and forfeiture provisions to which such Shares are subject shall lapse, if and
to the same extent that the vesting of outstanding Options accelerates in
connection with such merger or sale. If Options are to be assumed, continued or
substituted by a successor corporation or a Parent or Subsidiary thereof without
acceleration upon the occurrence of a merger or sale, the forfeiture provisions
to which such Stock Awards are subject shall continue with respect to shares of
the successor corporation or a Parent or Subsidiary thereof that may be issued
in exchange for such shares.
14. ACQUIRED COMPANY AWARDS. Notwithstanding anything in the Plan to
the contrary, the Administrator may grant Awards under the Plan in substitution
for awards issued under other plans, or assume under the Plan awards issued
under other plans, if the other plans are or were plans of other acquired
entities ("Acquired Entities") (or the parent of the Acquired Entity) and the
new Award is substituted, or the old award is assumed, by reason of a merger,
consolidation, acquisition of property or stock, reorganization or liquidation
(the "Acquisition Transaction"). In the event that a written agreement pursuant
to which the Acquisition Transaction is completed is approved by the Board and
said agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Administrator, and the
persons holding such awards shall be deemed to be Participants.
15. DATE OF GRANT. The date of grant of an Award shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Award, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Participant within a
reasonable time after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
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(a) AMENDMENT AND TERMINATION. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of any
Participant, unless mutually agreed otherwise between the Participant and the
Administrator, which agreement must be in writing and signed by the Participant
and the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to Awards
granted under the Plan prior to the date of such termination.
17. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to
an Award unless the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise
of an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
18. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
19. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
ADOPTED BY THE BOARD ON DECEMBER 8, 1999. AMENDED BY THE BOARD ON
JANUARY 13, 2000 TO ADD STOCK AWARDS AND SECTION 14. PLAN FURTHER
AMENDED BY THE BOARD ON FEBRUARY 10, 2000 TO INCREASE THE NUMBER
OF SHARES AVAILABLE FOR ISSUANCE (ALTHOUGH THE AGGREGATE NUMBER
OF SHARES AVAILABLE REMAINED AT 4,000,000 SHARES).
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AGREEMENT AND PLAN OF MERGER
AMONG
SHOPNOW.COM INC.
SHAMU ACQUISITION, INC.
AND
UBARTER.COM INC.
DATED AS OF JANUARY 20, 2000
<PAGE>
CONTENTS
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ARTICLE I -THE MERGER.....................................................................................1
1.1 The Merger..............................................................................1
1.2 The Closing.............................................................................2
1.3 Effective Date and Time.................................................................2
1.4 Articles of Incorporation of the Surviving Corporation..................................2
1.5 Bylaws of the Surviving Corporation.....................................................2
1.6 Directors and Officers..................................................................3
1.7 Conversion of Shares....................................................................3
1.7.1 Exchange Ratio...............................................................3
1.7.2 Exchange of Certificates.....................................................6
1.7.3 No Fractional Shares.........................................................7
1.7.4 No Further Transfers.........................................................7
1.8 Amendment to Provide for Alternative Merger Structures..................................7
1.9 Option Grants...........................................................................8
ARTICLE II -REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................8
2.1 Organization............................................................................9
2.2 Enforceability..........................................................................9
2.3 Capitalization..........................................................................9
2.4 Subsidiaries and Affiliates.............................................................11
2.5 No Approvals; No Conflicts..............................................................11
2.6 SEC Documents; Financial Statements.....................................................12
2.7 Absence of Certain Changes or Events....................................................14
2.8 Taxes...................................................................................15
2.9 Property................................................................................18
2.10 Contracts...............................................................................19
2.10.1 Material Contracts...........................................................19
2.10.2 Required Consents............................................................20
2.11 Claims and Legal Proceedings............................................................21
2.12 Labor and Employment Matters............................................................21
2.13 Employee Benefit Plans..................................................................22
2.13.1 Employee Benefit Plan Listing................................................22
2.13.2 Documents Provided...........................................................22
2.13.3 Compliance...................................................................23
2.13.4 Qualification................................................................24
2.13.5 Contributions and Premium Payments...........................................24
2.13.6 Related Employers............................................................24
2.13.7 Certain Pension Plans........................................................24
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2.13.8 Post-Termination Benefits....................................................24
2.13.9 Parachute Payments...........................................................25
2.13.10 Suits, Claims and Investigations.............................................25
2.13.11 Payments Resulting from Transactions.........................................25
2.13.12 Definitions..................................................................25
2.14 Intellectual Property...................................................................26
2.14.1 General......................................................................26
2.14.2 Company Technology...........................................................27
2.14.3 Third Party Technology.......................................................27
2.14.4 Trademarks...................................................................28
2.14.5 Intellectual Property Rights.................................................28
2.14.6 Maintenance of Rights........................................................28
2.14.7 Third Party Claims...........................................................29
2.14.8 Infringement by the Company..................................................29
2.14.9 Confidentiality..............................................................29
2.14.10 Warranty Against Defects.....................................................30
2.14.11 Domain Names.................................................................30
2.14.12 Year 2000....................................................................30
2.14.13 Participating Developers.....................................................31
2.15 Corporate Books and Records.............................................................31
2.16 Licenses, Permits, Authorizations, etc..................................................32
2.17 Compliance With Laws....................................................................32
2.18 Insurance...............................................................................32
2.19 Brokers or Finders......................................................................33
2.20 Absence of Questionable Payments........................................................33
2.21 Bank Accounts...........................................................................33
2.22 Customers and Suppliers.................................................................34
2.23 Accounts Receivable.....................................................................34
2.24 Creditors' List.........................................................................34
2.25 Insider Interests.......................................................................34
2.26 Compliance With Environmental Laws......................................................35
2.27 Information Supplied by the Company.....................................................35
2.28 Full Disclosure.........................................................................36
2.29 Hart-Scott-Rodino.......................................................................36
3.1 Organization............................................................................37
3.2 Enforceability..........................................................................37
3.3 Securities..............................................................................37
3.4 No Approvals or Notices Required; No Conflicts With Instruments.........................37
3.5 Information Supplied by ShopNow.com or Merger Sub.......................................38
3.6 Full Disclosure.........................................................................38
3.7 Capitalization..........................................................................39
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3.8 SEC Documents; Financial Statements.....................................................39
3.9 Compliance With Laws....................................................................40
3.10 Tax Matters.............................................................................40
ARTICLE IV -CONDITIONS PRECEDENT TO OBLIGATIONS OF SHOPNOW.COM AND MERGER SUB.............................41
4.1 Accuracy of Representations and Warranties..............................................41
4.2 Performance of Agreements...............................................................41
4.3 Opinion of Counsel for the Company......................................................42
4.4 Compliance Certificate..................................................................42
4.5 Material Adverse Change.................................................................42
4.6 Approvals and Consents..................................................................42
4.7 Proceedings and Documents; Secretary's Certificate......................................42
4.8 Non-U.S. Real Property Holding Corporation Affidavit....................................43
4.9 Compliance With Laws....................................................................43
4.10 Legal Proceedings.......................................................................43
4.11 Noncompetition Arrangements.............................................................43
4.12 Termination of Certain Agreements.......................................................43
4.13 Exercise or Termination of Stock Purchase Rights; Conversion of Convertible Securities..44
4.14 Company Option Plan.....................................................................44
4.15 Consents to Merger......................................................................44
4.16 Resignations............................................................................44
4.17 Tax Clearance Certificates..............................................................45
4.18 Releases of Liens.......................................................................45
4.19 Stockholder Approval....................................................................45
4.20 Affiliate Letters.......................................................................45
4.21 Voting Agreements.......................................................................45
4.22 S-4.....................................................................................45
4.23 Agreements With Certain Stockholders of the Company.....................................45
4.24 Employment and Consulting Agreements....................................................46
4.25 Lock-Up Agreements......................................................................46
4.26 Tax Opinion.............................................................................46
4.27 No Dissenters Rights....................................................................46
4.28 Board Actions...........................................................................46
ARTICLE V -CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.............................................47
5.1 Accuracy of Representations and Warranties..............................................47
5.2 Performance of Agreements...............................................................47
5.3 Compliance Certificate..................................................................47
5.4 Legal Proceedings.......................................................................47
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5.5 Material Adverse Change.................................................................48
5.6 Approvals and Consents..................................................................48
5.7 Compliance With Laws....................................................................48
5.8 Opinion of Counsel......................................................................48
5.9 S-4.....................................................................................48
5.10 Tax Opinion.............................................................................48
ARTICLE VI -COVENANTS.....................................................................................49
6.1 Conduct of Business by the Company Pending the Merger...................................49
6.2 Access to Information; Confidentiality..................................................51
6.3 No Alternative Transactions.............................................................51
6.4 Notification of Certain Matters.........................................................52
6.5 Further Action; Commercially Reasonable Efforts.........................................53
6.6 Publicity...............................................................................53
6.7 Bring-Down Capitalization Schedule......................................................54
6.8 Execution of All Operative Documents....................................................54
6.9 Stockholder Approval....................................................................54
6.10 Preparation of S-4......................................................................54
6.11 ShopNow.com Common Stock................................................................55
6.12 Retirement of Indebtedness..............................................................55
ARTICLE VII -TERMINATION, AMENDMENT AND WAIVER............................................................55
7.1 Termination.............................................................................55
7.2 Effect of Termination...................................................................56
ARTICLE VIII -GENERAL.....................................................................................56
8.1 Survival................................................................................56
8.2 Tax Matters - Reorganization Treatment..................................................57
8.3 Expenses................................................................................57
8.4 Notices.................................................................................57
8.5 Severability............................................................................58
8.6 Entire Agreement........................................................................59
8.7 Assignment..............................................................................59
8.8 Parties in Interest.....................................................................59
8.9 Governing Law; Venue....................................................................59
8.10 Headings................................................................................59
8.11 Counterparts............................................................................60
8.12 Waiver of Jury Trial....................................................................60
8.13 Amendment...............................................................................60
8.14 Waiver..................................................................................60
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EXHIBITS
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2 -- Company Disclosure Memorandum
4.3 -- Form of Opinion of Counsel for the Company
4.8 -- FIRPTA Affidavit
4.11 -- Form of Confidentiality, Invention Assignment and Non-Raiding Agreement
4.20 -- Form of Affiliate Letter
4.21 -- Form of Voting Agreement
4.24A -- Form of Employment Agreement
4.24B -- Form of Consulting Agreement
4.25A -- Form of Lock-Up Agreement between ShopNow.com and White
4.25B -- Form of Lock-Up Agreement between ShopNow.com and New Horizons, LP
5.8 -- Form of Opinion of Perkins Coie
</TABLE>
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AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger ("AGREEMENT") dated as of January 20,
2000, by and among ShopNow.com Inc., a Washington corporation
("ShopNow.com"), Shamu Acquisition, Inc., a Washington corporation and wholly
owned subsidiary of ShopNow.com ("MERGER SUB") and Ubarter.com Inc., a Nevada
corporation (the "COMPANY").
RECITALS
A. The Company ShopNow.com and Merger Sub believe it advisable and in
their respective best interests to effect a merger of the Company and Merger Sub
pursuant to this Agreement (the "MERGER").
B. The Board of Directors of the Company have approved this Agreement
and the Merger as required by applicable law.
C. The Boards of Directors of ShopNow.com and Merger Sub have approved
this Agreement and the Merger as required by applicable law.
D. It is intended that the Merger will qualify as a reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"CODE").
AGREEMENT
In consideration of the terms hereof, the parties hereto agree as
follows:
ARTICLE I - THE MERGER
1.1 THE MERGER
Upon the terms and subject to the conditions hereof, (a) at the
Effective Time (as defined in Section 1.3) the separate existence of the Company
shall cease and the Company shall be merged with and into Merger Sub (Merger Sub
as the surviving corporation after the Merger is sometimes referred to herein as
the "SURVIVING CORPORATION") and (b) from and after the Effective Time, the
Merger shall have all the effects of a merger under the laws of the state of
Washington and the state of Nevada and other applicable law.
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1.2 THE CLOSING
Subject to the terms and conditions of this Agreement, the closing of
the Merger (the "CLOSING") shall take place on the earliest practicable business
day (the "CLOSING DATE") after the satisfaction or waiver of the conditions set
forth in Articles IV and V at 10 a.m. local time at the offices of Perkins Coie
LLP, 1201 Third Avenue, 48th Floor, Seattle, Washington, or such other date,
time or location as ShopNow.com and the Company shall agree.
1.3 EFFECTIVE DATE AND TIME
On the Closing Date and subject to the terms and conditions hereof,
articles of merger and a certificate of merger (the "ARTICLES OF MERGER"),
complying with the applicable provisions of the Washington Business Corporation
Act ("WASHINGTON LAW") and the Nevada General Corporation Law ("NEVADA LAW") and
in such form and executed in such manner as required by Washington Law and
Nevada Law, shall be delivered for filing with the Secretary of State of the
state of Washington (the "WASHINGTON SECRETARY") and the Secretary of State of
the state of Nevada (the "NEVADA SECRETARY"). The Merger shall become effective
on the date (the "EFFECTIVE DATE") and at the time (the "EFFECTIVE TIME") of
filing of the Articles of Merger or at such other time as may be specified in
the Articles of Merger as filed. If the Washington Secretary or the Nevada
Secretary requires any changes in the Articles of Merger as a condition to
filing or issuing its certificate to the effect that the Merger is effective,
ShopNow.com, Merger Sub and the Company will execute any necessary revisions
incorporating such changes, provided such changes are not inconsistent with and
do not result in any material change in the terms of this Agreement.
1.4 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, the Articles of Incorporation of Merger Sub
shall be the Articles of Incorporation of the Surviving Corporation; provided,
however, that Article I thereof shall be amended to read as follows: "The name
of this corporation is Ubarter.com Inc." Thereafter, the Articles of
Incorporation of the Surviving Corporation may be amended in accordance with
their terms and as provided by law.
1.5 BYLAWS OF THE SURVIVING CORPORATION
At the Effective Time, the Bylaws of Merger Sub as in effect
immediately prior to the Effective Time shall become the Bylaws of the Surviving
Corporation. Thereafter, the Bylaws may be amended or repealed in accordance
with their terms and the Articles of Incorporation of the Surviving Corporation
and as provided by law.
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1.6 DIRECTORS AND OFFICERS
At the Effective Time, the directors and officers of the Company shall
resign and the directors of Merger Sub shall continue in office as the directors
of the Surviving Corporation and the officers of Merger Sub shall continue in
office as the officers of the Surviving Corporation, and such directors and
officers shall hold office in accordance with and subject to the Articles of
Incorporation and Bylaws of the Surviving Corporation.
1.7 CONVERSION OF SHARES
1.7.1 EXCHANGE RATIO
As of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof:
(a) All shares of any class of capital stock of the
Company held by the Company as treasury shares shall be canceled.
(b) Each issued and outstanding share of common stock,
par value $.001 per share, of the Company (the "COMPANY COMMON STOCK") that is
issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive from ShopNow.com a number of shares of
ShopNow.com common stock, par value $.001 per share (the "ShopNow.com COMMON
STOCK"), determined by dividing (a) the ShopNow.com Base Shares (as defined
below) by (b) the Fully Diluted Common Stock Number (as defined below). The
quotient derived in Section 1.7.1(b) shall be rounded to three decimal points
and shall be referred to herein as the "EXCHANGE RATIO." The "ShopNow.com BASE
SHARES" shall mean the total number of shares of ShopNow.com Common Stock to be
issued in the Merger, which shall be equal to the number of shares determined by
dividing (a) $44,900,000 by (b) $17.31 (the "BASE PRICE"). The "FULLY DILUTED
COMMON STOCK NUMBER" shall mean the total number of shares of Company Common
Stock outstanding immediately prior to the Effective Time on a fully diluted
basis, as set forth on SCHEDULE 2.3 to the Company Disclosure Memorandum, which
calculation assumes (x) the exercise on a cash or cashless basis, as the case
may be, of all outstanding rights, warrants or options, vested or unvested, to
acquire Company Common Stock, regardless of restrictions on exercise or
conversion and (y) the conversion of all outstanding securities and notes
convertible at any time into Company Common Stock (such rights, warrants, notes,
options and convertible securities referenced in clauses (x) and (y) being
referred to herein as "STOCK PURCHASE RIGHTS"); provided, however, that the term
"Fully Diluted Common Stock Number" shall not include (i) the convertible note
referenced in that certain letter
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agreement dated December 9, 1999 between Momentous Inc. Pension and Trust
("MOMENTOUS") and the Company (the "MOMENTOUS NOTE"), (ii) that certain
Convertible Promissory Note in favor of Alpine Capital LLC ("ALPINE CAPITAL")
dated August 27, 1999 (the "ALPINE CAPITAL NOTE"), (iii) that certain
Convertible Promissory Note, dated December 22, 1999 (the "ShopNow.com Note"),
and any (iv) options granted pursuant to that stock option agreement dated July
26, 1999, between Astra Ventures LLC ("ASTRA Ventures") and the Company that are
unexercised as of the Effective Time, provided that such options terminate as of
the Effective Time by their terms or by later agreement of Astra Ventures. The
shares of ShopNow.com Common Stock so issued shall be referred to herein as the
"CLOSING SHARES." The number of shares of ShopNow.com Common Stock to be issued
at the Closing to each stockholder under this Section 1.7.1(b) shall be
calculated by aggregating all shares of Company Common Stock held by each such
stockholder, so that such number of shares of ShopNow.com Common Stock to be
issued shall be equal to the number of shares of Company Common Stock held by
such stockholder multiplied by the Exchange Ratio, with fractional shares
rounded up to the nearest whole number pursuant to Section 1.7.3 hereof.
(c) The aggregate number of Closing Shares shall be
subject to adjustment as follows:
(i) In the event that any Company Liability (as
defined below) exists as of the date that is immediately prior to the Closing
Date, the aggregate number of Closing Shares shall be reduced by that number of
shares of ShopNow.com Common Stock determined by dividing the dollar amount of
the Company Liability by the Base Price. "COMPANY LIABILITY" shall mean all
liabilities, debts or obligations, contingent or otherwise, existing as of the
Closing Date immediately prior to the Effective Time, the value of which shall
not exceed the value of the ShopNow.com Base Shares (as measured by multiplying
the Base Price by the number of ShopNow.com Base Shares), including without
limitation, all outstanding liability to (1) Astra Ventures, (2) employees of
the Company based on change of control provisions in such employees' respective
employment agreements, (3) Alpine Capital, (4) Bob Bagga, as an earn-out under a
Share Purchase Agreement among Bob Bagga, International Barter Corp. and Barter
Business Exchange Inc., dated February 28, 1999 and promissory note dated March
2, 1999 (the "BBE PURCHASE AGREEMENT AND NOTE"), (5) Momentous and (6) various
lessors, lenders and vendors created in connection with the execution of
miscellaneous leases and other agreements; provided, however, that Company
Liability shall not include, in each case existing at the Closing, (x) any
outstanding indebtedness and accrued interest payable to ShopNow.com pursuant to
the ShopNow.com Note, (y) any payables or accrued expenses incurred in the
ordinary course of business (provided such payables and accrued expenses do not
exceed in the
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aggregate $225,000) and (z) any non-cash or barter trade dollar liabilities. Any
outstanding liability referenced in (1) through (6) above shall be deemed a
Company Liability in the event such liability is retired or paid off prior to
the Effective Time. The dollar amount of Company Liability shall be reduced by
any amounts received by the Company from option holders or warrant holders as a
result of the cash exercise of stock options or warrants between the date hereof
and the Effective Date. The Company shall cause to be prepared and delivered to
ShopNow.com, on the date that is two days immediately prior to the Closing Date,
a schedule, certified by the Company's Chief Financial Officer and in form and
substance satisfactory to ShopNow.com, as to the dollar amount of the Company
Liability, which schedule shall include a break down of the dollar amounts of
each liability, debt and obligation comprising the Company Liability.
(ii) In the event ShopNow.com reasonably determines
between the date hereof and March 1, 2000 as a result of its financial due
diligence investigation and tax assessment of the Company that the Company and
its subsidiaries, taken as a whole, have liabilities or obligations (whether
absolute, accrued or contingent) that are not (a) accrued or reserved against in
the Company Balance Sheet (as defined in Section 2.6) or reflected in the notes
thereto, (b) disclosed in the financial statements of the Company filed as a
part of the Company SEC Documents (as defined in Section 2.6) or (c) disclosed
in the Company Disclosure Memorandum (as defined in the preamble to Article II)
(an "UNDISCLOSED LIABILITY"), then the aggregate number of Closing Shares shall
be reduced by that number of shares of ShopNow.com Common Stock determined by
dividing the aggregate dollar amount of such Undisclosed Liabilities (up to
$1,000,000) by the Base Price. In the event that ShopNow.com's accountants and
the Company's accountants disagree as to whether a liability or obligation is an
Undisclosed Liability (a "DISPUTED LIABILITY"), then ShopNow.com and the Company
shall cause such accountants to promptly choose an independent financial expert
mutually agreeable to the Company's accountants and ShopNow.com's accountants,
and such independent financial expert shall determine whether the Disputed
Liability is an Undisclosed Liability. The fees of such independent financial
expert shall be paid by ShopNow.com, provided, however, that if such independent
financial expert determines that the Disputed Liability is an Undisclosed
Liability, the amount of such fees shall reduce the number of Closing Shares by
treating such amount as if it were an Undisclosed Liability. Undisclosed
payables and expenses incurred in the ordinary course of business shall not be
deemed Undisclosed Liabilities, provided that such payables and expenses do not
exceed $225,000.
(d) Holders of shares of Company Common Stock who have
complied with all the requirements for perfecting dissenters' rights, as
required under
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Nevada Law, shall be entitled to their rights under Nevada Law with respect to
such shares (the "DISSENTING Shares"). Notwithstanding the foregoing, if any
holder of Dissenting Shares shall effectively withdraw or lose (through failure
to perfect or otherwise) the right to dissent, then, as of the later of the
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent the right to receive the shares of
ShopNow.com Common Stock to which such holder is then entitled under this
Agreement and Nevada Law, without interest thereon and upon surrender of the
certificate representing such shares. Notwithstanding any provision of this
Agreement to the contrary, any Dissenting Shares held by a Shareholder who has
perfected dissenters' rights for such shares in accordance with Nevada Law shall
not be converted into ShopNow Common Stock pursuant to this Section 1.7.1.
1.7.2 EXCHANGE OF CERTIFICATES
(a) As soon as practicable after the Effective Time,
ShopNow.com shall cause Continental Stock Transfer & Trust (the "EXCHANGE
AGENT") to mail to each holder of record of Company Common Stock as of the
Effective Time (i) a letter of transmittal (which shall be in customary form and
specify that delivery shall be effected, and risk of loss and title to the
certificates of Company Common Stock shall pass, only upon delivery of such
certificates to the Exchange Agent) and (ii) instructions for use in effecting
the surrender of such certificates in exchange for certificates representing
ShopNow.com Common Stock. Upon surrender of a certificate of Company Common
Stock for cancellation to the Exchange Agent, together with a duly executed
letter of transmittal and such other documents as the Exchange Agent shall
require, the holder of such certificate shall be entitled to receive in exchange
therefor the number of whole shares of ShopNow.com Common Stock to which the
holder of Company Common Stock is entitled pursuant to Section 1.7.1 hereof. The
certificate so surrendered shall forthwith be canceled. Notwithstanding any
other provision of this Agreement, until holders of certificates of Company
Common Stock have surrendered them for exchange as provided herein, (i) no
dividends or other distributions shall be paid with respect to any shares
represented by such certificates, and (ii) without regard to when such
certificates are surrendered for exchange as provided herein, no interest shall
be paid on any dividends or other distributions. Upon surrender of a certificate
of Company Common Stock, there shall be paid to the holder of such certificate
the amount of any dividends or other distributions which theretofore became
payable, but which were not paid by reason of the foregoing, with respect to the
number of whole shares of ShopNow.com Common Stock represented by the
certificate or certificates issued upon such surrender. If any certificate for
ShopNow.com Common Stock is to be issued in a name other than in which the
certificate of Company Common Stock surrendered in exchange therefore is
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registered, it shall be a condition of such exchange that the person requesting
such exchange pay any transfer or other taxes required by reason of the issuance
of certificates for such shares of ShopNow.com Common Stock in a name other than
that of the registered holder of the certificate surrendered, or establish to
the satisfaction of the Surviving Corporation that such tax has been paid or is
not applicable. In connection with its undertakings pursuant to this Section
1.7.2, the Exchange Agent shall be entitled to withhold any income taxes as
required by the Code.
(b) The shares of ShopNow.com Common Stock that each
stockholder shall be entitled to receive pursuant to the Merger shall be deemed
to have been issued at the Effective Time, and no interest shall accrue on any
of the Closing Shares.
1.7.3 NO FRACTIONAL SHARES
No certificates or scrip representing fractional shares of ShopNow.com
Common Stock shall be issued by virtue of the Merger. The aggregate number of
shares of ShopNow.com Common Stock a stockholder is entitled to receive pursuant
to Section 1.7.1(b) shall be rounded to the nearest whole number of shares, with
.5 being rounded up.
1.7.4 NO FURTHER TRANSFERS
After the Effective Time, there shall be no transfers of any shares of
Company Common Stock on the stock transfer books of the Surviving Corporation.
Any ShopNow.com Common Stock made available to the Exchange Agent and not
exchanged for certificates of Company Common Stock within one year after the
Effective Time and any dividends and distributions held by the Exchange Agent
for payment or delivery to the holders of unsurrendered certificates
representing Company Common Stock and unclaimed at the end of such one year
period shall be redelivered or repaid by the Exchange Agent to ShopNow.com,
after which time any holder of certificates of Company Common Stock who has not
theretofore delivered or surrendered such certificates to the Exchange Agent,
subject to applicable law, shall look as a general creditor only to ShopNow.com
for payment of the ShopNow.com Common Stock and any such dividends or
distributions. Notwithstanding any provision of this Agreement, none of
ShopNow.com, the Exchange Agent, the Surviving Corporation or any other party
hereto shall be liable to any holder of Company Common Stock for any ShopNow.com
Common Stock or dividends or distributions delivered to a public official
pursuant to applicable abandoned property, escheat or similar law.
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1.8 AMENDMENT TO PROVIDE FOR ALTERNATIVE MERGER STRUCTURES
If at any time prior to the Closing Date, ShopNow.com elects to have
the Company be the Surviving Corporation or elects to have the Company merge
directly into ShopNow.com or to have a different subsidiary of ShopNow.com merge
with the Company in a forward or reverse triangular merger, the parties shall
promptly enter into an amendment to this Agreement to so provide, so long as
such action does not result in a breach of a representation or warranty set
forth in Article II, or the inability to satisfy any of the conditions set forth
in Articles IV and V hereof.
1.9 OPTION GRANTS
No later than thirty days after the Effective Time, ShopNow.com will
act to grant nonqualified stock options (the "NEW OPTIONS") under its Amended
and Restated 1999 Non-Officer Stock Option Plan, or such other plan having
substantially similar terms as ShopNow.com shall determine in its sole
discretion, to acquire an aggregate of 600,000 shares of ShopNow.com Common
Stock in the numbers specified and to the members of the management of the
Company immediately prior to the Effective Time (the "MANAGEMENT MEMBERS") and
to employees of the Company immediately prior to the Effective Time (the
"RETAINED EMPLOYEES"), who have been offered and accepted employment with
ShopNow.com or the Surviving Corporation and commence employment with
ShopNow.com or the Surviving Corporation after the Effective Time (with the
allocation of such grants among such Management Members and Retained Employees
to be mutually acceptable to ShopNow.com and Liad Meidar and Steven White,
except that 250,000 of such New Options shall be allocated to Liad Meidar). Such
New Options shall have an exercise price of $15.58 per share. One-third of the
New Options shall be vested upon the one-year anniversary of the Closing Date,
and the remaining balance of the New Options shall vest on a quarterly basis
over a period of two years following the one-year anniversary of the Closing
Date.
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as is otherwise set forth with appropriate Section references in
the Company Disclosure Memorandum attached as EXHIBIT 2 (the "COMPANY DISCLOSURE
MEMORANDUM"), each of which exceptions shall specifically identify or
cross-reference the provision of this Article II to which such exception
relates, and in order to induce ShopNow.com and Merger Sub to enter into and
perform this Agreement and the other agreements and documents attached hereto as
exhibits that are required to be completed and/or executed pursuant to this
Agreement (collectively, the "OPERATIVE DOCUMENTS"), the Company represents and
warrants to ShopNow.com and Merger Sub
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as of the date of this Agreement and as of the Closing Date as follows in this
Article II. For the purposes of Sections 2.7 through 2.29 of this Article II,
the term "Company" shall refer to the Company and all of its subsidiaries.
2.1 ORGANIZATION
The Company is a corporation duly organized and validly existing under
the laws of the state of Nevada. The Company's subsidiaries are duly organized
and validly existing under the laws of the jurisdictions in which they are
organized. The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and the
Operative Documents delivered by the Company or to which the Company is a party,
and to consummate, subject to the approval of the Merger by the stockholders of
the Company, the transactions contemplated hereby and thereby. The Company and
its subsidiaries are duly qualified and licensed as a foreign corporations to do
business and are in good standing in each jurisdiction in which the character of
the properties occupied, owned or held under lease or the nature of the business
conducted by the Company and its subsidiaries makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not have a material adverse effect on the financial condition, property,
business or results of operations of the Company and its subsidiaries, taken as
a whole.
2.2 ENFORCEABILITY
All corporate action on the part of the Company and its directors and
stockholders necessary for the authorization, execution, delivery and
performance of this Agreement and the Operative Documents delivered by the
Company or to which the Company is a party, the consummation of the Merger, and
the performance of all the Company's obligations under this Agreement and the
Operative Documents delivered by the Company or to which the Company is a party,
has been taken, subject to the approval of the Merger by the stockholders of the
Company. This Agreement and each of the Operative Documents to which the Company
is a party, has been duly executed and delivered by the Company and this
Agreement is, and each of the Operative Documents delivered by the Company or to
which the Company is a party is, a legal, valid and binding obligation of the
Company, enforceable against it in accordance with its terms.
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2.3 CAPITALIZATION
(a) The authorized capital stock of the Company consists of 25,000,000
shares of Company Common Stock, par value $.001 per share and 10,000,000 shares
of Preferred Stock, none of which shares of Preferred Stock are issued and
outstanding.
(b) The issued and outstanding capital stock of the Company consists
solely of 6,077,253 shares of Company Common Stock (collectively, the
"OUTSTANDING SHARES"). The Outstanding Shares are, and immediately prior to the
Closing will be, duly authorized and validly issued, fully paid and
nonassessable, and issued in compliance with all applicable federal and state
securities laws. True and correct copies of the stock records of the Company
showing all issuances of capital stock of the Company since inception have been
delivered to ShopNow.com or its counsel.
(c) As of the date of this Agreement and as of the Closing Date, and
except as contemplated by this Agreement, there are no outstanding rights of
first refusal or offer, preemptive rights, Stock Purchase Rights or other
agreements, either directly or indirectly, for the purchase or acquisition from
the Company or any stockholder of any shares of Company Common Stock or any
securities convertible into or exchangeable for shares of Company Common Stock
other than (i) options to purchase up to (A) 679,000 shares of Company Common
Stock that have been granted under the Company's 1998 Stock Option Plan (the
"COMPANY OPTION PLAN"), (B) 630,000 shares of Company Common Stock that have
been granted pursuant to a stock option agreement dated July 26, 1999, between
Astra Ventures and the Company, (C) 40,000 shares of Company Common Stock that
have been granted pursuant to a stock option agreement between Kevin Andersen
and the Company, (ii) 1,333,333 shares of Company Common Stock issuable upon
conversion of that certain Convertible Promissory Note dated August 27, 1999 in
favor of Alpine Capital LLC (the "ALPINE CAPITAL NOTE"), (iii) 183,333 shares of
Company Common Stock issuable upon exercise of that certain warrant dated August
27, 1999 issued to Alpine Capital LLC (the "ALPINE CAPITAL WARRANT"), (iv)
706,000 shares of Company Common Stock issuable upon exercise of outstanding E
Warrants and (v) shares of Company Common Stock issuable upon conversion of the
Momentous Note. Set forth on SCHEDULE 2.3 to the Company Disclosure Memorandum
is a spreadsheet accurately reflecting the number of options and other Stock
Purchase Rights outstanding, the grant or issue dates, vesting schedules and
exercise or conversion prices thereof and, in each case, the identities of the
holders and an indication of their relationships to the Company (if any exist
other than a security holder). The Company has delivered to ShopNow.com or its
counsel true and correct copies of the Company Option Plan, all stock option
agreements, board resolutions and exercise documentation relating to options
granted thereunder and granted to Astra Ventures and Kevin Anderson and all
agreements with
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respect to Stock Purchase Rights. SCHEDULE 2.3 to the Company Disclosure
Memorandum also identifies all options, warrants or other Stock Purchase Rights
that have been offered in connection with any employee or consulting agreement
but that, as of the date hereof, have not been issued or granted.
(d) Except as contemplated by this Agreement, the Company is not a
party or subject to any agreement or understanding and there is no agreement or
understanding between any Persons (as defined in Section 2.5) that affects or
relates to the voting or giving of written consents with respect to any
securities of the Company or the voting by any director of the Company. No
stockholder or any affiliate thereof is indebted to the Company, and the Company
is not indebted to any stockholder or any affiliate thereof. The Company is not
under any contractual or other obligation to register any of its presently
outstanding securities or any of its securities that may hereafter be issued.
(e) All rights of refusal, co-sale rights and registration rights
granted by the Company with respect to the Company Common Stock or Stock
Purchase Rights of the Company are described on SCHEDULE 2.3 to the Company
Disclosure Memorandum.
(f) All options, Stock Purchase Rights and shares of Company Common
Stock have been granted or issued at fair market value, as determined by the
Company's Board of Directors at the date of grant or issuance.
2.4 SUBSIDIARIES AND AFFILIATES
The Company does not own, directly or indirectly, any ownership,
equity, or voting interest in, any corporation, partnership, joint venture or
other entity, and has no agreement or commitment to purchase any such interest.
2.5 NO APPROVALS; NO CONFLICTS
The execution, delivery and performance of this Agreement and the
Operative Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby will not
(a) constitute a violation (with or without the giving of
notice or lapse of time, or both) of any provision of law or any judgment,
decree, order, regulation or rule of any court or other governmental authority
applicable to the Company;
(b) require any consent, approval or authorization of, or
declaration, filing or registration with, any person, corporation, partnership,
joint venture, association, organization, other entity or governmental or
regulatory authority (a
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"PERSON"), except for (i) approval by the stockholders of the Company, (ii) the
filing of all documents necessary to consummate the Merger with the Washington
Secretary and the Nevada Secretary, (iii) the filing of a premerger notification
report and all other required documents by ShopNow.com and the Company, and the
expiration of all applicable waiting periods, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and (iv) any
filings with the Securities and Exchange Commission (the "SEC") including such
reports and information as may be required under the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), the Securities Act and the rules and
regulations promulgated by the SEC under the Exchange Act or the Securities Act
and the declaration of the effectiveness of the S-4 (as defined in Section 2.27)
by the SEC;
(c) result in a default under (with or without the giving
of notice or lapse of time, or both), or acceleration or termination of, or the
creation in any party of the right to accelerate, terminate, modify or cancel,
any agreement, lease, note or other restriction, encumbrance, obligation or
liability to which the Company is a party or by which it is bound or to which
its assets are subject;
(d) result in the creation of any liens, mortgages,
pledges, deeds of trust, security interests, charges, encumbrances or other
adverse claims of interest of any kind (each, an "ENCUMBRANCE") upon any assets
of the Company or the Outstanding Shares;
(e) conflict with or result in a breach of or constitute
a default under any provision of the Company's Articles of Incorporation or
Bylaws, or
(f) invalidate or adversely affect any permit, license or
authorization or status used in the conduct of the Company's business.
2.6 SEC DOCUMENTS; FINANCIAL STATEMENTS
(a) The Company has filed all forms, reports and documents required to
be filed by it with the SEC since June 8, 1998 (the date the Company first
became a reporting Company under the Exchange Act) through the date of this
Agreement (collectively, the "COMPANY SEC DOCUMENTS"). As of their respective
filing dates, the Company SEC Documents complied in all material respects with
the requirements of the Exchange Act or the Securities Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such Company
SEC Documents, and none of the Company SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were
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made, not misleading. As of their respective filing dates, the financial
statements of the Company included in the Company SEC Documents (the "COMPANY
FINANCIAL STATEMENTS") complied as to form in all material respects with all
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto and were prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied (except as may be
indicated in the notes thereto) and fairly presented, in all material respects,
the consolidated financial position of the Company and its subsidiaries as at
the dates thereof and the results of their operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal,
recurring audit adjustments not material in scope or amount). There has been no
change in the Company's accounting policies or the methods of making accounting
estimates or changes in estimates that are material to the Company Financial
Statements, except as described in the notes thereto. The balance sheet of the
Company as of September 30, 1999 is herein referred to as the "COMPANY BALANCE
SHEET".
(b) The Company has delivered to ShopNow.com copies of the Company's
unaudited consolidated balance sheet as of September 30, 1999, and income
statement and statement of cash flows for the period ended September 30, 1999.
Such financial statements: (i) are in accordance with the books and records of
the Company; (ii) fairly present in all material respects the Company's
financial condition at the date therein indicated and the results of operations
for the period therein indicated and the results of operations for the period
therein specified; and (iii) have been prepared in accordance with GAAP applied
on a consistent basis (except for the absence of any footnotes required by
GAAP).
(c) The Company has heretofore furnished to ShopNow.com a complete and
correct copy of any amendments or modifications, which have not yet been filed
with the SEC but which are required to be filed, to agreements, documents or
other instruments which previously had been filed by the Company with the SEC
pursuant to the Securities Act or the Exchange Act.
(d) The Company and its subsidiaries, taken as a whole, have no
liabilities or obligations (whether absolute, accrued or contingent) except (i)
liabilities, obligations or contingencies that are accrued or reserved against
in the Company Balance Sheet or reflected in the notes thereto or disclosed in
the financial statements of the Company filed as a part of the Company SEC
Documents, (ii) liabilities, obligations or contingencies that would not have a
material adverse effect on the business, operations, prospects or financial
condition of the Company, or (iii) additional liabilities, obligations or
contingencies reserved against since the date of the Company Balance
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Sheet that (x) have arisen in the ordinary course of business and (y) are
accrued or reserved against on the books and records of the Company and its
subsidiaries.
(e) Except as disclosed in the Company SEC Documents as filed and
amended before the date hereof and as contemplated by this Agreement, since
September 30, 1999, no material adverse change in the business, financial
condition, results of operations or prospects of Company has occurred.
2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except for transactions specifically contemplated in this Agreement,
since the date of the Company Balance Sheet, neither the Company nor any of its
officers or directors in their representative capacities on behalf of the
Company have:
(a) taken any action or entered into or agreed to enter
into any transaction, agreement or commitment other than in the ordinary course
of business;
(b) forgiven or canceled any indebtedness or waived any
claims or rights of material value (including, without limitation, any
indebtedness owing by any stockholder, officer, director, employee or affiliate
of the Company);
(c) granted any increase in the compensation of
directors, officers, employees or consultants;
(d) suffered any change having a material adverse effect
on the Company's business operations, assets, liabilities (absolute, accrued,
contingent or otherwise), condition (financial or otherwise) or prospects;
(e) borrowed or agreed to borrow any funds, incurred or
become subject to, whether directly or by way of assumption or guarantee or
otherwise, any obligations or liabilities (absolute, accrued, contingent or
otherwise) in excess of $10,000 individually or in excess of $20,000 in the
aggregate, except liabilities and obligations that are incurred in the ordinary
course of business and consistent with past practice, or increased, or
experienced any change in any assumptions underlying or methods of calculating,
any bad debt, contingency or other reserves;
(f) paid, discharged or satisfied any material claims,
liabilities or obligations (absolute, accrued, contingent or otherwise) other
than the payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice of claims, liabilities and obligations
reflected or reserved against in the Company Balance Sheet or incurred in the
ordinary course of business and consistent with past practice since the date of
the Company Balance Sheet, or prepaid any
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obligation having a fixed maturity of more than 90 days from the date such
obligation was issued or incurred;
(g) knowingly permitted or allowed any of its property or
assets (real, personal or mixed, tangible or intangible) to be subjected to any
Encumbrance;
(h) purchased or sold, transferred or otherwise disposed
of any of its material properties or assets (real, personal or mixed, tangible
or intangible);
(i) disposed of or permitted to lapse any rights to the
use of any trademark, trade name, patent or copyright, or disposed of or
disclosed to any Person without obtaining an appropriate confidentiality
agreement from any such Person any trade secret, formula, process or know-how
not theretofore a matter of public knowledge;
(j) made any single capital expenditure or commitment in
excess of $10,000 for additions to property, plant, equipment or intangible
capital assets or otherwise or made aggregate capital expenditures in excess of
$20,000 for additions to property, plant, equipment or intangible capital assets
or otherwise;
(k) made any change in accounting methods or practices or
internal control procedure;
(l) issued any capital stock or other securities, or
declared, paid or set aside for payment any dividend or other distribution in
respect of its capital stock, or redeemed, purchased or otherwise acquired,
directly or indirectly, any shares of capital stock or other securities of the
Company, or otherwise permitted the withdrawal by any of the holders of Company
Common Stock of any cash or other assets (real, personal or mixed, tangible or
intangible), in compensation, indebtedness or otherwise, other than payments of
compensation in the ordinary course of business and consistent with past
practice;
(m) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to any of the stockholders or any of the Company's
officers, directors or employees or any affiliate of any of the stockholders of
the Company or of the Company's officers, directors or employees, except
compensation paid to officers and employees at rates not exceeding the rates of
compensation paid during the fiscal year last ended and except for advances for
travel and other business-related expenses; or
(n) agreed, whether in writing or otherwise, to take any
action described in this Section 2.7.
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2.8 TAXES
(a) (i) All Tax Returns (as defined below) required to be filed by or
on behalf of the Company have been timely filed and all such Tax Returns were
(at the time they were filed) and are true, correct and complete in all
respects; (ii) all Taxes (as defined below) of the Company (whether or not
reflected on any Tax Return) have been fully and timely paid; (iii) no waivers
of statutes of limitation have been given or requested with respect to the
Company in connection with any Tax Returns covering the Company with respect to
any Taxes payable by it; (iv) no taxing authority in a jurisdiction where the
Company does not file Tax Returns has made a claim, assertion or threat to the
Company that the Company is or may be subject to taxation by such jurisdiction,
and the Company has never been subject to state taxes (other than payroll taxes
that were fully and timely withheld and paid) in any state other than
Washington; (v) the Company has duly and timely withheld from employee salaries,
wages and other compensation and paid over to the appropriate governmental
authority all amounts required to be so withheld and paid over for all periods
under all applicable laws; (vi) there are no liens with respect to Taxes on any
of the Company's property or assets other than liens for current Taxes not yet
payable; (vii) there are no Tax rulings, requests for rulings, or closing
agreements relating to the Company that could affect the liability for Taxes or
the amount of taxable income of the Company for any period (or portion of a
period) after the date hereof; and (viii) any adjustment of Taxes of the Company
made by the IRS (as defined below) in any examination that is required to be
reported to the appropriate state, local or foreign taxing authorities has been
reported, and any additional Taxes due with respect thereto have been paid.
(b) Neither the Company nor any other Person on behalf of the Company
(i) has filed a consent pursuant to Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by the Company;
(ii) has executed or entered into a closing agreement pursuant to Section 7121
of the Code or any predecessor provision thereof or any similar provision of
state, local or foreign law; or (iii) has agreed to or is required to make any
adjustments pursuant to Section 481(a) of the Code or any similar provision of
state, local or foreign law by reason of a change in accounting method initiated
by the Company or has notice that a governmental authority has proposed any such
adjustment or change in accounting method.
(c) There is no outstanding dispute or claim concerning any Tax
liability of the Company, nor to the knowledge of the Company is any such claim
or dispute pending. SCHEDULE 2.8 to the Company Disclosure Memorandum lists all
Tax Returns filed with respect to the Company for taxable periods ended on or
after the Company's
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inception or the inception of any predecessor that have been audited, and
indicates those Tax Returns that currently are the subject of audit. The Company
has delivered to ShopNow.com correct and complete copies of all Tax Returns,
examination reports and statements of deficiencies assessed against or agreed to
by the Company since the Company's inception.
(d) The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(e) The Company is not a party to any Tax allocation or sharing
agreement. The Company (i) has not been a member of a Tax Group (as defined
below) filing a consolidated income Tax Return under Section 1501 of the Code
(or any similar provision of state, local or foreign law) and (ii) does not have
any liability for Taxes of any Person under Treasury Regulations Section
1.1502-6 (or any similar provision of state, local or foreign law) or by
operation of law or as a transferee or successor by contract or otherwise.
(f) The unpaid Taxes of the Company (i) did not, as of December 31,
1999, exceed the reserve for Tax liability set forth on the face (rather than
any reserve for deferred Taxes established to reflect timing differences between
book and Tax income) of the Company Balance Sheet and (ii) do not exceed that
reserve as adjusted for the passage of time and operations in the ordinary
course of business through the Closing Date.
(g) The aggregate net income tax losses (including net operating
losses) of the Company have exceeded its taxable income for all periods and
there has been no ownership change, as defined in Section 382(g) of the Code (or
any comparable provision of state or local or foreign law), with respect to the
Company during or after any taxable period in which the Company incurred a net
operating loss. The Company has no liability for unpaid income taxes. (including
any liability for penalties or interest with respect to such taxes). The Company
has never owed income taxes for any tax year (including the portion of the tax
year ending on the date hereof).
(h) All options that the Company has treated as incentive stock options
under Section 421 of the Code meet the requirements of Section 422 of the Code.
As used in this Agreement, the following terms shall have the following
meanings:
"TAXES" means all foreign, federal, state, county or local taxes,
charges, fees, levies, imposts, duties and other assessments, including, but not
limited to, any income,
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alternative minimum or add-on, estimated, gross income, gross receipts, sales,
use, transfer, transactions, intangibles, ad valorem, value-added, franchise,
registration, title, license, capital, paid-up capital, profits, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, real
property, recording, personal property, federal highway use, commercial rent,
environmental (including, but not limited to, taxes under Section 59A of the
Code) or windfall profit tax, custom, duty or other tax, governmental fee or
other like assessment or charge of any kind whatsoever, together with any
interest, penalties or additions to tax; and "TAX" means any of the foregoing
Taxes.
"TAX GROUP" means any federal, state, local or foreign consolidated,
affiliated, combined, unitary or other similar group of which the Company is now
or was formerly a member.
"TAX RETURNS" means any return, declaration, report, claim or refund,
information return, statement or other similar document relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
2.9 PROPERTY
(a) The Company owns no real property other than the leasehold
interests described on SCHEDULE 2.9(a) to the Company Disclosure Memorandum (the
"REAL PROPERTY"). The Company has delivered to ShopNow.com or its counsel true
and complete copies of all written leases, subleases, rental agreements,
contracts of sale, tenancies or licenses relating to the Real Property and
written summaries of the terms of any oral leases, subleases, rental agreements,
contracts of sale, tenancies or licenses to which the Real Property is subject.
(b) SCHEDULE 2.9(b) to the Company Disclosure Memorandum contains a
complete and accurate list of each item of personal property having a value in
excess of $10,000 that is owned, leased, rented or used by the Company (the
"PERSONAL PROPERTY"); provided that such list need not describe the Technology
or the IP Rights (as defined in Sections 2.14.2 and 2.14.5, respectively),
listed on SCHEDULE 2.14 to the Company Disclosure Memorandum. The Company has
delivered to ShopNow.com true and complete copies of all leases, subleases,
rental agreements, contracts of sale, tenancies or licenses to which the
Personal Property is subject. The gross value of the Company's assets (including
the assets of Cascade Trade Association) at the time of the Company's
reincorporation as a Nevada corporation did not exceed $500,000.
(c) The Real Property and the Personal Property include all the
properties and assets (whether real, personal or mixed, tangible or intangible)
(other than, in the
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case of the Personal Property, property rights with an individual value of less
than $10,000 and the Technology and IP Rights) reflected in the Company Balance
Sheet. The Real Property and the Personal Property include all material property
used in the business of the Company, other than the Technology and IP Rights.
The Company's offices and other structures and its Personal Property are in good
operating condition and repair, normal wear and tear excepted, are adequate for
the uses to which they are being put, and, to the Company's knowledge, comply in
all material respects with applicable safety and other laws and regulations.
(d) The Company's leasehold interest in each parcel of the Real
Property is free and clear of all Encumbrances. To the Company's knowledge, each
lease of any portion of the Real Property is valid, binding and enforceable in
accordance with its terms against the parties thereto and against any other
Person with an interest in such Real Property, the Company has performed in all
material respects all obligations imposed on it thereunder, and neither the
Company nor, to the knowledge of the Company, any other party thereto is in
default thereunder, nor is there any event that with notice or lapse of time, or
both, would constitute a default thereunder by the Company or, to the knowledge
of the Company, by any other party. The Company has not granted any lease,
sublease, tenancy or license of, or entered into any rental agreement or
contract of sale with respect to, any portion of the Real Property.
(e) The Personal Property is free and clear of all Encumbrances, and,
other than leased Personal Property that is so noted on the list supplied
pursuant to Section 2.9(b), the Company owns such Personal Property. To the
Company's knowledge, each lease, license, rental agreement, contract of sale or
other agreement to which the Personal Property is subject is valid, binding and
enforceable in accordance with its terms against the parties thereto, the
Company has performed in all material respects all obligations imposed on it
thereunder, and neither the Company nor, to the knowledge of the Company, any
other party thereto is in default thereunder, nor is there any event that with
notice or lapse of time, or both, would constitute a default by the Company or,
to the knowledge of the Company, any other party thereunder. The Company has not
granted any lease, sublease, tenancy or license of any portion of the Personal
Property, except in the ordinary course of business.
2.10 CONTRACTS
2.10.1 MATERIAL CONTRACTS
As of the date of this Agreement, all of the Company's "material
contracts" as such term is defined under Item 601 of Regulation S-K, have been
filed under the Exchange Act. Except to the extent that such agreements have
expired by their own
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terms, each agreement disclosed by the Company under the Exchange Act is in full
force and effect, except where the failure to be in full force and effect would
not have a material adverse affect on the business condition of the Company.
None of the parties to any of such agreements have terminated, except when such
agreements have expired under their own terms. The Company has provided to
ShopNow.com lease documents for any real or personal property in which the
amount of payments that the Company is required to make on an annual basis
exceeds $20,000 and that have not been filed as an exhibit to any Company SEC
Documents. Except as set forth on SCHEDULE 2.10.1 to the Company Disclosure
Memorandum and the Company SEC Documents, the Company has no
(a) contracts with directors, officers, stockholders,
employees, agents, consultants, advisors, salespeople, sales representatives,
distributors or dealers that cannot be canceled by the Company within 30 days'
notice without liability, penalty or premium, any agreement or arrangement
providing for the payment of any bonus or commission based on sales or earnings,
or any compensation agreement or arrangement affecting or relating to former
employees of the Company;
(b) employment agreement, whether express or implied, or
any other agreement for services that contains severance or termination pay
liabilities or obligations;
(c) noncompetition agreement or other arrangement that
would prevent the Company from carrying on its business anywhere in the world;
(d) notice that any party to any material contract
intends to cancel, terminate or refuse to renew such contract (if such contract
is renewable) or materially modify such contract;
(e) material dispute with any of its suppliers, material
customers, distributors, OEM resellers, licensors or licensees;
(f) product distribution agreement, development agreement
or license agreement as licensor or licensee (except for standard nonexclusive
software licenses granted to end-user customers in the ordinary course of
business, the form of which has been provided to ShopNow.com, or standard
licenses purchased by the Company for off-the-shelf software);
(g) joint venture contract or arrangement or any other
agreement that involves a sharing of profits with other persons;
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(h) instrument evidencing indebtedness for borrowed money
by way of a direct loan, sale of debt securities, purchase money obligation,
conditional sale or guarantee, or otherwise, except for trade indebtedness
incurred in the ordinary course of business, and except as disclosed in the
Company Financial Statements; and
(i) agreements or commitments to provide indemnification,
except as provided in the Company's Articles of Incorporation, Bylaws and under
Nevada Law.
2.10.2 REQUIRED CONSENTS
The execution and delivery of this Agreement and the performance of the
obligations of the Company hereunder will not constitute a default under any
material contracts or agreements to which the Company is currently a party or by
which the Company currently is bound and do not require the consent or waiver of
any other party to any such contract or agreement, except for those consents
and/or waivers listed on SCHEDULE 2.10.2 to the Company Disclosure Memorandum,
all of which will be obtained on or prior to the Closing.
2.11 CLAIMS AND LEGAL PROCEEDINGS
Except as set forth on SCHEDULE 2.11 and SCHEDULE 2.14 to the Company
Disclosure Memorandum, there are no claims, actions, suits, arbitrations,
mediations, investigations or proceedings pending or, to the knowledge of the
Company, threatened against the Company before or by any court or governmental
or nongovernmental department, commission, board, bureau, agency or
instrumentality, or any other Person. To the knowledge of the Company, except as
set forth on SCHEDULE 2.11 and SCHEDULE 2.14 to the Company Disclosure
Memorandum, there is no valid basis for any claim, action, suit, arbitration,
proceeding or investigation before or by any Person. There are no outstanding or
unsatisfied judgments, orders, decrees or stipulations to which the Company is a
party. SCHEDULE 2.11 to the Company Disclosure Memorandum sets forth a
description of any material disputes that have been settled or resolved by
litigation or arbitration since the Company's inception.
2.12 LABOR AND EMPLOYMENT MATTERS
There are no material labor disputes, employee grievances or
disciplinary actions pending or, to the knowledge of the Company, threatened
against or involving the Company or any of its present or former employees. The
Company has complied in all material respects with all provisions of law
relating to employment and employment practices, terms and conditions of
employment, wages and hours. The Company is not engaged in any unfair labor
practice and has no liability for any arrears of wages or Taxes or penalties for
failure to comply with any such provisions of law.
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There is no labor strike, dispute, slowdown or stoppage pending or, to the
knowledge of the Company, threatened against or affecting the Company, and the
Company has not experienced any work stoppage or other labor difficulty since
its incorporation. No collective bargaining agreement is binding on the Company.
The Company has no knowledge of any organizational efforts presently being made
or threatened by or on behalf of any labor union with respect to employees of
the Company. Each employee, officer and consultant of the Company has executed a
nondisclosure agreement in the form provided to ShopNow.com. To the knowledge of
the Company, no employee (or person performing similar functions) of the Company
is in violation of any such agreement or any employment agreement,
noncompetition agreement, patent disclosure agreement, invention assignment
agreement, proprietary information agreement or other contract or agreement
relating to the relationship of such employee with the Company or any other
party.
SCHEDULE 2.12 to the Company Disclosure Memorandum lists (a) the names
and current compensation amounts of all directors and officers of the Company;
(b) the wage rates for non-salaried and non-officer salaried employees of the
Company by classification, and all union contracts (if any); (c) all group
insurance programs in effect for employees of the Company; and (d) the names and
current compensation packages of all independent contractors and consultants of
the Company. The Company is not in default with respect to any of its
obligations referred to in clause (b) above and has no, and will not incur any,
obligation or liability for severance or back pay owed through or by virtue of
the Merger. Except as disclosed on SCHEDULE 2.12 to the Company Disclosure
Memorandum, all employees of the Company are employed on an "at will" basis, and
are eligible to work and are lawfully employed in the United States.
2.13 EMPLOYEE BENEFIT PLANS
2.13.1 EMPLOYEE BENEFIT PLAN LISTING
SCHEDULE 2.13.1 to the Company Disclosure Memorandum contains a
complete and accurate list of all Employee Benefit Plans (as defined below). The
Company does not have any agreement, arrangement, commitment or obligation to
create, enter into or contribute to any additional Employee Benefit Plan or to
modify any existing Employee Benefit Plan. There has been no amendment,
interpretation or other announcement or communication (written or oral) by the
Company (or any other Person) relating to, or change in participation or
coverage under, any Employee Benefit Plan that, either alone or together with
other such occurrences or events, could materially increase the expense of
maintaining the Employee Benefit Plans above the level of expense incurred with
respect thereto for the most recent fiscal
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year included in the Company Financial Statements. The terms of each Employee
Benefit Plan permit the Company to amend or terminate such Employee Benefit Plan
at any time and for any reason without penalty or material expense.
2.13.2 DOCUMENTS PROVIDED
The Company has delivered to ShopNow.com true, correct and complete
copies (or, in the case of unwritten Employee Benefit Plans, descriptions) of
all Employee Benefit Plans (and all amendments thereto), along with, to the
extent applicable to the particular Employee Benefit Plan, copies of the
following: (a) the last three annual reports (Form 5500 series) filed with
respect to such Employee Benefit Plan; (b) all summary plan descriptions,
summaries of material modifications and material employee manuals and
communications filed or distributed with respect to such Employee Benefit Plan
during the last three years; (c) all contracts and agreements (and any
amendments thereto) relating to such Employee Benefit Plan, including, without
limitation, all trust agreements, investment management agreements, annuity
contracts, insurance contracts, bonds, indemnification agreements and service
provider agreements; (d) all written communications relating to the amendment,
creation or termination of such Employee Benefit Plan, or an increase or
decrease in benefits, acceleration of payments or vesting or other events that
could result in liability to the Company sent or received during the last three
years; (e) all correspondence to or from any governmental entity or agency
relating to such Employee Benefit Plan sent or received during the last three
years; (f) all COBRA (as defined below) and HIPAA (as defined below) forms and
notices currently in use; and (g) all coverage and nondiscrimination tests
performed with respect to such Employee Benefit Plan for the last three years.
2.13.3 COMPLIANCE
With respect to each Employee Benefit Plan: (a) such Employee Benefit
Plan is, and at all times since inception has been, maintained, administered,
operated and funded in all respects in accordance with its terms and in material
compliance with all applicable requirements of all applicable laws, statutes,
orders, rules and regulations, including, without limitation, ERISA (as defined
below), COBRA, HIPAA and the Code; (b) the Company, each fiduciary of such
Employee Benefit Plan and all other Persons have, at all times, properly
performed all obligations in all material respects, whether arising by operation
of law or by contract, required to be performed by any of them in connection
with such Employee Benefit Plan; (c) all reports, Tax Returns, information
returns and other information and returns relating to such Employee Benefit Plan
required to be filed with any governmental entity or agency have been accurately
completed and timely and properly filed; (d) all notices, statements, reports
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and other disclosure required to be given or made to participants in such
Employee Benefit Plan or their beneficiaries have been accurately completed and
timely and properly disclosed or provided; (e) neither the Company nor any
fiduciary of such Employee Benefit Plan has engaged in any transaction or acted
or failed to act in a manner that violates the fiduciary requirements of ERISA
or any other applicable law; (f) no transaction or event has occurred or is
threatened or about to occur (including, without limitation, any of the
transactions contemplated in or by this Agreement or any of the other Operative
Documents) that constitutes or could constitute a "prohibited transaction," as
defined in Section 4975 of the Code or Section 406 or 407 of ERISA; and (g) the
Company has not incurred, and there exists no condition or set of circumstances
in connection with which the Company, ShopNow.com, Merger Sub or any of their
affiliates could incur, directly or indirectly, any material liability or
expense (except for routine contributions and benefit payments) under ERISA, the
Code or any other applicable law, statute, order, rule or regulation with
respect to such Employee Benefit Plan or pursuant to any indemnification or
similar agreement related to such Employee Benefit Plan.
2.13.4 QUALIFICATION
No Employee Benefit Plan is intended to be qualified under Section
401(a)
2.13.5 CONTRIBUTIONS AND PREMIUM PAYMENTS
All contributions, premiums and other payments due or required to be
paid to (or with respect to) each Employee Benefit Plan have been timely paid,
or, if not yet due, have been fully reserved for, and specifically identified
in, the Closing Balance Sheet.
2.13.6 RELATED EMPLOYERS
The Company is not, and has never been, a member of (a) a controlled
group of corporations, within the meaning of Section 414(b) of the Code, (b) a
group of trades or businesses under common control, within the meaning of
Section 414(c) of the Code, (c) an affiliated service group, within the meaning
of Section 414(m) of the Code, or (d) any other group of Persons treated as a
single employer under Section 414(o) of the Code.
2.13.7 CERTAIN PENSION PLANS
The Company does not maintain or contribute to, and has never
maintained or contributed to (or been obligated to contribute to), any
multiemployer plan as defined in Section 3(37) or Section 4001(a)(3) of ERISA or
414(f) of the Code, any multiple
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employer plan within the meaning of Section 4063 or 4064 of ERISA or Section
413(c) of the Code or any employee benefit plan, fund, program, contract or
arrangement that is subject to Section 412 of the Code, Section 302 of ERISA or
Title IV of ERISA.
2.13.8 POST-TERMINATION BENEFITS
Neither the Company nor any Employee Benefit Plan provides or has any
obligation to provide (or contribute toward the cost of) post-employment or
post-termination benefits of any kind, including, without limitation, death and
medical benefits, with respect to any current or former officer, employee,
agent, director or independent contractor of the Company, other than (a)
continuation coverage mandated by Sections 601 through 608 of ERISA and Section
4980B(f) of the Code, and (b) deferred compensation that is accrued as a current
liability on the Closing Balance Sheet.
2.13.9 PARACHUTE PAYMENTS
The Company has not made any payments, is not obligated to make any
payments and is not a party to any agreement that could obligate it to make any
payments that would not be deductible under Section 280G of the Code (or any
similar provision of state, local or foreign law).
2.13.10 SUITS, CLAIMS AND INVESTIGATIONS
There are no actions, suits or claims (other than routine claims for
benefits) pending or, to the knowledge of the Company, threatened with respect
to (or against the assets of) any Employee Benefit Plan, nor, to the knowledge
of the Company, is there a basis for any such action, suit or claim. No Employee
Benefit Plan is currently under investigation, audit or review, directly or
indirectly, by the IRS, the DOL (as defined below) or any other governmental
entity or agency, and, to the knowledge of the Company, no such action is
contemplated or under consideration by the IRS, the DOL or any other
governmental entity or agency.
2.13.11 PAYMENTS RESULTING FROM TRANSACTIONS
Except as set forth on Schedule 2.13.11 to the Company Disclosure
Memorandum, either the execution and delivery of this Agreement or the other
Operative Documents nor the consummation of the transactions contemplated in (or
by) this Agreement or the other Operative Documents (either alone or together
with any other transaction or event) will (a) entitle any individual to
severance pay, unemployment compensation or any other payment from the Company,
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ShopNow.com, Merger Sub, any of their affiliates or any Employee Benefit Plan,
(b) increase the amount of compensation due to any individual, (c) result in any
benefit or right becoming established or increased, or accelerate the time of
payment or vesting of any benefit, under any Employee Benefit Plan, or (d)
require the Company, ShopNow.com, Merger Sub or any of their affiliates to
transfer or set aside any assets to fund or otherwise provide for any benefits
for any individual.
2.13.12 DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
(a) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended.
(b) "DOL" means the United States Department of Labor.
(c) "EMPLOYEE BENEFIT PLAN" means any retirement, pension, profit
sharing, deferred compensation, stock bonus, savings, bonus, incentive,
cafeteria, medical, dental, vision, hospitalization, life insurance, accidental
death and dismemberment, medical expense reimbursement, dependent care
assistance, tuition reimbursement, disability, sick pay, holiday, vacation,
severance, change of control, stock purchase, stock option, stock appreciation
rights, fringe benefit or other employee benefit plan, fund, policy, program,
contract, arrangement or payroll practice (including, without limitation, any
"employee benefit plan," as defined in Section 3(3) of ERISA) or any employment,
consulting or personal services contract, whether written or oral, qualified or
nonqualified, or funded or unfunded, (i) sponsored, maintained or contributed to
by the Company or to which the Company is a party, (ii) covering or benefiting
any current or former officer, employee, agent, director or independent
contractor of the Company (or any dependent or beneficiary of any such
individual), or (iii) with respect to which the Company has (or could have) any
obligation or liability.
(d) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
(e) "HIPAA" means the Health Insurance Portability and Accountability
Act of 1997, as amended.
(f) "IRS" means the United States Internal Revenue Service.
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2.14 INTELLECTUAL PROPERTY
2.14.1 GENERAL
The Company owns or is licensed and has all rights that are required to
conduct its business as now conducted and as proposed to be conducted in and to
the following: (a) all products, tools, computer programs, specifications,
source code, object code, graphics, devices, techniques, algorithms, methods,
processes, procedures, packaging, trade dress, formulae, drawings, designs,
improvements, discoveries, concepts, user interfaces, development and other
tools, content, inventions (whether or not patentable or copyrightable and
whether or not reduced to practice), designs, logos, themes, know-how, concepts
and other technology that are now, or during the two years prior to the date of
this Agreement have been, or currently are proposed to be, developed, produced,
used, marketed or sold by the Company (collectively, the "TECHNOLOGY-RELATED
ASSETS"); and (b) all intellectual property and other proprietary rights in the
Technology-Related Assets, including, without limitation, all trade names,
trademarks, domain names, service marks, logos, brand names and other
identifiers, trade secrets, copyrights and domestic and foreign letters patent,
and the registrations, applications, renewals, extensions and continuations (in
whole or in part) thereof, all goodwill associated therewith and all rights and
causes of action for infringement, misappropriation, misuse, dilution or unfair
trade practices associated therewith.
2.14.2 COMPANY TECHNOLOGY
SCHEDULE 2.14.2 to the Company Disclosure Memorandum sets forth a list
of all products and tools developed, produced, used, marketed or sold by the
Company during the two years prior to the date of this Agreement, together with
all prior versions, predecessors or precursors to such products or tools
(collectively, the "PRODUCTS"). Except for the Third Party Technologies (as
defined in Section 2.14.3 hereof), the Company owns all right, title and
interest in and to the following (collectively, the "TECHNOLOGY"), free and
clear of all Encumbrances: (a) the Products, together with any and all codes,
techniques, software tools, formats, designs, user interfaces, content related
thereto; (b) any and all updates, enhancements, corrections, modifications,
improvements and new releases related to the items set forth in clause (a)
above; (c) any and all technology and work in progress related to the items set
forth in clauses (a) and (b) above; and (d) all inventions, discoveries,
processes, designs, trade secrets, know-how and other confidential or
proprietary information related to the items set forth in clauses (a), (b), and
(c) above. The Technology, excluding the Third Party Technologies (as defined
below), is sometimes referred to herein as the "COMPANY TECHNOLOGY."
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2.14.3 THIRD PARTY TECHNOLOGY
SCHEDULE 2.14.3 to the Company Disclosure Memorandum sets forth a list
of all Technology used in the Company's business for which the Company does not
own all right, title and interest (collectively, the "THIRD PARTY
TECHNOLOGIES"), and all license agreements or other contracts pursuant to which
the Company has the right to use (in the manner used by the Company, or intended
or necessary for use with the Company Technology) the Third Party Technologies
(the "THIRD PARTY LICENSES"), indicating, with respect to each of the Third
Party Technologies listed therein, the owner thereof and the Third Party License
applicable thereto. The Company has the lawful right to use (free of any
material restriction) (a) all Third Party Technology that is incorporated in or
used in the development or production of the Company Technology and (b) all
other Third Party Technology necessary for the conduct of the Company's business
as now conducted and as proposed to be conducted. To the Company's knowledge,
all Third Party Licenses are valid, binding and in full force and effect; the
Company and, to the knowledge of the Company, each other party thereto has
performed in all material respects his, her or its obligations thereunder; and
neither the Company nor, to the knowledge of the Company, any other party
thereto is in material default thereunder, nor to knowledge of the Company has
there occurred any event or circumstance that with notice or lapse of time or
both would constitute a default or event of default on the part of the Company
or, to the knowledge of the Company, any other party thereto or give to any
other party thereto the right to terminate or modify any Third Party License.
The Company has not received notice that any party to any Third Party License
intends to cancel, terminate or refuse to renew such Third Party License or to
exercise or decline to exercise any option or right thereunder.
2.14.4 TRADEMARKS
SCHEDULE 2.14.4 to the Company Disclosure Memorandum sets forth a list
of all trademarks, trade names, brand names, service marks, logos or other
identifiers for the Products or otherwise used by the Company in its business
(the "MARKS"). The Company has full legal and beneficial ownership, free and
clear of any Encumbrances, of all rights conferred by use of the Marks in
connection with the Products or otherwise in the Company's business and, as to
those Marks that have been registered in the United States Patent and Trademark
Office, by federal registration of the Marks.
2.14.5 INTELLECTUAL PROPERTY RIGHTS
SCHEDULE 2.14.5 to the Company Disclosure Memorandum sets forth all
patents, patent applications, copyright registrations (and applications
therefor) and trademark registrations (and applications therefor) (collectively,
the "IP REGISTRATIONS") associated
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with the Company Technology and the Marks. The Company owns all right, title and
interest, free and clear of any Encumbrances, in and to the IP Registrations,
together with any other rights in or to any copyrights (registered or
unregistered), rights in the Marks (registered or unregistered), trade secret
rights and other intellectual property rights (including, without limitation,
rights of enforcement) contained or embodied in the Company Technology and the
Marks (collectively, the "IP RIGHTS").
2.14.6 MAINTENANCE OF RIGHTS
Except as set forth on SCHEDULE 2.14.6 to the Company Disclosure
Memorandum, the Company has not conducted its business, and has not used or
enforced (or, to the knowledge of the Company, failed to use or enforce) the IP
Rights, in a manner that would result in the abandonment, cancellation or
unenforceability of any item of the IP Rights or the IP Registrations, and the
Company has not taken (or, to the knowledge of the Company, failed to take) any
action that would result in the forfeiture or relinquishment of any IP Rights or
IP Registrations. Except as set forth in SCHEDULE 2.14.6 to the Company
Disclosure Memorandum, the Company has not granted to any third party any rights
or permissions to use any of the Technology or the IP Rights. To the knowledge
of the Company, except pursuant to reasonably prudent safeguards, (a) no third
party has received any confidential information relating to the Technology or
the IP Rights and (b) the Company is not under any contractual or other
obligation to disclose to any third party any Company Technology.
2.14.7 THIRD PARTY CLAIMS
Except as set forth on SCHEDULE 2.14.7 to the Company Disclosure
Memorandum, (a) the Company has not received any notice or claim (whether
written, oral or otherwise) challenging the Company's ownership or rights in the
Company Technology or the IP Rights or claiming that any other person or entity
has any legal or beneficial ownership with respect thereto; (b) all the IP
Rights are legally valid and enforceable without any material qualification,
limitation or restriction on their use, and the Company has not received any
notice or claim (whether written, oral or otherwise) challenging the validity or
enforceability of any of the IP Rights; and (c) to the knowledge of the Company,
no other person or entity is infringing or misappropriating any part of the IP
Rights or otherwise making any unauthorized use of the Company Technology.
2.14.8 INFRINGEMENT BY THE COMPANY
Except as set forth on SCHEDULE 2.14.8 to the Company Disclosure
Memorandum, (a) the use of any of the Technology in the Company's business as
now
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conducted and as currently planned to be conducted does not and will not
infringe, violate or interfere with or constitute an appropriation of any right,
title or interest (including, without limitation, any patent, copyright or trade
secret right) held by any other person or entity, and there have been no claims
made with respect thereto; (b) the use of any of the Marks and other IP Rights
in the Company's business will not infringe, violate or interfere with or
constitute an appropriation of any right, title or interest (including, without
limitation, any patent, copyright, trademark or trade secret right) held by any
other person or entity, and there have been no claims made with respect thereto;
and (c) the Company has not received any notice or claim (whether written, oral
or otherwise) regarding any infringement, misappropriation, misuse, abuse or
other interference with any third party intellectual property or proprietary
rights (including, without limitation, infringement of any patent, copyright,
trademark or trade secret right of any third party) by the Company, the
Technology or the Marks or other IP Rights, or claiming that any other entity
has any claim of infringement with respect thereto.
2.14.9 CONFIDENTIALITY
Except as set forth on SCHEDULE 2.14.9 to the Company Disclosure
Memorandum, (a) the Company has not disclosed any source code regarding the
Technology to any person or entity other than an employee or consultant of the
Company who is under a written nondisclosure agreement; (b) the Company has at
all times maintained and diligently enforced commercially reasonable procedures
to protect all confidential information relating to the Technology; (c) neither
the Company nor any escrow agent is under any contractual or other obligation to
disclose the source code or any other proprietary information included in or
relating to the Technology; and (d) the Company has not deposited any source
code relating to the Technology into any source code escrows or similar
arrangements. If, as disclosed on SCHEDULE 2.14.9 to the Company Disclosure
Memorandum, the Company has deposited any source code to the Technology into
source code escrows or similar arrangements, no event has occurred that has or
could reasonably form the basis for a release of such source code from such
escrows or arrangements.
2.14.10 WARRANTY AGAINST DEFECTS
Except as set forth in SCHEDULE 2.14.10 to the Company Disclosure
Memorandum, the Technology is free from known material defects and substantially
conforms to the applicable specifications, documentation and samples of such
Technology.
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2.14.11 DOMAIN NAMES
SCHEDULE 2.14.11 to the Company Disclosure Memorandum sets forth a list
of all Internet domain names used by the Company in its business (collectively,
the "DOMAIN NAMES"). The Company has, and at the Effective Time the Surviving
Corporation will have, a valid registration and all material rights (free of any
material restriction) in and to the Domain Names, including, without limitation,
all rights necessary to continue to conduct the Company's business as it is
currently conducted and proposed to be conducted following the Effective Time.
2.14.12 YEAR 2000
Each hardware, software and firmware product used by the Company in its
business (collectively, the "SOFTWARE") accurately processes date data
(including, but not limited to, calculating, comparing and sequencing) from,
into and between the twentieth and twenty-first centuries, including, without
limitation, leap year calculations, without a material decrease in the
functionality of the Software. The Software is designed to be used prior to,
during and after the calendar year 2000 A.D. and will operate during each such
time period without material error relating to date data, specifically including
any error relating to, or the product of, date data that represents or
references different centuries or more than one century. Without limiting the
generality of the foregoing, the Software (a) will not abnormally end or provide
invalid or incorrect results as a result of date data, specifically including
date data that represents or references different centuries or more than one
century; (b) has been designed to ensure material year 2000 compatibility,
including, but not limited to, date data century recognition, calculations that
accommodate same century and multi-century formulas and date values, and date
data interface values that reflect the century; and (c) includes "YEAR 2000
CAPABILITIES," meaning that the Software (i) will manage and manipulate data
involving dates, including single century formulas and multicentury formulas,
and will not cause an abnormally ending scenario within the application or
generate incorrect values or invalid results involving such dates; (ii) provides
that all date-related user interface functionalities and data fields include the
indication of century; and (iii) provides that all date-related data interface
functionalities include the indication of century.
2.14.13 PARTICIPATING DEVELOPERS
SCHEDULE 2.14.13 to the Company Disclosure Memorandum contains a
complete list of all Participating Developers (as defined below), specifying for
each relationship between the Participating Developer and the Company (e.g.,
employee, contractor, etc.), all dates during which the relationship was in
effect and a list of any documents
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or other items relating to such relationship. The Company has furnished to
ShopNow.com or its counsel full and complete copies of such documents and other
items identified in SCHEDULE 2.14.13. "PARTICIPATING DEVELOPER" means any person
or entity that has, at any time and in any way, participated or contributed to
the Development of any IP Rights or any of the Company Technology. "DEVELOPMENT"
means create, author, design, engineer, invent, modify, discover, reduce to
practice or develop. Each Participating Developer has signed a nondisclosure
agreement in the form provided to ShopNow.com, and such agreement transfers to
the named transferee any and all right, title and interest which the named
Participating Developer may have or acquire in and to the IP Rights and the
Technology.
2.15 CORPORATE BOOKS AND RECORDS
The Company has furnished to ShopNow.com or its representatives for
their examination true and complete copies of (a) the Articles of Incorporation
and Bylaws of the Company as currently in effect, including all amendments
thereto, (b) the minute books of the Company, and (c) the stock transfer books
of the Company. Such minutes reflect all meetings of the Company's stockholders,
Board of Directors and any committees thereof since the Company's inception, and
such minutes accurately reflect in all material respects the events of and
actions taken at such meetings. Such stock transfer books accurately reflect all
issuances and transfers of shares of capital stock of the Company since its
inception.
2.16 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified on SCHEDULE 2.16 to the Company Disclosure
Memorandum, the Company has received all currently required material
governmental approvals, authorizations, consents, licenses, orders,
registrations and permits of all agencies, whether federal, state, local or
foreign (the "PERMITS"). The Company is in compliance in all material respects
with the terms of all Permits, and all the Permits are valid and in full force
and effect, and no proceeding is pending, or to the knowledge of the Company,
threatened, the object of which is to revoke, limit or otherwise affect any of
the Permits. The Company has not received any notifications of any asserted
present failure by it to have obtained any Permit, or any past and unremedied
failure to obtain such items.
2.17 COMPLIANCE WITH LAWS
Except as described on SCHEDULE 2.17 to the Company Disclosure
Memorandum, the business and operations of the Company have been conducted in
compliance in all material respects with all federal, state, local and foreign
laws, rules,
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regulations, ordinances, decrees and orders applicable to it, to its employees
or to the Real Property and the Personal Property, including, without
limitation, all such laws, rules, regulations, ordinances, decrees and orders
relating to intellectual property protection, antitrust matters, consumer
protection, currency exchange, environmental protection, equal employment
opportunity, health and occupational safety, pension and employee benefit
matters, securities and investor protection matters, labor and employment
matters and trading-with-the-enemy matters, except where the failure to so
conduct its business and operations would not be reasonably likely to have a
material adverse effect on the business or financial condition of the Company
and its subsidiaries, taken as a whole. The Company has not received any
notification of any asserted present or past unremedied failure by the Company
to comply with any of such laws, rules, regulations, ordinances, decrees or
orders.
2.18 INSURANCE
The Company Disclosure Memorandum sets forth a true and correct list of
all insurance policies maintained by the Company and includes the policy number,
amount of coverage and contact information for each such policy. The Company
maintains commercially reasonable levels of (a) insurance on its property
(including leased premises) that insures against loss or damage by fire or other
casualty and (b) insurance against liabilities, claims and risks of a nature and
in such amounts as are normal and customary in the Company's industry for
companies of similar size and financial condition. All insurance policies of the
Company are in full force and effect, all premiums with respect thereto covering
all periods up to and including the date this representation is made have been
paid, and no notice of cancellation or termination has been received with
respect to any such policy or binder. Such policies or binders are sufficient
for compliance with all requirements of law currently applicable to the Company
and of all agreements to which the Company is a party, will remain in full force
and effect through the respective expiration dates of such policies or binders
without the payment of additional premiums, and will not in any way be affected
by, or terminate or lapse by reason of, the transactions contemplated by this
Agreement. The Company has not been refused any insurance with respect to its
assets or operations, nor has its coverage been limited, by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance.
2.19 BROKERS OR FINDERS
The Company has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by or on behalf of the Company, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Merger, this Agreement or any transaction
contemplated hereby.
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2.20 ABSENCE OF QUESTIONABLE PAYMENTS
Neither the Company nor, to the Company's knowledge, any director,
officer, agent, employee or other Person acting on behalf of the Company has
used any Company funds for improper or unlawful contributions, payments, gifts
or entertainment, or made any improper or unlawful expenditures relating to
political activity to domestic or foreign government officials or others. The
Company has reasonable financial controls to prevent such improper or unlawful
contributions, payments, gifts, entertainment or expenditures. Neither the
Company nor, to the Company's knowledge, any current director, officer, agent,
employee or other Person acting on behalf of the Company has accepted or
received any improper or unlawful contributions, payments, gifts or
expenditures. The Company has at all times complied, and is in compliance, in
all respects with the Foreign Corrupt Practices Act and all foreign laws and
regulations relating to prevention of corrupt practices and similar matters.
2.21 BANK ACCOUNTS
SCHEDULE 2.21 to the Company Disclosure Memorandum sets forth the names
and locations of all banks, trust companies, savings and loan associations and
other financial institutions at which the Company maintains safe deposit boxes
or accounts of any nature and the names of all Persons authorized to draw
thereon, make withdrawals therefrom or have access to such safe deposit boxes or
accounts.
2.22 CUSTOMERS AND SUPPLIERS
SCHEDULE 2.22 to the Company Disclosure Memorandum sets forth (a) a
complete and accurate list of the customers of the Company accounting for 5% or
more of the Company's revenues during the fiscal year last ended and the period
ended December 31, 1999, showing the approximate total revenues from each such
customer during the fiscal year last ended and the period ended December 31,
1999 and (b) a complete and accurate list of the suppliers of the Company from
whom the Company has purchased 5% or more of the goods or services purchased by
the Company in the fiscal year last ended and the period ended December 31,
1999. The Company has not received any notice from its customers or suppliers
that would cause it, in its reasonable judgment, to expect any material
modification to its relationship with any customer or supplier named on such
SCHEDULE 2.22 to the Company Disclosure Memorandum.
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2.23 ACCOUNTS RECEIVABLE
All accounts receivable of the Company reflected in the Company Balance
Sheet ("ACCOUNTS"), or existing at the Effective Time, represent sales actually
made in the ordinary course of business and were recorded in the Company's books
consistent with the presentation applied in the Company Financial Statements for
the year ended March 31, 1999. Except as described on SCHEDULE 2.23 to the
Company Disclosure Memorandum, the bad debt reserves and sales return allowances
reflected in the Company Balance Sheet are adequate. Set forth on SCHEDULE 2.23
to the Company Disclosure Memorandum are a full and complete list and aging
study of all Accounts. To the knowledge of the Company, all Accounts existing
and remaining unpaid at the Effective Time will be collectible by the Surviving
Corporation in the ordinary course of business, consistent with past practice.
2.24 CREDITORS' LIST
SCHEDULE 2.24 to the Company Disclosure Memorandum sets forth a full,
complete and accurate list of all creditors of Company, with the amount payable
to each such creditor as of the date hereof.
2.25 INSIDER INTERESTS
Except as set forth on SCHEDULE 2.25 to the Company Disclosure
Memorandum, no stockholder or officer or director of the Company has any
interest (other than as a stockholder of the Company) (a) in any Real Property,
Personal Property, Technology or IP Rights used in or directly pertaining to the
business of the Company, including, without limitation, inventions, patents,
trademarks or trade names, or (b) in any agreement, contract, arrangement or
obligation relating to the Company, its present or prospective business or its
operations. Except as set forth on SCHEDULE 2.25 to the Company Disclosure
Memorandum or as contemplated by this Agreement, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, stockholders, affiliates or any affiliate thereof. The
Company and its officers and directors have no interest, either directly or
indirectly, in any entity, including, without limitation, any corporation,
partnership, joint venture, proprietorship, firm, licensee, business or
association (whether as an employee, officer, director, stockholder, agent,
independent contractor, security holder, creditor, consultant or otherwise),
other than ownership of capital stock comprising less than 1% of any publicly
held company, that presently (i) provides any services, produces and/or sells
any products or product lines, or engages in any activity that is the same,
similar to or competitive with any activity or business in which the Company is
now engaged or proposes to engage; (ii) is a supplier, customer or creditor; or
(iii) has any
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direct or indirect interest in any asset or property (real or personal, tangible
or intangible) of the Company or any property (real or personal, tangible or
intangible) that is necessary or desirable for the present or currently
anticipated future conduct of the Company's business.
2.26 COMPLIANCE WITH ENVIRONMENTAL LAWS
Neither the Company nor, to the knowledge of the Company, any other
Person (including, without limitation, any previous owner, lessee or sublessee)
has treated, stored or disposed of any material amounts of petroleum products,
hazardous waste, hazardous substances, pollutants or contaminants on the Real
Property, or any real property previously owned, leased, subleased or used by
the Company in the operation of its business, in violation of any applicable
foreign, federal, state or local statutes, regulations or ordinances, or common
law, in each case as in existence at or prior to the Closing. To the knowledge
of the Company, there have been no releases of any material amounts of
petroleum, petroleum products, hazardous waste, hazardous substances, pollutants
or contaminants on, at or from any assets or properties, including, without
limitation, the Real Property, owned, leased, subleased or used by the Company
in the operation of its business during the time such assets or properties were
owned, leased, subleased or used by the Company (or, to the knowledge of the
Company, prior to such time), including, without limitation, any releases of any
material amounts of petroleum, petroleum products, hazardous waste, hazardous
substances, pollutants or contaminants in violation of any law.
2.27 INFORMATION SUPPLIED BY THE COMPANY
None of the information supplied or to be supplied by the Company or
its subsidiaries, auditors, attorneys, financial advisors or other consultants
or advisors for inclusion in (i) the registration statement on Form S-4, and any
amendment thereto, to be filed under the Securities Act with the SEC by
ShopNow.com in connection with the issuance of the ShopNow.com Common Stock in
or as a result of the Merger (the "S-4"), or (ii) the proxy statement and any
amendment or supplement thereto to be distributed in connection with Company's
meetings of stockholders to vote upon this Agreement and the transactions
contemplated hereby (the "PROXY STATEMENT" and, together with the prospectus
included in the S-4, the "PROXY STATEMENT/PROSPECTUS") will, in the case of the
Proxy Statement and any amendment or supplement thereto, at the time of the
mailing of the Proxy Statement and any amendment or supplement thereto, and at
the time of the meeting of stockholders of the Company to vote upon this
Agreement and the transactions contemplated hereby, or, in the case of the S-4,
as amended or supplemented, at the time it becomes effective and at the time of
any post-effective amendment thereto and at the time of the meeting of
stockholders of the
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Company, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they are made, not misleading or
necessary to correct any statement in any earlier filing with the SEC of such
Proxy Statement/Prospectus or any amendment or supplement thereto or any earlier
communication (including the Proxy Statement/Prospectus) to stockholders of the
Company with respect to the transactions contemplated by this Agreement.
2.28 FULL DISCLOSURE
Neither this Agreement or the Operative Documents (including, but not
limited to, the Company Financial Statements and all information in the Company
Disclosure Memorandum and the other Exhibits hereto) contains any untrue
statement by the Company of a material fact or omits to state a material fact
necessary in order to make the statements so made or information so delivered
not misleading.
2.29 HART-SCOTT-RODINO
The Company is its own ultimate parent entity as defined under the
rules and regulations promulgated under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HART-SCOTT-RODINO ACT"). The Company
is not a $10 million person as defined thereunder. The Company is not "engaged
in manufacturing" for purposes of the Hart-Scott-Rodino Act.
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF
SHOPNOW.COM AND MERGER SUB
In order to induce the Company to enter into and perform this Agreement
and the Operative Documents, ShopNow.com and Merger Sub jointly and severally
represent and warrant to the Company as follows in this Article III:
3.1 ORGANIZATION
ShopNow.com is a corporation duly organized and validly existing under
the laws of the state of Washington. Merger Sub is a corporation duly organized
and validly existing under the laws of the state of Washington. Each of
ShopNow.com and Merger Sub has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and the
Operative Documents to which it is a party and to consummate the transactions
contemplated hereby and thereby. All the issued and outstanding shares of
capital stock of Merger Sub are held of record and beneficially by ShopNow.com.
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3.2 ENFORCEABILITY
All corporate action on the part of ShopNow.com and Merger Sub and
their respective officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Operative Documents, the consummation of the Merger and the performance of all
their respective obligations under this Agreement and the Operative Documents
has been taken or will be taken prior to the Effective Time. This Agreement and
each of the Operative Documents has been duly executed and delivered by each of
ShopNow.com and Merger Sub, as applicable, and this Agreement and each of the
Operative Documents is a legal, valid and binding obligation of each of
ShopNow.com and Merger Sub, as applicable, enforceable against each of them in
accordance with its terms.
3.3 SECURITIES
The Closing Shares to be issued pursuant to this Agreement have been,
or will be prior to the Effective Time, duly authorized for issuance, and such
Closing Shares, when issued and delivered pursuant to this Agreement, shall be
validly issued, fully paid and nonassessable.
3.4 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS
The execution, delivery and performance of this Agreement and the
Operative Documents by Merger Sub and ShopNow.com, as applicable, and the
consummation by them of the transactions contemplated hereby and thereby will
not
(a) constitute a violation (with or without the giving of notice or
lapse of time, or both) of any provision of law or any judgment, decree, order,
regulation or rule of any court or other governmental authority applicable to
ShopNow.com or Merger Sub;
(b) require any consent, approval or authorization of, or declaration,
filing or registration with, any Person, except (i) compliance with applicable
securities laws; (ii) the filing of all documents necessary to consummate the
Merger with the Washington Secretary and the Nevada Secretary; (iii) the filing
of a premerger notification report and all other required documents by
ShopNow.com and the Company, and the expiration of all applicable waiting
periods, under the HSR Act; and (iv) any filings with the SEC including such
reports and information as may be required under the Exchange Act, the
Securities Act and the rules and regulations promulgated by the SEC under the
Exchange Act or the Securities Act and the declaration of the effectiveness of
the S-4 by the SEC; or
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(c) conflict with or result in a breach of or constitute a default
under any provision of the Articles of Incorporation or Bylaws of ShopNow.com or
Merger Sub.
3.5 INFORMATION SUPPLIED BY SHOPNOW.COM OR MERGER SUB
None of the information supplied or to be supplied by ShopNow.com or
its subsidiaries, auditors, attorneys, financial advisors, other consultants or
advisors or Merger Sub for inclusion in the S-4 or the Proxy
Statement/Prospectus, will, in the case of the Proxy Statement and any amendment
or supplement thereto, at the time of the mailing of the Proxy Statement and any
amendment or supplement thereto, and at the time of any meeting of stockholders
of the Company to vote upon this Agreement and the transactions contemplated
hereby, or in the case of the S-4, as amended or supplemented, at the time it
becomes effective and at the time of any post-effective amendment thereto and at
the time of the meeting of stockholders of the Company, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading or necessary to correct any
statement in any earlier filing with the SEC of such Proxy Statement/Prospectus
or any amendment or supplement thereto or any earlier communication (including
the Proxy Statement/Prospectus) to stockholders of the Company with respect to
the transactions contemplated by this Agreement.
3.6 FULL DISCLOSURE
Neither this Agreement or the Operative Documents contains any untrue
statement by ShopNow.com or Merger Sub of a material fact or omits to state a
material fact necessary in order to make the statements so made or information
so delivered not misleading.
3.7 CAPITALIZATION
(a) The authorized capital stock of ShopNow.com consists of 200,000,000
shares of ShopNow.com Common Stock, par value $.001 per share, 42,923,035 of
which are issued and outstanding as of December 31, 1999, and 5,000,000 shares
of Preferred Stock, $.001 par value per shares, none of which are issued and
outstanding as of_December 31, 1999. As of December 31, 1999, there are
7,586,112 shares of ShopNow.com Common Stock reserved for issuance upon the
exercise of outstanding stock options under the ShopNow.com 1999 Non-Officer
Stock Option Plan and 1996 Combined Incentive and Nonqualified Stock Option
Plan. The Shares of ShopNow.com Common Stock to be issued pursuant to the Merger
in accordance with Section 1.7.1 and the shares of ShopNow.com Common Stock
which will be issued
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upon exercise of the options granted in accordance with Section 1.9 have been
duly and validly authorized, have been reserved for issuance and upon issuance
in accordance with the terms hereof or thereof, will be duly authorized, validly
issued, fully paid and nonassessable.
3.8 SEC DOCUMENTS; FINANCIAL STATEMENTS
(a) ShopNow.com has filed all forms, reports and documents required to
be filed by it with the SEC since September 28, 1999 through the date of this
Agreement (collectively, the "SHOPNOW.COM SEC DOCUMENTS"). As of their
respective filing dates, the ShopNow.com SEC Documents complied in all material
respects with the requirements of the Exchange Act or the Securities Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such ShopNow.com SEC Documents, and none of the ShopNow.com SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As of their respective filing dates, the financial statements of
ShopNow.com included in the ShopNow.com SEC Documents (the "ShopNow.com
FINANCIAL STATEMENTS") complied as to form in all material respects with all
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto and were prepared in accordance with GAAP
consistently applied (except as may be indicated in the notes thereto) and
fairly presented, in all material respects, the consolidated financial position
of ShopNow.com and its subsidiaries as at the dates thereof and the results of
their operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal, recurring audit adjustments not material in
scope or amount). There has been no change in ShopNow.com's accounting policies
or the methods of making accounting estimates or changes in estimates that are
material to the ShopNow.com Financial Statements, except as described in the
notes thereto.
(b) Except as disclosed in the ShopNow.com SEC Documents as filed and
amended before the date hereof and as contemplated by this Agreement, since
September 30, 1999, no material adverse change in the business, financial
condition, results of operations or prospects of ShopNow.com has occurred.
Changes in the trading prices of ShopNow.com Common Stock or a public offering
of ShopNow.com Common Stock shall not be deemed material adverse changes under
this Agreement.
3.9 COMPLIANCE WITH LAWS
The business and operations of ShopNow.com have been conducted in
compliance in all material respects with all federal, state, local and foreign
laws, rules,
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regulations, ordinances, decrees and orders applicable to it, to its employees
or to its property, including, without limitation, all such laws, rules,
regulations, ordinances, decrees and orders relating to intellectual property
protection, antitrust matters, consumer protection, currency exchange,
environmental protection, equal employment opportunity, health and occupational
safety, pension and employee benefit matters, securities and investor protection
matters, labor and employment matters and trading-with-the-enemy matters, except
where the failure to so conduct its business and operations would not be
reasonably likely to have a material adverse effect on the business or financial
condition of ShopNow.com and its subsidiaries, taken as a whole. ShopNow.com has
not received any notification of any asserted present or past unremedied failure
by ShopNow.com to comply with any of such laws, rules, regulations, ordinances,
decrees or orders.
3.10 TAX MATTERS
Solely for tax purposes, ShopNow represents the following:
(a) It has no present plan or intention to cause Merger Sub to issue,
after the Merger, additional shares of Merger Sub stock (or rights to acquire
shares of Merger Sub stock) or take any other action that would result in
ShopNow.com losing control of Merger Sub, as defined in Section 368(c) of the
Code.
(b) ShopNow.com has no present plan or intention to directly or
indirectly (including through a party related to ShopNow.com within the meaning
of Treasury Regulation 1.368-1(e)(3)) reacquire any of its stock issued pursuant
to the Merger such that the Merger would fail the "continuity of proprietary
interest" requirement set forth in Treasury Regulation Section 1.368-1(e).
(c) It has no present plan or intention to: (i) cause Merger Sub to
sell, transfer or otherwise dispose of any of its assets or of any of the assets
acquired from the Company except for dispositions made in the ordinary course of
business or for the payment of expenses incurred by the Company in connection
with the Merger; (ii) liquidate Merger Sub; (iii) merge Merger Sub with or into
another corporation including ShopNow or any of its affiliates; or (iv) to sell,
distribute or otherwise dispose of the stock of Merger Sub, other than as would
be allowed by Section 368(a)(2)(C) of the Code or the corresponding Treasury
Regulations.
(d) It is ShopNow's present plan or intention to cause Merger Sub to
continue the Company's historic business or use a significant portion of the
Company's historic business assets in a business within the meaning of Treasury
Regulation 1.368-1(d).
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ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS
OF SHOPNOW.COM AND MERGER SUB
The obligations of ShopNow.com and Merger Sub to perform and observe
the covenants, agreements and conditions hereof to be performed and observed by
them at or before the Closing shall be subject to the satisfaction of the
following conditions, which may be expressly waived only in writing signed by
ShopNow.com and Merger Sub:
4.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained herein
(including applicable Exhibits or Schedules to the Company Disclosure
Memorandum) and in the Operative Documents shall have been true and correct in
all material respects when made and, except (a) for changes contemplated by this
Agreement and the Operative Documents, (b) for representations and warranties
qualified by materiality which shall be correct in all respects and (c) to the
extent that such representations and warranties speak as of an earlier date,
shall be true and correct in all material respects as of the Closing Date, as
though made on that date.
4.2 PERFORMANCE OF AGREEMENTS
The Company shall have performed in all material respects all
obligations and agreements and complied with all covenants contained in this
Agreement or any Operative Document to be performed and complied with by it at
or prior to the Closing.
4.3 OPINION OF COUNSEL FOR THE COMPANY
ShopNow.com shall have received the opinion letter of Dorsey & Whitney
LLP, counsel for the Company, dated the Closing Date in the form attached hereto
as EXHIBIT 4.3.
4.4 COMPLIANCE CERTIFICATE
ShopNow.com shall have received a certificate of the President and the
Chief Financial Officer of the Company, dated the Closing Date, in form and
substance reasonably satisfactory to ShopNow.com, (a) certifying that the
conditions to the obligations of ShopNow.com and Merger Sub in Sections 4.1,
4.2, 4.5, 4.6, 4.12, and 4.13 have been fulfilled, and (b) verifying the
accuracy of the information contained in the Option Consideration Spreadsheet
(as defined below).
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4.5 MATERIAL ADVERSE CHANGE
Since the date of the Company Balance Sheet and through the Closing,
there shall not have occurred any change that is or is reasonably likely to be
materially adverse to the Company's business, financial condition, operations,
properties or prospects. Changes in the trading prices of the Company Common
Stock shall not be deemed a material adverse change.
4.6 APPROVALS AND CONSENTS
All transfers of permits or licenses and all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby,
including, if applicable, approvals or notices required by the Hart-Scott-Rodino
Act, or for the continued operation of the Company, shall have been obtained,
and all waiting periods specified by law shall have passed. All other consents,
approvals and notices referred to in this Agreement shall have been obtained or
delivered.
4.7 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
ShopNow.com shall have received a certificate of the Secretary of the
Company, in form and substance reasonably satisfactory to ShopNow.com, as to the
authenticity and effectiveness of the actions of the Board of Directors of the
Company and the stockholders authorizing the Merger and the transactions
contemplated by this Agreement and the Operative Documents. Copies of (a) the
Company's Articles of Incorporation, certified by the Nevada Secretary, (b) the
Company's Bylaws, certified by the Secretary of the Company, and (c) the
resolutions of the Board of Directors of the Company and the stockholders
relating to the transactions contemplated by this Agreement and the Operative
Documents shall be attached to such certificate.
4.8 NON-U.S. REAL PROPERTY HOLDING CORPORATION AFFIDAVIT
ShopNow.com shall have received from the Company, pursuant to Section
1445 of the Code, a Foreign Investment in Real Property Tax Act Affidavit in the
form attached hereto as EXHIBIT 4.8.
4.9 COMPLIANCE WITH LAWS
The effectiveness of the Merger and the performance by ShopNow.com,
Merger Sub, and the Company of their respective obligations pursuant to this
Agreement and the Operative Documents shall be legally permitted by all laws and
regulations to
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which ShopNow.com, Merger Sub, the Company and the stockholders of the Company
are subject.
4.10 LEGAL PROCEEDINGS
No order of any court or administrative agency shall be in effect that
enjoins, restrains, conditions or prohibits consummation of this Agreement or
any Operative Document, and no litigation, investigation or administrative
proceeding shall be pending or threatened that would enjoin, restrain, condition
or prevent consummation of this Agreement or any Operative Document.
4.11 NONCOMPETITION ARRANGEMENTS
Each of the Management Members and Retained Employees who has been
offered and has accepted employment with ShopNow.com shall have executed the
ShopNow.com standard form of Intellectual Property Agreement (Confidentiality,
Invention Assignment, Non-raiding and Noncompetition) in the form attached
hereto as EXHIBIT 4.11 and each such agreement shall be in full force and effect
on the Closing Date.
4.12 TERMINATION OF CERTAIN AGREEMENTS
Any and all rights of refusal, co-sale rights and registration rights
for the benefit of the holders of Company Common Stock, or Stock Purchase Rights
set forth in the Company Disclosure Memorandum, shall have terminated. The
Company shall also terminate the following agreements: (i) the BBE Purchase
Agreement and Note, (ii) the Share Pledge Agreement Among International Barter
Corp., Bob Bagga and Barter Business Exchange Inc., dated March 2, 1999, (iii)
all employment agreements with current Ubarter employees (including, without
limitation, those employment agreements with Steven White, Dan Schneider, Dick
Mayer, Alan Zimmelman, Kevin Andersen, Robert Benson, Eric Silver, Bob Bagga,
Patricia Falus and Cameron Herold and Barbara Ryan), (iii) the Alpine Capital
Note and Alpine Capital Warrant (as to registration rights) (iv) the Share
Purchase Agreement, dated May 12, 1999, among Mark Thomas, Susan Thomas, the
Company and Barter Business Exchange (Windsor), Inc. (as to registration rights)
and (v) all agreements with Astra Ventures and Momentous. In addition, the
Company shall withdraw its Registration Statement on Form SB-2, as amended.
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4.13 EXERCISE OR TERMINATION OF STOCK PURCHASE RIGHTS; CONVERSION OF
CONVERTIBLE SECURITIES
Any and all Stock Purchase Rights (including all options to purchase
shares of the Company's Common Stock) and any and all securities and notes
convertible at any time into Company Common Stock, vested and unvested, and
regardless of restrictions on exercise or conversion, shall have been exercised
or converted (for cash or on a cashless basis) for shares of Company Common
Stock, or shall have been terminated, as the case may be, immediately prior to
the Effective Time.
4.14 COMPANY OPTION PLAN
The Company shall accelerate the vesting of all options issued and
outstanding under the Company Option Plan and shall make such amendments to the
Company Option Plan as are reasonably requested by ShopNow.com. The Company
shall make all tax withholdings with respect to the exercise of options
following such acceleration as required by law and prior to the Effective Time.
4.15 CONSENTS TO MERGER
SCHEDULE 2.10.2 to the Company Disclosure Memorandum lists certain
agreements, leases, notes or other documents identified in the schedules to the
Company Disclosure Memorandum that, by their terms require consent or waiver to
consummate the Merger. Unless otherwise set forth in SCHEDULE 2.10.2 to the
Company Disclosure Memorandum, the Company shall have received and shall have
delivered to ShopNow.com or its counsel written consents to the Merger or
waivers, as applicable, from each of the parties (other than the Company) to
such agreements, leases, notes or other documents, which consents or waivers, as
the case may be, shall be reasonably satisfactory in all respects to
ShopNow.com.
4.16 RESIGNATIONS
ShopNow.com and Merger Sub shall have received copies of the
resignations, effective as of the Effective Time, of all the directors and
officers of the Company.
4.17 TAX CLEARANCE CERTIFICATES
The Company shall provide to ShopNow.com tax clearance certificates
from those states, including but not limited to Nevada, in which the Company is
engaged in business.
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4.18 RELEASES OF LIENS
Prior to the Effective Time, except as agreed to in writing by
ShopNow.com, the Company shall obtain the release of any and all Encumbrances
with respect to any of the Company's assets except for such Encumbrances that
are incurred in the ordinary course of the Company's business and are not
material.
4.19 STOCKHOLDER APPROVAL
This Agreement and the Merger shall have been approved by the Company's
stockholders as required by the Company's Articles of Incorporation and
applicable law.
4.20 AFFILIATE LETTERS
The Company shall have delivered or caused to be delivered to
ShopNow.com an Affiliate Letter substantially in the form of EXHIBIT 4.20 from
each of those Persons who were, on the date on which the requisite number of
consents or votes has been obtained to approve the Merger, "affiliates" of the
Company within the meaning of Rule 145 of the rules and regulations promulgated
under the Securities Act.
4.21 VOTING AGREEMENTS
Steven White and New Horizons, LP (the "KEY STOCKHOLDERS") shall have
executed, concurrently with the execution of this Agreement, and have fulfilled
the terms of, voting agreements in the form of EXHIBIT 4.21.
4.22 S-4
The S-4 shall have become effective under the Securities Act and shall
not be the subject of any stop order or proceedings seeking a stop order and the
Proxy Statement shall not be at the Effective Time subject to any proceedings
commenced or threatened by the SEC.
4.23 AGREEMENTS WITH CERTAIN STOCKHOLDERS OF THE COMPANY
ShopNow.com and Astra Ventures shall have entered into an agreement
wherein at the Closing, in exchange for the termination of all obligations of
the Company to or agreements with Astra Ventures, ShopNow.com shall pay to Astra
Ventures $675,000 in cash and that number of shares of ShopNow.com Common Stock
determined by dividing $675,000 by $17.31. ShopNow.com and Momentous shall have
entered into an agreement wherein at the Closing ShopNow.com shall issue to
Momentous a warrant to purchase 20,000 shares of ShopNow.com Common Stock
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in exchange for the cancellation and retirement of all indebtedness under the
Momentous Note. Such warrant shall have a one-year term and an exercise price
equal to the closing sales price of ShopNow.com Common Stock as reported on the
Nasdaq National Market on the trading day immediately preceding the Effective
Time.
4.24 EMPLOYMENT AND CONSULTING AGREEMENTS
ShopNow.com and Liad Meidar shall have entered into an Employment
Agreement in substantially the form attached hereto as EXHIBIT 4.24A.
ShopNow.com and Steven White shall have entered into a Consulting Agreement
substantially in the form attached hereto as EXHIBIT 4.24B.
4.25 LOCK-UP AGREEMENTS
ShopNow.com shall have entered into Lock-Up Agreements in substantially
the form attached hereto as EXHIBIT 4.25A with Steven White and Liad Meidar.
ShopNow.com and New Horizons LP shall have entered into the Lock-Up Agreement in
substantially the form attached hereto as EXHIBIT 4.25B.
4.26 TAX OPINION
ShopNow.com shall have received an opinion from Perkins Coie LLP to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinion, Perkins Coie LLP shall be
entitled to rely upon customary representation letters signed by the Company,
ShopNow.com and Merger Sub.
4.27 NO DISSENTERS RIGHTS
Holders of not more than 5% of the outstanding shares of Company Common
Stock shall have delivered before the Effective Time timely written notice of
such holders' intent to demand payment as dissenting shareholders for such
shares in accordance with Nevada Law.
4.28 BOARD ACTIONS
The Company shall provide ShopNow.com or its counsel with evidence
reasonably satisfactory to ShopNow.com or its counsel that all corporate actions
reflected in the minutes of the Company and all stock issuances and options
grants have been duly authorized by the board of directors of the Company.
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ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE COMPANY
The obligations of the Company to perform and observe the covenants,
agreements and conditions hereof to be performed and observed by it at or before
the Closing shall be subject to the satisfaction of the following conditions,
which may be expressly waived only in writing signed by the Company.
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of ShopNow.com and Merger Sub
contained herein and in the Operative Documents shall have been true and correct
in all material respects when made and, except (a) for changes contemplated by
this Agreement and the Operative Documents and (b) to the extent that such
representations and warranties speak as of an earlier date, shall be true and
correct as of the Closing Date as though made on that date.
5.2 PERFORMANCE OF AGREEMENTS
ShopNow.com and Merger Sub shall have performed in all material
respects all obligations and agreements and complied with all covenants
contained in this Agreement or any Operative Document to be performed and
complied with by them at or prior to the Closing.
5.3 COMPLIANCE CERTIFICATE
The Company shall have received a certificate of an officer of
ShopNow.com, dated the Closing Date, in form and substance reasonably
satisfactory to the Company, certifying that the conditions to the obligations
of the Company in Sections 5.1, 5.2, 5.5 and 5.6 have been fulfilled.
5.4 LEGAL PROCEEDINGS
No order of any court or administrative agency shall be in effect that
enjoins, restrains, conditions or prohibits consummation of this Agreement or
any Operative Document, and no litigation, investigation or administrative
proceeding shall be pending or threatened which would enjoin, restrain,
condition or prevent consummation of this Agreement or any Operative Document.
5.5 MATERIAL ADVERSE CHANGE
Since the date of this Agreement and through the Closing, there shall
not have occurred any material change in the business, financial condition,
operations,
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properties or prospects of ShopNow.com. Changes in the trading prices of
ShopNow.com Common Stock or a public offering of ShopNow.com Common Stock shall
not be deemed material adverse changes under this Agreement.
5.6 APPROVALS AND CONSENTS
All transfers of permits or licenses and all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary on the part of ShopNow.com and Merger Sub for the
consummation of the transactions contemplated hereby, shall have been obtained,
and all waiting periods specified by law shall have passed. All other consents,
approvals and notices on the part of ShopNow.com and Merger Sub referred to in
this Agreement shall have been obtained or delivered.
5.7 COMPLIANCE WITH LAWS
The effectiveness of the Merger and the performance by ShopNow.com,
Merger Sub and the Company of the obligations hereunder and under the Operative
Documents shall be legally permitted by all laws and regulations to which
ShopNow.com, Merger Sub and the Company are subject.
5.8 OPINION OF COUNSEL
The Company shall have received the opinion letter of Perkins Coie LLP,
counsel for ShopNow.com and Merger Sub, dated the Closing Date, in the form of
EXHIBIT 5.8.
5.9 S-4
The S-4 shall have become effective under the Securities Act and shall
not be the subject of any stop order or proceedings seeking a stop order and the
Proxy Statement shall not be at the Effective Time subject to any proceedings
commenced or threatened by the SEC.
5.10 TAX OPINION
The Company shall have received an opinion from Dorsey & Whitney LLP to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code. In rendering such opinion, Dorsey & Whitney LLP
shall be entitled to rely upon customary representation letters signed by the
Company, ShopNow.com and Merger Sub.
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ARTICLE VI - COVENANTS
Between the date of this Agreement and the Effective Time, the parties
covenant and agree as set forth in this Article VI.
6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER
Unless ShopNow.com shall otherwise agree in writing, the Company
covenants and agrees to conduct the Company's business between the date of this
Agreement and the Effective Time in and only in, and the Company shall not take
any action except in, the ordinary course of business and in a manner consistent
with past practice and in accordance with applicable law; and the Company shall
use its reasonable best efforts to preserve intact the business organization of
the Company, to keep available the services of the current officers, employees
and consultants of the Company and to preserve the current relationships of the
Company with, and the goodwill of, customers, suppliers and other Persons with
which the Company has significant business relations. By way of amplification
and not limitation, except as otherwise contemplated by this Agreement, the
Company shall not, between the date of this Agreement and the Effective Time,
directly or indirectly do, or propose to do, any of the following without the
prior written consent of ShopNow.com:
(a) amend or otherwise change the Company's Articles of Incorporation
or Bylaws;
(b) except for the issuance of shares of Company Common Stock upon the
exercise or conversion of currently outstanding Stock Purchase Rights, issue,
sell, contract to issue or sell, pledge, dispose of, grant, encumber or
authorize the issuance, sale, pledge, disposition, grant or Encumbrance of (i)
any shares of capital stock of any class of the Company, (ii) any assets of the
Company, except in the ordinary course of business and in a manner consistent
with past practice or (iii) any options, warrants, convertible securities or
other rights of any kind to acquire any shares of such capital stock, or any
other ownership interest (including, without limitation, any phantom interest)
of the Company;
(c) declare, set aside, make or pay any dividend or other distribution,
payable in cash, stock or other securities, property or otherwise, with respect
to any of its capital stock;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock or other
securities;
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(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
other business organization or division thereof or any material amount of
assets; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any Person, or make any loans or
advances, except in the ordinary course of business and consistent with past
practice; (iii) enter into any contract or agreement other than in the ordinary
course of business, consistent with past practice; (iv) authorize any single
capital expenditure which is in excess of $50,000 or capital expenditures which
are, in the aggregate, in excess of $200,000 for the Company taken as a whole;
(v) enter into any agreement in which the obligation of the Company exceeds
$50,000 or which shall not terminate or be subject to termination for
convenience within 30 days following execution; (vi) license any Technology or
IP Rights; or (vii) enter into or amend any contract, agreement, commitment or
arrangement with respect to any matter set forth in this subsection (e);
(f) enter into or amend any employment, consulting or agency agreement,
or increase the compensation payable or to become payable to its officers,
employees, agents or consultants, or grant any severance or termination pay to,
or enter into any employment or severance agreement with, any director, officer
or other employee of the Company, or establish, adopt, enter into or amend any
Employee Benefit Plan, collective bargaining, bonus, profit-sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance, benefit or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any director,
officer or employee;
(g) take any action, other than reasonable and usual actions in the
ordinary course of business and consistent with past practice, with respect to
accounting methods, policies or procedures (including, without limitation,
procedures with respect to the payment of accounts payable and collection of
accounts receivable);
(h) make any Tax election or settle or compromise any Tax liability;
(i) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice;
(j) take any action that would or is reasonably likely to result in any
of the representations or warranties of the Company set forth in this Agreement
being untrue in any material respect, or in any covenant of the Company set
forth in this Agreement
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being breached, or in any of the conditions to the Merger specified in Article
IV not being satisfied; or
(k) agree to do any of the foregoing.
6.2 ACCESS TO INFORMATION; CONFIDENTIALITY
From the date hereof to the Effective Time, the Company shall, and
shall cause the officers, directors, employees and agents of the Company to,
afford the officers, employees and agents of ShopNow.com access at all
reasonable times to the officers, employees, agents, properties, offices, plants
and other facilities, books and records of the Company and shall furnish
ShopNow.com with all financial, operating and other data and information as
ShopNow.com , through its officers, employees or agents, may reasonably request.
From the date hereof until the Effective Time, the Company shall provide
ShopNow.com with monthly and other financial statements of the Company as they
become available internally at the Company, all of which financial statements
shall fairly present the financial position and results of operations of the
Company as of the dates and for the periods therein specified. No investigation
pursuant to this Section 6.2 shall affect any representation or warranty in this
Agreement of any party hereto or any condition to the obligations of the parties
hereto. The parties shall continue to comply with and to perform their
respective obligations under the Mutual Nondisclosure Agreement between
ShopNow.com and the Company entered into as of December 17, 1999.
6.3 NO ALTERNATIVE TRANSACTIONS
(a) Unless this Agreement shall have been terminated in accordance with
its terms, the Company shall not, directly or indirectly, through any officer,
director, agent or otherwise, solicit, initiate or encourage the submission of
any proposal or offer from any Person relating to any acquisition or purchase of
all or (other than in the ordinary course of business) any material portion of
the assets of, or any equity interest in, the Company or any business
combination with the Company (an "ALTERNATIVE TRANSACTION"), or participate in
any negotiations regarding, or furnish to any other Person any information with
respect to, or otherwise cooperate or negotiate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any other
Person to do or seek any of the foregoing. The Company shall notify ShopNow.com
promptly if any such proposal or offer, or any inquiry or contact with any
Person with respect thereto, is made and shall, in any such notice to
ShopNow.com, indicate in reasonable detail the identity of the Person making
such proposal, offer, inquiry or contact and the terms and conditions of such
proposal, offer, inquiry or contact. The Company agrees not to release any third
party from, or waive any
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provision of, any confidentiality or standstill (e.g., agreement not to invest
in or seek change of control of the Company) agreement to which the Company is a
party. Notwithstanding the foregoing, in the event the Company receives a bona
fide offer or proposal from any third party regarding an Alternative Transaction
(an "OFFER") the Company may accept such Offer (after complying with Section
6.3(b) below) if the board of directors of the Company reasonably determines
after due consideration of the factual basis and the advice of counsel
experienced in such matters that such action is required by law; provided,
however, that any such action by the Company shall be deemed a breach of this
Section 6.3 for purposes of determining whether the Company must pay the
Termination Fee described in Section 7.2.
(b) In the event the Company receives an Offer as described in the last
sentence of Section 6.3(a), then the Company shall, prior to accepting such
Offer or entering into any definitive agreement with respect to the Offer,
notify ShopNow.com in writing of: (a) all of the terms and conditions of such
Offer (which notice shall include a copy of any term sheets and proposed
definitive agreements reflecting such terms and conditions and include the
identity of the third party or parties making the Offer); (b) the Company's
intention of accepting the Offer on such terms and conditions; and (c) the
Company's agreement to enter into a proposed Alternative Transaction with
ShopNow.com on terms and conditions substantially similar to those set forth in
the Offer (a "Notice of Offer"). ShopNow.com will have 10 days from the receipt
of such Notice of Offer (the "Exclusivity Period") to deliver written notice to
the Company of ShopNow.com's acceptance of the Company's offer to enter into an
agreement with the Company providing for a Alternative Transaction on terms and
conditions substantially similar to those set forth in the Notice of Offer (a
"Notice of Acceptance"); provided, however, that to the extent that the
consideration being offered to the Company in the Offer consists of property
other than cash or securities, then ShopNow.com's acceptance shall, in lieu of
such noncash property or securities, provide for the payment of other
consideration to the Company of substantially equivalent fair market value. The
Company agrees that it will not accept any Offer, enter into any definitive
agreement providing for, or otherwise consummate any Alternative Transaction
with any third party other than ShopNow.com until the expiration of the
Exclusivity Period. If ShopNow.com delivers a Notice of Acceptance to the
Company prior to the expiration of the Exclusivity Period, then ShopNow.com and
the Company shall, within 20 days following receipt of the Notice of Acceptance,
enter into an agreement, on final terms and conditions to be negotiated in good
faith between them, providing for a Alternative Transaction on the terms and
conditions provided for in the Notice of Offer and Notice of Acceptance.
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6.4 NOTIFICATION OF CERTAIN MATTERS
Each party shall give prompt notice to the other parties of (a) the
occurrence or nonoccurrence of any event that would be reasonably likely to
cause any representation or warranty made by such party contained in this
Agreement to be untrue or inaccurate in any material respect and (b) any
material failure by such party to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this Section 6.4 shall not
limit or otherwise affect the remedies available to the parties hereunder.
6.5 FURTHER ACTION; COMMERCIALLY REASONABLE EFFORTS
Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use commercially reasonable efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby, including,
without limitation, using commercially reasonable efforts to obtain all waivers,
licenses, permits, consents, approvals, authorizations, qualifications and
orders of governmental authorities and parties to contracts with the Company as
are necessary for the consummation of the transactions contemplated hereby and
to fulfill the conditions to the Merger. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement or the Operative Documents, each party to this Agreement shall
use commercially reasonable efforts to promptly take all such action. After the
Closing, each party hereto, at the request of and without any further cost or
expense to the other parties, shall take any further actions reasonably
necessary or desirable to carry out the purposes of this Agreement or any
Operative Document, to vest in the Surviving Corporation full title to all
properties, assets and rights of the Company and to effect the issuance of the
Closing Shares pursuant to the terms and conditions hereof.
6.6 PUBLICITY
No party hereto shall issue any press release or otherwise make any
statements to any third party with respect to this Agreement or the transactions
contemplated hereby other than the issuance by ShopNow.com of a press release
announcing this Agreement and the transactions contemplated hereby or as
required by law. Any party who is required by law to make any such disclosure
must provide notice in advance of the disclosure to all other parties. Such
notice shall contain (a) the contents of the proposed disclosure; (b) the
reasons that the party contemplating disclosure believes
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that disclosure is required by law; and (c) the proposed time and place of such
disclosure.
6.7 BRING-DOWN CAPITALIZATION SCHEDULE
No later than three days prior to the Closing, the Company shall
deliver to ShopNow.com an updated version of SCHEDULE 2.3 to the Company
Disclosure Memorandum (Capitalization). The updated SCHEDULE 2.3 shall be deemed
an amendment to SCHEDULE 2.3 attached hereto.
6.8 EXECUTION OF ALL OPERATIVE DOCUMENTS
Each party shall execute at or prior to the Closing each Operative
Document to which he, she or it is a party.
6.9 STOCKHOLDER APPROVAL
The Company will call a special Stockholders Meeting as soon as
practicable but in no event later than 30 days after the Form S-4 is declared
effective by the SEC to submit this Agreement, the Merger and related matters
for the consideration and approval of the Company's Stockholders ("COMPANY
STOCKHOLDERS MEETING"). Such approval will be recommended by the Company's Board
of Directors, subject to the fiduciary obligations of its directors. Such
meeting will be called, held and conducted, and any proxies will be solicited,
in compliance with applicable law.
6.10 PREPARATION OF S-4
The Company will as promptly as practicable provide to ShopNow.com and
its counsel for inclusion within the Proxy Statement/Prospectus and the S-4 in a
form reasonably satisfactory to ShopNow.com and its counsel, such information
concerning the Company, its operations, capitalization, technology, share
ownership and other information as ShopNow.com or its counsel may reasonably
request. By February 15, 2000, or as soon as practicable thereafter, ShopNow.com
and the Company shall prepare and file with the SEC the Proxy Statement and any
other documents required by the Exchange Act in connection with the Merger, and
ShopNow.com shall prepare and file with the SEC the S-4, in which the Proxy
Statement will be included as a part of the prospectus. Each of ShopNow.com and
the Company shall use its commercially reasonable best efforts to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing. Prior to the effective date of the S-4, ShopNow.com shall also take
any action required to be taken under any applicable federal or state securities
or blue sky laws in connection with the issuance of the ShopNow.com Common Stock
in the Merger. The Company agrees that the Proxy
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Statement/Prospectus will comply as to form in all material respects with the
provisions of all applicable laws, including the provisions of the Exchange Act
and the rules and regulations of the SEC thereunder, except that no
representation is made by the Company with respect to information supplied by
ShopNow.com specifically for inclusion therein. ShopNow.com agrees that the S-4
and the Proxy Statement/Prospectus will comply as to form in all material
respects with the provisions of all applicable laws including the provisions of
the Securities Act and the Exchange Act and the rules and regulations of the SEC
thereunder, except that no representation is made by ShopNow.com with respect to
information supplied by the Company specifically for inclusion therein.
6.11 SHOPNOW.COM COMMON STOCK
ShopNow.com agrees to authorize for listing on the Nasdaq National
Market the shares of ShopNow.com Common Stock comprising the Closing Shares by
filing with the Nasdaq National Market a Notification of Listing of Additional
Shares (or such other form as may be required by the Nasdaq National Market) as
soon as reasonably practicable after the Closing or otherwise in accordance with
the rules and regulations of the Nasdaq National Market.
6.12 RETIREMENT OF INDEBTEDNESS
Immediately prior to the Effective Time, ShopNow.com agrees to pay off
all outstanding indebtedness of the Company under the Alpine Capital Note.
ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time (notwithstanding approval of this Agreement by
the stockholders):
(a) by mutual written consent of the Company and ShopNow.com;
(b) by either the Company or ShopNow.com, if the Merger has not been
consummated by June 22, 2000; provided, however, that the right to terminate
this Agreement under this subsection (b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before such
date;
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<PAGE>
(c) by either the Company or ShopNow.com, if there shall be any law or
regulation that makes consummation of the Merger illegal or if any judgment,
injunction, order or decree enjoining ShopNow.com, Merger Sub or the Company
from consummating the Merger is entered and such judgment, injunction, order or
decree shall become final and non-appealable; provided, however, that the party
seeking to terminate this Agreement pursuant to this subsection (c) shall have
used all reasonable efforts to remove such judgment, injunction, order or
decree;
(d) by the Company, in the event of a material breach by ShopNow.com or
Merger Sub of any representation, warranty or agreement contained herein that
has not been cured or is not curable by June 22, 2000; or
(e) by ShopNow.com, in the event of a material breach by the Company of
any representation, warranty or agreement contained herein that has not been
cured or is not curable by June 22, 2000.
(f) by either ShopNow.com or the Company upon written notice to the
other party, in the event that the Undisclosed Liability as determined in
accordance with Section 1.7.1(c)(ii) exceeds $1,000,000 and the parties are
unable to agree within 15 days after the date such Undisclosed Liability is
determined to any adjustment to the Closing Shares.
7.2 EFFECT OF TERMINATION
(a) Except as specifically provided in this Section 7.2, in the event
of the termination of this Agreement pursuant to Section 7.1 hereof, there shall
be no further obligation on the part of any party hereto, except that nothing
herein shall relieve any party from liability for any willful breach hereof.
(b) If ShopNow.com shall terminate this Agreement pursuant to (i)
Section 7.1(b) by reason of the Company's failure or inability to satisfy the
conditions to the Merger or (ii) Section 7.1(e) by reason of the Company's
breach of the covenants contained in Sections 6.1, 6.3 or 6.6 (a "BREAKUP
TERMINATION"), and the Company consummates an Alternative Transaction on or
before the one-year anniversary of such termination, the Company shall: (i) pay
to ShopNow.com upon the closing of the Alternative Transaction a termination fee
(the "TERMINATION FEE"), equal to 20% of the aggregate value of cash and
non-cash consideration (including the assumption of any liabilities of the
Company) received and to be received by the Company and/or its stockholders in
respect of such Alternative Transaction in excess of $45 million.
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ARTICLE VIII - GENERAL
8.1 SURVIVAL
All representations and warranties contained in this Agreement or in
the Operative Documents or in any certificate delivered pursuant hereto or
thereto shall terminate upon the Effective Time. The covenants and agreements
contained in this Agreement shall survive and continue until all obligations
with respect thereto shall have been performed or satisfied or shall have been
terminated in accordance with their terms.
8.2 TAX MATTERS - REORGANIZATION TREATMENT
Solely for tax purposes and except as otherwise required by law,
ShopNow.com shall, and shall cause Merger Sub and the Company to: (a) report the
Merger as a reorganization under Section 368(a)(1) of the Code on all applicable
U.S. federal, state and local Tax Returns (as defined in Section 2.8) and (b)
keep records and file in connection with their respective U.S. federal and state
Tax Returns all such information as may be required by Treasury Regulation
Section 1.368-3.
8.3 EXPENSES
If the transactions contemplated by this Agreement are not consummated,
each party shall pay its own fees and expenses incident to the negotiation,
preparation and execution of this Agreement and the Operative Documents
(including legal and accounting fees and expenses); provided, however, that the
attorneys' fees and expenses of the prevailing party in any action brought
hereunder shall be paid by the other party to such action. If the transactions
contemplated by this Agreement are consummated, ShopNow.com will pay the
reasonable fees and expenses of the Company and the Key Stockholders incident to
the negotiation, preparation and execution of this Agreement and the Operative
Documents (other than the costs and expenses of the attorneys, accountants and
other representatives of the Key Stockholders in excess of $10,000, which excess
expenses shall remain the responsibility of the Key Stockholders). The
stockholders of the Company shall pay any and all brokerage or finders' fees or
agents' commissions or any similar charges incurred in connection with the
Merger and set forth on Schedule 2.19 to the Company Disclosure Memorandum.
8.4 NOTICES
Any notice, request or demand desired or required to be given hereunder
shall be in writing given by personal delivery, confirmed facsimile transmission
or overnight
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<PAGE>
courier service, in each case addressed as respectively set forth below or to
such other address as any party shall have previously designated by such a
notice. The effective date of any notice, request or demand shall be the date of
personal delivery, the date on which successful facsimile transmission is
confirmed or the date actually delivered by a reputable overnight courier
service, as the case may be, in each case properly addressed as provided herein
and with all charges prepaid.
TO SHOPNOW.COM OR MERGER SUB:
ShopNow.com Inc.
411 First Avenue South, Suite 200 North
Seattle, Washington 98101
Fax: (206) 223-2324
Attention: Alan D. Koslow
with a copy to:
Perkins Coie LLP
1201 Third Avenue, 48th Floor
Seattle, Washington 98101-3099
Fax: (206) 583-8500
Attention: Edmund Belsheim
TO THE COMPANY:
Ubarter.com Inc.
2815 2nd Avenue Suite 500
Seattle, WA 98121
Fax: (206)239-2729
Attention: Steven M. White
with a copy to:
Dorsey & Whitney LLP
U.S. Bank Building Center
1420 Fifth Avenue, Suite 400
Seattle, WA 98101
Fax: (206) 903-8820
Attention: Michael Brown
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<PAGE>
8.5 SEVERABILITY
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby be consummated as originally contemplated to
the fullest extent possible.
8.6 ENTIRE AGREEMENT
This Agreement, the Operative Documents, that certain Non-Disclosure
Agreement dated on or about December 17, 1999, and the ShopNow.com Note,
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements and undertakings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof and thereof (including, without limitation, the Letter of
Intent, dated December 20, 1999, between ShopNow.com, the Company, and the Key
Stockholders).
8.7 ASSIGNMENT
This Agreement shall not be assigned by operation of law or otherwise;
provided, however, that Merger Sub's rights and obligations may be assigned to
and assumed by ShopNow.com or any other corporation wholly owned (directly or
through intermediate wholly owned subsidiaries) by ShopNow.com.
8.8 PARTIES IN INTEREST
This Agreement shall be binding upon and inure solely to the benefit of
the parties hereto and their respective successors, heirs, legal representatives
and permitted assigns, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
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<PAGE>
8.9 GOVERNING LAW; VENUE
This Agreement shall be governed by, and construed in accordance with,
the laws of the state of Washington applicable to contracts executed in and to
be performed in that state. The parties irrevocably consent to the jurisdiction
and venue of the state and federal courts located in King County, Washington in
connection with any action relating to this Agreement (except to the extent
provisions of Nevada Law apply to the Merger).
8.10 HEADINGS
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.11 COUNTERPARTS
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed and delivered shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
8.12 WAIVER OF JURY TRIAL
Each of ShopNow.com, the Company and Merger Sub hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
(whether based on contract, tort or otherwise) arising out of or relating to
this Agreement, the transactions contemplated hereby or the actions of such
parties in the negotiation, administration, performance and enforcement hereof.
8.13 AMENDMENT
This Agreement may not be amended except by an instrument in writing
signed by ShopNow.com, Merger Sub and the Company.
8.14 WAIVER
At any time prior to the Effective Time, any party hereto may (a)
extend the time for the performance of any obligation or other act of any other
party hereto, (b) waive any inaccuracy in the representations and warranties
contained herein or in any document delivered pursuant hereto, or (c) waive
compliance with any agreement
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<PAGE>
or condition contained herein. Any such extension or waiver shall be valid only
if set forth in an instrument in writing signed by the party or parties to be
bound thereby.
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into and signed
this Agreement and Plan of Merger as of the date and year first above written.
SHOPNOW.COM INC.
/s/ Alan Koslow
-------------------------------------------
Name
---------------------------------------
Its
----------------------------------------
SHAMU ACQUISITION, INC.
/s/ Alan Koslow
-------------------------------------------
Name
---------------------------------------
Its
----------------------------------------
UBARTER.COM INC.
/s/ Steven M. White
-------------------------------------------
Name
---------------------------------------
Its CEO
----------------------------------------
<PAGE>
Exhibit 21.1
Subsidiaries of the
Registrant
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
GO Software Inc. Washington
CardSecure, Inc. Delaware
3019542 Nova Scotia Company Nova Scotia
3019543 Nova Scotia Company Nova Scotia
3037952 Nova Scotia Company Nova Scotia
WebCentric, Inc. Kansas
SpeedyClick, Corp. California
Cortix Inc. Arizona
AXC Corporation Washington
Shamu Acquisition, Inc. Washington
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-90099 of Form S-8 and Registration
Statement File No. 333-92533 on Form S-8.
/s/ Arthur Andersen LLP
Seattle, Washington
February 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 0 9,849 10,660
<SECURITIES> 0 150 52,172
<RECEIVABLES> 0 2,496 6,882
<ALLOWANCES> 0 (230) (291)
<INVENTORY> 0 59 825
<CURRENT-ASSETS> 0 14,422 77,084
<PP&E> 0 5,188 24,145
<DEPRECIATION> 0 1,063 4,760
<TOTAL-ASSETS> 0 23,783 274,174
<CURRENT-LIABILITIES> 0 8,744 33,653
<BONDS> 0 1,837 5,409
0 0 0
0 35,070 0
<COMMON> 0 6,559 325,502
<OTHER-SE> 0 (28,427) (96,289)
<TOTAL-LIABILITY-AND-EQUITY> 0 23,783 274,174
<SALES> 604 4,458 15,486
<TOTAL-REVENUES> 604 7,154 36,955
<CGS> 515 4,452 18,883
<TOTAL-COSTS> 515 5,849 27,329
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 384 617
<INTEREST-EXPENSE> 164 211 127
<INCOME-PRETAX> (4,766) (24,745) (75,943)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (4,766) (24,745) (75,943)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (4,766) (24,745) (75,943)
<EPS-BASIC> (1.83) (7.01) (5.80)
<EPS-DILUTED> (1.83) (7.01) (5.80)
</TABLE>
