<PAGE>
As filed with the Securities and Exchange Commission on January 20, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SHOPNOW.COM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Washington 7374 91-1628103
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
411 First Avenue South
Suite 200 North
Seattle, Washington 98104
(206) 223-1996
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DWAYNE M. WALKER
Chief Executive Officer
411 First Avenue South
Suite 200 North
Seattle, Washington 98104
(206) 223-1996
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
STEPHEN M. GRAHAM DANIEL G. KELLY, JR.
FAITH M. WILSON Davis Polk & Wardwell
PAMELA M. ALMAGUER 1600 El Camino Real
Perkins Coie LLP Menlo Park, California 94025
1201 Third Avenue, 48th Floor (650) 752-2000
Seattle, Washington 98101-3099
(206) 583-8888
</TABLE>
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEES
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Shares To Amount to be Offering Price Aggregate Amount of
Be Registered Registered(1) Per Unit(2) Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock, par value $.0001........... 11,500,000 $18.719 $215,268,500 $56,831
</TABLE>
(1) Includes 1,500,000 shares that Underwriters have an option to purchase to
cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
amount of the registration fee. The proposed maximum offering price per
share is based on the average of the high and low prices for a share
reported on the Nasdaq National Market on January 19, 2000.
------------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall hereafter become effective in accordance with Section
8(a) of the Securities Act of 1933 or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy the securities
in any state where the offer or sale is not permitted.
<PAGE>
Subject to completion, dated January 20, 2000
Prospectus
SHARES
[LOGO]
COMMON STOCK
Shopnow.com Inc. is offering 8,500,000 shares of its common stock and the
selling shareholders are selling an additional 1,500,000 shares.
ShopNow's common stock is traded on the Nasdaq National Market under the symbol
"SPNW." The last reported sale price of the common stock on the Nasdaq National
Market on January 19, 2000 was $18.69 per share.
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
- -------------------------------------------------------------------------------------------------------
Underwriting
Public discounts Proceeds to
offering and Proceeds to selling
price commissions ShopNow shareholders
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total $ $ $ $
- -------------------------------------------------------------------------------------------------------
</TABLE>
We have granted the underwriters the right to purchase up to an additional
1,500,000 shares of common stock to cover over-allotments.
The shares of common stock will be ready for delivery in New York, New York, on
, 2000.
J.P. Morgan & Co.
CIBC World Markets
PaineWebber Incorporated
U.S. Bancorp Piper Jaffray
January , 2000
<PAGE>
[Inside Front Cover]
[Laptop computer with the following text superimposed:
"ShopNow provides end-to-end solutions that enable e-commerce.
- - Direct Marketing Services
- - Online and Traditional Sales and Marketing
- - E-commerce Technology Platform
- - Order and Payment Processing
- - Fraud Prevention
- - Order Fulfillment and Call Center"]
<PAGE>
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate as
of the date on the front cover, but the information may have changed since that
date.
"ShopNow" is our registered trademark, and we have applied for trademark
registration for each of the following additional marks: "ShopNow.com" and
"b2bNow.com." This prospectus also contains trademarks of companies other than
ShopNow.
------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 7
Use of Proceeds....................... 17
Price Range of Our Common Stock and
Dividend Policy................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Consolidated Financial
Data.............................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 23
Business.............................. 31
</TABLE>
<TABLE>
Management............................ 41
<CAPTION>
Page
<S> <C>
Related Transactions with Executive
Officers, Directors and 5%
Shareholders...................... 50
Principal and Selling Shareholders.... 52
Description of Capital Stock.......... 55
Shares Eligible For Future Sale....... 57
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Change in Independent Public
Accountants....................... 60
Where You Can Find More Information... 61
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------
3
<PAGE>
Prospectus Summary
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. BEFORE MAKING AN INVESTMENT DECISION YOU SHOULD READ THE ENTIRE
PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS, THE UNAUDITED PRO
FORMA COMBINED FINANCIAL INFORMATION AND RELATED NOTES. THE TERMS "WE" AND
"SHOPNOW" MEAN SHOPNOW.COM INC. AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE
STATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
ShopNow.com Inc.
ShopNow provides an end-to-end solution that enables businesses to engage in
electronic 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 secure payment and order processing, fraud prevention,
hosting and maintenance, custom online store development, marketing and customer
acquisition and order fulfillment.
The ShopNow network, our online marketplace, aggregates merchants and shoppers
over a distributed network of web sites. With access to the ShopNow network,
merchants can reach concentrated and targeted groups of shoppers at the
ShopNow.com portal site and at our more than 3,000 affiliate and 50 syndication
shopping sites. There are currently over 45,000 merchants and more than five
million products listed on the ShopNow network. In the quarter ended
December 31, 1999, there were more than 20 million visits to the ShopNow
network.
In January 2000, we launched b2bNow.com, a business-to-business portal and
marketplace that aggregates businesses who wish to transact with one another. We
intend to continually expand the features found in b2bNow.com and have recently
agreed to acquire Ubarter.com, an online barter marketplace, to facilitate the
exchange of goods and services between businesses.
Our e-commerce products and services allow our business and merchant clients to
address the challenges of online commerce by providing the following benefits:
- 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. 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. Our extensive experience typically allows us to
create enabled web sites for our clients in less time than an in-house
developer.
- IMMEDIATE AND LONG-TERM SAVINGS. Our clients are able to avoid the
significant investment of resources required to develop and maintain
end-to-end e-commerce capabilities internally or to integrate an
outsourced multi-vendor solution.
- FACILITATE CUSTOMER ACQUISITION AT LOWER COSTS. With our custom sales and
marketing services, and access to the ShopNow network, merchants can more
effectively and more efficiently attract targeted shoppers to their online
stores.
- COMPREHENSIVE TECHNOLOGY PLATFORM. We provide a flexible scaleable
technology platform from which we can tailor solutions to meet the
changing needs of our clients.
ShopNow was incorporated in Washington in January 1994. Our executive offices
are located at 411 First Avenue South, Suite 200 North, Seattle, Washington
98104. Our telephone number is (206) 223-1996 and our main web site is located
at http://www.shopnow.com. Information contained on our web sites is not a part
of this prospectus.
Risk Factors
This offering involves a high degree of risk. Since our inception in
January 1994, we have incurred significant losses, and as of September 30, 1999,
we had an accumulated deficit of $76.6 million. We expect our operating losses
and negative cash flow to continue for the foreseeable future. We face
significant competition from other providers of
4
<PAGE>
e-commerce enabling products and services and online marketplaces. You should
carefully consider these risks and uncertainties as well as those other risks
and uncertainties described in "Risk Factors" beginning on page 7 of this
prospectus before deciding whether to invest in shares of our common stock.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by ShopNow.............. shares
Common stock offered by selling
shareholders............................... shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. To obtain working capital for general
corporate purposes, including expansion of
sales and marketing activities, research and
development and potential acquisitions. See
"Use of Proceeds."
Nasdaq National Market symbol................ SPNW
</TABLE>
The number of shares of common stock to be outstanding after this offering is
based on shares outstanding as of December 31, 1999. This calculation excludes:
- 11,509,959 shares of common stock issuable upon the exercise of options,
which consist of:
- 10,312,983 shares of common stock underlying options outstanding as of
December 31, 1999, at a weighted average exercise price of $6.08 per
share, of which 3,231,952 were exercisable as of December 31, 1999; and
- 1,196,976 shares of common stock underlying options available for
future grants;
- 2,000,000 shares of common stock issuable under our employee stock
purchase plan; and
- 3,811,171 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 1999 to purchase common stock at a weighted
average exercise price of $6.99 per share.
5
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
January 20,
1994 Nine Months
(Inception) to Year Ended December 31, Ended
December 31, ----------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
-------------- -------- -------- -------- -------- --------------
(Unaudited)
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 $ 23,537
Cost of revenues... 127 323 430 515 5,849 19,494
------------ ------ ------ ------- -------- --------------
Gross profit... 152 404 563 89 1,305 4,043
Total operating expenses... 332 510 1,323 4,691 26,221 50,686
------------ ------ ------ ------- -------- --------------
Loss from operation... (180) (106) (760) (4,602) (24,916) (46,643)
Other income (expense)... (1) (7) (50) (164) 171 (605)
------------ ------ ------ ------- -------- --------------
Net loss...... $ (181) $ (113) $ (810) $(4,766) $(24,745) $ (47,248)
============ ====== ====== ======= ======== ==============
Basic and diluted net loss per share(2)... $ (0.11) $(0.06) $(0.40) $ (1.83) $ (7.01) $ (9.03)
============ ====== ====== ======= ========
Basic and diluted pro forma net loss per
share(2)........
<CAPTION>
--------------
Pro Forma
Nine Months
Ended
September 30,
1999(1)
--------------
(Unaudited)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C>
Consolidated Statements of Operations Data:
Revenues:....... $ 17,460
Cost of revenues... 9,080
--------------
Gross profit... 8,380
Total operating expenses... 92,695
--------------
Loss from operation... (84,315)
Other income (expense)... (627)
--------------
Net loss...... $ (84,942)
==============
Basic and diluted net loss per share(2)...
==============
Basic and diluted pro forma net loss per
share(2)........ $ (5.83)
==============
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
September 30, 1999
------------------------------------------
Pro Forma As
Actual Pro Forma(3) Adjusted(4)
------------ ------------ ------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
Consolidated Balance Sheet Data:
Cash and cash equivalents................................... $ 2,913 $ 90,771
Working capital............................................. (14,644) 70,887
Total assets................................................ 81,000 314,055
Total liabilities........................................... 42,819 47,118
Total shareholders' equity.................................. 38,181 266,937
------------ ------------ ------------
</TABLE>
<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(5):
Number of advertising and merchandising clients on the
ShopNow network........................................... 181 336 514
Number of merchants listed on the ShopNow network........... 33,841 37,099 45,522
Number of shopper visits to the ShopNow network............. 6,422,000 7,485,000 20,906,143
</TABLE>
(1) We acquired The Internet Mall in August 1998, Media Assets in
September 1998, GO Software in June 1999, SpeedyClick in November 1999 and
WebCentric in December 1999. Also in December, we executed a letter of
intent to acquire Ubarter.com and expect to close this acquisition in the
second quarter of 2000. In June 1999, we ceased operations of our
BuySoftware.com business. The pro forma statement of operations data reflect
consolidation of the operations results from these businesses and the
cessation of BuySoftware.com as if they had occurred on January 1, 1999. The
pro forma information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the Unaudited Pro Forma Combined Financial Information and related Notes
appearing elsewhere in this prospectus.
(2) See Note 1 to the Consolidated Financial Statements for a description of the
method used to compute basic and diluted net loss per share. In addition,
see Note 2(e) to the Unaudited Pro Forma Combined Financial Information for
a description of the method used to compute basic and diluted pro forma net
loss per share.
(3) The pro forma consolidated balance sheet data gives effect to the
acquisitions described in Note (1) above as well as to the closing our
initial public offering early in the fourth quarter of 1999, where we issued
a total of 8,337,500 shares of common stock at $12.00 per share, realized
proceeds of $91.6 million, net of underwriters' discounts and commissions
and offering expenses.
(4) The pro forma as adjusted balance sheet data gives effect to the sale of the
10,000,000 shares of common stock offered under this prospectus at an
assumed public offering price of $ per share, after deducting underwriting
discounts, commissions and estimated expenses payable by us upon closing of
this offering.
(5) 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
network during the applicable quarter.
6
<PAGE>
Risk Factors
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON
STOCK. WHILE WE HAVE ATTEMPTED TO IDENTIFY ALL RISKS THAT ARE MATERIAL TO OUR
BUSINESS, ADDITIONAL RISKS THAT WE HAVE NOT YET IDENTIFIED OR THAT WE CURRENTLY
THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, IN WHICH CASE YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD
ALSO REFER TO THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING THE
CONSOLIDATED FINANCIAL STATEMENTS, THE UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION AND RELATED NOTES.
Risks Related to Our Business
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
online commerce. In August 1998, we launched our online marketplace,
Shopnow.com. In recent months, we have increasingly focused on developing and
providing products and services to enable businesses to conduct online commerce,
including the launch of b2bNow.com. The recent changes in our business focus may
make it difficult for you to evaluate our business and prospects. When making
your investment decision, you should also consider the risks, expenses and
difficulties that we may encounter as a young company in a rapidly evolving
market.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES
We incurred net losses of $24.7 million for the year ended December 31, 1998 and
$47.2 million for the nine-month period ended September 30, 1999. At
September 30, 1999, we had an accumulated deficit of $76.6 million. We have
historically invested heavily in sales and marketing, technology infrastructure
and research and development and expect to do so in the future. As a result, we
must generate significant revenues to achieve and maintain profitability. We
expect that our sales and marketing expenses, research and development expenses
and general and administrative expenses will continue to increase in absolute
dollars and may increase as 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
It is difficult for us to accurately forecast our revenues in any given period.
Our revenues could fall short of our expectations if we experience declines in
the number of merchants to which we provide products and services. We may not be
able to sustain our recent revenue growth rates or obtain sufficient revenues to
achieve profitability.
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. 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:
- 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.
7
<PAGE>
Period-to-period comparisons of our operating results are not a good indication
of our future performance. It is likely that our operating results in some
quarters 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. Under a letter of intent, we have
agreed to acquire Ubarter.com, subject to completion of a mutually satisfactory
definitive agreement and 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 with one another. If we
are unable to identify suitable acquisition targets, or we are unable to
successfully complete acquisitions and successfully integrate the acquired
businesses, 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
- inability 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 would suffer. For example, in June 1998 we acquired
e-Warehouse and CyberTrust. These companies had developed payment processing
technologies that we planned to utilize as part of our e-commerce and direct
marketing services. However, we are not currently utilizing the acquired
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.
8
<PAGE>
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 marketplace has achieved
only limited market acceptance to date. Therefore we may not currently have
adequate market share to successfully execute our business plan. The ShopNow
network aggregates products and services from more than 45,000 merchants.
However, we must continue to attract new merchants and businesses in order to
increase our attractiveness to shoppers. 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; and
- increase the number of businesses, merchants and shoppers using our
e-commerce products and services and online marketplaces.
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 network 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 market 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 would 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 number of 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
9
<PAGE>
- a reduction in the prices or margins of 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 KEY BUSINESS RELATIONSHIPS AND ENTER INTO NEW
RELATIONSHIPS OUR BUSINESS WILL SUFFER
An important element of our strategy involves entering into key business
relationships with other companies. Our success is dependent on maintaining our
current contractual relationships and developing new relationships. These
contractual relationships typically involve joint marketing, promotional
arrangements or distribution. For example, we have entered into a licensing and
co-marketing agreement with Chase Manhattan Bank, a 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 a key factor in
our strategy, in that they are intended to provide us important marketing and
distribution arrangements, the parties with which we contract may not view their
relationships with us as significant to their own businesses. To date, we have
not derived material revenue from these relationships, and some of these
relationships impose substantial obligations on us. It is not certain that the
benefits to us will outweigh our obligations. For example, our relationship with
24/7 Media requires us to refer to them any 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 key
business relationships we will need to meet our partners' specific business
objectives, including incremental revenue, brand awareness and implementation of
specific e-commerce applications. If our key business relationships are
discontinued for any reason, or if we are unsuccessful in entering into new
relationships in the future, our business and results of operations may be
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 infrastructure and 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 successfully retain our key personnel.
WE MUST HIRE ADDITIONAL PERSONNEL TO EXPAND OUR OPERATIONS
Our future success depends on our ability to identify, hire, train, retain and
motivate highly skilled executive, technical, managerial, sales and marketing
and business development personnel. We intend to hire a significant number of
personnel during the next year, and as of 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 network 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 network. 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 a leased facility in Seattle, Washington
and a third-party facility in Weehawken, New Jersey. Our systems and operations
are
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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 temporary capacity constraints, which may cause
unanticipated system disruptions, slower response times and lower levels of
customer service. We may be unable to accurately project the rate or timing of
increases, if any, in the use of our 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 economic weakness. If the Japanese economy
continues to exhibit weakness, our efforts to develop a Japanese-language online
marketplace and our ability to grow in that market could be impaired. In
addition, the failure to succeed in the Japanese market could impair our ability
to enter other international markets.
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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<PAGE>
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 or future patent applications will be
granted, that any existing or future patents will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide us with a
competitive advantage. The laws of some 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 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 as an effective
medium of commerce by businesses, merchants and shoppers. 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 services. If the
Internet continues to experience significant growth in the number of users,
frequency of use and amount of data transmitted, the Internet infrastructure of
thousands of computers communicating via telephone lines, coaxial cable and
other telecommunications systems may be unable to support the demands placed on
it, and the Internet's performance or reliability may suffer as a result of this
continued growth. If the performance or reliability of the Internet suffers,
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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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 products, such as firearms. Although we carry general liability
insurance, our insurance may not cover claims of these types, or may not be
adequate to indemnify us against this type of liability. Any imposition of
liability, and in particular liability that is not covered by our insurance or
is in excess of our insurance coverage, could have a material adverse effect on
our reputation and our operating results, or could result in the imposition of
criminal penalties on us.
WE DO NOT CURRENTLY COLLECT SALES TAX FROM ALL TRANSACTIONS
We do not currently collect sales or other similar taxes in respect to products
sold by ShopNow 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 Washington and California could subject
shipments into these states to state or foreign sales taxes. A successful
assertion by one or more states or any foreign country that we should collect
sales or other similar taxes on the sale of merchandise could result in
liability for penalties as well as substantially higher expenses incurred by our
business.
Risks Related to this Offering
PROVISIONS OF OUR CHARTER DOCUMENTS AND WASHINGTON LAW COULD DISCOURAGE OUR
ACQUISITION BY A THIRD PARTY
Specific provisions of our articles of incorporation and bylaws and Washington
law could make it more difficult for a third party to acquire 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
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preventing a change of control of ShopNow and may adversely affect the market
price of the common stock and the voting and other rights of the holders of
common stock.
Washington law imposes restrictions on some transactions between a corporation
and significant shareholders. Chapter 23B.19 of the Washington Business
Corporation Act prohibits a "target corporation," with some exceptions, from
engaging in particular significant business transactions with an "acquiring
person," which is defined as a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation, for a period of
five years after the acquisition, unless the transaction or acquisition of
shares is approved by a majority of the members of the target corporation's
board of directors prior to the acquisition. Prohibited transactions include,
among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive any disproportionate benefit as a
shareholder.
A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of ShopNow.
The foregoing provisions of our charter documents and Washington law could have
the effect of making it more difficult or more expensive for a third party to
acquire, or could discourage a third party from attempting to acquire, control
of ShopNow. These provisions may therefore have the effect of limiting the price
that investors might be willing to pay in the future for our common stock.
OUR MANAGEMENT HAS BROAD DISCRETION OVER HOW WE USE THE PROCEEDS OF THIS
OFFERING
Our management has broad discretion over the use of the proceeds of this
offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have desired, or that
we will fail to maximize our return on these proceeds.
OUR STOCK PRICE MAY BE VOLATILE
The stock market in general, and the stock prices of Internet-related companies
in particular, have recently experienced extreme volatility, which has often
been unrelated to the operating performance of any particular company or
companies. Our stock price could be subject to wide fluctuations in response to
factors such as the following:
- actual or anticipated variations in quarterly results of operations;
- the addition or loss of merchants and 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 and e-commerce and marketing
industries;
- changes in the market valuations of other Internet, online service or
software companies;
- our announcements of significant acquisitions, strategic relationships,
joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of our common stock;
- general market conditions; and
- other events or factors, many of which are beyond our control.
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These broad market and industry factors may materially and adversely affect our
stock price, regardless of our operating performance. The trading prices of the
stocks of many technology companies are at or near historical highs and reflect
price to earnings ratios substantially above historical levels. These trading
prices and price-to-earnings ratios may not be sustained.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in their stock prices. We may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert our management's time and resources, which could
cause our business to suffer.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
After this offering, a total of shares of our common stock will be
outstanding. All the shares sold in this offering will be freely tradable. The
remaining shares of our common stock outstanding after this offering will become
available for public sale as follows:
<TABLE>
----------------------------------------
Percentage of
Shares
Number of Outstanding After
Date of Availability for Sale Shares Offering
- ---------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
90 days after the date of this prospectus.................
At various times on or after March 27, 2000, upon
expiration of lockup agreements signed in connection with
our initial public offering...............................
</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.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE.
The assumed public offering price is substantially higher than the net tangible
book value per outstanding share of common stock. Purchasers of our common stock
will incur immediate and substantial dilution of $ per share in the
net tangible book value of our common stock from the assumed public offering
price of $ . Additional dilution will occur upon the exercise of
outstanding options and warrants and issuances of shares under our employee
stock purchase plan.
Use of Proceeds
We estimate that the net proceeds to us from the sale of the 8,500,000 shares of
common stock offered by us will be approximately $ million, at an assumed
public offering price of $ per share, and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds from this offering will be $ million. We will not receive any
proceeds from the sale of shares by selling shareholders.
The principal purposes of the offering are to obtain working capital for general
corporate purposes, including expansion of sales and marketing activities and
research and development. We may use a portion of the net proceeds to acquire or
invest in complementary businesses, products and technologies. From time to
time, in the ordinary course of business, we expect to evaluate potential
acquisitions of such businesses, products or technologies. As a result, we will
have broad discretion in the way we use net proceeds. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
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Price Range of Our Common Stock and Dividend Policy
Since our initial public offering on September 28, 1999, our common stock has
traded on the Nasdaq National Market under the symbol "SPNW." The following
table sets forth the range of high and low closing sales prices of our common
stock for the periods indicated:
<TABLE>
-------------------
High Low
------ ------
<S> <C> <C>
Fourth quarter 1999 (from September 28, 1999)............... $25.13 $10.94
First quarter 2000 (through January 19, 2000)............... $25.94 $15.00
</TABLE>
On January 19, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $18.69 per share.
We have never declared or paid any dividends on our capital stock. We currently
expect to retain future earnings, if any, for use in the operation and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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Capitalization
The following table sets forth our capitalization as of September 30, 1999 on an
actual basis; on a pro forma basis to include: 1) the issuance of 8,337,500
shares of common stock and the conversion of 20,189,061 issued and outstanding
shares of preferred stock to common stock in connection with the closing of our
initial public offering early in the fourth quarter of 1999, and 2) the issuance
of 14,792,253 shares of common stock in connection with the acquisitions of
SpeedyClick, WebCentric and the proposed acquisition of Ubarter.com; and on a
pro forma as adjusted basis to give effect to the sale of 8,500,000 shares of
common stock at the assumed public offering price of $ per share and the
application of the estimated net proceeds from the sale of those shares
contemplated in this prospectus.
<TABLE>
------------------------------
September 30, 1999
------------------------------
Pro
Forma
As
Actual Pro Adjusted
Forma
-------- -------- --------
IN THOUSANDS, EXCEPT SHARE DATA
<S> <C> <C> <C>
Long-term obligations, including current portion............ $ 15,281 $15,281 $
Shareholders' equity:
Convertible preferred stock; $0.01 par value; authorized
20,000,000 actual and 5,000,000 pro forma and pro forma
as adjusted; 20,189,061 issued and outstanding; none pro
forma or pro forma as adjusted.......................... 89,351 --
Common stock; $0.01 par value, 40,000,000 shares
authorized actual and 200,000,000 pro forma and pro
forma as adjusted; 6,581,112 issued and outstanding
actual; 43,318,814 pro forma; pro forma as
adjusted................................................ 23,414 321,310
Common stock warrants..................................... 7,968 7,968
Deferred compensation..................................... (3,179) (3,179)
Unrealized holding loss................................... (2,762) (2,762)
Accumulated deficit....................................... (76,611) (76,611)
-------- -------- -------
Total shareholders' equity................................ 38,181 246,726
-------- -------- -------
Total capitalization.................................... $ 53,462 $262,007 $
======== ======== =======
</TABLE>
This table excludes the following shares:
- 11,361,976 shares of common stock issuable upon the exercise of options at
September 30, 1999, which consists of:
- 9,098,039 shares of common stock underlying options outstanding as of
September 30, 1999 at a weighted average exercise price of $4.98 per
share, of which 2,707,245 were exercisable as of September 30, 1999;
and
- 2,263,937 shares of common stock underlying options available for
future grants;
- 2,000,000 shares of common stock issuable under our employee stock
purchase plan; and
- 4,228,306 shares of common stock issuable upon exercise of warrants
outstanding as of September 30, 1999 to purchase common stock at a
weighted average exercise price of $6.26 per share.
Upon the completion of our initial public offering early in the fourth quarter
1999, our articles of incorporation were amended to increase the authorized
number of shares of common stock from 40,000,000 to 200,000,000. In addition,
the authorized shares of preferred stock were decreased from 20,000,000 to
5,000,000. The amended and restated articles of incorporation also decreased the
par value of the common stock and the preferred stock to $0.001.
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Dilution
If you invest in our common stock, your interest will be immediately diluted to
the extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common stock
after this offering. Our pro forma net tangible book value as of September 30,
1999 was $247.0 million, or $5.70 per share of common stock. Pro forma net
tangible book value per share is determined by dividing the difference between
our total assets excluding goodwill from acquisitions and total liabilities by
the pro forma number of outstanding shares of common stock. Total assets
includes the net consideration received of approximately $91.6 million from the
closing of our initial public offering of common stock which closed early in the
fourth quarter of 1999 as well as approximately $118.7 million of net
consideration issued or issuable in the acquisitions of SpeedyClick and
WebCentric and the proposed acquisition of Ubarter.com. After giving effect to
the receipt of the estimated net proceeds from the sale of 8,500,000 shares of
common stock contemplated by this offering at an assumed public offering price
of $ per share and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net tangible book
value as of September 30, 1999 would have been $ million or approximately $
per share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing shareholders and an immediate dilution in pro
forma net tangible book value of $ per share to new investors purchasing shares
of common stock in this offering. The following table illustrates this dilution
on a per share basis:
<TABLE>
<S> <C> <C>
-------------------
Assumed public offering price per share..................... $
Pro forma net tangible book value per share as of
September 30, 1999...................................... $ 5.70
Increase per share attributable to new investors..........
=======
Pro forma net tangible book value per share after the
offering..................................................
========
Dilution per share to new investors......................... $
========
Dilution as a percentage of assumed offering price..........
========
</TABLE>
The following table summarizes, as of September 30, 1999, the differences
between the number of shares of common stock purchased from ShopNow, the total
consideration paid, and the average price per share paid by existing
shareholders and by investors purchasing shares of common stock in this
offering, before deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, at the assumed public offering price
of $ per share:
<TABLE>
------------------------------------------------------------
Shares Purchased Total Consideration Average
--------------------- ----------------------- Price (per
Number Percent Amount Percent share)
---------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 43,318,814 $344,724,196 $7.96
New shareholders........................
---------- ----- ------------ -----
Total................................... 100.0% $ 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables are based upon the number of shares of
common stock outstanding as of September 30, 1999, and give effect to the sale
of 8,337,500 shares of common stock and the conversion of 20,189,061 issued and
outstanding shares of preferred stock to common stock in connection with the
closing of our initial public offering early in the fourth quarter of 1999 as
well as the issuance of 14,792,253 shares of common stock from the acquisitions
of SpeedyClick, WebCentric and the proposed acquisition of Ubarter.com during
the fourth quarter of 1999. These calculations exclude all shares of common
stock issuable upon the exercise of our outstanding stock options and warrants
to purchase common stock, all shares of common stock available for future grants
under our stock option plans, and all shares of common stock issuable under our
employee stock purchase plan. To the extent any of these options or warrants are
exercised, there will be further dilution to new public investors. See
"Capitalization," "Management - Employee Benefit Plans," "Description of Capital
Stock" and Note 11 to the Consolidated Financial Statements.
20
<PAGE>
Selected Consolidated Financial Data
The statements of operations data for the years ended December 31, 1996, 1997
and 1998 are derived from our audited consolidated financial statements
appearing elsewhere in this prospectus. The statements of operations data for
the period from January 20, 1994 (inception) to December 31, 1994 and for the
year ended December 31, 1995 are derived from audited consolidated financial
statements not included in this prospectus. The pro forma as adjusted balance
sheet data give effect to the sale of the 8,500,000 shares of common stock that
we are offering under this prospectus at an assumed public offering price of
$ per share and after deducting underwriting discounts and commissions and
estimated expenses payable by us. Due to the acquisitions in 1998 and in the
first nine months of 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," the Unaudited Pro Forma Combined Financial
Information and the Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
January 20, Nine
1994 Months
(Inception) to Year Ended December 31, Ended
December 31, ----------------------------------------- Sept. 30,
1994 1995 1996 1997 1998 1999
-------------- -------- -------- -------- -------- --------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:... $ 279 $ 727 $ 993 $ 604 $ 7,154 $ 23,537
Cost of revenues:... 127 323 430 515 5,849 19,494
------------ ------- ------ ------- -------- --------------
Gross profit... 152 404 563 89 1,305 4,043
Operating expenses:
Sales and marketing... 116 163 610 1,201 12,183 33,545
General and administrative... 216 347 656 918 3,549 5,493
Research and development... -- -- 25 2,436 4,370 5,367
Amortization of intangible assets... -- -- 32 136 730 3,734
Stock-based compensation... -- -- -- -- 182 2,547
Unusual item - write-off of acquired
technology... -- -- -- -- 5,207 --
------------ ------- ------ ------- -------- --------------
Total operating expenses... 332 510 1,323 4,691 26,221 50,686
------------ ------- ------ ------- -------- --------------
Loss from operations... (180) (106) (760) (4,602) (24,916) (46,643)
Other income (expense)... (1) (7) (50) (164) 171 (605)
------------ ------- ------ ------- -------- --------------
Net loss... $ (181) $ (113) $ (810) $(4,766) $(24,745) $ (47,248)
============ ======= ====== ======= ======== ==============
Basic and diluted net loss per share(1)... $ (0.11) $ (0.06) $(0.40) $ (1.83) $ (7.01) $ (9.03)
============ ======= ====== ======= ======== ==============
Basic and diluted pro forma net loss per
share(1)...
<CAPTION>
--------------
Pro Forma
Nine Months
Ended
Sept. 30,
1999
--------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA (Unaudited)
<S> <C>
Consolidated Statements of Operations Data:
Revenues:... $ 17,460
Cost of revenues:... 9,080
--------------
Gross profit... 8,380
Operating expenses:
Sales and marketing... 32,161
General and administrative... 9,879
Research and development... 6,581
Amortization of intangible assets... 41,527
Stock-based compensation... 2,547
Unusual item - write-off of acquired
technology... --
--------------
Total operating expenses... 92,695
--------------
Loss from operations... (84,315)
Other income (expense)... (627)
--------------
Net loss... $ (84,942)
==============
Basic and diluted net loss per share(1)...
Basic and diluted pro forma net loss per
share(1)... $ (5.83)
==============
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
September 30, 1999
------------------------------------------
Pro Forma
As
Actual Pro Forma(2) Adjusted(3)
DOLLARS IN THOUSANDS ------------ ------------ ------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................. $ 2,913 $ 90,771
Working capital........................................... (14,644) 70,887
Total assets.............................................. 81,000 314,055
Total liabilities......................................... 42,819 47,118
Total shareholders' equity................................ 38,181 266,937
</TABLE>
21
<PAGE>
<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(4):
Number of advertising and merchandising clients on the
ShopNow network........................................... 181 336 514
Number of merchants listed on the ShopNow network........... 33,841 37,099 45,522
Number of shopper visits to the ShopNow network............. 6,422,000 7,485,000 20,906,143
</TABLE>
(1) See Note 1 to the Consolidated Financial Statements for a description of the
method used to compute basic and diluted net loss per share. In addition,
see Note 2(e) to the Unaudited Pro Forma Combined Financial Information for
a description of the method used to compute basic and diluted pro forma net
loss per share.
(2) The pro forma consolidated balance sheet data gives effect to the
acquisitions described in the introductory paragraph above as well as to the
closing our initial public offering early in the fourth quarter of 1999,
where we issued a total of 8,337,500 shares of common stock at $12.00 per
share. The net proceeds to us, less offering costs, was $91.6 million.
(3) The pro forma as adjusted balance sheet data gives effect to the sale of the
10,000,000 shares of common stock that we are offering under this prospectus
at an assumed public offering price of $ per share, after deducting
underwriting discounts, commissions and estimated expenses payable by us
upon closing of this offering.
(4) 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 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
network during the applicable quarter.
22
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR
SELECTED CONSOLIDATED FINANCIAL DATA, OUR UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION AND CERTAIN OTHER PARTS
OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. WORDS SUCH AS "MAY," "COULD," "WOULD," "EXPECT,"
"ANTICIPATE," "INTEND," "PLAN," "BELIEVE" AND "ESTIMATE," AND VARIATIONS OF SUCH
WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH ARE BASED ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT
FUTURE EVENTS, ARE NOT GUARANTEES OF FUTURE PERFORMANCE, ARE SUBJECT TO RISKS,
UNCERTAINTIES AND ASSUMPTIONS (INCLUDING THOSE DESCRIBED IN "RISK FACTORS") AND
APPLY ONLY AS OF THE DATE OF THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW AND IN THE SECTION ENTITLED "RISK FACTORS," AS WELL AS
THOSE DISCUSSED ELSEWHERE HEREIN. SEE "FORWARD-LOOKING STATEMENTS."
Overview
ShopNow provides an end-to-end solution that enables businesses to engage in
electronic 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 online store development and design, hosting and
maintenance, sales and marketing services and transaction processing. Our online
marketplace, the ShopNow network, 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,
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 network. In addition, with the recent launch of b2bNow.com, we
expect to derive additional revenues from the 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 online stores and direct marketing projects
on a percentage of completion basis over the period of development or the period
of the direct 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.
Revenues from the ShopNow network are generated primarily from advertising and
merchandising paid by merchants, leads and orders delivered to merchants, as
well as transaction processing 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 fees from
our payment processing and fraud prevention services.
23
<PAGE>
In limited circumstances, we offer products directly to shoppers on the ShopNow
network. We principally offer these products to increase the number of leads we
generate for merchants on the ShopNow network. We record as revenues the full
sales price of the product sold and record the full cost of the product to us as
our cost of goods sold. These transaction revenues represented approximately 20%
of our pro forma 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, merchandising and services fees
from b2bNow.com, our business-to-business portal. In addition, in December 1999
we executed a letter of intent 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 our business-to-business portal.
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 network consists primarily of the portion of our
Internet telecommunications connections that are directly attributable to
traffic on the ShopNow network 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 network. Any
shopping traffic that we purchase from a third party that is used to fulfill
these obligations is included as a cost of revenues on the ShopNow network. 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 THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Total revenues for the nine-month period ended September 30, 1999
were $23.5 million, compared to $3.0 million for the same period ended
September 30, 1998, an increase of $20.5 million. The increase was due primarily
to the expansion of the ShopNow network as well as increased demand for
e-commerce enabling products and services from the business-to-business
division, including Media Assets, which we acquired in September 1998. The
BuySoftware.com portion of revenues for the nine-month period ended
September 30, 1999 was $9.9 million compared to $2.4 million for the same period
ended September 30, 1998.
COST OF REVENUES. The cost of revenues for the nine-month period ended
September 30, 1999 was $19.5 million, compared to $2.8 million for the same
period ended September 30, 1998, an increase of $16.7 million. The increase in
our cost of revenues was due primarily to increased product sales from the
ShopNow network and cost of revenues of the business-to-business division,
including Media Assets. The BuySoftware.com portion of cost of revenues for the
nine-month period ended September 30, 1999 was $11.2 million, compared to $2.5
million for the same period ended September 30, 1998.
GROSS PROFIT. Gross profit for the nine-month period ended September 30, 1999
was $4.0 million, compared to a gross profit of $183,000 for the same period
ended September 30, 1998, an increase of $3.8 million. This increase in gross
profit was due primarily to the increase in revenues of our business-to-business
division, which operates at higher gross profit, than from the sales of products
over the ShopNow network. 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.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and commissions and costs associated with marketing programs such as advertising
and public relations. Sales and marketing expenses for the nine-month period
ended September 30, 1999 were $33.5 million compared to $7.7 for the same period
ended September 30, 1998, an increase of $25.8 million. This increase was due
primarily to increased spending as a result of our launch and expansion of our
merchant services and of the ShopNow network, including additional personnel
24
<PAGE>
and nationwide print and radio advertisements. We expect to continue to increase
our sales and marketing expenses in 1999 and 2000 through both online and
traditional advertising 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 nine-month period ended September 30, 1999 were
$5.5 million, compared to $2.4 million for the same period ended September 30,
1998, an increase of $3.1 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 in 1999 and 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.
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 nine-month period ended September 30, 1999 were
$5.4 million, compared to $3.0 million for the same period ended September 30,
1998, an increase of $2.4 million. This increase was due primarily to the
development and enhancement of our technology platform, as well as to an
increase in technology personnel. These employees focus on developing our
technology platform as well as building the overall infrastructure that supports
our merchant services and the ShopNow network. We anticipate continued growth in
our research and development expenses during 1999 and 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 and goodwill. Amortization of intangible
assets expense for the nine-month period ended September 30, 1999 was $3.7
million, compared to $341,000 for the same period ended September 30, 1998, an
increase of $3.4 million. This increase was due primarily to the increase in
intangible assets and related amortization expenses from business acquisitions
completed during the first half of 1999, including GO Software and CardSecure.
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 nine-month period ended September 30, 1999 was $2.5 million, compared to
$37,000 for the same period ended September 30, 1998, an increase of $2.5
million. This expense is related to employee stock option grants with option
exercise prices below the estimated fair market value of our common stock as of
the date of grant. The amount of deferred compensation resulting from these
grants is generally amortized over a three-year vesting period as stock-based
compensation expense.
OTHER INCOME (EXPENSE), NET. Other income (expense) consists primarily of
interest income on cash and cash equivalents and interest expense on our
outstanding debt obligations. Other expense, net for the nine-month period ended
September 30, 1999 was $605,000, compared to other income, net of $177,000 for
the same period ended September 30, 1998, a decrease of $782,000. This decrease
was due primarily to an increase in our debt obligations during 1999, which
resulted in an increase in interest expense.
NET LOSS. Net loss for the nine-month period ended September 30, 1999 was $47.2
million, compared to a net loss of $13.1 million for the same period ended
September 30, 1998, an increase of $34.1 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 anticipate to incur additional net losses in 1999 and 2000.
25
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Revenues for the year ended December 31, 1998 were $7.2 million
compared to $604,000 for the year ended December 31, 1997, an increase of $6.6
million. The increase in revenues was due primarily to increased product sales
from the BuySoftware.com business and revenues generated by Media Assets, which
we acquired in September 1998. The BuySoftware.com portion of revenues for the
year ended December 31, 1998 was $4.5 million compared to $69,000 for the year
ended December 31, 1998, an increase of $4.4 million.
COST OF REVENUES. The cost of revenues for the year ended December 31, 1998 was
$5.8 million compared to $515,000 for the year ended December 31, 1997, an
increase of $5.3 million. The increase in our cost of revenues was due primarily
to increased product sales from the BuySoftware.com business and cost of
revenues incurred by Media Assets, which we acquired in September 1998. The
BuySoftware.com portion of cost of revenues for the year ended December 31, 1998
was $4.4 million compared to $124,000 for the year ended December 31, 1997, an
increase of $4.3 million.
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, which was acquired in
September 1998.
SALES AND MARKETING. Sales and marketing expenses for the year ended
December 31, 1998 were $12.2 million compared to $1.2 million for the year ended
December 31, 1997, an increase of $11.0 million. The increase was due primarily
to increased spending as a result of the development and expansion of the
ShopNow network. Substantially all of the selling expenses incurred in 1997 were
in support of our previous computer services business, which was 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 and an increase in our technology
personnel as well as building the overall infrastructure that supports the
ShopNow network.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense
for the year ended December 31, 1998 was $730,000 compared to $136,000 for the
year ended December 31, 1997, an increase of $594,000. The acquisition of Media
Assets and The Internet Mall resulted in $387,000 of this increase. The
remainder of this increase resulted from other purchases of intangible assets
including domain names and customer lists.
STOCK-BASED COMPENSATION. Stock-based compensation expense for the year ended
December 31, 1998 was $182,000 compared to no expense for the same period ended
December 31, 1997, an increase of $182,000. The expenses are related to employee
stock option grants with option exercise prices below the estimated fair market
value of our common stock as of the date of grant. The amount of deferred
compensation resulting from these grants is generally amortized over a
three-year period as stock-based compensation expense.
UNUSUAL ITEM - IMPAIRMENT OF ACQUIRED TECHNOLOGY. In June 1998, we acquired
e-Warehouse and CyberTrust with the intent of integrating the acquired
technologies with our own e-commerce product offerings. The amount we paid for
these acquisitions was $5.4 million. We are presently not utilizing the acquired
technologies and have determined that they have no alternative future use or
value to us, as our technology platform provides superior functionality. As a
result, we wrote off $5.2 million of the purchase price during the fourth
quarter of 1998.
OTHER INCOME (EXPENSE), NET. Other income, net for the year ended December 31,
1998, was $171,000, compared to $164,000 of other expense, net for the year
ended December 31, 1997, an increase of $335,000. The increase was
26
<PAGE>
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 of our computer services
business beginning in late 1997.
COST OF REVENUES. The cost of revenues for the year ended December 31, 1997 was
$515,000 compared to $430,000 for the year ended December 31, 1996, an increase
of $85,000. The overall increase in cost of revenues was due to the cost of
developing the BuySoftware.com business, partially offset by the phase out of
our computer services business.
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 of the BuySoftware.com business, which has 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 e-commerce
business. 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 e-commerce
business.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year ended
December 31, 1997 were $2.4 million compared to $25,000 for the year ended
December 31, 1996, an increase of $2.4 million. The increase was due entirely to
the development of our technology platform, which began in 1997 to support our
growth and transition to an e-commerce business.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense
for the year ended December 31, 1997 was $136,000 compared to $32,000 for the
year ended December 31, 1996, an increase of $104,000. The increase was due
primarily to various acquisitions of web domain names during 1997, resulting in
an increase in amortization of intangible assets expense recorded from these
transactions.
OTHER INCOME (EXPENSE), NET. Other expense, net for the year ended December 31,
1997, was $164,000 compared to $50,000 for the year ended December 31, 1996, an
increase of $114,000. The increase was due primarily to 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, 1997, 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.
27
<PAGE>
Net Operating Loss Carryforwards
As of September 30, 1999, we had net operating loss carryforwards of
approximately $65.0 million. If not used, the net operating loss carryforwards
will expire at various dates beginning in 2012. The Tax Reform Act of 1986
imposes restrictions on the use of net operating losses and tax credits in the
event that there has been an "ownership change" of a corporation since the
periods in which the net operating losses were incurred. Our ability to use net
operating losses incurred prior to April 1998 is limited to approximately $3.0
million per year due to sales of Series D and Series E convertible preferred
stock to third parties in 1998 that resulted in an "ownership change." 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, and as of September 30, 1999, had an accumulated deficit of $76.6
million. We have financed our activities largely through issuances of common
stock and preferred stock, from the issuance of short-term and long-term
obligations and from capital leasing transactions for certain of our fixed asset
purchases. Through September 30, 1999, our aggregate net proceeds have been
$69.7 million from issuing equity securities and $20.1 million from issuing debt
securities. As of September 30, 1999, we had $9.0 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 $91.6 million,
inclusive of the over-allotment option and net of underwriting discounts,
commissions and offering costs. As of December 31, 1999, we had total cash and
cash equivalents of $5.0 million, short-term investments of $57.8 million, and
marketable equity securities with a fair market value of $30.9 million.
Net cash used in operating activities was $28.6 million for the nine-month
period ended September 30, 1999, compared to net cash used in operating
activities of $10.9 million for the same period in 1998. The increase was due
primarily to the increase in our net loss for the nine-month period ended
September 30, 1999, to $47.2 million compared to $13.1 million for the same
period ended 1998.
Net cash used in investing activities was $22.6 million for the nine-month
period ended September 30, 1999, compared to net cash used in investing
activities of $7.3 million for the same period in 1998. The increase was due
primarily to the net increase in purchases of short-term investments of $8.5
million for the nine-month period ended September 30, 1999, compared to $2.4
million for the same period in 1998, and due to the increase in purchases of
property and equipment of $9.5 million for the nine-month period ended
September 30, 1999, compared to $2.0 million for the same period in 1998.
Net cash provided by financing activities was $44.3 million for the nine-month
period ended September 30, 1999, compared to net cash provided by financing
activities of $20.7 million for the nine-month period ended September 30, 1998.
The increase was due primarily to proceeds from the issuance of debt of $11.7
million during the nine-month period ended September 30, 1999, compared to
proceeds from the issuance of debt of $38,000 during the nine-month period ended
September 30, 1998, and to the increase in the amount of net proceeds from
issuances of preferred stock and warrants of $33.4 million during the nine-month
period ended September 30, 1999, compared to net proceeds from issuances of
preferred stock and warrants of $23.0 million during the nine-month period ended
September 30, 1998.
In March 1999 we entered into a loan and security agreement with Transamerica
Business Credit Corporation for a term loan and line of credit. In June 1999,
the agreement was amended and restated allowing us to borrow up to $8.5 million
at any one time, consisting of a $3.5 million term loan, 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 is repaid. At September 30, 1999, the principal
amount of outstanding borrowings with Transamerica consisted of a $3.5 million
term loan, a $4.0 million bridge loan and a $1.0 million line of credit. The
line of credit bears interest at the Transamerica Business Credit
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Corporation's base rate plus 2%, is secured by substantially all of our assets
and expires on March 31, 2000. The interest rate for September 1999 was an
annual rate of 10.25%. The term loan bears interest at 12%, is secured by
substantially all of our assets and matures in March 2002. The bridge loan,
which bore interest at 12%, was repaid in October 1999 after the closing of our
initial public offering. At September 30, 1999, we also had a total of $1.4
million outstanding on two promissory notes issued in business acquisitions. One
of the notes in the amount of $1.0 million was repaid in October 1999 after the
closing of our initial public offering. The other note is to be paid off in
quarterly installments of $112,500 through October 1, 2000.
Our capital requirements depend on numerous factors, including the rate of
expansion of the ShopNow network, the investments we make in our technology
platform, the number of acquisitions, if any, that are completed and the
composition of the consideration between cash and stock for those acquisitions
and the resources we devote to expansion of our sales, marketing and branding
programs. We have also entered into agreements with Chase Manhattan Bank,
About.com and 24/7 Media that require us to make aggregate advertising and
marketing expenditures of $6.0 million annually through 2001. We believe that
existing cash balances and cash generated from operations, together with the net
proceeds from our initial public offering and the net proceeds from this
offering, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures in the short-term (for the next 12 months), and
at least through the next 18 months. After that time, we may be required to
raise additional financing. There can be no assurance that the assumed levels of
revenues and expenses underlying our anticipated cash needs will prove to be
accurate. The sale of additional equity or convertible debt securities could
result in additional dilution to our shareholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, or
even available at all.
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.
Seasonality
We believe that our advertising and merchandising revenues on the ShopNow
network 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.
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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.
Recent Developments
Our revenues and gross profit for the fourth quarter of 1999 were $13.4 million
and $5.6 million, an increase over the previous quarter of 77.6% and 103.5%,
respectively. The following table represents, on a pro forma basis, our fourth
quarter and fiscal 1999 revenues, gross profit, net loss and net loss per share,
as compared to the previous quarter and the previous year, respectively. The
data for the year ended 1998 was derived from our audited financial statements
(amounts are in thousands, except per share data).
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Three Months Ended
------------------------------- Year Ended December 31,
September 30, December 31, -------------------------------
1999 1999 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 7,555 $ 13,418 $ 2,696 $ 27,032
============== ============== ============== ==============
Gross profit.............................. $ 2,744 $ 5,583 $ 1,299 $ 10,893
============== ============== ============== ==============
Net loss.................................. $ (16,826) $ (18,958) $ (13,532) $ (53,825)
============== ============== ============== ==============
Basic and diluted pro forma net loss per
share................................... $ (0.65) $ (0.51) $ (1.05) $ (2.09)
============== ============== ============== ==============
</TABLE>
The pro forma data listed above excludes amortization of intangible assets,
stock-based compensation and the historical results of operations of our
BuySoftware.com web site, which we ceased operating in June 1999. Also, basic
and diluted pro forma net loss per share includes all of our issued and
outstanding preferred stock that converted to common stock upon completion of
our initial public offering early in the fourth quarter of 1999, using the "if
converted" method.
As of December 31, 1999, we had total cash and cash equivalents of $5.0 million,
short-term investments of $57.8 million, marketable equity securities with a
fair market value of $30.9 million and shareholders' equity of $229.2 million.
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Business
Overview
ShopNow offers businesses a tailored end-to-end solution that addresses the
challenges associated with implementing a successful e-commerce strategy. We
offer a comprehensive suite of products and services ranging from the
development, hosting and maintenance of online stores, to online and traditional
sales and marketing services and transaction processing. We also offer access to
growing online marketplaces. The ShopNow network, our first online 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 exchange
goods and services with each other. This combination of products, services and
marketplace access enables businesses to create online stores, access customers
and transact business efficiently.
Industry Background
RAPID GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has grown in less than a decade from a limited research tool into a
global network consisting of millions of computers and users. The Internet is an
increasingly significant medium for communication, information and commerce.
International Data Corporation, or IDC, estimates that at the end of 1998 there
were over 51 million web users in the United States and over 97 million web
users worldwide and that by the end of 2003 the number of web users will
increase to over 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
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 storefronts 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
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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 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 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 network, a distributed online marketplace
comprised of the ShopNow.com portal and more than 3,000 affiliate and 50
syndication shopping sites, which together provide access to more than 45,000
merchants and more than five million products. We also 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 an established
online marketplace. Our marketing services include advertising,
merchandising and e-mail services on the ShopNow network and on our
business-to-business portal, b2bNow.com. 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 brings about a greater requirement for 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
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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 AT LOWER COSTS. The ShopNow network allows
merchants to market their products in an established online marketplace
where shoppers congregate for the specific purpose of making purchases. We
enable shoppers to search for products 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 network, 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 merchants and
businesses. 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 and by
encouraging merchants on the ShopNow network to participate in the
b2bNow.com marketplace. Upon completion of the acquisition of Ubarter.com,
we plan to integrate Ubarter's online barter marketplace into b2bNow.com.
We plan to offer our suite of merchant services on b2bNow.com.
- EXPAND THE SHOPNOW NETWORK. We intend to aggressively expand the ShopNow
network primarily by using the technology and services acquired through
our recent acquisitions to broaden the range of features available for
merchants listed on the ShopNow network. 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 network 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 network 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,
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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 our network. 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 KEY 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 key 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 key 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 and on b2bNow.com.
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 services, including credit card authorization, address
verification, 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
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merchants with detailed electronic and hard copy reports summarizing
visits to and transactions made on their online stores.
- CUSTOM ONLINE STORE DEVELOPMENT. We provide businesses and merchants with
design and technical development services for their 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
network, 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 ShopNow 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 companies 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, allowing merchants to tailor their service package to their
particular needs. Fee arrangements are based on the specific service purchased
and may be computed on a project basis, a monthly fee basis, a per transaction
basis or a combination thereof.
THE SHOPNOW NETWORK
The ShopNow network is an online marketplace that aggregates merchants and
shoppers over a distributed network of web sites. The ShopNow network consists
of ShopNow.com, our shopping portal, and 3,000 affiliate sites and 50
syndication sites. Our network aggregates more than one million products and
services from more than 45,000 merchants, including retailers, catalog
companies, manufacturers and individuals. The ShopNow network directory lists
merchants under 28 different product categories. Our website 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
network. These products usually are shipped directly from the manufacturer or
distributor. We principally offer these products to drive traffic to the ShopNow
network.
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During the last quarter of 1999, we completed three strategic acquisitions to
enhance the ShopNow network. 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 network,
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 ad from within any website and purchase
the product or service in the banner ad without leaving the site where the
shopper originally saw the banner advertisement. The eBuy technology has been
licensed to 24/7 Media, GiftSpot.com, AthleteNow.com, ChickClick.com and Art
GalleryLive.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.
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 network for the year ended December 31, 1999:
<TABLE>
<CAPTION>
Merchant Services ShopNow Network
- ----------------- ---------------
<S> <C>
Artgallerylive.com AuctioNet.com
AthleteNow.com Damark
Birkenstock eBay
Hallmark Cards ephones.com
The Nature Company FashionMall.com
Palm Computing Accounting.net
SelfCare iWin.com
Service Merchandise MVP.com
Snowball.com Perfumania.com
Sony Social Net
</TABLE>
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 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.
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<PAGE>
Since January 1999, we have acquired seven companies that possess attributes
complementary to our products and services for 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 U.S., the U.K., France and Canada. The
bottomdollar.com shopping engine also provides comparison services on affiliate
web sites.
UBARTER. On December 20, 1999, we announced the execution of a letter of intent
to acquire Ubarter.com Inc., a business-to-business barter marketplace. We
believe that 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. 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 will jointly launch Persona, PrivaSeek's suite of identity and
permission management tools. Persona will allow shoppers and merchants to
conveniently exchange and effectively manage shopper information, permissioning
and usage online across the ShopNow network. 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 network will experience personalized
advertisements or special offers relevant to their interests or personal life
events.
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, which was launched
in October 1999, 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 more than
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
37
<PAGE>
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 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 key 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 up selling 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 direct
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
38
<PAGE>
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.
Our software runs on system hardware that is hosted in leased and third-party
data centers located in Seattle, Washington and Weehawken, New Jersey. These
data centers are connected to our headquarters in Seattle, Washington through
high speed networks. These data centers, as well as the system hardware located
at our headquarters, are connected to back-up generators to maintain
uninterrupted electrical service and to the Internet through multiple Internet
service providers to avoid connectivity problems. Our systems are redundant, and
we maintain multiple clustered high speed routers, multiple clustered load
balancing hardware, multiple web servers and multiple application and database
servers. Data for our networks is stored on dedicated, high speed and redundant
disk appliances that provide continuous access to the data even if individual
disk drives, computers and power supplies fail. Data is backed up regularly and
is stored off site at the third-party data centers to provide for data recovery
in the event of a disaster. We employ extensive automated and manual monitoring
to maintain a high level of network uptime.
We employ several relational databases for product Stock Keeping Units, or SKUs,
transaction data and tracking multiple resellers or affiliates. Our databases
have been designed for high levels of performance and scalability. Shopper data
is maintained in a profile database that is used for targeted shopper
relationship management. The software architecture has been designed to
accommodate our expected growth over the next 24 months.
We believe that our future success will depend in part on our ability to
license, develop and maintain advanced e-commerce technologies. Consequently, we
expect to invest heavily in developing new technologies and to continue to make
strategic acquisitions to increase our direct control and ownership of
proprietary technology.
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.
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<PAGE>
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 $25,000 in 1996, $2.4 million
in 1997, $4.4 million in 1998 and $5.4 million in the first nine months of 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 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 network, and 39 in general and administrative
functions. We are not subject to any collective bargaining agreements and
believe that our employee relations are good.
Facilities
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.
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.
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<PAGE>
Management
Executive Officers and Directors
The following table sets forth certain information with respect to the executive
officers and directors of ShopNow as of January 20, 2000.
<TABLE>
- --------------------------------------------------------------------------------------------------
Name Age Position
- --------------------------------------- -- ----------------------------------------------
<S> <C> <C>
Dwayne M. Walker 38 Chairman, Chief Executive Officer and Director
Joe E. Arciniega, Jr. 41 President, ShopNow.com USA and Chief Operating
Officer
Alan D. Koslow 42 Executive Vice President, Chief Financial
Officer,
General Counsel and Secretary
Ganapathy Krishnan, Ph.D. 39 Executive Vice President and Chief Technology
Officer
Othniel D. Palomino 36 Executive Vice President
William D. Pittman 38 Executive Vice President and Chief Technical
Architect
Anne-Marie K. Savage 35 Executive Vice President
Jacob I. Friesel 50 Director
Eytan J. Lombroso 48 Director
David M. Lonsdale 46 Director
Bret R. Maxwell 40 Director
Mark C. McClure 49 Director
John R. Snedegar 50 Director
Mark H. Terbeek 29 Director
</TABLE>
Dwayne M. Walker has been our Chairman since March 1996, our Chief Executive
Officer since August 1996 and a director since August 1995. Mr. Walker was our
President from March 1996 to January 2000. From April 1995 to April 1996, he was
President and Chief Executive Officer of Integra Technologies, a wireless
communications company. From September 1989 to March 1995, he was a Director for
Microsoft Windows NT and Networking Products and a General Manager of Microsoft
Corporation, a software company.
Joe E. Arciniega, Jr. has been the President of ShopNow.com USA since January
2000 and our Chief Operating Officer since November 1998. From May 1996 to
November 1998, he was Vice President of Operations for GT Interactive Software,
an entertainment software company. From November 1994 to May 1996, he was Vice
President of Operations of Humongous Entertainment, a children's software
company. From September 1994 to October 1994, he was the Operations Consultant
for Humongous Entertainment. From October 1991 to July 1994, he served as
Director at the Pritikin Longevity Center, a cardio-health facility.
Alan D. Koslow has been our Executive Vice President, Chief Financial Officer,
General Counsel and Secretary since June 1998. From May 1997 to June 1998, he
was of counsel to Graham & James LLP/Riddell Williams P.S., a law firm. From
February 1990 to April 1997, he was an attorney at Foster Pepper & Shefelman
PLLC, a law firm. Mr. Koslow received a B.A. in Economics and Accounting from
Rutgers University and a J.D. from Rutgers Law School. Mr. Koslow is a certified
public accountant.
Ganapathy Krishnan, Ph.D. has been our Executive Vice President and Chief
Technology Officer since January 1997. From March 1996 to December 1996, he was
Chief Executive Officer of Web Solutions, an e-commerce software company. From
September 1991 to December 1996, he was Chief Executive Officer of Intelligent
Software Solutions, an e-commerce software company. Dr. Krishnan received a B.S.
in Technology, Chemical Engineering from IIT Madras in India, an M.S. in
Chemical Engineering from the University of Louisville and an M.S. and Ph.D. in
Computer Science from the State University of New York/Buffalo.
Othniel D. Palomino has been an Executive Vice President since April 1997.
Mr. Palomino manages e-commerce services and the b2bNow.com portal. From
September 1991 to March 1997, he was a Group Manager for Microsoft. He received
a B.S. in Engineering from Princeton University and an M.B.A. from Stanford
University.
41
<PAGE>
William D. Pittman has been our Executive Vice President and Chief Technical
Architect since June 1999. From 1993 to June 1999, he was founder and Chief
Technical Officer of GO Software, a developer of e-commerce payment processing
technologies. Mr. Pittman received a B.S. in Chemical Engineering from the
University of Southern Florida and an M.B.A. from Georgia Southern University.
Anne-Marie K. Savage has been an Executive Vice President since June 1999.
Ms. Savage has primary responsibility for ShopNow.com. From February 1998 to
June 1999, she was our Senior Vice President, Marketing and Business
Development. From March 1997 to February 1998, she was our Vice President of
Online Stores, and from July 1996 to March 1997, she was our Director of
Marketing. From April 1995 to April 1996, she was the Director of Marketing with
Integra Technologies. From April 1994 to April 1995, she was an independent
marketing consultant. Ms. Savage received a B.A. in Hotel and Restaurant
Administration from Washington State University.
Jacob I. Friesel has served as a director since November 1999. Since
February 1998, he has been the Executive Vice President-Sales and Marketing and
a Director of 24/7 Media, an Internet advertising and direct marketing firm.
From 1997 to 1998, he was President of Katz Millennium Marketing, the Internet
media sales division of Katz Media Group, Inc. From 1994 to 1997, he was Vice
President, Strategic Planning for the Katz Television Group. From 1993 to 1994,
he was a Vice President and General Sales Manager of Katz American Television,
an advertising representative of major market television stations. Mr. Friesel
was elected as one of our directors pursuant to a provision of our cross
promotion agreement with 24/7 Media. Mr. Friesel received a B.A. from the City
University of New York.
Eytan J. Lombroso has served as a director since October 1999. Since May 1998,
he has been Senior Vice President-Card Member Services at Chase Manhattan Bank.
From September 1996 to May 1998, he was Senior Vice President-International
Consumer at Chase. From August 1995 to September 1996, he was Senior Vice
President-Merger Integration at Chase. From January 1993 to August 1995, he was
Senior Vice President-Retail Bank Transformation at Chase. Mr. Lombroso was
elected as one of our directors pursuant to our agreement with Chase Manhattan
Bank. Mr. Lombroso received a B.S. from Technion-Israel Institute of Technology
and an M.B.A. from Pepperdine University.
David M. Lonsdale has served as a director since October 1998. Since
December 1998, he has been President and Chief Executive Officer of Uppercase, a
Xerox subsidiary and software development company. From November 1996 to
November 1998, he was the Chief Executive Officer and President of Major
Connections, a software distribution company. From April 1995 to November 1996,
he was Vice President of Worldwide Sales at Integrated Micro Products, a
computer manufacturer. From May 1990 to April 1995, he was President and Chief
Executive Officer of A.C. Nielsen Software and Systems, a direct marketing
software company delivering software and solutions for direct marketing. He also
serves on the board of directors of Vizicom. Mr. Lonsdale received a B.S. in
Physics and a B.S. in Mathematics from the University of Leeds in England and an
M.B.A. from Cornell University.
Bret R. Maxwell has served as a director since February 1997. Since June 1982,
he has been co-Chief Executive Officer of First Analysis, a venture capital
firm. Mr. Maxwell received a B.S. in Engineering and an M.B.A. from Northwestern
University. He serves on the board of directors and is a member of the
compensation committee of Dynamic Healthcare Technologies.
Mark C. McClure has served as a director since August 1998. From January 1979 to
November 1997, he was President and Chief Executive Officer of Cobra Golf, a
golf club manufacturer.
John R. Snedegar has served as a director since September 1998. Since
April 1999, he has been President and Chief Executive Officer of Micro General,
a telecommunications and commerce service provider. From September 1991 to
March 1999, he was the President of United Digital network, a long distance
telephone company. He serves on the boards of directors of StarBase Corporation,
Star Telecommunications and Micro General.
Mark H. Terbeek has served as a director since February 1997. Since July 1999 he
has been Vice President, Corporate Development at Vitaltone, Inc. From August
1997 to July 1999, he was an independent management consultant. From May 1995 to
August 1997, he was an Associate for First Analysis Corporation, a venture
capital
42
<PAGE>
firm. From August 1993 to May 1995, he was a business analyst at McKinsey & Co.,
a management consulting company. He received a B.A. from DePauw University and
an M.B.A. from Stanford University.
Board of Directors
Our articles of incorporation provides for nine directors. Our board currently
consists of eight directors with one vacancy. Our board of directors is divided
into three classes. Class I consists of Messrs. Friesel, McClure and Terbeek,
whose terms will expire at the annual meeting of shareholders to be held in
2000; Class II consists of Messrs. Maxwell, Lombroso and Snedegar, whose terms
will expire at the annual meeting of shareholders to be held in 2001; and
Class III consists of Messrs. Lonsdale and Walker, whose terms will expire at
the annual meeting of shareholders to be held in 2002. At each annual meeting of
shareholders, successor directors are elected to replace those whose terms have
expired. Directors serve from the time of election and qualification until the
third annual meeting following election and until their successors have been
duly elected and qualified. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of an equal number of
directors. This classification of the board of directors may have the effect of
delaying or preventing a change of control or management. See "Risk Factors -
Provisions of our charter documents and Washington law could discourage our
acquisition by a third party." Pursuant to our agreements with 24/7 Media and
Chase Manhattan Bank, each company has the right to designate one director. Each
officer serves at the discretion of the board of directors. There are no family
relationships among any of our directors or executive officers.
Board Committees
The board has an audit committee and a compensation committee.
The audit committee reviews our financial controls and our accounting, audit and
reporting activities. The audit committee also makes recommendations to our
board of directors regarding the selection of independent auditors, reviews the
results and scope of audit and other services provided by our independent
auditors and reviews the accounting principles and auditing practices and
procedures to be used for our financial statements. Messrs. Lonsdale, Maxwell
and McClure constitute the audit committee.
The compensation committee reviews and recommends to the board of directors the
compensation and benefits for our officers, directors and employees. The
compensation committee also administers our stock option plans and our employee
stock purchase plan. Messrs. Lonsdale, McClure and Snedegar constitute the
compensation committee.
Compensation Committee Interlocks and Insider Participation
During fiscal 1999, Mr. Walker served both as our President and Chief Executive
Officer and as a member of the compensation committee. Currently, no member of
the compensation committee is an officer or employee of ShopNow. No member of
the compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Director Compensation
Directors currently do not receive any cash compensation from us for serving as
directors or on board committees, but are reimbursed for their reasonable
expenses incurred in attending board meetings. We are, however, authorized to
pay members for attendance at meetings or a salary in addition to reimbursement
for expenses in connection with attendance at meetings. In the past, we have
granted options to purchase common stock to non-employee members of the board of
directors. See "Related Transactions with Executive Officers, Directors and 5%
Shareholders."
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<PAGE>
Executive Compensation
The following table sets forth the compensation paid by us to our Chief
Executive Officer, other executive officers whose salary and bonus for fiscal
1999 exceeded $100,000 and certain other highly compensated employees:
Summary Compensation Table
<TABLE>
---------------------------------------------
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
------------------- Underlying
Name and Principal Position Year Salary Bonus Options
- ------------------------------------------------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Dwayne M. Walker...................................... 1999 $321,923 $101,566 950,175
Chairman and 1998 187,092 50,000 335,475
Chief Executive Officer 1997 97,778 0 461,458
Joe E. Arciniega, Jr.................................. 1999 173,672 1,566 50,175
President, ShopNow.com USA and 1998 21,875 0 250,100
Chief Operating Officer
Alan D. Koslow........................................ 1999 173,654 26,566 160,175
Executive Vice President, 1998 95,996 0 190,475
Chief Financial Officer,
General Counsel and
Secretary
Othniel Palomino...................................... 1999 134,263 26,566 50,175
Executive Vice President 1998 80,000 12,000 40,475
Corporate Development 1997 23,282 0 368,000
Anne-Marie K. Savage.................................. 1999 134,263 26,566 43,475
Executive Vice President 1998 84,167 14,000 48,750
1997 68,750 0 0
Jeffrey B. Haggin..................................... 1999 173,654 1,566 300,175
Former Executive Vice President 1998 29,167 0 220,100
Timothy E. Jones...................................... 1999 76,069 158,712(1) 17,875
General Manager, Sales 1998 71,000 61,561(2) 13,475
1997 24,194 0 10,000
Marguerite Athoe...................................... 1999 77,600 130,661(3) 6,175
Vice President Business Development 1998 0 0 8,864
</TABLE>
- ------------------------
(1) Includes commission of $151,546 and bonus of $7,166.
(2) Includes commission only.
(3) Includes commission of $126,958 and bonus of $3,703.
OPTION GRANTS. During fiscal 1999, we granted options to purchase a total of
6,966,759 shares of common stock both outside of and under our stock option
plans to our employees, directors and consultants, including the individuals
listed in the Summary Compensation Table. No stock appreciation rights were
granted during fiscal 1999.
44
<PAGE>
The following table sets forth certain information with respect to stock options
granted to each of the individuals listed in the Summary Compensation Table in
fiscal 1999. In accordance with Securities and Exchange Commission rules,
potential realizable values for the following table are:
- net of exercise price before taxes;
- based on the assumption that our common stock appreciates at the annual
rate shown, compounded annually, from the date of grant until the
expiration of the term; and
- based on the assumption that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price.
These numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future stock price
growth. Actual gains, if any, on stock option exercises will be dependent on the
future performance of our common stock.
Option Grants in Fiscal 1999
<TABLE>
---------------------------------------------------------------------------------------------------
Individual Grants
----------------------------------- Potential Realizable
% of Total Fair Value at Assumed
Number of Options Market Annual Rates of
Securities Granted to Value on Stock Appreciation
Underlying Employees Exercise the Date for Option Term
Options In Last Price of Grant* Expiration -----------------------------------
Name Granted Fiscal Year ($/share) ($/share) Date 0% 5% 10%
- --------------------- ----------- ----------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dwayne M. Walker..... 450,000 6.46% $ 10.00 $ 8.54 6/18/09 0 $1,759,842 $5,467,752
175 ** 9.00 9.50 8/11/09 88 1,133 2,737
500,000 7.18 12.00 9.50 9/27/09 0 1,737,249 6,320,277
Joe E. Arciniega,
Jr................. 50,000 ** 10.00 8.54 6/18/09 0 195,538 607,528
175 ** 9.00 9.50 8/11/09 88 1,133 2,737
Alan D. Koslow....... 110,000 1.58 10.00 8.54 6/18/09 0 430,184 1,336,562
175 ** 9.00 9.50 8/11/09 88 1,133 2,737
50,000 ** 2.00 11.63 10/1/09 481,250 846,795 1,407,613
Othniel Palomino..... 50,000 ** 10.00 8.54 6/18/09 0 195,538 607,528
175 ** 9.00 9.50 8/11/09 88 1,133 2,737
Jeffrey B. Haggin.... 300,000 2.00 9/15/08
175 ** 9.00 9.50 8/11/09 88 1,133 2,737
Anne-Marie K.
Savage............. 122,675 1.78 10.00 8.54 6/18/09 0 479,752 1,490,570
175 ** 9.00 9.50 8/11/09 88 1,133 2,737
</TABLE>
- ------------------------
* Prior to the Company's initial public offering, fair market value was
established in good faith by the Company's Board of Directors based on
several factors; subsequent to the Company's initial public offering, fair
market value is based on the closing price for the Common Stock as reported
by the Nasdaq National Market on the date of grant.
** Less than 1.0% of total options granted to employees in last fiscal year.
FISCAL YEAR-END OPTION VALUES. The following table presents information about
options held by the executive officers named in the Summary Compensation Table
and the value of those options as of December 31, 1999. The value of
in-the-money options is based on the closing price on December 31, 1999, net of
the option exercise price.
45
<PAGE>
Fiscal Year-End Option Values
<TABLE>
--------------------------------------------------------------------------------------------------
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Shares December 31, 1999 at December 31, 1999
Acquired on Value --------------------------- ------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ------------ -------------- ------------ ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Dwayne M. Walker....... 25,650 203,588 704,792 1,016,666 $ 11,976,342 $ 8,736,446
Joe E. Arciniega,
Jr................... 0 0 83,575 216,700 1,247,527 2,936,956
Alan D. Koslow......... 127,200 1,003,700 93,450 130,000 1,589,397 1,321,875
Othniel Palomino....... 52,510 463,845 341,140 65,000 6,246,321 700,938
Anne-Marie K. Savage... 10,000 97,500 95,736 144,339 1,718,183 1,473,338
Jeffrey B. Haggin...... 0 0 262,775 257,500 4,586,827 4,443,906
</TABLE>
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
ShopNow has entered into a written employment agreement with Mr. Walker
effective as of July 1, 1999. This agreement may be terminated by either
Mr. Walker or ShopNow at any time, upon written notice to the other. The
agreement provides for an initial annual salary of $400,000 and a yearly bonus
of up to $200,000 based upon the achievement of performance criteria specified
by the compensation committee. Mr. Walker's salary is to be reviewed at the end
of each calendar year by the compensation committee and adjusted at the board's
sole discretion, provided, however, that Mr. Walker's salary may not be adjusted
downward without his consent. Pursuant to the agreement, Mr. Walker received, as
of September 27, 1999, an option to purchase 500,000 shares of common stock at
an exercise price equal to $12.00, which option will vest in four equal
semi-annual installments subject to Mr. Walker's continued employment with
ShopNow. After the first year of the agreement, ShopNow will grant Mr. Walker
during each of the next eight quarters an option to purchase up to 125,000
shares of common stock at an exercise price equal to the closing price of
ShopNow's common stock on the Nasdaq National Market on the date of grant, which
option will vest in four equal semi-annual installments subject to Mr. Walker's
continued employment with ShopNow. Mr. Walker receives a $400 monthly car
allowance and life insurance of $2,000,000. If Mr. Walker is terminated by
ShopNow at any time without cause, or if he terminates his employment for "good
reason" after we have received 30 days' notice and have failed to cure or leaves
within six months after a change of control of ShopNow, ShopNow shall pay him a
lump-sum amount equal to his annual base salary, ShopNow will pay his salary for
a period of 24 months following termination and all options granted to him under
this agreement shall vest. In addition, upon such termination Mr. Walker may
elect to borrow up to $2,000,000 to finance the exercise of those options. For
purposes of the agreement, "good reason" means and includes the occurrence
without Mr. Walker's consent of a material reduction in his title, authority,
status or responsibilities or our material breach of the agreement.
Employee Benefit Plans
401(K) PLAN. In November 1996, we established a discretionary 401(k)
tax-qualified employee savings and retirement plan covering all employees who
satisfy certain eligibility requirements relating to minimum age. Pursuant to
our 401(k) plan, eligible employees may elect to reduce their current
compensation by up to the lesser of 15% of their base compensation or the
statutorily prescribed annual limit, currently $10,000, and have the amount of
such reduction contributed to the 401(k) plan. Our 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code of 1986, so that
contributions, and income earned on the contributions, are not taxable until
withdrawn. The 401(k) plan permits us to make discretionary contributions based
on compensation. To date, we have not made any contributions to the 401(k) plan.
STOCK OPTION PLAN. In October 1996, we adopted our stock option plan. Our board
of directors amended and restated our stock option plan in June 1999 and, in
July 1999, the stock option plan was approved by our shareholders. The stock
option plan provides for the grant to employees of incentive stock options
within the meaning
46
<PAGE>
of Section 422 of the Internal Revenue Code of 1986 and for the grant to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights. Unless sooner terminated, the stock option plan will
automatically terminate in 2009. A total of 8,000,000 shares of common stock are
reserved for issuance pursuant to the stock option plan. In addition, the stock
option plan provides for automatic annual increases equal to the lesser of
750,000 shares, 3% of the outstanding shares under the plan on such date, or an
amount determined by the board of directors. As of December 31, 1999, options to
purchase 538,776 shares of common stock had been exercised and options to
purchase 7,390,900 shares of common stock were outstanding under the stock
option plan with a weighted-average exercise price of $6.24.
The stock option plan is administered by the board of directors. The board has
the power to determine the terms of the options granted, including the exercise
price, the number of shares subject to the option, and the exercisability
thereof, and the form of consideration payable upon such exercise. In addition,
the board of directors has the authority to amend, suspend or terminate the
amended stock option plan, provided that no such action may affect any share of
common stock previously issued and sold or any option previously granted under
the stock option plan without the optionholder's consent.
The exercise price of all incentive stock options granted under the stock option
plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options granted under
the stock option plan is determined by the board of directors. The term of all
options granted under the stock option plan may not exceed ten years.
Options and stock purchase rights granted under the stock option plan are not
generally transferable by the optionee, and each option and stock purchase right
is generally exercisable during the lifetime of the optionee only by such
optionee. Options granted under the stock option plan must generally be
exercised within three months following termination of an optionee's status as
an employee, director or consultant of the company or within 12 months following
termination of an optionee by death or disability, but in no event later than
the expiration of the option's ten year term. In the case of stock purchase
rights, unless the administrator determines otherwise, a restricted stock
purchase agreement shall grant us a repurchase option that lapses at a rate
determined by the administrator. The purchase price for shares repurchased
pursuant to a restricted stock purchase agreement will be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to us.
The stock option plan provides that in the event of our merger with or into
another corporation or a sale of all or substantially all of our assets, each
option and stock purchase right will be assumed or substituted for by the
successor corporation. In the event the successor corporation refuses to assume
or substitute for the option or stock purchase right, the optionee will have the
right to exercise all of the optioned stock, including shares as to which it
would not otherwise be exercisable, for a period of 15 days from the date of
notice from the administrator, after which date the option or stock purchase
right will terminate.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our employee stock purchase plan was adopted
by the board of directors in June 1999, and approved by our shareholders in
July 1999. A total of 2,000,000 shares of common stock are reserved for issuance
under the employee stock purchase plan. Additionally, the employee stock
purchase plan provides for an automatic annual increase in the number of shares
reserved for issuance beginning on the first day of our fiscal year 2002 equal
to the lesser of:
- 600,000 shares;
- 2%; or
- an amount determined by the board of directors.
The employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, will be administered by the
board of directors or by a committee appointed by the board. Our employees,
including officers and employee directors, are eligible to participate in the
employee stock purchase plan if they are employed for at least 20 hours per week
and for more than five months in any calendar year. The employee stock purchase
plan will be implemented by consecutive offering periods generally six months in
duration. However, the
47
<PAGE>
initial offering period under the employee stock purchase plan began on
September 28, 1999, the effective date of our initial public offering and will
terminate on April 30, 2000. The board of directors may change the timing or
duration of the future offering periods.
The employee stock purchase plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the lesser of the fair
market value per share of the common stock on the first day of the offering
period or on the purchase date. Participants generally may not purchase shares
if, immediately after the grant, the participant would own stock or options to
purchase shares of common stock totaling 5% or more of the total combined voting
power of all of ShopNow's capital stock, or more than $25,000 of our capital
stock in any calendar year. In addition, a participant may not purchase more
than 5,000 shares during any offering period. In the event of a sale of all or
substantially all of our assets or the merger of ShopNow with or into another
corporation, the board of directors may accelerate the exercise date of the
current purchase period to a date prior to the change of control.
1999 NONOFFICER EMPLOYEE STOCK OPTION PLAN. On December 8, 1999, our board of
directors adopted our 1999 nonofficer employee stock option plan. The purposes
of the plan are to attract and retain personnel, to provide additional incentive
to our employees and consultants and to promote the success of our business. The
plan permits the issuance of nonqualified stock options and shares of common
stock or units denominated in common stock, all of which may be subject to
restrictions determined by the plan administrator. All employees and consultants
who are not directors or Section 16 officers of ShopNow at the time of grant of
an award are eligible to participate in the plan.
Our board has reserved a total of (a) 1,000,000 shares of common stock plus
(b) an automatic increase to be added on the first day of each fiscal quarter
beginning on January 1, 2000 equal to 10,000 shares multiplied by the number of
individuals who began employment or services with us in the preceding fiscal
quarter in connection with our acquisition of another corporation or business
entity. The aggregate maximum number of shares available for issuance under the
plan cannot exceed 4,000,000 shares, and no more than 30% of the shares
authorized for issuance may be issued to officers of ShopNow.
The compensation committee of the board of directors administers the plan and
determines the individuals to whom awards are granted. In addition, our board
has authorized Mr. Walker to grant options to new and current employees, up to
an aggregate maximum of 50,000 shares of common stock per employee in any
calendar year. Unless the plan administrator permits otherwise, awards may not
be assigned or transferred by the holder other than by will or by the applicable
laws of descent and distribution, and, during the holder's lifetime, awards
generally may be exercised only by the holder. The board may suspend, amend or
terminate the plan at any time, provided that no action may affect any share of
common stock previously issued and sold or any option previously granted without
the holder's consent.
The plan administrator has the authority to specify the terms and conditions of
each option granted under the plan, including the vesting schedule, the term and
the exercise price. Options granted under the plan generally must be exercised
within three months following termination of employment or consulting services
at ShopNow or within 12 months following termination by death or disability, but
in no event later than the expiration of the option's term.
The plan administrator may also award stock awards subject to terms and
conditions determined by the plan administrator, including conditions on how the
shares subject to restrictions must be held while restricted and the
circumstances under which a holder will forfeit the shares if services with us
are terminated. Holders of restricted stock are shareholders of ShopNow and
have, subject to certain restrictions, all the rights of shareholders with
respect to their shares.
In the event of our merger with or into another corporation or a sale of all or
substantially all of our assets, each outstanding award will be assumed or
substituted for by the successor corporation. In the event the successor
corporation refuses to assume or substitute for the award, the forfeiture
restrictions applicable to stock awards will lapse and outstanding options will
become fully exercisable for a period of 15 days from the date of notice from
the plan administrator, after which date the options will terminate and no
longer be exercisable.
48
<PAGE>
Director and Officer Indemnification and Liability
Our articles of incorporation limit the liability of directors to the fullest
extent permitted by the Washington Business Corporation Act as it currently
exists or as it may be amended in the future. Consequently, subject to the
Washington Business Corporation Act, no director shall be personally liable to
us or our shareholders for monetary damages resulting from his or her conduct as
a director of ShopNow, except liability for
- acts or omissions involving intentional misconduct or knowing violations
of law,
- unlawful distributions, or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Any repeal of or modification to our articles of incorporation may not adversely
affect any right or protection of a director of ShopNow who is or was a director
at the time of such repeal or modification.
In addition, our bylaws provide that we will indemnify any individual who was,
is or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit, claim or proceeding by reason of
the fact that he or she is or was a director or officer of ShopNow. This right
to indemnification will continue as to an individual who has ceased to be a
director or officer. Our bylaws will provide that we may indemnify our other
officers and employees and other agents. We have obtained and maintain
directors' and officers' liability insurance, under which our directors and
officers may be indemnified against liability they incur for serving in their
capabilities as directors and officers.
We understand that the current position of the Securities and Exchange
Commission is that any indemnification of our directors and officers for
liabilities arising under the Securities Act of 1933 is against public policy
and is, therefore, unenforceable.
We believe that the limitation of liability provision in our articles of
incorporation, the indemnification provisions in our bylaws and our liability
insurance will facilitate our ability to continue to attract and retain
qualified individuals to serve as directors and officers.
49
<PAGE>
Related Transactions With Executive Officers, Directors
and 5% Shareholders
In connection with our acquisition of Media Assets in September 1998, Jeff
Haggin, the sole shareholder of Media Assets, joined ShopNow as an executive
officer and he received 600,000 shares of our common stock based upon an
agreed-upon value of $6.00 per share, $300,000 in cash, a convertible promissory
note in the aggregate principal amount of $1,050,000 and options to purchase an
aggregate of 1,120,000 shares of our common stock. These options included an
option to purchase 220,000 shares at an exercise price of $1.00 per share and
performance-based options to purchase 900,000 shares of common stock at an
exercise price of $2.00 per share. The total value of the package Mr. Haggin
received at the time of the acquisition equaled $4,941,500. In May 1999,
Mr. Haggin exchanged his performance-based options for options to purchase
300,000 shares of common stock at an exercise price of $2.00 per share.
In April 1999, we issued to 24/7 Media 4,300,000 shares of Series G convertible
preferred stock at $7.00 per share in exchange for $30.1 million in
consideration, consisting of cash, 466,683 shares of 24/7 Media common stock and
24/7 Media's majority interest in CardSecure. A portion of the shares of
Series G convertible preferred stock and of the warrants were placed in escrow
pending consummation of our acquisition of CardSecure, which occurred on
June 15, 1999. 24/7 Media also received warrants to purchase 860,000 shares of
common stock at $7.00 per share. As of December 31, 1999, 24/7 Media will
beneficially own 12.0% of our shares of common stock. In connection with the
acquisition of CardSecure, we acquired an additional 9,727 shares of 24/7 Media
common stock. As of December 31, 1999, we owned 476,410 shares of 24/7 Media
common stock. In connection with this purchase, we also entered into both a
cross promotion agreement and a mutual promotion agreement with 24/7 Media.
Under the cross promotion agreement, 24/7 Media promotes our e-commerce and
direct marketing services to its network of over 2,500 affiliated web sites in
exchange for our promotion of 24/7 Media's advertising, representation and
e-mail management services to merchants. This agreement entitles each party to
share in the revenues of the other party based on the amount of business
generated through this relationship. The agreement prohibits 24/7 Media from
engaging other specifically identified providers of e-commerce services as
co-marketing partners for e-commerce technologies that we offer. We also have a
right of first refusal on any partnership with 24/7 Media for e-commerce
technology or services from other third parties, assuming we provide similar
products and services. 24/7 Media is the only third party authorized to sell
advertising on our web site. Under this agreement, we are obligated to purchase
at least $1.0 million annually in shopping traffic from 24/7 Media. In
connection with 24/7 Media's investment in ShopNow, 24/7 Media has the right to
designate a director of ShopNow. 24/7 Media has designated Jacob Friesel as that
nominee.
Under the mutual promotion agreement, we jointly brand 24/7 Media's Click2Buy
transactional banner service with the ShopNow name and receive fees for
processing all Click2Buy transactions. Click2Buy is the process whereby a
shopper can click on a banner advertisement from within a specific web site and
purchase the product or service in the banner advertisement without having to
leave the web site where the shopper originally saw the banner advertisement.
In connection with our acquisition of GO Software in June 1999, William Pittman
joined ShopNow as an executive officer and he received, in exchange for his
shares of capital stock in GO Software, 814,688 shares of our common stock,
$2.0 million in cash, and options to purchase an aggregate of 100,000 shares of
our common stock at an exercise price of $7.00 per share. The total value of the
package Mr. Pittman received at the time of the acquisition equaled $8,517,504.
In June 1999, we entered into a stock purchase agreement with CB Capital
Investors pursuant to which we issued 2,100,000 shares of Series I convertible
preferred stock at $9.00 per share in exchange for $18.9 million in cash. CB
Capital Investors also received warrants to purchase 555,556 shares of common
stock. As of December 31, 1999, CB Capital Investors beneficially owned 6.2% of
our shares of common stock. In July 1999, we entered into a licensing agreement
with Chase Manhattan Capital, an affiliate of CB Capital Investors, which
agreement has been assigned to Chase Manhattan Bank. Pursuant to this agreement,
Chase will pay ShopNow a licensing fee to use the technology
50
<PAGE>
underlying the site. As part of the agreement, Chase will be a preferred
provider of financial services for ShopNow.com and the exclusive marketer of
credit cards featuring the ShopNow brand. The agreement provides that each party
will share in the revenues of the other party based on the amount of business
generated through this relationship. As part of the agreement, we will
participate equally with Chase in a cooperative marketing fund to promote the
services being offered under this agreement. Our marketing obligations to Chase
include placing an advertisement on the ShopNow.com home page, making direct
mailings regarding Chase's merchant services to merchants on the ShopNow network
and mentioning Chase's merchants in our own advertising. Our obligation to the
fund is to contribute at least $3.0 million annually. The agreement has an
initial term of 27 months, with a three year renewal period at Chase's option.
In connection with Chase's investment in ShopNow, Chase has the right to
designate one nominee to serve as a director of ShopNow.
On various occasions during fiscal 1999 and fiscal 1998, we granted the
following options to purchase shares of our common stock to the following
executive officers and directors:
- On January 1, 1998, August 1, 1998, November 30, 1998 and December 11,
1998, we granted Mr. Walker options to purchase 25,000, 310,000, 375 and
100 shares of common stock, respectively, with exercise prices of $2.00,
$4.00, $2.50 and $4.00, respectively;
- On September 15, 1998, September 30, 1998 and December 11, 1998, we
granted Mr. Haggin options to purchase 300,000, 220,000 and 100 shares of
common stock, respectively, with exercise prices of $2.00, $1.00 and
$4.00, respectively; the 300,000 options granted to Mr. Haggin on
September 15, 1998 were regranted on May 15, 1999 with the same exercise
price and vesting terms;
- On June 8, 1998, November 30, 1998, December 11, 1998 and December 31,
1998, we granted Mr. Koslow options to purchase 150,000, 375, 100 and
40,000 shares of common stock, respectively, with exercise prices of
$1.75, $2.50, $4.00 and $2.00, respectively;
- On March 18, 1998, June 1, 1998, November 30, 1998 and December 11, 1998,
we granted Dr. Krishnan options to purchase 10,000, 100,000, 375 and 100
shares of common stock, respectively, with exercise prices of $2.00,
$2.00, $2.50 and $4.00, respectively;
- On January 1, 1998, November 30, 1998, December 11, 1998 and December 31,
1998, we granted Mr. Palomino options to purchase 10,000, 375, 100 and
30,000 shares of common stock, respectively, with exercise prices of
$2.00, $2.50, $4.00 and $2.00, respectively;
- On January 1, 1998, November 30, 1998, December 11, 1998 and December 31,
1998, we granted Ms. Savage options to purchase 13,000, 375, 100 and
30,000 shares of common stock, respectively, with exercise prices of
$2.00, $2.50, $4.00 and $2.00, respectively;
- On November 16, 1998 and December 11, 1998, we granted Mr. Arciniega
options to purchase 250,000 and 100 shares of common stock, respectively,
with exercise prices of $4.00;
- On both September 30, 1998 and May 3, 1999, we granted Mr. Lonsdale
options to purchase 50,000 shares of common stock with exercise prices of
$4.00 and $7.00, respectively;
- On May 3, 1999, we granted Mr. Maxwell options to purchase 50,000 shares
of common stock with exercise prices of $7.00;
- On both September 30, 1998 and May 3, 1999, we granted Mr. McClure options
to purchase 50,000 shares of common stock with exercise prices of $4.00
and $7.00, respectively;
- On both September 30, 1998 and May 3, 1999, we granted Mr. Snedegar
options to purchase 50,000 shares of common stock with exercise prices of
$4.00 and $7.00, respectively;
- On May 3, 1999, we granted Mr. Terbeek options to purchase 50,000 shares
of common stock with exercise prices of $7.00; and
51
<PAGE>
- In June 1999, we granted Mr. Walker, Mr. Koslow, Dr. Krishnan,
Mr. Palomino, Ms. Savage and Mr. Arciniega options to purchase 450,000,
110,000, 35,525, 50,000, 122,675 and 50,000 shares of common stock,
respectively, at an exercise price equal to the low point of the filing
range as indicated in our preliminary prospectus for this offering, or
$10.00 per share. These options vest over a two-year period commencing
after the closing of this offering.
- On August 11, 1999, we granted each of Mr. Arciniega, Mr. Haggin,
Mr. Koslow, Mr. Krishnan, Mr. Palomino, Ms. Savage and Mr. Walker options
to purchase 175 shares of common stock with exercise prices of $9.00;
- On May 15, 1999, we granted Mr. Haggin options to purchase 300,000 shares
of common stock with exercise prices of $2.00;
- On October 1, 1999, we granted Mr. Koslow options to purchase 50,000
shares of common stock with exercise prices of $2.00;
- On September 27, 1999, we granted Mr. Walker options to purchase 500,000
shares of common stock withe exercise prices of $12.00;
On October 28, 1999, ShopNow entered into a Stock Purchase Agreement with
escrow.com, Inc., pursuant to which ShopNow purchased 500,000 of escrow.com's
common stock and 2,000,000 shares of its Series A Preferred Stock, representing
in the aggregate approximately 11.9% of the outstanding equity securities of
escrow.com. Dwayne Walker, Chief Executive Officer and Chairman of the Board of
ShopNow, is a director of escrow.com. John Snedegar, a member of the board of
director of ShopNow, is the Chief Executive Officer and a director of
escrow.com. Mr. Walker and Mr. Snedegar also beneficially own approximately 1.9%
and 2.8%, respectively, of the outstanding common stock of escrow.com. In
connection with the share purchase, ShopNow and escrow.com also entered into a
Services Agreement, pursuant to which ShopNow agreed to serve as the exclusive
provider of payment processing services for all escrow transactions effected by
escrow.com. In addition, under the Services Agreement, escrow.com agreed to
serve as the exclusive provider of escrow services for transactions via the
ShopNow Network. Under the agreement, ShopNow will receive 9% of escrow.com's
net revenues and will receive monthly payments in the amount of $100,000 per
month for a period of at least 12 months commencing on October 25, 1999, which
may be extended by Shopnow for an additional 6 months upon the satisfaction of
certain criteria. In addition, ShopNow received the right to acquire warrants to
purchase to an additional 500,000 shares of escrow.com's common stock by
introducing escrow.com to partnering Internet sites for affiliation.
On September 28, 1999, ShopNow entered into a Promissory Note in the principal
amount of $212,500 with Alan Koslow, Executive Vice President, Chief Financial
Officer, General Counsel and Secretary of ShopNow. The execution of the
promissory note in favor of ShopNow was made pursuant to the exercise of
Mr. Koslow's stock options. The promissory note is secured by the shares of
common stock issued pursuant to such stock option, matures on the earlier of
(i) September 28, 2001 or (ii) the sale of the shares subject to the security
interest, and bears interest at 6.25% per annum.
We believe that all of these transactions were made on terms as favorable to us
as we would have received from unaffiliated third parties. Any future
transactions between us and our officers, directors and greater than 5%
shareholders and their affiliates will be approved by a majority of the board of
directors, including a majority of our disinterested, non-employee directors.
Principal and Selling Shareholders
The following table sets forth information known to ShopNow with respect to the
beneficial ownership of our common stock as of December 31, 1999 by (i) each
shareholder known by ShopNow to own beneficially more than 5% of its common
stock, (ii) each of the individuals listed on the Summary Compensation Table,
(iii) each director of ShopNow, (iv) all directors and executive officers as a
group and (v) the selling shareholders.
The percentage ownership in the table below is based on 42,923,035 shares
outstanding as of December 31, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. Shares
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<PAGE>
of common stock subject to options currently exercisable or exercisable within
60 days of the proposed effective date of the offering are deemed outstanding
for the purpose of computing the percentage ownership of the person holding the
options but are not deemed outstanding for computing the percentage ownership of
any other person. Unless otherwise indicated below, the persons and entities
named in the table have sole voting and sole investment power with respect to
all shares beneficially owned subject to community property laws where
applicable.
The percentage of shares outstanding after the offering assumes the
underwriters' over-allotment is not exercised.
<TABLE>
------------------------------------------------------------
Beneficially Owned
Prior to Offering Shares After Offering
--------------------- Being ---------------------
Name of Beneficial Owners(1) Number Percent Offered Number Percent
- ------------------------------------------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Named Executive Officers, Directors and
5% Shareholders
24/7 Media, Inc. (2)....................... 5,168,500 11.80% 500,000 4,668,500 9.03%
Jacob I. Friesel (3)....................... 5,168,500 11.80 500,000 4,668,500 9.03
Bret R. Maxwell (4)........................ 2,937,130 6.83 250,000 2,687,130 5.24
Mark H. Terbeek (5)........................ 2,937,130 6.83 250,000 2,687,130 5.24
Eytan Lombroso (6)......................... 2,655,556 6.10 0 2,655,556 5.18
Chase Manhattan Capital, LP (7)............ 2,655,556 6.10 0 2,655,556 5.18
Dwayne M. Walker(8)........................ 2,660,465 6.08 262,000 2,398,465 4.61
Environmental Private Equity Fund II, L.P.
(9)...................................... 1,462,315 3.40 125,000 1,337,315 2.60
The Productivity Fund III, LP (10)......... 1,462,315 3.40 125,000 1,337,315 2.60
Krishnan Ganapathy, Ph.D. (11)............. 834,388 1.94 75,000 759,388 1.48
William Pittman (12)....................... 814,688 1.89 75,000 739,688 1.44
Othniel Palomino (13)...................... 756,986 1.75 75,000 681,986 1.33
Jeffrey B. Haggin (14)..................... 376,275 * 0 376,275 *
Mark C. McClure (15)....................... 161,056 * 43,000 118,056 *
Anne-Marie K. Savage (16).................. 107,868 * 0 107,868 *
Alan D. Koslow (17)........................ 213,450 * 25,000 188,450 *
Joe E. Arciniega, Jr. (18)................. 83,575 * 0 83,575 *
John R. Snedegar (19)...................... 33,345 * 0 33,345 *
David M. Lonsdale (20)..................... 33,345 * 0 33,345 *
All directors and executive officers as a
group (15 persons)....................... 16,849,127 36.52 1,125,000 15,461,627 35.10
Other Selling Shareholders
Wayne Gilpin (21).......................... 439,007 1.01 75,000 364,007 *
Qwest Communications Corporation........... 70,000 * 70,000 0 *
</TABLE>
* Less than 1% of the outstanding shares of common stock.
(1) The address of 24/7 Media, Inc. and Mr. Friesel is 1250 Broadway, 28th
Floor, New York, New York 10001. The address of Environmental Private Equity
Fund II, L.P., The Productivity Fund III, L.P. and Messrs. Maxwell and
Terbeek is c/o First Analysis Corporation, the Sears Tower, Suite 950, 233
South Wacker Drive, Chicago, Illinois 60606. The address of Chase Manhattan
Capital, L.P. and Mr. Lombroso is 2 Chase Manhattan Plaza, 16th Floor, New
York, New York 10081. The address of Messrs. Walker, Arciniega, Pittman,
Palomino, Haggin, Koslow, McClure, Lonsdale and Snedegar and Dr. Ganapathy
and Ms. Savage is c/o ShopNow.com, Inc., 411 First Avenue South, Suite 200
North, Seattle, Washington 98104. The address of Mr. Gilpin is c/o Madison
Securities, Inc., 105 West Madison Street, Chicago, Illinois 60602.
(2) Includes 860,000 shares issuable pursuant to warrants held by 24/7
Media, Inc. that are currently exercisable.
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<PAGE>
(3) Includes 4,308,500 shares held by 24/7 Media, Inc. and 860,000 shares
issuable pursuant to warrants held by 24/7 Media, Inc. that are currently
exercisable. Mr. Friesel is a director and an Executive Vice President of
24/7 Media, Inc. Mr. Friesel disclaims beneficial ownership of all shares
held by 24/7 Media, Inc.
(4) Includes 1,456,065 shares held by each of the Environmental Private Equity
Fund II, L.P. and The Productivity Fund III, L.P. Also includes 6,250 shares
issuable pursuant to warrants held by each of Environmental Private Equity
Fund II, L.P. and The Productivity Fund III, L.P. that are currently
exercisable. Also includes 12,500 shares issuable pursuant to options held
by Mr. Maxwell that are currently exercisable or are exercisable within
60 days of December 31, 1999. Mr. Maxwell is Chief Executive Officer of
First Analysis Corporation, which is the manager of the funds. Mr. Maxwell
disclaims beneficial ownership of all shares held by the Environmental
Private Equity Fund II, L.P. and the Productivity Fund III, L.P. except to
the extent of his pro rata pecuniary interest therein.
(5) Includes 1,456,065 shares held by each of the Environmental Private Equity
Fund II, L.P. and The Productivity Fund III, L.P. Also includes 6,250 shares
issuable pursuant to warrants held by each of Environmental Private Equity
Fund II, L.P. and The Productivity Fund III, L.P. that are currently
exercisable. Also includes 12,500 shares issuable pursuant to options held
by Mr. Terbeek that are currently exercisable or are exercisable within
60 days of December 31, 1999. Mr. Terbeek was formerly an associate with
First Analysis Corporation, which is the manager of the funds. Mr. Terbeek
disclaims beneficial ownership of all shares held by the Environmental
Private Equity Fund II, L.P. and the Productivity Fund III, L.P. except to
the extent of his pro rata pecuniary interest therein.
(6) Includes 2,100,000 shares held by Chase Manhattan Capital, L.P. and 555,556
shares issuable pursuant to a warrant held by Chase Manhattan Capital, L.P.
that is currently exercisable. Mr. Lombroso is an executive officer of Chase
Manhattan Bank, an affiliate of Chase Manhattan Capital, L.P.
(7) Includes 2,100,000 shares held by Chase Manhattan Capital, L.P. and 555,556
shares issuable pursuant to a warrant held by Chase Manhattan Capital, L.P.
that is currently exercisable.
(8) Includes 6,400 shares owned by family members of Mr. Walker over which
Mr. Walker holds voting power and 75,000 shares over which Mr. Walker has
voting power which are held by various trusts. Also includes 771,458 shares
issuable pursuant to options held by Mr. Walker that are currently
exercisable or exercisable within 60 days of December 31, 1999.
(9) Includes 6,250 shares issuable pursuant to a warrant held by the
Environmental Private Equity Fund II, L.P. that is currently exercisable.
(10) Includes 6,250 shares issuable pursuant to a warrant held by The
Productivity Fund III, L.P. that is currently exercisable.
(11) Includes 815,173 shares held jointly with Dr. Krishnan's wife, Kalyani.
Also includes 9,215 shares issuable pursuant to options held by
Dr. Krishnan that are currently exercisable or exercisable within 60 days of
December 31, 1999.
(12) Includes 75,000 shares owned jointly with Mr. Pittman's wife, Joan, and
4,000 shares held by the Pittman Irrevocable Trust.
(13) Includes 341,140 shares issuable pursuant to options held by Mr. Palomino
that are currently exercisable or exercisable within 60 days of
December 31, 1999.
(14) Includes 113,500 shares held by Mr. Haggin as trustee of various trusts.
Also includes 262,775 shares issuable pursuant to options held by
Mr. Haggin that are currently exercisable or exercisable within 60 days of
December 31, 1999.
(15) Includes 127,711 shares held jointly with Mr. McClure's wife, Doren, and
33,345 shares issuable pursuant to options held by Mr. McClure that are
currently exercisable or exercisable within 60 days of December 31, 1999.
(16) Includes 97,868 shares issuable pursuant to options held by Ms. Savage that
are currently exercisable or exercisable within 60 days of December 31,
1999.
(17) Includes 93,450 shares issuable pursuant to options held by Mr. Koslow that
are currently exercisable or exercisable within 60 days of December 31,
1999.
(18) Includes 83,575 shares issuable pursuant to options held by Mr. Arciniega
that are currently exercisable or exercisable within 60 days of
December 31, 1999.
(19) Includes 33,345 shares issuable pursuant to options held by Mr. Snedegar
that are currently exercisable or exercisable within 60 days of
December 31, 1999.
(20) Includes 33,345 shares issuable pursuant to options held by Mr. Lonsdale
that are currently exercisable or exercisable within 60 days of
December 31, 1999.
(21) Includes 385,506 shares issuable pursuant to options held by Mr. Gilpin
that are currently exercisable or exercisable within 60 days of
December 31, 1999.
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Description of Capital Stock
ShopNow's authorized capital stock consists of 200,000,000 shares of common
stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par
value. The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our articles of
incorporation and bylaws, which are included as exhibits to the registration
Statement of which this prospectus forms a part, and by the provisions of
applicable Washington law.
Common Stock
As of December 31, 1999, there were outstanding 42,923,035 shares of common
stock held of record by approximately shareholders and options to purchase
10,312,983 shares of common stock.
The holders of common stock are entitled to one vote on each matter submitted to
a vote of the shareholders. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock shall be entitled to receive ratably dividends at such times and in
such amounts as may be determined by the board of directors. In the event of any
dissolution, liquidation or winding up, the holders of common stock are entitled
to share ratably in all of the assets remaining after payment or provision for
payment of the debts and other liabilities and the liquidation preference of any
outstanding shares of preferred stock. The holders of common stock have no
preemptive or subscription rights. There are no conversion rights, redemption
rights, sinking fund provisions or fixed dividend rights with respect to the
common stock. The holders of common stock are not entitled to cumulative voting
at any election of directors. All outstanding shares of common stock are fully
paid and non-assessable, and the shares of common stock to be issued in the
offering will be fully paid and non-assessable.
Preferred Stock
The board of directors has authority, pursuant to our articles of incorporation
and without further action by the shareholders, to issue up to 5,000,000 shares
of preferred stock in one or more series. The board of directors may also
determine or alter for each series such voting powers, designations,
preferences, and special rights, qualifications, limitations or restrictions as
permitted by law. The board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely affect the voting
power or other rights of the holders of the common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, have the
effect of delaying, deferring or preventing a change in control of ShopNow and
may adversely affect the market price of the common stock and the voting and
other rights of the holders of common stock. There presently are no shares of
preferred stock outstanding, and we have no current plans to issue any shares of
preferred stock.
Common Stock Warrants
As of December 31, 1999, we had warrants outstanding to purchase an aggregate of
3,811,171 shares of common stock at exercise prices ranging from $1.25 to $18.93
per share. These warrants contain anti-dilution provisions providing for
adjustments to the exercise price and the number of shares of common stock
underlying these warrants upon the occurrence of specified events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction.
Other Equity-Based Agreements
From time to time in connection with the negotiation of material agreements, we
may use equity-based arrangements, including warrants to purchase shares of
common stock, as an incentive for a party with which ShopNow has a business
relationship to enter into an agreement with ShopNow.
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<PAGE>
REGISTRATION RIGHTS
As of December 31, 1999, the holders of 15,062,453 shares of outstanding common
stock and 1,735,771 shares issuable upon exercise of our outstanding warrants
will be entitled to certain rights with respect to the registration of such
shares under the Securities Act of 1933. Under the terms of our registration
rights agreement, the holders of more than 50% of the registrable securities
issued and issuable may request, by written notice nine months after
September 28, 1999, the effective date of our initial public offering of
securities, that we register any registrable securities specified in the notice
in a public offering with a public offering price of at least $5.00 per share of
common stock and the anticipated aggregate proceeds of which would exceed
$4.0 million. Also under the terms of our registration rights agreement, the
holders of more than 50% of the registrable securities issued and issuable may
require that we register its shares for public resale on Form S-2, Form S-3 or
similar short-form registration, provided that we are a registrant entitled to
use such a form and that the value of the securities to be registered is at
least $750,000. We are not obligated to effect any such short-form registration
at any time more than three years after the initial public offering or if it has
effected one such registration during the immediately preceding twelve-month
period. These registration rights are subject to the right of the managing
underwriter to reduce the number of shares proposed to be registered in view of
market conditions. All expenses in connection with any registration will be
borne by us. A holder's registration rights will terminate if the holder is
entitled to immediately sell all of its shares under Rule 144 of the Securities
Act during any 90-day period and the holders of the registrable stock own less
than 1% of the outstanding common stock.
Washington Anti-takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Washington law and our articles of incorporation and
bylaws could make more difficult the acquisition of ShopNow by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of ShopNow to first negotiate with
us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure ShopNow outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Our articles of incorporation provide for
the division of our board of directors into three classes, as nearly as equal in
number as possible, with the directors in each class serving for a three-year
term, and one class being elected each year by our shareholders. The initial
term of the Class I directors expires at our annual meeting of shareholders to
be held in 2000; the initial term of the Class II directors expires at our
annual meeting of shareholders to be held in 2001; and the initial term of the
Class III directors expires at our annual meeting of shareholders to be held in
2002. Thereafter, the term of each class of directors will be three years. This
system of electing and removing directors generally makes it more difficult for
shareholders to replace a majority of the members of our board of directors and
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of ShopNow and may have the effect of maintaining the
incumbency of our board of directors.
SHAREHOLDER MEETING. Our bylaws provide that, except as otherwise required by
law or by our articles of incorporation, special meetings of the shareholders
may only be called pursuant to a resolution adopted by our board of directors,
the Chairman of our board of directors or our President. These provisions of our
articles of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change of control. Our intent in using
these provisions is to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by them and
to discourage certain types of transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. However, these provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they could inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. Such
provisions could have the effect of preventing changes in our management.
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REQUIREMENTS FOR ADVANCE NOTIFICATION OF SHAREHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws contain advance notice procedures with respect to
shareholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
WASHINGTON ANTI-TAKEOVER LAW. Washington law imposes restrictions on some
transactions between a corporation and certain significant shareholders. Chapter
23B.19 of the Washington Business Corporation Act prohibits a "target
corporation," with some exceptions, from engaging in certain significant
business transactions with an "acquiring person," which is defined as a person
or group of persons that beneficially owns 10% or more of the voting securities
of the target corporation, for a period of five years after such acquisition,
unless the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of such
acquisition. Such prohibited transactions include, among others things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive any disproportionate benefit as a
shareholder.
After the five-year period, a "significant business transaction" may occur, as
long as it complies with certain "fair price" provisions of the statute. A
corporation may not opt out of this statute. This provision may have the effect
of delaying, deterring or preventing a change of control of ShopNow.
SHAREHOLDER ACTION BY WRITTEN CONSENT. Our Amended and Restated Articles of
Incorporation permit shareholders to act by written consent without a meeting
only with the written consent of all shareholders entitled to vote on the
subject matter.
ELIMINATION OF CUMULATIVE VOTING. Our Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws do not provide for cumulative
voting in the election of directors.
UNDESIGNATED PREFERRED STOCK. The authorization of undesignated preferred stock
makes it possible for the Board of Directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of ShopNow. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of ShopNow.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
Nasdaq National Market Listing
Our common stock is traded on the Nasdaq National Market under the symbol
"SPNW."
Shares Eligible For Future Sale
Upon the completion of this offering, the Company will have an aggregate of
shares of common stock outstanding, based upon shares outstanding as
of December 31, 1999 and assuming no exercise of the underwriters'
over-allotment option, and no exercise of outstanding options or warrants. Of
the outstanding shares, the shares sold in this offering will be
freely tradable without restriction under the Securities Act of 1933, except for
any shares purchased by "affiliates" of ShopNow as that term is defined in
Rule 144 under the Securities Act of 1933. Of the remaining shares of
common stock held by existing shareholders, shares will be deemed
"restricted securities" as that term is defined in Rule 144. of these
restricted securities will be subject to lock-up agreements providing that, with
certain limited exceptions, the shareholder will not offer, sell, contract to
sell or otherwise dispose of any securities of ShopNow that are substantially
similar to the common stock, including but not limited to any securities that
are convertible into or exchangeable for, or that represent the
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right to receive, common stock or any such substantially similar securities
(other than pursuant to employee stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities outstanding as
of, the date of the lock-up agreement) for a period of 90 days after the date of
this prospectus without the prior written consent of J.P. Morgan & Co. As a
result of these lock-up agreements, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, none of these shares
may be sold until 90 days after the date of this prospectus. At various times
after expiration of the lock-up agreements, these restricted securities will be
eligible for sale in the public market, subject, in some cases, to volume
limitations. In addition, as of December 31, 1999, there were outstanding
options to purchase shares of common stock and warrants to purchase
shares of common stock. Options to purchase shares of
common stock and warrants to purchase shares of common stock held by
ShopNow's executive officers, directors, and 5% shareholders will be subject to
lock-up agreements. J.P. Morgan & Co. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
In general, under Rule 144, as currently in effect, a person (or persons whose
shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 335,000 shares immediately after this
offering) or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed,
subject to restrictions. In addition, a person who is not deemed to have been an
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate, such person's holding period for the purpose of effecting a sale
under Rule 144 commences on the date of transfer from the affiliate.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any employee, officer or director of or
consultant to ShopNow who purchased shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this Prospectus before selling
such shares. However, all Rule 701 shares held by ShopNow's executive officers
and directors will be subject to lock-up agreements and will only become
eligible for sale at the earlier of the expiration of the 90-day lock-up
agreements or upon the prior written consent of J.P. Morgan & Co.
The Company has filed registration statements on Form S-8 under the Securities
Act of 1933 covering a total of shares of Common Stock subject to
outstanding options under and shares offered pursuant to our
. Accordingly, shares registered under such registration statement
are available for resale in the public market without restriction by
non-affiliates.
Also, beginning , holders of shares of common stock and
holders of warrants to purchase shares of common stock will be
entitled to certain rights with respect to registration of such shares for sale
in the public market. See "Description of Capital Stock - Registration Rights."
Registration of such shares under the Securities Act would result in such shares
becoming freely tradable without restriction under the Securities Act (except
for shares purchased by affiliates) immediately upon the effectiveness of such
registration to the extent such shares are not already freely tradable.
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Underwriting
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom J.P. Morgan Securities Inc., CIBC World Markets Corp., PaineWebber
Incorporated and U.S. Bancorp Piper Jaffray, are acting as representatives, have
severally agreed to purchase, and ShopNow and the selling shareholders have
agreed to sell to them, the respective number of shares of common stock set
forth opposite their names below.
<TABLE>
<CAPTION>
-----------------
Number of Shares
Underwriters -----------------
<S> <C>
J.P. Morgan Securities Inc..................................
CIBC World Markets Corp.....................................
PaineWebber Incorporated....................................
U.S. Bancorp Piper Jaffray..................................
Total...................................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. Under the
terms and conditions of the underwriting agreement, all of the underwriters are
obligated to take and pay for all such shares of common stock, if any are taken.
The underwriters propose initially to offer the shares of common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
public offering of the common stock, the offering price and other selling terms
may be changed from time to time by the underwriters.
According to the terms of the underwriting agreement, we have granted the
underwriters an option, exercisable for 30 days after the date of this
prospectus, to purchase up to 1,500,000 additional shares of common stock, on
the same terms and conditions as set forth on the cover page hereof. If such
option is exercised in full the total price to the public, underwriting
discounts and commissions, and proceeds to us from the sale of such shares will
be $ , $ and $ , respectively. The underwriters may exercise such
option only to cover over-allotments, if any, made in connection with the sale
of shares of common stock offered. To the extent that option is exercised, each
of the underwriters will have a commitment, subject to certain conditions, to
purchase approximately the same percentage of those additional shares as the
number of shares of common stock to be purchased by it as shown in the table
above bears to the total number of shares of common stock initially offered
hereby.
ShopNow and each of the selling shareholders, have agreed that, without the
prior written consent of J.P. Morgan on behalf of the underwriters, they will
not, during the period commencing on the date hereof and ending 90 days after
the date of this prospectus, (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or (2) enter
into any swap or other agreement that transfers to another, in whole or in part,
any of the economic consequences of ownership of the common stock, whether any
such transaction described in clause (1) or (2) above is to be settled by
delivery of common stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (a) the sale of any shares to the
underwriters pursuant to the underwriting agreement, (b) transactions relating
to shares of common stock or other securities acquired in open market
transactions after the completion of this offering or (c) exercise any shares of
common stock issued upon the exercise of options granted under existing employee
stock option plans. In addition, the parties have agreed that, without the prior
written consent of J.P. Morgan on behalf of the underwriters, they will not,
during the period commencing on the date hereof and ending 90 days after the
date of this Prospectus, make any demand for or exercise any right
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with respect to, the registration of any shares of common stock or any security
convertible into or exercisable or exchangeable for common stock.
We have agreed to indemnify the underwriters against specified liabilities,
losses and expenses, including liabilities under the Securities Act of 1933, or
to contribute to payments that the underwriters may be required to make in
connection with such liabilities.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot in connection with this offering,
creating a syndicate short position. In addition, the underwriters may bid for,
and purchase, shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the common stock in this offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
It is expected that delivery of the shares sold in this offering will be made to
investors on or about , 2000.
Legal Matters
The validity of the common stock offered hereby will be passed upon for us by
Perkins Coie LLP, Seattle, Washington. Certain legal matters will be passed upon
for the underwriters by Davis Polk & Wardwell, Menlo Park, California.
Experts
The audited financial statements for ShopNow.com Inc., Media Assets, Inc.,
SpeedyClick, Corp. and The Internet Mall, Inc. and schedule included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements for WebCentric, Inc. have been audited by KPMG
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The audited financial statements for Ubarter.com Inc. have been audited by Moss
Adams, LLP independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The financial statements of GO Software, Inc. at December 31, 1998 and 1997, and
for each of two years in the period ended December 31, 1998, appearing in the
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
Change in Independent Public Accountants
Our board of directors has selected Arthur Andersen LLP to serve as independent
public accountants. Arthur Andersen LLP has served as our independent public
accountants since August 1998. On August 7, 1998, we dismissed Ernst & Young LLP
as our independent accountants. Ernst & Young's report on the Company's
consolidated financial statements for the two years ended December 31, 1997 does
not cover the consolidated financial statements of the Company included in this
prospectus. Ernst & Young's reports on the financial statements for the years
ended December 31, 1996 and 1997 did not contain any adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. The decision to change independent
accountants was
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approved by the board of directors. During the years ended December 31, 1996 and
1997 and through August, 1998 there were no reportable events, as defined in
regulations of the Securities and Exchange Commission, or disagreements with
Ernst & Young LLP on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. Prior to
retaining Arthur Andersen LLP, we had not consulted with Arthur Andersen LLP
regarding accounting principles.
Where You Can Find More Information
We filed with the Securities and Exchange Commission a registration statement on
Form S-1 under the Securities Act of 1933, that registers the shares of common
stock offered in this prospectus. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules filed with the registration statement. For more information about us
and the common stock offered hereby, you should review the registration
statement and the exhibits and schedules filed with the registration statement.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, you should review the copy of such contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules filed with the
registration statement may be inspected and copied at the following location of
the Securities and Exchange Commission:
Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549.
You may also obtain copies of all or any part of the registration statement from
that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
61
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Unaudited Pro Forma Combined Financial Information
Unaudited Pro Forma Combined Balance Sheet................ F-3
Unaudited Pro Forma Combined Statements of Operations..... F-4
Notes to Unaudited Pro Forma Combined Financial
Statements.............................................. F-6
ShopNow.com Inc.
Report of Independent Public Accountants.................. F-9
Consolidated Balance Sheets............................... F-10
Consolidated Statements of Operations..................... F-11
Consolidated Statements of Comprehensive Loss............. F-12
Consolidated Statements of Shareholders' Equity
(Deficit)............................................... F-13
Consolidated Statements of Cash Flows..................... F-15
Notes to Consolidated Financial Statements................ F-17
Media Assets, Inc.
Report of Independent Public Accountants.................. F-38
Balance Sheets............................................ F-39
Statements of Operations.................................. F-40
Statements of Shareholder's Equity........................ F-41
Statements of Cash Flows.................................. F-42
Notes to Financial Statements............................. F-43
The Internet Mall, Inc.
Report of Independent Public Accountants.................. F-47
Balance Sheets............................................ F-48
Statements of Operations.................................. F-49
Statements of Shareholders' Equity........................ F-50
Statements of Cash Flows.................................. F-51
Notes to Financial Statements............................. F-52
GO Software, Inc.
Report of Independent Auditors............................ F-58
Balance Sheets............................................ F-59
Statements of Operations.................................. F-60
Statements of Shareholders' Equity (Deficit).............. F-61
Statements of Cash Flows.................................. F-62
Notes to Financial Statements............................. F-63
WebCentric, Inc.
Report of Independent Auditor's Report.................... F-68
Balance Sheets............................................ F-69
Statements of Operations.................................. F-70
Statements of Shareholders' Equity (Deficit).............. F-71
Statements of Cash Flows.................................. F-72
Notes to Financial Statements............................. F-73
SpeedyClick, Corp.
Report of Independent Public Accountants.................. F-79
Balance Sheets............................................ F-80
Statements of Operations.................................. F-81
Statements of Cash Flows.................................. F-82
Statements of Stockholders' Deficit....................... F-83
Notes to Financial Statements............................. F-84
Ubarter.com Inc.
Independent Auditor's Report.............................. F-88
Consolidated Balance Sheet................................ F-89
Consolidated Statement of Operations...................... F-90
Consolidated Statement of Stockholders' Equity............ F-91
Consolidated Statement of Cash Flows...................... F-92
Notes to Consolidated Financial Statements................ F-93
</TABLE>
F-1
<PAGE>
ShopNow.com Inc.
Unaudited Pro Forma Combined Financial Information
The unaudited pro forma combined balance sheet as of September 30, 1999 gives
effect to the proposed acquisitions of Ubarter.com Inc., SpeedyClick, Corp. and
WebCentric, Inc. as if these transactions had occurred on September 30, 1999.
The unaudited pro forma combined statements of operations for the year ended
December 31, 1998 and for the nine months ended September 30, 1999 give effect
to the acquisitions of Media Assets, Inc., The Internet Mall, Inc., GO
Software, Inc., SpeedyClick, Corp., Ubarter.com Inc. and WebCentric, Inc. and
the disposition of BuySoftware.com as if these transactions had occurred
January 1, 1998.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the cash and common stock consideration exchanged by
ShopNow.com Inc. for the fair value of the assets acquired and liabilities
assumed.
F-2
<PAGE>
ShopNow.com Inc.
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
ShopNow.com SpeedyClick, WebCentric, Ubarter.com
Inc. Corp. Inc. Inc. Adjustments(g) Total
------------- ------------ ----------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 2,913 $ 20 $ 460 $ 376 $ (4,545) $ (776)
Short-term investments................. 6,098 -- -- -- -- 6,098
Accounts receivable, net............... 7,911 177 379 273 -- 8,740
Unbilled services...................... 1,288 -- -- -- -- 1,288
Prepaid expenses and other............. 2,794 -- 108 314 (105) 3,111
------------- ----------- ----------- ----------- ------------- --------
Total current assets................. 21,004 197 947 963 (4,650) 18,461
Property and Equipment, net.............. 12,746 166 129 395 -- 13,436
Goodwill and Other Intangible Assets,
net.................................... 19,438 -- -- 2,225 (2,225) 162,608
143,170
Investment in Marketable Equity
Securities............................. 20,764 -- 31 -- -- 20,795
Other Assets, net........................ 7,048 2 -- 158 -- 7,208
------------- ----------- ----------- ----------- ------------- --------
Total assets......................... $ 81,000 $ 365 $ 1,107 $ 3,741 $ 136,295 $222,508
============= =========== =========== =========== ============= ========
Current Liabilities:
Accounts payable....................... $ 7,801 $ 223 $ 57 189 $ -- $ 8,270
Accrued liabilities.................... 6,505 52 44 212 -- 6,813
Line of credit......................... 1,000 -- -- -- -- 1,000
Current portion of notes and leases.... 8,110 44 38 192 -- 8,384
Customer deposits...................... 6,185 -- -- -- -- 6,185
Deferred revenue and trade dollars..... 6,047 46 -- 2,376 -- 8,469
------------- ----------- ----------- ----------- ------------- --------
Total current liabilities............ 35,648 365 139 2,969 39,121
Notes and Leases Payable, less current
portion................................ 5,802 220 170 574 (138) 6,628
Put Warrant Liability.................... 1,369 -- -- -- -- 1,369
Redeemable Preferred Stock............... -- -- 1,026 -- (1,026) --
Shareholders' Equity:
Convertible preferred stock............ 89,351 535 -- -- (535) 89,351
Common stock........................... 23,414 114 3 3,353 133,739 160,623
Common stock warrants.................. 7,968 -- -- -- -- 7,968
Deferred compensation.................. (3,179) -- -- -- -- (3,179)
Accumulated other comprehensive
income............................... (2,762) -- -- 10 (10) (2,762)
Retained earnings (deficit)............ (76,611) (869) (231) (3,165) 4,265 (76,611)
------------- ----------- ----------- ----------- ------------- --------
Total shareholders' equity........... 38,181 (220) (228) 198 137,459 175,390
------------- ----------- ----------- ----------- ------------- --------
Total liabilities and shareholders'
equity............................. $ 81,000 $ 365 $ 1,107 $ 3,741 $ 136,295 $222,508
============= =========== =========== =========== ============= ========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
ShopNow.com Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
(1/1/98 to (1/1/98 to (9/1/98 to (4/1/98 to
8/8/98) 9/17/98) 12/31/98) 3/31/99)
ShopNow.com The Internet Media GO Software, SpeedyClick, WebCentric, Ubarter.com
Inc. Mall, Inc. Assets, Inc. Inc. Corp. Inc. Inc.
------------- ------------ ------------ ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 7,154 $ 175 $ 4,833 $ 1,346 $ -- 389 $ 505
Cost of Revenues..... 5,849 24 2,808 55 -- 185 44
------------- ----------- ----------- ------------ ----------- ----------- -----------
Gross profit....... 1,305 151 2,025 1,291 -- 204 461
------------- ----------- ----------- ------------ ----------- ----------- -----------
Operating Expenses:
Sales and
marketing........ 12,183 56 1,365 143 4 44 95
General and
administrative... 3,549 275 318 1,006 3 130 991
Research and
development...... 4,370 114 -- 253 28 84 216
Amortization of
intangible
assets........... 730 -- 1 -- -- -- --
Stock-based
compensation..... 182 -- -- -- -- -- --
Unusual
item-impairment
of acquired
technology....... 5,207 -- -- -- -- -- --
------------- ----------- ----------- ------------ ----------- ----------- -----------
Total operating
expenses....... 26,221 445 1,684 1,402 35 258 1,302
------------- ----------- ----------- ------------ ----------- ----------- -----------
(Loss) income from
operations......... (24,916) (294) 341 (111) (35) (54) (841)
Other Income
(Expense), net..... 171 (13) 17 41 -- (6) 43
------------- ----------- ----------- ------------ ----------- ----------- -----------
(Loss) income before
provision for
income taxes....... (24,745) (307) 358 (70) (35) (60) (798)
Provision for income
taxes.............. -- -- -- 17 -- -- --
------------- ----------- ----------- ------------ ----------- ----------- -----------
Net (loss) income.... $ (24,745) $ (307) $ 358 $ (53) $ (35) $ (60) $ (798)
============= =========== =========== ============ =========== =========== ===========
Basic and Diluted Net
Loss Per Share
(h)................ $ (7.01)
=============
Weighted average
shares outstanding
used to compute
basic and diluted
net loss per
share.............. 3,532,054
=============
Basic and Diluted Pro
Forma Net Loss Per
Share (h).......... $ (1.92)
=============
Weighted average
shares used to
compute basic and
diluted pro forma
net loss per
share.............. 12,857,745
=============
<CAPTION>
---------------------------
Pro Forma Combined
Adjustments Total
----------- ----------
<S> <C> <C>
Revenues............. $ (4,458)(c) $ 9,964
Cost of Revenues..... (4,452)(c) 4,513
----------- ----------
Gross profit....... (6) 5,431
----------- ----------
Operating Expenses:
Sales and
marketing........ (2,956)(c) 10,934
General and
administrative... (955)(c)(f) 5,317
Research and
development...... (1,061)(c) 4,004
Amortization of
intangible
assets........... 53,297 (a) 54,028
Stock-based
compensation..... -- 182
Unusual
item-impairment
of acquired
technology....... -- 5,207
----------- ----------
Total operating
expenses....... 48,325 79,672
----------- ----------
(Loss) income from
operations......... (48,331) (74,241)
Other Income
(Expense), net..... (125)(b) 128
----------- ----------
(Loss) income before
provision for
income taxes....... (48,456) (74,113)
Provision for income
taxes.............. (17)(d) --
----------- ----------
Net (loss) income.... $ (48,473) $ (74,113)
=========== ==========
Basic and Diluted Net
Loss Per Share
(h)................ $ (5.40)
==========
Weighted average
shares outstanding
used to compute
basic and diluted
net loss per
share.............. 13,717,022
==========
Basic and Diluted Pro
Forma Net Loss Per
Share (h).......... $ (3.20)
==========
Weighted average
shares used to
compute basic and
diluted pro forma
net loss per
share.............. 23,130,809
==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
ShopNow.com Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
(1/1/99 to (1/1/99 to (1/1/99 to (1/1/99 to
6/15/99) 9/30/99) 9/30/99) 9/30/99)
ShopNow.com GO Software, SpeedyClick, WebCentric, Ubarter.com Pro Forma Combined
Inc. Inc. Corp. Inc. Inc. Adjustments Total
------------- ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 23,537 $ 728 $ 328 $ 1,111 $ 1,704 $ (9,948)(c)(e) $ 17,460
Cost of Revenues......... 19,494 45 -- 416 315 (11,190)(c) 9,080
------------- ------------ ----------- ----------- ----------- ----------- ----------
Gross profit........... 4,043 683 328 695 1,389 1,242 8,380
------------- ------------ ----------- ----------- ----------- ----------- ----------
Operating Expenses:
Sales and marketing.... 33,545 172 777 346 232 (2,911)(c)(e) 32,161
General and
administrative....... 5,493 514 212 415 3,393 (148)(c)(f) 9,879
Research and
development.......... 5,367 182 171 246 625 (10)(c) 6,581
Amortization of
intangible assets.... 3,734 -- -- -- -- 37,793 (a) 41,527
Stock-based
compensation......... 2,547 -- -- -- -- -- 2,547
------------- ------------ ----------- ----------- ----------- ----------- ----------
Total operating
expenses........... 50,686 868 1,160 1,007 4,250 34,724 92,695
------------- ------------ ----------- ----------- ----------- ----------- ----------
Loss From Operations..... (46,643) (185) (832) (312) (2,861) (33,482) (84,315)
Other (Expense) Income,
net.................... (605) 12 (2) (4) 22 (50)(b) (627)
------------- ------------ ----------- ----------- ----------- ----------- ----------
Loss Before Provision for
Income Taxes........... (47,248) (173) (834) (316) (2,839) (33,532) (84,942)
Provision for Income
Taxes.................. -- 12 -- 105 -- (117)(d) --
------------- ------------ ----------- ----------- ----------- ----------- ----------
Net loss............... $ (47,248) $ (161) $ (834) $ (211) $ (2,839) $ (33,649) $ (84,942)
============= ============ =========== =========== =========== =========== ==========
Basic and Diluted Net
Loss Per Share (h)..... $ (9.03) $ (5.83)
============= ==========
Weighted Average Shares
Outstanding Used to
Compute Basic and
Diluted Net Loss Per
Share.................. 5,230,394 14,565,286
============= ==========
Basic and Diluted Pro
Forma Net Loss Per
Share (h).............. $ (2.16) $ (2.82)
============= ==========
Weighted Average Shares
Used to Compute Basic
and Diluted Pro Forma
Net Loss Per Share..... 21,859,604 30,070,745
============= ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
ShopNow.com Inc.
Notes to Unaudited Pro Forma Combined Financial Statements
September 30, 1999
(in thousands, except share amounts)
Note 1. Basis of Presentation:
The unaudited pro forma combined balance sheet as of September 30, 1999 gives
effect to the proposed acquisition of Ubarter.com Inc., and the acquisitions of
SpeedyClick, Corp. and WebCentric, Inc. as if these transactions had occurred on
September 30, 1999. The unaudited pro forma combined statements of operations
for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 give effect to the acquisitions of Media Assets, Inc., The
Internet Mall, Inc., GO Software, Inc., SpeedyClick, Corp., and
WebCentric, Inc. and the disposition of BuySoftware.com as if these transactions
had occurred January 1, 1998. As Ubarter.com Inc. has a March 31 year-end, their
results of operations represent the period from April, 1998 through March 31,
1999 in the accompanying unaudited pro forma combined results of operations for
the year ended December 31, 1998.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the cash and common stock consideration exchanged by
ShopNow.com Inc. for the fair value of the assets acquired and liabilities
assumed.
Note 2. Pro Forma Adjustments:
(a) To record amortization of intangible assets based on the excess purchase
price. As Media Assets, Inc. and The Internet Mall, Inc. were acquired during
1998 and GO Software, Inc. was acquired on June 15, 1999, amortization is based
on the actual purchase price allocation and is computed for the period from
January 1, 1998 to the respective date of acquisition. As the acquisitions of
SpeedyClick, Corp., WebCentric, Inc. and the proposed acquisition of Ubarter.com
Inc. occur after September 30, 1999, amortization is based on the estimated
purchase price allocation and is computed for the period from January 1, 1998 to
the respective date of acquisition. Intangible assets acquired are assumed to
have a three-year life.
<TABLE>
<S> <C>
Seven months of The Internet Mall, Inc...................... $ 422
Eight months of Media Assets, Inc........................... 347
Twelve months of GO Software, Inc........................... 4,798
Twelve months of SpeedyClick, Corp.......................... 18,622
Twelve months of WebCentric, Inc............................ 13,380
Twelve months of Ubarter.com Inc............................ 15,728
------------
Total 1998 pro forma amortization........................... $ 53,297
============
Five months of GO Software, Inc............................. $ 1,998
Nine months of SpeedyClick, Corp............................ 13,966
Nine months of WebCentric, Inc.............................. 10,035
Nine months of Ubarter.com Inc.............................. 11,794
------------
Total 1999 pro forma amortization........................... $ 37,793
============
</TABLE>
(b) To record eight months of interest expense associated with the note
issued as consideration for Media Assets, Inc., totaling $25, and to record 12
and six months of interest expense associated with the GO Software, Inc.
convertible promissory note, totaling $100 and $50, respectively.
F-6
<PAGE>
ShopNow.com Inc.
Notes to Unaudited Pro Forma Combined Financial Statements (Continued)
September 30, 1999
(in thousands, except share amounts)
Note 2. Pro Forma Adjustments: (Continued)
(c) To eliminate the results of operations of BuySoftware.com. Given the
Company's continued involvement in certain retailing activities, the results of
BuySoftware.com have been reflected in continuing operations through June 1999.
However, the Company believes that it is meaningful to present the disposal as
if it had occurred as of January 1, 1998. As BuySoftware.com was run as a
separate business segment, the revenues, cost of revenues and operating expenses
directly attributable to the business segment were removed.
(d) To eliminate tax benefits recorded by GO Software, Inc. and
WebCentric, Inc., which may not be realized by the Company.
(e) To eliminate revenues recognized by SpeedyClick, Corp. related to cash
received from ShopNow.com Inc. for advertising on the SpeedyClick.com web site.
As the pro forma statements of operations are prepared as if the merger had
occurred on January 1, 1998, these revenues and the related expense have been
eliminated.
(f) To record compensation of SpeedyClick, Corp. executives per employment
agreements as follows (these amounts represent compensation at historical
levels):
<TABLE>
<S> <C>
1998 - Four months of compensation expense.................. $ 128
1999 - Nine months of compensation expense.................. $ 288
</TABLE>
(g) To record the acquisitions of: 1) SpeedyClick, Corp. for $3 million in
cash, 3,799,237 shares of common stock and 157,537 options to purchase shares of
common stock, representing consideration of approximately $57.4 million;
2) WebCentric, Inc. for $1.4 million in cash, 2,161,904 shares of common stock
and 121,544 options to purchase shares of common stock, representing non-cash
consideration of approximately $39.5 million, and 3) the proposed acquisition of
Ubarter.com Inc. for $45 million worth of ShopNow.com's common stock. The excess
purchase price of these acquisitions has been determined as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
SpeedyClick, WebCentric, Ubarter.com
Corp. Inc. Inc. Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Purchase price.............................. $ 55,645 $ 40,825 $ 45,147 $ 141,617
Net (liabilities assumed) assets acquired... 220 (694) 2,027 1,553
------------ ------------ ------------ ------------
Excess purchase price....................... $ 55,865 $ 40,131 $ 47,174 $ 143,170
============ ============ ============ ============
</TABLE>
(h) Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of shares outstanding during the period assuming
that shares issued for acquisitions were outstanding for the entire period. Pro
forma basic and diluted net loss per share is computed based on the weighted
average number of shares outstanding, giving effect to both shares issued in
acquisitions as if they were outstanding for the entire period and to conversion
of convertible preferred stock on an as-if converted basis from the original
issuance date.
F-7
<PAGE>
ShopNow.com Inc.
Notes to Unaudited Pro Forma Combined Financial Statements (Continued)
September 30, 1999
(in thousands, except share amounts)
Note 3. Reconciliation of Historical Weighted Average Shares to Pro Forma
Weighted Average Shares:
<TABLE>
<CAPTION>
-------------------------------
December 31, September 30,
1998 1999
-------------- --------------
<S> <C> <C>
Historical.................................................. 3,532,054 5,230,394
The Internet Mall, Inc., January 1, 1998 - August 8, 1998... 426,024 --
Media Assets, Inc., January 1, 1998 - September 17, 1998.... 424,052 --
GO Software, Inc., January 1, 1998 - December 31, 1998;
January 1, 1999 - September 30, 1999...................... 1,123,751 1,123,751
SpeedyClick, Corp., January 1, 1998 - December 31, 1998;
January 1, 1999 - September 30, 1999...................... 3,799,237 3,799,237
WebCentric, Inc., January 1, 1998 - December 31, 1998;
January 1, 1999 - September 30, 1999...................... 2,161,904 2,161,904
Ubarter.com Inc., January 1, 1998 - December 31, 1998;
January 1, 1999 - September 30, 1999...................... 2,250,000 2,250,000
-------------- --------------
Pro forma................................................... 13,717,022 14,565,286
============== ==============
</TABLE>
F-8
<PAGE>
Report of Independent Public Accountants
To ShopNow.com Inc.:
We have audited the accompanying consolidated balance sheets of ShopNow.com Inc.
(a Washington corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, comprehensive loss,
shareholders' equity (deficit) and cash flows for each of the years in the three
year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether these financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ShopNow.com Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
consolidated financial statements is presented for purpose of complying with the
Securities and Exchange Commission rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Seattle, Washington,
January 19, 2000
F-9
<PAGE>
ShopNow.com Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
-------------------------------------------------------------
Pro Forma
Shareholders'
As of December 31, As of Equity at
--------------------------- September 30, September 30,
1997 1998 1999 1999
------------ ------------ -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 376 $ 9,820 $ 2,913
Short-term investments................................ -- 179 6,098
Accounts receivable, net.............................. 146 2,266 7,911
Unbilled services..................................... -- 1,448 1,288
Prepaid expenses and other............................ 192 709 2,794
------------ ------------ -------------
Total current assets................................ 714 14,422 21,004
Property and equipment, net............................. 472 4,185 12,746
Goodwill, net........................................... -- 515 965
Other intangible assets, net............................ 582 3,944 18,473
Investment in marketable equity securities.............. -- -- 20,764
Other assets, net....................................... 562 717 7,048
------------ ------------ -------------
Total assets........................................ $ 2,330 $ 23,783 $ 81,000
============ ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................... $ 1,083 $ 3,551 $ 7,801
Accrued liabilities................................... 502 1,132 6,505
Line of credit........................................ 200 238 1,000
Current portion of notes and leases................... 1,684 1,133 8,110
Customer deposits..................................... -- 2,155 6,185
Deferred revenue...................................... -- 535 6,047
------------ ------------ -------------
Total current liabilities........................... 3,469 8,744 35,648
Notes and leases payable, less current portion.......... 884 1,837 5,802
Put warrant liability................................... -- -- 1,369
------------ ------------ -------------
Total liabilities................................... 4,353 10,581 42,819
Commitments (Note 8)
Shareholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares - 20,000,000 (5,000,000 pro
forma); issued shares - 3,868,896 in 1997,
12,299,896 in 1998 and 20,189,061 in 1999 (none pro
forma), preference in liquidation of $98,973 in
1999................................................ 3,403 35,070 89,351 $ --
Common stock, $0.01 par value: Authorized shares -
40,000,000 (200,000,000 pro forma); issued shares -
2,763,055 in 1997, 4,602,573 in 1998, and 6,581,112
in 1999 (26,770,173 pro forma)...................... (808) 6,559 23,414 112,765
Common stock warrants................................. -- 1,866 7,968 7,968
Deferred compensation................................. -- (930) (3,179) (3,179)
Accumulated other comprehensive loss.................. -- -- (2,762) (2,762)
Accumulated deficit................................... (4,618) (29,363) (76,611) (76,611)
------------ ------------ ------------- -------------
Total shareholders' equity (deficit).................. (2,023) 13,202 38,181 $ 38,181
------------ ------------ ------------- =============
Total liabilities and shareholders' equity
(deficit)........................................... $ 2,330 $ 23,783 $ 81,000
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-10
<PAGE>
ShopNow.com Inc.
Consolidated Statements of Operations
(in thousands, except share amounts)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
For the Year Ended For the Nine Months Ended
December 31, September 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
ShopNow network and
transaction processing...... $ -- $ 69 $ 4,211 $ 2,128 $ 15,996
Merchant services............. 993 535 2,943 869 7,541
------------ ------------ ------------ ------------ ------------
Total revenues.............. 993 604 7,154 2,997 23,537
------------ ------------ ------------ ------------ ------------
Cost of Revenues:
ShopNow network and
transaction processing...... -- 159 4,493 2,457 14,738
Merchant services............. 430 356 1,356 357 4,756
------------ ------------ ------------ ------------ ------------
Total cost of revenues...... 430 515 5,849 2,814 19,494
------------ ------------ ------------ ------------ ------------
Gross profit.................... 563 89 1,305 183 4,043
------------ ------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing........... 610 1,201 12,183 7,688 33,545
General and administrative.... 656 918 3,549 2,423 5,493
Research and development...... 25 2,436 4,370 3,002 5,367
Amortization of intangible
assets...................... 32 136 730 341 3,734
Stock-based compensation...... -- -- 182 37 2,547
Unusual item - impairment of
acquired technology......... -- -- 5,207 -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses.... 1,323 4,691 26,221 13,491 50,686
Loss from operations...... (760) (4,602) (24,916) (13,308) (46,643)
Other income (expense), net..... (50) (164) 171 177 (605)
------------ ------------ ------------ ------------ ------------
Net loss.................. $ (810) $ (4,766) $ (24,745) $ (13,131) $ (47,248)
============ ============ ============ ============ ============
Basic and diluted net loss per
share......................... $ (0.40) $ (1.83) $ (7.01) $ (3.90) $ (9.03)
============ ============ ============ ============ ============
Weighted average shares
outstanding used to compute
basic and diluted net loss per
share......................... 2,012,285 2,608,398 3,532,054 3,366,355 5,230,394
============ ============ ============ ============ ============
Basic and diluted pro forma net
loss per share................ $ (1.92) $ (2.16)
============ ============
Weighted average shares
outstanding used to compute
basic and diluted pro forma
net loss per share............ 12,857,745 21,859,604
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE>
ShopNow.com Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
For the Nine Months Ended
December 31, September 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss........................ $ (810) $ (4,766) $ (24,745) $ (13,131) $ (47,248)
Unrealized loss on
investments................... -- -- -- -- (2,762)
------------ ------------ ------------ ------------ ------------
Comprehensive loss.............. $ (810) $ (4,766) $ (24,745) $ (13,131) $ (50,010)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE>
ShopNow.com Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
(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, 1995....... -- $ -- 1,946,684 $ 246 $ -- $ -- $ --
Issuance of common stock........ -- -- 391,429 80 -- -- --
Repurchase of common stock...... -- -- (342,391) (51) -- -- --
Net loss........................ -- -- -- -- -- -- --
---------- ---------- --------- ------- -------- ----------- ------------
Balances, December 31, 1996....... -- -- 1,995,722 275 -- -- --
Net loss January 1, 1997 through
February 25, 1997............. -- -- -- -- -- -- --
Conversion from S Corporation to
C Corporation................. -- -- -- (1,252) -- -- --
Conversion of shareholder notes
into Series A preferred
stock......................... 699,612 350 -- -- -- -- --
Issuance of Series B preferred
stock......................... 2,334,079 1,800 -- -- -- -- --
Issuance of common stock........ -- -- 600,000 90 -- -- --
Repurchase of common stock...... -- -- (10,000) (10) -- -- --
Conversion of shareholder notes
into Series C preferred
stock......................... 835,205 1,253 -- -- -- -- --
Conversion of shareholder notes
into common stock............. -- -- 177,333 89 -- -- --
Net loss, February 26, 1997
through December 31, 1997..... -- -- -- -- -- -- --
---------- ---------- --------- ------- -------- ----------- ------------
Balances, December 31, 1997....... 3,868,896 3,403 2,763,055 (808) -- -- --
Issuance of Series D preferred
stock......................... 4,250,000 13,461 -- -- 673 -- --
Common stock, options and
warrants issued for businesses
acquired...................... -- -- 1,744,692 6,105 -- -- --
Issuance of Series E preferred
stock and warrants to acquire
common stock.................. 2,125,000 7,672 -- -- 328 -- --
Issuance of Series F preferred
stock and warrants to acquire
common stock.................. 2,056,000 10,534 -- -- 865 -- --
Exercise of common stock
options....................... -- -- 32,499 25 -- -- --
Issuance of common stock in
consideration for professional
services...................... -- -- 62,327 125 -- -- --
Issuance of compensatory stock
options....................... -- -- -- 1,112 -- -- (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 Total
Other Shareholders'
Comprehensive Accumulated Equity
Income Deficit (Deficit)
------------- ----------- -------------
<S> <C> <C> <C>
Balances, December 31, 1995....... $ -- $ (294) $ (48)
Issuance of common stock........ -- -- 80
Repurchase of common stock...... -- -- (51)
Net loss........................ -- (810) (810)
------------- ----------- ------------
Balances, December 31, 1996....... -- (1,104) (829)
Net loss January 1, 1997 through
February 25, 1997............. -- (148) (148)
Conversion from S Corporation to
C Corporation................. -- 1,252 --
Conversion of shareholder notes
into Series A preferred
stock......................... -- -- 350
Issuance of Series B preferred
stock......................... -- -- 1,800
Issuance of common stock........ -- -- 90
Repurchase of common stock...... -- -- (10)
Conversion of shareholder notes
into Series C preferred
stock......................... -- -- 1,253
Conversion of shareholder notes
into common stock............. -- -- 89
Net loss, February 26, 1997
through December 31, 1997..... -- (4,618) (4,618)
------------- ----------- ------------
Balances, December 31, 1997....... -- (4,618) (2,023)
Issuance of Series D preferred
stock......................... -- -- 14,134
Common stock, options and
warrants issued for businesses
acquired...................... -- -- 6,105
Issuance of Series E preferred
stock and warrants to acquire
common stock.................. -- -- 8,000
Issuance of Series F preferred
stock and warrants to acquire
common stock.................. -- -- 11,399
Exercise of common stock
options....................... -- -- 25
Issuance of common stock in
consideration for professional
services...................... -- -- 125
Issuance of compensatory stock
options....................... -- -- --
Compensation attributable to
stock options vesting......... -- -- 182
Net loss........................ -- (24,745) (24,745)
------------- ----------- ------------
Balances, December 31, 1998....... -- (29,363) 13,202
</TABLE>
F-13
<PAGE>
ShopNow.com Inc.
Consolidated Statements of Shareholders' Equity (Deficit) (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 -- -- -- -- --
Common stock issued for
businesses acquired........... -- -- 1,366,787 11,496 -- -- --
Issuance of warrants for loan
origination fees.............. -- -- -- -- 588 -- --
Issuance of options and warrants
to marketing partners......... -- -- -- 46 1,286 -- --
Exercise of common stock
options....................... -- -- 638,330 1,162 -- (397) --
Exercise of common stock
warrants...................... -- -- 88,650 330 (20) -- --
Issuance of common stock in
consideration for professional
services...................... -- -- 4,000 4 -- -- --
Issuance of common stock in
consideration for customer
lists......................... -- -- 10,000 64 -- -- --
Repurchase of common stock...... -- -- (129,228) (46) -- -- --
Issuance of compensatory stock
options....................... -- -- -- 4,196 -- -- (4,196)
Compensation attributable to
stock......................... -- -- -- -- -- -- 1,947
Unrealized loss on
investments................... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
---------- ---------- --------- ------- -------- ----------- ------------
Balances, September 30, 1999
(unaudited)..................... 20,189,061 $ 89,351 6,581,112 $23,811 $ 7,968 $ (397) $ (3,179)
========== ========== ========= ======= ======== =========== ============
<CAPTION>
-------------------------------------------
Accumulated Total
Other Shareholders'
Comprehensive Accumulated Equity
Income Deficit (Deficit)
------------- ----------- -------------
<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
Common stock issued for
businesses acquired........... -- -- 11,496
Issuance of warrants for loan
origination fees.............. -- -- 588
Issuance of options and warrants
to marketing partners......... -- -- 1,332
Exercise of common stock
options....................... -- -- 765
Exercise of common stock
warrants...................... -- -- 310
Issuance of common stock in
consideration for professional
services...................... -- -- 4
Issuance of common stock in
consideration for customer
lists......................... -- -- 64
Repurchase of common stock...... -- -- (46)
Issuance of compensatory stock
options....................... -- -- --
Compensation attributable to
stock......................... -- -- 1,947
Unrealized loss on
investments................... (2,762) -- (2,762)
Net loss........................ -- (47,248) (47,248)
------------- ----------- ------------
Balances, September 30, 1999
(unaudited)..................... $ (2,762) $ (76,611) $ 38,181
============= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<PAGE>
ShopNow.com Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
For the Year Ended For the Nine Months Ended
December 31, September 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss........................ $ (810) $ (4,766) (24,745) $ (13,131) $ (47,248)
Adjustments to reconcile net
loss to net cash used in
operating activities -
Unusual item - impairment of
acquired technology....... -- -- 5,207 -- --
Depreciation and
amortization.............. 35 277 1,602 745 6,364
Write down of long-term
investments............... -- 34 -- -- --
Amortization of deferred
compensation.............. -- -- 182 37 1,947
Operating expenses paid in
stock and warrants........ -- -- 125 125 1,354
Changes in operating assets
and liabilities, net of
effect of businesses
acquired:
Accounts receivable....... (15) (51) 2,107 (997) (5,627)
Prepaid expenses and other
current assets.......... (22) (189) (77) 184 (2,215)
Other assets.............. -- -- -- -- (1,075)
Unbilled services and
customer deposits,
net..................... -- -- (3,713) -- 4,190
Accounts payable.......... 218 831 2,303 1,975 4,114
Accrued liabilities....... 29 417 521 (54) 4,237
Deferred revenue.......... -- -- 535 193 5,383
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities.................... (565) (3,447) (15,953) (10,923) (28,576)
------------ ------------ ------------ ------------ ------------
Investing activities:
Purchases of property and
equipment..................... (31) (481) (2,189) (1,959) (9,533)
Purchase of short-term
investments, net.............. -- -- (179) (2,422) (23,630)
Sale of short-term
investments................... -- -- -- -- 15,111
Purchase of domain names........ -- -- -- -- (195)
Investments in common stock and
other assets.................. -- (943) (147) (76) (447)
Acquisition of businesses, net
of cash acquired of $2,850 in
the year ended December 31,
1998 and $640 in the
nine-month period ended
September 30, 1999............ -- (250) (2,851) (2,851) (3,951)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (31) (1,674) (5,366) (7,308) (22,645)
------------ ------------ ------------ ------------ ------------
</TABLE>
F-15
<PAGE>
ShopNow.com Inc.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
For the Year Ended For the Nine Months Ended
December 31, September 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Financing activities:
Borrowings under bank line of
credit........................ $ -- $ 200 $ 38 $ 38 $ 1,000
Principal payments under bank
line of credit................ (1) (78) -- -- (238)
Proceeds from sale of common
stock......................... 80 -- 25 15 1,076
Common stock repurchased........ (51) (10) -- -- (46)
Proceeds from sale of preferred
stock and warrants, net of
issuance costs................ -- 1,800 33,034 22,983 33,429
Proceeds from convertible
subordinated notes............ -- 1,253 -- -- --
Proceeds from long-term debt.... 603 2,562 3,700 -- 10,706
Payments on long-term debt...... (61) (242) (6,034) (2,314) (1,613)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities.................... 570 5,485 30,763 20,722 44,314
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents.......... (26) 364 9,444 2,491 (6,907)
Cash and cash equivalents at
beginning of period........... 38 12 376 376 9,820
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period..................... $ 12 $ 376 $ 9,820 $ 2,867 $ 2,913
============ ============ ============ ============ ============
Supplementary disclosure of cash
flow information:
Cash paid during the period
for interest................ $ 50 $ 11 $ 232 $ 76 $ 911
============ ============ ============ ============ ============
Non-cash investing and financing
activities:
Common stock, options and
warrants issued as part of
business and technology
acquisitions................ $ -- $ 90 $ 6,105 $ 1,485 $ 11,560
============ ============ ============ ============ ============
Conversion of note payable and
convertible subordinated
debt to preferred stock..... $ -- $ 1,603 $ 500 $ 500 $ --
============ ============ ============ ============ ============
Conversion of note payable to
common stock................ $ -- $ 89 $ -- $ -- $ --
============ ============ ============ ============ ============
Assets acquired under capital
leases...................... $ -- $ 125 $ 2,092 $ 1,730 $ 987
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-16
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited)
(in thousands except share amounts)
Note 1. Description of the Company and Summary of Significant Accounting
Policies:
THE COMPANY
ShopNow.com Inc. (the Company), formerly TechWave, Inc., provides end-to-end
solutions that enable businesses to engage in electronic commerce with consumers
and with other businesses. The Company's offerings include customized
transaction and merchandising services through ShopNow.com, retail computer and
accessory sales and electronic software distribution through BuySoftware.com,
and a variety of merchant services, including technology consulting services and
traditional direct marketing and creative design services through Media
Assets, Inc., which was acquired in September 1998.
In June, 1999 the Company ceased operating its BuySoftware.com business. Given
the Company's continued involvement in certain retailing activities, 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 and larger companies
with greater financial, technical management and marketing resources and risks
associated with recent acquisitions. Further, during the period required to
develop commercially viable products, services and sources of revenues, the
Company may require additional funds that may not be readily available.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements for the nine month period ended
September 30, 1998 and 1999 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-17
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 1. Description of the Company and Summary of Significant Accounting
Policies: (Continued)
NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
"Computation of Earnings Per Share," basic earnings per share is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing net loss by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares of common stock issuable upon the conversion of the
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method); common equivalent shares are excluded from the calculation if their
effect is antidilutive. The Company has not had any issuances or grants for
nominal consideration as defined under Staff Accounting Bulletin 98. Diluted net
loss per share for all periods shown does not include the effects of the
convertible preferred stock and shares issuable upon the exercise of stock
options and warrants as the effect of their inclusion is antidilutive during
each period.
Pro forma basic and diluted net loss per share is computed based on the weighted
average number of shares of common stock outstanding giving effect to the
conversion of convertible preferred stock outstanding that automatically
converted upon completion of the Company's initial public offering (using the
if-converted method from the original issuance date) on October 4, 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.
REVENUE RECOGNITION
The Company generates revenues primarily from e-commerce outsourcing and
enabling services, advertising and merchandising conducted by businesses and
merchants on the Company's network of web sites (the ShowNow Network),
transaction fees from e-commerce web sites built and operated by the Company as
well as from products and services purchased by customers. Revenues are
recognized when e-commerce enabling and outsourcing services are provided or
when products have been shipped to the customer. The Company bears full credit
risk with respect to these sales. Transactional fees paid by merchants credit
risk with respect to these sales. Transactional fees paid by merchants generally
are recognized at the time of sale of a product or service using the Company's
transaction processing systems. In these transactions, the merchant bears the
full credit risk and the Company recognizes a transaction fee upon consummation
of the sale. Advertising and merchandising revenues are recognized ratably over
the term of the applicable agreement. Merchandising agreements typically run for
a period of one to four months, except for listing agreements which may run for
up to twelve months.
E-commerce enabling and outsourcing merchant services revenues from fixed and
unit price contracts are recognized on the percentage of completion method of
accounting, based primarily on the ratio of contract costs incurred to date to
total estimated contract costs. Anticipated losses on these contracts are
recorded when identified. To date, losses have not been 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. Fee revenue from
F-18
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 1. Description of the Company and Summary of Significant Accounting
Policies: (Continued)
ancillary services provided by the merchant services division is recognized upon
completion of the related job by the applicable third party vendor.
Unbilled services typically represent amounts earned under the Company's
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of customer lists, domain names, acquired
technology and goodwill related to acquisitions accounted for under the purchase
method of accounting. Amortization of these purchased intangibles is provided on
the straight-line basis over the respective useful lives of the assets,
primarily three years. The Company identifies and records impairment losses on
intangible and other assets when events and circumstances indicate that such
assets might be impaired. The Company considers factors such as significant
changes in the regulatory or business climate and projected future cash flows
from the respective asset. Impairment losses are measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset (See Note
9). Other intangible assets consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------
December 31,
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Customer lists......................................... $ -- $ 1,978 $ 2,698
Domain names........................................... -- 1,533 1,744
Acquired technology.................................... 379 840 18,128
Other.................................................. 340 386 402
------------ ------------ ----------
719 4,737 22,972
Less - Accumulated amortization........................ (137) (793) (4,499)
------------ ------------ ----------
$ 582 $ 3,944 $ 18,473
============ ============ ==========
</TABLE>
INCOME TAXES
The shareholders of the Company elected to be treated as an S Corporation under
the Internal Revenue Code until February 26, 1997. As a result, taxable income
until that date was included in the taxable income of the individual
F-19
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 1. Description of the Company and Summary of Significant Accounting
Policies: (Continued)
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets purchased under capital leases
are recorded at cost (based on the present value of future minimum lease
payments discounted at the contractual interest rates). Depreciation is computed
using the straight-line method over the assets' estimated useful lives of three
to seven years.
STOCK COMPENSATION
The Company has adopted the disclosure only provisions of the SFAS No. 123,
"Accounting for Stock-Based Compensation", whereby it applies APB No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the market price of the Company's common stock at the date of grant over
the stock option exercise price.
Options and warrants issued to non-employees are accounted for using the fair
value method of accounting as prescribed by SFAS No. 123, utilizing the
Black-Scholes model.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist primarily of
salaries, supplies and contract services.
The Company's accounting policy is to capitalize eligible computer software
development costs upon the establishment of technological feasibility, which the
Company has defined as a completion of a working model. For the years ended
December 31, 1996, 1997 and 1998 and the period ended September 30, 1999, the
amount of eligible costs to be capitalized has not been significant, and
accordingly, the Company has charged all software development costs to research
and development in the accompanying consolidated statements of operations.
F-20
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 1. Description of the Company and Summary of Significant Accounting
Policies: (Continued)
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the years ended
December 31, 1996, 1997 and 1998 and the nine month period ended September 30,
1999, the Company incurred advertising and direct marketing expenses of
approximately $0, $470, $5.7 million and $17.3 million, respectively.
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
Upon the closing of the initial public offering discussed in Note 2, all of the
preferred stock outstanding as of the closing date was automatically converted
into shares of common stock. Unaudited pro forma shareholders' equity at
September 30, 1999, as adjusted for the conversion of preferred stock, is
presented in the accompanying consolidated balance sheet.
STATEMENT OF COMPREHENSIVE LOSS
There were no reclassification adjustments as defined in SFAS 130, "Reporting
Comprehensive Income" or income tax provision related to the unrealized loss on
investments during the nine month period ended September 30, 1999.
RECLASSIFICATIONS
Certain information reported in previous years has been reclassified to conform
to the 1999 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the company's financial position or results of
operations.
Note 2. Initial Public Offering:
On October 4, 1999, the Company closed its IPO of 7,250,000 shares of common
stock at $12.00 per share, for net proceeds 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
F-21
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 2. Initial Public Offering: (Continued)
of the IPO exercised their over-allotment option and sold an additional
1,087,500 shares at $12.00 per share, for net proceeds of $12.1 million. The
combined net proceeds to the Company, less offering costs of approximately $1.4
million, were $91.6 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 3. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------
December 31,
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Computer equipment..................................... $ 601 $ 3,313 $ 7,713
Furniture and fixtures................................. 14 568 1,142
Software............................................... 42 759 6,544
Leasehold improvements................................. 2 548 641
------------ ------------ ----------
659 5,188 16,040
Less - Accumulated depreciation and amortization....... (187) (1,003) (3,294)
------------ ------------ ----------
Property and equipment, net............................ $ 472 $ 4,185 $ 12,746
============ ============ ==========
</TABLE>
Property and equipment shown above include assets under capital leases of
approximately $125, $2.2 million and $3.8 million at December 31, 1997 and 1998
and September 30, 1999, with corresponding accumulated amortization of $60 and
$270 and $975 at December 31, 1997 and 1998 and September 30, 1999,
respectively.
Note 4. Investment in Marketable Equity Securities:
At September 30, 1999, the Company held 476,410 shares of 24/7 Media and 195,122
shares of FreeShop.com, Inc., both of which are publicly traded companies
subject to the reporting requirements of the Securities and Exchange Commission.
The Company classifies these investments 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 loss in the accompanying consolidated balance
sheets. Fair value is based on quoted market prices.
F-22
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 5. Accrued Liabilities:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------
December 31,
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Accrued compensation and benefits...................... $ 324 $ 576 $ 1,529
Accrued marketing expenses............................. -- -- 3,359
Other accrued liabilities.............................. 178 556 1,617
------------ ------------ ----------
$ 502 $ 1,132 $ 6,505
============ ============ ==========
</TABLE>
Note 6. Line of Credit:
The Company had a line of credit with a financial institution with a maximum
balance of $300. The line of credit bore interest at prime plus 2% (9.75% at
December 31, 1998), with interest payable monthly. The line of credit expired
and principal balance was paid in February 1999. The line of credit was secured
by substantially all assets of the Company.
In March 1999, the Company entered into a loan and security agreement
(agreement) with a financial institution for a term loan and line of credit. In
May 1999, the agreement was amended allowing the Company to borrow up to $8.5
million at any one time, consisting of a $3.5 million term loan (term loan), a
$4.0 million bridge loan (bridge loan) and a line of credit of up to $2.5
million ($1.0 million until the bridge loan is repaid). The line of credit bears
interest at the financial institution's base rate plus 2%, is secured by
substantially all assets of the Company and expires on March 31, 2000. The term
loan bears interest at 12%, is secured by substantially all assets of the
Company and matures in March 2002. The bridge loan bears interest at 12% and is
due upon the earlier of December 1, 1999 or a debt or equity financing by the
Company surpassing $10.0 million. In conjunction with the agreement, the Company
issued warrants to acquire 72,000 shares of common stock at an exercise price of
$6.25 per share. The warrants are exercisable immediately and expire in
March 2006. In May 1999 in connection with the modification, the Company issued
additional warrants to acquire 70,000 shares of common stock at an exercise
price of $7.00 per share. The warrants are exercisable immediately and expire in
June 2006.
F-23
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 7. Notes and Leases Payable:
<TABLE>
<CAPTION>
--------------------------------------------
December
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Subordinated demand notes payable bearing interest at
9%; in January 1998, principal converted to preferred
stock and interest was paid in cash.................. $ 500 $ -- $ --
Notes payable bearing interest at 12%, increasing by 1%
per year each 30 days, to a maximum of 18% per year;
principal and interest was paid in January 1998...... 1,775 -- --
Convertible note payable to shareholder, interest at
applicable short-term federal rate, quarterly
principal and interest payments totaling $113; final
payment due in October 2000. The note is convertible
to common stock at $8.00 per share................... -- 859 401
Convertible note payable to shareholder, interest at
10% with principal due the earlier of June 15, 2000
or upon effectiveness of an initial public offering,
at which time the note is convertible into common
stock at the option of the holder.................... -- -- 1,000
Bridge note payable with interest at 12% due upon the
earlier of December 1, 1999 or the date of certain
milestones........................................... -- -- 3,929
Term note payable bearing interest at 12%, maturity
date March, 2002..................................... -- -- 3,500
Capital lease obligations and other notes payable,
interest, and principal payable monthly, interest at
rates from 6% to 18% with maturity dates between 1999
and 2003............................................. 293 2,111 5,082
------------ ------------ ----------
2,568 2,970 13,912
Less - current portion................................. (1,684) (1,133) (8,110)
------------ ------------ ----------
$ 884 $ 1,837 $ 5,802
============ ============ ==========
</TABLE>
In September 1997, the Company issued 9% Subordinated Demand Notes totaling $500
to each of two shareholders. In January 1998, the principal amount of these
Demand Notes was converted to 125,000 shares of Series D preferred stock and
interest of approximately $13 was paid in cash.
In November 1997, the Company completed a bridge financing with individual
investors and executed Promissory Notes with principal totaling $1,775. The
interest on this principal was 12% per annum, increasing by 1% per year each 30
days to a maximum of 18% per year. In connection with the closing of the
Company's Series D equity placement in January 1998, the $1,775 plus interest of
$61 was paid in full. The placement agent and the holders of the Promissory
Notes also received warrants to purchase 177,500 and 62,125 shares of the
Company's common stock, respectively, at $1.50 per share. The warrants are
exercisable immediately and expire in October 2000.
F-24
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 7. Notes and Leases Payable: (Continued)
In October 1998, the Company completed a bridge financing with individual
investors and executed Promissory notes with principal totaling $3.7 million.
The interest on this principal was 13% per year. In connection with the
Company's Series F equity placement in December 1998, the $3,700 plus interest
of $12 was paid in full. The placement agent and the holders of the promissory
notes also received 129,500 and 129,500 warrants, respectively, to purchase a
total of 259,000 shares of the 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,
1998:
<TABLE>
<S> <C>
1999........................................................ $ 1,165
2000........................................................ 1,074
2001........................................................ 459
2002........................................................ 198
2003........................................................ 74
------------
$ 2,970
============
</TABLE>
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair market value of long-term debt
approximates the carrying amount at December 31, 1998.
Note 8. Commitments:
The Company is obligated under capital and operating leases for its headquarters
and various equipment leases. The leases expire through 2004. Future minimum
lease payments under these leases are as follows for the periods ending
December 31, 1998:
<TABLE>
<CAPTION>
---------------------------
Capital Operating
Leases Leases
------------ ------------
<S> <C> <C>
1999........................................................ $ 746 $ 708
2000........................................................ 712 709
2001........................................................ 507 473
2002........................................................ 184 --
2003........................................................ 72 --
------------ ------------
2,221 $ 1,890
============
Less - Amounts representing interest........................ (169)
------------
Net present value of minimum lease payment.................. $ 2,052
============
</TABLE>
F-25
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 8. Commitments: (Continued)
In 1999, the Company issued 62,400 warrants to purchase common stock at $6.25
per share to two financial institutions in conjunction with certain leases
included above. The warrants are exercisable immediately and expire between June
2004 and April 2006.
Rental expense for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999 was approximately $95, $127, $225 and $823,
respectively.
The Company has commitments under various business agreements to purchase
advertising totaling approximately $5.5 million in 1999, $6.0 million in 2000
and $3.5 million in 2001.
Note 9. Acquisitions:
In January 1997, the Company formed a wholly owned subsidiary, TechWave
Acquisition, Inc. (TechWave Acquisition). In January 1997, Web Solutions, Inc.
(Web Solutions) and Intelligent Software Solutions, Inc. (Intelligent Software)
merged with and into TechWave Acquisition in exchange for 600,000 shares of the
Company's common stock valued at $90, a convertible note payable for $250 ($226
in principal and $24 in interest), and $25 in cash, aggregating a total purchase
price of $341. The acquisition was accounted for in accordance with the purchase
method of accounting. The excess purchase price was principally allocated to
acquired technology, which is amortized over a five year life. In
November 1997, the unpaid principal balance of $89 was converted into 177,333
shares of common stock.
Both Web Solutions and Intelligent Software were software development companies
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 is not utilizing the acquired technology and has determined that it
has no alternative future use or value in the Company's transaction processing
systems, as the Company's technology platform provides the enhanced
functionality needed in the Company's business operations. Due to the impairment
of the acquired technology, the Company has written off all of the excess
purchase price, except for value assigned to domain names, in the accompanying
1998 consolidated statement of operations. As a result of the impairment, the
Company commenced legal proceedings in December 1998 against two of the
executives associated with the acquired companies. In January 1999, the two
executives filed a counterclaim against the Company. On August 10, 1999, all
legal proceedings were settled, resulting in an insignificant charge to the
Company.
In August 1998, the Company completed its acquisition of The Internet Mall which
was doing business as ShopNow, Inc. (ShopNow). The Internet Mall, Inc. operated
a shopping aggregation Web site and provided the Company with technology and
merchant relationships to assist in the development of an online shopping
destination. In connection with the Merger, the Company issued 719,915 shares of
common stock (the Merger Shares), valued at
F-26
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 9. Acquisitions: (Continued)
$3.30 per share, and warrants to purchase common stock for a total purchase
price of approximately $2.6 million. The acquisition was accounted for using the
purchase method of accounting. Of the total excess purchase price of $2.6
million, approximately $1.5 million was allocated to customer lists and domain
names, which are amortized over a three-year life, with the remainder being
allocated to acquired technology, workforce and goodwill, which are amortized
over three-year lives.
In September 1998, the Company entered into a purchase and merger agreement with
Media Assets, Inc. (doing business as The Haggin Group). The Haggin Group is a
creative design and direct marketing firm with an office in Mill Valley,
California. The Company paid The Haggin Group consideration including $300 in
cash, a promissory note for $1.0 million, 600,000 shares of the Company's common
stock, valued at $3.30 per share, and options to acquire common stock for a
total purchase price of approximately $3.3 million. The terms of the promissory
note require payments, by the Company, of eight equal quarterly installments of
$113 on the first day of each quarter commencing January 1, 1999 (with the
exception of April 1, 1999, which shall be $254) until fully paid on October 1,
2000. The acquisition was accounted for using the purchase method of accounting.
The excess purchase price of approximately $1.7 million was allocated to
customer lists and domain names and is being amortized over a three-year life.
In connection with this acquisition, three employees were granted a total of 1.2
million options at exercise prices between $2.00 and $3.00 per share to acquire
the Company's common stock. The vesting of these options was dependent upon the
achievement of certain performance measures related to business unit revenue and
customer growth as defined in the stock option agreements. The performance
measures initially established were well beyond the historical financial results
achieved during prior periods. As such, during the period these options were
outstanding, the thresholds established to trigger vesting were not considered
achievable and were not achieved. As no measurement date for the options
occurred since the price of the options was fixed, the number of shares to be
ultimately issued was not known. Since these thresholds were not considered
achievable, these options were cancelled in May of 1999. The three employees
were granted fixed-price options to purchase 405,000 shares of the Company's
common stock with time vesting provisions not dependent upon performance. These
options had the same strike prices and vesting terms as the original grants. As
the grant of the new options created a new measurement date, the Company
recorded $1.9 million of deferred compensation for the difference between the
strike price and the underlying fair market value of the common stock at
May 1999, which was determined to be $7.22 per share. The Company also
recognized a compensation charge of $831,000 for the immediately vested portion
of these grants in the accompanying consolidated September 30, 1999 financial
statements.
In June 1999, the Company acquired GO Software, Inc. (GO). GO develops and
markets transaction processing software for personal computers that can function
on a stand-alone basis or can interface with core corporate accounting systems.
The Company paid GO $4.7 million in cash, issued a $1 million promissory note
bearing interest at 10%, and issued 1,123,751 shares of common stock, valued at
$8.54 per share, for a total purchase price of $15.4 million. The acquisition
was accounted for using the purchase method of accounting. Of the excess
purchase price of approximately $14.4 million, $13.8 million was allocated to
acquired technology and $556 was allocated to goodwill, which are both being
amortized over a three-year life. The note bears interest at 10% and is due on
the earlier of June 15, 2000 or upon the effective date of an initial public
offering, at which time the note becomes convertible to common stock at the
option of the holder at the initial public offering price per share.
F-27
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 9. Acquisitions: (Continued)
In addition, as discussed in Note 11, the Company acquired CardSecure, Inc.
(CardSecure) in June 1999 for a purchase price of approximately $3.5 million.
CardSecure is a developer of e-commerce enabled Web sites. The acquisition was
accounted for using the purchase method of accounting. The excess purchase price
of approximately $3.5 million was allocated to acquired technology and is being
amortized over a three year life.
UNAUDITED PRO FORMA COMBINED RESULTS
The following summarizes the unaudited pro forma results of the Company's
operations for the years ended December 31, 1997 and 1998 and nine months ended
September 30, 1999, assuming the Media Assets, Inc., and The Internet
Mall, Inc. transactions occurred as of January 1, 1997 and the GO and CardSecure
transactions occurred as of January 1, 1998. Pro forma information for the
e-Warehouse, Inc. and CyberTrust, Inc. transactions is not presented, as it is
not considered meaningful. The pro forma 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 Nine Months
December 31, Ended
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Revenues............................................... $ 6,426 $ 13,508 $ 24,278
Net loss before taxes.................................. $ (4,917) $ (24,764) $ (49,922)
Net loss per share..................................... $ (0.98) $ (4.49) $ (8.24)
</TABLE>
Note 10. Income Taxes:
The Company did not provide any current or deferred United States federal, state
or foreign income tax provision or benefit for any of the periods presented
because it has experienced operating losses since inception, and has provided
full valuation allowances on deferred tax assets because of uncertainty
regarding their realizability. Deferred taxes consist primarily of net operating
loss carryforwards, offset by deferred tax liabilities resulting from stock
acquisitions.
The difference between the statutory federal tax rate of 34% and the tax
provision of zero recorded by the Company is primarily due to the Company's full
valuation allowance against its deferred tax assets.
At September 30, 1999, the Company had net operating loss carryforwards of
approximately $65.0 million related to U.S. federal, foreign and state
jurisdictions. Utilization of net operating loss carryforwards are subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended due to the Series D and E financing transactions. The Company is limited
to approximately $3.0 million per year on net operating losses incurred prior to
April 1998. These carryforwards will begin to expire at various times commencing
in 2012.
F-28
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 10. 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:
<TABLE>
<CAPTION>
--------------------------------------------
December 31
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Net operating loss carryforwards....................... $ 1,300 $ 7,500 $ 22,100
Other.................................................. -- 200 200
------------ ------------ ----------
Total deferred assets.................................. 1,300 7,700 22,300
Intangible assets...................................... -- (1,300) (5,570)
Valuation allowance for deferred tax assets............ (1,300) (6,400) (16,730)
------------ ------------ ----------
Net deferred taxes..................................... $ -- $ -- $ --
============ ============ ==========
</TABLE>
Note 11. Shareholders' Equity:
CONVERTIBLE PREFERRED STOCK
The Company has authorized 20,000,000 shares of convertible preferred stock.
Shares of convertible preferred stock may be issued from time to time in one or
more series, with designations, preferences and limitations established by the
Company's board of directors.
F-29
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 11. Shareholders' Equity: (Continued)
As of September 30, 1999, the Company had designated nine series of convertible
preferred stock (Series A through I). Amounts are as follows:
<TABLE>
<CAPTION>
--------------------------------------------
December 31,
--------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Series A preferred stock: Issued 699,612 shares in
1997, aggregate liquidation preference $350.......... $ 350 $ 350 $ 350
Series B preferred stock: Issued 2,334,079 shares in
1997, aggregate liquidation preference $1,800........ 1,800 1,800 1,800
Series C preferred stock: Issued 996,748 shares in
1997, aggregate liquidation preference $1,473........ 1,253 1,253 1,473
Series D preferred stock: Issued 4,250,000 shares in
1998, aggregate liquidation preference $17,000....... -- 13,461 13,461
Series E preferred stock: Issued 2,125,000 shares in
1998, aggregate liquidation preference $8,500........ -- 7,672 7,672
Series F preferred stock: Issued 2,056,000 shares in
1998 and 2,336,000 in 1999, aggregate liquidation
preference $12,850................................... -- 10,534 11,934
Series G preferred stock: Issued 5,014,286 shares in
1999, aggregate liquidation preference $35,100....... -- -- 33,200
Series H preferred stock: Issued 333,334 shares in
1999, aggregate liquidation preference $3,000........ -- -- 2,840
Series I preferred stock: Issued 2,100,000 shares in
1999, aggregate liquidation preference $18,900....... -- -- 16,621
------------ ------------ ----------
$ 3,403 $ 35,070 $ 89,351
============ ============ ==========
</TABLE>
Series A through I preferred stock is convertible into common stock on a
one-for-one basis, at the option of the holder, subject to antidilution
provisions. In the event of an effective registration statement where the total
proceeds exceed $15 million and the minimum price per share is achieved, the
Series A through I preferred stock is automatically converted into common stock.
The Series A through I shareholders have the right to one vote for each share of
common stock into which the stock could be converted. In the event of
liquidation, Series A through I shareholders are entitled to a per-share
distribution in preference to common shareholders equal to the original issue
price. In the event the funds are insufficient to make a complete distribution
to the Series A through I shareholders, then all of the funds available shall be
distributed ratably based on their respective liquidation preferences among the
holders of Series A through I preferred stock.
On February 26, 1997, the Company issued 699,612 shares of convertible Series A
preferred stock (Series A stock) for the cancellation of approximately $350 of
shareholder notes. In February and May of 1997, the Company issued 2,334,079
shares of convertible Series B preferred stock (Series B stock) for
approximately $1.8 million.
F-30
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 11. Shareholders' Equity: (Continued)
In May through July 1997, the Company issued $1.2 million of convertible
subordinated notes. These notes bore interest at an annual rate of 8%. On
October 31, 1997, the outstanding principal under these notes was converted into
835,205 shares of a new series of the Company's preferred stock (Series C
stock). Upon conversion, the holders of the notes also received warrants that
expire on their sixth anniversary date or the closing of an initial public
offering to purchase 167,047 shares of Series C stock exercisable at $1.50 per
share.
During the period from January 23 through April 15, 1998, the Company completed
a $25.5 million private equity placement. The Company issued 4.25 million shares
of Series D and 2.125 million shares of Series E preferred stock each at $4.00
per share, for a total of 6.375 million shares. In conjunction with this sale,
the Company issued 637,500 warrants to purchase common stock at $5.00 per share.
The warrants are currently exercisable and expire on their third anniversary. In
addition, the Company issued to the placement agent 625,000 warrants to purchase
common stock at $4.40 per share. The warrants are exercisable immediately and
expire on their third anniversary.
During the fourth quarter of 1998 and the first quarter of 1999, the Company
completed a $14.6 million private equity placement. The Company issued 2,336,000
shares of Series F preferred stock at $6.25 per share. In conjunction with this
sale, the Company issued 233,600 warrants to purchase common stock at $7.50 per
share. The warrants are exercisable on the first anniversary of their issuance
and expire on their third anniversary. In addition, the Company issued to the
placement agent 233,600 warrants to purchase common stock at $6.25 per share.
The warrants are exercisable immediately and expire on their third anniversary.
As a condition to the commencement of the Series D private equity placement
described above, the holders of the Series A, Series B, and Series C stock
agreed to an amended and restated Articles of Incorporation that amended and
deleted certain rights of the Series A, Series B, and Series C stock, including
redemption and preferential dividend rights.
In March and April 1999, the Company completed a $5 million private equity
placement. The Company issued 714,286 shares of Series G preferred stock at
$7.00 per share and 35,715 warrants to purchase common stock at $7.50 per share.
The warrants are exercisable immediately and expire on their third anniversary.
In April 1999, the Company entered into a cross promotion agreement and equity
exchange agreement with 24/7 Media. As a part of the equity exchange agreement,
24/7 Media acquired 4.3 million shares of the Company's Series G preferred stock
at $7.00 per share and 860,000 warrants to acquire common stock at $7.00 per
share in exchange for consideration valued at $30.1 million. The warrants are
exercisable immediately and expire on their third anniversary. The purchase
price consists of three parts: $5.0 million in cash, 466,683 shares of 24/7
Media's common stock, and the right to acquire 24/7 Media's interest in
CardSecure, Inc., a developer of e-commerce enabled Web sites. In June, 1999,
the Company acquired 24/7 Media's interest in CardSecure, Inc. and also acquired
the remaining minority interest from CardSecure's founders and received 9,727
additional shares of 24/7 Media's common stock by issuing 243,036 shares of the
Company's common stock valued at $8.54 per share. The total purchase price for
CardSecure, Inc. was $3.5 million.
In May 1999, the Company completed a $3 million private equity placement. The
Company issued 333,334 shares of Series H preferred stock at $9.00 per share and
50,000 warrants to purchase common stock at $9.00 per share. The warrants are
exercisable immediately and expire on their third anniversary.
F-31
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 11. Shareholders' Equity: (Continued)
In July 1999 the Company closed a $18.9 million private equity placement with a
financial institution pursuant to the terms of a stock purchase agreement which
had been entered into on June 17, 1999. The closing of the private equity
placement was subject only to shareholder approval of an amendment to the
Company's Articles of Incorporation and the receipt of Hart-Scott-Rodino Act
approval. The Company issued 2,100,000 shares of Series I preferred stock at
$9.00 per share and 555,556 warrants to purchase common stock at $9.00 per
share. The warrants are exercisable immediately and expire on their third
anniversary. The Series I preferred stock contains substantially the same rights
and preferences as the previous series of preferred stock.
In conjunction with the Series I preferred stock, the Company entered into an
agreement with the financial institution and received $6.1 million in cash,
which represents prepaid licensing fees. This amount is being recognized as
revenue on a straight-line basis over 27 months, which represents the term of
the agreement, which began in August 1999.
STOCK OPTION PLANS
In October 1996, the Company adopted a combined incentive and nonqualified stock
option plan (the Plan) to provide incentive to employees, directors, consultants
and advisors. The Company reserved 5,000,000 shares of common stock for issuance
under the Plan. During 1999, the Company amended the Plan and increased the
shares reserved for issuance under the Plan to 8,000,000. The Company has
granted rights to purchase 1,739,470 shares to Company executives outside the
Plan.
Options under the Plan, as well as outside the Plan, generally expire 10 years
from the date of grant. The Board of Directors determines the terms and
conditions of options granted under the Plan, and outside the Plan, including
the exercise price. Options are generally granted at fair market value on the
date of grant and vest immediately or ratably over three years from the date of
grant.
Under APB No. 25, the Company records compensation expense over the vesting
period for the difference between the exercise price and the deemed fair market
value for financial reporting purposes of stock options granted. The fair value
of common stock has been determined by the Company based on factors including,
but not limited to, preferred stock sales, milestones achieved in the
development of the business, comparisons to competitive public companies and
general market conditions. In conjunction with grants made in 1998 and 1999, the
Company recorded approximately $183 and $2,547 as stock compensation expense in
the accompanying December 31, 1998 and September 30, 1999 consolidated
statements of operations, respectively.
F-32
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 11. Shareholders' Equity: (Continued)
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,
------------------------------------------ September 30,
1996 1997 1998 1999
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net loss:
As reported.............................. $ (810) $ (4,766) $ (24,745) $ (47,248)
Pro forma................................ (810) (4,766) (25,067) (50,900)
Basic and diluted net loss per share:
As reported.............................. $ (0.40) $ (1.83) $ (7.01) $ (9.03)
Pro forma................................ (0.40) (1.83) (7.10) (9.73)
</TABLE>
The fair value of each option is estimated using the Black-Scholes option
pricing model that takes into account: (1) the stock price at the grant date,
(2) the exercise price, (3) estimated lives ranging from two to three years,
(4) no dividends, (5) risk-free interest rates ranging from 5.3% to 6.5% and
(6) volatility ranging from 0% through June 18, 1999 to 72.0% subsequent to
June 18, 1999. The initial impact on pro forma net loss may not be
representative of compensation expense in future years when the effect of the
amortization of multiple awards would be reflected in results from operations.
A summary of activity related to the option grants inside and outside the Plan
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------
1996 1997 1998 September 30, 1999
------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
-------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period............. -- $ -- 145,500 $0.47 1,793,515 $0.54 4,333,566 $1.91
Granted............ 155,500 0.47 1,813,482 0.55 3,087,379 2.60 5,793,991 6.94
Exercised.......... -- -- -- -- (27,499) 0.77 (509,987) 2.18
Canceled........... (10,000) 0.50 (165,467) 0.60 (519,829) 2.28 (519,531) 4.06
Outstanding at end of
period............. 145,500 0.47 1,793,515 0.54 4,333,566 1.91 9,098,039 4.98
======= ========= ========= =========
Exercisable at the
end of the
period............. 20,000 0.25 436,653 0.68 1,681,026 1.06 2,707,245 1.82
======= ========= ========= =========
</TABLE>
F-33
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 11. Shareholders' Equity: (Continued)
The following information is provided for options outstanding and exercisable at
September 30, 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 $2.13.................. 3,167,640 $ 1.08 6.7 2,150,391 $ 0.99
$2.13 to $4.25.................. 2,168,142 3.76 9.0 373,156 3.74
$4.25 to $6.38.................. 98,915 5.09 9.6 3,365 5.35
$6.38 to $8.50.................. 1,180,312 7.00 9.3 122,387 7.00
$8.50 to $10.63................. 1,983,030 9.59 9.7 57,946 9.02
$10.63 to $12.75................ 500,000 12.00 10.0 -- --
------------ ------------ ------------ ------------ ------------
9,098,039 $ 4.98 8.4 2,707,245 $ 1.82
============ ============ ============ ============ ============
</TABLE>
In addition to the shares noted above, the Company has granted 310,000 options
outside of the plan at an exercise price of $4.00 that are contingent on certain
performance criteria being met. Achievement of the performance measures was not
ascertainable at September 30, 1999. Accordingly, no amounts have been recorded
in the accompanying consolidated statement of operations relating to this option
grant. In June 1999, the Company granted 995,079 options to certain executives.
The price and vesting of these options is dependent upon the Company completing
an initial public offering of its common stock.
WARRANTS AND OPTIONS ISSUED TO MARKETING PARTNERS
On April 29, 1999, pursuant to a distribution and marketing agreement with a
telecommunications company, the Company issued warrants to purchase 100,000
shares of the Company's common stock at $10 per share. The warrants are
exercisable immediately and expire in April 2002. Simultaneously, the Company
entered into a put agreement, which allows the telecommunications company to put
the shares back to the Company for $25 per share during the period from
June 2001 to August 2001. The number of shares subject to the put warrant
declines over time as the Company generates revenue under the marketing and
distribution agreement. In accordance with EITF 96-13, the Company has recorded
the fair value of the put warrant in the accompanying consolidated balance sheet
as of June 30, 1999.
On May 19, 1999, the Company entered into a distribution agreement with a
software manufacturer. As part of this agreement, the Company issued warrants to
purchase 100,000 shares of common stock at $9.00 per share, and options to
purchase 300,000 shares of common stock at $4.80 and 200,000 shares of common
stock at an exercise price of $9.00 per share, respectively.
F-34
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 11. Shareholders' Equity: (Continued)
The following shares of common stock were reserved at September 30, 1999:
<TABLE>
<S> <C>
Convertible preferred stock (Series A-I).................... 20,189,061
Stock options............................................... 8,940,503
Common stock warrants....................................... 4,228,306
Preferred stock warrants.................................... 3,390
------------
33,361,260
============
</TABLE>
Note 12. Segment Information:
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during the first quarter of fiscal 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available, 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 of the Company. The Company has identified
three distinct reportable segments: Merchant services, transactions and
merchandising and retail product sales through the BuySoftware.com Web site.
While the decision making group evaluates results in a number of different ways,
the line of business management structure is the primary basis for which it
assesses financial performance and allocates resources. The accounting policies
of the line of business operating segments are the same as those described in
the summary of significant accounting policies.
F-35
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 12. Segment Information: (Continued)
The following table represents the Company's segment information for the years
ended December 31, 1996, 1997 and 1998, and the nine months ended September 30,
1998 and 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
For The Nine Months Ended
December 31, September 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated customers:
ShopNow network and transaction
processing (excluding
BuySoftware.com).................... $ -- $ 35 $ 280 $ 56 $ 6,249
Merchant services (excluding
BuySoftware.com).................... 993 500 2,416 517 7,365
BuySoftware.com....................... -- 69 4,458 2,424 9,923
----------- ----------- ----------- ----------- -----------
993 604 7,154 2,997 23,537
----------- ----------- ----------- ----------- -----------
Cost of revenues:
ShopNow network and transaction
processing (excluding
BuySoftware.com).................... -- 35 142 18 3,585
Merchant services (excluding
BuySoftware.com).................... 430 356 1,255 270 4,719
BuySoftware.com....................... -- 124 4,452 2,526 11,190
----------- ----------- ----------- ----------- -----------
430 515 5,849 2,814 19,494
----------- ----------- ----------- ----------- -----------
Gross profit:
ShopNow network and transaction
processing (excluding
BuySoftware.com).................... -- -- 138 38 2,664
Merchant services (excluding
BuySoftware.com).................... 563 144 1,161 247 2,646
BuySoftware.com....................... -- (55) 6 (102) (1,267)
----------- ----------- ----------- ----------- -----------
$ 563 $ 89 $ 1,305 $ 183 $ 4,043
=========== =========== =========== =========== ===========
Profit reconciliation:
Gross profit for reportable
segments............................ $ 563 $ 89 $ 1,305 $ 183 $ 4,043
Operating expenses.................... (1,323) (4,691) (26,221) (13,491) (50,686)
Other income and expenses............. (50) (164) 171 177 (605)
----------- ----------- ----------- ----------- -----------
Loss before provision for income
taxes............................... $ (810) $ (4,766) $ (24,745) $ (13,131) $ (47,248)
=========== =========== =========== =========== ===========
</TABLE>
The Company does not track assets by operating segments. Consequently is it not
practicable to show assets by operating segments.
F-36
<PAGE>
ShopNow.com Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Information as of and for the nine month periods ended September 30, 1998
and 1999 is unaudited) (Continued)
(in thousands except share amounts)
Note 13. Subsequent Events:
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 World Wide
Web site that focuses on entertainment and interactivity. Upon effectiveness of
the acquisition, a total of 3,799,237 unregistered shares of ShopNow common
stock were issued to the owners of SpeedyClick. Options to purchase SpeedyClick
common stock were assumed by the Company and converted into 157,527 options to
purchase ShopNow common stock. The Company also paid cash consideration of $3
million to the owners of SpeedyClick. The Company accounted for this transaction
as a purchase.
On December 3, 1999, the Company acquired Cortix, Inc. (Cortix), an Arizona
corporation d/b/a 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 unregistered shares
of ShopNow common stock were issued to the owners of Cortix. The Company also
paid cash consideration of $1 million to the owners of Cortix. The Company
accounted for this transaction as a purchase.
On December 17, 1999, the Company acquired WebCentric Inc., (WebCentric) a
Kansas corporation d/b/a bottomdollar.com, for $40.8 million of cash, common
stock and common stock options. 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 unregistered shares of ShopNow common stock
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 cash
consideration paid was $1.4 million. The Company accounted for this transaction
a purchase.
On December 20, 1999, the Company entered into a letter of intent to acquire
Ubarter.com, Inc. (Ubarter), for approximately $45 million of common stock and
common stock warrants. Ubarter, a publicly traded company, is an e-commerce
company specializing in online business-to-business barter exchange e-commerce.
The acquisition is expected to close in the second quarter of 2000 subject to
the effectiveness of a registration statement on Form S-4 with the Securities
and Exchange Commission and the approval of the shareholders of Ubarter.
F-37
<PAGE>
Report of Independent Public Accountants
To ShopNow.com Inc.:
We have audited the accompanying balance sheets of Media Assets, Inc. as of
June 30, 1997 and 1998, and the related statements of operations, shareholder's
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Media Assets, Inc. as of
June 30, 1997 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 31, 1999
F-38
<PAGE>
Media Assets, Inc.
Balance Sheets
(in thousands except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------
June 30,
--------------------------- September 17,
1997 1998 1998
------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2 $ 957 $ 1,528
Accounts receivable.................................. 864 2,739 4,184
Receivable from shareholder.......................... 38 123 142
Unbilled services.................................... 400 456 413
Prepaid expenses and other current assets............ 11 8 152
------------ ------------ ----------
Total current assets............................... 1,315 4,283 6,419
Property and equipment, net............................ 204 287 271
Other assets........................................... 21 24 24
------------ ------------ ----------
Total assets....................................... $ 1,540 $ 4,594 $ 6,714
============ ============ ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable, current portion....................... $ 16 $ 29 $ 35
Accounts payable..................................... 386 378 121
Accrued wages and related expenses................... 132 134 54
Other accrued expenses............................... 43 115 494
Customer deposits.................................... 788 3,219 4,833
Income taxes......................................... 38 166 --
------------ ------------ ----------
Total current liabilities.......................... 1,403 4,041 5,537
------------ ------------ ----------
Long-term debt, net of current portion................. 34 94 78
------------ ------------ ----------
Commitments (Note 6)
Shareholder's equity:
Common stock, $.01 par value - authorized; 10,000
shares, issued and outstanding; 2,000 shares at
December 31, 1997 and September 17, 1998........... 1 1 1
Retained earnings.................................... 102 458 1,098
------------ ------------ ----------
Total shareholder's equity......................... 103 459 1,099
------------ ------------ ----------
Total liabilities and shareholder's equity......... $ 1,540 $ 4,594 $ 6,714
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-39
<PAGE>
Media Assets, Inc.
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------
Year Ended June 30, January 1, 1998
--------------------------- through
1997 1998 September 17, 1998
------------ ------------ -------------------
(Unaudited)
<S> <C> <C> <C>
Revenues........................................... $ 4,086 $ 5,597 $ 4,833
Costs and expenses:
Costs of revenues................................ 2,415 3,112 2,808
Selling, general and administrative.............. 1,497 1,925 1,684
------------ ------------ --------------
Total operating expenses....................... 3,912 5,037 4,492
------------ ------------ --------------
Operating income............................. 174 560 341
Other income, net.................................. -- 38 17
------------ ------------ --------------
Income before provision for income taxes........... 174 598 358
Provision for income taxes......................... (72) (242) --
------------ ------------ --------------
Net income................................... $ 102 $ 356 $ 358
============ ============ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
Media Assets, Inc.
Statements of Shareholder's Equity
(in thousands except share amounts)
<TABLE>
<CAPTION>
----------------------------------------------------------
Common Stock Total
--------------------------- Retained Shareholder's
Shares Amount Earnings Equity
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balances, June 30, 1996..................... 2,000 $ 1 $ -- $ 1
Net income................................ -- -- 102 102
------------ ------------ ------------ ------------
Balances, June 30, 1997..................... 2,000 1 102 103
Net income................................ -- -- 356 356
------------ ------------ ------------ ------------
Balances, June 30, 1998..................... 2,000 1 458 459
Net income................................ -- -- 640 640
------------ ------------ ------------ ------------
Balance September 17, 1998 (Unaudited)...... 2,000 $ 1 $ 1,098 $ 1,099
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
Media Assets, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------
January 1
Year Ended June 30, 1998 through
--------------------------- September 17,
1997 1998 1998
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 102 $ 356 $ 358
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation....................................... 73 101 120
Changes in assets and liabilities:
Accounts receivable................................ (324) (1,960) (2,217)
Unbilled services.................................. (326) (56) 428
Prepaid expenses and other assets.................. (12) -- 29
Income taxes....................................... 38 128 (10)
Accounts payable and accrued expenses.............. 303 66 161
Deposits........................................... 290 2,431 1,369
------------ ------------ ----------
Net cash provided by operating activities.......... 144 1,066 238
------------ ------------ ----------
Cash flows from investing activities:
Additions to property and equipment.................. (102) (184) (16)
------------ ------------ ----------
Cash flows from financing activities:
Proceeds on long-term debt........................... -- 81 --
Principal repayments of long-term debt............... (44) (8) (48)
------------ ------------ ----------
Net cash (used in) provided by financing
activities....................................... (44) 73 (48)
------------ ------------ ----------
Net increase (decrease) in cash and cash
equivalents...................................... (2) 955 174
Cash and cash equivalents, beginning of year........... 4 2 1,354
------------ ------------ ----------
Cash and cash equivalents, end of year................. $ 2 $ 957 $ 1,528
============ ============ ==========
Cash paid during the year for:
Interest............................................... $ 5 $ 14 $ 11
============ ============ ==========
Income taxes........................................... $ 38 $ 212 $ 212
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
Media Assets, Inc.
Notes to Financial Statements
June 30, 1998
(in thousands, except share amounts)
Note 1. Organization of the Company and Nature of Operations:
Media Assets, Inc., a California corporation doing business as The Haggin Group
(the Company) provides creative design and direct marketing services to
corporate customers throughout the United States. Additionally, the Company
provides certain ancillary services including color film separations and
printing, both of which are outsourced to vendors.
Note 2. Summary of Significant Accounting Policies:
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of September 17, 1998 and for the
period from January 1, 1998 through September 17, 1998 have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes that the results of operations for the period from January 1,
1998 through September 17, 1998 are not necessarily indicative of the results to
be expected for any future period.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from its fixed and unit price contracts in
process on the percentage of completion method of accounting, based primarily on
the ratio of contract costs incurred to date to total estimated contract costs.
Anticipated losses on these contracts are recorded when identified. Contract
costs include all direct labor, material, subcontract, other direct project
costs and indirect costs, including depreciation, vehicles, and labor related to
contract performance. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements that may result in revision to costs and income, are
recognized in the period in which the revisions are determined.
Unbilled services typically represent amounts earned under the Company's
contracts, but not billed due to timing or contract terms, which usually
consider passage of time, achievement of certain milestones or completion of the
project. Where billings exceed revenues earned on contracts, the amounts are
included in the accompanying balance sheets as customer deposits, as the amounts
typically relate to ancillary services, whereby the Company is acting in an
agency capacity.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers any highly
liquid short term investments purchased with an original maturity date of three
months or less to be cash equivalents.
F-43
<PAGE>
Media Assets, Inc.
Notes to Financial Statements (Continued)
June 30, 1998
(in thousands, except share amounts)
Note 2. Summary of Significant Accounting Policies: (Continued)
The Company maintains its cash in high credit quality financial institutions
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable.
To date, accounts receivable have been derived from revenues earned from
customers located in the United States. The Company performs ongoing credit
evaluations of its customers and generally requires no collateral. Historically,
credit losses have been minor and within management's expectations. At June 30,
1998, one customer accounted for 60% of the accounts receivable balance. This
amount was collected subsequent to June 30.
During the year ended June 30, 1998, 1 customer accounted for 12% of the
Company's net revenues.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life.
Maintenance, repairs and minor renewals are expensed as incurred. Major renewals
and betterments which substantially extend the life of the property are
capitalized. When an asset is sold or retired, the cost and related accumulated
depreciation are removed from the balance sheet and the resulting gain or loss
is included in the results of operations.
INCOME TAXES
The Company recognized deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for the amount of any future benefits which, more likely
than not based on current circumstances, are not expected to be realized.
Note 3. Receivable from Shareholder:
During 1997 and 1998, the Company made non-interest bearing loans to the sole
shareholder. Subsequent to June 30, 1998, all outstanding amounts were paid in
full.
F-44
<PAGE>
Media Assets, Inc.
Notes to Financial Statements (Continued)
June 30, 1998
(in thousands, except share amounts)
Note 4. Property and Equipment:
The accompanying balance sheets include the following property and equipment as
of June 30:
<TABLE>
<CAPTION>
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Computers and office equipment.............................. $ 271 $ 458
Vehicles.................................................... 65 65
Leasehold improvements...................................... 67 64
------------ ------------
403 587
Less: Accumulated depreciation and amortization............. (199) (300)
------------ ------------
Property and equipment - net................................ $ 204 $ 287
============ ============
</TABLE>
Note 5. Debt:
Long-term debt is summarized as follows as of June 30:
<TABLE>
<CAPTION>
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Equipment loan, interest at index rate + 1.5% due
October 2002.............................................. $ 8 $ 90
Notes payable, equipment financing, due in equal monthly
installments of principal and interest, interest at 9% to
10%, to maturity in July 2002............................. 42 33
------------ ------------
50 123
Less - current portion...................................... (16) (29)
------------ ------------
Long-term debt - net........................................ $ 34 $ 94
============ ============
</TABLE>
The aggregate maturities of long-term debt for the years subsequent to June 30,
1998, are as follows:
<TABLE>
<CAPTION>
Years ended June 30, Amount
- ------------------------------------------------------------ ------------
<S> <C>
1999........................................................ $ 29
2000........................................................ 29
2001........................................................ 29
2002........................................................ 26
2003........................................................ 10
------------
$ 123
============
</TABLE>
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities,
Note 6. Commitments:
The Company leases its facilities under various operating leases expiring in
October 1999.
F-45
<PAGE>
Media Assets, Inc.
Notes to Financial Statements (Continued)
June 30, 1998
(in thousands, except share amounts)
Note 6. Commitments: (Continued)
At June 30, 1998, future minimum lease payments under operating leases were as
follows:
<TABLE>
<CAPTION>
Years ended June 30, Amount
- ------------------------------------------------------------ ------------
<S> <C>
1999........................................................ $ 181
2000........................................................ 60
------------
$ 241
============
</TABLE>
Note 7. Income Taxes:
The provision for income taxes consisted of the following components:
<TABLE>
<CAPTION>
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Current:
Federal................................................... $ 64 $ 133
State..................................................... 19 39
------------ ------------
83 172
------------ ------------
Deferred:
Federal................................................... (9) 59
State..................................................... (2) 11
------------ ------------
(11) 70
------------ ------------
Total tax provision......................................... $ 72 $ 242
============ ============
</TABLE>
The provision for income taxes differs from the amount estimated by applying the
statutory federal income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Provision computed at federal statutory rate:............... 34.0% 34.0%
State taxes, net of federal tax benefit................... 6.1 6.1
Other items - net........................................... 1.3 0.4
------------ ------------
Effective tax rate.......................................... 41.4% 40.5%
============ ============
</TABLE>
Deferred tax liabilities at December 31, 1997 and 1998 consist primarily of cash
to accrual adjustments as the Company filed its tax returns on a cash basis.
Note 8. Acquisition:
On September 17, 1998, the Company was acquired by ShopNow.com Inc.
F-46
<PAGE>
Report of Independent Public Accountants
To ShopNow.com Inc.:
We have audited the accompanying balance sheets of The Internet Mall, Inc. (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception (November 13, 1996) to December 31, 1996 and for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Internet Mall, Inc., as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (November 13, 1996) to December 31, 1996 and the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
May 27, 1999
F-47
<PAGE>
The Internet Mall, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
------------------------------------------
December 31,
--------------------------- August 8,
1996 1997 1998
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 155 $ 240 $ 68
Accounts receivable..................................... -- 57 33
------------ ------------ ------------
Total current assets................................ 155 297 101
Property and equipment, net of accumulated depreciation
of $1 and $8 and $18.................................. 10 34 39
Intangible assets, net of accumulated amortization of
$10, $78 and $117..................................... 190 122 83
------------ ------------ ------------
Total assets........................................ $ 355 $ 453 $ 223
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.............. $ -- $ 90 $ 112
Deferred revenue...................................... -- 48 123
Convertible subordinated promissory note.............. -- 300 300
------------ ------------ ------------
Total current liabilities........................... -- 438 535
Commitments
Shareholders' equity:
Convertible preferred stock, 6,000,000 shares authorized
-
Series B convertible preferred stock, $0.0001 par
value, 2,000,000 shares designated; none, 1,724,867
and 1,724,867 issued and outstanding at 1996, 1997
and 1998, preference in liquidation of $500......... -- 490 490
Series A convertible preferred stock, $0.0001 par
value, 4,000,000 shares designated; 4,000,000 issued
and outstanding at 1996 and 1997, 1,951,563 in 1998
preference in liquidation of $1,952................. 383 383 363
Common stock, $0.0001 par value; 17,000,000 shares
authorized; 7,000,000 issued and outstanding at
1996, 1997 and 1998, net of subscriptions receivable
of $57.............................................. 13 13 13
Accumulated deficit................................... (41) (871) (1,178)
------------ ------------ ------------
Total shareholders' equity (deficit)................ 355 15 (312)
------------ ------------ ------------
Total liabilities and shareholders' equity
(deficit)......................................... $ 355 $ 453 $ 223
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-48
<PAGE>
The Internet Mall, Inc.
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------
Period from Inception January 1, 1998
(November 13, 1996) to Year Ended to
December 31, 1996 December 31, 1997 August 8, 1998
----------------------- ------------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Revenues.............................................. $ -- $ 188 $ 175
Operating expenses:
Cost of revenue....................................... -- 30 24
Product development................................... -- 71 114
Sales and marketing................................... -- 273 56
General and administrative............................ 41 639 275
--------------------- ----------------- ---------------
Total operating expenses............................ 41 1,013 469
--------------------- ----------------- ---------------
Operating loss...................................... (41) (825) (294)
--------------------- ----------------- ---------------
Interest expense...................................... -- 5 13
--------------------- ----------------- ---------------
Net loss............................................ $ (41) $ (830) $ (307)
===================== ================= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
The Internet Mall, Inc.
Statements of Shareholders' Equity
For the Period from Inception (November 13, 1996) to December 31, 1996
and for the Year Ended December 31, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Series B Convertible Series A Convertible
Preferred Stock Preferred Stock Common Stock Total
--------------------- --------------------- --------------------- Accumulate Shareholders'
Shares Amount Shares Amount Shares Amount Deficit Equity
---------- -------- ---------- -------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, November 13,
1996.................... -- $ -- -- $ -- -- $ -- $ -- $ --
Sale of common stock to
founders at $0.01
per share in
November 1996, net of
subscriptions receivable
of $57.................. -- -- -- -- 5,750,000 1 -- 1
Sale of common and
preferred stock at $0.01
and $0.10 per share,
respectively, in
exchange for assets and
cash in November 1996,
net of issuance costs of
$5...................... -- -- 4,000,000 383 1,250,000 12 -- 395
Net loss.................. -- -- -- -- -- -- (41) (41)
--------- -------- ---------- -------- --------- -------- ---------- ------------
Balances, December 31,
1996.................... -- -- 4,000,000 383 7,000,000 13 (41) 355
Sale of preferred stock at
$0.27 and $0.35 per
share in May and
August 1997,
respectively, net of
issuance costs of $10... 1,724,867 490 -- -- -- -- -- 490
Net loss.................. -- -- -- -- -- -- (830) (830)
--------- -------- ---------- -------- --------- -------- ---------- ------------
Balances, December 31,
1997.................... 1,724,867 490 4,000,000 383 7,000,000 13 (871) 15
Repurchase of preferred
stock at $0.01 per share
in January and
April 1998.............. -- -- (2,048,437) (20) -- -- -- (20)
Net loss.................. -- -- -- -- -- -- (307) (307)
--------- -------- ---------- -------- --------- -------- ---------- ------------
Balances, August 8, 1998
(Unaudited)............. 1,724,867 $ 490 1,951,563 $ 363 7,000,000 $ 13 $ (1,178) $ (312)
========= ======== ========== ======== ========= ======== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
The Internet Mall, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------
Period from Inception January 1, 1998
(November 13, 1996) to Year Ended to
December 31, 1996 December 31, 1997 August 8, 1998
----------------------- ------------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (41) (830) $ (307)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization..................... 11 76 49
Changes in operating assets and liabilities:
Accounts receivable........................... -- (57) 24
Accounts payable and accrued expenses......... -- 90 22
Deferred revenue.............................. -- 48 75
--------------------- ----------------- ---------------
Net cash used in operating activities....... (30) (673) (137)
--------------------- ----------------- ---------------
Cash flows used in investing activities:
Purchase of property and equipment............ (11) (32) (15)
--------------------- ----------------- ---------------
Cash flows from financing activities:
Net proceeds from preferred and common stock
issuances................................... 196 490 --
Repurchase of preferred stock................. -- -- (20)
Proceeds from convertible subordinated
promissory note............................. -- 300 --
Net cash (used in) provided by financing
activities................................ 196 790 (20)
--------------------- ----------------- ---------------
(Decrease) increase in cash and cash equivalents...... 155 85 (172)
Cash and cash equivalents, beginning of period........ -- 155 240
--------------------- ----------------- ---------------
Cash and cash equivalents, end of period.............. $ 155 $ 240 $ 68
===================== ================= ===============
Supplemental disclosures of cash flow information:
Common stock issued to founders in exchange
for promissory notes........................ $ 57 $ -- $ --
===================== ================= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
The Internet Mall, Inc.
Notes to Financial Statements
December 31, 1997
(in thousands except share amounts)
Note 1. Organization and Nature of Operations:
The Internet Mall, Inc. (the Company), a Delaware corporation, was incorporated
on November 13, 1996. The Company operated an internet shopping aggregation Web
site and provided links to on-line retailers that offer products and services.
Note 2. Significant Accounting Policies:
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of August 8, 1998 and for the
period from January 1, 1998 through August 8, 1998 have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes that the results of operations for the period from January 1,
1998 through August 8, 1998 are not necessarily indicative of the results to be
expected for any future period.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's revenue to date has been primarily derived from banner
advertising. Advertising revenue is recognized in the period the advertising
impressions are delivered.
The Company sells one-year mall listings on its site and recognizes revenue over
the term of the listing. Deferred revenue represents residual amounts from these
listings. In addition, the Company earns transaction fees for sales made through
the site which are recorded in the period of the sale.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and furniture
and is stated at cost. Depreciation is computed using an accelerated method over
estimated useful lives, which range from five to seven years.
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred and consist primarily of
salaries, travel, materials, supplies and contract services.
F-52
<PAGE>
The Internet Mall, Inc.
Notes to Financial Statements
December 31, 1997
(in thousands except share amounts) (Continued)
Note 2. Significant Accounting Policies: (Continued)
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for the amount of any future benefits which, more likely
than not based on current circumstances, are not expected to be realized.
INTANGIBLE ASSETS
Intangible assets consist primarily of technology acquired through the issuance
of Series A preferred stock. Intangible assets are being amortized over a three
year life. Amortization expense totaled $11 and $68 in 1996 and 1997.
STOCK COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its employee stock
benefit plans.
Note 3. Income Taxes:
At December 31, 1996 and 1997, a valuation allowance was recognized to offset
the related deferred tax assets due to the uncertainty of realizing the benefit
of the Company's net operating loss carryforward. The need for this valuation
allowance is subject to periodic review. If it is determined in a future period
that it is more likely than not that the tax benefits of the carryforwards will
be realized, the reduction of the valuation allowance will be recorded as a
reduction of the Company's income tax expense.
At 1997, the Company had net operating loss carryforwards of approximately $780,
which expire commencing in 2011. Under current tax law, net operating loss
carryforwards available in any given year may be limited upon the occurrence of
certain events, including significant changes in ownership interests.
The deferred tax assets of approximately $10 and $260 at December 31, 1996 and
1997, respectively, are composed primarily of net operating loss carryforwards.
Because the Company's utilization of these deferred tax assets is dependent upon
future profits that are not assured, a valuation allowance equal to deferred tax
assets has been provided.
Note 4. Convertible Subordinated Promissory Note:
In October 1997 the Company issued a convertible subordinated promissory note in
the amount of $300. The note bears interest at 7% and was originally due in
April 1998. Subsequent to December 31, 1997, the note due date was extended to
August 1998 and satisfied in connection with the acquisition discussed in Note
6.
F-53
<PAGE>
The Internet Mall, Inc.
Notes to Financial Statements
December 31, 1997
(in thousands except share amounts) (Continued)
Note 5. Shareholders' Equity:
COMMON STOCK
In November 1996, common stock was issued to founders for cash of $1 and
promissory notes of $57. The notes accrued interest at 5.87% per year.
CONVERTIBLE PREFERRED STOCK
The Company has authorized 6,000,000 shares of convertible preferred stock
(preferred stock). The board of directors has the authority to establish and
define, in one or more series, the price, rights, preferences and dividends of
authorized but unissued shares of preferred stock.
The shares outstanding at December 31, 1997 are summarized as follows:
SERIES B - The Company designated 2,000,000 shares as Series B
Convertible Stock (Series B), and issued 1,724,867 shares in May and
August 1997, at prices of $0.27 and $0.35 per share.
SERIES A - The Company designated 4,000,000 shares as Series A
Convertible Preferred Stock (Series A). In November 1996, 4,000,000
shares were issued in conjunction with 1,250,000 shares of common stock
in exchange for cash and technology rights, at a price of $0.10 per
share.
The rights and preferences of the preferred stock are as follows:
DIVIDENDS - Holders of preferred stock are entitled to receive annual
dividends of $0.02 per share for Series B and $0.005 per share for
Series A, when and if declared by the board of directors. Such dividends
are not cumulative. As of December 31, 1997, none has been declared.
CONVERSION - Each share of preferred stock is convertible at the option
of the holder into common stock at the conversion price in effect in such
date. Shares also convert upon a vote of the majority of the shareholders
of the respective series. Each share of the preferred stock automatically
converts into common stock upon the closing of an initial public offering
that meets certain conditions.
LIQUIDATION PREFERENCE - The Series B and Series A shares have
liquidation preferences of $0.29 and $0.10 per share, respectively, plus
all declared but unpaid dividends.
If the value of the Company on liquidation is insufficient to pay the
entire preferential amount, distribution should be made as follows: the
first $100 of assets shall be distributed to the holders of Series B and
any remaining amount shall be distributed pro rata to preferred
shareholders in proportion to remaining preferential amount the preferred
shareholder is entitled to receive.
Any assets remaining after the preferential distribution will be paid to
holders of common stock in proportion to shares held by each.
VOTING RIGHTS - Each holder of preferred stock shall be entitled to the
number of votes equal to the number of shares of common stock into which
such shares could be converted, and have voting rights equal to holders
of common stock.
F-54
<PAGE>
The Internet Mall, Inc.
Notes to Financial Statements
December 31, 1997
(in thousands except share amounts) (Continued)
Note 5. Shareholders' Equity: (Continued)
REPURCHASE RIGHT
Certain shares of common stock outstanding at December 31, 1997 were subject to
a repurchase right by the Company at the original sale price of $0.01 per share.
The number of shares the Company may repurchase was established on the date of
sale and is reduced ratably over the 36-month period ending in November 1999. At
December 31, 1997, 2,731,249 shares were subject to repurchase rights.
The Company repurchased 1,545,312 and 503,125 shares of common stock at $0.01
per share in January 1998 and April 1998, pursuant to the repurchase right
discussed above.
STOCK OPTIONS
On November 13, 1996, the Company adopted the 1996 Stock Option Plan (the Plan).
Under the terms of the Plan, stock options may be granted to employees,
directors, officers and consultants at a price determined by the Board. Options
have a term of up to 10 years and vest over a schedule determined by the Board
of Directors, generally four years.
The Plan is accounted for under APB Opinion No. 25, under which no compensation
cost has been recognized. Had compensation cost for this program been determined
consistent with SFAS No. 123, the Company's net loss would have changed to the
pro-forma amounts indicated below:
<TABLE>
<CAPTION>
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net loss - as reported...................................... $ (41) $ (830)
Net loss - pro-forma........................................ $ (41) $ (831)
</TABLE>
To determine compensation expense under SFAS No. 123 in 1997 and 1996, the fair
value of each grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
- Risk-free interest rates of 6.0%
- Expected lives of 4 years
- Expected dividend yields of 0%
- Expected volatility of 0%
F-55
<PAGE>
The Internet Mall, Inc.
Notes to Financial Statements
December 31, 1997
(in thousands except share amounts) (Continued)
Note 5. Shareholders' Equity: (Continued)
Option activity under the Plan was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Weighted
Weighted Average Grant
Available for Outstanding Average Date Fair
Future Grant Shares Exercise Price Value
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Balances, November 13, 1996................. -- -- $ -- $ --
Authorized................................ 1,650,000 -- -- --
Granted................................... -- -- -- --
Exercised................................. -- -- -- --
Cancelled................................. -- -- -- --
Balances, December 31, 1996................. 1,650,000 -- -- --
Granted................................... (332,557) 332,557 0.05 0.01
Exercised................................. -- -- -- --
Cancelled................................. 37,500 (37,500) 0.05 --
Balances, December 31, 1997................. 1,354,943 295,057 $ 0.05 --
</TABLE>
The options outstanding at December 31, 1997 have an exercise price of $0.05,
and a weighted average remaining contractual life of nine years. 117,929 options
were vested at December 31, 1997 with a weighted average exercise price of
$0.05.
SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1997, the Company had reserved shares of its common stock for
the following purposes:
<TABLE>
<S> <C>
Conversion of outstanding preferred stock:
Series A.................................................. 4,000,000
Series B.................................................. 1,725,867
1996 Stock Option Plan...................................... 1,650,000
------------
7,375,867
============
</TABLE>
Note 6. Commitments:
OPERATING LEASES
The Company leases office and computer equipment under operating leases with
expiration dates through May 1999.
Minimum lease commitments under noncancellable leases are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 19
1999........................................................ 5
------------
$ 24
============
</TABLE>
F-56
<PAGE>
The Internet Mall, Inc.
Notes to Financial Statements
December 31, 1997
(in thousands except share amounts) (Continued)
Note 6. Commitments: (Continued)
Rent expense under operating leases totaled $6 and $52 for the period from
inception (November 13, 1996) to December 31, 1996 and the year ended
December 31, 1997, respectively.
Note 7. Acquisition:
On August 6, 1998, the Company was acquired by ShopNow.com Inc.
F-57
<PAGE>
Report of Independent Auditors
Board of Directors
GO Software, Inc.
We have audited the accompanying balance sheets of GO Software, Inc. (the
Company) as of December 31, 1997 and 1998, the related statements of operations,
shareholder's equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GO Software, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Jacksonville, Florida
June 11, 1999
F-58
<PAGE>
GO Software, Inc.
Balance Sheets
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
------------------------------------------
December 31,
--------------------------- June 15,
1997 1998 1999
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,047 $ 766 $ 640
Accounts receivable, net of allowance of $55 in 1997, $49
in 1998 and $62 in 1999 (unaudited).................... 56 137 236
Refundable income taxes.................................. -- 33 33
Inventory................................................ 5 11 9
Prepaid expenses and other current assets................ 13 36 19
------------ ------------ ------------
Total current assets....................................... 1,121 983 937
Property and equipment, at cost:
Computer equipment....................................... 47 106 123
Office equipment......................................... 22 32 35
------------ ------------ ------------
69 138 158
Accumulated depreciation................................. (20) (50) (68)
------------ ------------ ------------
Net property and equipment................................. 49 88 90
Capitalized software development costs..................... -- 28 28
Deferred income tax asset.................................. 2 7 20
------------ ------------ ------------
Total assets............................................... $ 1,172 $ 1,106 $ 1,075
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses.............. $ 26 $ 66 $ 88
Income taxes payable..................................... 20 -- 3
Other taxes payable...................................... 5 2 --
Deferred revenue......................................... 9 21 128
------------ ------------ ------------
Total current liabilities.................................. 60 89 219
Deferred income tax liability.............................. 17 24 24
Series A redeemable preferred stock, $1.39167 par value
per share, 700,597 and 664,671 shares authorized and
outstanding (liquidation value)........................ 1,043 1,194 1,293
Shareholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized
and 1,000,000 shares outstanding....................... 10 10 10
Paid-in capital.......................................... 211 211 211
Retained earnings (deficit).............................. (169) (422) (682)
------------ ------------ ------------
Total shareholders' equity (deficit)....................... 52 (201) (461)
------------ ------------ ------------
Total liabilities and shareholders' equity................. $ 1,172 $ 1,106 $ 1,075
============ ============ ============
</TABLE>
See accompanying notes.
F-59
<PAGE>
GO Software, Inc.
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
----------------------------------------------
Years ended
December 31, January 1, 1999
--------------------------- to June 15,
1997 1998 1999
------------ ------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Net revenues.......................................... $ 793 $ 1,346 $ 728
Cost of goods sold.................................... 21 55 45
------------ ------------ ------------
Gross profit.......................................... 772 1,291 683
Selling, general and administrative expenses.......... 410 1,149 686
Research and development.............................. 130 253 182
------------ ------------ ------------
Operating (loss) income............................... 232 (111) (185)
Interest income....................................... 17 41 12
------------ ------------ ------------
(Loss) income before income taxes..................... 249 (70) (173)
Benefit (provision) for income taxes.................. (34) 17 12
------------ ------------ ------------
Net (loss) income..................................... $ 215 $ (53) $ (161)
============ ============ ============
</TABLE>
See accompanying notes.
F-60
<PAGE>
GO Software, Inc.
Statements of Shareholder's Equity (Deficit)
(in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------
Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................ $ 10 $ -- $ 62 $ 72
Net income prior to conversion to C
Corporation............................... -- -- 141 141
Conversion from S Corporation to C
Corporation............................... -- 203 (203) --
Accretion of Series A redeemable preferred
stock dividends........................... -- -- (68) (68)
Distributions to shareholders............... -- -- (175) (175)
Issuance of options......................... -- 8 -- 8
Net income.................................. -- -- 74 74
------------ ------------ ------------ ------------
Balance at December 31, 1997................ 10 211 (169) 52
Net loss.................................... -- -- (53) (53)
Accretion of Series A redeemable preferred
stock dividends........................... -- -- (200) (200)
------------ ------------ ------------ ------------
Balance at December 31, 1998................ 10 211 (422) (201)
Net loss (unaudited)........................ -- -- (161) (161)
Accretion of Series A redeemable preferred
stock dividends (unaudited)............... -- -- (99) (99)
------------ ------------ ------------ ------------
Balance at June 15, 1999 (unaudited)........ $ 10 $ 211 $ (682) $ (461)
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-61
<PAGE>
GO Software, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
----------------------------------------------
Years ended December 31 January 1, 1999
--------------------------- to June 15,
1997 1998 1999
------------ ------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income..................................... $ 215 $ (53) $ (161)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization....................... 14 29 18
Issuance of options................................. 8 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable, net.............. (38) (81) (99)
Increase in refundable income taxes............... -- (33) --
Increase (decrease) in inventory.................. (5) (6) 2
Increase (decrease) in prepaid expenses and other
current assets.................................. (13) (23) 17
Increase (decrease) in deferred income tax
liabilities, net................................ 15 2 (13)
Increase in deferred revenue...................... 6 12 107
Increase in accounts payable and accrued
expenses........................................ 23 17 22
Increase in income and other taxes payable........ 25 -- 1
------------ ------------ ------------
Net cash (used in) provided by operating activities... 250 (136) (106)
Cash flows from investing activities
Additions to property and equipment................... (40) (67) (20)
Capitalized software development costs................ -- (28) --
------------ ------------ ------------
Net cash used in investing activities................. (40) (95) (20)
Cash flows from financing activities
Distributions to shareholders......................... (175) -- --
Proceeds from issuance of Series A redeemable
preferred stock..................................... 1,000 -- --
Repurchase of preferred stock......................... (25) (50) --
------------ ------------ ------------
Net cash (used in) provided by financing activities... 800 (50) --
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents......................................... 1,010 (281) (126)
Cash and cash equivalents, beginning of year.......... 37 1,047 766
------------ ------------ ------------
Cash and cash equivalents, end of year................ $ 1,047 $ 766 $ 640
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during period for taxes................... $ -- $ 33 $ --
============ ============ ============
Noncash financing activities:
Accretion of Series A redeemable preferred stock.... $ 68 $ 200 $ 99
============ ============ ============
</TABLE>
See accompanying notes.
F-62
<PAGE>
GO Software, Inc.
Notes to Financial Statements
December 31, 1998
(in thousands except share and per share amounts)
Note 1. Organization and Nature of Business
GO Software, Inc. (the Company) was incorporated in Georgia in 1994. Initially,
the sole shareholder, in exchange for his knowledge in the fields of software
development and credit card processing, along with the rights to certain
software products, received 1,000,000 shares of common stock of the Company
after adjustment for the stock dividend (Note 3). The Company develops and
markets transaction processing software for personal computers that can function
on a stand-alone basis or can interface with core corporate accounting systems.
The Company currently sells its products to businesses in the United States and
Canada.
Note 2. Summary of Significant Accounting Policies
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company licenses software under license agreements that include multiple
elements including software and maintenance and support services. In accordance
with SOP 97-2, license agreement revenues are allocated to the various elements
based on "vendor-specific objective evidence of fair value." Revenues for the
software element are recognized when a license agreement has been signed,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. Revenues from maintenance agreements are recognized ratably over the
maintenance period.
The Company may bill resellers under which no shipment is made until sales are
made by the reseller to a third-party end user. Revenues from these arrangements
are deferred and recognized upon shipment to the third-party end user.
INVENTORY
Inventory, consisting of software media, manuals, and related packaging
materials, is stated at the lower of cost, determined on the first-in, first-out
basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three years.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with maturities
of three months or less when purchased to be cash equivalents.
F-63
<PAGE>
GO Software, Inc.
Notes to Financial Statements (Continued)
December 31, 1998
(in thousands except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (Continued)
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86. Costs incurred prior to
establishment of technological feasibility are expensed as incurred. Software
development costs of $0 and $28 were capitalized as of December 31, 1997 and
1998, respectively.
Amortization of capitalized software costs commences when the software is
available for general release to customers. Amortization is based on the
straight-line method over the estimated economic life of the product, which may
range from three to five years. No amortization was recorded in 1998 as none of
the products for which costs were capitalized were available for general release
by the end of the year.
DEFERRED REVENUE
Deferred revenue represents license fees and maintenance and support which have
been sold and payment received but not earned at year end.
During August 1997, the Company changed its income tax status from a Subchapter
S Corporation, which generally does not provide for income taxes at the
corporate level, to a C Corporation, which does provide for income taxes at the
corporate level. Accordingly, as of 1997, the accompanying financial statements
include a provision for income taxes.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires
income taxes to be recognized using the liability method. Specifically, deferred
tax assets and liabilities are determined based on estimated future tax effects
attributable to temporary differences between the amount of assets and
liabilities recognized for financial reporting and income tax purposes.
CREDIT RISK
The Company extends credit to certain customers, generally resellers. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
ADVERTISING AND PROMOTION
All costs associated with advertising and promoting products are expensed when
incurred. Advertising expense was $69 in 1997 and $143 in 1998.
Note 3. Shareholder's Equity
Effective January 2, 1997, the Company amended its Articles of Incorporation to
increase the number of authorized shares of no par common stock from 10,000 to
10,000,000. In connection with the recapitalization, the Company issued a stock
dividend of 999 shares of common stock for every 1 share of common stock
outstanding.
F-64
<PAGE>
GO Software, Inc.
Notes to Financial Statements (Continued)
December 31, 1998
(in thousands except share and per share amounts)
Note 4. Series A Redeemable Preferred Stock
On August 22, 1997 (the Closing Date), the Company executed an agreement with
certain private investors (the Investors) to issue 718,563 shares of convertible
preferred stock (the Preferred Stock) to the Investors for cash consideration of
$1,000. During 1997 and 1998, the Company acquired and retired $25 and $50,
respectively, of the outstanding preferred stock at the initial purchase price
(par value) plus a 4% return. The Preferred Stock is convertible initially on a
one-to-one basis into shares of common stock. The Preferred Stock is
automatically convertible into common stock upon an initial public offering of
the Company's common stock meeting certain conditions. The Preferred Stock has
certain anti-dilution features, has voting rights for the number of common
shares into which it is convertible, and has certain demand registration rights.
The Investors may put the Preferred Stock back to the Company at the initial
purchase price plus a 20% rate of return, compounded annually and cumulatively
from the Closing Date, beginning one-third on June 30, 2001, one-third on
June 30, 2002, and one-third on June 30, 2003. The Preferred Stock has a
liquidation preference equal to the face value of the Preferred Stock plus a
return compounded annually and cumulatively at 20% per year for the first two
years and 40% per year thereafter to the earlier of June 30, 2003 or the date
the Company liquidates, dissolves, or winds up its affairs. As of December 31,
1997 and 1998, returns related to the defined redemption price, which are
included in preferred stock on the accompanying balance sheets were $68 and
$269, respectively.
Note 5. Employee Stock Option Plan
Effective January 2, 1997, the Company adopted the 1997 Stock Incentive Plan
(the Plan). Under the terms of the Plan, the Company may grant incentive stock
options, nonqualified stock options, and restricted stock grants to employees
and other key persons, as defined. The total number of shares of common stock
reserved under the Plan is 277,445. Options are exercisable for a maximum of 10
years from the date of grant and must be granted at an exercise price at least
equal to fair value. Options generally vest on a pro rata basis over four years
from the date of grant.
In accordance with APB 25, the Company records no compensation expense for its
stock options when the exercise price equals or exceeds the fair value of common
stock on the date of grant. Pro forma information regarding net income is
required by FASB Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for the options
were estimated at the date of grant using the minimum value method with the
following weighted-average assumptions for 1998 and 1997: risk-free interest
rate of 5.60%; dividend yield of 0%; and a weighted-average expected life of the
options of 10 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The per share weighted
average fair value of options granted during the year ended
F-65
<PAGE>
GO Software, Inc.
Notes to Financial Statements (Continued)
December 31, 1998
(in thousands except share and per share amounts)
Note 5. Employee Stock Option Plan (Continued)
December 31, 1997 and 1998 was $.00 and $.61, respectively. The Company's 1997
and 1998 pro forma information follows:
<TABLE>
<CAPTION>
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
(Loss) income before pro forma effect of stock options...... $ 215 $ (53)
Pro forma compensation expense from stock options:
1997 grant................................................ -- --
1998 grants............................................... -- 19
Pro forma net (loss) income................................. $ 215 $ (72)
</TABLE>
Because options vest over several years and additional option grants are
expected, the effects of these pro forma calculations are not likely to be
representative of similar future calculations.
The following table summarizes option activity for the Company's stock option
plan for the years ended December 31, 1997 and 1998. During 1997, an employee
holding 199,601 options under the Plan resigned from the Company and forfeited
all options held, including vested and unvested options.
<TABLE>
<CAPTION>
----------------------------------------------
Weighted
Exercise Price Average
Shares per Share Exercise Price
------------ -------------- --------------
<S> <C> <C> <C>
Granted............................................... 208,801 $.26 to $3.00 $ .38
Exercised............................................. -- -- --
Canceled.............................................. 199,601 $.26 $ .26
Balance, December 31, 1997............................ 9,200 $3.00 $ 3.00
Granted............................................... 215,581 $1.39 to $2.00 $ 1.41
Exercised............................................. -- -- --
Canceled.............................................. -- -- --
Balance, December 31, 1998............................ 224,781 $1.39 to $3.00 $ 1.49
</TABLE>
No options are exercisable at December 31, 1998. Subsequent to December 31,
1998, 39,920 options granted in 1988 were canceled. The pro forma compensation
expense from these options is not included in the pro forma information above.
Note 6. Commitment
LEASE
The Company leases office space under a lease which expired in March 1999 and is
continuing on a month-to-month basis. The lease requires 60 days notice prior to
vacating the space. Future lease payments under this lease at December 31, 1998
are approximately $7. Lease expense for 1997 and 1998 was $12 and $22,
respectively.
F-66
<PAGE>
GO Software, Inc.
Notes to Financial Statements (Continued)
December 31, 1998
(in thousands except share and per share amounts)
Note 7. Income Taxes
The provision for income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Current:
Federal................................................... $ (15) $ 15
State..................................................... (5) 5
------------ ------------
(20) 20
Deferred:
Federal................................................... (12) (2)
State..................................................... (2) (1)
------------ ------------
(14) (3)
------------ ------------
$ (34) $ 17
============ ============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
---------------------------
December 31
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses.......................................... $ 2 $ 3
NOL carryforward.......................................... -- 4
------------ ------------
Total deferred tax assets................................... 2 7
Deferred tax liabilities:
Capitalized software development costs.................... -- 7
Accelerated depreciation.................................. 17 17
------------ ------------
Total deferred tax liabilities.............................. 17 24
------------ ------------
Net deferred tax liabilities................................ $ 15 $ 17
============ ============
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards of
approximately $16, which expire in 2013, if not utilized.
Utilization of the net operating loss may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating loss before utilization.
Note 8. Sale of Business
On June 15, 1999, the Company was acquired by ShopNow.com Inc.
F-67
<PAGE>
Independent Auditor's Report
The Board of Directors
WebCentric, Inc.:
We have audited the accompanying balance sheets of WebCentric, Inc. as of
December 31, 1998 and September 30, 1999 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the period August
15, 1997 (date of inception) to December 31, 1997, the year ended December 31,
1998 and the nine months ended September 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WebCentric, Inc. as of
December 31, 1998 and September 30, 1999 and the results of their operations and
their cash flows for the period August 15, 1997 (date of inception) to
December 31, 1997, the year ended December 31, 1998 and the nine months ended
September 30, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
November 5, 1999
Omaha, Nebraska
F-68
<PAGE>
WebCentric, Inc.
Balance Sheets
December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
------------------------------
December 31, September 30,
1998 1999
------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 46,795 $ 460,189
Trade accounts receivable, net of allowance of $8,500 and
$1,247 for 1998 and 1998, respectively.................. 94,460 378,790
Other current assets...................................... -- 3,510
Deferred tax asset........................................ -- 104,550
------------ -------------
Total current assets.................................... 141,255 947,039
Certificate of deposit...................................... 30,000 31,469
Property and equipment, net................................. 26,828 128,747
------------ -------------
Total assets............................................ $ 198,083 $ 1,107,255
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable.................................... $ 49,680 $ 57,448
Accrued liabilities....................................... 12,394 43,664
Capital lease - current portion........................... 5,627 20,054
Long-term debt - current installments..................... 6,853 18,269
------------ -------------
Total current liabilities............................... 74,554 139,435
Capital lease, net of current portion....................... 18,150 31,446
Long-term debt, net of current installments................. 123,081 138,126
------------ -------------
Total liabilities....................................... 215,785 309,007
------------ -------------
Preferred stock............................................. -- 1,026,667
Stockholders' Equity (Deficit):
Common stock, $.01 par value; 1,000,000 shares authorized;
276,000 shares issued and outstanding as of
September 30, 1999 and December 31, 1998 and 1997,
respectively............................................ 2,760 2,760
Additional paid-in capital................................ 110,028 --
Retained deficit:
Stockholders............................................ (130,490) --
Corporate............................................... -- (230,999)
------------ -------------
(17,702) (228,239)
Treasury stock............................................ -- (180)
------------ -------------
Total stockholders' equity (deficit).................... (17,702) (228,419)
------------ -------------
Total liabilities and stockholders' equity (deficit).... $ 198,083 $ 1,107,255
============ =============
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
WebCentric, Inc.
Statements of Operations
Period August 15, 1997 (date of inception) to December 31, 1997,
the year ended December 31, 1998 and the nine months ended
September 30, 1999
<TABLE>
<CAPTION>
----------------------------------------------
December 31, December 31, September 30,
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Retailer referral compensation............................ $ -- $ 288,882 $ 598,200
Advertising sales......................................... -- 98,467 452,675
International licensing/royalties......................... -- -- 50,000
Other..................................................... 248 1,654 10,091
------------ ------------ -------------
248 389,003 1,110,966
Costs of services........................................... -- 184,703 415,885
------------ ------------ -------------
Gross profit............................................ 248 204,300 695,081
------------ ------------ -------------
Operating Expenses:
Sales and marketing....................................... 12,985 44,499 346,266
General and administrative................................ 14,426 129,512 414,361
Research and development.................................. -- 83,698 246,066
------------ ------------ -------------
Total operating expenses................................ 27,411 257,709 1,006,693
------------ ------------ -------------
Operating loss.......................................... (27,163) (53,409) (311,612)
Net interest expense........................................ -- 6,775 4,029
------------ ------------ -------------
Loss before income taxes................................ (27,163) (60,184) (315,641)
Income tax benefit.......................................... -- -- 104,550
------------ ------------ -------------
Net loss................................................ $ (27,163) $ (60,184) $ (211,091)
============ ============ =============
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
WebCentric, Inc.
Statements of Stockholders' Equity (Deficit)
Period August 15, 1997 (date of inception) to December 31, 1997,
the year ended December 31, 1998 and the nine months ended September 30, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Total
Additional Retained deficit stockholders'
Common paid-in ------------------------- Treasury equity
stock capital Stockholders Corporate stock (deficit)
-------- ---------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 15, 1997 (date of
inception)............................ $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 20,000 shares of common
stock, $.01 par value................. 2,620 (620) -- -- -- 2,000
Additional capital contributed by
stockholders.......................... -- 30,000 -- -- -- 30,000
Net loss................................ -- -- (27,163) -- -- (27,163)
-------- --------- --------- --------- -------- ------------
Balance at December 31, 1997............ 2,620 29,380 (27,163) -- -- 4,837
Issuance of 1,053 shares of common
stock, $.01 par value................. 140 648 -- -- -- 788
Additional capital contributed by
stockholders.......................... -- 80,000 -- -- -- 80,000
Distributions to stockholders........... -- -- (43,143) -- -- (43,143)
Net loss................................ -- -- (60,184) -- -- (60,184)
-------- --------- --------- --------- -------- ------------
Balance at December 31, 1998............ 2,760 110,028 (130,490) -- -- (17,702)
Acquisition of treasury stock........... -- 180 -- -- (180) --
Officer's compensation expense.......... -- 40,000 -- -- -- 40,000
Distributions to stockholders........... -- -- (12,959) -- -- (12,959)
Elimination of stockholders' retained
deficit............................... -- (150,208) 177,427 (27,219) -- --
Accumulation of dividends for preferred
stock................................. -- -- -- (26,667) -- (26,667)
Net loss................................ -- -- (33,978) (177,113) -- (211,091)
-------- --------- --------- --------- -------- ------------
Balance at September 30, 1999........... $ 2,760 $ -- $ -- $(230,999) $ (180) $ (228,419)
======== ========= ========= ========= ======== ============
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
WebCentric, Inc.
Statements of Cash Flows
Period August 15, 1997 (date of inception) to December 31, 1997,
the year ended December 31, 1998 and the nine months ended September 30, 1999
<TABLE>
<CAPTION>
----------------------------------------------
December 31, December 31, September 30,
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (27,163) $ (60,184) $ (211,091)
------------ ------------ -------------
Adjustments to reconcile net loss to net cash used in
operating activities:................................... 42 1,060 7,003
Depreciation and amortization........................... -- -- 40,000
Officer's compensation expense
(Increase) decrease in:
Trade accounts receivable............................. (228) (94,232) (284,330)
Other current assets.................................. -- -- (3,510)
Deferred tax asset.................................... -- -- (104,550)
(Increase) decrease in:
Trade accounts payable................................ -- 49,680 7,768
Accrued liabilities................................... 3,436 8,958 31,270
------------ ------------ -------------
Total adjustments..................................... 3,250 (34,534) (306,349)
------------ ------------ -------------
Net cash used in operating activities................. (23,913) (94,718) (517,440)
------------ ------------ -------------
Cash flows from investing activities:
Acquisition of equipment.................................. (1,000) (1,859) (75,362)
Certificate of deposit.................................... -- (30,000) (1,469)
------------ ------------ -------------
Net cash used in investing activities................. (1,000) (31,859) (76,831)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 132,000 34,941
Payments on long-term debt and capital leases............. -- (3,360) (14,317)
Proceeds from issuance of capital......................... 32,000 80,788 1,000,000
S Corporation distributions............................... -- (43,143) (12,959)
------------ ------------ -------------
Net cash provided by financing activities............. 32,000 166,285 1,007,665
------------ ------------ -------------
Net increase in cash.................................. 7,087 39,708 413,394
Cash at beginning of period................................. -- 7,087 46,795
------------ ------------ -------------
Cash at end of period....................................... $ 7,087 $ 46,795 $ 460,189
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ -- $ 8,426 $ 12,825
============ ============ =============
Capital lease obligations incurred........................ $ -- $ 25,071 $ 33,560
============ ============ =============
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
WebCentric, Inc.
Notes to Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
The WebCentric, Inc. (the "Company") has developed proprietary data integration
technology and an application of that technology through its Bottom Dollar
shopping search engine capability. It is one of the first firms to deploy what
is known as "agent" or "bot" virtual search assistant technology. This
technology offers a comprehensive, easy to use and accessible way for consumers
to shop the Web, enabling them to quickly and easily compare key decision
factors, such as price and availability, on an extensive selection of products
from top Internet merchants. They access the Bottom Dollar shopping search
engine capability by the Company's web site at "http://www.bottomdollar.com" or
by visiting one of the 1,000+ partner sites that have implemented the Bottom
Dollar shopping search engine capabilities on their sites.
PROPERTY AND EQUIPMENT
The Company's equipment is depreciated using primarily the straight-line method.
The Company has various items of equipment under capital lease that are more
specifically identified in note 4. The leased property under capital lease is
amortized over the expected useful life of the property.
REVENUE RECOGNITION
Retailer referral compensation revenue is earned over the terms of the contract,
which is generated on a "click-thru" or commission basis. Advertising sales
revenue is earned each time an advertisement is displayed on a web site.
International licensing/royalties revenues are recognized as earned under the
terms of the contract.
ADVERTISING COSTS
The Company expenses advertising costs as they are incurred. Advertising
expenses for the years ended December 31, 1997 and 1998 and September 30, 1999
were $6,221, $28,377, and $39,954, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred and amounted
to $0 for the period August 15, 1997 (date of inception) to December 31, 1997,
$83,698 for the year ended December 31, 1998, and $246,066 for the nine months
ended September 30, 1999.
INCOME TAXES
Effective May 1, 1999, the Company became a "C Corporation" in which the Company
uses the asset and liability method to account for income taxes. Under this
method, deferred income taxes are recognized at enacted tax rates for the tax
consequences of temporary differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities. Provisions are
made for the U. S. income tax liability on earnings of foreign subsidiaries,
except for those locations that the Company considers such earnings to be
permanently invested.
Prior to May 1, 1999, the Company had elected to be taxed as an "S Corporation"
under Code Section 1362 of the Internal Revenue Code. Consequently, with limited
exceptions, the Company is not taxed at the corporate level. The Company does
not anticipate any of the limited exceptions to create a corporate-level tax
and, therefore, no income taxes have been accrued for the Company.
F-73
<PAGE>
WebCentric, Inc.
Notes to Financial Statements (Continued)
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and reported amounts of
revenues and expenses to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
Note 2. Equipment and Leased Property Under Capital Lease
Equipment and leased property under capital lease consist of the following at
December 31, 1998 and September 30, 1999:
<TABLE>
<CAPTION>
------------------------------
December 31, September 30,
Description 1998 1999
- ------------------------------------------------------------ ------------- --------------
<S> <C> <C>
Furniture and fixtures...................................... $ 1,788 $ 5,130
Equipment................................................... 1,071 83,127
Computer equipment.......................................... 25,071 48,595
------------ -------------
27,930 136,852
Accumulated depreciation and amortization................... (1,102) (8,105)
------------ -------------
$ 26,828 $ 128,747
============ =============
</TABLE>
Note 3. Debt
The Company's long-term debt consists of the following at December 31, 1998 and
September 30, 1999:
<TABLE>
<CAPTION>
------------------------------
December 31, September 30,
1998 1999
------------- --------------
<S> <C> <C>
Variable notes payable carrying an interest rate of 2.25%
over prime (10.5% at September 30, 1999), interest only
payable monthly and is due in one lump sum payment of all
outstanding principal plus all accrued interest at
March 1, 2003............................................. $ 100,000 $ 100,000
9.75% note payable, due in monthly installments of $312.96,
including interest, final payment plus interest due
August 2003............................................... 13,982 12,128
9.75% note payable, due in monthly installments of $328.25,
including interest, final payment plus interest due
August 2001............................................... 9,164 6,805
9.25% note payable, due in monthly installments of $145.60,
including interest, final payment plus interest due
October 2003.............................................. 6,788 5,922
9.5% note payable, due in monthly installments of $1,119.73,
including interest, final payment plus interest due
May 2002.................................................. -- 31,540
------------ -------------
Total long-term debt...................................... 129,934 156,395
Less current installments of long-term debt................. 6,853 18,269
------------ -------------
Long-term debt, excluding current installments............ $ 123,081 $ 138,126
============ =============
</TABLE>
The $100,000 note is secured by a real estate mortgage on property owned by two
of the Company's shareholders and a $30,000 certificate of deposit. This note is
insured by the Small Business Administration.
F-74
<PAGE>
WebCentric, Inc.
Notes to Financial Statements (Continued)
Note 3. Debt (Continued)
The remaining three notes, above, are secured by all inventory, chattel paper,
accounts, equipment, and general intangibles.
The following is a summary of principal maturities of long-term debt during the
next five years:
<TABLE>
<S> <C>
2000........................................................ $ 18,269
2001........................................................ 19,704
2002........................................................ 13,404
2003........................................................ 104,870
2004........................................................ 148
------------
$ 156,395
============
</TABLE>
Note 4. Commitments
The Company leases computer equipment under a capital lease. The economic
substance of the lease is that the Company is financing the acquisition of the
asset through the lease, and accordingly, it is recorded in the Company's assets
and liabilities. The Company also leases facilities under operating lease
agreements. The following is a summary of future minimum lease payments under
capitalized leases and under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at September 30, 1999:
<TABLE>
<CAPTION>
---------------------------
Capitalized Operating
leases leases
------------ ------------
<S> <C> <C>
Year ending September 30, 1999:
2000...................................................... $ 24,823 $ 14,949
2001...................................................... 22,462 13,142
2002...................................................... 11,788 6,298
------------ ------------
Total minimum lease payments............................ 59,073 $ 34,389
============
Inputed interest, at rates ranging from 10.0% to 17.1%...... (7,573)
------------
Present value of minimum capitalized lease payments..... 51,500
Current portion............................................. 20,054
------------
Long-term capitalized lease obligations................. $ 31,446
============
</TABLE>
Assets recorded under capital leases are included in property and equipment as
follows:
<TABLE>
<CAPTION>
------------------------------
December 31, September 30,
1998 1999
------------- --------------
<S> <C> <C>
Computer equipment.......................................... $ 25,071 $ 23,524
Office equipment............................................ -- 10,036
------------ -------------
25,071 33,560
Accumulated depreciation.................................... (835) (5,409)
------------ -------------
$ 24,236 $ 28,151
============ =============
</TABLE>
F-75
<PAGE>
WebCentric, Inc.
Notes to Financial Statements (Continued)
Note 4. Commitments (Continued)
Rental expense for operating leases amounted to $0, $7,176, and $19,642 for the
years ended December 31, 1997 and 1998 and nine months ended September 30, 1999,
respectively.
Note 5. Income Taxes
Income tax benefit for September 30, 1999 consisted of the following components:
<TABLE>
<CAPTION>
------------------------------------------
Current Deferred Total
------------ ------------ ------------
<S> <C> <C> <C>
Federal................................................. $ 82,800 $ 10,300 $ 93,100
State................................................... 10,150 1,300 11,450
------------ ------------ ------------
Total................................................. $ 92,950 $ 11,600 $ 104,550
============ ============ ============
</TABLE>
The difference between the Company's income tax benefit as reported in the
accompanying financial statements for September 30, 1999 and that which would be
calculated applying the U. S. federal income tax rate of 34% on pretax loss is
as follows:
<TABLE>
<S> <C>
Expected federal income tax benefit......................... $ 99,519
State income taxes, net of federal benefit.................. 7,557
Meals and entertainment..................................... (3,375)
Other....................................................... 849
------------
Total................................................... $ 104,550
============
</TABLE>
Deferred tax assets at September 30, 1999 were comprised of the following:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 500
Accrued expenses.......................................... 9,900
Net operating loss carryforward........................... 92,950
Deferred income........................................... 1,200
------------
Total deferred tax assets............................... $ 104,550
============
</TABLE>
There was no valuation allowance for deferred tax assets as of September 30,
1999. Based upon the projected future taxable income, management believes it is
more likely than not the Company will realize the benefits of deferred tax
assets as of September 30, 1999.
Note 6. Stockholders' Equity (Deficit)
On May 19, 1999, the Company effected a 13.12-to-1 stock split, which has been
given retroactive effect in the accompanying financial statements.
F-76
<PAGE>
WebCentric, Inc.
Notes to Financial Statements (Continued)
Note 7. Capital Stock
As of September 30, 1999, 24,000 shares of preferred stock with a par value of
$.01 were authorized, issued, and outstanding. The cumulative preferred stock
pays 8% preferential dividends and is convertible to common stock at the
holder's option at a price of $41.66. The preferred stock is redeemable after
five years at either the holder's or Company's option. The holder can redeem the
stock at a price per share equal to the original cost plus all accumulated
dividends plus a default premium. The Company can redeem at the original cost
plus all accrued and unpaid dividends. Accumulated dividends are immediately due
and payable upon conversion into common stock or if the Company is sold.
Note 8. Stock Compensation Plan
During May 1999, the Company adopted a stock option plan (the "Plan"). A total
of 18,000 shares of common stock have been reserved for issuance pursuant to the
Plan at September 30, 1999. In September 1999, the Company's shareholders
granted options to employees of the Company. At September 30, 1999, the number
of shares available for issuance was 2,145 shares.
At inception, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of Accounting Principal Board (APB)
No. 25 and provide pro forma net earnings and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Options to purchase shares of common stock have been granted in 1999 with an
exercise price of $1.00, which was below the fair value of the common stock on
the date of grant. The related compensation expense was minimal and not recorded
for these grants. Had compensation cost for the stock option grants been
determined using the fair value method, the Company's net loss would have been
unaffected.
The weighted average fair value of options granted in 1999 was $3.21. Pro forma
net income reflects the allocation of compensation cost for stock option grants
using the fair value method. Compensation cost is allocated between periods
based upon the vesting period of the options. Therefore, the full impact of
calculating compensation cost using the fair value method is not reflected in
pro forma net income amounts presented above because compensation cost is
amortized to expense over the vesting period, and additional options may be
granted in future years. The fair value of these options was estimated at the
date of grant using the Black-Scholes model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield at date of grant.................... 0
Expected stock price volatility............................. 0%
Risk-free interest rate..................................... 5%
Expected life of options.................................... 5 years
</TABLE>
F-77
<PAGE>
WebCentric, Inc.
Notes to Financial Statements (Continued)
Note 8. Stock Compensation Plan (Continued)
The following information related to options to purchase common stock:
<TABLE>
<CAPTION>
--------------------------------------------
Number of
shares Exercise price Fair value
------------ -------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1998............................ --
Granted................................................. 15,855 $ 1.00 $ 3.21
------------
Balance at September 30, 1999........................... 15,855 1.00 3.21
============
Exercisable at September 30, 1999....................... --
============
</TABLE>
At September 30, 1999, the exercise prices for outstanding stock options was
$1.00, and the weighted average remaining contractual life of outstanding stock
options was five years.
Note 9. Officer Compensation
During the nine months ended September 30, 1999, an officer of the Company was
given stock by shareholders in lieu of compensation for his services.
Compensation expense of $40,000 has been incurred by the Company during the nine
months ended September 30, 1999.
Note 10. Concentration of Credit Risk
The Company's customers, while concentrated in the United States, are spread
across diverse market sectors. For the nine months ended September 30, 1999,
sales to one customer accounted for 12% of the Company's total sales, including
an accounts receivable balance of $65,714. For the year ended December 31, 1998,
sales to three customers accounted for 38% of sales, with accounts receivable
balances totaling $5,004 and no customers meeting the 10% threshold for the
period August 15, 1997 (date of inception) to December 31, 1997. The Company's
accounts receivable are unsecured and the Company is at risk to the extent such
amounts become uncollectible. The Company establishes its allowance for doubtful
accounts based upon the credit risk of specific customers, historical trends,
and other information.
Note 11. Subsequent Events
During the month of October 1999, the Company entered into a nonbinding letter
of intent with a third party for the potential acquisition of all outstanding
stock of the Company.
The Company is also pursuing a financing arrangement for the purchase of
additional computer equipment totaling approximately $128,200, with payments
being made over a three year period. The financing arrangement is guaranteed by
two shareholders of the Company.
F-78
<PAGE>
Report of Independent Public Accountants
To ShopNow.com Inc.:
We have audited the accompanying balance sheet of SpeedyClick, Corp. (a
California corporation) as of December 31, 1998, and the related statements of
operations, stockholders' deficit and cash flows for the period from inception
(September 1, 1998) to December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 SpeedyClick, Corp. as of
December 31, 1998, and the results of its operations and its cash flows for the
period from inception (September 1, 1998) to December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
November 24, 1999
F-79
<PAGE>
SpeedyClick, Corp.
Balance Sheets
<TABLE>
<CAPTION>
------------------------------
December 31, September 30,
1998 1999
------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 4,272 $ 19,454
Accounts receivable, net of allowance of $0 and $11,000... -- 177,288
------------- -------------
Total current assets.................................... 4,272 196,742
Property and equipment, at cost, net of $0 and $19,500 of
accumulated depreciation.................................. -- 165,690
Other assets................................................ 2,477 2,477
------------- -------------
Total assets............................................ $ 6,749 $ 364,909
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ -- $ 222,932
Accrued compensation and benefits......................... 10,558 22,345
Accrued expenses.......................................... -- 29,324
Deferred revenue.......................................... -- 46,225
Current portion of notes payable and other long-term
liabilities............................................. -- 44,579
------------- -------------
Total current liabilities............................... 10,558 365,405
Notes payable and other long-term liabilities, net of
current portion........................................... -- 219,782
------------- -------------
Total liabilities........................................... 10,558 585,187
------------- -------------
Stockholders' deficit:
Preferred stock, no par value; 0 and 1,000,000 shares
authorized; 0 and 535,000 shares issued and outstanding;
preference in liquidation of $535,000 at September 30,
1999.................................................... -- 535,000
Common stock and paid-in capital, $0.01 par value;
10,000,000 and 7,000,000 shares authorized; 4,999,995
and 5,228,020 issued and outstanding, respectively...... 31,000 113,803
Accumulated deficit......................................... (34,809) (869,081)
------------- -------------
Total stockholders' deficit................................. (3,809) (220,278)
Total liabilities and stockholders' deficit................. $ 6,749 $ 364,909
============= =============
</TABLE>
The accompanying notes are an integral part of these sheets.
F-80
<PAGE>
SpeedyClick, Corp.
Statements of Operations
<TABLE>
<CAPTION>
------------------------------------------
Period From
Inception
(September 1, 1998)
to Nine Months Ended
December 31, 1998 September 30, 1999
-------------------- -------------------
(unaudited)
<S> <C> <C>
Revenues.................................................... $ -- $ 328,435
-------------------- ------------------
Operating expenses:
Sales and marketing....................................... 4,188 776,783
General and administrative................................ 2,490 211,874
Research and development.................................. 28,131 172,019
-------------------- ------------------
Total operating expenses................................ 34,809 1,160,676
-------------------- ------------------
Loss from operations........................................ (34,809) (832,241)
Interest expense, net....................................... -- (2,031)
-------------------- ------------------
Net loss.................................................... $ (34,809) $ (834,272)
==================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE>
SpeedyClick, Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
-------------------------------------------
Period from Inception
(September 1, 1998) Nine Months Ended
to December 31, 1998 September 30, 1999
--------------------- -------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (34,809) $ (834,272)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation.............................................. -- 19,500
Changes in operating assets and liabilities:..............
Accounts receivable....................................... -- (177,288)
Other assets.............................................. (2,477) --
Accounts payable.......................................... -- 222,932
Accrued compensation, benefits and expenses............... 10,558 41,111
Deferred revenue.......................................... -- 46,225
-------------------- ------------------
Net cash used in operating activities..................... (26,728) (681,792)
-------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment....................... -- (114,257)
-------------------- ------------------
Net cash used in investing activities..................... -- (114,257)
-------------------- ------------------
Cash flows from financing activities:
Sales of common stock..................................... 9,000 14,500
Sales of Series A preferred stock......................... -- 435,000
Exercise of common stock options.......................... -- 8,303
Capital contributions by founders......................... 22,000 60,000
Borrowings on notes payable............................... -- 300,000
Repayments of notes payable............................... -- (6,572)
-------------------- ------------------
Net cash provided by financing activities................. 31,000 811,231
-------------------- ------------------
Net increase in cash........................................ 4,272 15,182
Cash, beginning of period................................... -- 4,272
-------------------- ------------------
Cash, end of period......................................... $ 4,272 $ 19,454
==================== ==================
Supplemental disclosure of cash flow information and noncash
activities:
Cash paid for interest.................................... $ -- $ 2,031
Conversion of notes payable into Series A preferred
stock................................................... $ -- $ 100,000
Property and equipment acquired under notes payable....... $ -- $ 70,933
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
SpeedyClick, Corp.
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Series A Preferred
Common Stock Stock Total
----------------------- --------------------- Accumulated Stockholders'
Shares Amount Shares Amount Deficit Deficit
---------- ---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at inception.................. -- $ -- -- $ -- $ -- $ --
Issuance of founders stock in
exchange for cash and services
rendered........................... 4,999,995 31,000 -- -- -- 31,000
Net loss............................. -- -- -- -- (34,809) (34,809)
--------- -------- ------- -------- ----------- ------------
Balances, December 31, 1998............ 4,999,995 31,000 -- -- (34,809) (3,809)
Additional founders capital
contribution....................... -- 60,000 -- -- -- 60,000
Sales of preferred stock............. -- -- 435,000 435,000 -- 435,000
Sales of common stock................ 145,000 14,500 -- -- -- 14,500
Exercise of common stock options..... 83,025 8,303 -- -- -- 8,303
Conversion of notes payable.......... -- -- 100,000 100,000 -- 100,000
Net loss............................. -- -- -- -- (834,272) (834,272)
--------- -------- ------- -------- ----------- ------------
Balances, September 30, 1999
(unaudited).......................... 5,228,020 $113,803 535,000 $535,000 $ (869,081) $ (220,278)
========= ======== ======= ======== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
SpeedyClick, Corp.
Notes to Financial Statements
December 31, 1998
(Information as of and for the Period Ended September 30, 1999 Is Unaudited.)
Note 1. Organization and Nature of Operations:
SpeedyClick, Corp., a California corporation, (the Company) was founded in
September 1998 in Glendale, California. The Company operates a website offering
various games and entertainment targeted toward women. The website went live in
January 1999.
Note 2. Significant Accounting Policies:
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of September 30, 1999 and for the
nine-month period then ended have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are generated primarily from click-through payments, interactive game
sponsorships and e-mailings. The Company uses outside advertising agencies to
obtain a significant portion of its advertising revenues. Revenues are
recognized net of commissions paid to advertising agencies ratably over the term
of the advertising contract or over the course of the sponsorship.
CASH
Cash consists of deposits in checking and savings accounts. The Company has no
cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and accounts receivable.
To date, accounts receivable have been derived from revenues earned from
customers located in the United States. Historically, credit losses have been
minor and within management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and furniture
and is stated at cost. Depreciation is computed using the straight-line method
over estimated useful lives, which are estimated to be three years.
F-84
<PAGE>
SpeedyClick, Corp.
Notes to Financial Statements (Continued)
December 31, 1998
(Information as of and for the Period Ended September 30, 1999 Is Unaudited.)
Note 2. Significant Accounting Policies: (Continued)
SOFTWARE DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," capitalization of software development costs
begins upon the establishment of technological feasibility of the product, which
the Company has defined as the completion of beta testing of a working product.
The establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenues, estimated economic life and changes in software
and hardware technology. Amounts that could have been capitalized under this
statement after consideration of the above factors were immaterial and,
therefore, no software development costs have been capitalized by the Company to
date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist primarily of
salaries, travel, materials, supplies and contract services.
STOCK COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its employee stock
benefits.
Note 3. Income Taxes:
At December 31, 1998, a valuation allowance was recognized to offset the related
deferred tax asset of approximately $10,200 due to the uncertainty of realizing
the benefit of the Company's net operating loss carryforward. The need for this
valuation allowance is subject to periodic review. If it is determined in a
future period that it is more likely than not that the tax benefit of the
carryforward will be realized, the reduction of the valuation allowance will be
recorded as a reduction of the Company's income tax expense.
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $27,000, which expires in 2012. Under current tax law, net
operating loss carryforwards available in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.
Note 4. Commitments:
The Company operated in space provided to it by a related party for the period
from inception to December 31, 1998, and accordingly, no rent expense was
recorded in the accompanying financial statements. Had such expense been
recorded, the effects on the accompanying financial statements would have been
immaterial.
F-85
<PAGE>
SpeedyClick, Corp.
Notes to Financial Statements (Continued)
December 31, 1998
(Information as of and for the Period Ended September 30, 1999 Is Unaudited.)
Note 5. Related Party Transactions:
Since formation, the founders did not receive salaries. Accordingly, no
compensation expense was recorded by the Company. Additionally, certain
operating expenses of the Company were paid on its behalf by the founders and
certain related parties. No amounts funded by related parties have been recorded
in the accompanying financial statements. The amounts funded related to
operating expenses are not estimable and will not be repaid by the Company to
the funding parties.
Note 6. Subsequent Events:
AMENDMENT OF ARTICLES OF INCORPORATION
On April 19, 1999, the Company restated its articles of incorporation approving,
among other things:
- STOCK SPLIT - a 5.55555 for one stock split, which has been reflected in
the accompanying financial statements as if it had occurred at inception.
- STOCK INCENTIVE PLAN - the SpeedyClick, Corp. 1999 Stock Incentive Plan
(Plan) was approved and a number of awards of stock options were granted
to vest retroactive to the original hiring date of the employee. 375,000
shares are reserved for issuance under the Plan. As of September 30, 1999,
there were 218,818 options outstanding at prices ranging from $0.01 to
$0.10 per share.
- AUTHORIZED STOCK - The Company was authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Company was authorized to
issue is 7,000,000 shares of Common Stock and 1,000,000 shares of
Preferred Stock.
BRIDGE LOAN FINANCING
On April 2, 1999, the Company issued a $100,000 convertible promissory note to
an outside investor. The note accrued interest at the rate of five percent per
year until the note was converted into 100,000 shares of Series A preferred
stock on May 10, 1999.
SALE OF SERIES A PREFERRED STOCK
On May 10, 1999, the Company issued 535,000 shares of Series A Preferred Stock,
of which 100,000 shares were issued upon conversion of a bridge loan, while the
remaining were sold for cash. Dividends are payable at a rate of $.08 per share
when declared and are non-cumulative. The holders of these shares were entitled
to receive a preference in liquidation equal to the original issuance price plus
any declared but unpaid dividends.
SALE OF COMMON STOCK
On May 10, 1999, the Company issued 145,000 shares of common stock to investors
at $0.10 per share. These shares have the same rights and preferences as the
previously issued common shares granted at inception.
NOTES PAYABLE
The Company obtained a $200,000 loan from an outside investor and a $100,000
loan from one of the founders during August and September 1999. The $200,000
loan was subsequently converted into 100,000 shares of common
F-86
<PAGE>
SpeedyClick, Corp.
Notes to Financial Statements (Continued)
December 31, 1998
(Information as of and for the Period Ended September 30, 1999 Is Unaudited.)
Note 6. Subsequent Events: (Continued)
stock prior to the acquisition by ShopNow.com Inc. (ShopNow) on November 12,
1999 as discussed below. The $100,000 loan was repaid by ShopNow in conjunction
with the acquisition.
CAPITAL LEASES
Subsequent to year-end, the Company obtained a number of computers under capital
leases. As of September 30, 1999, the Company's other long-term liabilities
consist of capital lease obligations. Total capital lease commitments of the
Company as of September 30, 1999 including interest were as follows:
<TABLE>
<S> <C>
2000........................................................ $ 52,800
2001........................................................ 14,000
2002........................................................ 8,000
2003 and thereafter......................................... --
---------
$ 74,800
=========
</TABLE>
ACQUISITION BY SHOPNOW.COM
On November 12, 1999, the Company was acquired by ShopNow.
F-87
<PAGE>
Independent Auditor's Report
To the Stockholders and Board of Directors
of Ubarter.com Inc.
We have audited the consolidated balance sheet of Ubarter.com Inc. and
subsidiary as of March 31, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ubarter.com Inc.
and subsidiary as of March 31, 1999, and the results of their operations and
their cash flows for the year then ended, in accordance with generally accepted
accounting principles.
/s/ Moss Adams LLP
Seattle, Washington
June 16, 1999
F-88
<PAGE>
Ubarter.com Inc.
Consolidated Balance Sheet
March 31, 1999 and September 30, 1999
<TABLE>
<CAPTION>
-----------------------------
March 31, September 30,
1999 1999
------------ --------------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 442,700 $ 375,500
Accounts receivable, net.................................. 305,700 272,800
Inventory................................................. 310,400 308,900
Other current assets...................................... 9,200 5,300
------------ ----------
Total current assets.................................... 1,068,000 962,500
------------ ----------
Equipment and leaseholds, net............................... 383,600 394,500
------------ ----------
Other assets
Goodwill.................................................. 2,750,900 2,225,000
Prepaid advertising....................................... 135,000 135,000
Notes receivable.......................................... 23,500 22,900
Other assets.............................................. 28,700 1,000
------------ ----------
2,938,100 2,383,900
------------ ----------
$ 4,389,700 $3,740,900
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable.......................................... $ 111,400 $ 188,900
Accrued liabilities....................................... 28,200 211,700
Unearned revenue.......................................... 186,300 --
Trade dollars issued in excess of earned.................. 2,147,900 2,376,300
Note payable to shareholder............................... 66,200 66,200
Current portion of long-term obligations.................. 35,400 126,000
------------ ----------
Total current liabilities............................... 2,575,400 2,969,100
------------ ----------
Long-term obligations....................................... 81,600 573,900
------------ ----------
Commitments (Note 9)
Stockholders' equity
Common Stock.............................................. 5,900 6,000
Additional paid-in capital................................ 2,649,300 3,359,400
Accumulated deficit....................................... (909,500) (3,164,700)
Treasury stock............................................ (13,000) (13,000)
Accumulated other comprehensive income.................... -- 10,200
------------ ----------
1,732,700 197,900
------------ ----------
$ 4,389,700 $3,740,900
============ ==========
</TABLE>
F-89
<PAGE>
Ubarter.com Inc.
Consolidated Statement of Operations
Year Ended March 31, 1999 and Six Months Ended September 30, 1999
<TABLE>
<CAPTION>
-----------------------------
March 31, September 30,
1999 1999
------------ --------------
(Audited) (Unaudited)
<S> <C> <C>
Revenue
Trade exchange revenue.................................... $ 460,600 $1,266,200
Corporate trading revenue................................. 43,900 380,200
------------ ----------
504,500 1,646,400
------------ ----------
Costs and operating expenses
Cost of corporate trading revenue......................... 43,900 314,700
Sales and marketing....................................... 94,700 230,400
Product development....................................... 216,300 486,500
General and administrative................................ 990,600 2,880,700
------------ ----------
1,345,500 3,912,300
------------ ----------
Loss from oeprations........................................ (841,000) (2,265,900)
------------ ----------
Other income (Expense)
Interest income........................................... 45,700 13,000
Interest expense.......................................... (2,700) (2,300)
------------ ----------
43,000 10,700
------------ ----------
Net loss.................................................... $ (798,000) $(2,255,200)
============ ==========
Average common and equivalent shares
Basic..................................................... 5,521,583 5,994,533
============ ==========
Diluted................................................... 5,521,583 5,994,533
============ ==========
Net loss per common share
Basic..................................................... $ (0.14) $ (0.38)
============ ==========
Diluted................................................... $ (0.14) $ (0.38)
============ ==========
</TABLE>
F-90
<PAGE>
Ubarter.com Inc.
Consolidated Statement of Stockholders' Equity
Year Ended March 31, 1999 and Six Months Ended September 30, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
-------------------- Paid-In Subscribed Comprehensive Accumulated
Shares Amount Capital Stock Income Deficit
--------- -------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998............ 3,832,900 $3,800 $ 540,700 $ 37,500 $ -- $ (111,500)
Issuance of subscribed stock..... 100,000 100 37,400 (37,500) -- --
Exercise of "B" warrants......... 563,500 500 278,000 -- -- --
Exercise of "C" and "D"
warrants....................... 480,000 500 228,300 -- -- --
Issuance of stock................ 800,000 800 999,200 -- -- --
Issuance of stock in connection
with acquisition............... 150,000 200 374,800 -- -- --
Stock options granted............ -- -- 190,900 -- -- --
Treasury stock required.......... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (798,000)
--------- ------ ---------- ---------- ------------- -----------
Balance, March 31, 1999
(Audited)........................ 5,926,400 5,900 2,649,300 -- -- (909,500)
Exercise of "E" warrants......... 94,000 100 663,900 -- -- --
Foreign currency translation..... -- -- -- -- 10,200 --
Issuance of stock as partial
payment for equity ownership of
BBE Windsor.................... 20,000 -- 46,200 -- -- --
Net loss......................... -- -- -- -- -- (2,255,200)
--------- ------ ---------- ---------- ------------- -----------
Balance, September 30, 1999
(Unaudited)...................... 6,040,400 $6,000 $3,359,400 $ -- $ 10,200 $(3,164,700)
========= ====== ========== ========== ============= ===========
<CAPTION>
---------------------------------
Treasury Stock
-------------------
Shares Amount Total
-------- -------- -----------
<S> <C> <C> <C>
Balance, March 31, 1998............ -- $ -- $ 470,500
Issuance of subscribed stock..... -- -- --
Exercise of "B" warrants......... -- -- 278,500
Exercise of "C" and "D"
warrants....................... -- -- 228,800
Issuance of stock................ -- -- 1,000,000
Issuance of stock in connection
with acquisition............... -- -- 375,000
Stock options granted............ -- -- 199,000
Treasury stock required.......... 10,980 (13,000) (13,000)
Net loss......................... (798,000)
------- -------- -----------
Balance, March 31, 1999
(Audited)........................ 10,980 (13,000) 1,732,700
Exercise of "E" warrants......... -- -- 664,000
Foreign currency translation..... -- -- 10,200
Issuance of stock as partial
payment for equity ownership of
BBE Windsor.................... -- -- 46,200
Net loss......................... -- -- (2,255,20)
------- -------- -----------
Balance, September 30, 1999
(Unaudited)...................... 10,980 $(13,000) $ 197,900
======= ======== ===========
</TABLE>
F-91
<PAGE>
Ubarter.com Inc.
Consolidated Statement of Cash Flows
Year Ended March 31, 1999 and Six Months Ended September 30, 1999
<TABLE>
<CAPTION>
-----------------------------
March 31, September 30,
1999 1999
------------ --------------
(Audited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................. $ (798,000) $(2,255,200)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation............................................ 18,400 907,700
Write-off of bad debts.................................. -- (4,200)
Non-cash charges related to stock option grants......... 172,800 37,400
Foreign currency loss................................... -- 10,200
Net trade dollars expended/(earned)..................... (3,700) 143,800
Accrued interest on notes receivable.................... (2,400) --
Change in operating assets and liabilities
Accounts receivable..................................... 38,700 37,100
Prepaid advertising and other assets.................... (133,100) 31,600
Accounts payable and other liabilities.................. 7,300 74,700
------------ ----------
(700,000) (1,016,900)
------------ ----------
Cash from investing activities
Acquisition of equipment and leaseholds................... (84,800) (226,600)
Purchase of Barter Business Exchange Inc. stock........... (647,300) --
Notes receivable collections.............................. 11,700 600
------------ ----------
(720,400) (226,000)
------------ ----------
Cash from financing activities
Proceeds from issuance of common stock.................... 1,507,300 141,000
Proceeds from notes payable............................... -- 1,036,800
Treasury stock acquired................................... (13,000) --
Repayment of notes payable................................ (13,800) (2,100)
------------ ----------
1,480,500 1,175,700
------------ ----------
Net change in cash and cash equivalents..................... 60,100 (67,200)
Cash and cash equivalents
Beginning of Period....................................... 382,600 442,700
------------ ----------
End of Period............................................. $ 442,700 $ 375,500
============ ==========
Supplemental cash flow information
Cash paid during the year for:
Interest................................................ $ 2,700 $ 3,100
============ ==========
</TABLE>
F-92
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement
March 31, 1999 and September 30, 1999
Note 1 - Description of Business and Organization
Ubarter.com Inc., formerly International Barter Corp., was incorporated on
September 18, 1996, in the State of Nevada. Ubarter.com Inc. ("the Company")
operates a trade exchange offering bartering services for retail, professional,
media and corporate clients. Operations are primarily transacted in the State of
Washington. Operations of the Company's subsidiary, Barter Business Exchange
Inc. (see Note 3), are primarily transacted in the Canadian provinces of Ontario
and British Columbia. The Company acts as a third-party record-keeper of
clients' transactions and balances, which are denominated in Trade Dollars. A
Trade Dollar is an accounting unit used to record the value of trades as
determined by the buying and selling parties in barter transactions. Trade
Dollars denote the right to receive goods or services available from other
clients or the obligation to provide goods or services to other clients. Trade
Dollars may not be redeemed for cash. Trade Dollars are not legal tender,
securities, or commodities. Clients pay cash and Trade Dollar fees and
commissions to the Company. The Company typically receives a cash commission on
all transactions, charging both the buyer and seller 5% on the purchase and
sale.
Note 2 - Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and,
effective March 31, 1999, the balance sheet of its wholly-owned subsidiary,
Barter Business Exchange Inc. (BBE). The Company's fiscal year end is March 31.
BBE's fiscal year end is February 28. For purposes of consolidation the
difference in fiscal year-ends is not significant. All significant intercompany
accounts and transactions have been eliminated.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company for the six months ended
September 30, 1999, included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations
relating to interim financial statements. In the opinion of management, the
accompanying unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company at September 30, 1999, the results of
operations and its cash flows for the six months ended September 30, 1999.
STOCK SPLIT
On July 9, 1998 the Board of Directors authorized a 2-for-1 split of its common
stock to be distributed to stockholders of record at the close of business on
July 24, 1998. All per-share and shares outstanding data in the accompanying
consolidated financial statements have been restated to reflect the stock split.
FOREIGN CURRENCY TRANSLATION
Financial statements of the Company's Canadian subsidiary, BBE, are translated
into U.S. dollars using the exchange rate at the balance sheet date for assets
and liabilities. The functional currency of BBE is the local currency, the
Canadian dollar. Translation adjustments, if necessary, are recorded as a
separate component of Stockholders' Equity. There were no translation
adjustments required as of March 31, 1999.
F-93
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 2 - Summary of Significant Accounting Policies (Continued)
COMPREHENSIVE INCOME
In 1999, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "REPORTING COMPREHENSIVE INCOME". This statement establishes
rules for the reporting of comprehensive income and its components. The adoption
of SFAS No. 130 had no impact on total stockholders' equity as of March 31,
1999.
REVENUE RECOGNITION
The Company recognizes revenue equal to the cash to be received from the
commission earned when the buyer has made an unconditional commitment to pay and
the earnings process has been completed by the finalization of a trade
transaction. Revenue is recognized for monthly dues after the fees have been
earned. Initiation and annual renewal fees are nonrefundable, are deferred and
included in income over a twelve month period.
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to develop,
enhance, monitor and operate the Company's website. Product development costs
are expensed as incurred.
TRADE DOLLAR TRANSACTIONS
The Company uses the ratio of one Trade Dollar to one local currency dollar
(United States or Canadian) in measuring and accounting for purchases and sales.
This one-for-one ratio is the pervasive standard with the Company and throughout
the barter industry. The Company does not recognize any accounting implications
if differences are observed between Trade Dollar and the applicable local
currency dollar prices are within reasonable ranges existing between prices of
similar U.S. dollar or Canadian dollar transactions.
The negative Trade Dollar balance of the Company is shown as a liability in the
balance sheet. This occurs as a result of the Company "borrowing" trade dollars
through the issuance of Trade Dollars in excess of the amounts earned by the
Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INVENTORY
At times, the Company acquires inventory for resale from clients of the barter
exchange. Inventory is stated at lower of cost (first-in, first-out basis) or
market.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
The Company provides an allowance for accounts receivable doubtful of
collection. The allowance is based upon management's periodic analysis of
receivables, evaluation of current economic conditions, and other pertinent
factors. Ultimate losses may vary from the current estimates and, as additions
to the allowance become necessary, are charged against earnings in the period in
which they become known. Losses are charged and recoveries are credited to the
allowance. At March 31, 1999, the allowance for doubtful accounts was $129,400.
F-94
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 2 - Summary of Significant Accounting Policies (Continued)
DEPRECIATION AND AMORTIZATION
Equipment and leaseholds are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, generally
five to seven years. Leasehold improvements are amortized on a straight-line
basis over the shorter of the estimated useful lives or the term of the lease.
GOODWILL
Goodwill resulting from the acquisition of BBE was estimated by management to be
primarily associated with the acquired workforce, infrastructure and
technological expertise. As a result of the rapid technological changes
occurring in the Internet industry and the intense competition for qualified
professionals, goodwill is amortized on a straight-line basis over the estimated
life of the benefit of 24 months (see Note 3).
INCOME TAXES
Income taxes are computed using the asset and liability method. Under this
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires a valuation allowance against deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some or all of
its deferred tax assets will not be realized.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average number
of shares outstanding during the period. Diluted net income (loss) per share is
computed using the weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares
consist of shares issuable upon the exercise of stock options and stock
warrants.
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 revenue and expenses during the reported period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash is deposited with high credit, quality financial institutions. Accounts
receivable are typically unsecured and are derived from revenues earned from
customers primarily located in the Pacific Northwest and the Canadian provinces
of Ontario and British Columbia. The Company performs ongoing credit evaluations
of its customers and maintains reserves for potential credit losses;
historically, such losses have been within management's expectations. At
March 31, 1999, no one customer accounted for 10% or more of the accounts
receivable balance.
F-95
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 2 - Summary of Significant Accounting Policies (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash, accounts receivable,
accounts payable, notes payable and long-term obligations are carried at cost,
which approximates their fair value because of the short-term maturity of these
instruments.
ADVERTISING
The Company recognizes advertising expenses in accordance with Statement of
Position 93-7, "REPORTING ON ADVERTISING COSTS". As such, the Company expenses
the cost of communicating advertising in the period in which the advertising
space or airtime is used. Advertising expenses amounted to $51,700 for the year
ended March 31, 1999.
STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion (APB) No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and complies with the disclosure
provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION". Under APB
25, compensation cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance with
"SFAS" No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE
DISPOSED OF". SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
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". This standard requires
companies to capitalize qualifying computer software costs that are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company does not expect that the adoption of SOP 98-1
will have a material impact on its consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES." SOP 98-5 is effective for
the Company's fiscal year ending March 31, 2000. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Adoption
is not expected to have a material effect on the Company's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The Company does
not expect that the
F-96
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 2 - Summary of Significant Accounting Policies (Continued)
adoption of SFAS No. 133 will have a material impact on its consolidated
financial statements because the Company does not currently hold any derivative
instruments.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
Note 3 - Acquisition
ACQUISITION OF BARTER BUSINESS EXCHANGE, INC.
On March 2, 1999, the Company entered into a stock purchase agreement to acquire
all of the outstanding capital stock of Barter Business Exchange Inc. (BBE), a
privately-held Canadian corporation which presently operates a trade exchange in
the Canadian Provinces of Ontario and British Columbia. The total purchase price
of approximately $1,270,200 is comprised of cash in the amount of $663,300; a
promissory note in the principal amount of $66,200 (Note 7); Ubarter.com Trade
dollars in the amount of $165,700; the issuance of 150,000 shares of Ubarter.com
common stock, which had a value of $375,000 at the acquisition date. In
addition, the purchase agreement provides for contingent consideration. The
terms of the note payable provide for additional payments of up to $500,000
dependent upon attainment of certain operating results. Additionally, if 10% of
the cash revenues, as defined in the agreement, exceed $500,000, the Company
will be required to pay the amount exceeding $500,000 in common shares of the
Company.
The purchase has been accounted for under the purchase method of accounting.
Under the purchase method of accounting, the purchase price is allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
the date of the acquisition. The excess purchase price over the estimated fair
value of the assets acquired and liabilities assumed has been allocated to
goodwill. The Company estimated the economic useful life of the goodwill to be
two years.
The consolidated financial statements combine the Company's balance sheet as of
March 31, 1999 with the balance sheet of BBE as of February 28, 1999. The
consolidated statement of operations presents the results of operations of the
Company and excludes the results of operations of BBE. Results of operations of
BBE will be consolidated with the Company from the date of purchase, March 1,
1999. However, due to the differing year-ends, the results of operations of BBE
for the fiscal year from March 1, 1999 through February 28, 2000 will be
consolidated with the Company's results of operations for the fiscal year ended
March 31, 2000.
STATEMENT OF CASH FLOWS
The acquisition of BBE resulted in a non-cash transactions which increased
assets in the amount of $3,069,700 and liabilities in the amount of $2,610,400.
Non-cash consideration included 150,000 shares of the Company's common stock,
trade dollars, and a note payable (Note 7).
F-97
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 3 - Acquisition (Continued)
UNAUDITED PRO FORMA DISCLOSURES OF SIGNIFICANT ACQUISITION
The following unaudited pro forma consolidated results of operations give effect
to the acquisition of BBE as if it had occurred as of the beginning of the
period.
<TABLE>
<CAPTION>
------------
Year Ended
March 31,
1999
------------
<S> <C>
Revenue..................................................... $ 3,289,900
Net Loss.................................................... $ (2,682,100)
Net Loss per share - basic.................................. $ (0.49)
Net Loss per share - diluted................................ $ (0.49)
Shares used in per share calculation - basic and diluted.... 5,521,583
</TABLE>
Note 4 - Notes Receivable
At March 31, 1999, the Company had notes receivable amounting to $23,500 which
bear interest ranging from 10% to 10.75%. Although the Company periodically
receives payments, the notes are currently in default. The notes are
collateralized by real estate.
Note 5 - Equipment and Leaseholds
At March 31, 1999, equipment and leaseholds consisted of the following:
<TABLE>
<CAPTION>
------------
March 31
------------
<S> <C>
Computer equipment.......................................... $ 183,100
Equipment................................................... 121,800
Furniture and fixtures...................................... 141,500
Leasehold improvements...................................... 57,100
Automobile.................................................. 25,600
------------
529,100
Less: accumulated depreciation.............................. (145,500)
------------
$ 383,600
============
</TABLE>
Note 6 - Excess of Trade Dollars Issued Over Trade Dollars Earned
In accordance with the guidelines established by the International Reciprocal
Trade Association, the Company has the right to borrow from the exchange and
spend within the exchange systems. Such a practice is used by barter exchanges,
worldwide, to cover inventory purchases, capital purchases, operating expenses
and to control the supply of trade dollars in the exchange economy. The Company
is obligated to provide goods and services to clients to offset any amounts of
Trade Dollars issued in excess of earned. At March 31, 1999, the Company had
expended $2,147,900 Trade Dollars, in excess of the amount of Trade Dollars
earned by the Company.
F-98
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 7 - Notes Payable
The Company has a $67,000 revolving note payable with a Canadian bank. The note
payable is subject to annual renewal. There were no borrowings outstanding as of
March 31, 1999. Borrowings on the line of credit are secured by cash and cash
equivalents on deposit with the bank.
In connection with the acquisition of BBE (Note 3), the Company has a $66,200
note payable to a shareholder. The non-interest bearing note is due on March 1,
2000.
Note 8 - Long-Term Obligations
At March 31, 1999, long-term obligations consisted of the following:
<TABLE>
<CAPTION>
------------
March 31
------------
<S> <C>
Note payable to Financial Services, Inc. at $800 per month,
including interest at 10% per annum (collateralized by
real estate), due 2002.................................... $ 18,400
Note payable to bank, interest at prime plus 2 1/2%, payable
in monthly installments of $1,400 plus interest, maturing
July 2004, partially guaranteed by a stockholder and
collateralized by equipment............................... 73,800
Capital lease for leasehold improvements, due in monthly
installments of $900, including imputed interest of 19%,
due December 2001......................................... 21,800
Note payable to bank, paid in full in 1999.................. --
Other....................................................... 3,000
------------
117,000
Less current portion........................................ (35,400)
------------
$ 81,600
============
</TABLE>
Maturities of long-term obligations for future years ending March 31 are as
follows:
<TABLE>
<CAPTION>
-------------------------------------------
Principal Capital Lease
Payments Obligation Total
------------ ------------- ------------
<S> <C> <C> <C>
2000.................................................... $ 28,400 $ 10,800 $ 39,200
2001.................................................... 25,400 10,800 36,200
2002.................................................... 17,800 7,600 25,400
2003.................................................... 16,700 -- 16,700
2004.................................................... 6,900 -- 6,900
------------ ------------ ------------
95,200 29,200 124,400
Amount representing interest............................ -- (7,400) (7,400)
------------ ------------ ------------
$ 95,200 $ 21,800 $ 117,000
============ ============ ============
</TABLE>
F-99
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 9 - Commitments
The Company leases office space under non-cancelable operating leases expiring
in May 2003. Future minimum lease payments under the leases are as follows for
the years ending March 31:
<TABLE>
<S> <C>
2000........................................................ $ 119,100
2001........................................................ 91,400
2002........................................................ 79,300
2003........................................................ 75,500
2004........................................................ 18,900
------------
$ 384,200
============
</TABLE>
Rent expense amounted to $23,500 for the year ended March 31, 1999.
Note 10 - Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of $.001 par value common
stock. As of March 31, 1999, the Company has 6,040,400 shares of common stock
outstanding.
During fiscal 1997, the Company completed a private placement (Offering) of its
common stock pursuant to which 600,000 shares were subscribed for $150,000.
Under the terms of the Offering, one "A" warrant and one "B" warrant were issued
with each issued share of common stock issued. During fiscal 1998, "A" and "B"
warrants were exercised for 492,900 shares of common stock for $226,800. During
the fiscal year 1999, the remaining outstanding "B" warrants were exercised for
563,500 shares of common stock with proceeds totaling $278,500.
During fiscal 1998, the Company completed a private placement (Placement) of its
common stock pursuant to which 240,000 shares of common stock were issued for
$72,000. Under the terms of the Placement, one "C" warrant and one "D" warrant
was issued with each one share of common stock issued. During fiscal 1999, all
outstanding "C" and "D" warrants were exercised for 480,000 shares of common
stock with proceeds totaling $228,800.
During fiscal 1999, the Company received cash for common stock and warrants
through a private placement whereby, 800,000 units were sold at $1.25 per unit.
Each unit consists of one share of common stock and one "E" warrant exercisable
at $1.50 per share. The warrants expire June 20, 2000. At March 31, 1999, there
were 800,000 "E" warrants issued and outstanding.
During fiscal 1999, a brokerage account was opened and funded for the sole
purpose of repurchasing up to 250,000 shares of the Company's common stock in
the open market. In October of 1998, 10,980 shares were repurchased for
approximately $13,000 and classified as treasury stock.
Note 11 - Stock Options
The Company adopted a Stock Option Plan ("the Plan") effective June 1, 1998
whereby, non-qualified and incentive stock options for up to 1,155,040 shares of
common stock may be granted to Directors, Officers, Employees and Consultants.
Options granted under the Plan are not to have a life in excess of five years
from the date of grant and vest 50% after 12 months, 75% after 18 months, 100%
after 24 months from the date of grant. The provisions of the Plan allow the
administrators to determine the vesting period of options granted.
F-100
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 11 - Stock Options (Continued)
In June 1998, the Company granted options under the Plan to purchase 55,000
shares of common stock at an exercise price of $0.82 per share to the Company's
non-employee Director and to certain consultants. The options granted to the
non-employee Director vest 100% in November 1999, and the options granted to the
consultants are fully vested. The options expire five years from the date of
grant and were valued at $11,400, which was recognized as expense in 1999.
In October 1998, the Company granted options to purchase 630,000 shares of
common stock to a consultant. The options are fully vested and expire five years
from the date of grant. The exercise prices of the options range from $4.00 to
$14.00 per share and have a weighted average exercise price of $11.11 per share.
The options were valued at $243,800. The Company is recognizing consulting
expense related to these options granted over the consultant's contractual
period of 39 months. In 1999, the Company recognized consulting expense of
$37,500 related to the stock options. The consulting agreement also contains an
anti-dilutive provision whereby the consultant will be granted additional
options from time to time so that the options will equal approximately 10.4% of
common stock outstanding on a fully diluted basis.
In November 1998, the Company granted options under the Plan to purchase 25,000
shares of common stock at $2.00 per share to other service providers. The
options vest over one year and expire five years from the date of grant. The
options were valued at $11,400, which was recognized as consulting expense
during 1999.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
----------------------------------
Number of Weighted-Average
Shares Exercise Price
--------------- ----------------
<S> <C> <C>
Balance, April 1, 1998...................................... -- $ --
Options granted........................................... 1,069,000 7.80
Options forfeited......................................... (1,000) 2.75
Options exercised......................................... -- --
---------------
Balance, March 31, 1999..................................... 1,068,000 $ 7.17
=============== ===============
</TABLE>
The following table summarizes information about options outstanding and
exercisable at March 31, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.8125-$2.75...................... 438,000 4.5 years $ 1.49 90,000 $ 0.81
$4.00-$6.00........................ 90,000 4.5 years 4.89 90,000 4.89
$8.00-$10.00....................... 140,000 4.5 years 9.14 140,000 9.14
$12.00-$14.00...................... 400,000 4.5 years 13.20 400,000 13.20
--------- --------------- --------------- ---------- ---------------
1,068,000 4.5 years $ 7.177 20,000 $ 9.82
========= ==========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 (APB No. 25) in
accounting for stock options. Accordingly, no compensation cost is recognized
from options issued under the Company stock option plan if the
F-101
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 11 - Stock Options (Continued)
exercise price equals the fair value at the date of grant. During 1999, 40,000
options were granted to one employee that were fully vested and had an exercise
price less than the fair value of the common stock on the date of grant. Using
the intrinsic value method required by APB No. 25 the Company has recorded
compensation expense in the amount of $112,500 in 1999.
An alternative method of accounting for stock options is SFAS No. 123 (Note 2).
Under SFAS No. 123, employee stock options are valued at grant date using the
Black-Scholes option-pricing model and compensation cost is recognized ratably
over the vesting period. Had compensation cost for the Company's stock option
plan been determined based on the Black-Scholes value at the grant dates for
awards as prescribed by SFAS No. 123, pro forma statement of operations for
fiscal 1999 would have been as follows:
<TABLE>
<CAPTION>
---------------
Year Ended
March 31, 1999
---------------
<S> <C>
Net Less
As Reported............................................... $ (798,000)
Pro forma................................................. $ (836,800)
Net Loss per common share
As Reported............................................... $ (0.14)
Pro forma................................................. $ (0.15)
------------
</TABLE>
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net earnings and earnings per
share in future years. In addition, valuations are based on highly subjective
assumptions about the future, including stock price volatility and exercise
patterns.
The weighted average fair market value of an option granted during 1999 was
$1.69 using the Black-Scholes option-pricing model. The following assumptions
were applied in determining the pro forma compensation cost:
<TABLE>
<CAPTION>
---------------
Year Ended
March 31, 1999
---------------
<S> <C>
Interest rate............................................... 6.0%
Dividend yield.............................................. 0.0%
Expected volatility......................................... 122.8%
Expected useful life in years............................... 5
------------
</TABLE>
Note 12 - Income Taxes
The components of the provision for income taxes at March 31, 1999 are as
follows:
<TABLE>
<S> <C>
Current - Federal........................................... $ --
Deferred - Federal.......................................... --
------------
Income tax provision........................................ $ --
============
</TABLE>
F-102
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 12 - Income Taxes (Continued)
A reconciliation of the consolidated income tax provision to the amount expected
using the U.S. Federal statutory rate for the year ended March 31, 1999 follows:
<TABLE>
<CAPTION>
------------
1999
------------
<S> <C>
Expected amount using U.S. Federal statutory rate........... --
Non-deductible expenses..................................... --
Depreciation and bad debts allowance........................ --
------------
Effective tax............................................... $ --
============
</TABLE>
Deferred tax assets (liabilities) consisted of the following at March 31, 1999:
<TABLE>
<S> <C>
Deferred tax assets
Bad debt allowance........................................ $ 11,900
Stock Options............................................. 58,800
Net operating loss carryforwards.......................... 746,100
------------
816,800
Deferred tax liability
Property and equipment.................................... (500)
------------
816,300
Valuation allowance......................................... (816,300)
------------
$ --
============
</TABLE>
As of March 31, 1999, the Company has domestic net operating loss carryforwards
of approximately $646,000 and Canadian net operating loss carryforwards of
approximately $1,212,200. The domestic carryforwards begin to expire in fiscal
year 2012. The Canadian carryforwards begin to expire in fiscal year 2000.
Deferred tax assets have been reduced by a valuation allowance because of
uncertainties as to future recognition of taxable income to assure realization.
F-103
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 13 - Income (Loss) Per Share
Following is a reconciliation of the numerators of the basic and diluted income
(loss) per share for the year ended March 31, 1999:
<TABLE>
<S> <C>
Net income (loss) available to common stockholders.......... $ (798,000)
============
Weighted average shares..................................... 5,521,583
Effect of dilutive securities:
Options................................................... --
Warrants.................................................. --
------------
5,521,583
============
Basic income (loss) per share (based on weighted average
shares)................................................... $ (.14)
============
</TABLE>
1,028,000 options and 800,000 warrants to purchase shares of common stock were
excluded from the computation in 1999 because their effect would be
anti-dilutive.
Note 14 - Geographic Segment Information
<TABLE>
<CAPTION>
------------
1999
------------
<S> <C>
Assets
U.S. operations........................................... $ 700,700
Canadian subsidiary....................................... 3,689,000
------------
$ 4,389,700
============
</TABLE>
Note 15 - Revenue
The following table summarizes the cash and trade dollars components of revenue
for the year ended March 31, 1999:
<TABLE>
<CAPTION>
------------
March 31
------------
<S> <C>
Trade....................................................... $ 263,900
Cash........................................................ 240,600
------------
$ 504,500
============
</TABLE>
Note 16 - Events Subsequent to the Date of the Auditors' Report (Unaudited)
PREFERRED STOCK
The Board of Directors authorized the Company to issue up to 10,000,000 shares
of preferred stock.
F-104
<PAGE>
Ubarter.com Inc.
Notes to Consolidated Financial Statement (Continued)
March 31, 1999 and September 30, 1999
Note 16 - Events Subsequent to the Date of the Auditors' Report (Unaudited)
(Continued)
CONVERTIBLE NOTE PAYABLE
In December 1999, the Company issued a $100,000 8% convertible promissory note
which matures March 1, 2000. The holder of the note has the right to convert the
note into a future round of financing that the Company completes prior to
repayment or conversion of the note, upon the same terms and conditions as other
investors participating in such future financings. If the Note is not repaid by
March 1, 2000, the holder of the note shall have the option to convert the note
into shares of common stock of the Company equal to the lower of $1.50 per share
or 50% of the average closing price of the common stock through the OTC Bulletin
Board on the 10 days prior to March 1, 2000. If the note is not paid or
converted by March 1, 2000, the note will remain outstanding and bear interest
at 16% per annum until paid in full.
AXC AGREEMENT
In December 1999, the Company entered into an agreement with AXC Corporation
("AXC") to retain future services with the firm to provide Internet related
software-consulting. The Company paid AXC $250,000 ($100,000 in stock and
$150,000 in cash) as a retainer against future invoices. The Company issued
33,333 shares of its common stock at $3.00 per share; such shares having
"piggyback" registration rights that AXC may exercise in the event of a
subsequent public offering of Company shares. The Company further agreed that in
the event the price of Company shares at the close of market shall be less than
$2.50 per share on the earlier of two events following (i) the one year
anniversary of the transfer of these shares to AXC or (ii) the day immediately
prior to a subsequent public offering of the Company shares; then the Company
shall transfer to AXC sufficient additional shares of its common stock to
compensate for the difference between $3.00 per share and the closing price on
the dates mentioned in (i) and (ii).
NOTE PAYABLE
In August 1999, funds totaling $1,000,000 ("the Note") were loaned to the
Company by Alpine Capital Group, LLC. The Note is payable on September 1, 2002,
with interest accruing at the rate of 5 1/2% per annum on the unpaid principal
amount. If the Company closes a financing or financings in the aggregate amount
of at least $2,500,000 through public or private sale of its debt or equity
securities on or before June 1, 2000, the Company must repay any unpaid
principal and interest within 5 business days of such closing. If, on June 1,
2000, there remains unpaid principal on the Note, the Payee shall have the
option exercisable at any time thereafter, but not later than September 1, 2002,
to convert such unpaid principal into 1,333,333 shares of common stock at the
rate of $.75 per share. After June 1, 2000, the holder of the note may exercise
the conversion option any time prior to the maturity date of the note. Alpine
Capital Group, Inc. also received 183,333 warrants to purchase common shares at
$2.00 per share. Accordingly, the Company has allocated $451,700 of the proceeds
to the warrants and is amortizing this amount of interest expense from the
period of issuance to June 1, 2000. The effective rate of the note payable is
20.5%. The warrants may be exercised from September 1, 1999 through
September 1, 2004.
PROPOSED MERGER AGREEMENT
In January 2000, the Company entered into a merger agreement with ShopNow.com
Inc. The agreement provides for ShopNow.com to acquire all of the Company's
equity for $45 million in ShopNow.com common stock. The purchase price will be
reduced by the certain adjustments including an adjustment for the Company's
debt at the date of merger. The ShopNow.com stock is to be exchanged at the
lower of $20 per share or the average closing price as reported on the Nasdaq
national market for the 10 days prior to closing the merger.
F-105
<PAGE>
[Inside Back Cover]
[b2bNow.com and ShopNow.com web page superimposed on office background with the
following text: "ShopNow provides one stop e-commerce solutions but also
provides businesses and merchants access to millions of shoppers."]
[LOGO]
<PAGE>
Part II
Information Not Required in Prospectus
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by ShopNow.com in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ 56,831
NASD filing fee............................................. 22,057
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving costs................................ 20,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 200,000
Transfer Agent and Registrar fees........................... 10,000
-------
Total................................................... 726,388
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation
Act (the "WBCA") authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 5 of the registrant's Amended and Restated Bylaws
(Exhibit 3.2 hereto) provides for indemnification of the registrant's directors,
officers, employees and agents to the maximum extent permitted by Washington
law. The directors and officers of the registrant also may be indemnified
against liability they may incur for serving in that capacity pursuant to a
liability insurance policy maintained by the registrant for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's
liability to the corporation or its shareholders for monetary damages for acts
or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Section 10 of the registrant's Amended and Restated Articles of
Incorporation (Exhibit 3.1 hereto), contains provisions implementing, to the
fullest extent permitted by Washington law, such limitations on a director's
liability to the registrant and its shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued and sold unregistered
securities as set forth below.
1. On September 30, 1996, the Registrant issued 300,000 shares of common stock
to Othniel Palomino at $0.15 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
2. On January 2, 1997, the Registrant issued to Ganapathy Krishnan a promissory
note in the principal amount of $250,000, which was converted into 500,000
shares of common stock upon the initial public offering. These securities have
been issued in a transaction exempt from registration under the Securities Act
of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
3. On January 2, 1997, pursuant to an Acquisition Agreement among the
Registrant, Web Solutions, Inc. and Intelligent Software Solutions, Inc., the
Registrant issued to the shareholders of Web Solutions, Inc. and Intelligent
Software Solutions, Inc. 600,000 shares of common stock, valued at $0.15 per
share, and a convertible promissory
II-1
<PAGE>
note in the principal amount of $225,738. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
4. On February 26, 1997, the Registrant issued 699,612 shares of Series A
convertible preferred stock at $0.50 per share, which were converted into
699,612 shares of common stock upon the initial public offering, to Dwayne
Walker in exchange for the cancellation of certain promissory notes issued by
the Registrant to Mr. Walker. These securities have been issued in a transaction
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder.
5. On February 26, 1997 and April 30, 1997, the Registrant issued 2,334,079
shares of Series B convertible preferred stock, which were converted into
2,334,079 shares of common stock upon the initial public offering, to four
accredited investors at $0.77 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D thereunder.
6. During the period from May 15, 1997 through July 15, 1997, the Registrant
issued promissory notes in the aggregate principal amount of $1,220,000, each of
which accrued interest at an annual rate of 8% (the "1997 Notes"). These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
7. During the period from October 21, 1997 through November 12, 1997, the
Registrant issued promissory notes in the aggregate principal amount of
$1,775,000. In connection with this transaction, the Registrant issued to the
investors warrants to purchase an aggregate of 62,125 shares of common stock at
an exercise price of $1.50 per share. Additionally, the Registrant issued to the
placement agent, Madison Securities, Inc., warrants to purchase 177,500 shares
of common stock at an exercise price of $1.50 per share. These securities have
been issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D thereunder.
8. On October 31, 1997, the Registrant issued 835,205 shares of Series C
convertible preferred stock, which were converted into 835,205 shares of common
stock upon the initial public offering, to 14 investors at $1.50 per share in
exchange for the cancellation of the 1997 Notes. In connection with this
transaction, the Registrant issued to the investors warrants to purchase an
aggregate of 167,047 shares of Series C convertible preferred stock at an
exercise price of $1.50 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D thereunder.
9. On November 11, 1997, the Registrant issued 177,333 shares of common stock
to Ganapathy and Kalyani Krishnan at $0.50 per share. These securities have been
issued in a transaction exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
10. During the period from January 23, 1998 through April 15, 1998, in a private
placement the Registrant issued, to 163 investors, an aggregate of 4,250,000
shares of Series D convertible preferred stock which were converted into
4,250,000 shares of common stock upon the initial public offering and warrants
to purchase an aggregate of 425,000 shares of common stock at an exercise price
of $5.00 per share and issued, to 111 investors, an aggregate of 2,125,000
shares of Series E convertible preferred stock which were converted into
2,125,000 shares of common stock upon the initial public offering and warrants
to purchase an aggregate of 212,500 shares of common stock at a exercise price
of $5.00 per share. In connection with this transaction, the Registrant issued
to the placement agent, Madison Securities, Inc., warrants to purchase 625,000
shares of common stock at an exercise price of $4.40 per share. These securities
have been issued in transactions exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D thereunder.
11. On January 29, 1998, the Registrant entered into a Stock Purchase Agreement
with Trucost, Inc., pursuant to which the Registrant issued to Trucost, Inc. a
warrant to purchase 10,000 shares of common stock at an exercise price of $5.00.
These securities have been issued in a transaction exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
II-2
<PAGE>
12. On March 23, 1998, pursuant to a development and license agreement between
the Registrant and InstallShield Software Corporation, the Registrant issued
62,327 shares of common stock to InstallShield Software. These securities have
been issued in a transaction exempt from registration under the Securities Act
of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
13. On June 8, 1998, pursuant to an Acquisition Agreement among the Registrant
and Saturn Solutions, Inc., the Registrant issued 422,710 shares of common stock
to Saturn Solutions, Inc. and 649 shares of common stock to Robert Gagnon, in
each case, valued at $3.30 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
14. On July 8, 1998, in connection with the purchase of services, the Registrant
issued to The Culligan Group a warrant to purchase 5,000 shares of common stock
at an exercise price of $1.00 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
15. On August 6, 1998, pursuant to a Merger Agreement among the Registrant and
The Internet Mall, Inc. the Registrant issued to the shareholders of The
Internet Mall, Inc. 666,667 shares of common stock, valued at $6.00 per share.
In connection with this agreement, the Registrant assumed an outstanding
promissory note in the principal amount of $300,000 issued to the NVCC Fund, and
following such transaction the NVCC Fund converted the note plus accrued
interest into 52,915 shares of common stock and warrants to purchase 10,583
shares of common stock at an exercise price of $4.00 per share. These securities
have been issued in transactions exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
16. On September 17, 1998, pursuant to an Agreement and Plan of Merger between
the Registrant and Media Assets, Inc., the Registrant issued to the sole
shareholder of Media Assets, Inc., Jeff Haggin, 600,000 shares of common stock,
a convertible promissory note in the principal amount of $1,050,000 and options
to purchase an aggregate of 1,120,000 shares of common stock at an exercise
price of $2.00 per share. In May 1999, Mr. Haggin exchanged performance-based
options to purchase 900,000 shares of common stock for an option to purchase
300,000 shares of common stock. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
17. In October 1998, the Registrant completed a Bridge Financing whereby it
issued promissory notes in the aggregate principal amount of $3,700,000 and
warrants to purchase 129,500 shares of common stock at $4.00 per share. In
connection therewith, the Registrant issued to the placement agent, Madison
Securities, Inc., warrants to purchase 129,500 shares of common stock at $4.00
per share. These securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2) of
the Securities Act of 1933.
18. On October 21, 1998, in connection with the financing of a fixed asset
acquisition, the Registrant issued to Cornerstone Equipment Finance a warrant to
purchase 6,795 shares of common stock at an exercise price of $6.00 per share.
These securities have been issued in a transaction exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933.
19. During the period from November 24, 1998 through January 19, 1999, the
Registrant issued an aggregate of 2,336,000 shares of Series F convertible
preferred stock which were converted into 2,336,000 shares of common stock upon
the initial public offering to 130 investors at $6.25 per share. In connection
with this transaction, the Registrant issued to the investors warrants to
purchase 233,600 shares of common stock at an exercise price of $7.50 per share.
In connection with this transaction, the Registrant issued to the placement
agent, Madison Securities, Inc., warrants to purchase 233,600 shares of common
stock, at an exercise price of $6.25 per share. These securities have been
issued in transactions exempt from registration under the Securities Act of 1933
in reliance upon Section 4(2) of the Securities Act of 1933.
20. On November 30, 1998, the Registrant issued 10,000 shares of common stock to
Jim Tweeten at $5.00 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
II-3
<PAGE>
21. On December 15, 1998, the Registrant issued 5,000 shares of common stock to
Steve McClure at $.50 per share pursuant an option exercise. These securities
have been issued in a transaction exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
22. On January 10, 1999, in connection with the purchase of services, the
Registrant issued to The Culligan Group a warrant to purchase 3,400 shares of
common stock at an exercise price of $1.00 per share. These securities have been
issued in a transaction exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
23. On February 3, 1999, pursuant to a licensing agreement between the
Registrant and Interworld Corporation, the Registrant issued to Interworld
Corporation a warrant to purchase 16,000 shares of common stock at an exercise
price of $6.25 per share. These securities have been issued in a transaction
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
24. On February 17, 1999, in connection with the purchase of services, the
Registrant issued to Star Telecommunications, Inc. a warrant to purchase 20,000
shares of common stock at an exercise price of $4.68 per share. These securities
have been issued in a transaction exempt from registration under the Securities
Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933.
25. On March 1, 1999, in connection with the purchase of services, the
Registrant issued to Jim Tweeten a warrant to purchase 15,000 shares of common
stock at an exercise price of $6.25 per share. These securities have been issued
in a transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
26. On March 4, 1999, pursuant to a Loan and Security Agreement between the
Registrant and Transamerica Business Credit Corporation, the Registrant issued
to Transamerica Business Credit Corporation a warrant to purchase 72,000 shares
of common stock at $6.25 per share. These securities have been issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
27. On March 10, 1999, the Registrant issued 1,000 shares of common stock to
Howard Barokas and Andrew Cullen as a bonus for consulting services previously
rendered to the Registrant. These securities have been issued in transactions
exempt from registration under the Securities Act of 1933 in because no sale
occurred for purposes of the Securities Act of 1933.
28. During March and April 1999, the Registrant issued to the ZERON Group in
exchange for $5,000,000 in cash 714,286 shares of Series G convertible preferred
stock which converted into 714,286 shares of common stock upon the initial
public offering and warrants to purchase 35,715 shares of common stock at an
exercise price of $7.50 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
29. In April 1999, we issued to 24/7 Media 4,300,000 shares of Series G
convertible preferred stock at $7.00 per share which converted into 4,300,000
shares of common stock upon the initial public offering in exchange for
$30.1 million in consideration, consisting of cash, shares of 24/7 Media, Inc.
common stock and 24/7 Media, Inc.'s majority interest in CardSecure, Inc. A
portion of the shares of Series G convertible preferred stock and of the
warrants were placed in escrow pending consummation of our acquisition of
CardSecure, Inc., which occurred on June 15, 1999. 24/7 Media, Inc. also
received warrants to purchase 860,000 shares of common stock at $7.00 per share.
These securities have been issued in transactions exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act
of 1933.
30. On April 15, 1999, pursuant to an Asset Purchase Agreement between the
Registrant and Discountjewelry.com, Inc., the Registrant issued 8,000 shares of
common stock, valued at $6.25 per share, to Mike Kmet, Discountjewelry.com,
Inc.'s sole proprietor. In connection with the Asset Purchase Agreement, the
Registrant also agreed to issue an aggregate of 8,000 additional shares of
common stock over the next eight months. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
II-4
<PAGE>
31. On April 16, 1999, pursuant to a Master Lease Agreement between the
Registrant and Silicon Valley Bank, the Registrant issued to Silicon Valley Bank
warrants to purchase 40,000 shares of common stock at $6.25 per share. These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
32. On April 29, 1999, pursuant to a Distributor/Marketing Agreement between the
Registrant and Qwest Communications Corporation, the Registrant issued to Qwest
Communications Corporation warrants to purchase 100,000 shares of common stock
at $10.00 per share. These securities have been issued in a transaction exempt
from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
33. On May 18, 1999, the Registrant issued 333,334 shares of Series H preferred
stock to HNC Software, Inc. at $9.00 per share which was converted into 333,334
shares of common stock upon the inital public offering. In connection with this
transaction, the Registrant issued to HNC Software, Inc. warrants to purchase
50,000 shares of common stock at an exercise price of $9.00 per share. These
securities have been issued in a transaction exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
34. On May 19, 1999, pursuant to a Distribution Agreement between the Registrant
and Corel Corporation, the Registrant issued to Corel Corporation warrants to
purchase 100,000 shares of common stock at an exercise price of $9.00 and
options to purchase 300,000 and 200,000 shares of common stock at $4.80 and
$9.00, respectively. These securities have been issued in a transaction exempt
from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
35. In May 1999, pursuant to the First Amendment to Loan and Security Agreement
between the Registrant and Transamerica Business Credit Corporation, the
Registrant issued to each of Transamerica Business Credit Corporation and Sand
Hill Capital LLC a warrant to purchase 35,000 shares of common stock at an
exercise price of $7.00 per share. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
36. On June 8, 1999, in connection with the acquisition of CardSecure, Inc., the
Registrant issued, to 3 shareholders of the acquired company, an aggregate of
243,036 shares of common stock valued at $7.00 per share. These securities have
been issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
37. On June 15, 1999, pursuant to a Acquisition Agreement between the Registrant
and GO Software, Inc., the Registrant issued to the shareholders of GO
Software, Inc., 1,123,751 shares of common stock and to one of these
shareholders a promissory note in the principal amount of $1,000,000,
convertible at the shareholder's option for common stock at a conversion price
equal to the initial public offering price. These securities have been issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
38. On June 17, 1999, the Registrant entered into the Stock Purchase Agreement
among the Registrant and CB Capital Investors, L.P., to sell 2,100,000 shares of
Series I convertible preferred stock which were converted into 2,100,000 shares
of common stock upon the initial public offering and a warrant to purchase
555,556 shares of common stock at an exercise price of $9.00 per share to CB
Capital Investors, L.P. The transaction closed on July 17, 1999. These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
39. On April 12, 1999, Merrimac Capital Company, LLC and Leasing
Technologies, Inc., made a loan commitment to the Registrant pursuant to which
the Registrant agreed to issue to Merrimac Capital Company, LLC a warrant to
purchase 6,400 shares of common stock at an exercise price of $6.25 per share
and to Leasing Technologies Inc. a warrant to purchase 22,400 shares of common
stock at an exercise price of $6.25 per share. These securities were issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
40. On April 20, 1999, in exchange for the cancellation of the Registrant's
obligation to pay a lease brokerage fee to Matt Christian and Tim O'Keefe, the
Registrant agreed to issue to Matt Christian a warrant to purchase 13,182
II-5
<PAGE>
shares of common stock at an exercise price of $9.00 per share and to Tim
O'Keefe a warrant to purchase 3,600 shares of common stock at an exercise price
of $9.00 per share. These securities have been issued in transactions exempt
from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
41. Through June 30, 1999, the Registrant granted, pursuant to its stock option
plan and outside of its stock option plan, options to purchase an aggregate of
9,307,275. The options granted under the stock option plan were issued to the
Registrant's officers, employees and consultants at exercise prices ranging from
$0.25 to $7.00. The options granted outside of the stock option plan were
granted to its employees and officers at prices ranging from $0.25 to $4.00. A
significant portion of these options were issued pursuant to the Registrant's
stock option plan. These securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Rule 701
promulgated under the Securities Act of 1933. Where Rule 701 has not been
available, the securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2) of
the Securities Act of 1933.
42. On October 28, 1999, pursuant to a Stock Purchase Agreement between the
Registrant and escrow.com, Inc., the Registrant 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 $.25 per share and
(ii) 2,000,000 shares of Series A Preferred Stock at a purchase price of $2.4375
per share. These securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2) of
the Securities Act of 1933.
43. On November 12, 1999, pursuant to an Agreement and Plan of Merger between
the Registrant, Racer Acquisition, Inc. and SpeedyClick Corp., the Registrant
issued 3,799,237 shares of common stock at $12.313 per share to shareholders of
SpeedyClick in exchange for all equity securities of SpeedyClick. These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
44. On November 15, 1999, pursuant to the Asset Purchase Agreement between the
Registrant and Discountjewelry.com, the Registrant issued 2,000 shares of common
stock at $16.50 per share to Mike Kmet.
45. On December 6, 1999, pursuant to an Agreement and Plan of Merger between the
Registrant, Cardinals Acquisition, Inc. and Cortix, Inc., the Registrant issued
711,435 shares of common stock at $16.85 per share to shareholders of Cortix in
exchange for all equity securities of Cortix. These securities have been issued
in transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
46. On December 14, 1999, the Registrant 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.
47. On December 17, 1999, pursuant to an Agreement and Plan of Merger between
the Registrant, Chiefs Acquisition, Inc. and WebCentric, Inc., the Registrant
issued 2,161,904 shares of common stock at $21.61 per share to WebCentric in
exchange for all equity securities of WebCentric. These securities have been
issued in transactions exempt from registration under the Securities Act of 1933
in reliance upon Section 4(2) of the Securities Act of 1933.
48. On December 17, 1999, pursuant to the Asset Purchase Agreement between the
Registrant and Discountjewelry.com, the Registrant issued 1,000 shares of common
stock at $19.1875 per share to Mike Kmet.
49. On December 22, 1999, the Registrant issued 264,199 shares of common stock
at $18.9251 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. These securities have
been issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
50. On October 1, 1999, in connection with the provision of consulting services,
the Registrant issued warrants to purchase 30,000 shares of common stock at
$7.50 to Woodstock Group International, LLC. These securities have been issued
in transactions exempt from registration under the Securities Act of 1933 in
reliance upon Section 4(2) of the Securities Act of 1933.
51. On October 5, 1999, in connection with a business arrangement to build their
online store, the Registrant issued warrants to purchase 10,000 shares of common
stock at $10.00 to StairMaster Corp. These securities have been
II-6
<PAGE>
issued in transactions exempt from registration under the Securities Act of 1933
in reliance upon Section 4(2) of the Securities Act of 1933.
52. On October 9, 1999, in connection with a prior private placement of the
Registrant, the Registrant issued warrants to purchase 7,000 shares of common
stock at $4.00 to Jim Saunders Wood Specialties. These securities have been
issued in transactions exempt from registration under the Securities Act of 1933
in reliance upon Section 4(2) of the Securities Act of 1933.
53. On October 28, 1999, in connection with a prior private placement of the
Registrant, the Registrant issued warrants to purchase 7,000 shares of common
stock at $4.00 to Jason Bank. These securities have been issued in transactions
exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933.
54. On November 11, 1999, the Registrant 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. These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
55. On November 11, 1999, the Registrant 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. These
securities have been issued in transactions exempt from registration under the
Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of
1933.
56. On December 8, 1999, in connection with the provision of services, the
Registrant issued warrants to purchase 7,500 and 2,500 shares of common stock at
$12.00 to Intec Inc. and e-solutions Inc., respectively. These securities have
been issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
57. On January 18, 2000, pursuant to an Agreement and Plan of Merger, dated as
of December 23, 1999, among the Registrant, SN Acquisition, Inc., AXC
Corporation, and Michael Axtman, Karl Reeves, Seth Weissman, Kevin Harris,
Robert Harbison, David Henn, and Paul VanDerVelde, the Registrant issued 540,296
shares of common stock at $18.325 per share to the shareholders of AXC
Corporation in exchange for all equity securities of AXC. These securities have
been issued in transactions exempt from registration under the Securities Act of
1933 in reliance upon Section 4(2) of the Securities Act of 1933.
58. On January 13, 2000, pursuant to a Share Sale and Purchase Agreement among
the Registrant, 3037952 Nova Scotia Company, and the shareholders Pronet
Enterprises Ltd., namely Finn A. Knutsen, Kevin T. Dennehy, Nicole Arens and
Candis Heath, the Registrant issued 162,508 shares of common stock at $17.2725
per share to the shareholders of Pronet in exchange for all equity securities of
Pronet. These securities have been issued in transactions exempt from
registration under the Securities Act of 1933 in reliance upon Section 4(2) of
the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
<TABLE>
- -------------------------------------------------------------------------
Number Description
- -------------------------------------------------------------------------
<C> <S>
1.1 ** Form of Underwriting Agreement.
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.
</TABLE>
II-7
<PAGE>
<TABLE>
- -------------------------------------------------------------------------
Number Description
- -------------------------------------------------------------------------
<C> <S>
4.3 ++ Amendment No. 2 to Second Amended and Restated Registration
Rights Agreement dated as of June 16, 1999.
5.1 ** Opinion of Perkins Coie LLP as to the legality of the
shares.
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 ##### 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 Regsitrant.
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.
</TABLE>
II-8
<PAGE>
<TABLE>
- -------------------------------------------------------------------------
Number Description
- -------------------------------------------------------------------------
<C> <S>
10.24* Promissory Note, dated September 28, 1999, from Alan Koslow
to the Registrant.
21.1 ** List of Subsidiaries
23.1 * Consent of Ernst & Young LLP, Independent Accountants.
23.2 * Consent of Arthur Andersen LLP, Independent Accountants.
23.3 * Consent of KPMG LLP, Independent Accountants
23.4 * Consent of Moss Adams LLP, Independent Accountants
23.5 ** Consent of Perkins Coie LLP (contained in the opinion filed
as Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1 * Financial Data Schedule.
</TABLE>
* Filed herewith
** To be filed by amendment
+ 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. 000-26819) 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 November 9, 1999.
##### Incorporated by reference to Registration Statement on Form S-8 (File
No. 000-26707) filed by the Registrant December 10, 1999.
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
II-9
<PAGE>
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-10
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on the 20th day of January, 2000.
<TABLE>
<S> <C> <C>
SHOPNOW.COM INC.
By: /s/ DWAYNE M. WALKER
-----------------------------------------
Dwayne M. Walker, Chief Executive Officer
</TABLE>
Power of Attorney
Each person whose individual signature appears below hereby authorizes and
appoints Dwayne M. Walker and Alan D. Koslow, and each of them, with full power
of substitution and resubstitution and full power to act without the other, as
his true and lawful attorney-in-fact and agent to act in his name, place and
stead and to execute in the name and on behalf of each person, individually and
in each capacity stated below, and to file, any and all amendments to this
Registration Statement, including any and all post-effective amendments and
amendments thereto and any registration statement relating to the same offering
as this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their and his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 20th day of January, 2000.
<TABLE>
<C> <S>
/s/ DWAYNE M. WALKER
- -------------------------------------------- Chief Executive Officer and Chairman of the
Dwayne M. Walker Board (Principal Executive Officer)
Executive Vice President, Chief Financial
/s/ ALAN KOSLOW Officer, General Counsel and Secretary
- -------------------------------------------- (Principal Financial and Accounting
Alan D. Koslow Officer)
/s/ JACOB I. FRIESEL
- -------------------------------------------- Director
Jacob I. Friesel
/s/ DAVID M. LONSDALE
- -------------------------------------------- Director
David M. Lonsdale
/s/ BRET R. MAXWELL
- -------------------------------------------- Director
Bret R. Maxwell
/s/ MARK C. MCCLURE
- -------------------------------------------- Director
Mark C. McClure
</TABLE>
II-11
<PAGE>
<TABLE>
<C> <S>
/s/ JON R. SNEDEGAR
- -------------------------------------------- Director
John R. Snedegar
/s/ MARK H. TERBEEK
- -------------------------------------------- Director
Mark H. Terbeek
/s/ EYTAN J. LOMBROSO
- -------------------------------------------- Director
Eytan Lombroso
</TABLE>
II-12
<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, 1998.................... $ 23 $ 591 $ (384) $ 230
================= =============== ============= ============
Year ended December 31, 1997.................... $ 3 $ 20 $ -- $ 23
================= =============== ============= ============
Year ended December 31, 1996.................... $ 2 $ 3 $ (2) $ 3
================= =============== ============= ============
</TABLE>
- ------------------------
(1) Write-offs, net of bad debt recovery.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
- -------------------------------------------------------------------------
Number Description
- -------------------------------------------------------------------------
<C> <S>
1.1 ** Form of Underwriting Agreement.
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.
5.1 ** Opinion of Perkins Coie LLP as to the legality of the
shares.
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 ##### 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.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
- -------------------------------------------------------------------------
Number Description
<C> <S>
- -------------------------------------------------------------------------
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.
21.1 ** List of Subsidiaries
23.1 * Consent of Ernst & Young LLP, Independent Accountants.
23.2 * Consent of Arthur Andersen LLP, Independent Accountants.
23.3 * Consent of KPMG LLP, Independent Accountants
23.4 * Consent of Moss Adams LLP, Independent Accountants
23.5 ** Consent of Perkins Coie LLP (contained in the opinion filed
as Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
+ 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. 000-26819) 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 November 9, 1999.
##### Incorporated by reference to Registration Statement on Form S-8 (File
No. 000-26707) filed by the Registrant December 10, 1999.
<PAGE>
OFFICE LEASE
THIS OFFICE LEASE (this "Lease") made as of this 13th day of December,
1999, by and between Benaroya Capital Company, LLC, a Washington limited
liability company ("Lessor"), and Shopnow.com Inc., a Washington corporation
("Lessee").
1. PREMISES. Lessor does hereby lease to Lessee those certain premises, to
wit: approximately 105,410 rentable square feet of office space on floors
8,9,10 and 11, as outlined on the Floor Plan attached hereto as EXHIBIT A
in the Building known as Metropolitan Park North Tower located at 1220
Howell Street in Seattle, Washington (hereinafter called "Premises"). The
legal description of the land (the "Land") on which the Building is located
is set forth in EXHIBIT A-1. For the purpose of determination of the
rentable area of the Premises and the Building, the BOMA definition
American National Standard Z65.1-1996 area calculation standards for office
area will apply. If the actual rentable area of the Premises is determined
to be other than 105,410 square feet, the Monthly Minimum Rent payable
hereunder shall be adjusted based upon the actual number of the rentable
square feet contained in the Premises. The Building is hereafter sometimes
referred to as the "Project". In addition, Lessee has the right, in common
with other tenants in the Project and subject to the Rules and Regulations,
to use of the Common Areas in the Building and on the Land. The Common
Areas include, without limitation, those portions of the elevators,
stairways, entrances, lobbies, pedestrian sidewalks, ramps, landscaped
areas and areas for vehicular circulation that are not included within any
lessee's premises. During the Term of this Lease, no changes shall be made
in or to the Common Areas in such a manner as to materially affect Lessee's
use of the Premises for its conduct of its business. Lessee and Lessee's
employees shall have full elevator access to the Premises and stairway
egress from the Premises at all times, 24 hours per day, 7 days per week.
Lessor shall provide to Lessee and its employees, for no additional charge
to Lessee, a multi-level proximity card reader system for Building garage
entries, Building entries, and Building elevators. As part of Lessee
Improvements and as a charge to the Lessee Improvement Allowance, Lessee
will have the right to integrate the Building card reader system with the
entry doors to the Premises. For purposes of this Lease, the term "Lessee
Improvements" shall mean the improvements to the Premises to be made in
accordance with the Construction Drawings pursuant to EXHIBIT D hereto.
2. TERM. This Lease shall be for a term (the "Term") of ten (10) years
commencing February 1, 2001 (the "Commencement Date") and terminating
January 31, 2011. Rent for any fractional calendar month shall be the
prorated portion of the rent computed on a daily basis. Notwithstanding
the foregoing to the contrary, the Commencement Date shall not occur until
and unless all of the following conditions are satisfied: (i) with the
exception of normal punch list items, Lessor's completion of all of the
Lessee Improvements pursuant to EXHIBIT D hereto; (ii) the delivery to
Lessee of a Certificate of Occupancy from the governmental body or bodies
having jurisdiction on the Premises respecting
<PAGE>
Lessee's occupancy of the Premises; (iii) the delivery to Lessee and
Lessee's review and approval in its reasonable discretion of an
inspection report on the Lessee Improvements prepared by an inspector
designated by Lessee at Lessee's sole cost and expense, verifying that
the Lessee Improvements were constructed in accordance with the
Construction Drawings approved by Lessor and Lessee; and (iv) the
delivery of exclusive possession of the Premises to Lessee.
3. MONTHLY MINIMUM RENT. Lessee covenants and agrees to pay Lessor at 1001
Fourth Avenue, Suite 4700, Seattle, WA 98154, or to such other party or at
such other place as Lessor may hereafter designate, Monthly Minimum Rent in
the following amounts according to the schedule below and Additional Rent,
as provided in Section 9, in advance without offset or deduction, on or
before the first (1st) day of each month of the Lease Term:
Beginning February 1, 2001 and ending October 31, 2003 the Monthly Minimum
Rent shall be $264,403.00 (based upon $30.10 per rentable square foot of
the Premises per year).
Beginning November 1, 2003 and ending October 31, 2006 the Monthly Minimum
Rent shall be $281,972.00 (based upon $32.10 per rentable square foot of
the Premises per year).
Beginning November 1, 2006 and ending January 31, 2011 the Monthly Minimum
Rent shall be $295,148.00 (based upon $33.60 per rentable square foot of
the Premises per year).
4. SECURITY DEPOSIT. On or before December 1, 1999, Lessee will deposit
with Lessor the amount of Five Hundred Ninety Thousand Two Hundred
Ninety-Six and No/100 dollars ($590,296) in the form of cash or an
irrevocable and unconditional Letter of Credit drawn on a bank
acceptable to Lessor and expiring sixty (60) days following the
expiration date of this Lease, as security for the full and timely
performance of this Lease. Alternatively, the expiration date of the
Letter of Credit may be for any shorter term so long as Lessee provides
Lessor with evidence of extensions at least 60 days prior to each
expiration date. Lessee may substitute cash for the Letter of Credit at
any time. Said sum or Letter of Credit shall be held by Lessor as
security for the faithful performance by Lessee of all the terms,
covenants and conditions of this Lease to be kept and performed by
Lessee during the entire Term hereof. If Lessee defaults with respect
to any provision of this Lease, including, but not limited to, the
provisions relating to the payment of Rent or other sums due under this
Lease, Lessor may (but shall not be required to) use, apply or retain
all or any part of the security deposit for the payment of any sums due
under this Lease or any sum in default, or for the payment of any amount
which Lessor may spend or become obligated to spend by reason of
Lessee's default hereunder, or to compensate Lessor for any other loss,
damage, cost or expense (including attorneys' fees) which Lessor may
suffer or incur by reason of Lessee's default hereunder. If any portion
of
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said security deposit is so used or applied, Lessee shall, within five
(5) days after Lessee's receipt of Lessor's written demand therefor,
deposit a certified or cashier's check with Lessor in an amount
sufficient to restore the security deposit to its original amount and
Lessee's failure to do so shall be a default under this Lease. Lessor
shall not be required to keep the security deposit separate from its
general funds and Lessee shall not be entitled to interest on such
deposit. If Lessee shall fully and faithfully perform every provision
of this Lease to be performed by it, the security deposit or any balance
thereof after deduction hereunder by Lessor shall be returned to Lessee
(or, at Lessor's option, to the last assignee of Lessee's interest
hereunder) within thirty (30) days following expiration of the Lease
Term; provided, that in the event this Lease shall be terminated upon the
default of Lessee, the Letter of Credit will be converted to cash and
the security deposit, to the extent necessary to compensate Lessor for
such default of Lessee, shall be retained by Lessor and all of Lessee's
interest therein (to the extent necessary to compensate Lessor for
Lessee's default) shall terminate and the security deposit (to the extent
necessary to compensate Lessor for Lessee's default) will be applied
against the damages suffered by Lessor by reason of the Lessee's default,
and the balance of the security deposit shall be returned to Lessee. In
the event of termination of Lessor's interest in this Lease, Lessor shall
transfer said security deposit to Lessor's successor in interest. In the
event Lessee's market capitalization falls below $175 million at any time
during the Term of this Lease, the security deposit (in the form of
either cash or letter of credit) will be increased to an amount
calculated by Lessor and equal to the then unamortized (amortized over 10
years at 10% interest) amounts of the Lessee Improvement Allowance, the
commission paid by Lessor pursuant to Section 35 hereof, and 8 months'
Monthly Minimum Rent.
5. USE. Lessee shall use and occupy the Premises for the purpose of
"Class A" building general office, telephone and computer service, and
other activities associated with the conduct of the electronic commerce
business and any other legally permitted uses. For purposes of this Lease,
the term "Class A" buildings refers to office buildings having at least
eleven stories located in the Central Business District of Seattle,
Washington. Lessee shall not use the Premises for any other purposes,
without prior written consent of Lessor, which consent shall not be
unreasonably withheld or delayed. Lessee shall comply with all
governmental laws, ordinances, regulations, orders and directives and those
reasonable fire hazard/safety-related insurance requirements applicable to
Lessee's use of the Premises. Lessee shall not occupy or use or permit any
portion of the Premises to be occupied or used in violation of this Lease
in such a manner or for any purpose which would increase the cost of
insurance coverage upon the Premises, the Building or the contents
thereof. Lessor warrants that, as of the Commencement Date of this Lease,
the Building in which the Premises are located will comply with all
applicable building and land use codes and ordinances related to
construction and use, including those requirements imposed by the
Americans with Disabilities Act.
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6. RULES AND REGULATIONS. Lessee agrees to comply with the Rules and
Regulations attached hereto as EXHIBIT B, as well as such other reasonable
Rules and Regulations as may from time to time be adopted by Lessor for the
management, good order and safety of the Common Areas, the Building and its
lessee(s), copies of which shall be provided to Lessee upon adoption by
Lessor. In the event of any conflict between the terms of this Lease and
the Rules and Regulations, the terms of this Lease shall prevail. Lessee
shall cause its employees, agents and invitees to comply with all rules and
regulations. Lessor shall equitably enforce the compliance with such Rules
and Regulations by all of the lessees and occupants of the Building.
Lessor's failure to enforce any of such Rules and Regulations against
Lessee or any other tenants shall not be deemed to be a waiver of same.
7. MAINTENANCE AND REPAIRS.
A. LESSEE OBLIGATIONS. By accepting possession of the Premises, unless
Lessee notifies Lessor in writing to the contrary, Lessee will be
deemed to have accepted the Premises as being in good and sanitary
order, condition and repair. Subject to Lessor's obligation to
provide janitorial services to the Premises pursuant to the terms
hereof, Lessee shall, at its expense, keep, maintain and preserve the
interior of the Premises in good and sanitary condition. Lessee
shall, upon the expiration or sooner termination of the Term hereof,
surrender the Premises to Lessor in the same condition as when
received, usual and ordinary wear and tear and casualty damages
excepted. Lessee shall not alter, remodel, improve, repair, or paint
the Premises or any part thereof without first complying with the
provisions of Paragraph 13 below.
B. LESSOR OBLIGATIONS. Notwithstanding Section 7A, Lessor shall maintain
and repair (including replacement) the structural portions of the
Building and the Premises, and the structural and non-structural
portions of the Common Areas (and keep the Common Areas free of ice
and snow), and the plumbing, heating, ventilating, air conditioning,
elevator and electrical systems that are standard for the Building
serving the Building, the Premises and the Common Areas; the costs of
the foregoing shall be Operating Expenses (subject to the limitations
set forth in Section 9), unless such maintenance and repairs are
necessitated by the act, neglect or omission of Lessee, its agents,
employees or invitees, in which case Lessee shall pay to Lessor, as
additional rent, the cost of such maintenance and repairs. Lessor
shall also ensure that as of the Commencement Date the Building, the
Premises and the Common Areas and all plumbing, HVAC, elevator,
electrical and other systems located thereon or serving them shall be
in full compliance with all applicable laws, rules, regulations and
ordinances. Lessor shall also ensure such compliance at all times
during the Term of this Lease if Lessor receives a valid written
notice from an authorized governmental authority requiring such
compliance, unless such requirement results from the act,
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negligence or omission of Lessee, in which event Lessee will ensure
such compliance. Lessor shall not be liable for any failure to
make any such repairs or to perform any maintenance unless such
failure shall persist for an unreasonable time after written notice
of the need of such repairs or maintenance is given to Lessor by
Lessee. Except as specifically set forth herein, there shall be no
abatement of rent and no liability of Lessor by reason of any
injury to or interference with Lessee's business arising from the
making of any repairs, alterations or improvements in or to any
portion of the Building or the Premises or in or to fixtures,
appurtenances and equipment therein. Lessee waives the right, if
any, to make repairs at Lessor's expense under any law, statute or
ordinance now or hereafter in effect; provided, however, in the
event of emergency, if Lessee was unable to notify Lessor, or if
Lessor fails to respond in a timely manner, Lessee may expend a sum
not to exceed Two Thousand Dollars ($2,000.00) for Lessor's account
in satisfaction of Lessor's obligations contained in this Section
7B and Lessor shall reimburse Lessee the amount rightfully expended
by Lessee concerning such emergency repairs within fifteen (15)
days of Lessee's billing of Lessor therefor. Lessor agrees to
repair and maintain the Building including the Premises and the
Common Areas in a manner appropriate for a Class A building.
Notwithstanding anything contained herein to the contrary, if a
portion of the Premises are not usable due to Lessor's failure to
make repairs in a reasonable time as provided in this Lease (except
for those caused by Lessee's act or gross negligence) which
materially affects Lessee's ability to conduct business, (i)
beginning on the third (3rd) consecutive day, the rent payable
hereunder shall abate for the period during which Lessor fails to
make or to commence the making of such repairs; and (ii) if such
failure continues for thirty (30) days or more, Lessee shall have
the right to terminate this Lease upon 30 days prior written notice
to Lessor.
8. UTILITIES AND FEES. Lessor shall furnish utilities and services as set
forth in EXHIBIT C hereto. Except in the event of Lessor's negligence or
intentional misconduct, Lessor's failure to furnish any of such items shall
not result in any liability to Lessor, Lessee shall not be entitled to any
abatement or reduction of rent by reason of such failure, and no eviction
of Lessee shall result from such failure; provided, however, in the event
there is a disruption of essential services to Lessee or the Premises
materially disrupting Lessee's ability to conduct business and said
disruption is within Lessor's control, then (i) beginning with the third
(3rd) business day of the disruption, rent payable hereunder shall be
abated until said disruption has been remedied, and (ii) if such disruption
continues for thirty (30) days or more, Lessee shall have the right to
terminate this Lease upon written notice to Lessor. If Lessee uses more
water or electrical power than is considered reasonable or normal by
Lessor, in Lessor's reasonable discretion, Lessor may at its option require
Lessee to pay, as additional rent, the cost, as fairly and equitably
determined by Lessor, incurred by such extraordinary usage. In addition,
Lessor may install separate meter(s) for the Premises, at Lessor's
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expense, and Lessee thereafter shall pay all charges so metered in excess
of that portion of the charges originally included in Monthly
Minimum Rent.
9. ADDITIONAL RENT AND MONTHLY OPERATING EXPENSE ADJUSTMENTS. For each
calendar year during the Term of this Lease, or portion thereof, Lessee
shall pay as Additional Rent any amount payable by Lessee under Paragraph 8
above together with its pro rata share of the amount by which Operating
Expenses for each year exceed the Base Year Operating Expenses. Lessee's
pro rata share shall be calculated based upon the number of rentable square
feet included in the Premises and the number of rentable square feet of
space applicable to each item of expense included in the Building. Lessor
shall estimate, from time to time, Lessee's pro rata share of such excess
Operating Expenses. Whenever the estimated amount of the Operating
Expenses payable by Lessee increases more than five percent (5%) per year
on a non-cumulative basis, Lessor shall consult with Lessee in good faith
and implement those measures reasonably requested by Lessee to reduce the
amount of the Operating Expenses. This estimated amount shall be divided
into equal monthly installments, one payable with each installment of the
Monthly Minimum Rent. As soon as practical following each calendar year
(not later than 90 days after the end of each calendar year), Lessor shall
prepare an accounting of actual Operating Expenses incurred during the
prior calendar year and such accounting shall reflect Lessee's pro rata
share. If the Additional Rent paid by Lessee under this Section 9 during
the preceding calendar year was less than the actual amount of Lessee's pro
rata share of Operating Expenses, Lessor shall notify Lessee and Lessee
shall pay such amount to Lessor within fifteen (15) days of receipt of such
notice. If Lessee's payments were greater than the actual amount due, then
such overpayment shall be credited by Lessor to Rent next due. The Base
Year for this Lease shall be Calendar Year 2001 (or the fiscal year
commencing in 2001 with respect to the real estate taxes and assessments).
For the purposes of this Paragraph 9, "Operating Expenses" shall include,
but not be limited to:
Real estate taxes and assessments levied upon or with respect to the
Land, the Building or Lessor's interest in the same (excluding any
inheritance taxes, gift taxes, transfer/excise taxes, franchise taxes,
net income taxes, profit taxes, capital levies, late payment charges
and penalties, and special assessments levied against property other
than real estate; and, if Lessor is permitted to do so, the taxes and
assessments shall be paid by Lessor in installments over the longest
possible period, and only those installments becoming due and payable
during the applicable calendar year shall be included in the Operating
Expenses), and any assessments levied by the Owners' Association, if
any, all costs of management, operation and maintenance of the
Premises, the Building and the Land, including without limitation the
following: wages and salaries of employees; janitorial, cleaning,
maintenance, and other services; electricity, water, waste disposal
and other utilities; heating, ventilating and air conditioning;
materials and supplies; painting, repairs and other maintenance;
insurance; management fees ; expenses incurred
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to operate an on site management office; and association
dues directly attributable to the management of the property.
Notwithstanding the foregoing to the contrary, Operating
Expenses shall not include any of the following items:
(a) Costs of decorating, redecorating, or special cleaning or other
services within another tenant's space or the Premises, not
provided on a regular basis to tenants of the Building;
(b) Wages, salaries, fees and benefits paid to executive personnel or
officers or partners of Lessor not located at the Metropolitan
Park Properties;
(c) Any charge for depreciation of the Building or equipment and any
interest or other financing charge;
(d) Any charge for Lessor's income taxes, excess profit taxes,
franchise taxes or similar taxes on Lessor's business;
(e) All costs relating to activities for the solicitation and
execution of leases of space in the Building; relocation of
existing tenants;
(f) All costs and expenses of operating the garage;
(g) All costs for which Lessee or any other lessee in the Building is
being separately charged other than pursuant to the Operating
Expenses clauses;
(h) The cost of any electric current separately furnished to other
tenants for non-standard equipment;
(i) The cost of correcting defects in the construction of the
Building or in the Building equipment, except conditions (not
occasioned by construction defects) resulting from ordinary wear
and tear, will not be deemed defects for the purpose of this
category;
(j) The cost of any repair made by Lessor because of the total or
partial destruction of the Building or the condemnation of a
portion of the Building;
(k) Any increase in insurance premium to the extent that such
increase is specifically and exclusively caused or attributable
to the use, occupancy or act of another tenant;
(l) The cost of any items for which Lessor is reimbursed by insurance
or otherwise compensated by parties other than lessees of the
Building pursuant to clauses similar to this Section;
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(m) The cost of any additions or capital improvements to the Building
subsequent to the date of original construction except as
provided in section 9(s) below;
(n) The cost of any repairs, alterations, additions, changes,
replacements, and other items which, under generally accepted
accounting principles, are properly classified as capital
expenditures to the extent they upgrade or improve the Building,
as opposed to replace existing items which have worn out except
as provided in section 9(s) below;
(o) Any operating expense representing an amount paid to a related
corporation, entity or person which is in excess of the amount
which would be paid in the absence of such relationship;
(p) The cost of tools and equipment used initially in the
construction of the Building;
(q) The cost of alterations of space in the Building leased to other
tenants or performing work expressly provided in this Lease to be
borne at Lessor's expense;
(r) The cost of overtime or other expense to Lessor in curing its
defaults;
(s) The cost of capital improvements or expenditures shall be
included in Operating Expenses in an amount as amortized over the
useful life of the improvement or item;
(t) Ground rent or similar payments to a ground lessor; and
(u) Salaries paid to employees above the Building Manager level,
commission to brokers, advertising and promotion costs.
Even after this Lease has expired or been terminated, when final
determination is made of Lessee's pro rata share of Operating Expenses for
the year in which this Lease expires or terminates, Lessee shall
immediately pay any shortfall due. Conversely, any overpayment made shall
be rebated by Lessor to Lessee, unless Lessee at that time is indebted to
Lessor.
The determination of actual costs and estimated costs of Operating Expenses
allocable to the Premises shall be made by Lessor, subject to Lessee's
audit. Lessor or its agent shall keep records showing all expenditures
made for the Operating Expenses items enumerated above for two (2) years
from the end of the applicable calendar year, which records shall be
available for inspection and review by Lessee. Lessee shall have the right,
itself or through an accountant designated by Lessee, at reasonable times
and upon no less than thirty (30) days prior written notice to Lessor to
review or audit Lessor's records relating to
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the actual costs and estimated costs of Operating Expenses allocable to
the Premises for a particular calendar year, which review or audit must
be conducted within two (2) years after Lessee's receipt of the
statement of actual costs allocable to the Premises for that particular
calendar year. If such review or audit is not conducted within such
period, then the matters set forth in the statement of actual costs of
Operating Expenses allocable to the Premises for that particular
calendar year shall be deemed conclusive. Lessee shall pay the costs
and expenses of such review or audit unless such review or audit
reveals that Lessor has overstated the Operating Expenses for the
calendar year in question by an amount equal to 5% or more, in which
event Lessor shall pay up to $2,500 in payment of the actual costs paid
or incurred by Lessee in the performance of such review or audit.
10. LESSOR'S RESERVATIONS. Lessee shall have the right at Lessee's expense
to install security systems within the Premises to protect its
administrative and technical areas, to which access shall be limited to
Lessee's authorized employees. Lessor reserves the right without liability
to Lessee (except in the event of Lessor's gross negligence or intentional
misconduct) after not less than 24 hours' prior notice to Lessee, in a
manner not to materially interfere with Lessee's conduct of its business at
the Premises: (a) to inspect the Premises, and to show them to prospective
lessees, partners or lenders; (b) to retain at all times and to use in
appropriate instances keys to doors within and into the Premises; (c) to
make repairs, alterations, additions or improvements, whether structural or
otherwise, in or about the Building, and for such purposes to enter upon
the Premises and during the continuance of any work, to close the Common
Areas and to interrupt or temporarily suspend Building services and
facilities, all without affecting any of Lessee's obligations hereunder, so
long as the Premises are reasonably accessible and usable for Lessee's
conduct of its business; and (d) generally to perform any act relating to
the safety, protection and preservation of the Premises or the Building.
Notwithstanding the above, Lessor agrees that (except in the case of
emergencies) Lessor and its representatives shall have no right to enter
the secured technical and/or administrative areas within the Premises
unless accompanied by a representative of Lessee; and Lessee agrees to
indemnify and hold Lessor harmless from any cost, liability or expense
resulting from this restriction, including any increase to insurance
premiums, and, unless Lessee provides its representative to accompany
Lessor or waives such requirement, Lessee waives any requirement for Lessor
to maintain or repair any portion of the Premises from which Lessor is
excluded pursuant to this sentence.
11. POSSESSION. If Lessor does not deliver possession of the Premises or the
Commencement Date does not otherwise occur as provided in Section 2 above
on February 1, 2001, unless such delay is caused by Lessee or said delay
was beyond Lessor's control, Lessee may give Lessor written notice of its
intention to terminate this Lease if possession is not delivered and the
Commencement Date as provided in Section 2 above does not otherwise occur
on or before June 1, 2001. Lessor shall not be liable for any damages
caused by failure to deliver
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possession of the Premises and Lessee shall not be liable for any Rent
until the Commencement Date on which exclusive possession of the
Premises is delivered to Lessee. A delay of the Commencement Date
shall not extend the termination date. Notwithstanding the above, (i)
in the event the delay was caused by Lessee, then the payment of Rent
shall commence on the date on which the Commencement Date would have
occurred but for the delay caused by Lessee and Lessee shall not have
any right to terminate this Lease as a result of such delay; and (ii)
if this Lease is not terminated by Lessee, if the delay was caused by
Lessor, and if Lessee pays or incurs any rent, cost, expenses or other
amount as a result of holding-over under the then existing lease or
entering into a new lease, necessitated by the delay in the
Commencement Date beyond February 1, 2001, which is in excess of the
Rent which would have been payable hereunder during the applicable
period, Lessor shall pay or reimburse such excess amount to Lessee on
the Commencement Date.
Lessor shall offer access to the Premises for a period at least sixty (60)
days prior to the Commencement Date of the Term of this Lease, and if
Lessee accepts such early access for the purpose of installing Lessee's
fixtures and personal property and performing improvements on the Premises,
then both parties shall be bound by all of the covenants and terms
contained herein during such period except for the payment of Monthly
Minimum Rent, however, such access shall not cause the Commencement Date to
occur, and Lessee shall not be deemed to have accepted the Premises because
of such access. Additionally, Lessee and Lessee's contractor(s) shall not
undertake any actions that would jeopardize labor harmony on the jobsite
and/or interfere with Lessor's work at the Project and in the Premises.
Lessee will immediately stop work and leave the Premises' job site upon
notice from Lessor that a labor dispute has resulted from Lessee or
Lessee's contractor's actions on the job site. Lessee shall instruct
Lessee's contractor(s) to cooperate with Lessor's contractor(s) to minimize
interference with, and facilitate the completion of, Lessor's work in the
Premises and Lessor and Lessor's contractor(s) agree to cooperate with
Lessee and Lessee's contractor(s) to minimize interference with Lessee's
work in the Premises. If applicable, Lessee shall coordinate with Lessor's
contractor for the use of temporary electrical power in the Premises until
permanent power has been provided.
12. ASSIGNMENT AND SUBLETTING. Lessee shall not either voluntarily or by
operation of law assign, transfer, convey or encumber this Lease or any
interest under it, or sublet its right to occupy or use all or any portion
of the Premises without Lessor's prior written consent, which consent will
not be unreasonably withheld or delayed. Provided the assignee or
sublessee has an equal or greater market capitalization as or than Lessee
as of the date of this Lease (I.E., $777,000,000), then Lessee may assign
this Lease or sublease any or all portions of the Premises to an entity
affiliated with Lessee without Lessor's consent, and, for purposes of this
Lease, an entity shall be deemed affiliated with Lessee if it is a division
of Lessee, or a corporation or other entity controlling, controlled by or
under common control with (directly or indirectly) Lessee,
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including without limitation, any parent corporation controlling Lessee
or any subsidiary that any parent or Lessee controls. Lessee and
Lessor shall equally share all profits that may arise out of an
assignment or sublease. Among the criteria to be used by Lessor in
evaluating a request for assignment or subletting will be (i) the
proposed use of the Premises; (ii) the anticipated impact, if any, on
parking; (iii) the financial capacity of the assignee/sublessee to
perform the obligations under this Lease; (iv) the compatibility of the
proposed use with the remainder of the tenants and operation of the
Building. Lessor reserves the right to recapture the Premises or
applicable portion thereof in lieu of giving its consent by written
notice given to Lessee within twenty (20) days after receipt of
Lessee's written request for assignment or subletting. Such recapture
shall terminate this Lease as to the applicable space effective on the
proposed date of assignment or subletting, which shall be the last day
of a calendar month and not earlier than sixty (60) days after Lessor's
receipt of Lessee's request hereunder. In the event that Lessor shall
not elect to recapture, and consents to the proposed sublease or
assignment, Lessee shall pay Lessor a reasonable fee, not to exceed One
Thousand And No/100 Dollars ($1,000.00) to reimburse Lessor for
processing costs incurred in connection with reviewing Lessee's request
for sublease or assignment. Lessor's consent shall not release or
discharge Lessee from future liability under this Lease and shall not
waive Lessor's right to consent to any future assignment or sublease.
Except as permitted herein, any assignment or subletting without
Lessor's consent shall be void and shall, at Lessor's option,
constitute a default under this Lease. For purposes of this Lease, the
transfer of the ownership in Lessee or the merger or consolidation of
Lessee with other entities shall not constitute assignment of this
Lease.
Lessee shall not assign its interest in or under this Lease for security
purposes, nor shall Lessee grant any security interest, lien or encumbrance
against its interest in this Lease or in or to any property affixed to the
Premises without the prior written consent of the Lessor, which consent
shall not be unreasonably delayed, withheld or conditioned. In no event
shall Lessee grant, or allow to exist, any security interest in, or lien or
encumbrance against, the fee title to the Premises, the Building in which
the Premises are located or the real property on which the Building is
located.
13. ALTERATIONS. After obtaining the prior written consent of Lessor, Lessee
may make alterations, additions and improvements in the Premises (so long
as such alterations, additions or improvements are not structural in nature
and not visible from the exterior of the Premises) at its sole cost and
expense. Lessee agrees to save Lessor harmless from any damage, loss, or
expense arising therefrom and to comply with all laws, ordinances, rules
and regulations. Upon termination of this Lease, all of the then-existing
alterations, additions and improvements made in, to or on the Premises by
Lessee or by Lessor as part of the initial improvements (including without
limitation all electrical, lighting, plumbing, heating, air conditioning,
and communications equipment and systems, doors, windows, partitions,
drapery, carpeting, shelving, counters, and other physically attached
fixtures unless excluded by written agreement between Lessor and
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Lessee) shall remain upon and be surrendered as a part of the Premises;
provided however, Lessee shall remove those additions, alterations, or
improvements (other than the Building standard improvements) as may be
specified by Lessor, and repair and restore the Premises to its original
condition at Lessee's sole cost and expense prior to expiration of the
Term. Lessee may request, and Lessor shall comply with such request
within ten (10) days after Lessor's receipt of such request, at the time
it obtains Lessor's approval to make alterations, that Lessor identify
in writing any specific item that Lessor requires to be removed at the
termination of this Lease. Notwithstanding the foregoing to the
contrary, Lessee shall have no obligation to remove any of the Lessee
Improvements made pursuant to EXHIBIT D hereto, unless specifically
identified by Lessor in EXHIBIT D hereto. Any structural and other
changes, alterations or additions in or to the Building, the Premises or
the Common Areas which may be necessary or required by reason of any
law, rule, regulation or order promulgated by competent governmental
authority shall be made promptly by Lessor after receipt of valid
written notice from such authorized governmental authority requiring
such change, alteration or addition.
14. LIENS. Lessee shall keep the Premises free from any liens arising out of
any work performed, materials furnished, equipment supplied, or obligations
incurred by or on behalf of Lessee. No work performed, material furnished,
equipment supplied or obligations incurred by or on behalf of Lessee shall
be deemed to be for the immediate use and benefit of Lessor so that no
mechanic's lien or other lien shall be allowed against Lessor's estate in
the Premises. Lessee shall provide, at Lessee's own cost, waivers of lien
signed by any party who performs work, furnishes materials, or supplies
equipment to the Premises. Lessor will require, at Lessee's sole cost and
expense, a lien release and completion bond for work in excess of $50,000
in an amount equal to either the actual contract price or one and one-half
times the estimated cost of any improvements, additions or alterations in
the Premises which Lessee desires to make, to insure Lessor against any
liability for lien and to insure completion of the work.
15. SIGNS. All signs or symbols placed by Lessee in the windows and doors of
the Premises, or upon any exterior part of the Building, shall be subject
to Lessor's reasonable prior written approval and to all applicable codes
and ordinances. Prior to termination of this Lease, Lessee will remove all
signs placed by it upon the Premises and/or the Building, and will repair
any damages caused by such removal.
Lessor shall, at no cost to Lessee, place Lessee's name on the main
Building directory for all tenants of the Building and on any multi-tenant
floor occupied by Lessee. Lessor shall provide a common monument sign
outside the main entrance to the Building (Howell Street) upon which Lessor
shall place Lessee's name and logo along with the names and logos of other
tenant(s) of the Building. Provided Lessee occupies more than 50% of the
Building and subject to applicable codes and ordinances and Lessor's
approval: (1) Lessee shall receive its preferred office signage location
for the installation of its signage on
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the Building; and (2) Lessor agrees that no other tenant of the Building
shall have more prominent signage on or around the Building than Lessee.
Lessee's signage placed on the Building shall be at Lessee's expense.
16. INSURANCE.
A. Lessee shall pay for and maintain, during the entire Lease Term, the
following policies of insurance:
(i) Commercial general liability insurance, including products,
completed operations coverage and auto liability insurance
covering Lessee's operations and the Premises with limits
of not less than $2,000,000 per occurrence. Such policies
shall be endorsed to provide contractual liability
insurance covering all liability assumed by Lessee under
the provisions of this Lease and a copy of said endorsement
will be delivered to Lessor prior to the Commencement Date.
(ii) Special cause of loss "all risk" perils and sprinkler
leakage property insurance upon Lessee's property in the
amount of one hundred percent (100%) full replacement cost.
B. Each policy provided by Lessee and Lessor shall expressly provide that
it shall not be subject to cancellation or material change without at
least thirty (30) days prior written notice to the other party.
Lessee and Lessor shall furnish the other party, prior to the
Commencement Date, with insurance certificates naming the other party
as additional insured.
C. Lessor shall maintain property insurance during the entire Lease Term
in the amount of one hundred percent (100%) full replacement value of
the Building, the Premises (including the Lessee Improvements provided
by Lessor under EXHIBIT D (Work Letter) and other improvements
thereto), the Common Areas and all improvements thereto. Lessor's
coverage may include the perils of Special cause of loss (all risk)
and earthquake. Lessor shall also maintain commercial general
liability insurance, including auto liability insurance, covering
Lessor's operations and the Building, the Common Areas and the
Premises with limits of not less than $2,000,000 per occurrence. Such
policies shall be endorsed to provide contractual liability insurance
covering all liability assumed by Lessor under the provisions of this
Lease and a copy of said endorsement will be delivered to Lessee prior
to the Commencement Date.
17. INDEMNITY AGAINST LIABILITY FOR LOSS OR DAMAGE
A. Lessee assumes all liability for and shall indemnify, hold harmless
and defend Lessor from and against all loss, damage or expense which
Lessor may sustain or incur, and against any and all claims, demands,
suits and actions whatsoever, including expense of investigation and
litigation, on
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account of injury to or death of persons, including without
limitation employees of Lessor, employees of Lessee or its affiliated
companies or on account of damage to or destruction of property,
including without limitation property owned by and property in the
care, custody or control of Lessor during the Term, due to or arising
in any manner from:
(i) The acts or negligence of Lessee or any contractor,
subcontractor, or agent of Lessee or their respective
employees;
(ii) The use or operation of the Premises and/or materials or
substances used by Lessee or any of its contractors,
subcontractors or agents of Lessee or by their respective
employees;
(iii) Any damage or injury to persons or property arising out of
Lessee's breach of this Lease, including, but not limited
to, obligations of Lessee under Section 7, Maintenance.
B. Except in the event of Lessor's negligence or intentional misconduct,
Lessor shall have no liability to Lessee as a result of loss or damage
to Lessee's property or for death or bodily injury caused by the acts
or omissions of other tenants in the Building or by third parties
(including criminal acts).
C. Lessee shall not be obligated to indemnify Lessor for the portion of
any claim or liability caused by or arising from the act, omission,
intentional misconduct or gross negligence of Lessor or any of its
contractors, subcontractors, or agents of Lessor or by their
respective employees.
D. Lessor assumes all liability for and shall indemnify, hold harmless
and defend Lessee from and against all loss, damage or expense which
Lessee may sustain or incur, and against any and all claims, demands,
suits and actions whatsoever, including expense of investigation and
litigation, on account of injury to or death of persons, including
without limitation, employees of Lessee, employees of Lessor or its
affiliated companies or on account of damage to or destruction of
property, including without limitations, property owned by and
property in the care, custody or control of Lessee during the Term,
due to or arising in any manner from:
(i) The acts or negligence of Lessor or any contractor,
subcontractor, or agent of Lessor or their respective
employees;
(ii) The condition of the Premises, the Building or the Common
Areas and/or materials or substances present thereat or
used therein by Lessor or any of its contractors,
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subcontractors or agents of Lessor or by their respective
employees;
(iii) Any damage or injury to persons or property arising out of
Lessor's breach of this Lease, including, but not limited
to, obligations of Lessor under Section 7, Maintenance.
E. Lessor shall not be obligated to indemnify Lessee for the portion of
any claim or liability caused by or arising from the act, omission,
intentional misconduct or gross negligence of Lessee or any of its
contractors, subcontractors, or agents of Lessee or by their
respective employees.
F. It is mutually understood and agreed that the assumption of
liabilities and indemnification provided for in this Section 17 shall
survive any termination of this Lease.
18. DAMAGE OR DESTRUCTION. If any of the Premises, the Common Areas or a
substantial part of the Building in which the Premises are located, shall
be damaged or destroyed by fire or other insured casualty, and repair of
the damage can not be completed within one hundred eighty (180) days,
following receipt by Lessor of actual notice of such damage or destruction
Lessor shall have the option either (a) to repair or rebuild as soon as
reasonably possible, utilizing the insurance proceeds to effect such
repair, or (b) not to repair or rebuild, and to cancel this Lease on thirty
(30) days notice. If Lessor fails to give Lessee written notice of its
election within thirty (30) days from the date of damage, or if the
restoration of the Premises cannot be or are not actually completed within
one hundred eighty (180) days from date of damage, Lessee may terminate
this Lease at its option on three (3) days' written notice to Lessor.
During the period of untenantability, rent shall abate in the same ratio as
the portion of the Premises rendered untenantable bears to the whole of the
Premises; provided that if the damage is due to the fault or neglect of
Lessee, there shall be no abatement of rent.
If the Premises, the Common Areas or the Building in which the Premises are
located shall be damaged or destroyed by fire or other insured casualty,
and repair of the damage can be completed within one hundred eighty (180)
days, Lessor shall repair or rebuild, as soon as reasonably possible
utilizing the insurance proceeds to effect such repair. All repairs to the
Premises to be made by Lessor under this Section shall include the repair
and restoration of all of the Lessee Improvements described in EXHIBIT D
and any and all other improvements and fixtures made to the Premises by
Lessor, based on the same plans and design (updated as necessary to comply
with the then-current building codes and other applicable laws) as existed
immediately before such damage or destruction occurred. Materials used in
repair or rebuilding shall be as nearly like original materials as may then
be reasonably procured in regular channels of supply. All such work shall
be performed by Lessor at its sole cost and expense.
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If a substantial portion (in excess of $500,000) of the Premises or the
Building in which the Premises are located shall be damaged or destroyed by
an uninsured casualty, Lessor shall have the option either (a) to repair or
rebuild as soon as reasonably possible, or (b) not to repair or rebuild,
and to cancel this Lease on thirty (30) days notice. In the event of
cancellation by Lessor as a result of an uninsured casualty, Lessee shall
have the right, but not an obligation, within five (5) days following
Lessor's notice of cancellation, to override such cancellation by agreeing
to repair the damage at Lessee's sole cost and expense. In such event,
Lessee shall repair or rebuild within a reasonable time following the
damage or destruction.
19. EMINENT DOMAIN. If the whole of the Premises shall be taken by any
public authority under the power of eminent domain, or purchased by the
condemnor in lieu thereof, then the Term of this Lease shall cease as of
the date title or possession is taken by such public authority. If only
part of the Premises shall be so taken, this Lease shall terminate only as
to the portion taken, and shall continue in full force and effect as to the
remainder of the Premises, and after the effective date of the taking the
Monthly Minimum Rent and any additional rent as provided in this Lease
payable by Lessee to Lessor hereunder shall be reduced proportionately;
provided, however, if the remainder of the Premises cannot be made
tenantable for the purposes for which Lessee has been using the Premises or
if more than twenty-five percent (25%) of the rentable square footage of
the Premises shall be so taken, or the Common Areas necessary for Lessee's
conduct of its business at the Premises is so taken, then either party, by
written notice to the other, given at least thirty (30) days prior to the
date that possession must be surrendered to the public authority may
terminate this Lease effective as of such surrender of possession. Unless
this Lease is terminated by virtue of a taking pursuant to this Section,
Lessor shall as soon after the taking as may be reasonably possible, at its
sole expense, make all repairs and alterations to the Premises and the
Common Areas necessitated by such taking. In such event, Lessee shall
continue to utilize the Premises for the operation of its business to the
extent that it may be practicable to do so in Lessee's business judgment.
If Lessee continues doing business at the Premises prior to the completion
of repair and restoration work by Lessor, the rent payable hereunder by
Lessee shall be equitably abated based on the proportion that the unusable
part of the Premises bears to the whole thereof. In the event Lessee does
not continue doing business at the Premises prior to the completion of
repair or restoration work by Lessor, all rent and any and all other
charges payable hereunder by Lessee shall abate from the time of the actual
taking, sale or any disturbance of Lessee's possession of the Premises,
until completion of such repair and restoration work by Lessor, and the
expiration of such further reasonable time as shall be necessary to enable
Lessee to resume doing business at the Premises. Lessee may terminate this
Lease by giving Lessor thirty (30) days' prior written notice in the event
Lessor does not or is unable to complete its repair and/or restoration of
the Premises and the Common Areas within one hundred eighty (180) days
after the taking for any reason whatsoever. In the event of any taking,
whether whole or partial, Lessor shall be entitled to all awards,
settlements, or
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compensation which may be given for the Land and Building. Lessee shall
have no claim against Lessor for the value of any unexpired Term of this
Lease. Lessee shall have the right to seek an independent and separate
award from the condemning authority so long as such award does not
diminish the amount of the award payable to Lessor for the loss of
goodwill, business interruption, cost of removal and decrease in value, as
a result of such taking of Lessee's trade fixtures, equipment and
stock-in-trade located at the Premises and the value of the leasehold of
which it is deprived for the remainder of the Term of this Lease.
20. INSOLVENCY. If Lessee shall be finally declared insolvent or bankrupt,
or if Lessee's leasehold interest herein shall be levied upon or seized
under writ of any court of law, or if a trustee, receiver or assignee be
appointed for the property of Lessee, whether under operation of State or
Federal statutes, then Lessor may, at its option, immediately, without
notice (notice being expressly waived), terminate this Lease and take
possession of the Premises.
21. DEFAULT AND RE-ENTRY. If Lessee fails to keep or perform any of the
covenants and agreements herein contained, then the same shall constitute a
breach hereof, and if Lessee has not remedied such breach within three (3)
days after written notice thereof from Lessor if the breach is non-payment
of rent or other charges, or within twenty (20) days after written notice
thereof from Lessor in the event of the breach of any other covenant,
except that if the breach cannot reasonably be cured within such twenty
(20) day period, then if Lessee fails to commence to cure within such
twenty (20) day period and thereafter diligently prosecute such cure to
completion, then Lessor may, at its option, without further notice or
demand:
A. Cure such breach for the account and at the expense of Lessee
(including entry upon the Premises to make repairs on behalf of
Lessee where Lessee has failed to make such repairs as required under
this Lease) and such expense shall be deemed additional rent due on
the first of the following month; or
B. Re-enter the Premises, remove all persons therefrom, take possession
of the Premises and remove all personal property therein at Lessee's
risk and expense and (1) terminate this Lease, or (2) without
terminating this Lease or in any way affecting the rights and remedies
of Lessor or the obligations of Lessee, re-let the whole or any part
of the Premises as agent for Lessee, upon such terms and conditions as
Lessor may deem advisable. In either event, any moneys received from
Lessee and any deposit or other amounts held by Lessor may first be
applied by Lessor to any damages suffered by Lessor as a result of
such default, including without limitation, costs and expenses
incurred on re-entry and re-letting, any unamortized (amortized over
10 years at 10% interest) Lessee Improvement Allowance and commissions
paid by Lessor pursuant to Section 35 hereof, cleaning, necessary
repairs, restoration and alteration, and any commissions incurred on
re-letting, and the balance of such
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amounts may be applied toward payment of other sums due to Lessor
hereunder. In the event the Premises are re-let for Lessee's account,
Lessee shall pay to Lessor monthly any deficiency; however, Lessor
shall not be required to pay any excess to Lessee. Upon termination
of this Lease or of Lessee's right to possession due to Lessee's
default hereunder pursuant to this Section 21, Lessor has the right
to recover from Lessee: (1) the worth of the unpaid rent that had
been earned at the time of such termination; (2) the worth of the
amount of the unpaid rent that would have been earned hereunder after
the date of such termination; and (3) any other amount, including
court, attorney and collection costs, necessary to compensate Lessor.
The "worth," as used in clause (1), is to be calculated allowing
interest at 18% per year (or, if applicable, at such lower rate as
may represent the highest legal limit allowed in the State of
Washington). The "worth," as used for clause (2), is to be computed
by discounting the amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of termination. The above remedies
of Lessor are cumulative and in addition to any other remedies now or
hereafter allowed by law or elsewhere provided for in this Lease.
Notwithstanding anything contained herein to the contrary, Lessee's
failure to actually occupy or use any or all part of the Premises
shall not be a default of this Lease so long as Lessee pays the rent
required hereunder and performs its other obligations hereunder.
Should Lessor default in the performance of any covenant or agreement
herein, and such default continue for thirty (30) days after receipt
by Lessor of written notice thereof from Lessee, or if the default of
Lessor is of a type which is not reasonably possible to cure within
thirty (30) days, if Lessor has not commenced to cure said default
within said thirty (30) day period and does not thereafter diligently
prosecute the curing of said default to completion, Lessee may
(i) terminate this Lease upon written notice to Lessor; or (ii) pursue
any other available legal or equitable remedy.
22. REMOVAL OF PROPERTY. Any property of Lessee removed by Lessor in
accordance with Section 21 above shall be stored, sold or disposed of by
Lessor, without any additional notice to Lessee, at the sole risk and
expense of Lessee, and without any further responsibility of Lessor, in
accordance with all applicable laws and regulations. Any proceeds
therefrom may be applied by Lessor upon any indebtedness due from Lessee to
Lessor and the balance, if any, shall be remitted to Lessee. Lessee waives
all claims for damages that may be caused by Lessor re-entering the
Premises and removing or disposing of said property as herein provided
except for those resulting from Lessor's negligence or intentional
misconduct.
23. COSTS AND ATTORNEYS' FEES. In the event either party shall commence
legal action to enforce any provision of this Lease, the court shall award
to the prevailing party all reasonable attorneys' fees and all costs
incurred in connection
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therewith, including fees and costs on appeal and any bankruptcy
proceedings. Any action relating to this Lease shall be brought in King
County, Washington.
24. SUBROGATION WAIVER. Lessor and Lessee each herewith and hereby release
and relieve the other and waive its entire right of recovery against the
other for loss or damage arising out of or incident to the perils of fire,
explosion or any other perils described in the "all risk" insurance and the
events covered under the property insurance coverages required under this
Lease, whether due to the negligence of either party, their agents,
employees or otherwise. Each party shall obtain from its respective
insurer under each insurance policy that it maintains a waiver of all
rights of subrogation which the insurer may have against the other party
for claims that are released under this Section 24. Notwithstanding the
foregoing to the contrary, the foregoing provisions contained in this
Section 24 shall be inapplicable if it would have the effect, but only to
the extent that it would have the effect, of invalidating any insurance
coverage of the parties hereto. If Lessee enters into a similar agreement
with a subtenant of it as permitted under Section 12 above, which agreement
extends to Lessor, the agreement of Lessor contained in this Section shall
also extend to such subtenant.
25. HOLDING OVER. If Lessee, with the express consent of Lessor, shall hold
over after the expiration of the Term of this Lease, Lessee shall remain
bound by all the covenants and agreements herein, except that (a) the
tenancy shall be from month-to-month, and (b) the Monthly Minimum Rent to
be paid by Lessee shall be 125% of the Monthly Minimum Rent in effect
immediately preceding such expiration. If Lessee holds possession of the
Premises after the expiration of the Lease Term without the express
written consent of Lessor, Lessee shall remain bound by all the covenants
and agreements herein, except that (a) the tenancy shall be from
month-to-month, and (b) the Monthly Minimum Rent to be paid by Lessee
shall be the greater of 200% of the Monthly Minimum Rent in effect
immediately preceding such expiration or the total loss to Lessor as a
result of Lessee's holdover if, effective during the term of such
holdover, Lessor has leased all or part of the Premises to other
lessee(s). Any such tenancy may be terminated with twenty (20) days
prior notice as provided by Washington State law.
In the event of any unauthorized holding over, Lessee shall also indemnify
and hold Lessor harmless from and against all liability, losses, claims,
causes of action, damages, costs and expenses (including without limitation
attorney fees) resulting from Lessee's failure to surrender the Premises,
including without limitation claims made by succeeding lessees resulting
from Lessee's failure to surrender the Premises.
Lessee's rights and obligations under this Section 25 shall survive the
expiration or termination of this Lease.
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26. SUBORDINATION AND ATTORNMENT; MORTGAGE PROTECTION.
A. SUBORDINATION-NOTICE TO MORTGAGEE. Prior to the Commencement Date,
Lessor shall procure for the benefit of Lessee and deliver to Lessee
non-disturbance agreements in forms and substance reasonably
acceptable to Lessee from all of the then-existing holders of
mortgages, deeds of trust and/or other security documents on or
encumbering the Building, the Land, the Premises, or on Lessor's
interest hereunder. At the request of Lessor, Lessee shall promptly
execute, acknowledge and deliver, all instruments in forms and
substance reasonably acceptable to Lessee, which may be required to
subordinate this Lease to any existing or future mortgages, deeds of
trust and/or other security documents on or encumbering the Premises
or on the leasehold interest held by Lessor, and to any extensions,
renewals, or replacements thereof, provided that the mortgagee or
beneficiary, as the case may be, shall agree to recognize this Lease
and perform all of Lessor's obligations under this Lease in the event
of foreclosure if Lessee is not in material default hereunder at such
time.
B. LESSEE'S CERTIFICATE. Lessee shall at any time and from time to time
within five (5) business days after written notice from Lessor
execute, acknowledge and deliver to Lessor a statement in writing
(a) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and
certifying that this Lease as so modified is in full force and
effect), and the date to which the rental and other charges are paid
in advance, if any; and (b) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor or
Lessee hereunder, or specifying such defaults if any are claimed; and
(c) setting forth the date of commencement of rents and expiration of
the Lease Term hereof; and, (d) such other information as Lessor shall
reasonably require. Any such statement may be relied upon by any
prospective purchaser or encumbrancer of all or any portion of the
Building of which the Premises are a part.
C. MORTGAGEE PROTECTION CLAUSE. Lessee agrees to notify any mortgagee
and/or trust deed holders, by registered or certified mail, with a
copy of any notice of default served upon Lessor, provided that prior
to such notice Lessee has been notified in writing (by way of Notice
of Assignment of Rents and Lease, or otherwise) of the names and
addresses of such mortgagees and/or trust deed holders. Lessee
further agrees that if Lessor shall have failed to cure such default,
then the mortgagees and/or trust deed holders have thirty (30) days
within which to cure such default. In addition, if Lessor's default
does not interfere with or adversely affect Lessee's conduct of its
business at the Premises, and if such default cannot be cured within
such thirty (30) day period, the mortgagees and/or trust deed holders
shall have such additional time as may be necessary if within such
thirty (30) days any mortgagee and/or trust deed holder has
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commenced and is diligently pursuing the remedies necessary to cure
such default (including but not limited to commencement of
foreclosure proceedings if necessary to affect such cure), in which
event this Lease shall not be terminated so long as such remedies are
being so diligently pursued.
27. SURRENDER OF POSSESSION. Lessee shall, at or prior to the termination of
this Lease or of Lessee's right to possession, remove from the Premises all
personal property, all of which Lessee is entitled to remove, and those
alterations, additions, improvements or signs which may be required by
Lessor to be removed, pursuant to Sections 13 and 15 above, and shall
repair or pay for all damage to the Premises caused by such removal. All
personal property of Lessee remaining at the Premises after the termination
or expiration of the Term of this Lease shall be disposed of pursuant to
Section 22 above. Lessee shall upon termination of this Lease or of
Lessee's right of possession, deliver all keys to Lessor and peacefully
quit and surrender the Premises without notice, neat and clean, and in as
good condition as when Lessee took possession, except for reasonable wear
and tear and except for damage by casualty or condemnation.
28. LATE PAYMENT AND INTEREST. If any amount due from Lessee is not received
in the office of Lessor on or before the third (3rd) day following the date
upon which such amount is due and payable and following the date of
Lessee's receipt of Lessor's written notice relating thereto, a late charge
of five percent (5%) of said amount shall become immediately due and
payable, which late charge Lessor and Lessee agree represents a fair and
reasonable estimate of the processing and accounting costs that Lessor will
incur by reason of such late payment. All past due amounts owing to Lessor
under this Lease, including rent, shall be assessed interest at an annual
percentage rate of eighteen percent (18%) from the date due until paid.
29. NOTICE. Any notice, communication or remittance required or permitted by
this Lease by either party to the other shall be deemed given, served or
delivered, in writing, delivered personally or by courier or by telephonic
facsimile transmission with automatic confirmation, addressed to Lessor at
the address specified for the payment of rent under Section 3 of this Lease
or to Lessee at the Premises or to such other address as either party may
designate to the other in writing from time to time.
30. NO WAIVER OF COVENANTS. Time is of the essence of this Lease. Any
waiver by either party of any breach hereof by the other shall not be
considered a waiver of any future similar or other breach.
31. ENTIRE AGREEMENT. It is expressly understood and agreed by Lessor and
Lessee that there are no promises, agreements, conditions, understandings,
inducements, warranties, or representations, oral or written, express or
implied, between them, other than as herein set forth and that this Lease
shall not be
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modified in any manner except by an instrument in writing executed by the
parties.
32. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. The covenants and agreements
of this Lease shall be binding upon the heirs, executors, administrators,
successors and assigns of both parties hereto, except as hereinabove
provided.
33. LESSOR'S ASSIGNMENT. It is fully understood that Lessor shall have the
full right to assign this Lease, without any notice to Lessee; provided,
however, Lessor shall not be relieved from all and any liabilities under
this Lease unless and until Lessee receives Lessor's written notice of such
assignment and the assignee assumes all of Lessor's responsibilities as set
forth in this Lease.
34. ENVIRONMENTAL. See Rider One attached and incorporated into this Lease
by this reference.
35. BROKERS; AGENCY DISCLOSURE; BROKERAGE RELATIONSHIPS.
A. PAYMENT OF BROKERS. Lessor shall pay all of the fees and commissions,
if any, due those real estate brokers or agents named below
(collectively, the "Broker"), per the terms of a separate agreement
between Lessor and the Broker (the "Brokerage Agreement"), in
connection with this Lease including without limitation Lessee's
exercise (if any) of its option to expand the Premises and/or (if
applicable under the terms of the Brokerage Agreement), Lessee's
exercise of its option to extend the Term of this Lease. Such fees
and commissions to the Broker shall be paid one-half upon lease
execution and one-half upon occupancy, or as otherwise provided in the
Brokerage Agreement. If Lessee or Lessor (the "Indemnifying Party")
has dealt with any other person or real estate broker with respect to
leasing or renting space in the Building, the Indemnifying Party shall
be solely responsible for the payment of any fee due said person or
firm and the Indemnifying Party shall hold the other party hereto free
and harmless against any liability in respect thereto, including
attorneys' fees and costs.
B. AGENCY DISCLOSURE. At the signing of this Lease, Tim O'Keefe and Matt
Christian, of Colliers International, represented Lessee. Each party
signing this document confirms that the prior oral and/or written
disclosure of agency was provided to it in this transaction. (As
required by WAC 308-124D-040).
36. FORCE MAJEURE. Except for monetary obligations which are specifically
excluded from this Paragraph 36, neither party shall have any liability to
the other on account of the following acts of "force majeure," which shall
include (a) the inability to fulfill, or delay in fulfilling, any of such
party's obligations under this Lease by reason of strike, lockout, other
labor trouble, dispute or disturbance;
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(b) governmental regulation, moratorium, action, inaction, preemption or
priorities or other control, including delays in receipt of permits;
(c) shortages of fuel, supplies or labor; (d) any failure or defect in the
supply, quantity, or character of electricity or water furnishing the
Building with electricity or water; or (e) for any other reason, whether
similar or dissimilar to the above, or for act of God, beyond such party's
reasonable control. If this Lease specifies a time period for performance
of an obligation of either party, that time period shall be extended by
the period of any delay in such party's performance caused by any of the
events of force majeure described herein.
37. LIMITATION OF LIABILITY. The recourse of Lessee to recover any claim
against Lessor arising under this Lease shall be limited to Lessor's
interest in the Building and the Land and to the rents, issues and profits
from the Building and the Land. Lessee waives any and all recourse for any
such liability against Lessor's members, partners, shareholders, trustees
or beneficiaries, or any property or assets of Lessor other than the
Building and the Land.
38. EXHIBITS: The following exhibits or riders are made a part of this Lease
and are incorporated herein by reference:
Rider One - Environmental
Exhibit A - Floor Plan of Premises
Exhibit A-1 - Legal Description
Exhibit B - Rules and Regulations
Exhibit C - Standards for Utilities and
Services
Exhibit D - Work Letter Agreement
Exhibit D-1 - Construction Drawings
and Description of Lessee
Improvements
Exhibit
E - Additional Riders to Lease
Exhibit F - Standards for Cleaning
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LESSOR: LESSEE:
BENAROYA CAPITAL COMPANY, LLC SHOPNOW.COM INC.
By: ____________________________ By: _____________________________
Larry R. Benaroya Printed Name: ______________
Its: Manager Its:_____________________________
Date:___________________________ Date:____________________________
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<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Larry R. Benaroya
is the person who appeared before me, a Notary Public in and for the State of
Washington duly commissioned and sworn, and acknowledged that he is the Manager
of Benaroya Capital Company, LLC, a Washington limited liability company, who
executed the within and foregoing instrument, and acknowledged the instrument to
be the free and voluntary act and deed of said company for the uses and purposes
therein mentioned, and on oath stated that affiant is authorized to execute said
instrument on behalf of said company.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal
the day and year first above written.
(Seal or stamp) _________________________________________________
Notary Signature
_________________________________________________
Print/Type Name
Notary Public in and for the State of Washington,
residing at _____________________________________
My appointment expires __________________________
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STATE OF WASHINGTON )
) ss.
COUNTY OF ______________ )
I certify that I know or have satisfactory evidence that ________________
_________________________ is the person who appeared before me, a Notary Public
in and for the State of Washington duly commissioned and sworn, and acknowledged
that he/she is the ________________________, of Shopnow.com Inc., a Washington
corporation, who executed the within and foregoing instrument, and acknowledged
the instrument to be the free and voluntary act and deed of said corporation for
the uses and purposes therein mentioned, and on oath stated that affiant is
authorized to execute said instrument on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal
the day and year first above written.
(Seal or stamp)
_________________________________________________
Notary Signature
_________________________________________________
Print/Type Name
Notary Public in and for the State of Washington,
residing at _____________________________________
My appointment expires __________________________
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RIDER ONE
EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
a. EMISSIONS. Lessee shall not, in violation of applicable laws,
(i) discharge, emit or permit to be discharged or emitted, any liquid,
solid or gaseous matter, or any combination thereof, into the
atmosphere, the ground or any body of water, which does or may pollute
or contaminate the same, or does or may adversely affect the health or
safety of persons, or the use or enjoyment of the Premises; or
(ii) transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation in, on or about the
Premises.
b. STORAGE. If, with or without violation of this Lease, Lessee
possesses at the Premises any matter described in Section A above or
any Hazardous Substances (as defined below), Lessee shall store the
same in appropriate leak proof containers and/or areas which comply
with all laws.
c. DISPOSAL OF WASTE. Subject to Lessor's obligation to perform
janitorial services pursuant to EXHIBIT C and EXHIBIT F to this Lease,
Lessee shall not keep any trash, garbage, waste or other refuse on the
Premises except in sanitary containers and shall regularly and
frequently remove same from the Premises. Lessee shall keep all such
containers in a clean and sanitary condition. Lessee shall properly
dispose of all sanitary sewage and shall not use the sewage system for
the disposal of anything except sanitary sewage, nor in excess of
capacity. Lessee shall not cause any obstruction in the sewage
disposal system.
d. COMPLIANCE OF LAW. Notwithstanding any other provision in the Lease
to the contrary, Lessee shall comply with all Laws in complying with
its obligations under this Lease, and in particular, Laws relating to
the storage, use and disposal of Hazardous Substances (as defined
below).
e. INDEMNIFICATION FOR BREACH. Lessee shall defend, indemnify and hold
Lessor, the Project and the holder of a trust deed or mortgage on the
Project harmless from any loss, claim, liability or expense,
including, without limitation, attorneys fees and costs, at trial
and/or on appeal and review, arising out of or in connection with its
failure to observe or comply with the provisions of this Rider. This
indemnity shall survive the expiration or earlier termination of the
Term of the Lease or the termination of Lessee's right of possession
and be fully enforceable thereafter.
f. INDEMNIFICATION REGARDING HAZARDOUS SUBSTANCES. In addition to the
indemnity obligations contained elsewhere herein, Lessee shall
indemnify, defend and hold harmless Lessor, the Premises, the Project,
and the
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holder of a trust deed or mortgage on the Project, from and against
all claims, losses, damages, monitoring costs, response costs,
liabilities, and other costs expenses caused by, arising out of, or in
connection with, the generation, release, handling, storage,
discharge, transportation, deposit or disposal in, on, under or about
the Premises by Lessee or any of Lessee's agents of the following
(collectively referred to as "Hazardous Substances"): hazardous
materials, hazardous substances, toxic wastes, toxic substances,
pollutants, petroleum products, underground tanks, oils, pollution,
asbestos, PCB's, radioactive materials, or contaminants, as those
terms are commonly used or as defined by federal, state, and/or local
law or regulation related to protection of health or the environment
as any of same may be amended from time to time, and/or by any rules
and regulations promulgated thereunder. Such damages, costs,
liability and expenses shall include such as are claimed by any
regulating and/or administering agency, any ground lessor or master
lessor of the Project, the holder of any Mortgage or Deed of Trust on
the Project, and/or any successor of Lessor named herein. This
indemnity (and Lessor's indemnity specified in (h) below) shall
include (i) claims of third parties, including governmental agencies,
for damages, fines, penalties, response costs, monitoring costs,
injunctive or other relief; (ii) the costs, expenses or losses
resulting from any injunctive relief, including preliminary or
temporary injunctive relief; (iii) the expenses, including fees of
attorneys and experts, of report the existence of Hazardous Substances
to an agency of the State of which the Premises is located or of the
United States as required by applicable laws and regulations; and (iv)
any and all expenses or obligations, including attorney's fees,
incurred at, before and after any administrational proceeding, trial,
appeal and review. This indemnity (and Lessor's indemnity specified
in (h) below) shall survive the expiration or earlier termination of
the Term of the Lease or the termination of Lessee's right of
possession and shall remain fully enforceable thereafter.
g. INFORMATION. Lessee shall give prior written notice to Lessor of any
use, whether incidental or otherwise, of Hazardous Substances on the
Premises which might be in violation of applicable laws, and shall
immediately deliver to Lessor a copy of any notice of any violation of
any Law with respect to such use. Lessee shall also provide to
Lessor, upon request, copies of all filings and reports to
governmental entities. In the event of any accident, spill or other
incident involving Hazardous Substances, Lessee shall immediately
report the same to Lessor and supply Lessor with all information and
reports with respect to the same. All information described herein
shall be provided to Lessor regardless of any claim by Lessee that it
is confidential or privileged.
h. LESSOR'S OBLIGATIONS. Lessor warrants and represents to Lessee that
as of the date of this Lease, and as of the Commencement Date, (i) the
Premises and the Project do not contain any Hazardous Substances
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(except standard building materials present in compliance with
environmental laws and disclosed to Lessee), nor are there any
Hazardous Substances on, in or below the ground surface of the Land
including without limitation the Premises and the Project, (ii) the
Premises, the Project, the Common Areas and any other portion of the
Land have not been used to store, generate, handle, treat or dispose
of any Hazardous Substances, (iii) Lessor has not received any
Environmental Notices relating to any part of the Land, and (iv) the
Premises, the Project and the Common Areas do not contain any
(a) electrical transformers or other equipment containing
polychlorinated biphenyl in excess of 50 parts per million,
(b) asbestos in any form, (c) urea formaldehyde foam insulation or
(d) underground storage tanks. As used herein, "Environmental Notice"
means any complaint, order, or other notice with regard to Hazardous
Substances issued by any governmental entity or any other third party
with respect to the Land, the Project or the Premises. Lessor shall
immediately provide Lessee with telephone notice, followed by written
notice, of any Environmental Notices received by Lessor. Lessor shall
indemnify, hold harmless and defend Lessee, its trustees, officers,
employees, agents contractors and invitees from and against any and
all claims, liabilities, losses, damages, cleanup costs, and expenses
(including reasonable attorney's fees) arising out of or in any way
related to Lessor's breach of the foregoing representations or
warranties or Lessor's keeping or release of, existence of or claim of
existence of, or claim of injury or damage resulting from Hazardous
Substances in, on or under the Premises, the Project, the Land and the
Common Areas during the Term of this Lease. The foregoing obligations
of Lessor shall survive the expiration or termination of this Lease.
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EXHIBIT A
FLOOR PLAN OF PREMISES
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EXHIBIT A-1
LEGAL DESCRIPTION
PARCEL A:
THE NORTHEASTERLY 60.5 FEET OF LOT 12 AND THE SOUTHEASTERLY HALF OF THE
NORTHEASTERLY 60.5 FEET OF LOT 11, BLOCK 55, PLAT OF SECOND ADDITION TO THE
TOWN OF SEATTLE, AS LAID OFF BY THE HEIRS OF SARAH A. BELL (DECEASED),
(COMMONLY KNOWN AS HEIRS OF SARAH A. BELL'S SECOND ADDITION TO THE CITY OF
SEATTLE), ACCORDING TO THE PLAT THEREOF, RECORDED IN VOLUME 1 OF PLATS,
PAGE(S) 121, IN KING COUNTY, WASHINGTON.
PARCEL B:
LOTS 11 AND 12, BLOCK 55, SECOND ADDITION TO THE TOWN OF SEATTLE AS LAID OFF
BY THE HEIRS OF SARAH A. BELL (DECEASED), (COMMONLY KNOWN AS HEIRS OF SARAH
A. BELL'S SECOND ADDITION TO THE CITY OF SEATTLE), ACCORDING TO THE PLAT
THEREOF, RECORDED IN VOLUME 1 OF PLATS, PAGE(S) 121, IN KING COUNTY,
WASHINGTON;
EXCEPT THE NORTHWESTERLY HALF OF SAID LOT 11 AS CONVEYED TO GEORGE JENSEN BY
DEED RECORDED FEBRUARY 23, 1893 UNDER RECORDING NUMBER 110574; AND EXCEPT THE
NORTHEASTERLY 60.50 FEET OF THE REMAINDER AS CONVEYED TO E.J. FAIRCHILD BY
DEED RECORDED APRIL 18, 1946 UNDER RECORDING NUMBER 3560459; AND
LOTS 7, 8, 9, 10 AND THE NORTHWESTERLY HALF OF LOT 11 AS CONVEYED TO GEORGE
JENSEN BY DEED RECORDED FEBRUARY 23, 1893 UNDER RECORDING NUMBER 110574; ALL
IN BLOCK 55, SECOND ADDITION TO THE TOWN OF SEATTLE AS LAID OFF BY THE HEIRS
OF SARAH A. BELL (DECEASED), (COMMONLY KNOWN AS HEIRS OF SARAH A. BELL'S
SECOND ADDITION TO THE CITY OF SEATTLE), ACCORDING TO THE PLAT THEREOF,
RECORDED IN VOLUME 1 OF PLATS, PAGE(S) 121, IN KING COUNTY, WASHINGTON;
EXCEPT THE NORTHWESTERLY 7 FEET OF SAID LOT 7 CONDEMNED FOR STEWART STREET BY
THE CITY OF SEATTLE ON JULY 29, 1908 UNDER KING COUNTY SUPERIOR COURT CAUSE
NUMBER 58229 AS PROVIDED FOR IN CITY OF SEATTLE ORDINANCE NUMBER 14881.
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EXHIBIT B
RULES AND REGULATIONS
1. Any directory provided by Lessor for the Building will be for the display
of the name and location of tenants, and Lessor reserves the right to
exclude any other names.
2. Lessee shall not place any new locks or re-key any existing locks on any
doors of the Premises, or change any plumbing or wiring without the prior
written consent of Lessor. All keys shall be obtained from Lessor and
Lessee shall not, from any other source, duplicate keys. Lessee, upon
termination of the tenancy, shall deliver to Lessor all keys which have
been furnished, or shall pay Lessor the cost of changing the lock(s) opened
by any lost key(s) if Lessor reasonably deems it necessary to make such
change. Lessor, its employees and agents may retain a passkey to the
Premises.
3. The Common Area sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by Lessee or used for any purpose,
including storage or placement of trash, other than for ingress to and
egress from the Premises. The halls, passages, exits, entrances,
elevators, stairways, balconies and roof are not for the use of the general
public and Lessor shall in all cases retain the right to control and
prevent access thereto by all persons whose presence, in the judgment of
Lessor, shall be prejudicial to the safety, character, reputation and
interests of the Building and its tenants, provided that nothing herein
contained shall be construed to prevent such access to persons with whom
Lessee normally deals in the ordinary course of Lessee's business, unless
such persons are engaged in illegal activities, intoxicated or violate any
of these Rules and Regulations. Lessee, Lessee's employees or invitees
shall not go upon the roof of the Building except to install, maintain,
operate and replace Lessee's rooftop equipment, provided Lessee must be
accompanied by Lessor's representative (if available) whenever accessing
the roof.
4. Lessee shall not make or permit any use of the Premises which may emit
noise, odor or vibrations from the Premises which are objectionable to
Lessor or other occupants of the Building. Lessee shall not use or permit
any part of the Premises to be used for lodging or sleeping.
5. The toilet rooms, urinals, washbowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by Lessee who, or whose employees or invitees,
shall have caused it.
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6. Lessee shall not use or keep in the Premises or the Building, any kerosene,
gasoline or flammable or combustible fluid or materials in violation of
applicable laws or without Lessor's reasonable consent, or use any method
of heating or air conditioning other than supplied or authorized by Lessor.
7. Lessee shall not do or permit to be done within the Premises anything which
would unreasonably annoy or disturb or interfere with the rights of other
tenants of the Building. Lessee shall not solicit or canvass any occupant
of the Building.
8. Lessee shall not commit or permit to be committed any waste, damage or
injury to the Premises or other premises within the Building, or the Common
Areas within and adjoining the Building. Such waste, damage or injury
shall be repaired at Lessee's own expense.
9. Lessee shall not waste electricity or water and agrees to cooperate fully
with Lessor to assure the most effective and economical use of utility
services provided to the Building by Lessor.
10. Lessee shall keep Lessor advised of the current telephone numbers of
Lessee's employees who may be contacted in emergency, i.e., fire, break-in,
vandalism, etc. If Lessor shall reasonably deem it necessary to respond to
such emergency in Lessee's behalf, Lessee shall pay all reasonable costs
incurred for services ordered by Lessor to secure or otherwise protect the
Premises and the contents thereof, including a reasonable premium charge
for any time spent by Lessor's employees in responding to such emergency,
if applicable.
11. Lessee shall see that the doors of the Premises are closed and securely
locked before leaving the Building and must observe strict care and caution
that all water faucets or water apparatus are entirely shut off before
Lessee's employees leave the Premises, so as to prevent waste or damage,
and for any default or carelessness by Lessee, Lessee shall make good all
injuries sustained by Lessor, other tenants, or occupants of the Building.
12. Lessee shall not place upon or install on, or beside, the windows, walls or
exterior doors of the Premises or any part of the Premises visible from the
exterior of the Premises any object including without limitation signs,
symbols, canopies, awnings, window coverings or other advertising or
decorative material, without obtaining the reasonable prior written consent
of Lessor.
13. Lessee shall not overload the floor of the Premises or mark, drive nails,
screw, or drill into the partitions, woodwork or plaster, or in any way
deface the Premises or any part thereof without obtaining the reasonable
prior consent of Lessor. Lessee shall not bore holes, cut or string wires,
or lay floor tile, carpet or other floor covering in or around the Premises
in any manner, except as approved in writing by Lessor. The expense of
repairing any damage resulting from a violation of this rule or removal of
any floor covering shall be borne by Lessee by
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whom, or by whose contractors, employees, or invitees, the damage shall
have been caused.
14. No vending machine(s) of any description (except for those for the
exclusive use and benefit of Lessee's employees and invitees) shall be
installed, maintained or operated upon the Premises without the written
consent of Lessor.
15. Lessee agrees that it shall comply with all fire, life safety, security
and other regulatory policies and procedures that may be issued from time
to time by Lessor.
16. Without the written consent of Lessor, Lessee shall not use the name of the
Building in connection with or in promoting or advertising the business of
Lessee, except as Lessee's address.
17. No furniture, freight, or equipment of any kind shall be brought into the
Building without the reasonable consent of Lessor and all moving of the
same into or out of the Building shall be done at such time and in such
manner as Lessor shall reasonably designate. Lessor shall have the right
to prescribe the size and position of all safes and other heavy equipment
brought into the Building. Flooring under safes or other heavy objects
must be reinforced or a means of proper weight distribution provided, at
Lessee's expense, if, in the reasonable opinion of Lessor, such precautions
are necessary. Any damage done to the Building by moving or maintaining
any such safe or other property shall be repaired at the expense of Lessee.
There shall not be used in any space, or in the public halls of the
Building, either by Lessee or others, any pallet jacks or hand trucks,
except those equipped with rubber tires and side guards.
18. Lessee shall not employ or permit access to any person(s) for the purpose
of cleaning the Premises unless otherwise agreed to by Lessor. Lessee
shall not cause any unnecessary deterioration of the Premises by reason of
Lessee's carelessness or indifference in the preservation of good order and
cleanliness. Lessor shall in no way be responsible to Lessee for any loss
of property on the Premises, however occurring, or for any damage done to
the effects of Lessee, by the janitor or any person other than the
janitors, employees, contractors and agents of Lessor.
19. If the Premises are equipped with heating facilities separate from those in
the remainder of the Building, Lessee shall keep the Premises at a
temperature sufficient to prevent freezing of water in pipes and fixtures.
20. Lessor reserves the right, by written notice to Lessee, to rescind,
substitute, alter or waive any rule or regulation at any time prescribed
for the Building when, in Lessor's reasonable judgment, it is necessary,
desirable or proper for the best interest of the Building and its tenants.
21. Lessee may not bring any animals into the Building or the Premises except
for those that are utilized for service to the handicapped.
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EXHIBIT C
STANDARDS FOR UTILITIES AND SERVICES
The following Standards for Utilities and Services are in effect. Lessor
reserves the right to adopt nondiscriminatory modifications and additions
hereto.
1. Monday through Friday, except holidays, from 7 a.m. to 6 p.m. and on
Saturday's from 7:00 a.m. to 3:00 p.m. (and other times upon the request of
Lessee made on a floor-by-floor basis for the sum of $20.00 per hour per
floor and adjusted from time to time to reflect increases in utility
costs), ventilate the Premises and furnish air conditioning or heating, and
on such other days and hours, when in the reasonable judgment of Lessor it
may be required for the comfortable occupancy of the Premises. Lessee
agrees to cooperate fully at all times with Lessor, and to abide by all
reasonable regulations and requirements which Lessor may prescribe for the
proper function and protection of said HVAC system. Lessee agrees not to
connect any apparatus, device, conduit or pipe to the Building chilled and
hot water air conditioning supply lines. Lessee further agrees that
neither Lessee nor its employees, agents, visitors, licensees or
contractors shall at any time enter mechanical installations or facilities
of the Building or adjust, tamper with, touch or otherwise in any manner
affect said installations or facilities. The cost of maintenance and
service calls to adjust and regulate the HVAC system shall be charged to
Lessee if the need for maintenance work results from either Lessee's
adjustment of room thermostats or Lessee's failure to comply with its
obligations under this section.
2. Electric power as required by the Building standard office lighting, HVAC,
and typical office business machines in an amount not less than 8 watts per
rentable square foot. Lessee agrees, should its electrical installation or
electrical consumption be in excess of the aforesaid quantity or extend
beyond normal business hours, to reimburse Lessor monthly for the measured
consumption at the average cost per kilowatt hour charged to the Building
during the period. If a separate meter is not installed at Lessor's cost,
such excess costs will be established by an estimate agreed upon by Lessor
and Lessee, and if the parties fail to agree, as established by an
independent licensed engineer. Lessee agrees not to use any apparatus or
device in, or upon, or about the Premises which may in any way increase
the amount of such services usually furnished or supplied to the Premises,
and Lessee further agrees not to connect any apparatus or devise with
wires, conduits or pipes, or the other means by which such services are
supplied, for the purpose of using additional or unusual amounts of such
services, without the prior written consent of Lessor. Should Lessee use
the same to excess, the refusal on the part of Lessee to pay upon demand of
Lessor the amount reasonably established by Lessor and Lessee for such
excess charge shall constitute a breach of the obligation to pay rent under
this Lease and shall entitle Lessor to the rights therein granted for such
breach.
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At all times Lessee's use of electric current shall never exceed the
capacity of the feeders to the Building or the risers or wiring
installation and Lessee shall not install or use or permit the
installation or use of any unusually high weight or high electrical
consumption computer or electronic data processing equipment in the
Premises without the prior written consent of Lessor, which consent shall
not be unreasonably withheld, or delayed.
3. Provide janitor service to the Premises in accordance with EXHIBIT F to the
Lease, provided the same are used exclusively as offices, and are kept
reasonably in order by Lessee, and if to be kept clean by Lessee, no one
other than persons reasonably approved by Lessor shall be permitted to
enter the Premises for such purposes. If the Premises are not used
exclusively as offices, the non-office portions of the Premises shall be
kept clean and in order by Lessee, at Lessee's expense, and to the
reasonable satisfaction of Lessor, and by persons reasonably approved by
Lessor. Lessee shall pay to Lessor the cost of removal of any of Lessee's
refuse and rubbish to the extent that the same exceeds the refuse and
rubbish usually attendant upon the use of the Premises as offices. At no
additional cost to Lessee, Lessor shall cause the Premises to be thoroughly
cleaned prior to and immediately after Lessee's initial move into the
Premises, and Lessor shall not charge any additional amount to Lessee in
connection with Lessee's actual move into the Premises.
Subject to Lessee's right to rent abatement and Lease termination set forth
in this Lease, Lessor reserves the right to stop service of the elevator,
plumbing, ventilation, air conditioning and electric systems, when
necessary, by reason of accident or emergency or for repairs, alterations
or improvements, in the reasonable judgment of Lessor desirable or
necessary to be made, until said repairs, alterations or improvements,
shall have been completed, and shall further have no responsibility or
liability for failure to supply elevator facilities, plumbing, ventilation,
air conditioning or electric service. Subject to Lessee's right to rent
abatement and Lease termination set forth in this Lease, it is expressly
understood and agreed that any covenants, express or implied, for Lessor to
furnish any service for the benefit of Lessee shall not be deemed breached
if Lessor is unable to furnish or perform the same by virtue of a strike or
labor trouble or any other cause whatsoever beyond Lessor's reasonable
control.
4. Lessee shall not use or install in the Premises any heat generating
equipment (other than computers and computer-related equipment), except as
specifically authorized herein, or installed pursuant to the Work Letter
Agreement, without Lessor's reasonable prior written consent. The
inclusion of this restriction is to ensure that the HVAC system is adequate
to service the Building and the various uses of tenants that occupy the
Building.
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EXHIBIT D
WORK LETTER AGREEMENT
1. Lessor shall provide Lessee with a Lessee Improvement Allowance of $32.50
per square foot of rentable area included in the Premises (which amount
includes cost of construction, permitting and design fees, Washington State
Sales Tax and Lessor's 3% construction management/supervision fee) towards
the construction of the Lessee Improvements to the Premises (the "Lessee
Improvement Allowance"). Lessor shall provide any and all Building standard
materials (subject to the limits set in the Lessee Improvement Allowance
including any applicable management/supervision fee) at Lessor's direct
out-of-pocket costs containing no additional mark-up by Lessor. Lessor
shall not charge any fee for the use of the elevator or dock in connection
with the construction of the Lessee Improvements to the Lessee Improvements
Allowance or to Lessee. If the contract price to complete the Lessee
Improvements exceeds the Lessee Improvement Allowance (a "shortfall") or if
Lessee shall request any change in the Construction Drawings and if such
change results in a shortfall, Lessor shall promptly notify Lessee in
writing of the amount of such shortfall, and Lessee shall, prior to the
commencement of the Lessee Improvements, either (i) provide its approval of
the shortfall and deliver a check made payable to Lessor in the amount of
the authorized shortfall, or (ii) for any amount up to $5 per square foot
of rentable area included in the Premises, Lessee may choose to accept an
increase in the Minimum Monthly Rent by adding an amount sufficient to
amortize the authorized shortfall starting as of the Commencement Date in
equal monthly installments over the 10-year Lease Term at 10% interest per
annum, or (iii) cause the Construction Drawings to be redesigned (subject
to all the terms of this EXHIBIT D) to reduce the cost of the Lessee
Improvements to an amount within the limits of the Lessee Improvement
Allowance. Upon the Commencement Date, Lessor will provide Lessee with the
detailed calculation of the actual cost of the Lessee Improvements with
evidence of payment thereof reasonably satisfactory to Lessee, and any
unused portion of the shortfall payment previously made by Lessee shall be
refunded to Lessee. Any unused portion of the $32.50 per square foot
Lessee Improvement Allowance may be used for additional improvements to the
Premises or the payment of the Monthly Minimum Rent payable hereunder for a
period of up to one (1) year following the Commencement Date.
2. Lessor shall complete the Lessee Improvements to the Premises as described
in EXHIBIT D-1 in a good and workmanlike manner with new first-class
materials by a contractor approved by Lessee and Lessor in writing, subject
to Lessee's right to supervision and management. Prior to March 15, 2000,
Lessee shall cause its architect and interior designer to prepare space
plans (the "Space Plans") for the Premises and submit them to Lessor for
Lessor's review and reasonable approval. Prior to May 15, 2000, Lessee
shall cause its architect and interior designer to prepare permit drawings
(the "Permit Drawings") based upon the
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Space Plans approved by Lessor, and submit them to Lessor for Lessor's
review and reasonable approval. On or before June 30, 2000, Lessee
shall cause its architect and interior designer to prepare final
electrical, mechanical and other plans, specifications and construction
drawings for the Premises (the "Construction Drawings") based upon the
Space Plans and Permit Drawings approved by Lessor, and submit them to
Lessor for Lessor's review and reasonable approval. The Construction
Drawings approved and initialed by Lessor and Lessee shall be attached
hereto as EXHIBIT D-1 and made a part hereof. The fees of Lessee's
architect(s) and interior designer(s) in connection with the preparation
of the Space Plans, Permit Drawings and Construction Drawings shall be
paid or reimbursed to Lessee by Lessor up to $0.50 per rentable square
foot of the Premises upon written demand therefor by Lessee to Lessor.
As soon as such Space Plans, Permit Drawings and Construction Drawings
are completed, Lessee shall deliver the same to Lessor for approval.
Lessor shall promptly review and approve the Space Plans, Permit
Drawings and Construction Drawings within two (2) days after the date of
receipt thereof and shall initial two (2) copies of the Site Plans,
Permit Drawings and Construction Drawings as indication of its approval
thereof. Lessor's approval of the Construction Drawings shall
constitute mutual authorization to complete the Lessee Improvements in
accordance with such Construction Drawings. If Lessee desires to make
any change in the Construction Drawings after Lessor's approval thereof,
Lessee shall promptly notify Lessor in writing of the change and Lessor
shall have two (2) days to approve or reject the requested change. The
Lessee Improvements shall include, as part of the Lessee Improvement
Allowance, the installation of access at the street level from two (2)
separate and diverse points to bring fiber optic cable into the
Building, and two (2) four-inch (4") conduits total to the Building (1
from each point). Lessee shall have the right, at any time and from
time to time during the Term of this Lease (including, without
limitation, extension terms) to expand capacity as needed for its
business conducted at the Premises. Lessee shall also have the right to
install cable and conduits through the Building's risers in order to run
the cable and conduit from the street, the Building's ground floor and
the roof of the Premises and the Building. Lessee may have up to two (2)
four-inch (4") conduits in each riser.
3. Lessee is solely responsible for the suitability of the design and function
of the Lessee Improvements for Lessee's needs and business. Lessee shall
also be responsible for procuring or installing in the Premises any trade
fixtures, equipment, furniture, furnishings, telephone equipment or other
personal property (collectively, "Personal Property") to be used in the
Premises by Lessee, and the cost of such Personal Property shall be paid by
Lessee. Lessee shall conform to Lessor's wiring standard reasonably
acceptable to Lessee and all applicable codes when installing any telephone
and computer equipment and shall be subject to any and all rules of the
site during construction of the Lessee Improvements. Lessee shall have the
right to install in the Premises, at its sole option and expense, a
generator and a UPS system.
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Notwithstanding anything contained in this Lease which may be construed to
the contrary, Lessor warrants to Lessee that, on and after the Commencement
Date, all necessary equipment, software and appliances, including but not
limited to, elevators, heating, ventilating and air conditioning systems,
card key access systems, door locks, energy management systems, sprinkler
systems, fire detection and life safety systems and other Building systems
will be fully functional and perform their normal operations.
4. If the completion of the Lessee Improvements in the Premises is delayed
(i) at the request of Lessee, (ii) by Lessee's failure to comply with the
foregoing provisions, (iii) by changes in the work requested (whether or
not Lessee authorizes Lessor to proceed therewith) or ordered by Lessee or
by extra work ordered by Lessee, or (iv) because Lessee chooses to have
additional work performed by Lessor (each, a "Lease Delay"), then Lessee
shall be responsible for all costs and expenses occasioned by such delays.
including, without limitation, any costs and expenses attributable to
increases in labor or materials, and there shall be no delay in the
commencement of Lessee's obligation to pay rent if the completion of the
Lessee Improvements is delayed as a result of the foregoing.
5. Lessee may, with Lessor's written consent, which consent shall not be
unreasonably withheld or delayed, enter the Premises at least sixty (60)
days prior to the Commencement Date solely for the purpose of installing
Lessee's Personal Property, fixtures and equipment and making improvements
to the Premises as long as such entry does not interfere with the orderly
construction and completion of the Premises. Lessee shall notify Lessor of
its desired time(s) of entry and shall submit for Lessor's reasonable
approval the scope of the work to be performed and the name(s) of the
contractor(s) who will perform such work. Lessee hereby indemnifies and
agrees to protect, defend and hold Lessor, any mortgagee, ground lessor or
beneficiary of a mortgage, ground lease or deed of trust related to the
Premises or the Building harmless from and against any and all suits,
claims, actions, losses, costs or expenses (including claims for worker's
compensation) for any nature whatsoever, together with reasonable attorney
fees for counsel of Lessor's choice, arising out of or in connection with
the installation of Lessee's Personal Property or equipment (including, but
not limited to, claims for breach of warranty, personal injury or property
damage).
39
<PAGE>
EXHIBIT E
RIDERS TO LEASE
1. OPTION TO RENEW: Lessee may extend the Term of this Lease for two
additional terms of five (5) years each, provided Lessee satisfies the
conditions below. If so extended, this Lease shall continue as though the
extended term(s) were part of the original term except the Minimum Monthly
Rent pursuant to Section 3, which shall be increased at the beginning of
the extension term to the then current market rent (the "Market Rent").
Lessee's right to extend this Lease as above stated is subject to the
following conditions:
(a) Lessee shall provide Lessor at least twelve (12) months prior
written notice of its exercise of this option.
(b) Lessee shall not have been in default beyond any applicable cure
period more than once during the twelve (12) months period
immediately preceding Lessee's issuance of the extension option
exercise notice.
If Lessee exercises its option to renew the Term of this Lease, prior to
the commencement of the first extension term, if so requested by Lessee in
writing, for no additional cost to Lessee, Lessor shall replace the carpet
for the entire Premises and repaint all of the interior walls of the
Premises, and Lessee shall have the right to designate the color and
quality of the new carpet and paint for the Premises.
The Monthly Minimum Rent for each extension term shall be the Market Rent
as of the first day of the applicable extension term. The Market Rent
shall be the monthly rent paid under comparable leases for comparable space
(newly carpeted and painted, if repainting and recarpeting are performed by
Lessor pursuant to Lessee's request under the preceding paragraph) by
tenants in buildings of comparable quality in an area in Seattle,
Washington, bounded on the west by Elliott Bay, on the east by Interstate
5, on the north by Roy, and on the south by Yesler. The Market Rent shall
be determined as follows:
(a) Within ten (10) days after Lessor's receipt of Lessee's extension
option exercise notice, Lessor shall provide written notice to Lessee
setting forth the Market Rent as determined by Lessor (the "Landlord
Market Rent"). If Lessee does not object in writing delivered to
Lessor within five (5) days after its receipt of Lessor's notice
setting forth the Landlord Market Rent, such Landlord Market Rent
shall be the Monthly Minimum Rent for the applicable extension term.
(b) If Lessee timely objects to the Landlord Market Rent within the
5-day period, the parties shall have ten (10) days after Lessee's
objection notice in which to agree on the Market Rent.
40
<PAGE>
(c) If the parties are unable to agree on the Market Rent within that
period, then within ten (10) days after the expiration of that period,
Lessee shall deliver a written notice to Lessor setting forth the
Market Rent as determined by Lessee (the "Tenant Market Rent"), and
each party shall select an independent appraiser and the two
appraisers so selected shall jointly appoint a third appraiser (the
"Determining Appraiser"). The Determining Appraiser shall make an
independent determination of whether the Landlord Market Rent or the
Tenant Market Rent represents the correct Market Rent for the renewal
term as of the commencement date thereof, without reduction for
concessions and including any market escalations then in effect. The
Determining Appraiser will be instructed that it must choose either
the Landlord Market Rent or the Tenant Market Rent. Such determination
of Market Rent shall be made within thirty (30) days of selection of
the Determining Appraiser
Each party shall be bound by this determination. All appraisal costs
will be paid by the party whose suggested Market Rent was not selected as
the Market Rent by the Determining Appraiser. The Market Rent determination
established pursuant to this Section will be binding upon the parties and
the Lease shall be extended for the additional term unless the parties
mutually agree to nullify the Lease Term extension and allow the Lease to
terminate on its originally scheduled termination date.
2. OPTION TO CANCEL: Lessee shall have a one-time right to terminate all or a
portion of the Premises (the location of any remaining partial floor area
of which shall be subject to Lessor's reasonable approval, if Lessee wishes
to terminate this Lease with respect to less than all of any floor leased
by Lessee hereunder) at the end of the fifth year of the Term of this Lease
with twelve (12) months prior written notice. Upon Lessee's issuance of
such termination notice, Lessee shall pay to Lessor an amount equal to the
sum of (i) the unamortized Lessee Improvement Allowance and commission
(amortized over ten (10) years at 10% per annum interest); (ii) the Minimum
Monthly Rent for year 6 of the Term of this Lease; and (iii) the difference
between the average annual Minimum Monthly Rent payable under this Lease
during the entire ten (10) year Lease Term multiplied by five (5), and the
total Minimum Monthly Rent actually paid hereunder during the initial five
years of the Lease Term, attributable to the area of the Premises with
respect to which Lessee wishes to terminate this Lease on a per-square-foot
basis. In the event Lessee terminates this Lease with respect to a
portion of the Premises, the remaining Premises may include no more than
one "partial floor" as a result of such cancellation, and the Monthly
Minimum Rent, Additional Rent and all other amounts payable hereunder shall
be reduced based upon the ratio which the rentable square feet included in
the remaining Premises bears to the rentable square feet included in the
Premises prior to the reduction. Additionally, the partial floor that is
retained by Lessee shall be demised by Lessee in a configuration reasonably
specified by Lessor so that in Lessor's reasonable judgement, it will most
likely have the greatest success in the reletting of the remainder of the
floor to a third party.
41
<PAGE>
3. RIGHT OF FIRST OFFER: Provided Lessee has not been in default of any term
or condition of this Lease beyond any applicable cure period more than once
during the immediately preceding twelve- (12-) month period, and subject to
the rights of other tenants of the Building existing as of the date of this
Lease, if any space within the Building in which the Premises is located is
or becomes available for lease or if Lessor becomes aware that any such
space is to become available, Lessor will provide Lessee with notice of
such availability (the "First Offer Notice"). The First Offer Notice will
contain the following information:
1. The description of the specific space within the Building.
2. The date on which the space will become available.
3. The rental rate which Lessor is willing to accept for such space.
For ten (10) days following Lessee's receipt of the First Offer Notice,
Lessee will have the exclusive right to lease the space identified in the
notice for the same non-monetary terms and conditions of this Lease except
for the terms specified in the First Offer Notice. If Lessee either waives
its right or fails to notify Lessor within the ten-day period that Lessee
shall lease such additional space, then Lessor may lease such space to any
third party on terms acceptable to Lessor, and this Right of First Offer
shall terminate and be of no further force or effect with respect to that
particular First Offer Notice. Lessee's failure to exercise the Right of
First Offer in any instance shall not be a waiver to exercise its right in
a future instance. If Lessee exercises its right to lease the identified
space, this Lease shall be amended to include such additional space in the
Premises and to set forth such other amendments hereto mutually acceptable
to Lessee and Lessor. This Right of First Offer expires on January 31,
2010 unless Lessee has exercised its Option to Renew as provided in
paragraph 1 of this EXHIBIT E.
4. PARKING: Throughout the Term of this Lease, Lessor shall provide Lessee
with parking stalls in the parking area within the Building based on a
minimum ratio of 1 parking stall per 1000 RSF leased by Lessee in the
Building. Additionally, Lessor will provide Lessee up to 80 stalls in the
Building or in other areas that are close to the Building and that are
owned or controlled (garage or surface lot) by Lessor, on a month-to-month
if-available basis. All parking is provided at standard rates as adjusted
by Lessor from time to time.
5. ROOFTOP EQUIPMENT: Throughout the Term of this Lease (including any
extension thereof), Lessee shall have the non-exclusive right to install,
operate and maintain Lessee's rooftop communication equipment. All
equipment shall only serve Lessee and its customers and shall be subject to
the reasonable review and approval of Lessor as far as size and location,
and affect on roof membrane. The rent for such space shall be at market
rates as reasonably determined by Lessor based on similar charges received
by Lessor and other lessors for similar space. Lessor shall work with
Lessee on the configuration and
42
<PAGE>
installation of any rooftop equipment. Access to said equipment shall be
subject to Building rules and regulations. Lessee may conduct an
infra-red and structural inspection of the roof of the Building prior to
the Commencement Date.
6. OPTION TO EXPAND: At any time prior to February 1, 2000, Lessee shall have
the Option to Expand by adding some or all of the seventh floor of the
Building (which contains approximately 30,094 rentable square feet of
space) to the Premises by written notice to Lessor, which shall designate
the desired location of the additional Premises on the seventh floor, which
shall be subject to Lessor's reasonable approval, if Lessee desires to
lease less than all of the Seventh Floor. In the event Lessee exercises
its Option to Expand, the Monthly Minimum Rent, Additional Rent, the Lessee
Improvement Allowance, and all other terms shall be adjusted consistent
with the terms of the Lease on a per rentable square foot basis. The
parties will execute an amendment to this Lease reflecting the addition of
the expansion space within two (2) weeks following Lessee's exercise of its
Option to Expand.
7. TRADE FIXTURES: Lessee at its own expense shall provide, install and
maintain all trade fixtures and equipment reasonably required (and may
substitute for and alter the same) to enable it to conduct its business at
the Premises. Such fixtures and equipment shall remain the property of
Lessee and Lessee may remove the same or any part thereof at any time prior
to the expiration or termination of this Lease. Lessee shall repair at its
own expense any damage to the Premises caused by the removal of said
fixtures or equipment by Lessee, ordinary wear and tear and damages from
casualty and condemnation excepted. Any fixtures or equipment installed by
Lessee pursuant hereto shall not be subject to and shall be free of any
lien for the payment of rent by Lessee or for the performance of any other
obligation of Lessee under this Lease.
8. MEMORANDUM: It is agreed that a short form Memorandum of this Lease, upon
Lessee's request therefor, shall be executed and acknowledged by the
parties for the purpose of recording forthwith upon or after the execution
of this Lease and recorded by Lessee.
9. QUIET ENJOYMENT: Lessor covenants that Lessor is seized of the Premises
and has full right to make this Lease, and that Lessee shall have quiet and
peaceful possession thereof as against any adverse claim of Lessor or any
other party.
43
<PAGE>
EXHIBIT F
STANDARDS FOR CLEANING
The following cleaning and janitorial services shall be performed with
respect to the Premises and the Common Areas in a manner consistent with Class A
office building in downtown Seattle.
NIGHTLY SERVICES:
(a) Turn off all lights except those required to be left on.
(b) Vacuum carpeted areas and entrance mats. (Traffic patterns and
around desks as needed.)
(c) Dust mop all resilient floors with treated dust mops and spot
spillage.
(d) Dust desks, chairs, window ledges, credenzas, cabinets,
handrails, countertops, banisters and horizontal surfaces with
treated dust rags. No feather dusters will be allowed.
(e) Papers and folders on desks are not to be moved or disturbed.
(f) Spot clean all cabinetry doors and countertops in tenant kitchens
as well as exteriors of refrigerators, microwaves, dish washing
machines, trash compactors, etc. Clean and polish inside of all
sinks.
(g) Empty all ashtrays, clean and sanitize as needed.
(h) Empty waste baskets and recycle bins, insert liners as required,
remove and deposit trash in appropriate containers. Empty only
that which is in waste containers or otherwise clearly marked
trash.
(i) Clean and sanitize all waste baskets.
(j) Return chairs and waste baskets to proper positions.
(k) Police all interior stairwells.
(l) Police all interior public corridors and planters.
(m) Dust and remove debris from all entrances and all metal door
thresholds.
(n) Wipe clean all smudged brightwork.
(o) Spot clean all wall surfaces as needed.
44
<PAGE>
(p) Spot clean all carpets, resilient and composition floors as
required.
(q) Vacuum and clean all walk-off mats as required.
(r) Close all drapes and venetian blinds at exterior windows.
(s) Check for burned out lights and report to supervisor - supervisor
to advise Lessor who shall replace such lights as part of
Operating Expenses.
WEEKLY SERVICES:
(a) Perform all "low dusting" not done daily; coat racks and shelves,
desks, credenzas, counters, desk accessories, cabinets, all
ledges and flat surfaces within reach, furniture ledges, window
sills, door louvers, wood paneling and molding.
(b) Dust and remove debris from of all door thresholds.
(c) Clean and polish chrome and bright metal, entrance doors, kick
and push plates, and all metal thresholds. Leave all surfaces
streak-free.
(d) Spray wax and buff all tile floors.
(e) Sweep all service stairwells.
(f) Dust all vinyl base.
(g) Completely vacuum and edge all carpeted areas.
(h) Move all plastic carpet protectors and thoroughly vacuum under
and around all desks and office furniture.
(i) Remove fingerprints, smudges, etc. from all doors, door frames,
glass partitions, windows, light switches, walls, elevator doors,
jambs and elevator interiors. Leave all surfaces streak-free.
(j) Clean, sanitize and polish all drinking fountains.
MONTHLY SERVICES:
(a) Dust all high reach areas including tops of door frames,
furniture ledges, air conditioning diffusers, return air grills,
tops of partitions, picture frames, etc.
(b) Vacuum upholstered furniture.
45
<PAGE>
(c) Scrub and re-wax all floors as needed.
(d) Clean and disinfect all phones.
(e) Damp wipe fire extinguisher cabinets.
(f) Dust venetian blinds and vacuum drapes at exterior window and
relites.
QUARTERLY SERVICES:
(a) Dust leather, plastic or naugahyde furniture.
(b) Dust light fixtures using damp cloth.
(c) Vacuum carpet with pilelifter to restore pile to its original
upright condition and remove all imbedded dirt and grit.
(d) Strip all hard-surfaced floors, refinish and machine polish to
uniform appearance.
SEMI-ANNUAL SERVICES:
(a) Wash and dry all air diffusers and grills.
46
<PAGE>
EXHIBIT 10.24
PROMISSORY NOTE
$212,500.00 Seattle, Washington
September 28, 1999
Alan Koslow ("DEBTOR") hereby promises to pay to the order of
ShopNow.com Inc., a Washington corporation ("LENDER"), its successors and
assigns, in lawful money of the United States of America, the lesser of Two
Hundred Twelve Thousand Five Hundred DOLLARS ($212,500.00) or the principal
balance outstanding under this Promissory Note, together with accrued and
unpaid interest thereon, at the rate or rates set forth below, on the earlier
of (i) September 28, 2001 or (ii) the sale of the shares subject to the Stock
Pledge Agreement described in paragraph 4 below (the "MATURITY DATE").
The unpaid principal amount of this Promissory Note shall bear interest
at a rate per annum equal to Six and one quarter percent (6.25%) (the AFR)
calculated on the basis of a 365 day year and the actual number of days
elapsed. If any interest is determined to be in excess of the then legal
maximum rate, then that portion of each interest payment representing an
amount in excess of the then legal maximum rate shall be deemed a payment of
principal and applied against the principal of the obligations evidenced by
this Note.
In the event that Debtor shall fail to pay when due (whether at
maturity, by reason of acceleration or otherwise) any principal of or
interest on this Promissory Note, then such overdue amounts shall bear
interest at a rate per annum equal to the otherwise applicable rate pursuant
to paragraph 2 above PLUS two percent (2%) per annum.
This Promissory Note is secured pursuant to that certain Stock Pledge
Agreement, dated as of the date hereof, by and between Debtor and Lender.
Debtor hereby waives presentment, demand, notice of dishonor, protest,
notice of protest and all other demands, protests and notices in connection
with the execution, delivery, performance, collection and enforcement of this
Promissory Note. The Debtor shall pay all costs of collection when incurred,
including reasonable attorneys' fees, costs and expenses.
This Promissory Note is being delivered in, is intended to be performed
in, shall be construed and interpreted in accordance with, and be governed by
the internal laws of, the State of Washington, without regard to principles
of conflict of laws.
<PAGE>
This Promissory Note may only be amended, modified or terminated by an
agreement in writing signed by the party to be charged. This Promissory Note
shall be binding upon the heirs, executors, administrators, successors and
assigns of the Debtor and inure to the benefit of the Lender and its
permitted successors, endorsees and assigns. This Promissory Note shall not
be transferred without the express written consent of Lender, provided that
if Lender consents to any such transfer or if notwithstanding the foregoing
such a transfer occurs, then the provisions of this Promissory Note shall
inure to the benefit of and be binding upon any successor to Debtor and shall
be extended to any holder thereof.
[DEBTOR]
By: /s/ Alan Koslow
------------------------------------
Name: Alan Koslow
----------------------------------
Title: EVP
---------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 11, 1999, with respect to the 1998 and 1997
financial statements of GO Software, Inc. included in the Registration
Statement (Form S-1) and related Prospectus of ShopNow.com Inc. for the
registration of 8,000,000 shares of its common stock.
ERNST & YOUNG LLP
January 19, 2000
Jacksonville, Florida
<PAGE>
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Seattle, Washington
January 19, 2000
<PAGE>
[KPMG LOGO]
Two Central Park Plaza Telephone 402 348 1450
Suite 1501 Fax 402 348 0152
Omaha, NE 68102
233 South 13th Street, Suite 1600 Telephone 402 476 1216
Lincoln, NE 68508-2041 Fax 402 476 1944
ACCOUNTANTS' CONSENT
The Board of Directors
ShopNow.com Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG LLP
/s/ KPMG LLP
Omaha, Nebraska
January 19, 2000
[KPMG LOGO]
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use, in the Prospectus constituting part of this
Registration Statement on Form S-1 of ShopNow.com Inc., of our report dated
June 16, 1999, on the consolidated financial statements of Ubarter.com Inc.
as of and for the year ended March 19, 1999, which appear in the Prospectus.
We also consent to the reference to our Firm under the heading "Experts" in
the Prospectus.
/s/ Moss Adams LLP
Seattle, Washington
January 20, 2000
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<PAGE>
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<TOTAL-LIABILITY-AND-EQUITY> 0 (2,330) (23,783) 0
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<SALES> 993 604 4,458 2,424
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<CGS> 430 515 4,452 2,526
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<TOTAL-COSTS> 430 515 5,849 2,814
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<OTHER-EXPENSES> 0 0 0 13,314
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<LOSS-PROVISION> 0 0 0 266
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<INTEREST-EXPENSE> (49) (164) (211) 76
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<INCOME-PRETAX> (810) (4,766) (24,745) (13,131)
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<INCOME-TAX> 0 0 0 0
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<INCOME-CONTINUING> (810) (4,766) (24,745) (13,131)
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<NET-INCOME> (810) (4,765) (24,745) (13,131)
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