<PAGE> 1
As filed with the Securities and Exchange Commission on October 29, 1999
Registration No. 333-84703
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WEBVAN GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 7389 77-0446411
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1241 EAST HILLSDALE BOULEVARD, SUITE 210
FOSTER CITY, CALIFORNIA 94404
(650) 524-2200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GEORGE T. SHAHEEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WEBVAN GROUP, INC.
1241 EAST HILLSDALE BOULEVARD, SUITE 210
FOSTER CITY, CALIFORNIA 94404
(650) 524-2200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JEFFREY D. SAPER, ESQ. WILLIAM H. HINMAN, ESQ.
J. ROBERT SUFFOLETTA, ESQ. DANIELLE CARBONE, ESQ.
ROBERT G. DAY, ESQ. SHEARMAN & STERLING
ANIL P. PATEL, ESQ. 1550 EL CAMINO REAL, SUITE 100
WILSON SONSINI GOODRICH & ROSATI MENLO PARK, CALIFORNIA 94025
PROFESSIONAL CORPORATION (650) 330-2200
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared 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 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 number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED OCTOBER 28, 1999.
25,000,000 SHARES
WEBVAN GROUP, INC.
Common Stock
LOGO
-------------------------
This is an initial public offering of shares of common stock of Webvan
Group, Inc. All of the 25,000,000 shares of common stock are being sold by
Webvan.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $11.00 and $13.00. Application has been made for quotation
of the common stock on the Nasdaq National Market under the symbol "WBVN".
See "Risk Factors" beginning on page 5 to read about factors you should
consider before buying shares of the common stock.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Webvan........................ $ $
</TABLE>
To the extent that the underwriters sell more than 25,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
3,750,000 shares from Webvan at the initial public offering price, less the
underwriting discount.
The underwriters expect to deliver the shares on , 1999.
-------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
THOMAS WEISEL PARTNERS LLC
-------------------------
Prospectus dated , 1999.
<PAGE> 3
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, especially "Risk Factors" beginning on page 5.
WEBVAN GROUP, INC.
Webvan is an Internet retailer offering same-day delivery of consumer
products through an innovative proprietary business design that integrates our
Webstore, distribution center and delivery system. Our current product offerings
are principally focused on food, non-prescription drug products and general
merchandise.
Webvan offers a personalized shopping experience that provides customers
with:
- the convenience of same-day direct home delivery within a
customer-selected 30-minute window;
- a broad selection of high quality fresh foods including produce, hand-cut
meats, fresh fish and live lobsters, as well as non-perishable grocery
items, chef-prepared meals, fine wines, premium quality cigars and
non-prescription drug products;
- prices that are generally at or below everyday supermarket prices;
- reliable and friendly delivery service by Webvan employees, free of
charge for orders over $50; and
- an easy-to-navigate Webstore offering user-friendly features including
the ability to create personalized shopping lists.
Consumers are increasingly seeking a grocery shopping solution which will
allow them to save time and effort without sacrificing the wide selection, high
quality and low cost they have come to expect from supermarkets. While a number
of retailers have attempted to address this opportunity by offering grocery
items online, we believe that their lack of a highly automated distribution
system and inability to realize cost efficiencies has made it difficult for
these online grocers to deliver a high quality, low cost shopping solution in an
efficient manner.
Our interactive Webstore and highly automated distribution center were
designed to operate efficiently at high volumes, enabling us to operate with
much lower overhead and reduced headcount compared to traditional supermarkets.
Our initial distribution center, which serves the San Francisco Bay Area, was
designed to process product volumes equivalent to approximately 18 supermarkets
with substantially lower labor and real estate costs than these stores would
typically require. To date, we have only been operating at less than 20% of such
designed capacity. We do not expect any of our distribution centers to operate
at designed capacity for several years following their commercial launch, and we
cannot assure you that any distribution center will ever operate at or near its
designed capacity. Since the commercial launch of our Webstore on June 2, 1999,
we have delivered orders to over 21,000 separate customers which generated
approximately $4.2 million in net sales through September 30, 1999. During that
period, over 62% of our orders were from customers who had previously used our
service. During the month of September 1999, approximately 70% of our orders
were from repeat customers. The daily volume of orders that we have had to
fulfill to date has been significantly below our designed capacity and the
levels that are necessary for us to achieve profitability. It is not practicable
to test our system at high volumes except by processing commercial orders. As a
result, the success of our system in a high order volume environment has yet to
be proven.
Our proprietary distribution system and enabling software were designed to
optimize our inbound and outbound delivery operations and were created to be
readily replicated to facilitate our expansion into multiple geographic markets.
We commenced the commercial launch of our operations in the San Francisco Bay
Area in June 1999 and plan to open a second distribution center in Atlanta,
Georgia in the second quarter of 2000. We also plan under our contract with
Bechtel to open two additional distribution centers in 2000 in the Chicago and
Seattle markets and seven additional distribution centers in 2001 in Dallas,
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<PAGE> 4
Washington, D.C. and five other markets. In July 1999, we entered into an
agreement with Bechtel Corporation for the construction of up to 26 additional
distribution centers over the next three years. These distribution centers may
not necessarily be in 26 different markets, and if the level of demand in a
particular market is sufficiently high, we may construct up to four to six
distribution centers in that market over a period of several years.
We believe that our business design provides an innovative solution to the
challenge of e-commerce fulfillment by integrating a retail web site with a
highly automated distribution center and advanced delivery system which provide
a highly efficient means of delivering goods directly and rapidly to consumers.
WEBVAN'S OPERATING HISTORY
Webvan was incorporated in December 1996. From 1997 through May 1999, we
were focused on developing our Webstore and constructing and equipping our first
distribution center serving the San Francisco Bay Area. We did not begin
commercial operations until June 1999. Our operating history and revenues
derived from operations are therefore limited, and we have incurred significant
net losses since our inception. As of June 30, 1999, we had an accumulated
deficit of $50.0 million. We incurred net losses of $12.0 million for the fiscal
year ended December 31, 1998 and $35.1 million for the six months ended June 30,
1999. We will continue to incur significant capital and operating expenses over
the next several years in connection with our planned expansion, and we expect
to continue to have operating losses for the foreseeable future.
2
<PAGE> 5
THE OFFERING
Common stock offered by Webvan........ 25,000,000 shares
Common stock to be outstanding after
this offering......................... 321,845,386 shares
Proposed Nasdaq National Market
symbol................................ "WBVN"
Use of proceeds....................... Funding construction of and equipment
for distribution centers and for general
corporate purposes, including working
capital. See "Use of Proceeds".
The shares of common stock to be outstanding after the offering are stated
as of October 20, 1999 and include 205,910,277 shares of common stock to be
issued upon automatic conversion of all outstanding shares of our preferred
stock upon completion of this offering. The shares of common stock to be
outstanding exclude:
- 102,500,000 shares of common stock authorized for issuance under our
stock option plans, of which 67,657,816 shares at a weighted average
exercise price of $3.88 were subject to outstanding options as of October
20, 1999; and
- 4,059,804 shares of common stock issuable upon exercise of outstanding
warrants as of October 20, 1999 at a weighted average exercise price of
$1.49.
All of the information in this prospectus reflects a three-for-two split of
our outstanding shares of common stock and preferred stock on September 21, 1999
and assumes:
- the conversion of all outstanding shares of preferred stock into shares
of common stock prior to the closing of this offering; and
- no exercise of the underwriters' overallotment option.
-------------------------
CORPORATE INFORMATION
We were incorporated in California in December 1996 as Intelligent Systems
for Retail, Inc. and changed our state of incorporation to Delaware in October
1999. Our principal executive offices are located at 1241 East Hillsdale
Boulevard, Suite 210, Foster City, California 94404, and our telephone number at
that address is (650) 524-2200. Our address on the World Wide Web is
http://www.webvan.com. References to our web site do not incorporate by
reference the information contained at our web site into this prospectus.
3
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17,
1996 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
CONSOLIDATED STATEMENTS OF 1997 1998 1998 1999
OPERATIONS DATA: -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $ -- $ -- $ -- $ 395
Cost of goods sold..................... -- -- -- 419
----------- ----------- ----------- -----------
Gross profit......................... -- -- -- (24)
Operating expenses:
Software development................. 244 3,010 765 6,308
General and administrative........... 2,612 8,825 2,739 25,296
Amortization of deferred stock
compensation...................... -- 1,060 43 3,953
----------- ----------- ----------- -----------
Total operating expenses.......... 2,856 12,895 3,547 35,557
----------- ----------- ----------- -----------
Interest income........................ 85 923 285 1,641
Interest expense....................... 69 32 -- 1,194
----------- ----------- ----------- -----------
Net interest income.................. 16 891 285 447
----------- ----------- ----------- -----------
Net loss............................... $ (2,840) $ (12,004) $ (3,262) $ (35,134)
=========== =========== =========== ===========
Basic and diluted net loss per share... $ (0.08) $ (0.18) $ (0.05) $ (0.48)
=========== =========== =========== ===========
Shares used in calculating basic and
diluted net loss per share........... 37,406,785 67,114,048 65,075,326 73,280,388
=========== =========== =========== ===========
Pro forma basic and diluted net loss
per share(1)......................... $ (0.06) $ (0.14)
=========== ===========
Shares used in computing pro forma
basic and diluted net loss per
share(1)............................. 201,978,419 253,743,194
=========== ===========
OTHER OPERATING DATA:
Capital expenditures................... $ 265 $ 32,669 $ 4,283 $ 25,948
Depreciation and amortization.......... 57 1,323 93 6,626
</TABLE>
- -------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
The following table provides a consolidated summary of our balance sheets.
The Pro Forma column reflects the closing of the sale of an aggregate of
21,670,605 shares of our Series D preferred stock in July and August 1999 for
approximately $275.0 million and the conversion of all outstanding shares of
preferred stock into common stock immediately prior to the closing of this
offering. The Pro Forma As Adjusted column also reflects the issuance of the
shares of common stock in this offering at an assumed initial public offering
price of $12.00 per share.
<TABLE>
<CAPTION>
JUNE 30, 1999
DECEMBER 31, ----------------------------------
---------------- PRO FORMA
1997 1998 ACTUAL PRO FORMA AS ADJUSTED
------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents...................... $2,935 $13,839 $ 21,836 $296,736 $577,336
Working capital........................... 7,693 10,923 31,773 306,673 587,273
Total assets.............................. 8,279 60,009 112,429 387,329 667,929
Long-term liabilities..................... 17 14,337 14,216 14,216 14,216
Total shareholders' equity................ 7,972 33,612 79,626 354,526 635,126
</TABLE>
4
<PAGE> 7
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before purchasing our common stock. If any of the following risks actually
occur, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline, and
you could lose all or part of your investment.
WE ARE AN EARLY-STAGE COMPANY OPERATING IN A NEW AND RAPIDLY EVOLVING MARKET.
We were incorporated in December 1996. From 1997 through May 1999, we were
focused on developing our Webstore and constructing and equipping our first
distribution center serving the San Francisco Bay Area. We did not begin
commercial operations until June 1999. Our limited operating history makes an
evaluation of our business and prospects very difficult. You must consider our
business and prospects in light of the risks and difficulties we encounter as an
early stage company in the new and rapidly evolving market of e-commerce. These
risks and difficulties include, but are not limited to:
- a complex and unproven business system;
- lack of sufficient customers, orders, net sales or cash flow;
- difficulties in managing rapid growth in personnel and operations;
- high capital expenditures associated with our distribution centers,
systems and technologies; and
- lack of widespread acceptance of the Internet as a means of purchasing
groceries and other consumer products.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks. Our failure to address any of the
risks described above could have a material adverse effect on our business.
OUR BUSINESS SYSTEM IS NEW AND UNPROVEN AT HIGH VOLUMES, AND THE ACTUAL CAPACITY
OF OUR SYSTEM MAY BE LESS THAN ITS DESIGNED CAPACITY.
We have designed a new business system which integrates our Webstore,
highly automated distribution centers and complex order fulfillment and delivery
operations. We have only been delivering products to customers commercially
since we launched our Webstore on June 2, 1999 and the average daily volume of
orders that we have had to fulfill to date has been significantly below our
designed capacity of 8,000 orders per day and the levels that are necessary for
us to achieve profitability. Although our initial distribution center was
designed to process product volumes equivalent to approximately 18 supermarkets,
we have only been operating at less than 20% of such designed capacity.
We do not expect our distribution centers to operate at designed capacity
for several years following their commercial launch, and we cannot assure you
that any distribution center will ever operate at or near its designed capacity.
If a distribution center is able to operate at its designed capacity seven days
per week, we estimate that it would generate annual revenue of approximately
$300 million assuming an average order size of approximately $103.00. We
sometimes may refer to a distribution center operating at its designed capacity
seven days per week as operating at a "steady state." Our existing distribution
center currently operates five days per week and we do not plan to attempt to
commercially operate it at seven days per week for several months. We cannot
assure you that we can effectively operate any of our distribution centers more
than five days per week. Additionally, our average order size from our
commercial launch on June 2, 1999 through September 30, 1999 was approximately
$71.00. Thus, our average order size will have to increase by over $30.00 for
the distribution center to be able to generate annual revenue of $300 million at
its designed capacity. We cannot assure you that our average order size will
remain at current levels or increase in the future. If our average order size
does not increase substantially or if a distribution
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<PAGE> 8
center is not able to operate at designed capacity seven days per week, our
annual revenue at that distribution center will be substantially less than $300
million.
It is not practicable to test our system at high volumes except by
processing commercial orders. As part of our testing process, we have
voluntarily limited the number of customer orders accepted in any given delivery
window in an effort to ensure that our systems and technologies function
properly while maintaining a high level of customer service. We plan to
incrementally increase our voluntary limit on orders as our systems and
technologies are proven at each incremental volume level. As a result, the
success of our system in a high order volume environment has yet to be proven.
Based on our operational experiences, refinements and modifications to our
business systems and technologies may be necessary or advisable and the costs
associated with them may be material. We cannot assure you that our business
system will be able to accommodate a significant increase in the number of
customers and orders, or that our initial distribution center or other
distribution centers will in fact ever operate at or near designed capacity. If
we are unable to effectively accommodate substantial increases in customer
orders, we may lose existing customers or fail to add new customers, which would
adversely affect our business, net sales and operating margins.
OUR BUSINESS SYSTEM IS COMPLEX, AND WE ARE PERIODICALLY AFFECTED BY OPERATIONAL
DIFFICULTIES.
Our business system relies on the complex integration of numerous software
and hardware subsystems that utilize advanced algorithms to manage the entire
process from the receipt and processing of goods at our distribution center to
the picking, packing and delivery of these goods to customers in a 30-minute
delivery window. We have, from time to time, experienced operational "bugs" in
our systems and technologies which have resulted in order errors such as missing
items and delays in deliveries. Operational bugs may arise from one or more
factors including electro-mechanical equipment failures, computer server or
system failures, network outages, software performance problems or power
failures. We expect bugs to continue to occur from time to time, and we cannot
assure you that our operations will not be adversely affected. The efficient
operation of our business system is critical to consumer acceptance of our
service. If we are unable to meet customer demand or service expectations as a
result of operational issues, we may be unable to develop customer relationships
that result in repeat orders, which would adversely affect our business and net
sales.
OUR BUSINESS SYSTEM MAY NOT BE READILY OR COST-EFFECTIVELY REPLICABLE IN
ADDITIONAL GEOGRAPHIC MARKETS.
A critical part of our business strategy is to expand our business by
opening additional distribution centers in new and existing markets to achieve
economies of scale and leverage our significant and ongoing capital investment
in our proprietary business system. While we currently plan to open three
additional distribution centers in 2000 in the Atlanta, Chicago and Seattle
markets, and seven additional distribution centers in 2001, our expansion
strategy is dependent upon the ability of our proprietary business system and
enabling software to be readily replicated to facilitate our expansion into
additional geographic markets on a timely and cost-effective basis. Because our
business system is extremely complex and we currently have only one distribution
center, we have not demonstrated whether our proprietary business system is in
fact readily and cost-effectively replicable.
Our ability to successfully and cost-effectively replicate our business
system in additional geographic markets will also depend upon a number of
factors, including:
- the availability of appropriate and affordable sites that can accommodate
our distribution centers;
- our ability to successfully and cost-effectively hire and train qualified
employees to operate new distribution centers;
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<PAGE> 9
- our ability to develop relationships with local and regional
distributors, vendors and other product providers;
- acceptance of our product and service offerings; and
- competition.
The number, timing and cost of opening of new distribution centers are
dependent on these factors and are therefore subject to considerable
uncertainty. If the replication element of our expansion strategy fails, we
could incur substantial additional operating costs and be forced to delay our
entrance into other markets.
In addition, we currently obtain all of our carousels for our distribution
centers from Diamond Phoenix Corporation. In the event that the supply of
carousels from Diamond Phoenix was delayed or terminated for any reason, we
believe that we could obtain similar carousels from other sources; however, the
integration of other carousels into the complex systems of our distribution
centers could result in construction delays and could require modifications to
our software systems. Accordingly, any delay or termination of our relationship
with Diamond Phoenix could cause a material delay and increased cost in our
planned expansion program.
OUR EXPANSION PLANS ARE DEPENDENT ON THE PERFORMANCE OF, AND OUR RELATIONSHIP
WITH, BECHTEL CORPORATION.
In July 1999, we entered into an agreement with Bechtel for the
construction of up to 26 additional distribution centers over the next three
years. We expect that our next 26 distribution centers following our Atlanta,
Georgia distribution center will be constructed by Bechtel pursuant to this
agreement. These distribution centers may not necessarily be in 26 different
markets. The success of our expansion program is highly dependent on the success
of our relationship with Bechtel and Bechtel's ability to perform its
obligations under the contract. We have no prior working relationship with
Bechtel and we cannot assure you that we will not encounter unexpected delays or
design problems in connection with the build-out of our distribution centers. If
our relationship with Bechtel fails for any reason, we would be forced to engage
another contractor, which would likely result in a significant delay in our
expansion plans and could result in increased costs of constructing and
equipping our distribution centers.
WE HAVE NO EXPERIENCE IN MANAGING GEOGRAPHICALLY DIVERSE OPERATIONS.
Although we plan to expand geographically, we have no experience operating
in any other regions or in managing multiple distribution centers. Accordingly,
the success of our planned expansion will depend upon a number of factors,
including:
- our ability to integrate the operations of new distribution centers into
our existing operations;
- our ability to coordinate and manage distribution operations in multiple,
geographically distant locations; and
- our ability to establish and maintain adequate management and information
systems and financial controls.
Our failure to successfully address these factors could have a material
adverse effect on our ability to expand and on our results of operations.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.
We have experienced significant net losses and negative cash flow since our
inception. As of June 30, 1999, we had an accumulated deficit of $50.0 million.
We incurred net losses of $12.0 million for the fiscal year ended December 31,
1998 and $35.1 million for the six months ended
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<PAGE> 10
June 30, 1999. We will continue to incur significant capital and operating
expenses over the next several years in connection with our planned expansion,
including:
- the construction of and equipment for new distribution centers in
additional geographic markets at an estimated cost of $25.0 million to
$35.0 million per distribution center based on our experience to date and
efficiencies we expect to result from our relationship with Bechtel, such
as savings associated with procurement for multiple sites;
- the continued expansion and development of operations at our existing
distribution center;
- increases in personnel at our current and future distribution centers;
- brand development, marketing and other promotional activities;
- the continued development of our computer network, Webstore, warehouse
management and order fulfillment systems and delivery infrastructure; and
- the development of strategic business relationships.
As a result, we expect to continue to have operating losses and negative cash
flow on a quarterly and annual basis for the foreseeable future. To achieve
profitability, we must accomplish the following objectives:
- substantially increase our number of customers and the number of orders
placed by our customers;
- generate a sufficient average order size;
- realize repeat orders from a significant number of customers; and
- achieve favorable gross and operating margins.
We cannot assure you that we will be able to achieve these objectives. In
addition, because of the significant capital and operating expenses associated
with our expansion plan, our overall losses will increase significantly from
current levels. If we do achieve profitability, we cannot be certain that we
would be able to sustain or increase such profitability on a quarterly or annual
basis in the future. If we cannot achieve or sustain profitability, we may not
be able to meet our working capital requirements, which would have a material
adverse effect on our business.
THE SIGNIFICANT CAPITAL INVESTMENT REQUIRED BY OUR BUSINESS DESIGN MAY ADVERSELY
AFFECT OUR ABILITY TO ENTER ADDITIONAL MARKETS IN A TIMELY AND EFFECTIVE MANNER
AND COULD HARM OUR COMPETITIVE POSITION.
Our business design requires a significant capital investment to build,
equip and launch distribution centers and local stations in the markets in which
we seek to operate. Our competitors have developed or may develop systems that
are not as highly automated or capital-intensive as ours. This could enable them
to commence operations in a particular geographic market before we are able to
do so, which could harm our competitive position. In addition, because of the
substantial capital costs associated with the development of our distribution
centers, we will be unable to achieve profitability or reduce our operating
losses if we do not process sufficient order volumes.
WE FACE INTENSE COMPETITION FROM TRADITIONAL AND ONLINE RETAILERS OF GROCERY
PRODUCTS.
The grocery retailing market is extremely competitive. Local, regional, and
national food chains, independent food stores and markets, as well as online
grocery retailers comprise our principal competition, although we also face
substantial competition from convenience stores, liquor retailers, membership
warehouse clubs, specialty retailers, supercenters, and drugstore chains. Many
of our existing and potential competitors, particularly traditional grocers and
retailers, are larger and have substantially greater resources than we do. We
expect this competition will intensify as more traditional and online grocery
retailers offer competitive services.
Our initial distribution center in Oakland, California operates in the San
Francisco Bay Area market. In this market, we compete primarily with traditional
grocery retailers and with online grocers NetGrocer and Peapod. The number and
nature of competitors and the amount of competition we will experience will
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vary by market area. In other markets, we expect to compete with these and other
online grocers, including HomeGrocer, HomeRuns and Streamline. The principal
competitive factors that affect our business are location, breadth of product
selection, quality, service, price and consumer loyalty to traditional and
online grocery retailers. If we fail to effectively compete in any one of these
areas, we may lose existing and potential customers which would have a material
adverse effect on our business, net sales and operating margins.
IF WE FAIL TO GENERATE SUFFICIENT LEVELS OF REPEAT ORDERS AND MARKET
PENETRATION, OUR BUSINESS AND NET SALES WILL BE ADVERSELY AFFECTED.
In the online retail industry, customer attrition rates, or the rates at
which subscribers cancel a service, are generally high. Although we do not
charge on a subscription basis for our service, we do depend upon customers to
continue to order from us after their initial order is placed, and we compete to
retain customers once they have used our service.
In addition, the success of our business depends on our ability to
establish sufficient levels of market penetration in each market in which we
operate. For instance, we believe that if approximately 1% of the households in
the San Francisco Bay Area use our service on a consistent basis, we can achieve
positive earnings before interest, taxes, depreciation and amortization, for the
distribution center serving that area viewed as a stand-alone business unit. In
general, in most other markets, we believe we will need to achieve penetration
levels of approximately 1% to 3% in order to achieve positive earnings on a
similar basis. However, we cannot assure you as to the levels of penetration we
will achieve in the San Francisco Bay Area or in other markets, and even if we
do achieve these levels of penetration, we cannot assure you that we will
achieve positive earnings.
If we experience significant decreases in repeat customer orders as a
percentage of orders delivered, or if we are unable to establish sufficient
market penetration levels, our business and net sales could be materially
adversely affected.
THE INTERNET MAY FAIL TO BECOME A WIDELY ACCEPTED MEDIUM FOR GROCERY SHOPPING.
We rely solely on product orders received through our Webstore for sales.
The market for e-commerce is new and rapidly evolving, and it is uncertain
whether e-commerce will achieve and sustain high levels of demand and market
acceptance, particularly with respect to the grocery industry. Our success will
depend to a substantial extent on the willingness of consumers to increase their
use of online services as a method to buy groceries and other products and
services. Our success will also depend upon our vendors' acceptance of our
online service as a significant means to market and sell their products.
Moreover, our growth will depend on the extent to which an increasing number of
consumers own or have access to personal computers or other systems that can
access the Internet. If e-commerce in the grocery industry does not achieve high
levels of demand and market acceptance, our business will be materially
adversely affected.
OUR EFFORTS TO BUILD STRONG BRAND IDENTITY AND CUSTOMER LOYALTY MAY NOT BE
SUCCESSFUL.
Since we only recently launched the Webvan brand, we currently do not have
strong brand identity or brand loyalty. We believe that establishing and
maintaining brand identity and brand loyalty is critical to attracting consumers
and vendors. Furthermore, we believe that the importance of brand loyalty will
increase with the proliferation of Internet retailers. In order to attract and
retain consumers and vendors, and respond to competitive pressures, we intend to
increase spending substantially to create and maintain brand loyalty among these
groups. We plan to accomplish this goal by expanding our current radio and
newspaper advertising campaigns and by conducting online and television
advertising campaigns. We believe that advertising rates, and the cost of our
advertising campaigns in particular, could increase substantially in the future.
If our branding efforts are not successful, our net sales and ability to attract
customers will be materially and adversely affected.
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Promotion and enhancement of the Webvan brand will also depend on our
success in consistently providing a high-quality consumer experience for
purchasing groceries and other products. If consumers, other Internet users and
vendors do not perceive our service offerings to be of high quality, or if we
introduce new services that are not favorably received by these groups, the
value of the Webvan brand could be harmed. Any brand impairment or dilution
could decrease the attractiveness of Webvan to one or more of these groups,
which could harm our reputation, reduce our net sales and cause us to lose
customers.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF PRODUCTS FROM OUR KEY
VENDORS, OUR NET SALES WOULD BE ADVERSELY AFFECTED.
We expect to derive a significant percentage of our net sales from
high-volume items, well-known brand name products and fresh foods. We source
products from a network of manufacturers, wholesalers and distributors. We
currently rely on national and regional distributors for a substantial portion
of our items. We also utilize premium specialty suppliers or local sources for
gourmet foods, farm fresh produce, fresh fish and meats. From time to time, we
may experience difficulty in obtaining sufficient product allocations from a key
vendor. In addition, our key vendors may establish their own online retailing
efforts, which may impact our ability to get sufficient product allocations from
these vendors. Many of our key vendors also supply products to the retail
grocery industry and our online competitors. If we are unable to obtain
sufficient quantities of products from our key vendors to meet customer demand,
our net sales and results of operations would be materially adversely affected.
WE CURRENTLY OPERATE ONLY ONE DISTRIBUTION CENTER WHICH IS LOCATED IN THE SAN
FRANCISCO BAY AREA.
We currently operate only one distribution center, which is located in
Oakland, California and serves the San Francisco Bay Area. We do not expect to
begin operating a second distribution center until the second quarter of 2000.
Therefore, our business and operations would be materially adversely affected if
any of the following events affected our current distribution center or the San
Francisco Bay Area:
- prolonged power or equipment failures;
- disruptions in our web site, computer network, software and our order
fulfillment and delivery systems;
- disruptions in the transportation infrastructure including bridges,
tunnels and roads;
- refrigeration failures; or
- fires, floods, earthquakes or other disasters.
Since the San Francisco Bay Area is located in an earthquake-sensitive
area, we are particularly susceptible to the risk of damage to, or total
destruction of, our distribution center and the surrounding transportation
infrastructure caused by earthquakes. We cannot assure you that we are
adequately insured to cover the total amount of any losses caused by any of the
above events. In addition, we are not insured against any losses due to
interruptions in our business due to damage to or destruction of our
distribution center caused by earthquakes or to major transportation
infrastructure disruptions or other events that do not occur on our premises.
WE WILL NEED SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR PLANNED EXPANSION, AND
WE CANNOT BE SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
We require substantial amounts of working capital to fund our business. In
addition, the opening of new distribution centers and the continued development
of our order fulfillment and delivery systems requires significant amounts of
capital. Since our inception, we have experienced negative cash flow from
operations and expect to experience significant negative cash flow from
operations for the foreseeable future. In the past, we have funded our operating
losses and capital expenditures
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through proceeds from equity offerings, debt financing and equipment leases. In
addition to the proceeds from this offering, we expect to require substantial
additional capital to fund our expansion program and operating expenses. We
currently anticipate that the net proceeds of this offering, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through the next 12 to 24 months. In July 1999,
we entered into an agreement with Bechtel for the construction of up to 26
additional distribution centers over the next three years. Although the Company
has no specific capital commitment under this agreement, our expenditures under
the contract are estimated to be approximately $1.0 billion. Our future capital
needs will be highly dependent on the number and actual cost of additional
distribution centers we open, the timing of openings and the success of our
facilities once they are launched. We cannot assure you of the actual cost of
our additional distribution centers. Therefore, we will need to raise additional
capital to fund our planned expansion. We cannot be certain that additional
financing will be available to us on favorable terms when required, or at all.
If we are unable to obtain sufficient additional capital when needed, we could
be forced to alter our business strategy, delay or abandon some of our expansion
plans or sell assets. Any of these events would have a material adverse effect
on our business, financial condition and our ability to reduce losses or
generate profits. In addition, if we raise additional funds through the issuance
of equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders may experience additional dilution.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT FOR US AND
FOR FINANCIAL ANALYSTS THAT MAY PUBLISH ESTIMATES OF OUR FINANCIAL RESULTS.
As a result of our limited operating history, it is difficult to accurately
forecast our total revenue, revenue per distribution center, gross and operating
margins, real estate and labor costs, average order size, number of orders per
day and other financial and operating data. We have a limited amount of
meaningful historical financial data upon which to base planned operating
expenses. Due to our limited operating history, we do not currently have a cash
budget. We base our current and future expense levels on our operating plans and
estimates of future revenue, and our expenses are dependent in large part upon
our facilities and product costs. Sales and operating results are difficult to
forecast because they generally depend on the growth of our customer base and
the volume of the orders we receive, as well as the mix of products sold. As a
result, we may be unable to make accurate financial forecasts and adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
We believe that these difficulties also apply to financial analysts that may
publish estimates of our financial results, including the estimates of a
representative of Goldman, Sachs & Co. set forth under the heading "Risk
Factors -- You should read the entire prospectus carefully and should not
consider any particular statement herein or in published news reports or any
published financial projections without carefully considering the risks and
other information contained herein". This inability to accurately forecast our
results could cause our net losses in a given quarter to be greater than
expected and could cause a decline in the trading price of our common stock.
OUR QUARTERLY OPERATING RESULTS ARE EXPECTED TO BE VOLATILE AND DIFFICULT TO
PREDICT BASED ON A NUMBER OF FACTORS THAT WILL ALSO AFFECT OUR LONG-TERM
PERFORMANCE.
We expect our quarterly operating results to fluctuate significantly in the
future based on a variety of factors. These factors are also expected to affect
our long-term performance. Some of these factors include the following:
- the timing of our expansion plans as we construct and begin to operate
new distribution centers in additional geographic markets;
- changes in pricing policies or our product and service offerings;
- increases in personnel, marketing and other operating expenses to support
our anticipated growth;
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- our inability to obtain new customers or retain existing customers at
reasonable cost;
- our inability to manage our distribution and delivery operations to
handle significant increases in the number of customers and orders or to
overcome system or technology difficulties associated with these
increases;
- our inability to adequately maintain, upgrade and develop our Webstore,
our computer network or the systems that we use to process customer
orders and payments;
- competitive factors; and
- technical difficulties, system or web site downtime or Internet
brownouts.
In addition to these factors, our quarterly operating results are expected to
fluctuate based upon seasonal purchasing patterns of our customers and the mix
of groceries and other products sold by us.
Due to all of these factors, we expect our operating results to be volatile
and difficult to predict. As a result, quarter-to-quarter comparisons of our
operating results may not be good indicators of our future performance. In
addition, it is possible that in any future quarter our operating results could
be below the expectations of investors generally and any published reports or
analyses of Webvan. In that event, the price of our common stock could decline,
perhaps substantially.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY AND SHOULD NOT CONSIDER ANY
PARTICULAR STATEMENT HEREIN OR IN PUBLISHED NEWS REPORTS OR ANY PUBLISHED
FINANCIAL PROJECTIONS WITHOUT CAREFULLY CONSIDERING THE RISKS AND OTHER
INFORMATION CONTAINED HEREIN.
In an article in a securities industry Internet periodical dated October 6,
1999, information regarding this offering and Webvan was published. This article
was published without our consent. Some of the information in the article was
attributed to oral statements made by members of our management team during a
conference call held for prospective investors. The author of the article was
not invited to participate in the conference call. While the factual statements
about Webvan in the article are disclosed in this prospectus, the article
presented these statements in isolation and did not disclose the related risks
and uncertainties described in this prospectus. As a result, these statements
should not be considered in isolation and you should make your investment
decision only after reading this entire prospectus carefully.
The article also referred to a projected loss of over $300 million for the
year 2001 stated during the call by a representative of Goldman, Sachs & Co. The
representative of Goldman, Sachs & Co. stated during the call that its financial
projections for our company were: $11.9 million of revenue and a $73.8 million
net loss for the year 1999, $120.0 million of revenue and a $154.3 million net
loss for the year 2000 and $518.2 million of revenue and a $302 million net loss
for the year 2001. These projections are based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and
contingencies, including the timing and cost of our distribution center roll-
out, the volume and size of customer orders, market penetration and competition.
These projections were not prepared with a view toward compliance with published
guidelines of the Securities and Exchange Commission, the American Institute of
Certified Public Accountants or generally accepted accounting principles. For
example, the projections do not take into account any amortization related to
stock-based compensation. No independent accountants have expressed an opinion
or any other form of assurance on these projections. Projections are necessarily
speculative in nature, and it can be expected that one or more of the estimates
on which the projections were based will not materialize or will vary
significantly from actual results, and such variances will likely increase over
time. We also have a very limited operating history from which to derive
financial projections. Accordingly, actual results during the periods covered
will vary from the financial projections, which variations may be material and
adverse. For these reasons, you should only consider these projections after
carefully evaluating all of the information in this prospectus including the
risks described in this section and throughout this prospectus. Furthermore, we
do not make, and in the future do not intend to make, public financial
projections.
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In addition the October 18, 1999 issue of Forbes magazine contained an
article regarding George Shaheen leaving Andersen Consulting to become the Chief
Executive Officer of Webvan. The Forbes article attributed the following
statements to Mr. Shaheen: "Webvan was all about leveraging technology and
reinventing the grocery business, just as Andersen had reinvented consulting",
Webvan will "set the rules for the largest consumer sector in the economy. The
creation of 26 distribution centers -- each one bigger than 18 conventional
supermarkets -- will take costs out of the equation", and "The key to e-commerce
is all about the last mile to the customer". You should only consider these
statements after carefully evaluating all of the information in this prospectus
including the risks described in this section and throughout this prospectus. In
particular, Andersen Consulting and Webvan are vastly different businesses and
you should not make any comparison between the two companies.
The Company has received, and may continue to receive, a high degree of
media coverage, including coverage that it not directly attributable to
statements made by Webvan's officers and employees. Neither we nor any of the
underwriters in this offering have confirmed, endorsed or adopted any statements
that were not made by us for utilization by, or distribution to, prospective
purchasers in this offering. To the extent any such statements are inconsistent
with, or conflict with, the information contained in this prospectus, or relate
to information not contained in this prospectus, they are disclaimed by us and
the underwriters. Accordingly, prospective investors should not rely on such
statements that were not made by us.
IF WE EXPERIENCE PROBLEMS IN OUR DELIVERY OPERATIONS, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We use our own couriers to deliver products from our distribution center to
our local stations, and from the local stations to our customers. We are
therefore subject to the risks associated with our ability to provide delivery
services to meet our shipping needs, including potential labor activism or
employee strikes, inclement weather, disruptions in the transportation
infrastructure, including bridges, roads and traffic congestion. In addition,
our failure to deliver products to our customers in a timely and accurate manner
or to meet our targeted delivery times would harm our reputation and brand,
which would have a material adverse effect on our business and net sales.
OUR NET SALES WOULD BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales and results of operations would be harmed. We rely on security and
authentication technology to perform real-time credit card authorization and
verification with our bank. We cannot predict whether events or developments
will result in a compromise or breach of the technology we use to protect a
customer's personal information.
Furthermore, our computer servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any breaches. We cannot assure you
that we can prevent all security breaches, and any failure to do so could have a
material adverse effect on our reputation and results of operations.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
The loss of the services of one or more of our key personnel could
seriously harm our business. We depend on the continued services and performance
of our senior management and other key personnel, particularly Louis H. Borders,
our founder and Chairman of the Board. Our future success also depends upon the
continued service of our executive officers and other key software development,
merchandising, marketing and support personnel. None of our officers or key
employees
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are bound by an employment agreement and our relationships with these officers
and key employees are at will. The "key person" life insurance policy we
currently hold for Mr. Borders expires in January 2000 and would not be
sufficient to compensate for the loss of his services. Additionally, there are
low levels of unemployment in the San Francisco Bay Area and in many of the
regions in which we plan to operate. These low levels of unemployment have led
to pressure on wage rates, which can make it more difficult and costly for us to
attract and retain qualified employees. The loss of key personnel, or the
failure to attract additional personnel, could have a material adverse effect on
our business, results of operations and performance in specific geographic
markets.
SEVERAL KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE ONLY RECENTLY JOINED US AND IF
THEY ARE NOT SUCCESSFULLY INTEGRATED INTO OUR BUSINESS OR FAIL TO WORK TOGETHER
AS A MANAGEMENT TEAM, OUR BUSINESS WILL SUFFER.
Several key members of our management team have joined us since August 1,
1999, including George T. Shaheen, our President and Chief Executive Officer,
and we expect to hire additional key personnel. If we do not effectively
integrate these employees into our business, or if they do not work together as
a management team to enable us to implement our business strategy, our business
will suffer.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION OF THE INTERNET INCREASES OR IF REGULATION DIRECTED AT LARGE-SCALE
RETAIL OPERATIONS IS DEEMED APPLICABLE TO US.
The adoption or modification of laws or regulations relating to the
Internet and large-scale retail store operations could adversely affect the
manner in which we currently conduct our business. In addition, the growth and
development of the market for online commerce may lead to more stringent
consumer protection laws which may impose additional burdens on us. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States government recently enacted
Internet laws regarding privacy, copyrights, taxation and the transmission of
sexually explicit material. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the Governor of California recently vetoed legislation which would
have prohibited a public agency from authorizing retail store developments
exceeding 100,000 square feet if more than a small portion of the store were
devoted to the sale of non-taxable items, such as groceries. While it is not
clear whether our operations would be considered a retail store for purposes of
this kind of legislation, we cannot assure you that other state or local
governments will not seek to enact similar laws or that we would be successful
if forced to challenge the applicability of this kind of legislation to our
distribution facilities. The expenses associated with any challenge to this kind
of legislation could be material. If we are required to comply with new
regulations or legislation or new interpretations of existing regulations or
legislation, this compliance could cause us to incur additional expenses or
alter our business model.
WE MAY INCUR SIGNIFICANT COSTS OR EXPERIENCE PRODUCT AVAILABILITY DELAYS IN
COMPLYING WITH REGULATIONS APPLICABLE TO THE SALE OF FOOD PRODUCTS.
As of the date of this prospectus, we are not subject to regulation by the
United States Department of Agriculture, or USDA. Whether the handling of food
items in our distribution facility, such as meat and fish, will subject us to
USDA regulation in the future will depend on several factors, including whether
we sell food products on a wholesale basis or whether we obtain food products
from non-USDA inspected facilities. Although we have designed our food handling
operations to comply with USDA regulations, we cannot assure you that the USDA
will not require changes to our food handling operations. We will also be
required to comply with local health regulations concerning the preparation and
packaging of our prepared meals and other food items. Any applicable federal,
state or local regulations may cause us to incur substantial compliance costs or
delay the availability
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of a number of items at one or more of our distribution centers. In addition,
any inquiry or investigation from a food regulatory authority could have a
negative impact on our reputation. Any of these events could have a material
adverse effect on our business and expansion plans and could cause us to lose
customers.
WE MAY NOT BE ABLE TO OBTAIN REQUIRED LICENSES OR PERMITS FOR THE SALE OF
ALCOHOL AND TOBACCO PRODUCTS IN A COST-EFFECTIVE MANNER OR AT ALL.
We will be required to obtain state licenses and permits for the sale of
alcohol and tobacco products in each location in which we seek to open a
distribution center. We cannot assure you that we will be able to obtain any
required permits or licenses in a timely manner, or at all. We may be forced to
incur substantial costs and experience significant delays in obtaining these
permits or licenses. In addition, the United States Congress is considering
enacting legislation which would restrict the interstate sale of alcoholic
beverages over the Internet. Changes to existing laws or our inability to obtain
required permits or licenses could prevent us from selling alcohol or tobacco
products in one or more of our geographic markets. Any of these events could
substantially harm our net sales, gross profit and ability to attract and retain
customers.
IN THE FUTURE WE MAY FACE POTENTIAL PRODUCT LIABILITY CLAIMS.
We cannot assure you that the products that we deliver will be free from
contaminants. Grocery and other related products occasionally contain
contaminants due to inherent defects in the products or improper storage or
handling. If any of the products that we sell cause harm to any of our
customers, we could be subject to product liability lawsuits. If we are found
liable under a product liability claim, or even if we are required to defend
ourselves against such a claim, our reputation could suffer and customers may
substantially reduce their orders or stop ordering from us.
OUR NET SALES WOULD BE HARMED IF WE EXPERIENCE SIGNIFICANT CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions would
harm our net sales and results of operations because we do not carry insurance
against this risk. We may suffer losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, we are
liable for fraudulent credit card transactions because we do not obtain a
cardholder's signature. Because we have had an extremely short operating
history, we cannot predict our future levels of bad debt expense.
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BUSINESS MAY BE SERIOUSLY HARMED.
We regard patent rights, copyrights, service marks, trademarks, trade
secrets and similar intellectual property as important to our success. We rely
on patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees, customers, partners
and others to protect our proprietary rights; however, the steps we take to
protect our proprietary rights may be inadequate. We currently have no patents.
We have filed, and from time to time expect to file, patent applications
directed to aspects of our proprietary technology. We cannot assure you that any
of these applications will be approved, that any issued patents will protect our
intellectual property or that any issued patents will not be challenged by third
parties. In addition, other parties may independently develop similar or
competing technology or design around any patents that may be issued to us. Our
failure to protect our proprietary rights could materially adversely affect our
business and competitive position.
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INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
Patent, trademark and other intellectual property rights are becoming
increasingly important to us and other e-commerce vendors. Many companies are
devoting significant resources to developing patents that could affect many
aspects of our business. Other parties may assert infringement or unfair
competition claims against us that could relate to any aspect of our
technologies, business processes or other intellectual property. We cannot
predict whether third parties will assert claims of infringement against us, the
subject matter of any of these claims, or whether these assertions or
prosecutions will harm our business. If we are forced to defend ourselves
against any of these claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, inability to use our current web site
technology, or product shipment delays. As a result of a dispute, we may have to
develop non-infringing technology or enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. If there is a successful claim of patent
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, our business
and competitive position may be materially adversely affected.
ANY DEFICIENCIES IN OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE RELY
COULD ADVERSELY AFFECT OUR BUSINESS AND RESULT IN A LOSS OF CUSTOMERS.
Our Webstore has experienced in the past and may experience in the future
slower response times or disruptions in service for a variety of reasons
including failures or interruptions in our systems. In addition, our users
depend on Internet service providers, online service providers and other web
site operators for access to our Webstore. Many of them have experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Moreover, the
Internet infrastructure may not be able to support continued growth in its use.
Any of these problems could have a material adverse effect on our business and
could result in a loss of customers.
Our communications hardware and certain of our other computer hardware
operations are located at the facilities of Exodus Communications, Inc. in Santa
Clara, California. The hardware for our warehouse management and materials
handling systems is maintained in our Oakland, California distribution center.
Fires, floods, earthquakes, power losses, telecommunications failures, break-ins
and similar events could damage these systems or cause them to fail completely.
For instance, a power failure in October 1999 at the facilities of Exodus caused
our Webstore to be inaccessible for approximately two hours. To date, we have
only experienced two other instances when our Webstore was inaccessible for
unexpected reasons. Computer viruses, electronic break-ins or other similar
disruptive problems could also adversely affect our Webstore. Our business could
be adversely affected if our systems were affected by any of these occurrences.
Problems faced by Exodus, with the telecommunications network providers with
whom it contracts or with the systems by which it allocates capacity among its
customers, including Webvan, could adversely impact the customer shopping
experience and consequently, our business. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems.
WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences for
us. These consequences would include difficulties in operating our Webstore
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. We also depend on the year 2000
compliance of the computer systems and financial services used by consumers. We
are in the process of developing remediation and contingency plans as part of
our year 2000 initiative program, based on an inventory
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and risk assessment of our critical assets and third party systems. We expect to
complete this assessment and the development of these plans by the end of
October 1999. Exodus Communications, which hosts our web servers, has informed
us that their internal systems are year 2000 compliant. However, Exodus has not
assured us as to the year 2000 compliance of the third party systems and
software upon which they depend. We have not yet determined the costs of
developing and implementing these plans, and these costs may be material. A
significant disruption in the ability of consumers to reliably access the
Internet, especially our Webstore, or to use their credit cards would have an
adverse effect on our operations and demand for our services.
WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
As a publisher of online content, we face potential liability for
negligence, copyright, patent or trademark infringement, or other claims based
on the nature and content of materials that we publish or distribute. If we face
liability, particularly liability that is not covered by our insurance or is in
excess of our insurance coverage, then our reputation and our business may
suffer. In the past, plaintiffs have brought these types of claims and sometimes
successfully litigated them against online services. We cannot assure you that
we are adequately insured to cover claims of these types or to indemnify us for
all liability that may be imposed on us.
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL EXERCISE SIGNIFICANT
CONTROL OVER WEBVAN.
As of October 20, 1999, our executive officers and directors and their
immediate family members and affiliated venture capital funds beneficially
owned, in the aggregate, approximately 60.5% of our outstanding common stock,
assuming conversion of all preferred stock into common stock. As a result, these
stockholders are able to exercise significant control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could delay or prevent someone from
acquiring or merging with us. See "Principal Stockholders".
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US DUE TO ANTI-TAKEOVER
PROVISIONS.
Our charter documents authorize 10,000,000 shares of undesignated preferred
stock, create a classified board of directors, eliminate the right of
stockholders to call a special meeting of stockholders, require stockholders to
comply with advance notice requirements before raising a matter at a meeting of
stockholders, eliminate the ability of stockholders to take action by written
consent and eliminate the ability of stockholders to cumulate votes in the
election of directors. As a Delaware corporation, we are also subject to the
Delaware antitakeover statute contained in Section 203 of the Delaware General
Corporation Law. These provisions could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our stockholders. See
"Description of Capital Stock".
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE FOLLOWING THIS OFFERING.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly consumer-oriented
Internet-related companies, have been highly volatile. You may not be able to
resell your shares at or above the initial public offering price. The price at
which our common stock will trade after this offering is likely to be volatile
and may fluctuate substantially due to factors such as:
- our historical and anticipated quarterly and annual operating results;
- variations between our actual results and the expectations of investors
or published reports or analyses of Webvan;
- announcements by us or others and developments affecting our business,
systems or expansion plans; and
- conditions and trends in e-commerce industries, particularly the online
grocery industry.
17
<PAGE> 20
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decline. Based on shares outstanding as of October 20, 1999, upon
completion of this offering we will have outstanding 321,845,386 shares of
common stock, assuming no exercise of the underwriters' over-allotment option.
Of these shares, the 25,000,000 shares of our common stock sold in this offering
will be freely tradeable, without restriction, in the public market. Our
directors, officers and stockholders have entered into lock-up agreements in
connection with this offering generally providing that they will not offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
our common stock or any securities exercisable for or convertible into our
common stock without the prior written consent of Goldman, Sachs & Co. According
to the lock-up agreements, at any time beginning on the third day following the
public release of our earnings for the year ended December 31, 1999, each
stockholder may offer, sell, transfer, assign, pledge or otherwise dispose of up
to 15% of his or her shares owned as of December 31, 1999; and at any time
beginning on the 48th day following the public release of our earnings for the
year ended December 31, 1999, each stockholder may offer, sell, transfer,
assign, pledge or otherwise dispose of an additional 25% of his or her shares
owned as of December 31, 1999. The lock-up restrictions will expire as to the
remaining shares on the date which is 180 days after the date of this
prospectus. As a result, a substantial number of shares of our common stock will
be eligible for sale in the public market prior to the expiration of the
customary 180-day lock-up period following an initial public offering.
In addition, approximately 71.7 million shares under outstanding options
and warrants and approximately 10.0 million shares reserved for future issuance
under our stock option plans as of October 20, 1999 will be eligible for sale in
the public market subject to vesting, the expiration of lock-up agreements and
restrictions imposed under Rules 144 and 701 under the Securities Act. See
"Shares Eligible for Future Sale".
18
<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control. All
statements, other than statements of historical facts included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will", "believe", "anticipate", "intend", "estimate", "expect", "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus. You
should not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that these plans, intentions or expectations will be achieved.
We disclose important factors that could cause our actual results to differ
materially from our expectations under "Risk Factors" and elsewhere in this
prospectus. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
19
<PAGE> 22
USE OF PROCEEDS
The net proceeds we receive from the sale of the common stock offered
hereby will be approximately $280.6 million, based on an assumed initial public
offering price of $12.00 per share and after deducting the underwriters'
discounts and commissions and expenses payable by us estimated at $1.4 million.
We expect to use the net proceeds from this offering principally to fund the
construction of and equipment for distribution centers in other geographic
markets at an estimated cost of $25.0 million to $35.0 million per distribution
center. This estimated cost is based on our experience to date and efficiencies
we expect to result from our relationship with Bechtel. Our contract with
Bechtel Corporation contemplates the construction of up to 26 additional
distribution centers over the next three years. The cost of constructing and
equipping 26 additional distribution centers is currently estimated at from $650
million to over $900 million. At June 30, 1999, our cash and cash equivalents
were approximately $577.3 million after including the expected net proceeds from
the shares sold in this offering. Thus, the completion of 26 additional
distribution centers would require us to generate cash flow from operations or
to sell additional debt or equity securities or obtain a line of credit. If such
funds are not available when needed or if the cost of these distribution centers
exceeds our current estimates, we could also be forced to curtail our expansion
plans. The number and timing of opening of new distribution centers are subject
to considerable uncertainty due to a number of factors, including the following:
- the availability of appropriate and affordable sites that can accommodate
our distribution centers;
- the actual cost of constructing and equipping our distribution centers;
- our ability to successfully and cost-effectively hire and train qualified
employees to operate new distribution centers;
- our ability to develop relationships with local and regional
distributors, vendors and other product providers;
- acceptance of our product and service offerings; and
- competition.
We also expect to use the proceeds for general corporate purposes,
including working capital and funding of our expected operating losses. We may
use a portion of the net proceeds to pursue possible acquisitions of
complementary businesses, technologies or products; however, we have no present
understandings, commitments or agreements with respect to any such transactions,
and we have not identified the nature of any such businesses, technologies or
products. Pending use of such net proceeds for the above purposes, we intend to
invest such funds in short-term interest-bearing investment-grade securities.
DIVIDEND POLICY
We have not paid any dividends since our inception and do not intend to pay
any dividends on our capital stock in the foreseeable future.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth our cash and equivalents and capitalization
as of June 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to the closing of the sale of an
aggregate of 21,670,605 shares of our Series D-2 preferred stock in July
and August 1999 for approximately $275.0 million and the conversion of
each outstanding share of preferred stock into one share of common stock
upon the closing of this offering; and
- on a pro forma basis as adjusted for this offering at an assumed initial
public offering price of $12.00 per share and application of the net
proceeds therefrom. You should read this table in conjunction with our
consolidated financial statements and the notes to those statements
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and equivalents........................................ $ 21,836 $296,736 $577,336
======== ======== ========
Capital lease obligations, net of current portion........... 2,137 2,137 2,137
-------- -------- --------
Long term debt, net of current portion...................... 11,811 11,811 11,811
-------- -------- --------
Redeemable common stock..................................... 1,556 1,556 1,556
Shareholders' equity:
Convertible preferred stock:
Series A preferred stock, no par value; 112,635,168
shares authorized actual, no shares authorized pro
forma and pro forma as adjusted; 112,635,168 shares
issued and outstanding actual, no shares issued and
outstanding pro forma and pro forma as adjusted...... 10,759 -- --
Series B preferred stock, no par value; 41,814,000
shares authorized actual, 2,700,696 shares authorized
pro forma, no shares authorized pro forma as
adjusted; 39,113,304 shares issued and outstanding
actual, no shares issued and outstanding pro forma
and pro forma as adjusted(1)......................... 34,834 -- --
Series C preferred stock, no par value; 34,601,616
shares authorized actual, 2,260,416 shares authorized
pro forma, no shares authorized pro forma as
adjusted; 32,341,200 shares issued and outstanding
actual, no shares issued and outstanding pro forma
and pro forma as adjusted(2)......................... 72,776 -- --
Series D preferred stock, no par value; no shares
authorized actual, 29,550,831 shares authorized, pro
forma, no shares authorized pro forma as adjusted; no
shares issued and outstanding actual, pro forma and
pro forma as adjusted(3)............................. -- -- --
Preferred stock; no shares authorized actual and pro
forma, 10,000,000 shares authorized pro forma as
adjusted; no shares issued and outstanding actual, pro
forma and pro forma as adjusted........................ -- -- --
Common stock; 450,000,000 shares authorized actual and pro
forma, 800,000,000 shares authorized pro forma as
adjusted; 81,908,562 shares issued and outstanding
actual, 287,668,839 shares issued and outstanding pro
forma, 312,668,839 shares issued and outstanding pro
forma as adjusted(4)................................... 31,251 424,520 705,120
Additional paid-in capital................................ 3,829 3,829 3,829
Deferred compensation....................................... (23,790) (23,790) (23,790)
Accumulated deficit......................................... (49,978) (49,978) (49,978)
Accumulated other comprehensive income (loss)............... (55) (55) (55)
-------- -------- --------
Total shareholders' equity........................ 79,626 354,526 635,126
-------- -------- --------
Total capitalization.............................. $ 95,130 $370,030 $650,630
======== ======== ========
</TABLE>
21
<PAGE> 24
- -------------------------
(1) Excludes warrants to purchase an aggregate of 2,397,804 shares of Series B
preferred stock at a weighted average exercise price of $0.91 per share.
(2) Excludes (a) options to purchase 430,416 shares of Series C preferred stock
at an exercise price of $2.32 per share as of March 31, 1999, (b) a warrant
to purchase up to 1,650,000 shares of our Series C preferred stock at an
exercise price of $2.32 per share issued in June 1999 and (c) 150,000 shares
of our Series C preferred stock issued upon exercise of warrants in
September 1999.
(3) On July 19, 1999, we authorized 25,610,718 shares of Series D-1 preferred
stock and 25,610,718 shares of Series D-2 preferred stock. In July and
August 1999, we issued 21,670,605 shares of Series D-2 preferred stock. Each
of these shares will automatically convert into one share of common stock
immediately prior to the closing of this offering. No shares of Series D-1
preferred stock are issued and outstanding, actual, pro forma and pro forma
as adjusted.
(4) Excludes 102,500,000 shares of common stock authorized for issuance under
our stock option plans, of which 67,657,816 shares at a weighted average
exercise price of $3.88 per share were subject to outstanding options as of
October 20, 1999.
22
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$354.4 million or $1.21 per share. Our pro forma net tangible book value per
share as of June 30, 1999 represents the amount of our total tangible assets
reduced by the amount of our total liabilities and divided by the total number
of shares of common stock outstanding including redeemable common stock and
after giving effect to the issuance of 21,670,605 shares of Series D preferred
stock in July and August 1999 and the automatic conversion of all outstanding
shares of our preferred stock. Dilution per share represents the difference
between the amount per share paid by investors of shares of common stock in this
offering and the pro forma net tangible book value per share of common stock
immediately after the completion of this offering. After giving effect to the
sale of the 25,000,000 shares of common stock offered by us at an assumed
initial public offering price of $12.00 per share, and after deducting the
underwriting discount and estimated offering expenses payable by us, our pro
forma as adjusted net tangible book value at June 30, 1999 would have been
approximately $635.0 million or $2.03 per share of common stock. This represents
an immediate increase in net tangible book value of $0.82 per share to existing
stockholders and an immediate dilution of $9.97 per share to new investors of
common stock. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $1.21
Increase per share attributable to new investors.......... 0.82
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 2.03
------
Dilution per share to new investors......................... $ 9.97
======
</TABLE>
The following table summarizes on a pro forma as adjusted basis after
giving effect to the offering, as of June 30, 1999, the differences between the
existing stockholders and new investors with respect to the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price per share paid at an assumed initial public offering price of
$12.00 per share, and after deducting the underwriting discount and estimated
offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 292,453,839 92.1% $429,464,000 58.9% $ 1.47
New investors................. 25,000,000 7.9 300,000,000 41.1 $12.00
----------- ----- ------------ -----
Totals........................ 317,453,839 100.0% $729,464,000 100.0%
=========== ===== ============ =====
</TABLE>
In the preceding tables, the shares of common stock outstanding exclude:
- 102,500,000 shares of common stock authorized for issuance under our
stock option plans, of which 67,657,816 shares at a weighted average
exercise price of $3.88 were subject to outstanding options as of
October 20, 1999; and
- 4,059,804 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.49 as of October
20, 1999.
To the extent outstanding options and warrants are exercised, there will be
further dilution to new investors.
23
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and the notes to those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus. The consolidated
statement of operations data for the period from inception through December 31,
1997 and for the year ended December 31, 1998, and the consolidated balance
sheet data as of December 31, 1997 and 1998 are derived from, and are qualified
by reference to, the audited consolidated financial statements and the notes to
those statements included in this prospectus that have been audited by Deloitte
& Touche LLP. The consolidated statement of operations data for the six months
ended June 30, 1998 and 1999, and the consolidated balance sheet data at June
30, 1999 are derived from unaudited consolidated financial statements that
include, in the opinion of our management, all adjustments, consisting of only
normal, recurring adjustments, necessary for a fair presentation of the
information set forth therein. The consolidated results of operations for the
six months ended June 30, 1999 are not necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17,
1996 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1997 1998 1998 1999
CONSOLIDATED STATEMENTS OF --------------- ------------ ----------- ------------
OPERATIONS DATA: (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.......................................... $ -- $ -- $ -- $ 395
Cost of goods sold................................. -- -- -- 419
----------- ------------ ----------- ------------
Gross profit (loss).............................. -- -- -- (24)
Operating expenses:
Software development............................. 244 3,010 765 6,308
General and administrative....................... 2,612 8,825 2,739 25,296
Amortization of deferred stock compensation...... -- 1,060 43 3,953
----------- ------------ ----------- ------------
Total operating expenses....................... 2,856 12,895 3,547 35,557
----------- ------------ ----------- ------------
Interest income.................................... 85 923 285 1,641
Interest expense................................... 69 32 -- 1,194
----------- ------------ ----------- ------------
Net interest income.............................. 16 891 285 447
----------- ------------ ----------- ------------
Net loss........................................... $ (2,840) $ (12,004) $ (3,262) $ (35,134)
=========== ============ =========== ============
Basic and diluted net loss per share............... $ (0.08) $ (0.18) $ (0.05) $ (0.48)
=========== ============ =========== ============
Shares used in calculating basic and diluted net
loss per share................................... 37,406,785 67,114,048 65,075,326 73,280,388
=========== ============ =========== ============
Pro forma basic and diluted net loss per
share(1)......................................... $ (0.06) $ (0.14)
============ ============
Shares used in calculating pro forma basic and
diluted net loss per share(1).................... 201,978,419 253,743,194
============ ============
OTHER OPERATING DATA:
Capital expenditures............................... $ 265 $ 32,669 $ 4,283 $ 25,948
Depreciation and amortization...................... 57 1,323 93 6,626
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
The following table provides a consolidated summary of our balance sheet.
The Pro Forma column reflects the closing of the sale of 21,670,605 shares of
our Series D-2 preferred stock in July and August 1999 for approximately $275.0
million and the conversion of all outstanding shares of preferred stock into
common stock immediately prior to the closing of this offering. The Pro Forma As
Adjusted column reflects the Pro Forma adjustments as well as the issuance of
the common stock in this offering at an assumed initial public offering price of
$12.00 per share.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
---------------- ------------------------------------
PRO FORMA
1997 1998 ACTUAL PRO FORMA AS ADJUSTED
------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents....................................... $2,935 $13,839 $ 21,836 $296,736 $577,336
Working capital............................................ 7,693 10,923 31,773 306,673 587,273
Total assets............................................... 8,279 60,009 112,429 387,329 667,929
Long-term liabilities...................................... 17 14,337 14,216 14,216 14,216
Total shareholder's equity................................. 7,972 33,612 79,626 354,526 635,126
</TABLE>
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties.
Webvan's actual results could differ materially from those discussed in this
prospectus. Factors that could cause or contribute to these differences include,
but are not limited to, the risks discussed in the section entitled "Risk
Factors" in this prospectus.
OVERVIEW
Webvan is an Internet retailer offering same-day delivery of consumer
products through an innovative proprietary business design which integrates our
Webstore, distribution center and delivery system. Our current product offerings
are principally focused on food, non-prescription drug products and general
merchandise.
We were incorporated in December 1996 as Intelligent Systems for Retail,
Inc. In April 1999, we changed our name to Webvan Group, Inc. We commenced our
grocery delivery service in May 1999 on a test basis to approximately 1,100
persons and commercially launched our Webstore on June 2, 1999. For the period
from inception to June 1999, our primary activities consisted of raising
capital, recruiting and training employees, developing our business strategy,
designing a business system to implement our strategy, constructing and
equipping our first distribution center and developing relationships with
vendors. Since launching our service, we have continued these operating
activities and have also focused on building sales momentum, establishing
additional vendor relationships, promoting our brand name and enhancing our
distribution, delivery and customer service operations. Our cost of sales and
operating expenses have increased significantly since inception and are expected
to continue to increase. This trend reflects the costs associated with our
formation as well as increased efforts to promote the Webvan brand, build market
awareness, attract new customers, recruit personnel, build our operating systems
and develop our Webstore and associated systems that we use to process
customers' orders and payments.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets. These
risks for Webvan include an unproven business system and our ability to
successfully manage our growth. To address these risks, we must:
- develop and increase our customer base;
- implement and successfully execute our business and marketing strategy;
- continue to develop, test, increase the capacity of and enhance our
Webstore, order fulfillment, transaction processing and delivery systems;
- respond to competitive developments; and
- attract, retain and motivate quality personnel.
Since our inception, we have incurred significant losses, and as of June
30, 1999, we had an accumulated deficit of $50.0 million. Our initial
distribution center in Oakland, California is currently operating at less than
20% of the capacity for which it was designed. We do not expect any of our
distribution centers to operate at designed capacity for several years following
their commercial launch, and we cannot assure you that any distribution center
will ever operate at or near its designed capacity. Since the commercial launch
of our Webstore on June 2, 1999, we have delivered orders to over 21,000
separate customers which generated approximately $4.2 million in net sales
through September 30, 1999. During that period, over 62% of our orders were from
customers who had previously used our service and our average order size was
approximately $71.00. From August 31, 1999 through September 17, 1999, our
average order size was approximately $80.00. We expect our average order size
and number of orders processed to fluctuate from time to time and there can be
no assurance that it will not decline significantly in future periods. Based on
an average order size of $80.00 and an average of 1,200 orders per day, our
distribution center would generate annual
25
<PAGE> 28
revenues of approximately $35 million if it operated seven days per week. Our
distribution center currently operates five days per week. During June and July
1999, our repeat customers ordered on average every 6 days, and from our
commercial launch through September 30, 1999, our repeat customers ordered on
average every 10 days. As a result of the potential advantages of our business
model compared to traditional supermarkets, we estimate that if our distribution
center is able to operate at its designed capacity of 8,000 orders per day seven
days per week and at an average order size of $103.00 per order, we can achieve
an operating margin of 12% compared to a 4% operating margin for a traditional
supermarket based on our analysis of publicly available data. However, we cannot
assure you that we will be able to achieve 8,000 orders per day at an average
order size of $103.00 or that we will be able to operate seven days per week,
and any failure to do so will result in lower operating margins. From our
commercial launch on June 2, 1999 through September 30, 1999, our average
customer order included over 20 items. In light of our extremely limited
operating history, and the daily and weekly fluctuations in our operating data
since our commercial launch, we believe the most meaningful operating data,
including data for average order size, is the cumulative data since our
commercial launch.
If a distribution center is able to successfully operate at the volume and
cost levels expected to be reached by a distribution center at the end of the
first year of operation, we expect that our annualized earnings before interest,
taxes, depreciation and amortization for that distribution center, viewed as a
stand-alone business unit without regard to headquarters' costs, would be
positive and the distribution center would start to generate significant cash
flow beginning in the fifth quarter of operations. As a result, we believe that
our core business of operating distribution centers is highly cash generative.
If a distribution center is able to generate positive cash flow from operations,
we plan to use the cash flow to fund capital expenditures for other distribution
centers. If a distribution center is able to operate successfully at volumes and
costs expected to be reached through the end of the third year of operation, we
expect that the annualized earnings before interest, taxes, depreciation and
amortization for that distribution center, viewed as a stand-alone business unit
without regard to headquarters' costs, from its launch through the end of that
three-year period, would approximate the expected costs of constructing and
equipping such distribution center. We cannot assure you that our distribution
centers will be able to successfully operate at expected volume or cost levels.
We believe that our success and our ability to achieve profitability at a
distribution center will depend on our ability to:
- substantially increase the number of customers and our average order
size;
- ensure that our technologies and systems function properly at increased
order volumes;
- realize repeat orders from a significant number of customers;
- achieve favorable gross and operating margins; and
- rapidly expand and build out distribution centers in new markets.
To meet these challenges, we intend to continue to invest heavily in
marketing and promotion, distribution facilities and equipment, technology and
personnel. As a result, we expect to incur substantial operating losses for the
foreseeable future and the rate at which such losses will be incurred may
increase significantly from current levels. In addition, our limited operating
history makes the prediction of future results of operations difficult, and
accordingly, we cannot assure you that we will achieve or sustain revenue growth
or profitability.
In connection with the grant of stock options during 1998 and the first six
months of 1999, we recorded deferred compensation of $11.8 million and $17.0
million and compensation expense of $1.1 million and $4.0 million, respectively,
representing the difference between the deemed fair value and the option
exercise price as determined by our Board of Directors on the date of grant. In
connection with the grant of options in the third quarter of 1999, we recorded
additional deferred compensation of $46.6 million. Additionally, in connection
with the terms of employment entered into with George T. Shaheen, in September
1999 we will record immediate compensation for a bonus
26
<PAGE> 29
and options grants in an aggregate amount of approximately $27.0 million and
deferred compensation of approximately $48.0 million. The aggregate deferred
compensation of $123.7 million is being amortized over the four-year vesting
period of the underlying options and will result in compensation expense of
approximately $9.7 million in the quarter ended September 30, 1999.
In connection with the issuance of an option to purchase 150,000 shares of
common stock to Yahoo! Inc. in July 1999 at a price of $3.33 per share, we will
record expense based on changes in the fair value of the stock using an option
pricing model and such expense will be charged as Mr. Koogle serves as a
director of Webvan.
In connection with the warrant issued to Bechtel to purchase 1,800,000
shares of Series C preferred stock at an exercise price of $2.32 per share, the
cost of services provided by Bechtel will include recognition of the changes in
the fair value of the warrant using an option pricing model and following the
applicable accounting guidelines in Emerging Issues Task Force Issue No. 96-18,
or EITF 96-18, "Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Under EITF 96-18, the measurement date for the warrant is July 8, 1999 as that
is the performance commitment date. As of July 8, 1999, we will capitalize the
fair value of the warrant related to 150,000 exercisable shares as deferred
stock-based compensation and will amortize such amount over a five-year period
corresponding to the exclusivity clause of the agreement with Bechtel. No amount
will be capitalized as of that date for the fair value of the warrant related to
the non-exercisable shares, as eventual exercisability is dependent on Bechtel's
performance. Any amounts capitalized based on Bechtel's future performance will
be amortized over the useful life of the distribution centers developed by
Bechtel. If and when the warrant becomes exercisable as to additional shares,
based on Bechtel's performance, we will capitalize additional cost based on the
then fair value of the warrant related to the additional exercisable shares.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1998
NET SALES
Net sales are comprised of the price of groceries and other products we
sell, net of returns and credits. We commenced our grocery delivery service in
May 1999 and commercially launched our Webstore in June 1999. We therefore did
not generate any net sales in 1997 or 1998. We recognize revenue at the time our
products are delivered to customers.
COST OF GOODS SOLD
Cost of goods sold includes the cost of the groceries and other products we
sell as well as payroll and related expenses for the preparation of our home
replacement meals. We did not have any cost of goods sold in 1997 or 1998.
OPERATING EXPENSES
SOFTWARE DEVELOPMENT. Software development expenses include the payroll and
related costs for the team of software developers directly involved in
programming our computer systems. Software development expenses increased to
$3.0 million in 1998 from $0.2 million for the period from inception through
1997. This increase was primarily attributable to increased staffing,
consultants and associated costs related to creating and enhancing the features
and functionality of our Webstore, and implementing our order fulfillment,
inventory, distribution, accounting and delivery systems used to process
customer orders. Costs have been capitalized in accordance with Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" where appropriate. We believe that continued
investment in software development is critical to
27
<PAGE> 30
attaining our strategic objectives and, as a result, expect software development
expenses to increase significantly in future quarters.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
costs related to fulfillment and delivery of products, real estate, technology
operations, equipment leases, merchandising, finance, marketing, and
professional services. General and administrative expenses increased to $8.8
million in 1998 from $2.6 million for the period from inception through 1997.
The payroll expense for general and administrative functions increased by $3.2
million due to an increase in headcount. Consulting and professional expenses
increased by $0.8 million, primarily related to marketing. In addition, rent and
facility charges increased by $1.1 million due to the addition of corporate
office space and the distribution center in Oakland, California. We expect
general and administrative expenses to increase as we expand our staff and incur
additional costs to support the expected growth of our business.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists of earnings on our cash and cash
equivalents and interest payments on our loan and lease agreements. Net interest
income increased to $891,000 in 1998 from $16,000 in the period from inception
through 1997. This increase was primarily attributable to earnings on higher
average cash and cash equivalent balances during 1998.
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
NET SALES
We commenced our grocery delivery service in May 1999 on a test basis to
approximately 1,100 customers and commercially launched our Webstore in June
1999. We did not have any net sales in the six months ended June 30, 1998. We
had net sales of $395,000 in the six months ended June 30, 1999.
COST OF GOODS SOLD
We did not have any cost of goods sold in the six months ended June 30,
1998. Our cost of goods sold was $419,000 in the six months ended June 30, 1999.
OPERATING EXPENSES
SOFTWARE DEVELOPMENT. Software development expenses increased to $6.3
million in the six months ended June 30, 1999 from $0.8 million in the six
months ended June 30, 1998. This increase was primarily attributable to $1.9
million for increased staffing and $3.4 million for consultants related to
enhancing the features, content and functionality of our Webstore and increasing
the capacity of our order processing, distribution center and delivery systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $25.3 million for the six months ended June 30, 1999 from $2.7 million for
the six months ended June 30, 1998. General and administrative expenses
pertaining to our distribution center in the six months ended June 30, 1999
totalled $9.9 million, as compared to zero in the six months ended June 30,
1998. Payroll and related expenses increased by $7.2 million due to increased
staffing at headquarters. Consulting and professional fees related to logistical
and marketing development increased by $1.3 million. Rent and facility charges
increased by $0.8 million due to additional corporate office space.
INTEREST INCOME (EXPENSE) NET
Net interest income increased to $447,000 in the six months ended June 30,
1999 from $285,000 in the six months ended June 30, 1998 primarily due to
earnings on higher average cash and cash equivalent balances.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of preferred stock which through June 30, 1999 totaled $118.3 million (net
of issuance costs). Net cash used in operating activities was $22.6 million in
the six months ended June 30, 1999, $2.2 million in the year ended December 31,
1998, and $2.4 million in the period from inception through 1997. Net cash used
in operating activities for each of these periods primarily consisted of net
losses as well as increases in prepaid expenses, partially offset by increases
in accounts payable, accrued liabilities and depreciation and amortization. The
significant increase in working capital during 1998 was primarily due to
proceeds from the sale of our preferred stock. Net cash used in investing
activities was $42.7 million in the six months ended June 30, 1999, $39.0
million in the year ended December 31, 1998, and $5.3 million in the period from
inception through December 31, 1997. Net cash used in investing activities for
each of these periods primarily consisted of leasehold improvements and
purchases of equipment and systems, including computer equipment and fixtures
and furniture. Net cash provided by financing activities was $73.3 million in
the six months ended June 30, 1999, $52.1 million in the year ended December 31,
1998, and $10.7 million in the period from inception through 1997. Net cash
provided by financing activities during the six months ended June 30, 1999 and
the year ended December 31, 1998 primarily consisted of proceeds from the
issuance of preferred stock of $72.8 million and $34.8 million, respectively. As
of June 30, 1999, we had $21.8 million of cash and equivalents.
In July 1999, we entered into a preferred stock purchase agreement whereby
we sold an aggregate of 21,670,605 shares of our Series D-2 preferred stock to
investors at a price of $12.69 per share for an aggregate purchase price of
approximately $275.0 million.
As of June 30, 1999, our principal commitments consisted of obligations of
approximately $18.2 million outstanding under capital leases and loans. As of
June 30, 1999, we had capital commitments of approximately $20.0 million
principally related to the construction of and equipment for our Atlanta,
Georgia distribution center. We anticipate capital expenditures of up to $150
million for the 12 months ending June 30, 2000. We anticipate a substantial
increase in our capital expenditures and lease commitments to support our
anticipated growth in operations, systems and personnel. The launch of each
distribution center will require us to commit to additional lease obligations
and to purchase equipment and install leasehold improvements.
In July 1999, we entered into an agreement with Bechtel for the
construction of up to 26 additional distribution centers over the next three
years. Although the Company has no specific capital commitment under this
agreement, our expenditures under the contract are estimated to be approximately
$1.0 billion.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through the next 12 to 24 months. We
believe that without the proceeds from this offering, we could continue to fund
our operations for the next 12 months, although our expansion plans would have
to be slowed down or scaled back. Our future long-term capital needs will be
highly dependent on the number and actual cost of additional distribution
centers we open, the timing of these openings and the success of these
facilities once they are launched. Thus, any projections of future long-term
cash needs and cash flows are subject to substantial uncertainty. If the net
proceeds of this offering, together with our available funds and cash generated
from operations are insufficient to satisfy our long-term liquidity
requirements, we may seek to sell additional equity or debt securities, obtain a
line of credit or curtail our expansion plans. However, the terms of our
guaranty of our subsidiary's credit facility contain restrictions on our ability
to incur debt or issue equity securities. In addition, if we issue additional
securities to raise funds, those securities may have rights, preferences or
privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
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YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the financial institutions involved
in processing our customers' credit card payments for Internet services and a
third party that hosts our servers. We are also dependent on telecommunications
vendors to maintain our communications network and suppliers to deliver products
to us.
Since inception, we have internally developed substantially all of the
systems for the operation of our web site. These systems include the software
used to provide our Webstore's search, customer interaction, and
transaction-processing and distribution functions, as well as monitoring and
back-up capabilities. Based upon our assessment to date, we believe that our
internally developed proprietary software is year 2000 compliant, but we cannot
assure you that unanticipated year 2000 problems will not occur.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software for use in our accounting, database and security systems. The failure
of any software or systems upon which we rely to be year 2000 compliant could
have a material negative impact on our corporate accounting functions and the
operation of our web site and distribution system. As part of the assessment of
the year 2000 compliance of these systems, we have sought assurances from these
vendors that their software, computer technology and other services are year
2000 compliant. Because this process was begun recently, we have not yet
received a material number of responses from these vendors. We intend to follow
up with any vendors who have not responded to our request in a timely manner. We
have also engaged consulting firms to assess the year 2000 compliance of two of
our critical systems at a cost estimated at $1.1 million, of which approximately
$300,000 was incurred as of September 23, 1999. Based upon the results of all of
our assessments, we are developing a remediation plan with respect to
third-party software, third-party vendors and computer technology and services
that may fail to be year 2000 compliant. We expect to complete any required
remediation for issues currently identified by the end of October 1999. Based
upon our experience to date, we estimate that the total costs associated with
our Year 2000 compliance efforts will be up to approximately $3.0 million.
The failure of our software and computer systems and of our third-party
suppliers to be year 2000 compliant would have a material adverse effect on us.
The year 2000 readiness of the general system necessary to support our
operations is difficult to assess. For instance, we depend on the integrity and
stability of the Internet to provide our services. We also depend on the year
2000 compliance of the computer systems and financial services used by
consumers. Thus, the system necessary to support our operations consists of a
network of computers and telecommunications systems located throughout the world
and operated by numerous unrelated entities and individuals, none of which has
the ability to control or manage the potential year 2000 issues that may impact
the entire system. Our ability to assess the reliability of this system is
limited and relies solely on generally available news reports, surveys and
comparable industry data. Based on these sources, we believe most entities and
individuals that rely significantly on the Internet are reviewing and attempting
to remediate issues relating to year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of year 2000 issues.
A significant disruption in the ability of consumers to reliably access the
Internet or portions of it or to use their credit cards would have an adverse
effect on demand for our services and would have a material adverse effect on
us. We will be developing a contingency plan based on the results of our year
2000 assessment and remediation efforts. We estimate that the cost of developing
and implementing this plan could be up to an additional $500,000. A reasonable
worst case year 2000 scenario would involve a major failure of our material
systems, our vendors' material systems or the
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Internet to be year 2000 compliant, any of which could have material adverse
consequences for us. These consequences could include refrigeration failures
resulting in spoilage of perishable products and difficulties or interruptions
in operating our web site effectively, taking customer orders, processing orders
in our distribution center, making deliveries or conducting other fundamental
parts of our business.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which defines derivatives, requires that all
derivatives be carried at fair value, and describes the applicability of and
methods for hedge accounting. Webvan will adopt this statement for its fiscal
year ending December 31, 2001. Management has not fully assessed the
implications of adopting this new standard.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Webvan maintains a short-term investment portfolio primarily consisting of
corporate debt securities with maturities of thirteen months or less. These
available-for-sale securities are subject to interest rate risk and will rise
and fall in value if market interest rates change. The extent of this risk is
not quantifiable or predictable due to the variability of future interest rates.
Webvan does not expect any material loss with respect to its investment
portfolio.
Webvan's restricted cash balance is invested in certificates of deposit.
Accordingly, changes in market interest rates have no material effect on
Webvan's operating results, financial condition and cash flows. There is
inherent roll over risk on these certificates of deposit as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable due to the variability of future interest rates.
The following table provides information about Webvan's investment
portfolio, restricted cash, capital lease obligations and long-term debt as of
June 30, 1999, and presents principal cash flows and related weighted averages
interest rates by expected maturity dates.
<TABLE>
<CAPTION>
YEAR OF MATURITY
--------------------------------------------------------- TOTAL
AFTER CARRYING
1999 2000 2001 2002 2003 2003 VALUE
------- ------ ------ ------ ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and Equivalents........... $21,836 -- -- -- -- -- $21,836
Average interest rate........ 4.95% -- -- -- -- -- 4.95%
Corporate Debt Securities...... $14,289 $7,942 -- -- -- -- $22,231
Average interest rate........ 4.81% 5.29% -- -- -- -- 4.98%
Restricted Cash -- Certificates
of Deposit................... $ 3,453 -- -- -- -- -- $ 3,453
Average interest rate........ 4.52% -- -- -- -- -- 4.52%
Capital Lease Obligations...... $ 299 $ 669 $ 773 $ 734 $ 283 -- $ 2,758
Average fixed interest
rate....................... 15.75% 15.77% 15.81% 15.28% 13.81% -- 15.45%
Long-term Debt................. $ 1,476 $3,931 $4,570 $5,140 $ 55 $ 6 $15,178
Average fixed interest
rate....................... 16.22% 16.24% 16.24% 16.25% 9.68% 8.57% 16.21%
</TABLE>
Fair value approximates carrying value for the above financial instruments.
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BUSINESS
Webvan is an Internet retailer offering same-day delivery of consumer
products through an innovative proprietary business design that integrates our
Webstore, distribution center and delivery system. Our current product offerings
are principally focused on food, non-prescription drug products and general
merchandise.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND E-COMMERCE
The rapid growth of the Internet and e-commerce is revolutionizing the way
in which businesses and consumers communicate, share information and conduct
business. International Data Corporation estimates that there were 63 million
web users in the United States at the end of 1998 and anticipates this number
will grow to approximately 177 million users by the end of 2003. This growth in
Internet usage is being fueled by a number of factors, including:
- a large and growing installed base of personal computers in the workplace
and at home;
- advances in the performance and speed of personal computers and modems;
- improvements in network security, system and bandwidth;
- faster, easier and cheaper access to the Internet;
- proliferation of content and services being provided on the Internet; and
- consumers' growing level of comfort and experience with e-commerce.
The unique characteristics of the Internet create a number of advantages
for online retailers and have dramatically affected the manner in which
companies distribute goods and services. Specifically, online retailers use the
Internet to:
- provide consumers with a broad selection of products and services,
increased information and enhanced convenience;
- operate with reduced overhead costs and greater economies of scale;
- frequently adjust featured selections, editorial content and pricing,
providing significant merchandising flexibility;
- "display" a larger number of products than traditional retailers at lower
cost; and
- obtain demographic and behavioral data about customers, increasing
opportunities for direct marketing and personalized services.
The Internet provides a powerful and convenient means for consumers to
order products and services. As a result of the increased use of the Internet
and the benefits of online retailing, consumer spending on the Internet is
growing rapidly. International Data Corporation estimates that consumer
purchases of goods and services over the Internet in the U.S. will increase from
$12.4 billion in 1998 to $75.0 billion in 2003. In addition, Forrester Research
estimates that online grocery spending in the U.S. will grow from $235 million
in 1998 to $10.8 billion by 2003 which will represent only 2% of the total
market for grocery products in 2003.
TRADITIONAL GROCERY RETAILING
The U.S. grocery market is large, with retail supermarket sales equal to
approximately $449 billion in 1998, according to Progressive Grocer. In
addition, the market for prepared meals or "home meal replacements" is growing
rapidly and, according to ACNielsen, comprises an incremental $100 billion
segment of the food industry. According to the National Association of Chain
Drugstores, traditional drugstore sales, including prescription drugs, were
approximately $106 billion in 1998. Based on this
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industry data, the combined market for groceries, drugstore merchandise and
prepared meals was over $650 billion in 1998, which we believe is the largest
opportunity in the e-commerce consumer category.
Many consumers find supermarket shopping to be a time-consuming and
inconvenient experience. Traditional store-based supermarkets face many
challenges in providing a satisfying shopping experience for consumers. Physical
space availability in stores limits the number of products supermarkets can
offer and reduces merchandising flexibility. This forces traditional store-based
supermarkets to limit their product selection to the most popular products,
further impairing customer selection. Traditional grocery retailers also face
significant costs associated with building and operating large brick and mortar
stores, including costs associated with personnel, real estate, construction,
store set-up, inventory and fixed assets. The challenges facing these
traditional retailers have created an opportunity for online grocery retailers
to provide a more compelling and cost-effective solution.
The Internet provides a medium that could significantly improve the
consumer grocery shopping experience. The Internet provides 24-hour shopping
convenience and the ability to monitor order and information accuracy, and
eliminates the need to wait in line. With an efficient business model, online
retailers will also be able to reduce labor, real estate and other operating
costs.
ONLINE GROCERY RETAILING
Consumers are increasingly seeking a grocery shopping solution which will
allow them to save time and effort without sacrificing the wide selection, high
quality and low cost they have come to expect from traditional supermarkets. We
believe that market demand for high-quality reliable grocery services is
enormous and is very much like the pent-up demand for high-quality
wide-bandwidth communication. However, we cannot assure you that our assessment
of the demand for online grocery services will prove to be accurate or that such
market demand will emerge in the short-term or at all. Attempting to capitalize
on the benefits of the Internet, several companies, including NetGrocer and
Peapod, have begun offering a variety of grocery products online. Many of these
services charge membership, delivery or service fees and often offer many of
their goods at prices higher than those of traditional supermarkets. In
addition, many of these online grocery efforts only offer a limited selection of
products, do not offer frozen foods or perishables and do not stock a wide range
of high-end items such as wine, prepared meals and specialty products. These
online grocers generally do not offer same-day delivery and guarantee delivery
within narrow time parameters. Many of these early online grocers currently lack
a highly automated distribution and delivery model which would enable rapid and
efficient expansion on a national level. As a result, these companies rely on
manual systems to fill the orders they receive over the Internet and often rely
on third parties to deliver orders to their customers.
THE WEBVAN SOLUTION
Our online shopping experience offers customers a broad selection of
high-quality, competitively priced grocery and related product offerings
delivered directly and conveniently to their homes. Our Webstore is designed to
create a user-friendly, informative and personalized shopping experience for
customers while providing them with the time savings and convenience of shopping
online. We believe that our innovative business design addresses the challenge
of e-commerce fulfillment by integrating a retail web site with an advanced
distribution center and delivery system which enable us to efficiently fill a
high volume of orders and deliver products to our customers on the same day. Our
delivery channel also enables us to create brand awareness and customer loyalty
that we believe will help to strengthen our market position.
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Our solution provides customers with the following key benefits:
- prices that are generally at or below everyday supermarket prices;
- a broad selection of high quality products;
- no membership or service fees and no delivery fees for orders over $50;
and
- same-day home delivery within a customer-selected 30-minute window.
The principal components of our solution include our:
BROAD SELECTION OF HIGH QUALITY PRODUCTS AT COMPETITIVE PRICES. Our
scalable Webstore and distribution system are designed to enable us to offer
over 50,000 different items to our customers. As of September 30, 1999, we were
offering consumers a broad selection of approximately 18,000 grocery and
specialty items including:
- farm fresh produce;
- premium meats hand cut in our butcher shop;
- fresh fish and other seafood including live lobsters;
- a variety of chef-prepared meals;
- bakery items including specialty breads, bagels and pastries;
- non-perishable grocery items typically found in large supermarkets;
- non-prescription drug products and health and beauty items;
- specialty items including fine wines and premium quality cigars; and
- general merchandise such as office products and small appliances.
From July 10, 1999 through September 18, 1999, produce represented
approximately 17% of our revenue. According to Progressive Grocer, in 1998,
produce represented approximately 10% of revenue of traditional grocers. Since
we only commenced operations on June 2, 1999, the percentage of our revenue from
produce is derived from very limited data and is expected to fluctuate from
period to period. As a result, we cannot assure you that the percentage of our
revenue from produce will remain at approximately 17% in the future.
INTERACTIVE AND PERSONALIZED WEBSTORE. Our Webstore is an easy-to-use
online alternative to the traditional supermarket providing customers with
significant time savings and convenience. The Webstore is organized to provide
information about the products we sell as well as interesting generalized
content. We believe our Webstore promotes customer loyalty by making the grocery
shopping experience easier for the consumer. Through our Webstore, consumers can
personalize their shopping experience by creating their own shopping lists and
by spending as much or as little time browsing and selecting products as is
appropriate for their specific needs. Customers may shop for products by:
- browsing clearly organized categories such as Produce, Meat and Seafood,
Prepared Food or Health and Beauty;
- going directly to a specific product by using our keyword search
technology; or
- accessing one of their personal shopping lists for immediate purchase or
editing.
Our Webstore utilizes a proprietary logistics technology to offer a
delivery window to the customer. A point-and-click time schedule will indicate
to the customer the 30-minute delivery slots which are currently available in
their specific location, based on the time of day, location and items purchased.
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HIGHLY AUTOMATED DISTRIBUTION CENTER. Our technologically advanced
distribution center is highly automated and is designed to provide economies of
scale and create significant cost savings compared to traditional supermarkets
and existing online grocers. Our distribution center is designed to process
product volumes equivalent to approximately 18 supermarkets and allow for a
highly flexible inventory selection of over 50,000 SKUs. The distribution center
is designed to fill customer orders using proprietary software and labor-saving
automation technology such as carousels and conveyors which bring individual
products directly to the worker, compared to traditional warehouse designs which
require the worker to move throughout rows of products to fill individual
orders. Our first distribution center is located in Oakland, California and
serves the San Francisco Bay Area. We plan to open a second distribution center
in Atlanta, Georgia in the second quarter of 2000 and to further expand with
distribution centers in other key geographic markets.
Our distribution center is designed to accommodate both a wide product
selection as well the finest in product quality. The design allows for
appropriate storage temperatures for individual product categories including
produce, meats and frozen foods and enables us to offer specialty products such
as premium wines and cigars. In addition to product storage, our distribution
center is designed with food preparation facilities which allow us to offer
chef-prepared meals, individually cut meats and fish and made-to-order fruit
baskets.
We have designed our initial distribution center in Oakland, California to
be a prototype that we can readily replicate in other locations. In July 1999,
we entered into an agreement with Bechtel Corporation for the construction of up
to 26 additional distribution centers for us over the next three years. These
distribution centers may not necessarily be in 26 different markets.
EFFICIENT DELIVERY PROCESS. To facilitate rapid and predictable product
delivery to the customer's home, we utilize a hub-and-spoke fulfillment model
that is designed to minimize product and order handling. Customer orders are
packaged in individual plastic containers or "totes" at the distribution center,
or hub, and are transferred by temperature-controlled trucks to local stations,
or spokes. At the local stations, the totes are transferred to smaller
temperature-controlled vans for delivery to the home. Each distribution center
will supply shipments to up to 10 - 12 stations, varying by market, which will
be strategically positioned throughout a particular delivery region within an
approximate 50 mile radius of each distribution center. Our hub-and-spoke model,
centralized order fulfillment and decentralized delivery, combined with our
proprietary route and load planning technology allows for a highly efficient,
low cost fulfillment solution. As a result of our automated distribution center
and efficient delivery process, our produce and other grocery products are
handled an average of eight times compared to an average of 14 times for a
traditional supermarket that utilizes typical distribution channels. We believe
that reduced handling enables us to deliver better quality produce to the
consumer than traditional grocery retailers.
SUPERIOR CUSTOMER SERVICE. Our home delivery model also provides us with an
important opportunity to interact with our customers. Because of the high
frequency of grocery purchases, our couriers will be able to help continually
reinforce our brand with the customer. Our couriers are valued employees and are
incentivized with competitive salaries and stock options. Our couriers have also
been trained to answer questions about the service and handle routine service
issues directly and promptly at the customer residence. Each courier
communicates with the route planning and delivery scheduling systems throughout
the delivery process through the use of a wireless mobile field device. If the
customer is not satisfied with the products received, the courier is able to
initiate a transaction to replace items or credit the customer's bill. We
believe this approach helps develop couriers who are highly focused on customer
service and on creating long-term consumer relationships.
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STRATEGY
Our objective is to be the leading online retailer offering same-day
delivery of consumer products. Our current product offerings are principally
focused on food, non-prescription drug products and general merchandise. The key
elements of our strategy are as follows:
BUILD BRAND AWARENESS AND MARKET SHARE. We intend to establish Webvan as
the leading brand for buying groceries and consumer goods over the Internet for
home delivery. Through our public relations programs, advertising campaigns,
promotional activities and media relationships, we plan to generate brand
awareness and drive customer trials of our services. Our efforts will focus on
building credibility with customers and achieving market acceptance for our
services. We will pursue online and traditional media marketing strategies on a
regional basis to achieve these results.
DELIVER SUPERIOR CUSTOMER SERVICE AND OPERATING PERFORMANCE. We intend to
offer our customers a compelling shopping experience by delivering orders on an
accurate, timely and reliable basis. We will strive to continuously improve our
delivery and service performance to enhance the customer experience. We are
focused on building strong, lasting customer relationships which will drive
repeat purchases and higher average order sizes. By interacting directly with
customers on a regular basis and providing high quality service, we believe we
will promote customer loyalty and establish Webvan as the leading online
retailer and distribution company providing same-day delivery direct to the
customer.
LEVERAGE EFFICIENT BUSINESS DESIGN. We have designed a proprietary business
system which integrates our interactive Webstore, distribution center and
delivery system. This design addresses the challenge of Internet commerce
fulfillment by providing a highly efficient means of delivering goods directly
to the homes of consumers on the same day that an online order is placed. Our
software, automated distribution center and hub and spoke delivery system were
designed to accommodate a high volume of orders and to enable us to offer over
50,000 different items to our customers. We believe that our highly automated
order fulfillment systems provide us with an advantage compared to our online
competitors which generally rely on manual order fulfillment systems.
REPLICATE DISTRIBUTION CENTER AND DELIVERY SYSTEM IN ADDITIONAL GEOGRAPHIC
MARKETS. We believe that our compelling product and service offerings combined
with the broad scope of the Internet present opportunities to expand to
additional locations in major cities in the U.S. Our distribution center and
delivery system are designed to be readily replicated and we plan to pursue an
aggressive expansion strategy by opening additional distribution centers in key
geographic markets beginning in the second quarter of 2000. In July 1999, we
entered into an agreement with Bechtel Corporation for the construction of up to
26 additional distribution centers over the next three years. These distribution
centers may not necessarily be in 26 different markets. We believe that our
alliance with Bechtel will enable us to more aggressively roll out distribution
centers in other markets by utilizing Bechtel's engineering, design, procurement
and construction expertise. After we have begun operating in additional markets,
we may eventually construct additional distribution centers in some of our
existing markets if there is sufficient demand for our service. In selected
large markets, we may construct up to four to six distribution centers over a
period of several years if there is sufficiently high demand for our service in
those markets.
LEVERAGE DISTRIBUTION SYSTEM TO ENTER ADDITIONAL CONSUMER PRODUCT
CATEGORIES. We intend to use our distribution system to sell products in other
consumer product categories to achieve additional revenue opportunities. While
our initial product focus is on groceries, non-prescription drugs and general
merchandise, we plan to identify and pursue new product category opportunities.
We believe that our same-day distribution system can position us as a preferred
online provider for many consumer products that can be delivered to the home.
THE WEBVAN WEBSTORE
Our Webstore is a user-friendly, informative and personalized web site
which enables users to quickly and easily navigate and purchase from a wide
selection of items. The Webstore makes the
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shopping experience easy for the customer by offering them multiple methods for
shopping the site. The store directory is divided into eleven intuitively
organized categories and allows the customer to quickly and efficiently find
items. Once customers find the item they want, they may add it to the shopping
cart or may save it to a shopping list. The shopping cart is always visible on
the screen and instantly updates and calculates the order total while the
customer shops. Our Webstore promotes brand loyalty and repeat purchases by
providing a convenient, easy-to-use experience that encourages customers to
return frequently.
HOME PAGE. Our home page serves as the entry point and gives visitors a
glimpse of the wide selection available on the site. On our home page, customers
find weekly specials on brand name products, a clearly defined directory
structure and links that showcase specific products and areas of the site.
BROWSING. Our Webstore displays a store directory which allows visitors to
browse through all the categories of products Webvan offers. The categories are
intuitively organized by type of product and enable the user to drill down from
general to more specific categories, such as moving from produce to fruits to
bananas. The browsing tool also enables customers to see all products in a
particular category before making a selection, similar to scanning the shelves
of a neighborhood store. In addition, each item on the site has an image and
some have nutritional information attached, which further enhances the user
experience.
SEARCHING. Our Webstore contains an interactive, searchable database of
over 18,000 SKUs. The customer can search based on product type, brand name or
category. The search results page displays each relevant item, along with the
product category and subcategories.
CONTENT AND FEATURES. Webvan offers an array of content on the site to
enhance the user experience and encourage visitors to try new items. Our weekly
electronic magazine, Sensations, features special recipes, cooking tips,
features authored by food and health experts, and the opportunity to interact
with culinary professionals. As we accumulate data, our Webstore can be
personalized to appeal to individual customer preferences and buying habits.
PERSONALIZATION AND LISTS. Our Webstore enables a customer to personalize
their shopping experience. The site's shopping list feature allows customers to
create and retain personal shopping lists in their profiles. Multiple lists can
be saved for weekly shopping, specific events or special occasions. Once a list
has been created and saved, it can be retrieved and modified at any time,
enabling customers to shop and check out in a few minutes. We believe that the
personalization of a customer's shopping experience is an important element of
our value proposition and we intend to continue to enhance our personalization
services.
DELIVERY. Customers schedule their delivery by selecting a time from a grid
of 30-minute alternatives. Our real-time inventory tracking and delivery route
software systems are designed to help ensure that the groceries a customer
orders will be available so that they can be delivered at the delivery time
window selected by the customer. Using this system, the customer is able to
select and schedule a delivery to occur within an available specific 30-minute
window, on the same day or up to four days after the order is placed. Deliveries
are currently made from 1:30 p.m. to 10:00 p.m. on Tuesday through Friday and
from 9:00 a.m. to 5:00 p.m. on Saturday. As we increase the number of orders we
process per day, we expect to make deliveries on Tuesday through Friday from
9:00 a.m. to 10:00 p.m. and maintain our current Saturday delivery times. Our
customers must be at home to accept delivery of perishable or frozen items or
regulated products such as alcohol and tobacco. Non-perishable items may be
delivered when the customer is not home.
Since our commercial launch through September 30, 1999, approximately 92%
of our orders have been delivered on time during the customer-selected delivery
window. While approximately 99% of our orders were delivered on time from August
18, 1999 through September 17, 1999, our on-time delivery rate has fluctuated
significantly since our commercial launch, and we expect it to fluctuate in the
future on a daily basis. For example, during the month of September 1999,
approximately 93% of
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our orders were delivered on time. In addition, during the month of September
1999, approximately 99% of items ordered were filled accurately by our system,
while from our commercial launch through September 30, 1999, our accuracy rate
was approximately 98%. The accuracy of this system has fluctuated from time to
time and there can be no assurance that this system will continue to operate at
or near 99% efficiency. Any material decrease in our on-time delivery rate or in
order fulfillment accuracy would likely have an adverse impact on our consumer
acceptance of our service, and a prolonged decline in our on-time delivery rate
or in order fulfillment accuracy would have an adverse impact on our financial
results. On occasion, we have experienced operational "bugs" that have resulted
in a high proportion of late deliveries or order fulfillment inaccuracies on
particular days. Operational bugs may arise from one or more factors including
electro-mechanical equipment failures, computer server or system failures,
network outages, software performance problems or power failures. To date, these
bugs have been corrected in a short period of time by Webvan employees and have
not resulted in any long term impact on our operations.
TECHNOLOGY
We have developed a technologically advanced systems platform, which
integrates our entire business process from end to end. We have built an array
of proprietary advanced inventory management, warehouse management, route
management and materials handling systems and software to manage the entire
customer ordering and delivery flow process. Our proprietary automated materials
handling controller communicates with the Webstore and warehouse management
system and issues instructions to the various mechanized areas of the
distribution center to ensure the proper fulfillment of orders. We designed the
system to utilize automated conveyors and carousels to transport items to a few
centrally located employees. As a result, the system allows us to increase
volume without a proportionate increase in human resources.
Once a delivery is scheduled, a route planning feature of the system
determines the most efficient route to deliver goods to the customer's home. The
courier communicates with the route planner and delivery scheduler modules
throughout the delivery process through the use of a wireless mobile field
device. Each aspect of this process is tightly integrated and enables us to
provide high quality service to our customers.
We have devoted over 50 person years of effort to our software development
effort. Our software development expenses were $244,000 in 1997, $3,010,000 in
1998 and $6,308,000 for the six months ended June 30, 1999.
We outsource most of our network operations functions and employ our own
customer services personnel. The continued uninterrupted operation of our
Webstore and transaction-processing systems is essential to our business, and it
is the job of the site operations staff to ensure, to the greatest extent
possible, the reliability of our Webstore and transaction-processing systems.
Webvan's web and database servers are hosted at Exodus Communications, Inc. in
Santa Clara, California.
DISTRIBUTION CENTER ROLL OUT
We currently operate a 336,000 square foot distribution center facility in
Oakland, California. The distribution center was designed to process product
volumes equivalent to approximately 18 supermarkets and is the hub for the
receipt and distribution of products and allows for efficient sorting and
distribution of products. The distribution center is a clean, climate-controlled
facility segmented into separate ambient, refrigerated and frozen areas that
store grocery items at optimal temperatures. Identical software systems will be
implemented at each distribution center, enabling the easy replication of the
distribution center model across multiple locations and allowing for central
management of the entire system. Each distribution center, together with the
related stations and delivery infrastructure, is expected to be staffed with
approximately 900 employees when operating near its designed capacity. Based on
our analysis of publicly available data from traditional supermarkets, the
operation of 18 supermarkets would require up to 2,700 employees.
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We intend to pursue a roll out of distribution centers into various
locations in the U.S. to capitalize on what we view as a substantial market
opportunity. Our first facility in Oakland, California was commercially launched
in June 1999. We currently plan to open an additional distribution center in the
Atlanta market in the second quarter of 2000 and in the Chicago and Seattle
markets later in 2000, as well as seven additional distribution centers in 2001.
The cost of the construction of and equipment for each additional distribution
center under our contract with Bechtel is estimated at $25.0 million to $35.0
million based on our experience to date and on efficiencies we expect to result
from our relationship with Bechtel. Based on our analysis of public information,
we believe that if our distribution center can generate annual revenue of
approximately $300 million, our revenue to capital expenditure ratio will be
approximately three times that of a traditional supermarket. We plan to locate
our distribution centers in industrially zoned areas, which generally have lower
real estate costs than traditional supermarkets located in commercial areas.
Specifically, when our distribution center is operating at its designed
capacity, we currently estimate that our real estate rental costs related to
such distribution center and related stations will be less than 1% of the
revenue from such distribution center. This compares to real estate rental costs
of approximately 4% to 6% of revenue for traditional supermarkets based on our
analysis of current real estate costs in the San Francisco Bay Area. If our
distribution center does not operate at its designed capacity or if our average
order size is less than expected, our real estate costs as a percentage of
revenue could be substantially higher than 1%, which could have a material
adverse effect on our results of operations. Additionally, our real estate
rental costs will likely vary as a percentage of revenue based on geographic
location.
In July 1999, we entered into an agreement with Bechtel Corporation for the
construction of up to 26 additional distribution centers after Atlanta over the
next three years in various locations that we designate. We believe that our
alliance with Bechtel will enable us to more aggressively and cost-effectively
roll out distribution centers in other markets by utilizing their engineering,
design, procurement and construction expertise. Bechtel will be responsible for
substantially all aspects of the build-out program and will deliver completed
distribution centers to Webvan. Bechtel will also leverage its strengths in
engineering management to incorporate improvements to the design of our
distribution centers. Bechtel is to perform such services within schedule and
budgetary parameters determined by Webvan, and will be eligible to receive cash
incentive payments to the extent distribution centers are completed within the
preestablished parameters. Under our agreement with Bechtel, Bechtel has agreed
not to provide substantially similar services to any other entity operating in a
number of Internet retail segments. We also issued Bechtel a warrant to purchase
up to 1,800,000 shares of our stock. The warrant has been exercised as to
150,000 shares and becomes exercisable as to 150,000 additional shares when the
first six distribution centers are completed and as to an additional 57,690
shares upon the completion of each distribution center within agreed upon
schedule and budgetary parameters.
We currently obtain all of our carousels for our distribution centers from
Diamond Phoenix Corporation. Under our agreement with Diamond Phoenix, Diamond
Phoenix has agreed not to sell carousels to any other entity operating in a
number of Internet retail segments. In the event that the supply of carousels
from Diamond Phoenix were delayed or terminated for any reason, the Company
believes that it could obtain similar carousels from other sources; however, the
integration of such other carousels into our distribution centers could result
in construction delays and could require modifications to our software systems.
Accordingly, any such delay or termination of our relationship with Diamond
Phoenix could cause a material delay in our planned expansion program. In
addition, in connection with this arrangement, we made a minority equity
investment in Diamond Phoenix.
DELIVERY OPERATIONS
The distribution center will serve as the center of our hub-and-spoke
delivery system. Orders are collected from the Webstore, routed and managed by
the distribution center, transferred to stations and delivered from the stations
to customers' homes. This model enables us to efficiently and cost effectively
deliver consumer goods to the home by combining centralized order fulfillment
with
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decentralized delivery. We use temperature-controlled trucks to deliver from the
distribution center to the station and smaller vans to deliver from the station
to the home. The stations are strategically positioned throughout a delivery
region within approximately 50 miles of a distribution center and typically
within approximately 10 miles of target customer residences. In our initial
market in the San Francisco Bay Area, we have 12 stations and expect future
distribution centers to support from 12 to 15 stations. We deliver to the
customer's door in a smaller van complete with refrigeration equipment to keep
chilled and frozen items at temperatures that insure their quality and
freshness. Each customer's order is delivered in environmentally-friendly
reusable containers, called totes.
All of our couriers are Webvan employees. We utilize strict hiring
standards in choosing couriers and require each new employee to complete an
intensive training program. The courier training lasts three weeks and includes
32 hours of classroom training, 24 hours of driving training and 16 hours of on
the job training. Couriers are trained in responsible driving practices,
courtesy and the proper handling of totes and products. Our couriers receive a
competitive compensation package, including cash and stock options, and are
incentivized to reinforce our brand and help to create a lasting one-to-one
relationship with our customers. In addition, couriers have been trained to
answer questions about the service and handle service issues directly and
promptly at the customer residence. If the customer is not satisfied with the
products received, the courier is able to initiate a transaction to replace
items or credit the customer's bill.
CUSTOMER SERVICE
We believe that our ability to establish and maintain long-term
relationships with our customers and to encourage repeat visits and purchases
depends on the strength of our customer support and service operations and
staff. We seek to achieve frequent communication with and feedback from our
customers to continually improve the Webvan service. Webvan offers a number of
automated help options on the website and an easy-to-use direct email service to
enable customers to ask questions and to encourage feedback and suggestions. We
plan to respond to customer email inquiries within 12 hours of the submission
and allow for a maximum response time of 24 hours. Our team of customer support
and service personnel are responsible for handling general customer inquiries,
answering customer questions about the ordering process, and investigating the
status of orders, deliveries and payments. Users can contact customer service
representatives via our toll free telephone number to ask questions. Our
automated customer service function distributes emails to customers after
registration and after each order is placed. We plan to enhance the automation
of the tools used by our customer support and service staff in the future.
MARKETING AND PROMOTION
Our marketing and promotion program is designed to strengthen the Webvan
brand name, drive trials of our service in our target markets, build strong
customer loyalty and maximize repeat usage and purchases. We intend to build our
brand name and customer loyalty through our public relations programs,
advertising campaigns and promotional activities. Our efforts will focus on
building credibility with customers and achieving market acceptance for our
services. We expect to advertise locally in our initial launch markets and plan
to tailor our advertising to each specific market. In addition, we plan to
leverage our relationships with our media investors, including CBS and Knight-
Ridder, for television, online and print advertising opportunities.
In the future, Webvan expects to be able to provide increasingly targeted
and customized services by using the customer purchasing, preference and
behavioral data obtained through the traffic and purchases generated at the
Webstore. We also build brand loyalty though personalized interaction with
customers through prompt, professional delivery persons and through use of
Webvan delivery vehicles. By offering customers a compelling and personalized
value proposition, our goal is to increase the number of visitors that make a
purchase, to encourage repeat visits and purchases and to extend customer
retention. In addition, loyal, satisfied customers generate strong word-of-mouth
support and awareness which drive new customer acquisitions and increased order
volumes.
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MERCHANTS AND VENDORS
Webvan sources products from a network of food and drug manufacturers,
wholesalers and distributors. We currently rely on rapid fulfillment from
national and regional distributors for a substantial portion of our items. We
purchase a number of top brands and high volume items directly from
manufacturers and may increase our use of direct suppliers as our product
volumes increase with additional distribution centers. We also utilize premium
specialty suppliers or local sources for gourmet foods, farm fresh produce,
fresh fish and meats. Because we cover a broad area and service high volumes
from a single point of distribution, we offer our suppliers a very efficient
product supply model which is reflected in the discounts and pricing we receive.
When we select a new product for purchase, it is entered into the inventory
management system and our Webstore. We employ advanced replenishment and
expiration date controls to manage our inventory and maintain product freshness.
We estimate that a distribution center operating at its designed capacity would
turn inventory 24 times annually, compared to the 9 to 11 times of traditional
supermarkets based on our analysis of publicly available data for such
supermarkets. Due to our limited operating history, we cannot assure you that
our distribution center will ever operate at or near its designed capacity or
that our inventory will turn at or near 24 times annually. As of June 30, 1999,
we were purchasing products from 10 distributors and directly from over 160
vendors.
COMPETITION
We believe that our business design currently provides us with a two-year
head start compared to our potential competitors which may seek to replicate our
business design of a retail website integrated with a highly automated
distribution center and a hub and spoke delivery system. However, the grocery
retailing market is extremely competitive, and we expect our competitive
advantage to erode rapidly. Local, regional, and national food chains,
independent food stores and markets, as well as online grocery retailers
comprise our principal competition, although we also face substantial
competition from convenience stores, liquor retailers, membership warehouse
clubs, specialty retailers, supercenters, and drugstore chains. Many of our
existing and potential competitors, particularly traditional grocers and
retailers, are larger and have substantially greater resources than we do. We
expect this competition will intensify as more traditional and online grocery
retailers offer competitive services. In addition, although no traditional
supermarket chain has introduced an Internet based service on a large scale, we
expect competition from such retailers to intensify in the near future.
Our initial distribution center in Oakland, California, operates in the San
Francisco Bay Area market. In this market, we compete primarily with traditional
grocery retailers and with online grocers NetGrocer and Peapod. We estimate that
as of the date of this prospectus, our potential competitors in markets other
than the San Francisco Bay Area include between five and ten full-service
grocery retailers operating exclusively online. The number and nature of
competitors and the amount of competition we will experience will vary over time
and by market area. In other markets, we expect to compete with current online
offerings from these companies and others, including HomeGrocer, HomeRuns and
Streamline. Many of these services charge membership, delivery or service fees,
and often offer their goods at a premium to traditional supermarkets. In
addition, most competing online retailers, including Peapod, currently use
manual shopping and retrieval systems which we believe lack the capability to
process a large number of orders for a large number of customers in a cost
efficient manner.
The principal competitive factors that affect our business are location,
breadth of product selection, quality, service, price and consumer loyalty to
traditional and online grocery retailers. We believe that we compete favorably
with respect to each of these factors as compared to other online grocery
retailers. However, many traditional grocery retailers may have substantially
greater levels of consumer loyalty and serve many more locations than we
currently do. If we fail to effectively compete in any one of these areas, we
may lose existing and potential customers which would have a material adverse
effect on our business, net sales and operating margins.
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We also compete to retain customers once they have registered for Webvan's
services. Generally, online subscriber attrition rates, or the rates at which
subscribers cancel an online service, are high. High rates of member attrition
could have a material adverse effect on our net sales and business.
GOVERNMENT REGULATION
In addition to regulations applicable to businesses generally or directly
applicable to electronic commerce, we are subject to a variety of regulations
concerning the handling, sale and delivery of food, alcohol and tobacco
products. As of the date of this prospectus, we are not subject to regulation by
the United States Department of Agriculture, or USDA. Whether the handling of
certain food items in our distribution facility, such as meat and fish, will
subject us to USDA regulation in the future will depend on several factors,
including whether we sell food products on a wholesale basis or whether we
obtain food products from non-USDA inspected facilities. Although we have
designed our food handling operations to comply with USDA regulations, we cannot
assure you that the USDA will not require changes to our food handling
operations. We will also be required to comply with local health regulations
concerning the preparation and packaging of our prepared meals and other food
items. Any applicable federal, state or local regulations may cause us to incur
substantial compliance costs or delay the availability of a number of items at
one or more of our distribution centers. In addition, any inquiry or
investigation from a food regulatory authority could have a negative impact on
our reputation. Any of these events could have a material adverse effect on our
business and expansion plans and could cause us to lose customers.
We will be required to obtain state licenses and permits for the sale of
alcohol and tobacco products in each location in which we seek to open a
distribution center. We cannot assure you that we will be able to obtain any
required permits or licenses in a timely manner, or at all. We may be forced to
incur substantial costs and experience significant delays in obtaining these
permits or licenses. In addition, the United States Congress is considering
enacting legislation which would restrict the interstate sale of alcoholic
beverages over the Internet. Changes to existing laws or our inability to obtain
required permits or licenses could prevent us from selling alcohol or tobacco
products in one or more of our geographic markets. Any of these events could
substantially harm our net sales, gross profit and ability to attract and retain
customers.
The adoption of laws or regulations relating to large-scale retail store
operations could adversely affect the manner in which we currently conduct our
business. For example, the Governor of California recently vetoed legislation
which would have prohibited a public agency from authorizing retail store
developments exceeding 100,000 square feet if more than a small portion of the
store were devoted to the sale of non-taxable items, such as groceries. While it
is not clear whether our operations would be considered a retail store for
purposes of this kind of legislation, we cannot assure you that other state or
local governments will not seek to enact similar laws or that we would be
successful if forced to challenge the applicability of this kind of legislation
to our distribution facilities. The expenses associated with any challenge to
this kind of legislation could be material. If we are required to comply with
new regulations or legislation or new interpretations of existing regulations or
legislation, this compliance could cause us to incur additional expenses or
alter our business model.
In addition, because of the increasing popularity of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties. We
do not currently provide personal information regarding our users to third
parties. However, the adoption of such consumer protection laws could create
uncertainty in web usage and reduce the demand for our products and services.
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We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted prior
to the wide use of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address these issues could create uncertainty in the Internet market
place. This uncertainty could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs.
INTELLECTUAL PROPERTY
We regard patent rights, copyrights, service marks, trademarks, trade
secrets and similar intellectual property as important to our success. We rely
on patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees, customers, partners
and others to protect our proprietary rights; however, the steps we take to
protect our proprietary rights may be inadequate. We have filed trademark
registration applications for the marks "WEBVAN", "WEBVAN.COM", the Webvan logo
and "THE ONLY .COM YOU REALLY NEED". We currently have no patents protecting our
technology. From time to time, we have filed and expect to file patent
applications directed to aspects of our proprietary technology. We cannot assure
you that any of these applications will be approved, that any issued patents
will protect our intellectual property or that any issued patents or trademark
registrations will not be challenged by third parties. In addition, other
parties may independently develop similar or competing technology or design
around any patents that may be issued to us.
EMPLOYEES
As of September 30, 1999, we had 630 full-time employees consisting of 71
in software development, 128 in operations and administration, 29 in
merchandising, 16 in marketing and 386 at our distribution center in Oakland. We
expect to hire additional personnel at our Oakland facility and to staff our
other distribution centers as they are opened. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our employee relations to be good.
DEVELOPMENT OF OUR BUSINESS
We believe that due to our current cash position, which includes the
proceeds from the sale of our preferred stock in July and August 1999, and our
flexibility with respect to the number and timing of additional distribution
centers we open, the net proceeds of this offering, together with our available
funds, will be sufficient to meet our anticipated needs for working capital and
capital expenditures through the next 12 months. Our future long-term capital
needs will be highly dependent on the number and cost of additional distribution
centers we open, the timing of these openings and the success of these
facilities once they are launched. During this time, we expect to incur product
development costs related to the continued development of our software systems,
including enhancements to our order fulfillment, distribution, inventory and
delivery systems and to the features and functionality of our Webstore. We also
plan to undertake the construction and equipping of up to 26 distribution
centers over the next 3 years pursuant to our agreement with Bechtel
Corporation. This expansion program will result in a material increase in our
number of employees as we staff our new distribution centers and add personnel
engaged in software development, operations and administration, marketing and
merchandising.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently a party to
any material litigation.
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FACILITIES
Our corporate offices are located in Foster City, California, where we
lease a total of approximately 7,400 square feet under leases that expire in May
2002. We recently signed a lease for approximately 55,000 square feet of office
space in Foster City, California that expires in November 2011, and we will be
relocating our corporate offices to this facility in the fourth quarter of 1999.
In addition, we recently signed two leases, which expire in August 2001 and
November 2012 for an aggregate of approximately 108,000 square feet of office
space in Foster City, California which we anticipate will satisfy our corporate
office space needs for the foreseeable future.
We lease approximately 336,000 square feet in Oakland, California for our
distribution center under a lease that expires in June 2008, with an option to
extend the lease for an additional five years. We also lease an aggregate of
approximately 106,000 square feet for 16 local facilities for distribution in
the San Francisco Bay Area under leases that expire from June 2001 to May 2009.
We have signed a lease for a site of approximately 350,000 square feet for our
second distribution center site in Atlanta, Georgia. This lease expires in July
2009, with two options to extend the lease for additional five year periods. We
recently signed leases for sites in Springfield, Virginia; Grapevine, Texas;
Carol Stream, Illinois and Kent, Washington on which we plan to construct
distribution centers that will serve the metropolitan areas of the District of
Columbia, Dallas, Chicago and Seattle, respectively. We are evaluating sites and
negotiating leases for additional distribution centers in other markets.
Although we expect those sites to be available, we cannot assure you that
suitable sites will be available on commercially reasonable terms. We do not own
any real estate and expect to lease distribution center and station locations in
the other markets we enter.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the executive officers
and directors of Webvan as of October 20, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Louis H. Borders................... 51 Chairman of the Board
George T. Shaheen.................. 55 President, Chief Executive Officer and Director
Kevin R. Czinger................... 40 Senior Vice President, Corporate Operations and
Finance
Arvind Peter Relan................. 37 Senior Vice President, Technology
Mark X. Zaleski.................... 36 Senior Vice President, Area Operations
Gregory Beutler.................... 39 Vice President, Merchandising
Gary B. Dahl....................... 46 Vice President, Distribution
Leo L. Farley...................... 46 Vice President, Food Production
Mark J. Holtzman................... 39 Vice President and Controller
Vivek M. Joshi..................... 36 Vice President, Program Management
Christian T. Mannella.............. 37 Vice President, Marketing
David S. Rock...................... 50 Vice President, Real Estate
Robert H. Swan..................... 39 Vice President, Finance
David M. Beirne(1)(2).............. 36 Director
Christos M. Cotsakos(2)............ 50 Director
Tim Koogle(1)...................... 47 Director
Michael J. Moritz(1)(2)............ 45 Director
</TABLE>
- -------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
LOUIS H. BORDERS has served as our Chairman of the Board since founding
Webvan in December 1996. Mr. Borders served as President and Chief Executive
Officer of Webvan from December 1996 to September 1999. Mr. Borders co-founded
Synergy Software, a software consulting company, in November 1989 and served on
its board of directors from November 1989 to November 1997. Mr. Borders founded
Borders Books, a retail bookstore chain, in 1971 and served as President and
Chief Executive Officer until 1983 and as Chairman from 1983 to 1992. He also
developed the advanced information systems used by Borders Books to manage
inventory across diverse geographic and demographic regions. In addition, Mr.
Borders is chairman of Mercury Capital Management, an investment firm he founded
in 1995. Mr. Borders holds a B.A. in Mathematics from the University of
Michigan.
GEORGE T. SHAHEEN has served as President and Chief Executive Officer and
as a member of the Board of Webvan since September 1999. Prior to joining
Webvan, he had been the managing partner and chief executive officer of Andersen
Consulting, a global consulting firm, since the firm became an independent unit
in 1989. He joined Andersen Consulting in 1967 and became a partner in 1977.
From 1980 to 1985, he oversaw the consulting practice for North and South
Carolina before heading the Northern California Consulting practice based in San
Francisco. Prior to becoming managing partner and chief executive officer of
Andersen Consulting, Mr. Shaheen was managing partner of the Southeast U.S.
Region and North American practices. In addition, he was the practice director
for Japan and the Pacific Northwest. Mr. Shaheen is also a director of Siebel
Systems, Inc., a software company. He is on the Board of Trustees at Bradley
University and is a member of the Board of Advisors for the Northwestern
University J.L. Kellogg Graduate School of Business. Mr. Shaheen received a
bachelor's degree in marketing and a master's degree in finance from Bradley
University.
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KEVIN R. CZINGER has served as Senior Vice President, Corporate Operations
and Finance of Webvan since July 1999. From March 1999 to July 1999, he was
Chief Financial Officer of Webvan. From 1998 to 1999, Mr. Czinger served as a
managing director in the media and telecommunications group at Merrill Lynch &
Co., Inc. From 1996 to 1998, Mr. Czinger served as Chief Executive Officer of
Volcano Entertainment L.L.C., a record and music publishing company he founded.
From 1994 to 1996, Mr. Czinger served as Executive Vice President, Chief
Financial Officer and then Chief Operating Officer of the North America
media/entertainment operations of Bertelsmann AG, a diversified media company.
From 1991 to 1994, Mr. Czinger was executive director and head of media banking
group at Goldman Sachs International, an investment banking firm. Mr. Czinger
holds a B.A. from Yale College and a J.D. from Yale Law School.
ARVIND PETER RELAN has served as Senior Vice President, Technology of
Webvan since February 1998. From May 1994 to February 1998, Mr. Relan served in
various management positions at Oracle Corporation, a software company, most
recently as Vice President of Internet Server Products in its Application Server
Division. In 1995, Mr. Relan founded Oracle's Internet Server Division,
including Oracle's patented Web Request Broker technology, Oracle Application
Server and Oracle Internet Commerce Server. From 1988 to 1994, Mr. Relan held
various positions at Hewlett-Packard, a computer systems, equipment and services
company, including principal technologist for the HP Openview Platform. Mr.
Relan holds a B.S. in Computer Engineering from the University of California,
Los Angeles and a M.S. in Engineering Management from Stanford University.
MARK X. ZALESKI has served as Senior Vice President, Area Operations of
Webvan since July 1999. From December 1998 to July 1999, he served as Chief
Operating Officer of Webvan. From 1994 to 1998, Mr. Zaleski served in various
executive management positions for ACNielsen, a market research company, most
recently as Senior Vice President and Group Managing Director of Central Europe.
From 1985 to 1994, Mr. Zaleski held several positions at Federal Express, most
recently as a Managing Director for Federal Express, Europe. From 1985 to 1988,
Mr. Zaleski held various management positions in hub, ground operation and sales
for Federal Express. Mr. Zaleski holds a B.S. in Business Administration and an
M.B.A. from the European University in Antwerp, Belgium.
GREGORY BEUTLER has served as Vice President, Merchandising since August
1999. From September 1996 to August 1999, Mr. Beutler held several positions at
the General Electric Company, most recently as General Manager, Worldwide
Sourcing for GE Lighting. From September 1996 to December 1998, Mr. Beutler was
Director, Corporate Initiatives Group in Europe and at GE Corporate. From June
1990 to August 1996, Mr. Beutler was a Management Consultant at Symmetrix, Inc.,
a management consulting firm, most recently as Vice President. Mr. Beutler holds
a B.S. in Chemical Engineering from Rensselaer Polytechnic Institute and a
Master of Engineering in Chemical Engineering from Cornell University and a
M.B.A. from Harvard Business School.
GARY B. DAHL has served as Vice President, Distribution of Webvan since
April 1997. From March 1993 to April 1997, Mr. Dahl served as Senior Vice
President, Logistics of American Stores Company, a retail food and drug company.
From 1990 to 1993, Mr. Dahl was employed with Lucky Stores, a retail grocery
company, as a Vice President of Warehousing and Distribution. Mr. Dahl received
his B.A. in Biology from California State University, Long Beach and his M.P.H.
in Public Health from the University of California, Berkeley.
LEO L. FARLEY has served as Vice President, Food Production of Webvan since
July 1999. From 1998 to 1999, Mr. Farley was Vice President of Culinary Research
and Development for Sodexho Marriott Services, a food services company. In this
capacity, Mr. Farley was responsible for menu and recipe development, culinary
research and development and food safety and quality assurance. From 1986 to
1998, Mr. Farley held several executive management positions in finance,
strategic planning, project management and marketing with Marriott Management
Services, the contract food service division of Marriott International. Mr.
Farley holds a B.A. in Political Science from Drew University, an A.O.S. in
culinary arts from the Culinary Institute of America and an M.B.A. in finance
from New York University.
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<PAGE> 49
MARK J. HOLTZMAN has served as Vice President and Controller of Webvan
since March 1999. Mr. Holtzman also serves as Chief Financial Officer of
Webvan -- Bay Area. From July 1997 to March 1999, Mr. Holtzman served as Chief
Financial Officer of Webvan. From December 1994 to July of 1997, Mr. Holtzman
served as Group Controller of MicroAge, a distributor and reseller of computer
products and services. From December 1989 to December 1994, Mr. Holtzman was
employed by Kenfil, Inc., a computer software distributor, becoming Chief
Financial Officer in 1993. Mr. Holtzman received his B.A. in Political Science
and Economics from University of California, Berkeley and his M.B.A. from the
University of Michigan. Mr. Holtzman is a Certified Public Accountant.
VIVEK M. JOSHI has served as Vice President, Program Management of Webvan
since August 1999. From May 1996 to August 1999, Mr. Joshi held several
positions at General Electric Company, most recently as General Manager,
Off-Highway/Transit Operations at GE Transportation Systems. From May 1996 to
June 1998, Mr. Joshi was Manager, Corporate Initiatives Group at GE Corporate.
From October 1993 to May 1996, Mr. Joshi was a management consultant at Booz
Allen & Hamilton, a global management consulting company. From July 1992 to
October 1993, Mr. Joshi was a Manufacturing Team Leader at Johnson & Johnson
Advanced Materials Company. Mr. Joshi holds a B.Tech in Chemical Engineering
from the Indian Institute of Technology, Bombay, and an M.S. in Chemical
Engineering and an M.B.A. from the University of Virginia.
CHRISTIAN T. MANNELLA has served as Vice President, Marketing of Webvan
since December 1998. From July 1990 to November 1998, Mr. Mannella held several
positions at MCI WorldCom, most recently as Vice President of Sales & Service
Operations. From December 1995 to March 1998, Mr. Mannella was Vice President of
Brand Marketing for MCI WorldCom. From September 1989 to June of 1990, Mr.
Mannella was employed by Credit Card Service Corporation as Group Product
Manager. From January 1986 to September 1989, Mr. Mannella was employed as a
Marketing Manager by Marriott International. From July 1984 to January 1986, Mr.
Mannella was a Management Consultant with Laventhol & Horwath, CPAs. Mr.
Mannella holds a B.A. in Hotel, Restaurant and Institutional Management from
Michigan State University.
DAVID S. ROCK has served as Vice President, Real Estate of Webvan since May
1999. From January 1997 to May 1999, Mr. Rock served as Webvan's Vice President,
Retail. From 1987 to 1996, Mr. Rock owned and operated a business brokerage firm
specializing in the sale and acquisition of food and beverage retail businesses.
ROBERT H. SWAN has served as Vice President, Finance of Webvan since
October 1999. From September 1985 to October 1999, Mr. Swan held a variety of
positions at General Electric Company, most recently as Vice President, Finance
and Chief Financial Officer of GE Lighting. From January 1997 to June 1998, Mr.
Swan served as Vice President, Finance of GE Medical Systems in Europe. From
October 1994 to January 1997, Mr. Swan served as Chief Financial Officer of GE
Transportation Systems. From May 1988 to October 1994, Mr. Swan held several
assignments with GE's Corporate Audit Staff. Mr. Swan holds a B.S. in Management
from the State University of New York at Buffalo and an M.B.A. from the State
University of New York at Binghamton.
DAVID M. BEIRNE has served as a member of the Board since October 1997. Mr.
Beirne has been a Managing Member of Benchmark Capital, a venture capital firm,
since June 1997. Prior to joining Benchmark Capital, Mr. Beirne founded
Ramsey/Beirne Associates, an executive search firm, and served as its Chief
Executive Officer from October 1987 to June 1997. Mr. Beirne serves as a
director of Scient Corporation, Kana Communications, Inc. and 1-800-FLOWERS.COM,
Inc. Mr. Beirne received a B.S. in Management from Bryant College.
CHRISTOS M. COTSAKOS has served as a member of the Board since May 1998.
Mr. Cotsakos has been the Chief Executive Officer and Chairman of the Board of
E*TRADE Group, Inc. since December 1998. He joined E*TRADE in March 1996 as
President and Chief Executive Officer. Prior to joining E*TRADE, he served as
President, Co-Chief Executive Officer, Chief Operating Officer and a director of
ACNielsen, Inc. from March 1992 to January 1996. From March 1973 to March 1992,
he held a number of senior executive positions at FedEx Corporation. Mr.
Cotsakos serves as a director of
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<PAGE> 50
National Processing Company, Inc., Digital Island, Inc., Critical Path, Inc.,
and FOX Entertainment Group, Inc. Mr. Cotsakos received a B.A. from William
Paterson College, an M.B.A. from Pepperdine University and is currently pursuing
a Ph.D. in economics at the Management School, University of London.
TIM KOOGLE has served as a member of the Board since July 1999. Mr. Koogle
has been the Chief Executive Officer of Yahoo!, Inc. and a member of Yahoo!'s
Board of Directors since August 1995. He has also been Yahoo!'s Chairman since
January 1999 and was its President from August 1995 until January 1999. Prior to
joining Yahoo!, Mr. Koogle was President of Intermec Corporation, a manufacturer
of data collection and data communication products, from 1992 to 1995. During
that time, he also served as a corporate Vice President of Intermec's parent
company, Western Atlas. Mr. Koogle also serves as a director of E-LOAN, Inc. Mr.
Koogle holds a B.S. degree from the University of Virginia and an M.S. degree
from Stanford University.
MICHAEL J. MORITZ has served as a member of the Board since October 1997.
Mr. Moritz has been a general partner of Sequoia Capital, a venture capital
firm, since 1988. Between 1979 and 1984, Mr. Moritz was employed in a variety of
positions by Time, Inc. Mr. Moritz also serves as a director of Yahoo!,
Flextronics International, eToys Inc. and Agile Software Corporation. Mr. Moritz
holds an M.A. degree in history from Oxford University and an M.B.A. from the
Wharton Business School of the University of Pennsylvania.
Officers serve at the discretion of the Board and are appointed annually.
The employment of each of our officers is at will and may be terminated at any
time, with or without cause. There are no family relationships between any of
the directors or executive officers of Webvan.
BOARD COMPOSITION
Webvan currently has authorized six directors. Webvan's Restated
Certificate of Incorporation will provide that, effective upon the closing of
this offering, the terms of office of the members of the Board of Directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2000, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2001, and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2002. The Class
I directors are Messrs. Cotsakos and Koogle, the Class II directors are Messrs.
Beirne and Moritz and the Class III directors are Messrs. Borders and Shaheen.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. 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 one-third of the total number of
directors. This classification of the Board of Directors may have the effect of
delaying or preventing changes in control or management of Webvan.
Messrs. Beirne and Moritz are currently serving on the Board as
representatives of the holders of our Series A preferred stock and Mr. Cotsakos
is currently serving on the Board as a representative of the holders of our
Series C preferred stock. The holders of our Series A preferred stock and Series
C preferred stock are entitled to elect these directors pursuant to the terms of
the preferred stock as set forth in our Restated Certificate of Incorporation.
Upon the closing of this offering, the outstanding shares of preferred stock
will convert into shares of common stock and the holders of the preferred stock
will no longer have the right to appoint any directors.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews our internal
accounting procedures and consults with and reviews the services provided by our
independent accountants. The Audit Committee currently consists of Messrs.
Beirne, Koogle and Moritz.
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<PAGE> 51
The Compensation Committee of the Board of Directors reviews and recommends
to the Board the compensation and benefits of all of our executive officers,
administers our stock option plan and employee stock purchase plan and
establishes and reviews general policies relating to compensation and benefits
of our employees. The Compensation Committee currently consists of Messrs.
Beirne, Cotsakos and Moritz. No interlocking relationships exist between our
Board of Directors or Compensation Committee and the board of directors or
compensation committee of any other company, nor has any interlocking
relationship existed in the past.
DIRECTOR COMPENSATION
Our directors do not receive cash for services they provide as directors.
In July 1998, Mr. Cotsakos was granted an option to purchase 2,190,276 shares of
common stock at an exercise price of $0.10 per share. The option granted to Mr.
Cotsakos vests at the rate of one-sixteenth ( 1/16th) of the shares subject to
the option per quarter.
COMPENSATION COMMITTEE INTERLOCKS
No executive officer of Webvan 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 Webvan's Board of Directors.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Shaheen is a party to an agreement with us effective as of September
19, 1999. As contemplated by this agreement, Mr. Shaheen will serve as our Chief
Executive Officer and President and a member of our Board of Directors. Under
the agreement, we agreed to pay Mr. Shaheen a base salary of $500,000, subject
to annual adjustment, and a target bonus of $250,000. In connection with this
agreement, Mr. Shaheen was provided a bonus which was used to purchase 1,250,000
shares of fully vested common stock and was granted an option to purchase an
additional 15,000,000 shares of common stock at an exercise price of $8.00 per
share. The option is immediately vested as to 3,000,000 shares and the remaining
shares will vest monthly over a four year period, subject to Mr. Shaheen's
continued service. Our Chairman, Louis Borders, also granted Webvan an option to
purchase up to 4,250,000 shares of common stock beneficially owned by Mr.
Borders at an exercise price of $8.00 per share. This option vests monthly over
a four year period, subject to Mr. Shaheen's continued service to Webvan. We
also loaned Mr. Shaheen $6.7 million at an annual interest rate of 6.2% with the
loan to be repaid with a portion of the gain realized by Mr. Shaheen upon the
sale of his shares of Webvan common stock or upon exercise of his Webvan stock
options. In connection with the terms of employment with Mr. Shaheen, in
September 1999 we will record immediate compensation for stock and option grants
of approximately $27.0 million and deferred compensation of approximately $48.0
million.
We also agreed to provide Mr. Shaheen a supplemental retirement benefit
equal to 50% of his base compensation plus target bonus upon his retirement for
any reason after June 30, 2000. In the event that Mr. Shaheen is terminated
without cause or resigns for good reason, he is entitled to severance equal to
two years of base salary plus target bonus and two years additional vesting on
his stock options. In addition, if Mr. Shaheen is terminated without cause or
resigns for good reason within 12 months following a change in control of
Webvan, he shall be entitled to severance equal to three years of base salary
plus target bonus, full vesting as to all of his unvested stock options and
payment of any excise taxes payable by Mr. Shaheen in connection with the
receipt of such compensation. In the event of Mr. Shaheen's death or permanent
disability, he shall be entitled to accelerated vesting as to 50% of his
unvested stock options and he or his estate shall have 12 months to exercise any
vested options.
Mr. Dahl is a party to an offer letter, dated March 31, 1997. Under the
offer letter, we agreed to pay Mr. Dahl a base salary of $200,000, subject to
annual adjustment.
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<PAGE> 52
Mr. S. Coppy Holzman, our Vice President, Merchandising until August 1999,
is a party to an offer letter, dated September 2, 1997. Under the offer letter,
we agreed to pay Mr. Holzman a base salary of $250,000, subject to annual
adjustment. The offer letter provides that, in the event that Mr. Holzman's
employment is terminated for other than cause, we are obligated to pay him a six
month salary severance. This provision expires on October 1, 1999.
Mr. Holtzman is a party to an offer letter, dated June 5, 1997. Under the
offer letter, we agreed to pay Mr. Holtzman a base salary of $175,000, subject
to annual adjustment. The offer letter provides that in the event that Mr.
Holtzman's employment is terminated for other than cause, we are obligated to
pay him a monthly salary severance and option vesting for up to six months until
he is employed elsewhere at a comparable salary.
Mr. Relan is a party to an offer letter, dated February 2, 1998. Under the
offer letter, we agreed to pay Mr. Relan a base salary of $200,000, subject to
annual adjustment. The offer letter provides that in the event that Mr. Relan's
employment is terminated for any reason following the second anniversary of his
employment, we are obligated to, at our option, either pay to Mr. Relan the sum
of $3.0 million or accelerate the vesting of all of Mr. Relan's options to
purchase our common stock. The offer letter further provides that, in the event
that Mr. Relan's employment is terminated without cause, we are obligated to pay
him six months of salary and benefits as severance. Under Mr. Relan's offer
letter, he has the right, expiring in March 2000, to cause Webvan to repurchase
up to 1,914,000 shares of common stock beginning on the first anniversary of his
employment and an additional 1,914,000 shares of common stock beginning on the
second anniversary of his employment, in each case at a price of $0.37 per
share. Mr. Relan also has the right to participate in sales of our preferred
stock prior to the initial public offering of our common stock up to a maximum
amount of $200,000 for each round of financing.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by Webvan
during the fiscal year ended December 31, 1998 to our Chief Executive Officer
and our four other most highly compensated executive officers whose salary and
bonus exceeds $100,000 (collectively, the "Named Executive Officers") for
services rendered in all capacities to Webvan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG TERM
----------------------------------- COMPENSATION
OTHER ANNUAL AWARDS OF ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION(2) STOCK OPTIONS COMPENSATION(3)
---------------------------- -------- ------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Louis H. Borders............... $ -- $ -- $ -- -- $ --
Chairman, President and Chief
Executive Officer(4)
Gary B. Dahl................... 178,600 8,750 -- 600,000 2,000
Vice President, Distribution
Mark J. Holtzman............... 150,000 7,500 13,835 1,200,000 2,000
Controller
S. Coppy Holzman(5)............ 219,431 -- -- 900,000 1,491
Vice President, Merchandising
Arvind Peter Relan(6).......... 142,974 7,692 -- 7,956,000 2,000
Senior Vice President,
Technology
</TABLE>
- -------------------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits
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<PAGE> 53
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus for the Named Executive Officer for such year.
(2) Represents a payment for a relocation allowance.
(3) Represents 401(k) plan matching by Webvan.
(4) Mr. Borders served as President and Chief Executive Officer of Webvan from
December 1996 to September 1999.
(5) Mr. Holzman was Vice President, Merchandising of Webvan from September 1997
through August 1999.
(6) Mr. Relan joined Webvan in February 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information for the fiscal year ended
December 31, 1998 with respect to each grant of stock options to the Named
Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------ VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION FOR
GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ----------------------
NAME GRANTED IN 1998(2) SHARE DATE 5% 10%
---- --------- ----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Louis H. Borders............. -- --% $ -- -- $ -- $ --
Gary B. Dahl................. 600,000 1.3 0.0125 1/06/2008 4,717 11,953
Mark J. Holtzman............. 1,200,000 2.6 0.0125 1/06/2008 9,433 23,906
S. Coppy Holzman............. 900,000 2.0 0.0125 1/06/2008 7,075 17,930
Arvind Peter Relan........... 7,656,000 16.5 0.0125 3/06/2008 60,185 152,521
Arvind Peter Relan........... 300,000 0.6 0.0125 5/13/2008 2,358 5,977
</TABLE>
- -------------------------
(1) Each of these options was granted pursuant to the Stock Plan and is subject
to the terms of such plan. These options were granted at an exercise price
equal to the fair market value of our common stock as determined by our
Board of Directors on the date of grant and, as long as the optionee
maintains continuous employment with Webvan, vest over a four year period at
the rate of one-fourth ( 1/4th) of the shares subject to the option on the
first anniversary of the date of grant and one-sixteenth ( 1/16th) of the
shares subject to the option per quarter thereafter.
(2) In 1998, we granted employees and consultants options to purchase an
aggregate of 46,436,478 shares of common stock.
(3) The gains shown are "option spreads" that would exist for the respective
options granted. These gains are based on the assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted over the full option term. These assumed annual compound rates of
stock price appreciation do not represent our estimate or projection of
future common stock prices.
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<PAGE> 54
AGGREGATED OPTION EXERCISES IN 1998 AND DECEMBER 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF OPTIONS AT
SHARES DECEMBER 31, VALUE OF IN-THE-MONEY
ACQUIRED VALUE 1998(2) OPTIONS(3)
ON OPTIONS REALIZED --------------------- -------------------------
NAME EXERCISE (1) VESTED UNVESTED VESTED UNVESTED
---- ---------- -------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Louis H. Borders....... -- $ -- -- -- $ -- $ --
Gary B. Dahl........... 2,250,000 26,250 1,068,750 1,781,250 12,821,487 21,369,145
Mark J. Holtzman....... 1,860,000 14,700 768,750 1,691,250 9,219,986 20,283,969
S. Coppy Holzman....... 2,250,000 26,250 984,375 2,165,625 11,808,401 25,978,482
Arvind Peter Relan..... 3,828,000 -- -- 7,956,000 -- 95,372,550
</TABLE>
- -------------------------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) The options are immediately exercisable for all of the option shares, but
any shares purchased under those options will be subject to repurchase by
Webvan at the original exercise price paid per share, if the optionee ceases
service with Webvan before vesting in those shares. The heading "Vested"
refers to shares that are no longer subject to repurchase and the heading
"Unvested" refers to shares subject to repurchase as of December 31, 1998.
(3) Based upon an assumed initial public offering price of $12.00 per share less
the exercise price per share.
COMPENSATION PLANS
1997 Stock Plan
Webvan's Stock Plan was approved by the Board of Directors and the
stockholders in September 1997 and was amended in March 1998, July 1998, October
1998, December 1998, January 1999 and August 1999. The Stock Plan provides for
the grant to employees of Webvan, including officers and employee directors, of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the grant of nonstatutory stock
options to employees, directors and consultants of Webvan. The Stock Plan is
currently administered by the Board of Directors which selects the optionees,
determines the number of shares to be subject to each option and determines the
exercise price of each option. The Stock Plan authorizes the issuance of an
aggregate of up to 79,500,000 shares of common stock. The maximum number of
shares that may be granted to any individual under the Stock Plan in any year is
2,000,000, except that an individual may be granted up to an additional
2,000,000 shares in connection with his or her initial service. As of October
20, 1999, options to purchase an aggregate of 51,547,816 shares of common stock
were outstanding under the Stock Plan, and an aggregate of 3,192,047 shares of
common stock remained available for future grants. The number of shares of
common stock reserved for issuance under this plan will be subject to an annual
increase on each anniversary beginning January 1, 2000 equal to the lesser of:
- 16,000,000 shares;
- 4% of the outstanding shares on such date; or
- an amount determined by the Board.
The exercise price of all incentive stock options granted under the Stock
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of all nonstatutory stock options granted
under the Stock Plan shall be determined by the administrator, but in no event
may be less than 85% of the fair market value on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of stock of Webvan, the exercise price of any incentive or
nonstatutory option granted must equal at least 110%
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<PAGE> 55
of the fair market value on the grant date and the maximum term of any such
option must not exceed five years. The term of all other options granted under
the Stock Plan may not exceed ten years.
In the event a participant in the Stock Plan ceases to be an employee,
director or consultant of Webvan, other than upon the participant's death or
disability, the participant may exercise his or her vested options for a period
of three months following such termination, unless a different exercise period
is specified in his or her option agreement.
In the event of a merger of Webvan with or into another corporation or a
sale of substantially all of our assets, the Stock Plan requires that each
outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, such
options will become fully vested and exercisable for a period of fifteen days
after notice from the administrator. Unless terminated sooner, the Stock Plan
will terminate ten years from its effective date. The Board has authority to
amend or terminate the Stock Plan, provided that no such action may impair the
rights of the holder of any outstanding options without the written consent of
that holder.
1999 Nonstatutory Stock Option Plan
Our 1999 Nonstatutory Stock Option Plan was approved by the Board of
Directors in September 1999. The Nonstatutory Plan provides for the grant of
nonstatutory stock options to employees, directors and consultants of Webvan.
Executive officers are only eligible to receive options under the Nonstatutory
Plan in connection with their initial employment by Webvan. The Nonstatutory
Plan is currently administered by the Board of Directors which selects the
optionees, determines the number of shares to be subject to each option and
determines the exercise price of each option. The Nonstatutory Plan authorizes
the issuance of an aggregate of up to 23,000,000 shares of common stock. As of
October 20, 1999 options to purchase an aggregate of 16,110,000 shares of common
stock were outstanding under the Nonstatutory Plan, and an aggregate of
6,875,000 shares of common stock remained available for future grants.
The exercise price of all stock options granted under the Nonstatutory Plan
shall be determined by the administrator and the maximum term of an option may
not exceed ten years.
In the event a participant in the Nonstatutory Plan ceases to be an
employee, director or consultant of Webvan, other than upon the participant's
death or disability, the participant may exercise his or her vested options for
a period of three months following such termination, unless a different exercise
period is specified in his or her option agreement.
In the event of a merger of Webvan with or into another corporation or a
sale of substantially all of our assets, the Nonstatutory Plan requires that
each outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, such
options will become fully vested and exercisable for a period of fifteen days
after notice from the administrator. Unless terminated sooner, the Nonstatutory
Plan will terminate ten years from its effective date. The Board has authority
to amend or terminate the Nonstatutory Plan, provided that no such action may
impair the rights of the holder of any outstanding options without the written
consent of that holder.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan, or the Purchase Plan, provides our
employees with an opportunity to purchase our common stock through accumulated
payroll deductions. This plan will become effective upon the closing of this
offering. A total of 5,000,000 shares of common stock have been reserved for
issuance under the Purchase Plan, none of which have been issued. The number of
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shares reserved for issuance under the Purchase Plan will be subject to an
annual increase on each anniversary beginning January 1, 2000 equal to the
lesser of:
- the number of shares issued under the Purchase Plan in the prior year; or
- an amount determined by the Board.
The Purchase Plan will be administered by the Board of Directors or by a
committee appointed by the Board. The Purchase Plan permits eligible employees
to purchase common stock through payroll deductions up to a maximum of $25,000
for all purchases ending within the same calendar year and up to a maximum of
1,000 shares for each purchase period. Employees are eligible to participate if
they are employed by us for at least 20 hours per week and more than five months
in any calendar year. Unless the Board of Directors or its committee determines
otherwise, each offering period will run for six months. The first offering
period will commence on the date of this prospectus and end on or about August
14, 2000, and new offering periods will commence every six months thereafter. In
the event we are acquired, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation. In the event that
the successor corporation refuses to assume or substitute for the option, the
offering period then in progress will be shortened by setting a new exercise
date. The price at which common stock will be purchased under the Purchase Plan
is equal to 85% of the fair market value of the common stock on the first or
last day of the applicable offering period, whichever is lower. Employees may
end their participation in the offering period at any time, and participation
automatically ends on termination of employment. Generally, the Board of
Directors may amend, modify or terminate the Purchase Plan at any time as long
as such amendment, modification or termination does not impair the rights of
plan participants. The Purchase Plan will terminate at 2009, unless terminated
earlier in accordance with its provisions.
401(k) Plan
Webvan adopted a retirement savings plan, or 401(k) Plan, that covers all
of our employees. An employee may elect to defer, in the form of contributions
to the 401(k) Plan, up to 15% of the total annual compensation that would
otherwise be paid to the employee, subject to statutory limitations. Employee
contributions are invested in selected mutual funds or money market funds
according to the directions of the employee. Webvan makes matching contributions
as a percentage of employee contributions, subject to established limits. The
employees' contributions are fully vested and nonforfeitable at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify other officers and
employees and our agents to the fullest extent permitted by law. We believe that
indemnification under our Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. Our Bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions
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<PAGE> 57
in that capacity, regardless of whether the Bylaws would permit indemnification.
We have director and officer liability insurance that covers matters, including
matters arising under the Securities Act.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for judgments, fines, settlement amounts and expenses,
including attorneys' fees, incurred by any of these persons in any action or
proceeding, including any action by or in the right of Webvan, arising out of
that person's services as a director or executive officer of ours, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of Webvan where indemnification will be required or
permitted. We are not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.
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RELATED PARTY TRANSACTIONS
SALES OF STOCK TO INSIDERS
In April 1997, we issued 27,038,856 shares of common stock to the Louis H.
Borders Amended and Restated Revocable Trust dated December 4, 1987, and
17,361,144 shares of common stock to ISR GRAT I, a trust affiliated with Mr.
Borders, for an aggregate purchase price of $37,000. Louis H. Borders is our
Chairman and former President and Chief Executive Officer.
In October 1997, we issued an aggregate of 111,643,872 shares of Series A
preferred stock to investors for an aggregate purchase price of approximately
$10.7 million. The following directors, executive officers, holders of more than
5% of a class of voting securities and members of such person's immediate
families purchased shares of Series A preferred stock:
<TABLE>
<CAPTION>
SHARES OF
SERIES A
PURCHASER PREFERRED STOCK
--------- ---------------
<S> <C>
Louis H. Borders Amended and Restated Revocable Trust dated
December 4, 1987.......................................... 22,240,896
ISR GRAT I.................................................. 14,281,080
Benchmark Capital........................................... 36,521,976
Sequoia Capital............................................. 36,521,976
</TABLE>
In May and June 1998, we issued an aggregate of 38,612,184 shares of Series
B preferred stock to investors for an aggregate purchase price of approximately
$35.3 million. SOFTBANK America Inc., a holder of more than 5% of our voting
securities, purchased 36,521,976 shares of Series B preferred stock in such
transaction.
In January and April 1999, we issued an aggregate of 32,341,200 shares of
Series C preferred stock to investors for an aggregate purchase price of
approximately $75.1 million. E*TRADE Group, Inc. and Yahoo! Inc. each purchased
4,304,100 shares of Series C preferred stock in such transaction. Christos M.
Cotsakos, a director of Webvan, is the President and CEO of E*TRADE Group, Inc.,
and Tim Koogle, a director of Webvan, is the Chief Executive Officer and
Chairman of Yahoo! Inc.
In June 1999, as contemplated by his offer letter, Kevin R. Czinger
purchased 450,000 shares of our common stock at a price of $1.35 per share.
In July 1999, we entered into an agreement to issue an aggregate of
21,670,605 shares of Series D-2 preferred stock to investors at an aggregate
purchase price of approximately $275.0 million. Entities affiliated with
SOFTBANK America Inc. purchased 9,850,275 shares of Series D-2 preferred stock
and entities affiliated with Sequoia Investors Group purchased 3,940,110 shares
of Series D-2 preferred stock transaction.
In July 1999, we issued an option to purchase 150,000 shares of common
stock to Yahoo! Inc. at a price of $3.33 per share under our 1997 Stock Plan.
The option granted to Yahoo! Inc. vests at the rate of one-sixteenth ( 1/16th)
of the shares subject to the agreement per quarter as long as Mr. Koogle remains
on our Board of Directors.
Each share of Series A preferred stock, Series B preferred stock, Series C
preferred stock and Series D preferred stock will convert into one share of
common stock immediately prior to the closing of this offering.
OTHER AGREEMENTS WITH INSIDERS
We were a party to a voting agreement executed in September 1997, as
amended in December 1998, with the Louis H. Borders Amended and Restated
Revocable Trust dated December 4, 1987, and a number of our shareholders
affiliated with or related to Mr. Borders. Such shareholders each executed an
irrevocable proxy appointing the trustee of the trust as their proxy and
attorney-in-fact. The voting agreement and irrevocable proxy was terminated in
October 1999.
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Mark Zaleski, our Senior Vice President, Area Operations, is a party to an
offer letter, dated December 14, 1998. In March 1999, Webvan loaned Mr. Zaleski
$200,000 to be used towards the purchase of a house in the San Francisco Bay
Area. This loan was made as an interest-free employee relocation bridge loan, as
contemplated by his offer letter, and is repayable upon the first to occur of
March 1, 2000 or 15 days after the sale of his previous residence. The offer
letter also provides that in the event that Mr. Zaleski's employment is
terminated for other than cause, we are obligated to pay him a severance of six
months of salary and benefits as well as continued salary and benefits for up to
12 months until he obtains subsequent employment. In the event of such a
termination, the unvested portion of Mr. Zaleski's options will become
exercisable to the extent of an additional 12 months of vesting.
Mr. Czinger is a party to an offer letter dated March 17, 1999. The offer
letter provides that, in the event that Mr. Czinger's employment is terminated
for other than cause, we are obligated to pay him a lump sum severance of six
months of salary and benefits as well as continued salary and benefits for up to
six months until Mr. Czinger obtains subsequent employment. Mr. Czinger also has
the option to purchase 430,416 shares of our Series C preferred stock at an
exercise price of $2.32 per share by January 1, 2000. The offer letter further
provides that, if Mr. Czinger is involuntarily terminated by Webvan or a
successor company, the unvested portion of his options will become exercisable
to the extent of an additional 12 months of vesting.
Gregory Beutler, our Vice President, Merchandising, Vivek M. Joshi, our
Vice President, Program Management and Christian T. Mannella, our Vice
President, Marketing are each party to offer letters, dated August 19, 1999,
July 25, 1999 and November 10, 1998, respectively. Each of the offer letters
provide that, in the event such person's employment is terminated for other than
cause, we are obligated to pay him a six month salary and benefits severance as
well as continued salary and benefits for up to six additional months until he
obtains subsequent employment.
In connection with the recruiting of some of our executive officers and
employees, we engaged the services of Ramsey/Beirne Associates, an executive
search firm. Mr. Beirne, one of our directors, is the chairman of Ramsey/Beirne
and owns more than 5% of the stock of Ramsey/Beirne. As consideration for these
services, we paid Ramsey/Beirne an aggregate of $185,000 in cash, 382,500 shares
of our common stock and options to purchase up to 159,840 shares of our common
stock, all of which have been exercised.
Robert H. Swan, our Vice President, Finance, is a party to an offer letter
dated October 2, 1999. The offer letter provides that in the event Mr. Swan's
employment is terminated for other than cause, we are obligated to pay him a six
month salary and benefits severance as well as continued salary and benefits for
up to six additional months until he obtains subsequent employment. The offer
letter further provides that if Mr. Swan is terminated for other than cause, the
unvested portion of his options will become exercisable to the extent of an
additional six months of vesting.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 20, 1999 with respect to
- each person or group of affiliated persons known by Webvan to own
beneficially more than 5% of the outstanding shares of common stock;
- each of our directors;
- each of the Named Executive Officers; and
- all directors and executive officers as a group.
The address for each listed director and officer is c/o Webvan Group, Inc.,
1241 East Hillsdale Boulevard, Suite 210, Foster City, California 94404. Except
as otherwise indicated in the footnotes to the table, each of the stockholders
has sole voting and investment power with respect to the shares of beneficially
owned by such stockholders, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED(1)
------------------------ ------------------ -------------------
<S> <C> <C>
Louis H. Borders(2)....................................... 83,872,776 28.3%
SOFTBANK America Inc.(3).................................. 46,372,251 15.6
300 Delaware Avenue, Suite 900
Wilmington, Delaware 19801
Sequoia Capital(4)........................................ 40,462,086 13.6
Michael J. Moritz
Benchmark Capital(5)...................................... 36,521,976 12.3
David M. Beirne
Arvind Peter Relan(6)..................................... 3,940,500 1.3
S. Coppy Holzman(7)....................................... 2,700,000 *
Gary B. Dahl(8)........................................... 2,625,000 *
Mark J. Holtzman(9)....................................... 1,926,000 *
Christos Cotsakos(10)..................................... 821,354 *
Tim Koogle(11)............................................ -- --
All directors and officers as a group (17 persons)(12).... 183,504,507 60.5
</TABLE>
- -------------------------
* Less than 1%
(1) Applicable percentage ownership is based on 296,845,386 shares of common
stock outstanding as of October 20, 1999. Shares of common stock that a
person has the right to acquire within 60 days of October 20, 1999 are
deemed outstanding for purposes of computing the percentage ownership of
the person holding such rights, but are not deemed outstanding for purposes
of computing the percentage ownership of any other person, except with
respect to the percentage ownership of all directors and executive officers
as a group.
(2) Includes 36,313,224 shares held by Louis H. Borders, Trustee of the Louis
H. Borders Amended and Restated Revocable Trust dated December 4, 1987, or
the Trust; 31,642,224 shares held by ISR GRAT I; 12,917,328 shares held by
ISR GRAT II and 3,000,000 shares held by Louis H. Borders as trustee of a
trust for the benefit of a member of his family. ISR GRAT I holds shares
for the benefit of the Trust and will expire in February 2000. ISR GRAT II
holds shares for the benefit of a member of Mr. Borders' family and will
expire in December 2002. Mr. Borders is Chairman of Webvan. Certain
employees of Mercury Capital Management held options to purchase 195,000
shares of common stock held by the Trust, and Webvan holds an option to
purchase up to 4,250,000 shares of common stock held by the Trust at an
exercise price of $8.00 per share.
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(3) Includes 9,717,243 shares held by SOFTBANK Capital Partners LP and 133,032
shares held by SOFTBANK Capital Advisors Fund LLP.
(4) Includes 33,417,612 shares held by Sequoia Capital VII, or Sequoia Capital;
3,940,110 shares held by Sequoia Capital Franchise Fund, or Sequoia Fund
and Sequoia Capital Franchise Partners, or Sequoia Partners; 1,460,880
shares held by Sequoia Technology Partners VII; 677,844 shares held by SQP
1997; 584,352 shares held by Sequoia International Partners and 381,288
shares held by Sequoia 1997 LLC. Mr. Moritz, one of our directors, is a
general partner of Sequoia Capital, Sequoia Fund, Sequoia Partners, Sequoia
Technology, SQP, Sequoia International and Sequoia LLC. Mr. Moritz
disclaims beneficial ownership of such shares held by Sequoia Capital,
Sequoia Fund, Sequoia Partners, Sequoia Technology, SQP, Sequoia
International and Sequoia LLC, except to the extent of his pecuniary
interest therein.
(5) Includes 32,043,432 shares held by Benchmark Capital Partners, L.P., or
Benchmark Capital, and 4,478,544 shares held by Benchmark Founders' Fund,
L.P., or Benchmark Founders. Mr. Beirne, one of our directors, is a
Managing Member of Benchmark Capital Management Co., LLC, the general
partner of Benchmark Capital and Benchmark Founders. Mr. Beirne disclaims
beneficial ownership of such shares held by Benchmark Capital and Benchmark
Founders, except to the extent of his pecuniary interest therein.
(6) Includes an aggregate of 55,000 shares held in trusts for the benefit of
Mr. Relan's relatives, 37,500 shares held by Renuka Prasad Relan, Trustee
of the Renuka Prasad Relan 1999 Grantor Trust, 37,500 shares held by Arvind
Peter Relan, Trustee of the Arvind Peter Relan 1999 Grantor Trust and
75,000 shares held by Arvind Peter Relan and Renuka Prasad Relan, Trustees
of the Relan Family 1999 Trust. Includes 112,500 shares subject to an
option exercisable within 60 days of October 20, 1999. Of the shares
included in the table, 957,000 shares are subject to a right of repurchase
in favor of Webvan in the event that Mr. Relan's employment with Webvan
terminates. Such repurchase right expired as to 25% of the shares in
February 1999 and will expire as to 1/16 of the shares on a quarterly basis
thereafter through February 2002.
(7) Includes 450,000 shares subject to an option exercisable within 60 days of
October 20, 1999. Of the shares included in the table, 1,125,000 shares are
subject to a right of repurchase in favor of Webvan in the event that Mr.
Holzman's employment with Webvan terminates. Such repurchase right expired
as to 25% of the shares in September 1998 and will expire as to 1/16th of
the shares on a quarterly basis thereafter through September 2001.
(8) Includes 375,000 shares subject to an option exercisable within 60 days of
October 20, 1999. Includes 525,000 shares held by Gary B. Dahl, Trustee of
the Double D Trust Number One and 525,000 shares held by Gary B. Dahl,
Trustee of the Double D Trust Number Two. Of the shares included in the
table, 984,375 shares are subject to a right of repurchase in favor of
Webvan in the event that Mr. Dahl's employment with Webvan terminates. Such
repurchase right expired as to 25% of the shares in April 1998 and will
expire as to 1/16th of the shares on a quarterly basis thereafter through
April 2001.
(9) Includes 74,070 shares subject to an option exercisable within 60 days of
October 20, 1999. Includes 225,000 shares held by Mark Jeffrey Holtzman,
Trustee of the Mark Holtzman 1999 Children's Trust and 225,000 shares held
by Mark Jeffrey Holtzman, Trustee of the Marla Holtzman 1999 Children's
Trust. Of the shares included in the table, 551,250 shares are subject to a
right of repurchase in favor of Webvan in the event that Mr. Holtzman's
employment with Webvan terminates. Such repurchase right expired as to 25%
of the shares in July 1998 and will expire as to 1/16th of the shares on a
quarterly basis thereafter through July 2001.
(10) Represents 136,892 shares issuable upon the exercise of options which are
exercisable within 60 days of October 20, 1999. Does not include 4,304,100
shares held by E*TRADE
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E-Commerce Fund LLC. Mr. Cotsakos is the Chairman of the Board, President
and Chief Executive Officer of E*TRADE Group, Inc. and disclaims beneficial
ownership of such shares.
(11) Does not include 4,304,100 shares held by Yahoo!, Inc. Mr. Koogle is the
Chairman of the Board and Chief Executive Officer of Yahoo!, Inc. and
disclaims beneficial ownership of such shares.
(12) Includes an aggregate of 6,238,927 shares subject to an option exercisable
within 60 days of October 20, 1999.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our Restated Certificate of Incorporation, which will be filed prior to the
closing of this offering, authorizes the issuance of up to 800,000,000 shares of
common stock, par value $0.0001 per share, and 10,000,000 shares of preferred
stock, par value $0.0001 per share, the rights and preferences of which may be
established by our Board of Directors. As of October 20, 1999, after giving
effect to the conversion of all outstanding shares of Series A, B, C and D
preferred stock prior to the closing of this offering, 296,845,386 shares of
common stock were issued and outstanding and held by approximately 310
stockholders.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record upon such matters and in such manner as may be provided by law. Subject
to preferences applicable to any outstanding shares of preferred stock, the
holders of common stock are entitled to receive ratably dividends, if any, as
may be declared by the Board of Directors out of funds legally available for
dividend payments. In the event we liquidate, dissolve or wind up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
the preferred stock. Holders of common stock have no preemptive rights or rights
to convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, the Board of Directors will be
authorized, absent any limitations prescribed by law, without stockholder
approval, to issue up to an aggregate of 10,000,000 shares of preferred stock,
in one or more series, each of the series to have rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors. The rights of the holders of common stock will be subject to, and may
be adversely affected by, the rights of holders of any preferred stock that may
be issued in the future. Issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of our outstanding voting stock. We have no present plans to issue any shares of
preferred stock.
REGISTRATION RIGHTS
Set forth below is a summary of the registration rights of the holders of
our Series A preferred stock, Series B preferred stock, Series C preferred stock
and Series D preferred stock each of which will convert into common stock
immediately prior to the consummation of this offering.
Demand Registrations. At any time on or after the first to occur of October
29, 2000 or six months following the closing date of the initial public offering
of our common stock, the holders of registration rights may request us to
register shares of common stock having a gross offering price of at least $25
million subject to our right, upon advice of our underwriters, to reduce the
number of shares proposed to be registered. We will be obligated to effect only
three registrations pursuant to such a request by holders of registration
rights. If shares requested to be included in a registration must be excluded
due to limitations on the number of shares to be registered on behalf of the
selling shareholders pursuant to the underwriters' advice, the shares registered
on behalf of the selling shareholders will be allocated among all holders of
shares with rights to be included in the registration on the basis of the number
of shares with such rights held by such shareholders.
Piggyback Registration Rights. The holders who have registration rights
have unlimited rights to request that shares be included in any
company-initiated registration of common stock other than registrations of
employee benefit plans or business combinations subject to Rule 145 under the
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Securities Act. In our initial registration, the underwriters may, for marketing
reasons, exclude all or part of the shares requested to be registered on behalf
of all shareholders having the right to request inclusion in such registration.
In our subsequent registrations, the underwriters may, for marketing reasons,
limit the shares requested to be registered on behalf of all shareholders having
the right to request inclusion in such registration to not less than 30%. In
addition, we have the right to terminate any registration we initiated prior to
its effectiveness regardless of any request for inclusion by any stockholders.
Form S-3 Registrations. After we have qualified for registration on Form
S-3 which will not be available until at least 12 months after we become a
publicly reporting company, holders of registration rights may request in
writing that we effect an unlimited number of registrations of such shares on
Form S-3 provided that the gross offering price of the shares to be so
registered in each such registration exceeds $1,000,000. If such registration is
to be an underwritten public offering, the underwriters may reduce for marketing
reasons the number of shares to be registered on behalf of all shareholders
having the right to request inclusion in such registration. We are not obligated
to effect a registration on Form S-3 prior to expiration of 180 days following
effectiveness of the most recent registration requested by the holders.
Future Grants of Registration Rights. We cannot grant further registration
rights without the prior written consent of current stockholders owning at least
a majority of the then outstanding registrable securities, including grants to
any holder or prospective holder of any registration rights which would:
- be on equal or more favorable terms than the existing registration
rights;
- cause a reduction in the amount of registrable securities held by current
holders that would be registrable in a registration statement; or
- require us to effect a registration earlier than the date current holders
can first require a registration.
Transferability. The registration rights are transferable upon notice by
the holder to us of the transfer, provided that the transferee or assignee is
not deemed by the Board of Directors to be a competitor of ours and assumes the
rights and obligations of the transferor for such shares.
Termination. The registration rights will terminate on the first to occur
of five years after the date of our initial public offering or the date on which
the holder may sell the shares pursuant to Rule 144, provided that the aggregate
of the shares held by the holder represent less than 1% of our then outstanding
equity securities.
WARRANTS
At October 20, 1999, we had outstanding warrants to purchase an aggregate
of 2,397,804 shares of our Series B preferred stock, which is convertible into
an equivalent number of shares of common stock. The weighted average exercise
price of the warrants is $0.91 per share. Any warrant may be exercised by
applying the value of a portion of the warrant, which is equal to the number of
shares issuable under the warrant being exercised multiplied by the fair market
value of the security receivable upon exercise of the warrant, less the per
share exercise price, in lieu of payment of the exercise price per share. The
warrants to purchase an aggregate of 2,233,572 shares expire in November 2005.
The warrant to purchase 164,232 shares expires in May 2008 or five years from
effective date of our initial public offering, whichever occurs first.
In connection with our agreement with Bechtel Corporation, we issued to
Bechtel a warrant to purchase up to 1,800,000 shares at an exercise price of
$2.32 per share. The warrant expires in July 2004 and became exercisable as to
150,000 shares as of July 31, 1999. Bechtel exercised the warrant as to 150,000
shares in September 1999. The warrant generally becomes exercisable as to the
remaining shares as distribution centers are completed by Bechtel within agreed
upon schedule and budgetary parameters.
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DELAWARE ANTI-TAKEOVER LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
Provisions of Delaware law and our Restated Certificate of Incorporation
and Bylaws could make more difficult our acquisition by a third party and the
removal of our incumbent officers and directors. These provisions, summarized
below, are expected to discourage coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of Webvan to
first negotiate with us. We believe that the benefits of increased protection of
our ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation could result in an improvement of their
terms.
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to such date the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders.
A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our Restated Certificate of Incorporation and Bylaws do not provide for the
right of stockholders to act by written consent without a meeting or for
cumulative voting in the election of directors. In addition, our Restated
Certificate of Incorporation permits the Board of Directors to issue preferred
stock with voting or other rights without any stockholder action. Our Restated
Certificate of Incorporation provides for the Board of Directors to be divided
into three classes, with staggered three-year terms. As a result, only one class
of directors will be elected at each annual meeting of stockholders. Each of the
two other classes of directors will continue to serve for the remainder of its
respective three-year term. These provisions, which require the vote of
stockholders holding at least a majority of the outstanding common stock to
amend, may have the effect of deterring hostile takeovers or delaying changes in
our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address and telephone number
is 235 Montgomery Street, 23rd Floor, San Francisco, California 94104 and (415)
743-1423.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse or are
released could adversely affect the prevailing market price and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 321,845,386 outstanding
shares of common stock. Of these shares, the 25,000,000 shares sold in the
offering, plus any shares issued upon exercise of the underwriters'
over-allotment option, will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act. In general, affiliates include officers,
directors or 10% stockholders.
The remaining 296,845,386 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and stockholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock without the prior written consent of Goldman, Sachs & Co.
According to the lock-up agreements, at any time beginning on the third day
following the public release of our earnings for the year ended December 31,
1999, each stockholder may offer, sell, transfer, assign, pledge or otherwise
dispose of up to 15% of his or her shares owned as of December 31, 1999; and at
any time beginning on the 48th day following the public release of our earnings
for the year ended December 31, 1999, each stockholder may offer, sell,
transfer, assign, pledge or otherwise dispose of an additional 25% of his or her
shares owned as of December 31, 1999. The lock-up restrictions will expire as to
the remaining shares on the date which is 180 days after the date of this
prospectus. Notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until such agreements expire or are waived by Goldman, Sachs
& Co. Taking into account the lock-up agreements, and assuming Goldman, Sachs &
Co. does not release stockholders from these agreements, the following shares
will be eligible for sale in the public market at the following times:
- Beginning on the date of this prospectus, only the shares sold in the
offering will be immediately available for sale in the public market.
- Beginning on or about February 1, 2000 (the third business day following
the public release of Webvan's earnings for the year ended December 31,
1999), approximately 2.9 million shares will be freely tradeable pursuant
to Rule 144(k), and an additional 38.1 million shares will be eligible
for sale subject to volume limitations, as explained below, pursuant to
Rules 144 and 701.
- Beginning on or about March 16, 2000 (45 days following the initial
lock-up expiration period), an additional 4.8 million shares will be
freely tradeable pursuant to Rule 144(k), and an additional 63.6 million
shares will be eligible for sale subject to volume limitations, as
explained below, pursuant to Rules 144 and 701.
- Beginning 180 days after the date of this prospectus, an additional 11.6
million shares will be freely tradeable pursuant to Rule 144(k), and an
additional 152.6 million shares will be eligible for sale subject to
volume limitations, as explained below, pursuant to Rules 144 and 701.
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<PAGE> 67
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding
which will equal approximately 3,218,453 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate and
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell such shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 180 days following the date of this prospectus to
register shares to be issued pursuant to our employee benefit plans. As a
result, any options or rights exercised under the 1997 Stock Plan, the 1999
Employee Stock Purchase Plan or any other benefit plan after the effectiveness
of the registration statement will also be freely tradable in the public market.
However, such shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resalable under Rule 701. As of October 20, 1999 there were
outstanding options for the purchase of approximately 67.7 million shares of
common stock, of which options to purchase approximately 6.3 million shares were
vested and exercisable.
LEGAL MATTERS
Legal matters in connection with this offering will be passed upon on
behalf of Webvan by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Jeffrey D. Saper, a member of Wilson Sonsini Goodrich &
Rosati, serves as our Secretary. Legal matters in connection with this offering
will be passed upon for the underwriters by Shearman & Sterling, Menlo Park,
California. As of the date of this prospectus, members of Wilson Sonsini
Goodrich & Rosati, P.C. and an investment partnership composed of current and
former members of and persons associated with Wilson Sonsini Goodrich & Rosati,
P.C. beneficially owned an aggregate of 2,068,944 shares of common stock.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for the period from December 17, 1996 (date of inception) to December 31, 1997
and for the year ended December 31, 1998 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
65
<PAGE> 68
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to Webvan and the common
stock offered in this offering, we refer you to the registration statement and
to the attached exhibits and schedules. Statements made in this prospectus
concerning the contents of any document referred to in this prospectus are not
necessarily complete. With respect to each such document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.
The reports and other information we file with the SEC can be inspected and
copied at the public reference facilities that the SEC maintains at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at the principal offices of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information
regarding the operation of the public reference room by calling 1(800) SEC-0330.
The SEC also maintains a web site (http://www.sec.gov) that makes available the
reports and other information we have filed with the SEC.
66
<PAGE> 69
WEBVAN GROUP, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998,
THE PERIOD FROM DECEMBER 17, 1996 (DATE OF INCEPTION)
TO DECEMBER 31, 1997 AND CUMULATIVE FROM
DECEMBER 17, 1996 (DATE OF INCEPTION) TO MARCH 31, 1999
AND INDEPENDENT AUDITORS' REPORT
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Webvan Group, Inc.:
We have audited the accompanying consolidated balance sheets of Webvan
Group, Inc. (formerly Intelligent Systems for Retail, Inc.) and subsidiary
(collectively, "Webvan") (a development stage company) as of December 31, 1998
and 1997, and the related consolidated statements of operations and
comprehensive loss, shareholders' equity and cash flows for the year ended
December 31, 1998 and for the period from December 17, 1996 (date of inception)
to December 31, 1997. These financial statements are the responsibility of
Webvan'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, such consolidated financial statements present fairly, in
all material respects, the financial position of Webvan at December 31, 1998 and
1997, and the results of its operations and its cash flows for periods stated
above, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
March 5, 1999
(August 5, 1999 as to the second sentence of Note 1 and as to Note 15 and
September 21, 1999 as to the first paragraph of Note 7)
F-2
<PAGE> 71
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JUNE 30, JUNE 30,
1997 1998 1999 1999
------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents...................................... $ 2,935 $ 13,839 $ 21,836
Marketable securities..................................... 5,043 7,728 22,231
Inventories............................................... -- -- 596
Related party receivable.................................. -- -- 847
Prepaid expenses and other current assets................. 5 114 3,294
------- -------- --------
Total current assets............................... 7,983 21,681 48,804
Property, Equipment and Leasehold Improvements, Net......... 208 32,624 56,186
Loan Fees, Net.............................................. -- 2,000 1,713
Investments................................................. -- 518 1,018
Deposits.................................................... 88 1,418 1,255
Restricted Cash............................................. -- 1,768 3,453
------- -------- --------
Total Assets................................................ $ 8,279 $ 60,009 $112,429
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 172 $ 6,815 $ 7,230
Accrued liabilities....................................... 118 706 5,813
Current portion capital lease obligations................. -- 133 621
Current portion long-term debt............................ -- 3,104 3,367
------- -------- --------
Total current liabilities.......................... 290 10,758 17,031
------- -------- --------
Deferred Rent............................................... 17 107 268
Capital Lease Obligations................................... -- 637 2,137
Long-Term Debt.............................................. -- 13,593 11,811
------- -------- --------
Commitments and Contingencies (Notes 6 and 11).............. -- -- --
Redeemable Common Stock..................................... -- 1,302 1,556
Shareholders' Equity
Series A preferred stock, no par value; 112,635 shares
authorized; 112,583, 112,635, 112,635 shares and none
issued and outstanding at December 31, 1997, 1998, June
30, 1999 and pro forma, respectively; (liquidation
preferences of $10,789, $10,794 and $10,794 at December
31, 1997, 1998 and June 30, 1999, respectively)......... 10,754 10,759 10,759 $ --
Series B preferred stock, no par value; 41,814 shares
authorized; 39,101 and 39,113 shares and none issued and
outstanding; liquidation preference of $35,713 and
$35,724 at December 31, 1998, June 30, 1999 and pro
forma, respectively..................................... -- 34,823 34,834 --
Series C preferred stock, no par value; 32,341 shares
authorized; 32,341 shares and none issued and
outstanding June 30, 1999 and pro forma; liquidation
preference of $75,000................................... -- -- 72,776 --
Restricted common stock, no par value; 360,000 shares
authorized; 64,394, 78,590, 81,909 and 265,998 issued
and outstanding at December 31, 1997, 1998, June 30,
1999 and pro forma, respectively........................ 58 11,921 31,251 149,620
Additional paid-in capital................................ -- 1,686 3,829 3,829
Deferred compensation..................................... -- (10,737) (23,790) (23,790)
Deficit accumulated during the development stage.......... (2,840) (14,844) (49,978) (49,978)
Accumulated other comprehensive income (loss)............. -- 4 (55) (55)
------- -------- -------- --------
Total shareholders' equity......................... 7,972 33,612 79,626 $ 79,626
------- -------- -------- ========
Total.............................................. $ 8,279 $ 60,009 $112,429
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 72
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE
DECEMBER 17, FROM
1996 (DATE OF DECEMBER 17,
INCORPORATION) SIX MONTHS 1996 (DATE OF
TO YEAR ENDED ENDED JUNE 30, INCORPORATION)
DECEMBER 31, DECEMBER 31, ------------------------- TO JUNE 30,
1997 1998 1998 1999 1999
-------------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales.................. $ -- $ -- $ -- $ 395 $ 395
Cost of Goods Sold......... -- -- -- 419 419
------- -------- ------- -------- --------
Gross Profit (Loss)........ -- -- -- (24) (24)
------- -------- ------- -------- --------
Software Development
Expenses................. 244 3,010 765 6,308 9,562
General and Administrative
Expenses................. 2,612 8,825 2,739 25,296 36,733
Amortization of Deferred
Stock Compensation....... -- 1,060 43 3,953 5,013
------- -------- ------- -------- --------
Total Expenses... 2,856 12,895 3,547 35,557 51,038
------- -------- ------- -------- --------
Interest Income............ 85 923 285 1,641 2,649
Interest Expense........... 69 32 -- 1,194 1,295
------- -------- ------- -------- --------
Net Interest Income........ 16 891 285 447 1,354
------- -------- ------- -------- --------
Net Loss................... (2,840) (12,004) (3,262) (35,134) (49,978)
Unrealized Gain (Loss) on
Marketable Securities.... -- 4 (2) (59) (55)
------- -------- ------- -------- --------
Comprehensive Loss......... $(2,840) $(12,000) $(3,264) $(35,193) $(50,033)
======= ======== ======= ======== ========
Basic and Diluted Net Loss
Per Share (Note 10)...... $ (0.08) $ (0.18) $ (0.05) $ (0.48) $ (0.89)
======= ======== ======= ======== ========
Shares Used in Calculating
Basic and Diluted Net
Loss Per Share (Note
10)...................... 37,407 67,114 65,075 73,280 56,221
======= ======== ======= ======== ========
Pro Forma Basic and Diluted
Net Loss Per Share....... $ (0.06) $ (0.14)
======== ========
Shares Used in Calculating
Pro Forma Basic and
Diluted Net Loss Per
Share.................... 201,978 253,743
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 73
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE CONVERTIBLE
SERIES A SERIES B SERIES C RESTRICTED
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A preferred, net
of $35 issuance costs, October
1997................................ 112,582,992 $10,754 -- $ -- -- $ -- -- $ --
Issuance of restricted common stock,
April through September 1997........ 64,380,972 53
Common stock issued for services,
December 1997....................... 13,500 5
Net loss.............................
----------- ------- ---------- ------- ---------- ------- ---------- -------
BALANCES, December 31, 1997.......... 112,582,992 10,754 -- -- -- -- 64,394,472 58
Issuance of Series A preferred,
January 1998........................ 52,176 5
Issuance of Series B preferred, net
of $890 issuance costs, May through
September 1998...................... 39,101,304 34,823
Series B preferred warrants granted
for debt, May 1998..................
Exercise of options during 1998...... 14,195,250 66
Options granted for services,
September and November 1998.........
Deferred Compensation................ 11,797
Amortization of deferred
compensation........................
Accumulated other comprehensive
income..............................
Net loss.............................
----------- ------- ---------- ------- ---------- ------- ---------- -------
BALANCES, December 31, 1998.......... 112,635,168 10,759 39,101,304 34,823 -- -- 78,589,722 11,921
Issuance of Series B preferred,
January 1999*....................... 12,000 11
Issuance of Series C preferred, net
of issuance costs of $2,363, January
through April 1999*................. 32,341,200 72,776
Exercise of stock options during
1999*............................... 2,868,840 76
Issuance of restricted common stock,
June 1999*.......................... 450,000 2,248
Issuance of warrant, June 1999*......
Deferred Compensation*............... 17,006
Amortization of deferred
compensation*.......................
Accumulated other comprehensive
loss*...............................
Net loss*............................
----------- ------- ---------- ------- ---------- ------- ---------- -------
BALANCES, June 30, 1999 *............ 112,635,168 $10,759 39,113,304 $34,834 32,341,200 $72,776 81,908,562 $31,251
=========== ======= ========== ======= ========== ======= ========== =======
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
ADDITIONAL DURING THE OTHER TOTAL
PAID-IN DEFERRED DEVELOPMENT COMPREHENSIVE SHAREHOLDERS'
CAPITAL COMPENSATION STAGE INCOME (LOSS) EQUITY
---------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Series A preferred, net
of $35 issuance costs, October
1997................................ $ -- $ -- $ -- $ -- $ 10,754
Issuance of restricted common stock,
April through September 1997........ 53
Common stock issued for services,
December 1997....................... 5
Net loss............................. (2,840) (2,840)
------ -------- -------- ---- --------
BALANCES, December 31, 1997.......... -- -- (2,840) -- 7,972
Issuance of Series A preferred,
January 1998........................ 5
Issuance of Series B preferred, net
of $890 issuance costs, May through
September 1998...................... 34,823
Series B preferred warrants granted
for debt, May 1998.................. 1,679 1,679
Exercise of options during 1998...... 66
Options granted for services,
September and November 1998......... 7 7
Deferred Compensation................ (11,797) --
Amortization of deferred
compensation........................ 1,060 1,060
Accumulated other comprehensive
income.............................. 4 4
Net loss............................. (12,004) (12,004)
------ -------- -------- ---- --------
BALANCES, December 31, 1998.......... 1,686 (10,737) (14,844) 4 33,612
Issuance of Series B preferred,
January 1999*....................... 11
Issuance of Series C preferred, net
of issuance costs of $2,363, January
through April 1999*................. 72,776
Exercise of stock options during
1999*............................... 76
Issuance of restricted common stock,
June 1999*.......................... 2,248
Issuance of warrant, June 1999*...... 2,143 2,143
Deferred Compensation*............... (17,006) --
Amortization of deferred
compensation*....................... 3,953 3,953
Accumulated other comprehensive
loss*............................... (59) (59)
Net loss*............................ (35,134) (35,134)
------ -------- -------- ---- --------
BALANCES, June 30, 1999 *............ $3,829 $(23,790) $(49,978) $(55) $ 79,626
====== ======== ======== ==== ========
</TABLE>
- ---------------
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE> 74
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
DECEMBER 17, DECEMBER 17,
1996 (DATE OF SIX MONTHS ENDED 1996 (DATE OF
INCORPORATION) TO YEAR ENDED JUNE 30, INCORPORATION)
DECEMBER 31, DECEMBER 31, ------------------------- TO JUNE 30,
1997 1998 1998 1999 1999
----------------- ------------ ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss....................................... $(2,840) $(12,004) $ (3,262) $(35,134) $(49,978)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 57 263 50 2,673 2,993
Accretion on redeemable common stock......... -- 1,242 564 254 1,496
Amortization of deferred stock
compensation............................... -- 1,060 43 3,953 5,013
Stock and stock options issued for
services................................... 95 7 -- -- 102
Noncash stock compensation................... -- -- -- 1,640 1,640
Issuance of warrant.......................... -- -- -- 2,143 2,143
Undistributed income on short-term
investments................................ (47) -- -- -- (47)
Changes in operating assets and liabilities:
Inventories................................ -- -- -- (596) (596)
Prepaid expenses and other current
assets................................... (5) (109) (1,671) (3,180) (3,294)
Accounts payable........................... 172 6,643 1,942 415 7,230
Accrued liabilities........................ 118 588 1,162 5,107 5,813
Deferred rent.............................. 17 90 3 161 268
------- -------- -------- -------- --------
Net cash used in operating activities.... (2,433) (2,220) (1,169) (22,564) (27,217)
------- -------- -------- -------- --------
Cash Flows From Investing Activities:
Purchases of property, equipment and leasehold
improvements................................. (265) (32,669) (4,283) (25,948) (58,882)
(Purchases) sale of marketable securities...... (4,996) (2,681) 992 (14,562) (22,239)
Purchase of investments........................ -- (518) -- (500) (1,018)
Related party receivable....................... -- -- -- (200) (200)
Deposits....................................... (88) (1,330) (212) 163 (1,255)
Restricted cash................................ -- (1,768) (950) (1,685) (3,453)
------- -------- -------- -------- --------
Net cash used in investing activities.... (5,349) (38,966) (4,453) (42,732) (87,047)
------- -------- -------- -------- --------
Cash Flows From Financing Activities:
Proceeds from shareholder loans................ 2,038 -- -- -- 2,038
Repayment of shareholder loans................. (2,038) -- -- -- (2,038)
Proceeds from long-term debt................... -- 17,168 -- -- 17,168
Repayment of long-term debt.................... -- (471) -- (1,519) (1,990)
Proceeds from capital lease financing.......... -- 794 50 2,200 2,994
Repayment of capital lease obligations......... -- (32) -- (212) (244)
Loan fees capitalized.......................... -- (323) -- -- (323)
Net proceeds from Series A preferred stock..... 10,664 5 -- -- 10,669
Net proceeds from Series B preferred stock..... -- 34,823 34,328 11 34,834
Net proceeds from Series C preferred stock..... -- -- -- 72,776 72,776
Proceeds from restricted common stock issued... 53 78 161 37 168
Proceeds from redeemable common stock issued... -- 48 -- -- 48
------- -------- -------- -------- --------
Net cash provided by financing
activities............................. 10,717 52,090 34,539 73,293 136,100
------- -------- -------- -------- --------
Net Increase in Cash and Equivalents............. 2,935 10,904 28,917 7,997 21,836
Cash and Equivalents, Beginning of period........ -- 2,935 2,935 13,839 --
------- -------- -------- -------- --------
Cash and Equivalents, End of period.............. $ 2,935 $ 13,839 $ 31,852 $ 21,836 $ 21,836
======= ======== ======== ======== ========
Supplemental Cash Flow Information:
Interest paid.................................. $ 69 $ 32 $ -- $ 28 $ 129
======= ======== ======== ======== ========
Income taxes paid.............................. $ 1 $ 1 $ -- $ -- $ 2
======= ======== ======== ======== ========
Restricted common stock issued for short-term
receivables.................................. $ -- $ -- $ -- $ 647 $ 647
======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 75
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Webvan Group, Inc., formerly Intelligent Systems for
Retail, Inc., and subsidiary (a development stage company) (collectively,
"Webvan") was incorporated in California on December 17, 1996. On April 21,
1999, Intelligent Systems for Retail, Inc. changed its name to Webvan Group,
Inc. Webvan will be an Internet-based service provider offering an array of
groceries, home meal replacements, drugstore items and other merchandise.
Presently, Webvan continues in the process of developing its system software,
the completion of its initial distribution center, and its internet "Webstore".
Webvan began selling and delivering products on an initial test basis during the
first quarter of 1999.
On March 26, 1998, Webvan formed a wholly-owned subsidiary Webvan -- Bay
Area, Inc. ("WBA"). WBA represents Webvan's distribution center and cross
docking stations that will provide the internet-based retail service and home
delivery.
As of June 30, 1999, Webvan was a development stage company. Successful
completion of the Company's development program and, ultimately, the attainment
of profitable operations is dependent upon future events, including obtaining
adequate financing to fulfill its development activities, increasing its
customer base, implementing and successfully executing its business and
marketing strategy, continuing to develop and enhance its Webstore fulfillment
transactions and hiring quality personnel.
CONSOLIDATION -- The accompanying consolidated financial statements include
the accounts of Webvan and its wholly-owned subsidiary, WBA. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS -- Webvan considers all highly liquid instruments acquired
with an original maturity of three months or less when purchased to be cash
equivalents. The recorded carrying amounts of the Company's cash equivalents
approximate to their fair market value due to their highly liquid nature.
MARKETABLE SECURITIES -- Webvan considers all investments with a maturity
of more than three months but less than one year when purchased and investments
to be sold within one year to be short-term and available for sale.
RELATED PARTY RECEIVABLE -- In March 1999, the Company loaned an officer
$200,000 to be used towards the purchase of a house. The loan is interest free
and is due on the earlier of 15 days after the sale of the officer's previous
residence or March 1, 2000.
RESTRICTED CASH -- During 1998, Webvan entered into lease and credit card
merchant bank service agreements which required Webvan to hold three standby
letters of credit. The letters of credit require Webvan to maintain certain
balances on deposit which restricts the use of cash and equivalents. See Note 5
for the amounts of these deposits. These agreements expire at various dates
ranging from 1999 through 2007.
F-7
<PAGE> 76
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject Webvan to concentrations of credit risk consist principally of cash,
cash equivalents and short-term investments to the extent these exceed federal
insurance limits. Risks associated with cash, cash equivalents and marketable
securities are mitigated by banking with and purchasing commercial paper, market
auction preferred stock, corporate notes, and corporate bonds from credit-worthy
institutions.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Property, equipment and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Depreciation is taken on assets placed into service using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized, using the straight-line method, over the
shorter of the lease term or the useful lives of the improvements.
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". The Company assesses the impairment of long-lived assets
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable. No such impairments have been identified to date.
LONG-TERM INVESTMENTS -- are recorded under the cost method of accounting
(Note 2).
LOAN FEES -- Webvan capitalizes loan and capital lease origination fees,
including the fair value of warrants and amortizes them over the life of the
related obligations.
REDEEMABLE COMMON STOCK -- Redeemable common stock represents common stock
sold to employees who have put rights. The put rights allow the shareholders to
sell to the Company, at a price of $0.3658 per share, 2,871,000 shares of common
stock after February 1999, and an additional 1,914,000 shares of common stock
after February 2000. Redeemable common stock was originally recorded at its
$0.0125 fair value as determined by the board of directors, and is being
accreted to the redemption amounts as compensation expense over the period the
put rights become exercisable. These rights expire in March 2000.
INCOME TAXES -- Income taxes are provided at current rates. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes.
STOCK OPTIONS -- As permitted by SFAS No. 123, Webvan accounts for stock
options to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As required by SFAS No. 123, the pro forma impact on earnings and
earnings per share resulting from the fair value method is disclosed in Note 8.
REVENUE RECOGNITION -- The Company recognizes revenues from product sales
and delivery, net of returns and discounts, when the products are delivered to
customers.
NET LOSS PER SHARE -- Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted net
loss per common share was the same as basic net loss per common share for all
periods presented since the effect of any potentially dilutive securities is
excluded as they are anti-dilutive because of Webvan's net losses.
UNAUDITED INTERIM FINANCIAL INFORMATION -- The interim financial
information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 and for the cumulative period from
F-8
<PAGE> 77
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
December 17, 1996 (date of inception) through June 30, 1999 is unaudited and has
been prepared on the same basis as the audited financial statements. In the
opinion of management, such unaudited financial information includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the interim information. Operating results for the six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
PRO FORMA NET LOSS PER COMMON SHARE -- Pro forma basic and diluted net loss
per common share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period (excluding shares subject to
repurchase) plus the weighted average number of common shares resulting from the
automatic conversion of outstanding shares of convertible preferred stock, which
will occur upon the closing of the planned initial public offering.
UNAUDITED PRO FORMA INFORMATION -- Upon the closing of the planned initial
public offering, each of the outstanding shares of convertible preferred stock
will convert into one share of common stock. The pro forma balance sheet
presents Webvan's balance sheet as if this had occurred at June 30, 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board ("FASB") adopted SFAS No. 130 "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net assets during the period
from non owner sources. Webvan adopted this statement during the year ended
December 31, 1998.
In February 1998, the FASB adopted SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits, an Amendment of FASB
Statements No. 87, 88, and 106," which revises employers' disclosures about
pension and other postretirement benefit plans. This statement does not change
the measurement or recognition of those plans, but standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Webvan adopted this statement
during the year ended December 31, 1998.
In March 1998, the Accounting Standards Committee of the American Institute
of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for an enterprise on accounting for
the costs of computer software developed or obtained for internal use. Webvan
adopted this statement during the year ended December 31, 1998 and has
capitalized software costs according to the provisions of the standard. These
costs are amortized on a straight-line basis over the useful life of the
software once it is placed into service.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires companies to expense the costs of start-up
activities and organization costs as incurred. Webvan adopted this statement
during the year ended December 31, 1998, and such adoption did not affect the
accompanying financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedging accounting when
certain conditions are met. Webvan will adopt this statement
F-9
<PAGE> 78
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
for its fiscal year ending December 31, 2000. Management has not fully assessed
the implications of adopting this new standard.
2. INVESTMENTS
On November 24, 1998, an agreement was signed between an equipment
manufacturer and Webvan. The agreement set out the terms for Webvan to acquire
1,000 shares of such equipment manufacturer for a total amount of $1,000,000
which represents a less than 10% interest in the manufacturer. Investments are
recorded at cost as fair market value is not readily determinable. Long-term
investments principally include $500,000 paid for such shares in December 1998.
Webvan paid the additional $500,000 for such shares in January 1999 to complete
this transaction.
3. MARKETABLE SECURITIES
The fair value of marketable securities at June 30, 1999 (unaudited), and
at December 31, 1998 and 1997 are presented below. Fair values are based on
quoted market prices. The Company's marketable securities are classified as
available-for-sale, as the Company intends to sell them as needed for
operations. Balances at year-end consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED)
-------------------------------------
UNREALIZED
AMORTIZED GAIN (LOSS) MARKET
COST ON INVESTMENT VALUE
--------- ------------- -------
<S> <C> <C> <C>
Money market funds................................. $ 8 $ -- $ 8
Commercial paper................................... 36,129 (12) 36,117
Foreign debt securities............................ 1,638 (6) 1,632
Corporate notes.................................... 6,346 (36) 6,310
------- ---- -------
Total.................................... 44,121 (54) 44,067
Less amounts included in cash and equivalents...... 21,843 (7) 21,836
------- ---- -------
$22,278 $(47) $22,231
======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
UNREALIZED
AMORTIZED GAIN ON MARKET
COST INVESTMENT VALUE
--------- ---------- -------
<S> <C> <C> <C>
Money market funds.................................... $ 27 $-- $ 27
Commercial paper...................................... 9,781 3 9,784
Commercial notes...................................... 3,164 1 3,165
Commercial bonds...................................... 1,285 -- 1,285
Market auction preferred.............................. 7,306 -- 7,306
------- -- -------
Total....................................... 21,563 4 21,567
Less amounts included in cash and equivalents......... 13,837 2 13,839
------- -- -------
$ 7,726 $2 $ 7,728
======= == =======
</TABLE>
F-10
<PAGE> 79
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Money market funds.......................................... $ 44
Commercial paper............................................ 7,859
------
Total at cost which approximates market........... 7,903
Less amounts included in cash and equivalents............... 2,860
------
$5,043
======
</TABLE>
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements at December 31, 1997, 1998
and June 30, 1999 consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1997 1998 1999
---- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software........................... $121 $ 2,284 $ 8,917
Machinery and equipment................................... 3 2,026 18,742
Leasehold improvements.................................... 32 407 19,195
Furniture and fixtures.................................... 109 287 625
---- ------- -------
265 5,004 47,479
Accumulated depreciation and amortization................. (57) (310) (2,696)
---- ------- -------
208 4,694 44,783
Construction in progress.................................. -- 27,930 11,403
---- ------- -------
Property, equipment and leasehold improvements, net....... $208 $32,624 $56,186
==== ======= =======
</TABLE>
Equipment under capital leases amounted to $794,000 at 1998. Accumulated
amortization on capital leases as of December 31, 1998 was $72,155.
Construction in progress includes costs incurred in the construction of
Webvan's distribution center located in Oakland. Such costs include the purchase
and installation of materials handling equipment, refrigeration and freezer
storage units. Webvan retains up to ten percent on all construction contracts in
process until final settlement of such contracts.
During the first six months of 1999, $2.2 million of computer equipment and
software was financed with capital leases.
F-11
<PAGE> 80
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
5. DEPOSITS
Deposits consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Software licenses........................................... $ 899 $ --
Payroll service provider.................................... 329 436
Real property leases........................................ 178 807
Other....................................................... 12 12
------ ------
$1,418 $1,255
====== ======
</TABLE>
6. BORROWING ARRANGEMENTS
In December 1998, WBA entered into a $17,000,000 loan and security
agreement. The loan is payable in $472,000 monthly installments from January
1999 through June 2002 with an additional $2,550,000 payment of the remaining
balance payable in June 2002. Based upon this repayment schedule, the imputed
interest on this loan is 16.33%. The loan is secured by substantially all the
assets of Webvan.
Related to the above financing, Webvan issued warrants to the lenders to
purchase an aggregate of 2,233,578 shares of Series B preferred stock at an
exercise price of $0.91 per share. The fair value of the warrants at the date
granted was $1,564,000 and was capitalized with loan fees (see Note 9). Webvan
also paid $323,000 in loan fees. The loan fees are being amortized over the 42
month term of the loan.
As part of an operating lease the landlord agreed to finance $168,340 of
improvements. The loan is payable in monthly installments including interest at
11% from January 1, 1999 through July 2003.
Future principal maturities under loan agreements as of December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999...................................................... $ 3,104
2000...................................................... 3,909
2001...................................................... 4,545
2002...................................................... 5,113
2003...................................................... 26
-------
16,697
Less current maturities..................................... 3,104
-------
$13,593
=======
</TABLE>
CAPITAL LEASE OBLIGATIONS
In March 1998, Webvan entered into a $3,000,000 nonrevolving master lease
agreement. The agreement specifies equipment which Webvan can purchase prior to
March 23, 1999 under the lease agreement. As of December 31, 1998, $2,230,000
was available for future financing, and obligations
F-12
<PAGE> 81
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
outstanding totaled $770,000. As part of the leasing arrangement, warrants for
164,226 shares of Series B preferred stock were granted to the provider at an
exercise price of $0.91 per share. The $115,000 fair value of the warrants at
the date granted has been capitalized with loan fees and is being amortized over
the 60 month term of the leases (see Note 9).
Future lease payments under the lease agreement as of December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999...................................................... $ 241
2000...................................................... 241
2001...................................................... 240
2002...................................................... 232
2003...................................................... 59
------
Total future lease payments................................. 1,013
Less portion relating to interest........................... 243
------
Total capital lease obligations............................. 770
Less current portion........................................ 133
------
Total long-term portion..................................... $ 637
======
</TABLE>
7. SHAREHOLDERS' EQUITY
STOCK SPLITS
In March 1998, January 1999, July 1999 and September 1999, the Company
effected two-for-one, two-for-one, two-for-one and three-for-two stock splits,
respectively, on the then outstanding shares, warrants and options. The splits
have been retroactively reflected in the financial statements and notes to the
financial statements.
CONVERTIBLE PREFERRED STOCK
Significant terms of outstanding Series A and B preferred stock are as
follows:
- In the event of liquidation, dissolution, or winding up of Webvan, the
holders of Series A and Series B preferred stock are entitled to receive
$0.0958 and $0.91 per share (subject to adjustment for stock splits and
like events), respectively, plus any declared but unpaid dividends prior
to any distribution to the common shareholders. After the preferred
shareholders have received payment, any remaining assets would be shared
by all preferred and common shareholders on a pro rata basis.
- Each share of preferred stock is convertible at the option of the holder
into one share of common stock (subject to adjustments for stock splits
and like events). Shares will automatically be converted upon an
underwritten initial public offering (IPO) of Webvan's common shares
meeting certain criteria.
- Each share of preferred stock has voting rights equivalent to the number
of shares of common stock into which it is convertible. In addition, for
so long as there are outstanding at least 12,000,000 shares in the case
of the Series A preferred stock, and 12,000,000 shares in the
F-13
<PAGE> 82
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
case of the Series B preferred stock, the holders of each of the Series A
preferred stock and Series B preferred stock shall be entitled to approve
amendments to the articles of incorporation, approve the payment or
declaration of dividends, approve the merger or consolidation of Webvan,
approve the sale of all or substantially all of the assets of the
Company, and approve other actions specified in the articles of
incorporation. In addition, for so long as there are at least 12,000,000
shares of Series A preferred stock outstanding, the holders of the Series
A preferred stock shall be entitled to nominate and elect two directors.
- Dividends may be declared at the discretion of the Board of Directors and
are non-cumulative. Dividends of $0.0067 per share on Series A preferred
stock and $0.0617 on Series B preferred stock (as adjusted for any stock
splits or like events) must be declared and paid before payment of any
common stock dividends.
- Prior to the sale of any shares in a subsequent stock offering, the
existing preferred shareholders shall have a right of first refusal to
purchase the shares, subject to certain exceptions. In addition, upon
written notice of a sale of preferred shares by Webvan's founder, each
shareholder has the right to sell its co-sale pro rata share of the
shares proposed to be sold. These provisions expire upon an initial
public offering.
PREFERRED STOCK -- SERIES C
On January 21, 1999, Webvan authorized the sale and issuance of up to
32,341,200 shares of its Series C preferred stock at a purchase price of $2.32
per share. As of June 30, 1999, Webvan had issued 32,341,200 shares of Series C
preferred stock. The actual cash proceeds, net of $2 million of issuance costs,
amounted to $73 million.
RESTRICTED COMMON STOCK
At December 31, 1998, Webvan had 360,000,000 authorized shares of common
stock of which 78,589,722 were issued and outstanding. At December 31, 1998,
Webvan had reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Issuance under stock options plan........................... 46,010
Issuance upon conversion of Series A preferred stock........ 112,635
Issuance upon conversion of Series B preferred stock........ 41,814
-------
Total shares reserved....................................... 200,459
=======
</TABLE>
Significant terms of the restricted common stock are as follows:
- In the event that the continuous status of an employee, consultant or
director of Webvan terminates for any reason, Webvan shall upon the date
of such termination have an irrevocable right for a period of 90 days
from such termination date to repurchase any unreleased (unvested) shares
at the original purchase price.
- The shares shall be released from the repurchase option immediately
(i.e., fully vested) or over a three-year period depending on the
specific terms of the agreement and the parties involved. As of December
31, 1998, 66,000,000 shares (see Note 8) were subject to repurchase under
the applicable restricted stock purchase agreements.
F-14
<PAGE> 83
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
- Prior to the sale of any common shares owned by certain shareholders,
Webvan shall have a right of first refusal to purchase the shares. These
rights shall terminate upon the closing of an IPO, a sale of all or
substantially all the assets of Webvan, or a merger.
- In connection with a possible IPO, the shareholders agree not to sell any
shares without the prior written consent of Webvan or the underwriters
managing the IPO for up to 180 days from the effective date of such
registration.
- Each share of common stock issued and outstanding shall have one vote.
8. STOCK OPTION PLAN
On September 17, 1997, Webvan adopted the 1997 Stock Plan (the Plan) and
reserved 30,000,000 shares of Webvan's common stock for issuance under the Plan,
which expires on September 17, 2007. Options are granted at fair market value at
the date of grant as determined by the Board of Directors. As provided for in
the Plan, incentive and non-statutory stock options may be granted to employees,
officers, directors or consultants. Incentive options may only be granted to
employees and at an exercise price of no less than fair value on the date of
grant. Non-statutory options may be granted at an exercise price of no less than
85% of fair value. For owners of more than 10% of Webvan's stock, options may
only be granted for an exercise price of no less than 110% of fair value.
Options generally become exercisable at a rate of 25% on the one year
anniversary of the vesting commencing date, which may precede the grant date,
with an additional 6.25% exercisable at the end of each quarter thereafter until
fully vested at the end of the fourth year. Vesting may not exceed five years
for grants to owners of more than 10% of Webvan's voting power, nor exceed ten
years for all other option holders.
Stock option activity under the 1997 Stock Plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE
(IN THOUSANDS) PRICE
-------------- --------
<S> <C> <C>
Options granted during 1997 (weighted average fair value of
$0.00016)................................................. 12,588 $0.00081
Options canceled during 1997................................ (108) 0.00081
-------
Balance, December 31, 1997 (none exercisable)............... 12,480 0.00081
Options granted during 1998 (weighted average fair value of
$0.01740)................................................. 46,437 0.10206
Options exercised during 1998............................... (18,981) 0.00645
Options canceled during 1998................................ (3,210) 0.02735
-------
Balance, December 31, 1998.................................. 36,726 0.12361
Options granted during 1999 (unaudited)..................... 6,990 1.90332
Options exercised during 1999 (unaudited)................... (2,869) 0.02554
Options canceled during 1999 (unaudited).................... (413) 0.12429
-------
Balance, June 30, 1999 (unaudited).......................... 40,434 $0.26546
=======
</TABLE>
F-15
<PAGE> 84
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
Additional information regarding options outstanding as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------
NUMBER WEIGHTED NUMBER
OF AVERAGE WEIGHTED OF WEIGHTED
SHARES REMAINING AVERAGE SHARES AVERAGE
EXERCISE (IN CONTRACTUAL EXERCISE (IN EXERCISE
PRICES THOUSANDS) LIFE (YEARS) PRICE THOUSANDS) PRICE
- ------------------- ---------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
$0.00081 2,163 8.09 $0.00081 924 $0.00081
$0.01250 13,062 9.07 $0.01250 6,741 $0.01250
$0.10000 13,998 9.60 $0.10000 -- --
$0.41667 7,503 9.94 $0.41667 -- --
------ -----
$0.00081 - $0.41667 36,726 9.39 $0.12773 7,665 $0.00650
====== =====
</TABLE>
At December 31, 1998, shares of common stock available for future option
grants totaled 16,293,522. During 1998 and in January 1999, Webvan's Board of
Directors increased the 30,000,000 shares of common stock reserved under the
plan as follows: 12,000,000 in May 1998; 6,000,000 in July 1998; 6,000,000 in
October 1998; 12,000,000 in December 1998 and 6,000,000 in January 1999. As a
result, 50,150,910 shares are reserved in the option pool as of June 30, 1999.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, Webvan accounts for its stock-based awards using
the intrinsic value method in accordance with APB 25. Based on the stock value
and exercise prices, during the year ended December 31, 1998, $1,060,00 of
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", (SFAS 123) requires the disclosure of pro forma net
income and earnings per share as if Webvan had adopted the fair value method as
of the beginning of the period ended December 31, 1997. Webvan's calculations
were made using the minimum value method with the following weighted average
assumptions: expected life of 60 months following the grant date; risk free
interest rates of 6% in 1998; and no dividends during the expected term.
Webvan's calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. If the computed fair value of 1998 and
1997 awards had been charged to compensation over the vesting period of the
awards, the net loss would have been $12,028,000 ($(0.18) per share, basic and
diluted) in 1998 and $2,841,000 ($(0.08) per share, basic and diluted) in 1997.
F-16
<PAGE> 85
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
9. NONCASH FINANCING ACTIVITIES
STOCK AND OPTIONS FOR RECRUITING
Webvan issued the following shares and options for recruiting services that
represent noncash operating expenses (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FAIR
NUMBER FAIR VALUE AT
DATE OF VALUE ISSUANCE
ISSUED SHARES PER SHARE DATE
------ ---------- --------- --------
<S> <C> <C> <C> <C>
Stock:
Series A preferred stock................ 1997 939 $0.09583 $90
Restricted common....................... 1997 360 0.01250 5
Series A preferred stock................ 1998 51 0.09583 5
</TABLE>
<TABLE>
<CAPTION>
FAIR
SHARES EXERCISE VALUE
DATE COVERED BY PRICE AT GRANT
ISSUED OPTIONS PER SHARE DATE
------ ---------- --------- --------
<S> <C> <C> <C> <C>
Stock options --
Restricted common....................... 1998 160 $0.10000 $7
</TABLE>
DEFERRED COMPENSATION
In connection with the grant of certain stock options in 1998 and 1999, the
Company recorded deferred compensation of $11,797,000 and $17,006,000 and
compensation expense of $1,060,000 and $3,953,000, respectively, representing
the difference between the deemed fair value and the option exercise price as
determined by the Board of Directors on the date of grant. The deferred
compensation is being amortized over the four-year vesting period of the
underlying options.
WARRANTS FOR DEBT
Webvan issued the following warrants in connection with its long-term debt
and capital lease arrangements (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FAIR
SHARES EXERCISE VALUE
DATE COVERED BY PRICE AT GRANT
ISSUED WARRANTS PER SHARE DATE
------ ---------- --------- --------
<S> <C> <C> <C> <C>
Series B preferred stock warrants......... 1998 2,398 $ 0.91 $1,679
</TABLE>
The above shares and shares covered by options and warrants reflect the
two-for-one stock splits in March 1998, January 1999 and July 1999 and the
three-for-two stock split in August 1999. The fair value of the options and
warrants was determined using the Black-Scholes option pricing model with the
following assumptions: expected life of seven years; risk-free interest rate of
6% in 1998 and 1997; no dividends during the expected term and volatility of
80%. The calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. The warrants expire November 2005.
F-17
<PAGE> 86
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
10. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands except per share
amounts):
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM FROM
DECEMBER 17, DECEMBER 17,
1996 (DATE OF YEAR SIX MONTHS ENDED 1996 (DATE OF
INCORPORATION) ENDED JUNE 30, INCORPORATION)
TO DECEMBER 31, DECEMBER 31, ------------------------- TO JUNE 30,
1997 1998 1998 1999 1999
--------------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss (numerator),
basic and
diluted............ $(2,840) $(12,004) $(3,262) $(35,134) $(49,978)
------- -------- ------- -------- --------
Shares (denominator):
Weighted average
common shares
outstanding..... 37,407 76,934 70,518 84,689 62,322
Weighted average
common shares
outstanding and
subject to
repurchase...... -- (9,820) (5,443) (11,409) (6,101)
------- -------- ------- -------- --------
Shares used in
computation, basic
and diluted........ 37,407 67,114 65,075 73,280 56,221
======= ======== ======= ======== ========
Net loss per share,
basic and
diluted............ $ (0.08) $ (0.18) $ (0.05) $ (0.48) $ (0.89)
======= ======== ======= ======== ========
</TABLE>
F-18
<PAGE> 87
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
For the above-mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following (in thousands, except per share amounts):
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM FROM
DECEMBER 17, DECEMBER 17,
1996 (DATE OF YEAR SIX MONTHS ENDED 1996 (DATE OF
INCORPORATION) ENDED JUNE 30, INCORPORATION)
TO DECEMBER 31, DECEMBER 31, ------------------------- TO JUNE 30,
1997 1998 1998 1999 1999
--------------- ------------ ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.............. 112,583 151,736 151,163 184,090 184,090
Shares of common
stock subject to
repurchase......... -- 14,456 16,629 9,345 9,345
Outstanding options.. 12,480 36,726 15,870 40,434 40,434
Warrants............. -- 2,398 -- 2,398 2,398
-------- -------- -------- -------- --------
Total...... 125,063 205,316 183,662 236,267 236,267
======== ======== ======== ======== ========
Weighted average
exercise price of
options............ $0.00083 $0.12773 $0.01043 $0.27431 $0.27431
======== ======== ======== ======== ========
Weighted average
exercise price of
warrants........... $ -- $ 0.91 $ -- $ 0.91 $ 0.91
======== ======== ======== ======== ========
</TABLE>
11. INCOME TAXES
While Webvan is in the development stage, substantially all losses incurred
for financial statements purposes will be deferred for income tax purposes. In
the year that Webvan first generates revenues from operations, expenditures
accumulated during the development stage will start being amortized for income
tax purposes over a five-year period. The deduction of these expenses for
financial statement purposes in years preceding the deduction for income tax
purposes is a temporary difference that creates a deferred tax asset. At
statutory rates, the deferred tax asset amounts to approximately $5.5 million
which has been offset by a valuation allowance of the same amount due to lack of
operating history combined with risks and uncertainties surrounding Webvan's
ability to generate future taxable income.
F-19
<PAGE> 88
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 101 $ 101
Start-up costs capitalized for tax purposes............... 1,000 5,384
Other..................................................... 15 34
------- -------
Total deferred tax assets................................... 1,116 5,519
Valuation allowance......................................... (1,116) (5,519)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
At December 31, 1998 the Company has federal net operating loss
carryforwards of approximately $227,000, expiring in 2012. The Company has
research tax credit carryforwards available to offset future federal taxes of
$45,000, expiring from 2012 to 2013. The Company has state net operating loss
carryforwards of approximately $235,000, expiring in 2002. The Company also has
state tax credit carryforwards of approximately $25,000, which do not expire.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
12. LEASES
Webvan leases facilities under noncancelable operating lease agreements
which expire at various dates through 2008.
Future lease payments under the lease agreements as of December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999................................................... $ 1,790
2000................................................... 1,834
2001................................................... 1,900
2002................................................... 1,665
2003................................................... 1,577
Thereafter.................................................. 7,070
-------
Total future lease payments....................... $15,836
=======
</TABLE>
Facilities rent expense was $1,026 and $123 for the periods ended December
31, 1998 and 1997, respectively.
13. EMPLOYEE BENEFIT PLAN
Webvan has a 401(k) profit-sharing plan (the 401(k) Plan) that covers
substantially all employees. The 401(k) Plan provides for voluntary salary
reduction contributions of up to 15% of
F-20
<PAGE> 89
WEBVAN GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1999 IS UNAUDITED)
eligible participants' annual compensation subject to Internal Revenue Code
limitations. Under the terms of the 401(k) Plan, Webvan will match 100% of
employees' contributions for the first $500 and 25% thereafter to a maximum of
$2,000 per year. Matching contributions made during the period ended December
31, 1997 and 1998 were $17,000 and $81,000, respectively.
14. RELATED PARTY TRANSACTIONS
From inception through October 1997, Webvan's founder advanced $2,037,679
to the Company in exchange for notes payable bearing 8% interest payable. The
notes were due on demand or upon Webvan's obtaining equity financing. The notes
were fully repaid with interest of $68,709 on October 30, 1997 after issuance of
Series A preferred stock on October 29, 1997.
A general contractor of Webvan has subcontracted with an equipment
manufacturer (see Note 2) to install equipment in Webvan's distribution center.
A total of $4.9 million of this work was completed by December 31, 1998 and is
included in construction in progress within property, equipment and leasehold
improvements.
15. SUBSEQUENT EVENTS
On July 8, 1999, the Company signed an agreement (the "Agreement") with a
contractor to design, develop and construct up to 26 distribution center
warehouse facilities ("Distribution Centers") in the United States. The
Agreement includes a five year exclusivity clause. The Agreement expires July 8,
2002, unless extended by written agreement. As part of the Agreement, the
contractor was granted a warrant to purchase up to 1,800,000 shares of the
Company's Series C preferred stock at $2.32 per share (the "Warrant"). The
Warrant is exercisable as to 150,000 shares on July 8, 1999 and generally
becomes exercisable as to the remaining shares as Distribution Centers are
completed by the contractor within agreed upon schedule and budgetary
parameters. A portion of the Warrant shares will be forfeited if the schedule
and budgetary parameters are not met for any Distribution Center.
Under the applicable accounting guidelines in Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services", the measurement date for the Warrant is July 8, 1999 as that is the
performance commitment date. As of July 8, 1999, the Company will capitalize
approximately $1.3 million, the fair value of the warrant related to the 150,000
exercisable shares, as determined by the board of directors and will amortize
that amount over the five year exclusivity period. No amount will be capitalized
as of that date for the fair value of the Warrant related to the non-exercisable
shares as eventual exercisability is dependent on counterparty performance. Any
amounts capitalized based on Bechtel's future performance will be amortized over
the useful life of the Distribution Centers. If and when the Warrant becomes
exercisable as to additional shares, based on counterparty performance, the
Company will capitalize additional cost based on the then fair value of the
Warrant related to such additional exercisable shares.
On July 15, 1999, Webvan entered into an agreement that provided for the
sale of 21,670,605 shares of its Series D-2 preferred stock at a price of $12.69
per share totaling approximately $275 million.
F-21
<PAGE> 90
UNDERWRITING
Webvan and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Donaldson, Lufkin
& Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc.,
Deutsche Bank Securities Inc. and Thomas Weisel Partners LLC are the
representatives of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
BancBoston Robertson Stephens Inc...........................
Bear, Stearns & Co. Inc.....................................
Deutsche Bank Securities Inc................................
Thomas Weisel Partners LLC..................................
----------
Total..................................................... 25,000,000
==========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
3,750,000 shares from Webvan to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
Webvan will sell the shares to the underwriters at a price of $ per
share, which represents a $ (or %) discount from the initial public
offering price set forth on the cover page of this prospectus. This discount is
the underwriters' compensation. The following table shows the per share and
total underwriting discounts and commissions to be paid to the underwriters by
Webvan. Such amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase 3,750,000 additional shares.
<TABLE>
<CAPTION>
PAID BY WEBVAN
--------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
Pursuant to lock-up agreements, Webvan and its directors, officers,
employees and other securityholders have agreed not to offer, sell, transfer or
otherwise dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the lock-up
period, except with the prior written consent of Goldman, Sachs & Co. According
to the lock-up agreements, at any time beginning on the third day following the
public release of our earnings for the year ended December 31, 1999, each
stockholder may dispose of or hedge up to 15% of his or her shares owned as of
December 31, 1999; at any time beginning on the 48th day following the public
release of our earnings for the year ended December 31, 1999, each stockholder
may dispose of or hedge up to an additional 25% of his or her shares owned as of
December 31, 1999; and each
U-1
<PAGE> 91
such stockholder may dispose of or hedge his or her remaining shares at any time
on or following the date which is 180 days after the date of this prospectus.
This agreement does not apply to any existing employee benefit plan. See "Shares
Eligible for Future Sale" for a discussion of transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price for the common stock will be negotiated among
Webvan and the representatives of the underwriters. Among the factors to be
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, will be Webvan's historical
performance, estimates of Webvan's business potential and earnings prospects, an
assessment of Webvan's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Webvan has applied to have the common stock listed on the Nasdaq National
Market under the symbol "WBVN".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect that market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Webvan currently anticipates that it will request the underwriters to
reserve up to 500,000 shares of its common stock for sale at the initial public
offering price to persons designated by Webvan, substantially all of whom have
been or are expected to be vendors or service providers to Webvan, through a
directed share program. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998 Thomas Weisel Partners has been named as a lead or co-manager of 76 filed
public offerings of equity securities, of which 53 have been completed, and has
acted as a syndicate member in an additional 38 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
Webvan or any of Webvan's officers, directors or other controlling persons,
except for its contractual relationship with Webvan under the terms of the
underwriting agreement entered into in connection with this offering.
In July 1999, entities affiliated with Goldman, Sachs & Co. purchased an
aggregate of 7,880,220 shares of Webvan's Series D-2 preferred stock for an
aggregate purchase price of approximately $100.0 million.
U-2
<PAGE> 92
Webvan estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.4
million.
Webvan has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-3
<PAGE> 93
Inside Front Cover Graphics
[artwork consists of the Webvan logo and
website address and pictures of food products]
<PAGE> 94
Inside Gatefold Graphics
[artwork which depicts the Webvan solution, illustrated by pictures of the
Company's Webstore, delivery service, distribution center and food products
together with captions explaining the pictures and diagram]
<PAGE> 95
Inside Back Cover Graphics
[artwork consists of an arrow pointing to "webvan.com"]
<PAGE> 96
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or represent anything not contained in this prospectus. You must not
rely on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances where
it is lawful to do so. The information contained in this prospectus is current
only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Summary Consolidated Financial Data... 4
Risk Factors.......................... 5
Special Note Regarding Forward-Looking
Statements.......................... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 23
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 32
Management............................ 45
Related Party Transactions............ 56
Principal Stockholders................ 58
Description of Capital Stock.......... 61
Shares Eligible for Future Sale....... 64
Legal Matters......................... 65
Experts............................... 65
Available Information................. 66
Index to Financial Statements......... F-1
Underwriting.......................... U-1
</TABLE>
-------------------------
Through and including November , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
25,000,000 Shares
WEBVAN GROUP, INC.
Common Stock
-------------------------
LOGO
-------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities being registered. All amounts shown are estimates except for
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee....................................... $ 103,903
NASD filing fee............................................ 30,500
Nasdaq National Market Fees................................ 80,000
Blue Sky qualification fees and expenses................... 10,000
Printing and engraving expenses............................ 200,000
Accountant's fees and expenses............................. 300,000
Legal fees and expenses.................................... 600,000
Miscellaneous.............................................. 75,597
----------
Total............................................ $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by such section.
The Registrant's Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
The Registrant's Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of the Registrant if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the Registrant, and, with respect to any criminal action
or proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Registrant has director and officer liability insurance that covers
matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Registrant's inception in December 1996, the Registrant has
issued and sold the following unregistered securities:
1. Between April and September 1997, the Registrant issued an aggregate of
64,034,472 shares of Common Stock of the Registrant to Louis H. Borders
and his family members, David Rock and entities and persons affiliated
with Wilson Sonsini Goodrich & Rosati, P.C. pursuant to restricted
stock purchase agreements for an aggregate amount of $53,362.06.
2. Between September 1997 and October 1999, the Registrant granted and
issued options to purchase an aggregate of 79,965,928 shares of Common
Stock of the Registrant to executive officers, employees, Ramsey Beirne
Associates, Inc., Christos Cotsakos and Yahoo! Inc. pursuant to the
Registrant's 1997 Stock Plan with an aggregate exercise price of
$104,514,171.57. The executive officers include Kevin R. Czinger,
Arvind Peter Relan,
II-1
<PAGE> 98
S. Coppy Holzman, Gary B. Dahl, Mark J. Holtzman, Christian T. Mannella, David
S. Rock, Robert H. Swan and Mark X. Zaleski.
3. In October 1997, the Registrant issued an aggregate of 111,643,872
shares of Series A Preferred Stock of the Registrant to entities
affiliated with Sequoia Capital, entities associated with Benchmark
Capital Partners, entities and persons affiliated with Wilson Sonsini
Goodrich & Rosati, P.C., unaffiliated investors and Louis H. Borders
for an aggregate amount of $10,699,204.40.
4. From December 1997 to February 1998, the Registrant issued an aggregate
of 991,296 shares of Series A Preferred Stock of the Registrant to
consultants for an aggregate amount of $94,999.20. The consultants
include DHR International, Inc., Information Technology Partners, Inc.
and Daniel P. Bowman.
5. From April 1998 to October 1999, the Registrant issued an aggregate of
24,760,137 shares of Common Stock of the Registrant to executive
officers, employees, Christos Cotsakos and Ramsey Beirne Associates,
Inc. pursuant to the Registrant's 1997 Stock Plan for an aggregate
exercise price of $1,114,661.71. The executive officers include Arvind
Peter Relan, S. Coppy Holzman, Gary B. Dahl, Mark J. Holtzman, Vivek
Joshi, Christian T. Mannella and David S. Rock.
6. In May 1998, the Registrant issued 16,380,000 shares of Series B
Preferred Stock of the Registrant to SOFTBANK Holdings, Inc. for an
amount of $14,960,400.
7. In May 1998, the Registrant granted and issued a warrant to purchase
164,232 shares of Series B Preferred Stock of the Registrant to
Comdisco for an exercise price of $149,998.56.
8. In June 1998, the Registrant issued an aggregate of 21,341,976 shares
of Series B Preferred Stock of the Registrant to SOFTBANK Holdings,
Inc. and Raj Vattikuti for an aggregate amount $19,492,338.08.
9. From June 1998 to September 1998, the Registrant issued an aggregate of
1,379,328 shares of Series B Preferred Stock of the Registrant to
consultants and individual investors for an aggregate amount of
$1,259,786.24. The consultants include Harbor Belmont Associates,
Distribution Planning, Inc. and individuals associated with
Distribution Planning, Inc.
10. In June 1998, the Registrant granted and issued an aggregate of 18,000
shares of Series B Preferred Stock of the Registrant to employees for
an aggregate amount of $16,440.
11. In November 1998, the Registrant granted and issued warrants to
purchase an aggregate of 2,233,572 shares of Series B Preferred Stock
of the Registrant to equipment lessors for an aggregate exercise price
of $2,039,995.76. The equipment lessors include Lighthouse Capital
Partners II, L.P., Dominion Capital Management, LLC, Imperial Bank,
MMC/GATX Partnership No. 1 and Venture Lending & Leasing, Inc.
12. In January 1999, the Registrant issued an aggregate of 12,000 shares of
Series B Preferred Stock of the Registrant to employees for an
aggregate amount of $10,960.
13. In January 1999, the Registrant issued an aggregate of 32,281,200
shares of Series C Preferred Stock of the Registrant to venture
investors for an aggregate amount of $74,999,988. The venture investors
include Yahoo! Inc. and E*TRADE Group, Inc.
14. In April 1999, the Registrant issued an aggregate of 60,000 shares of
Series C Preferred Stock of the Registrant to individual investors for
an aggregate amount of $139,400.
15. In June 1999, the Registrant issued 450,000 shares of Common Stock of
the Registrant to Kevin R. Czinger for an amount of $607,500.
II-2
<PAGE> 99
16. In July and August 1999, the Registrant issued an aggregate of
21,670,605 shares of Series D-2 Preferred Stock of the Registrant to
SOFTBANK Holdings, Inc., Goldman, Sachs & Co. and Sequoia Capital and
their affiliates for an aggregate amount of $274,999,997.40.
17. In July 1999, the Registrant granted and issued warrants to purchase an
aggregate of 1,812,000 shares of Series C Preferred Stock of the
Registrant to Vintage Island Partners and Bechtel Corporation for an
aggregate exercise price of $4,209,880.
18. In August, September and October 1999, the Registrant issued 22,500
shares of common stock of the Registrant to Ramsey Beirne Associates,
Inc. for services provided.
19. In September 1999, the Registrant issued 150,000 shares of Series C
Preferred Stock of the Registrant to Bechtel Corporation for $348,500.
20. In September 1999, the Registrant granted and issued options to
purchase an aggregate of 903,075 shares of common stock of the
Registrant to employees pursuant to the Registrant's 1997 Stock Plan
with an aggregate exercise price of $9,741,172.01.
21. In September and October 1999, the Registrant granted and issued
options to purchase an aggregate of 975,000 shares of common stock of
the Registrant to employees, Gregory Beutler, and Robert H. Swan
pursuant to the Registrant's 1999 Nonstatutory Stock Option Plan with
an aggregate exercise price of $4,686,873.
22. In September 1999, the Registrant granted and issued options to
purchase an aggregate of 15,150,000 shares of common stock of the
Registrant to Barton Executive Search, a consultant, and George T.
Shaheen, an executive officer, pursuant to the Registrant's 1999
Nonstatutory Stock Option Plan with an aggregate exercise price of
$121,618,005.
23. In October 1999, the Registrant issued 1,250,000 shares of common stock
of the Registrant to George T. Shaheen in connection with his
employment.
24. In October 1999, the Registrant issued 2,500 shares of common stock of
the Registrant to Cooley Godward LLP for services provided and 40,500
shares of common stock of the Registrant to Peter Keen, a consultant,
for services being provided.
25. In October 1999, the Registrant issued 15,000 shares of common stock of
the Registrant to Sanjay Uppal, an employee, pursuant to the
Registrant's 1999 Nonstatutory Stock Option Plan for an exercise price
of $49,999.50.
There were no underwriters involved in connection with any transaction set
forth above. The issuances of the securities in paragraphs 2, 5, 15 and 21 of
this Item 15 were deemed to be exempt from registration under the Securities Act
in reliance upon Rule 701 promulgated thereunder as grants of options pursuant
to written compensatory benefit plans approved by the Registrant's Board of
Directors. The other issuances set forth in this Item 15 were deemed to be
exempt from registration pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder as a transaction by an issuer not involving
a public offering.
In all of such transactions, the recipients of securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the securities issued.
II-3
<PAGE> 100
The following table summarizes the benefits to the executive officers and
directors in connection with the above issuances, based upon an assumed initial
public offering price of $12.00 per share, as compared to the price at which
such parties purchased the Registrant's securities.
<TABLE>
<CAPTION>
PRICE PAID
EXECUTIVE OFFICER OR DIRECTOR NUMBER OF SHARES PER SHARE VALUE OF BENEFIT
----------------------------- ---------------- ---------- ----------------
<S> <C> <C> <C>
Louis H. Borders.......................... 14,117,328 $0.00083 $169,396,218.62
22,240,896 0.09583 264,759,406.94
George T. Shaheen......................... 1,250,000 0.00000 15,000,000.00
Kevin R. Czinger.......................... 450,000 1.35000 4,792,500.00
Arvind Peter Relan........................ 3,828,000 0.01250 45,888,150.00
Gary B. Dahl.............................. 2,250,000 0.00083 26,998,132.50
Mark J. Holtzman.......................... 1,260,000 0.00083 15,118,954.20
Mark J. Holtzman.......................... 600,930 0.01250 7,203,648.38
S. Coppy Holzman.......................... 2,250,000 0.00083 26,998,132.50
Vivek Joshi............................... 30,000 3.33333 260,000.10
Christian T. Mannella..................... 78,000 0.41667 903,499.74
David S. Rock............................. 3,600,000 0.00083 43,197,012.00
360,000 0.01250 4,315,500.00
Christos Cotsakos......................... 684,462 0.10000 8,145,097.80
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1# Form of Underwriting Agreement
3.1# Certificate of Incorporation of the Registrant
3.2# Restated Certificate of Incorporation of the Registrant
3.3# Bylaws of the Registrant
3.4# Restated Certificate of Incorporation of the Registrant to
be filed following the closing of the offering.
4.1# Specimen Common Stock Certificate
4.2# Registration Rights Agreement dated October 29, 1997, as
amended
5.1# Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1# Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2# 1997 Stock Plan and form of agreements thereunder
10.3# 1999 Employee Stock Purchase Plan
10.4# Lease Agreement dated April 1, 1998 between the Registrant
and Lincoln Coliseum Distribution Center for premises in
Oakland, California
10.5# Lease Agreement dated March 4, 1999 between the Registrant
and AMB Property, LP for premises in Atlanta, Georgia
10.6# Lease Agreement dated January 21, 1997 between the
Registrant and Dove Holdings, Inc. for premises in Foster
City, California
10.7# Lease and Security Agreement dated November 18, 1998 between
the Registrant and Lighthouse Capital Partners and other
lenders
10.8# Offer Letter dated March 18, 1999 between the Registrant and
Kevin R. Czinger
10.9# Offer Letter dated February 2, 1998 between the Registrant
and Arvind Peter Relan
10.10# Offer Letter dated December 14, 1998 between the Registrant
and Mark X. Zaleski
10.11# Offer Letter dated March 31, 1997 between the Registrant and
Gary B. Dahl
10.12# Offer Letter dated June 5, 1997 between the Registrant and
Mark J. Holtzman
10.13# Offer Letter dated September 3, 1997 between the Registrant
and S. Coppy Holzman
10.14#+ Contract dated July 8, 1999 for turnkey design/build
construction and related services between the Registrant and
Bechtel Corporation
10.15# Warrant dated July 8, 1999 issued to Bechtel Corporation
10.16# Warrant dated May 27, 1998 issued to Comdisco Ventures
10.17# Warrant dated November 18, 1998 issued to Lighthouse Capital
Partners
</TABLE>
II-4
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.18# Internet Data Services Agreement dated January 21, 1999
between the Registrant and Exodus Communications, Inc.
10.19# 1999 Nonstatutory Stock Option Plan and form of agreements
thereunder
10.20# Employment Agreement between the Registrant and George T.
Shaheen
10.21# Offer Letter dated August 19, 1999 between the Registrant
and Gregory Beutler
10.22# Offer Letter dated July 25, 1999 between the Registrant and
Vivek M. Joshi
10.23# Offer Letter dated October 2, 1999 between the Registrant
and Robert H. Swan
10.24+ Exclusive Supply and Sole Source Agreement between the
Registrant and Diamond Phoenix Corporation
10.25 Offer Letter dated November 10, 1998 between the Registrant
and Christian T. Mannella
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2# Consent of Counsel (see Exhibit 5.1)
24.1# Power of Attorney
24.2# Power of Attorney
24.3# Power of Attorney for George T. Shaheen
27.1# Financial Data Schedule
</TABLE>
- -------------------------
# Previously filed
+ Confidential treatment has been requested for certain portions of this
exhibit.
(b) Financial Statement Schedules
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 agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 6 to Registration Statement to be signed on
its behalf by the undersigned, thereunto, duly authorized in Foster City,
California, on October 28, 1999.
Webvan Group, Inc.
By: /s/ KEVIN R. CZINGER
------------------------------------
Kevin R. Czinger
Senior Vice President,
Corporate Operations and Finance
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on October 28, 1999 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board of Directors
- -----------------------------------------------------
Louis H. Borders
* President,
- ----------------------------------------------------- Chief Executive Officer and Director
George T. Shaheen (Principal Executive Officer)
/s/ KEVIN R. CZINGER Senior Vice President,
- ----------------------------------------------------- Corporate Operations
Kevin R. Czinger and Finance
(Principal Financial and Accounting Officer)
* Director
- -----------------------------------------------------
David M. Beirne
* Director
- -----------------------------------------------------
Christos M. Cotsakos
* Director
- -----------------------------------------------------
Tim Koogle
* Director
- -----------------------------------------------------
Michael J. Moritz
*By: /s/ KEVIN R. CZINGER
- -----------------------------------------------------
Kevin R. Czinger
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ------------
<S> <C> <C>
1.1# Form of Underwriting Agreement..............................
3.1# Certificate of Incorporation of the Registrant..............
3.2# Restated Certificate of Incorporation of the Registrant.....
3.3# Bylaws of the Registrant....................................
3.4# Restated Certificate of Incorporation of the Registrant to
be filed following the closing of the offering..............
4.1# Specimen Common Stock Certificate...........................
4.2# Registration Rights Agreement dated October 29, 1997, as
amended.....................................................
5.1# Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.................................................
10.1# Form of Indemnification Agreement between the Registrant and
each of its directors and officers..........................
10.2# 1997 Stock Plan and form of agreements thereunder...........
10.3# 1999 Employee Stock Purchase Plan...........................
10.4# Lease Agreement dated April 1, 1998 between the Registrant
and Lincoln Coliseum Distribution Center for premises in
Oakland, California.........................................
10.5# Lease Agreement dated March 4, 1999 between the Registrant
and AMB Property, LP for premises in Atlanta, Georgia.......
10.6# Lease Agreement dated January 21, 1997 between the
Registrant and Dove Holdings, Inc. for premises in Foster
City, California............................................
10.7# Lease and Security Agreement dated November 18, 1998 between
the Registrant and Lighthouse Capital Partners and other
lenders.....................................................
10.8# Offer Letter dated March 18, 1999 between the Registrant and
Kevin R. Czinger............................................
10.9# Offer Letter dated February 2, 1998 between the Registrant
and Arvind Peter Relan......................................
10.10# Offer Letter dated December 14, 1998 between the Registrant
and Mark X. Zaleski.........................................
10.11# Offer Letter dated March 31, 1997 between the Registrant and
Gary B. Dahl................................................
10.12# Offer Letter dated June 5, 1997 between the Registrant and
Mark J. Holtzman............................................
10.13# Offer Letter dated September 3, 1997 between the Registrant
and S. Coppy Holzman........................................
10.14#+ Contract dated July 8, 1999 for turnkey design/build
construction and related services between the Registrant and
Bechtel Corporation.........................................
10.15# Warrant dated July 8, 1999 issued to Bechtel Corporation....
10.16# Warrant dated May 27, 1998 issued to Comdisco Ventures......
10.17# Warrant dated November 18, 1998 issued to Lighthouse Capital
Partners....................................................
10.18# Internet Data Services Agreement dated January 21, 1999
between the Registrant and Exodus Communications, Inc. .....
10.19# Nonstatutory Stock Option Plan and form of agreements
thereunder..................................................
10.20# Employment Agreement between the Registrant and George T.
Shaheen.....................................................
10.21# Offer Letter dated August 19, 1999 between the Registrant
and Gregory Beutler.........................................
10.22# Offer Letter dated July 25, 1999 between the Registrant and
Vivek M. Joshi..............................................
10.23# Offer Letter dated October 2, 1999 between the Registrant
and Robert H. Swan..........................................
10.24+ Exclusive Supply and Sole Source Agreement between the
Registrant and Diamond Phoenix Corporation
10.25 Offer Letter dated November 10, 1998 between the Registrant
and Christian T. Mannella...................................
23.1 Consent of Deloitte & Touche LLP, Independent Auditors......
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ------------
<S> <C> <C>
23.2# Consent of Counsel (see Exhibit 5.1)........................
24.1# Power of Attorney...........................................
24.2# Power of Attorney...........................................
24.3# Power of Attorney for George T. Shaheen.....................
27.1# Financial Data Schedule.....................................
</TABLE>
- -------------------------
# Previously filed
+ Confidential treatment has been requested for certain portions of this
exhibit.
<PAGE> 1
EXHIBIT 10.24
EXCLUSIVE SUPPLY AND SOLE SOURCE AGREEMENT
This Exclusive Supply and Sole Source Agreement (the "Agreement"),
entered into as of the Effective Date (the "Effective Date"), is by and between
Intelligent Systems for Retail, Inc. ("ISR"), a California corporation with
offices at 1241 E. Hillsdale Boulevard, Suite 210, Foster City, California
94404, and Diamond Phoenix Corporation ("Diamond "), a Maine corporation with
offices at 167 River Road, Lewiston, Maine 04241.
RECITALS
WHEREAS, ISR is in the business of soliciting direct consumer sales via
the Internet and then selling and delivering grocery, drugstore, and general
merchandise products to general consumers;
WHEREAS, Diamond is in the business of designing, manufacturing,
integrating and installing equipment for automated materials handling, including
Carousel Products;
WHEREAS, the parties desire that Diamond manufacture and sell to ISR
various types of Carousel Products for automated materials handling;
WHEREAS, the parties desire that ISR purchase all of its requirements
for these Carousel Products from Diamond Phoenix; and
WHEREAS, the parties by this Agreement desire to set forth their
various rights and responsibilities regarding the sale and purchase of such
Carousel Products.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
AGREEMENT
1.0 DEFINITIONS.
1.1 "Affiliate" shall mean (i) a corporation performing activities relating to
ISR's business in which ISR owns and controls, directly or indirectly, at least
fifty percent (50%) of the outstanding shares entitled to vote for the board of
directors; (ii) a franchisee or licensee of ISR; or (iii) a joint venture with a
third party (x) which joint venture performs activities relating to ISR's
business, and (y) in which ISR owns or controls at least twenty percent (20%)
equity interest.
1.2 "Carousel Product" shall mean Diamond's carousel product for automated
materials handling, as more fully described in Exhibit A, including all
equipment and related Carousel Software. The parties agree that, from time to
time and subject to mutual agreement, the parties may amend or add different
configurations of carousel
<PAGE> 2
products to this list. When used without capitalization, the term "carousel
products" shall refer to carousel products generally and not just those
manufactured by Diamond.
1.3 "Carousel Software" shall mean that certain software, in source code and
object code format, which (1) controls the functionality of the Carousel Product
or (2) interfaces with other materials handling systems.
1.4 "Intellectual Property" shall mean all rights of a person or entity in, to,
or arising out of: (i) any U.S. or foreign patent (or any similar right) or any
application therefor and any and all reissues, divisions, continuations,
renewals, extensions and continuations-in part thereof; (ii) inventions (whether
patentable or not in any country), invention disclosures, improvements, trade
secrets, proprietary information, know-how, technology and technical data; (iii)
copyrights and registrations and applications therefor in the U.S. or any
foreign country, and all other rights corresponding thereto throughout the
world; and (iv) any other proprietary rights anywhere in the world.
1.5 "Shareholder Agreement" shall mean that certain Amended and Restated
Shareholder Agreement of even date herewith.
1.6 "Specifications" means the specifications for the Carousel Product, as set
forth in Exhibit A.
1.7 "Purchase Order" means a written order from ISR (or any of its Affiliates)
delivered to Diamond requesting Diamond to manufacture and sell a Carousel
Product and stating the proposed unit numbers and specifications of the Carousel
Product, the location at which the Carousel Product will be installed (the
"Worksite") and any special conditions thereof that might affect the
fabrication, installation or testing of the Carousel Product, shipping
instructions, any request for Diamond to supply labor for installation, a
requested testing schedule and procedure, and the requested delivery date. The
Purchase Order may also include a reference to a "Technical Proposal" sent by
Diamond to ISR, including such information as price, scope of work, system
functionality, delivery schedule, and acceptance test criteria.
2.0 MANUFACTURING AND SALES.
2.1 Manufacturing and Sale.
(a) Manufacturing and Sale. Upon ISR's (as used in this Section 2.0
only, ISR shall also refer to ISR's designated Affiliate(s)) Purchase Orders
therefor and pursuant to the terms and conditions of this Agreement, Diamond
agrees to manufacture and sell all Carousel Products ordered by ISR to ISR or
its designated Affiliates, and, subject to Section 2.1(c), ISR agrees to
purchase such Carousel Products from Diamond.
(b) Diamond Exclusivity. Provided that ISR fulfills its obligations
pursuant to Section 4 or unless ISR provides prior written consent, Diamond
shall not sell any Carousel Products (whether sold by Diamond or sold by a
licensee, distributor, integrator, broker or any other third
2
<PAGE> 3
party authorized by Diamond) to any other entity in the business of soliciting
and transacting direct consumer sales via the Internet and delivering (whether
using its own transportation or via outsourcing to a third party) grocery,
drugstore, and general merchandise to customers.
(c) ISR Exclusivity and Sole Source. For so long as Diamond
manufactures and sells to ISR its required supply of carousel products, ISR
agrees to purchase all of its requirements for carousel products from Diamond.
If Diamond fails to provide ISR with all its required supply of Carousel
Products ordered pursuant to this Agreement on any particular Purchase Order for
a given site on the delivery dates reasonably required by ISR, such failure
shall not be considered a breach of this Agreement but will entitle to ISR to
purchase enough equivalent products from a third party to fulfill such
particular Purchase Order. The foregoing notwithstanding, subject to ISR's
fulfilling its obligations set forth in Section 4 of this Agreement, Diamond's
obligations pursuant to Section 2.1(b) shall remain in full force and effect.
2.2 Orders and Forecasts.
(a) All purchases and sales between ISR (and any of its Affiliates) and
Diamond, whether consummated directly or indirectly through a third party agent
of Diamond, shall be initiated by ISR's issuance of written Purchase Orders sent
via airmail or by telephone or facsimile and then confirmed by written Purchase
Orders. The acceptance by Diamond of a Purchase Order shall be indicated by
written acknowledgment thereof by Diamond. In the event of a conflict between
the terms and conditions of any Purchase Order and the terms and conditions of
this Agreement, the terms and conditions of this Agreement shall control as to
such conflict, unless the parties agree in writing that the terms and conditions
of a particular Purchase Order shall supersede a particular term or condition of
this Agreement.
(b) ISR shall have the right to cancel Purchase Order(s) or any
portions thereof for any reason by notifying Diamond in writing no later than
thirty (30) days after ISR submits its Purchase Order(s) pursuant to Section
2.2(a). Cancellation shall be effective upon Diamond's receipt of the written
cancellation notice from ISR. Diamond shall cease all work on such canceled
purchase order(s) in accordance with the cancellation notice. In the event that
Diamond incurs any costs in connection with preparing for or commencing work on
a Purchase Order that is canceled pursuant to this provision, including without
limitation costs for materials, drawings or labor, ISR shall reimburse Diamond
for such reasonable costs within thirty (30) days of receiving an invoice
therefor.
2.3 Delivery and Shipping. Diamond shall ship the Carousel Products to ISR's
Worksite suitably packaged for shipment in Diamond's standard containers. All
shipping costs shall be prepaid by Diamond but invoiced to ISR.
2.4 Insurance and Risk of Loss. Immediately following delivery of the Carousel
Product to the Worksite, ISR shall be responsible for and shall bear any and all
risk of loss of or damage to the Carousel Product. ISR shall, at its expense,
take out and maintain insurance in an amount at least equal to the Purchase
Price covering all risks of loss or damage to the Carousel Product. Such
insurance shall name Diamond as an insured party and shall provide for an
insurer's waiver of
3
<PAGE> 4
subrogation in favor of all insured parties. Prior to delivery of the Carousel
Product to the Worksite, Diamond shall be responsible for and shall bear any and
all risk of loss of or damage to the Carousel Product. Diamond, at its expense,
shall maintain insurance in an amount equal to or greater than the value of all
Carousel Products that Diamond is manufacturing for or shipping to ISR, such
insurance to cover all risks of loss or damage to the Carousel Products.
2.5 Site Conditions and Provisions by Purchaser. ISR, at its own expense, shall
provide at the Worksite reasonable means of access to a minimum of one dock
door, with the availability of a dock leveler, a completely enclosed building to
protect Diamond's equipment from the elements, completion of water-tight roof
and such electric current, water, heat, ventilation, telephone service, a
temporary office space, light and other utilities and facilities required for
the installation of the Carousel Product. In the event that any elevator or
crane service owned by ISR shall be available at the Worksite, Diamond may,
without charge, use any such service for handling of materials during
installation. ISR shall allow Diamond access to the Worksite for inspection of
compliance to these requirements, prior to commencement of the installation.
Additional provisions and conditions related to Worksite conditions and
installation may be attached to the Purchase Order and acceptance thereof.
2.6 Permits. Prior to the installation of the Carousel Product, ISR shall
procure and pay for all building, erection and other licenses, permits,
authorizations and inspections required in connection with the Carousel Product.
Diamond shall not be responsible for any failure of the Carousel Product or its
installation to comply with building, electrical or other codes or regulations
of local, state or federal agencies or authorities.
2.7 Changes, Delays. At any time prior to delivery, ISR may request in writing
any substitutions, deviations, additions, or deletions (hereinafter referred to
as "Changes") in the Carousel Product and in the specifications or drawings
incorporated in this Agreement or the Purchase Order. All of the terms and
conditions of this Agreement shall apply to such Changes. If Diamond's
performance is delayed by any such Changes or by other causes within control of
ISR, ISR agrees to reimburse Diamond for reasonable and documented expenses
incurred as a result of such delay, including without limitation, the costs of
storing, maintaining, repairing, and refurbishing Carousel Product, demurrage,
labor and material escalation and pull out charges. Upon request by ISR, Diamond
shall provide to ISR an itemized list of all such expenses with supporting
documentation. In such event, ISR also agrees to excuse the delay and accept
Diamond's performance at any appropriately deferred completion date.
2.8 Labor and Personnel. Any request that Diamond supply labor at the Worksite
(other than Diamond's customary installation supervisor) shall be set forth in
the Purchase Order and the cost of such labor, including any premium for
overtime, shall be negotiated for each order.
2.9 Test and Inspection By ISR.
(a) All Carousel Products manufactured and delivered by Diamond may be
subject to incoming receiving inspection by ISR at the Worksite.
4
<PAGE> 5
(b) Within five (5) days of delivery of the Carousel Product to the
Worksite, ISR shall inspect the Carousel Product for damage incurred during
shipping and conformity to the Purchase Order. If ISR determines that the order
it has received does not conform to the Purchase Order, or is damaged during
shipment, ISR shall notify Diamond in writing within ten days of the date of
delivery of the Carousel Product to the Worksite and Diamond shall at its own
expense repair or replace such Carousel Product.
(c) Each Purchase Order and acceptance thereof shall state the
procedure and schedule for testing of the Carousel Product.
3.0 CAROUSEL SOFTWARE.
3.1 Carousel Software. Diamond shall own all right, title and interest in and to
the Carousel Software, including any Intellectual Property rights therein.
3.2 License Grant. Diamond grants to ISR (and its designated Affiliate(s) as
applicable) a nonexclusive, worldwide, perpetual, irrevocable, royalty-free,
fully paid up license to use, display and publicly perform the Carousel Software
in connection with the operation of the Carousel Products; and, for purposes of
executing the Carousel Software, analysis, and running simulations by ISR and
Affiliate(s) only, to copy the Carousel Software. Without limiting the
foregoing, ISR may grant to its designated Affiliate(s) to which it has sold,
leased or otherwise transferred a Carousel Product or which has purchased a
carousel Product directly from Diamond (or any third party agent of Diamond) a
sublicense in and to its rights in the Carousel Software co-extensive with the
rights granted hereunder by Diamond to ISR.
3.3 Ownership of Modifications. As between ISR and Diamond, subject to and with
exception of Diamond's ownership of the Carousel Software as set forth in
section 3.1, ISR shall own all right, title, and interest in and to any
permitted modifications and derivative works made from or to the Carousel
Software on behalf of ISR, including all Intellectual Property rights therein.
ISR grants Diamond a nonexclusive, worldwide, perpetual, irrevocable,
royalty-free, fully paid up license to use and copy any such modifications and
to sub-license any such modifications and derivative works to any licensee other
than a business described in section 2.1(b). Nothing in this section 3.3 should
be construed to allow ISR to modify or make derivative works from the Carousel
Software without the express written consent of Diamond.
3.4. Software Escrow.
3.4.1. Escrow Account.
(a) On the Effective Date, and as a condition precedent to any
obligation of ISR hereunder, Diamond will deposit a copy of all materials
relating to the Carousel Software, including the binary and source code for the
Carousel Software, and all tools used by Diamond to generate such software that
are not generally commercially available, such as Diamond-authored development
tools, etc., such that a reasonably skilled programmer could understand and
modify such Carousel Software (collectively, the "Source Materials") in escrow
with a mutually
5
<PAGE> 6
acceptable escrow agent and the parties will enter into a mutually acceptable
source code escrow agreement on customary terms consistent with the provisions
of this Section 3.5. Diamond will deposit all Source Materials with the escrow
agent in accordance with the escrow agreement, but in no event shall such
deposits occur less frequently than once per calendar quarter. ISR shall have
the right to inspect any deposited Source Materials after delivery to the escrow
agent, but only on the premises of the escrow agent and only as necessary to
verify the nature and completeness of such Source Materials. ISR shall pay the
fees of the escrow agent.
(b) In the event that Diamond ceases to carry on business for thirty
(30) consecutive days, fails or is otherwise unable to provide service and
support which it is contractually obligated to provide for the Carousel
Software, which inability continues for thirty (30) days after ISR notifies
Diamond in writing of the alleged failure in service and support, the deposited
Source Materials shall be delivered to ISR by the escrow agent. Delivery of the
deposited materials will be made to ISR after written request by ISR to the
escrow agent, stating the grounds upon which the request is made. On receipt of
the request from ISR, the escrow agent will mail a copy of the request to
Diamond and will then deliver the deposited Source Materials to ISR forthwith
thirty (30) days after the copy of the request is mailed to Diamond. If Diamond
disputes the occurrence of any default event specified in ISR's request, the
escrow agent will not deliver the requested Source Materials to either party
until directed to do so by ISR and Diamond jointly, or until ordered to do so by
final order of a court of competent jurisdiction or pursuant to an arbitration
proceeding initiated by either of the parties, in accordance with the
then-current rules of the American Arbitration Association. If ISR initiates the
arbitration, it shall be with an arbitrator located in the State of Maine. If
Diamond initiates such arbitration, it shall be with an arbitrator located in
the State of California. If a party initiates such arbitration, the other party
agrees to submit to the jurisdiction thereof, solely for the purpose of
adjudicating release pursuant to this Section 3.4 and to cooperate fully to
complete such proceeding as quickly as possible. The decision of the arbitrator
will be binding and either party will have the right to enter such order in a
court of competent jurisdiction.
3.4.2. Use of Source Materials.
(a) On the occurrence of receipt by ISR of the Source Materials, ISR
may use the Source Materials, either directly or indirectly, through a third
party programmer or analyst engaged by ISR specifically to complete or continue
Diamond's work, solely to modify, enhance, and support the Carousel Product, and
to make a reasonable number of copies of the Source Materials to assist in the
performance of such tasks;
(b) ISR acknowledges and agrees that the Source Materials constitute
confidential proprietary information of Diamond. ISR may disclose the Source
Materials only to those employees of ISR (or Affiliates) required to have
knowledge of such information to perform their duties. ISR shall protect the
Source Materials with the same degree of care as it protects its own
confidential information, and in no event less than a reasonable degree of care.
(c) If a problem that resulted in ISR obtaining the Source Materials is
later cured, ISR shall promptly return the Source Materials to escrow agent.
6
<PAGE> 7
4.0 ISR PERFORMANCE CRITERIA.
4.1 Minimum Order. In order to maintain the exclusivity granted in Section
2.1(b) and the effect of the Standstill Period as defined in the Stock Purchase
Agreement and the Shareholder Agreement, ISR (including all orders from its
Affiliate(s)) shall annually order at least the following amounts of Carousel
Products from Diamond:
(a) From January 1, 1999, through March 31, 2000, ISR shall place
cumulative orders of Carousel Products in an amount of [*] Dollars ($[*]);
(b) From January 1, 1999, through December 31, 2000, ISR shall place
cumulative orders of Carousel Products in an amount of [*] Dollars ($[*]); and
(c) From January 1, 1999, through December 31, 2001, ISR shall place
cumulative orders of Carousel Products in an amount of [*] Dollars ($[*]).
4.2 In the event that ISR fails to order the minimum amounts of Carousel
Products set forth above, but such orders nonetheless total at least
seventy-five percent (75%) of such minimum amounts, such failure shall not be
considered a breach of this Agreement but ISR may only maintain the exclusivity
in 2. 1 (b) and the Standstill Period by placing additional orders to meet the
minimum amounts within the first quarter of the following year.
4.3 In the event that IRS fails to order the minimum number of Carousel Products
set forth above and does not correct any such shortcoming pursuant to section
4.2, such failure shall not be deemed a breach of this Agreement but shall allow
Diamond to terminate the Standstill Period and the restriction that Diamond
limit certain sales to ISR exclusively as set forth in section 2.1(b).
4.4 For the purpose of determining whether ISR has placed sufficient orders to
meet the performance criteria set forth in this section, an "order" shall be
defined to include all of the following:
(a) The receipt by Diamond of a written Purchase Order from ISR:
(b) The receipt by ISR of Diamond's written acceptance of the Purchase
Order;
(c) The receipt by Diamond of ISR's deposit of ten percent (10%) of the
purchase price; and
(d) The receipt by Diamond on a continuing basis of all payments
invoiced with respect to a particular order in a timely manner.
- ---------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
7
<PAGE> 8
For the purposes of this section 4, an order placed by ISR or an Affiliate
directly or indirectly through an authorized agent, licensee, distributor,
integrator or broker of Diamond's shall be considered an order by ISR from
Diamond.
5.0 TECHNICAL SUPPORT.
Within one hundred and twenty (120) days of the Effective Date, the
parties shall negotiate and enter into a Separate Support Agreement, pursuant to
which Diamond would provide technical support to ISR regarding use of the
Carousel Products.
6.0 PRICE AND PAYMENT.
6.1 Price. ISR (as used in this Section 6.0 only, ISR shall also refer to ISR's
Affiliate) will pay to Diamond for Carousel Products as follows:
(a) ISR will pay to Diamond (whether sold by Diamond or sold by a
licensee, distributor, integrator, broker or any other third party authorized by
Diamond) for Carousel Products based on the price list and pricing methodology
set forth in Exhibit B. During the Term (but not extending through any renewal
term), Diamond shall not increase the prices charged to ISR for Carousel
Products by more than [*] of the increase in the Consumer Price
Index ("CPI") over the twelve month period prior to any such increase. As used
herein, CPI means the U.S. Consumer Price Index for all Urban Consumers, U.S.
City Average - All Items 1982-1984 = 100 Base for the applicable twelve (12)
month period as published by the Bureau of Labor Statistics. The price for
Carousel Products sold during any renewal term is set forth in section 7.2.
(b) During the term of this Agreement and any extensions thereof,
Diamond shall provide ISR with a volume discount on Carousel Products ordered,
and such discount shall be set equal as follows:
(i) If during any one (1) calendar year period, ISR places
orders for Carousel Products in an aggregate sum of between Five
Million Dollars ($5,000,000.00) and Ten Million Dollars ($
10,000,000.00), Diamond shall reduce the price, retroactively or
prospectively, as the case may be, of Carousel Products ordered during
the entire calendar year by [*] percent ([*]%).
(ii) If during any one (1) calendar year period, ISR places
orders for Carousel Products in an aggregate sum of more than Ten
Million Dollars ($ 10,000,000.00) but less than Twenty Million Dollars
($20,000,000.00), Diamond shall reduce the price, retroactively or
prospectively, as the case may be, of Carousel Products ordered during
the entire calendar year by [*] percent ([*]%).
(iii) If during any one (1) calendar year period, ISR places
orders for Carousel Products in an aggregate sum of more than Twenty
Million Dollars
- --------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
8
<PAGE> 9
($20,000,000.00), Diamond shall reduce the price, retroactively or
prospectively, as the case may be, of Carousel Products ordered during
the entire calendar year by [*] percent ([*]%).
(iv) For the purpose of determining whether ISR has placed
sufficient orders to qualify for the discounts set forth in this
section and determining whether a particular order is made during a
calendar year when a discount has been earned, the definition of
"order" set forth in Section 4.4. shall apply.
(c) During each Extension Period (as defined in section 7.2 below)
elected by ISR, Diamond may increase the price charged ISR for the Carousel
Product by [*] percent ([*]%) of the increase in the CPI during the twelve month
period prior to any such increase.
6.2 Payment Method.
(a) ISR shall pay Diamond for all Carousel Products ordered by ISR as
follows. Within ten (10) days of Diamond's acceptance of an ISR Purchase Order,
ISR shall pay to Diamond a deposit equal to ten percent (10%) of the Purchase
Price. Diamond shall invoice ISR on the first and fifteenth days of each month
thereafter for progress payments for the cost of materials, fabrication,
installation and other services. Each invoice shall be paid by ISR within
fifteen (15) days of receipt. Ten percent (10%) of the Purchase Price shall be
held by ISR as a retainer, to be paid within fifteen (15) days after the
completion of the installation of the Carousel Product and the completion of the
Scope of Work set forth in the Purchase Order.
(b) In addition to the Purchase Price, ISR shall pay all shipping
costs, taxes (including without limitation, state, federal, local sales or value
added taxes and personal property taxes), import or export duties, and business
license fees. Any of the foregoing for which Diamond has a legal obligation of
payment may be invoiced by Diamond to ISR for payment within fifteen (15) days
unless ISR furnishes Diamond with the applicable tax exemption certificate or
direct payment certificate. ISR hereby indemnifies and holds Diamond harmless
from and against any claims by any third party for payment of any of the
foregoing taxes or fees.
7.0 TERM AND TERMINATION.
7.1 Term of this Agreement. This Agreement shall become effective on the
Effective Date and shall continue in force until December 31, 2001 (such period,
the "Term") unless terminated earlier pursuant to Section 7.3.
7.2 Renewal Option. After the Term and through December 31, 2005, ISR shall have
the option, in its sole discretion, to extend the Term for successive one (1)
year periods (each such period an "Extension Period") based on the following
option price formula and according to the following procedure:
- -------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
9
<PAGE> 10
ISR shall exercise its option to extend the Term for one year by giving
Diamond written notice no later than thirty (30) days following the end of the
Term or extension thereof. The price paid by ISR to Diamond for exercising any
renewal option shall be as follows:
(a) If during the immediately preceding calendar year, ISR (including
all orders from its Affiliates) places an order in an aggregate amount of more
than Ten Million Dollars ($10,000,000.00), ISR may exercise the option without
any charge.
(b) If during the immediately preceding calendar year, ISR (including
all orders from its Affiliates) places an order in an aggregate amount of less
than Ten Million Dollars ($10,000,000.00), ISR may exercise the option at a cost
of fifteen percent (15 %) of the difference between the actual annual orders
placed and Ten Million Dollars ($10,000,000.00).
(c) For the purpose of determining whether an order has been placed
during a particular calendar year, "order" shall be defined as in Section 4.4
hereof.
7.3 Termination. This Agreement may be terminated only in accordance with the
following:
(a) Either party hereto may terminate this Agreement for cause if the
other party hereto becomes the subject of a voluntary or involuntary petition in
bankruptcy or any proceeding relating to insolvency, receivership, liquidation,
or composition for the benefit of creditors, which petition or proceeding is not
dismissed with prejudice within sixty (60) days after filing.
(b) Either party hereto may terminate this Agreement for cause if the
other party breaches any express material term or condition of this Agreement
and fails to cure that breach within sixty (60) days after receiving written
notice of the breach. If the nature of the cure for any non-monetary breach is
such that it is reasonably expected to take longer than sixty (60) days, the
breaching party shall be given an additional forty-five (45) calendar days to
cure such breach, provided the cure is commenced during the original sixty (60)
day period and is diligently carried out thereafter. In the event the material
breach is not cured within the periods specified above after delivery of the
notice, the non-breaching party may terminate this Agreement in writing as of a
date specified in the termination notice. The terminating party shall have all
rights and remedies available at law or equity as well as any other rights and
remedies set forth in this Agreement.
7.4 Survival. The provisions of Sections 3.0 (Ownership and License Grant), 5.0
(Technical Support), 7.4 (Survival), 8.0 (Warranties and Indemnification), and
9.0 (Confidentiality), 10.0 (Jurisdiction and Applicable Law), and 11.0
(Miscellaneous) shall survive termination of this Agreement for any reason.
8.0 WARRANTIES AND INDEMNIFICATION.
8.1 Warranties. Diamond represents and warrants as follows:
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<PAGE> 11
(a) That it owns the technology incorporated into or embodied by the
Carousel Product sold to ISR (or its Affiliate) hereunder and that it has full
legal right to sell the Carousel Product and that it has satisfied any and all
applicable conditions precedent to such sale and that the sale by it of the
Carousel Product hereunder does not violate any obligations to third parties to
which it is bound.
(b) That it has full power to enter into this Agreement, to carry out
its respective obligations pursuant to this Agreement, and to grant the rights
granted pursuant to this Agreement. Further, Diamond represents and warrants
that it has obtained all corporate, third party, and governmental approvals
necessary to enter into this Agreement and carry out the transaction
contemplated thereby.
(c) That it is not engaged in nor has it been notified of any potential
claims, suits, actions, investigations, or proceedings relating to any
Intellectual Property rights concerning the Carousel Product. Diamond will
immediately give written notice to ISR of any such event known to it during the
term of this Agreement.
(d) Diamond warrants that (a) the Carousel Product shall be free from
all liens, charges or encumbrances, except any lien of Diamond in respect of any
unpaid portion of the Purchase Price; (b) the Carousel Product shall be free
from defects in material and workmanship and shall conform to the specifications
of the Carousel Product set forth in Exhibit A and also conform to the
functionality defined in the agreed to Technical Proposal attached to the
Purchase Order, if any; and (c) the Carousel Product shall be new and, in the
absence of specification of a nature consistent with Diamond's usual and normal
production. Diamond shall, at its option, repair or replace (at Diamond's
expense) any defective Carousel Product or component thereof, provided however,
that Diamond is given written notice of any defect during the warranty period.
For this purpose the warranty period shall commence on the earlier of the date
of first commercial use or the date on which Diamond tendered the Carousel
Product for commercial use, and the warranty period shall end one year after
such commencement date. When the installation and commissioning of equipment is
not the responsibility of Diamond Phoenix, the date of effective commercial use
shall be thirty (30) days after shipment, unless otherwise specified in writing.
ISR shall give Diamond prompt written notice of any claim under the
foregoing Warranty and permit Diamond to inspect the Carousel Product in order
to verify the defect or nonconformity. Failure of ISR to give Diamond such
notice and opportunity to inspect shall relieve Diamond of all obligations with
respect to such claims.
Subject to Diamond's obligations under section 8.2 of this Agreement,
ISR's remedies and Diamond's obligations in connection with any claim made under
this warranty shall be limited to repair or, at Diamond's option, replacement of
the equipment or part thereof which is found to be defective. Labor performed at
the Worksite with regard to such claims is not included in this warranty. ISR
shall be responsible for the normal maintenance and repair of the Carousel
Product and shall perform the same in accordance with generally accepted
maintenance procedures or such other procedures as are set forth in maintenance
and repair manuals provided by Diamond to ISR.
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<PAGE> 12
Diamond shall not be responsible for and shall not be obligated to pay or to
reimburse Purchaser for (a) any work or repairs performed on the Carousel
Product by third parties except for mutually agreed subcontractors, (b) any
materials furnished by third parties for use in connection with the Carousel
Product if the same was undertaken or furnished without mutual prior written
consent or (c) any loss or damage arising from improper operation or maintenance
of the Equipment or from ordinary wear and tear.
Notwithstanding other provisions of this Article, in instances of a
"major failure" during the warranty period. Diamond will provide all necessary
parts and installation labor to correct the defect. A "major failure" is defined
as failure of the Carousel Product or portion of the Carousel Product, to
operate as described in the Technical Proposal, which ISR, through the diligent
efforts of its maintenance personnel or available contractors, cannot remedy.
Diamond will immediately dispatch a serviceman by commercial air carrier upon
request and notification of a "major failure" by ISR.
Should it later be reasonably determined by Diamond that the necessary
corrective services were within the capabilities of the ISR's maintenance
personnel, ISR will reimburse Diamond for the labor and expenses of the service
trip.
This warranty applies only to products that are manufactured by Diamond
and ISR's sole warranty with respect to items not manufactured by Diamond
(including without limitation the computers that control the Carousel Product)
shall be that of the manufacturer, if any.
THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OTHER
THAN AS SPECIFICALLY SET FORTH ABOVE.
8.2 Indemnity by Diamond. Diamond agrees to indemnify and hold ISR and its
Affiliates harmless from any and all loss, cost, liability, or expense
(including court costs and reasonable fees of attorneys and other professionals)
arising out of or resulting from the breach or claimed breach of the above
warranties and representations, including but not limited to any such loss,
cost, liability, or expense arising out of or resulting from any claim brought
by a third party against ISR, including any claims that the Carousel Product
infringe the Intellectual Property rights of any third party. In the event of
any such claim, ISR (or its Affiliate) agrees to notify Diamond promptly of the
claim and to permit Diamond, at Diamond's expense, to assume control of the
defense thereof with counsel of Diamond's choosing, and cooperate with Diamond
in such defense at Diamond's expense.
8.3 ISR's Representations, Warranties, and Covenants.
(a) ISR represents and warrants that it has full power to enter into
this Agreement and to carry out its respective obligations pursuant to this
Agreement. ISR also represents and warrants
12
<PAGE> 13
that it has obtained all corporate, third party, and governmental approvals
necessary to enter into this Agreement and carry out the transaction
contemplated thereby.
(b) ISR covenants that it shall not modify the Carousel Product or the
Carousel Software nor create derivative works based on the Carousel Software in
any way without the express written consent of Diamond.
8.4 Indemnity by ISR. ISR agrees to indemnify and hold Diamond harmless from any
and all loss, cost, liability, or expense (including court costs and reasonable
fees of attorneys and other professionals) arising out of or resulting from the
breach or claimed breach of the above warranties and representations, including
but not limited to any such loss, cost, liability, or expense arising out of or
resulting from any claim brought by a third party against Diamond. In the event
of any such claim, Diamond agrees to notify ISR promptly of the claim and to
permit ISR at ISR's expense, to assume control of the defense thereof with
counsel of ISR's choosing, and cooperate with ISR in such defense at ISR's
expense.
9.0 CONFIDENTIAL INFORMATION.
9.1 "Confidential Information" means any information disclosed by one party to
the other party in connection with this Agreement and which the disclosing party
believes to include confidential information, is designated with an appropriate
legend such as "CONFIDENTIAL:" (or other label indicating its confidential
status) at the time of disclosure if in documentary or other tangible form, or
if such disclosure is initially oral or visual and not reduced to written or
documentary form at the time of disclosure, such Confidential Information shall
be identified as confidential at the time of disclosure, summarized or
identified in a written document that is marked with an appropriate legend
indicating its confidential status, and provided to the other party within
twenty (20) days following such oral or visual disclosure. For each item of
Confidential Information, the party disclosing the item shall be called the
"Disclosing Party," and the party receiving the item shall be called the
"Receiving Party."
9.2 Confidentiality Obligations. The Receiving Party shall hold all Confidential
Information of the Disclosing Party in trust and confidence, and protect it as
the Receiving Party would protect its own confidential information (which shall
in any event shall be no less than reasonable protection) and shall not use such
Confidential Information for any purpose other than that contemplated by this
Agreement. Unless agreed by the Disclosing Party in writing, the Receiving Party
shall not disclose any Confidential Information of the Disclosing Party, by
publication or otherwise, to any person other than employees and contractors
(such as contract manufacturers or software developers) bound to written
confidentiality obligations consistent with and at least as stringent as those
set forth herein and who have a need to know such Confidential Information for
purposes of enabling a party hereto to exercise its rights and perform its
obligations pursuant to this Agreement.
9.3 Exceptions. The obligations specified above shall not apply to any
Confidential Information to the extent that (a) it is already known to the
Receiving Party without restriction prior to the time of disclosure pursuant to
this Agreement; (b) it is acquired by the Receiving
13
<PAGE> 14
Party from a third party without confidentiality restriction and does not
originate with the Disclosing Party; (c) it is independently developed or
acquired by the Receiving Party by employees or contractors without access to
such Confidential Information; (d) it is approved for release by written
authorization of the Disclosing Party; (e) it is in the public domain at the
time it is disclosed or subsequently falls within the public domain through no
wrongful action of the Receiving Party; or (f) it is furnished to a third party
by the Disclosing Party without a similar restriction on the third party's
right.
9.4 Compelled Disclosure. A Receiving Party may disclose Confidential
Information if it is disclosed pursuant to the requirement of a court or other
governmental agency or disclosure is permitted or required by operation of law,
provided that the Receiving Party use its best efforts to notify the Disclosing
Party in advance and seeks confidential treatment for such Confidential
Information.
9.5 Return of Confidential Information. Upon written request of the Disclosing
Party, the Receiving Party shall return to the Disclosing Party any Confidential
Information in its possession or shall certify in writing as to its destruction.
In any event, upon termination of this Agreement for any reason, the Receiving
Party shall promptly return all Confidential Information to the Disclosing
Party.
9.6 Confidentiality of Agreement. Each party agrees that the terms and
conditions of this Agreement shall be treated as Confidential Information;
provided that each party may disclose the terms and conditions of this
Agreement: (i) as required by any court or other governmental body or as
otherwise required by law; (ii) to legal counsel; (iii) in confidence, to
accountants, banks, and financing sources and their advisors; and (iv) in
confidence, in connection with the enforcement of this Agreement or rights under
this Agreement.
10.0 JURISDICTION, APPLICABLE LAW, AND DISPUTE RESOLUTION.
10.1 Governing Law and Venue. This Agreement and any matters hereunder shall be
governed by and construed in accordance with the internal laws of the State of
Maine, excluding its conflict of law rules. The parties hereto hereby consent to
the exclusive jurisdiction and venue of the state and federal courts of Maine
and California with respect to the resolution of any suit, action or proceeding
hereunder; provided, however, that only the defendant in any such suit, action
or proceeding shall have the right to select the venue as between the states of
Maine or California with respect to any such suit, action or proceeding. In any
such suit, action or proceeding, the non-prevailing party shall pay to the
prevailing party all reasonable attorneys' and expenses incurred by the
prevailing party in such suit, action or proceeding. For purposes of the
immediately preceding sentence, "attorneys' fees" shall include, without
limitation: fees for services relating to the claim or dispute rendered prior to
litigation (including investigation); at both trial and appellate levels; after
judgment in seeking to obtain any execution or enforcement thereof; and in
connection with any bankruptcy or similar proceeding.
10.2 Dispute Resolution. The parties agree to adopt the following procedures
with respect to the resolution of any disputes or controversies which may arise
during the term of this Agreement:
14
<PAGE> 15
In the event that one party believes that the other party has failed to
perform any of its obligations under this Agreement, such party's
nominated representative shall promptly so notify the other party's
nominated representative in writing and request a performance review
meeting. The nominated representatives or their designated
representatives will discuss the problem and negotiate in good faith in
an effort to resolve the dispute without any formal proceeding. No
litigation for the resolution of such disputes may be commenced until
the designated representatives have met and either party has concluded
in good faith that amicable resolution through continued negotiation
does not appear possible.
11.0 MISCELLANEOUS.
11.1 Independent Contractors. Each party acknowledges that the relationship
between the parties pursuant to this Agreement is that of independent
contractors. No provision of this Agreement shall be construed to (i) constitute
the parties as partners, joint venturers or participants in a joint undertaking,
or (ii) give any party the power to direct and control the day-to-day activities
of the other. Further, no employees of any party shall be deemed or treated as
employees of another party, and each party shall be solely responsible for any
and all payroll, employment and related taxes, and withholding applicable to its
own employees.
11.2 Waiver. Any waiver of breach or default pursuant to this Agreement shall
not be a waiver of any other subsequent default. Failure or delay by either
party to enforce any term or condition of this Agreement shall not constitute a
waiver of such term or condition.
11.3 Conflicts in Provisions. In the event of any apparent conflicts or
inconsistencies between this Agreement and any Exhibits hereto, to the extent
possible such provisions shall be interpreted so as to make them consistent, and
if such is not possible, the provisions of this Agreement shall prevail.
11.4 Headings. The Section headings herein are for reference and convenience
only and shall not enter into the interpretation hereof.
11.5 Severability. To the extent than any provision of this Agreement is found
by a court of competent jurisdiction to be invalid or unenforceable, that
provision notwithstanding, the remaining provisions of this Agreement shall
remain in full force and effect and such invalid or unenforceable provision
shall be deleted.
11.6 No Assignment. Neither Diamond nor ISR shall assign this Agreement
(including without limitation by operation of law such as by merger, change of
control, stock or asset sale or stock swap) or assign, transfer, or sublicense
any right arising hereunder without the prior written consent of the other. Any
assignment permitted hereunder shall be subject to the written consent of the
assignee to all the terms and provisions of this Agreement. This provision shall
not be construed to prevent the assignment of this Agreement or any rights
hereunder to a secured lender
15
<PAGE> 16
as collateral for a loan or to prevent the use by either party of independent
contractors in the ordinary course of business.
11.7 Authority. Each party warrants to the other party that it has the authority
to enter into this Agreement and that all necessary corporate or other approvals
have been or will be obtained.
11.8 Notices. Any notice required or permitted pursuant to this Agreement shall
be in writing delivered by hand, overnight courier, telecopy, facsimile, or
certified or registered mail to the address first set forth above and shall be
effective upon receipt
11.9 Amendment. No alternation, waiver, cancellation, or any other change or
modification in any term or condition of this Agreement, or any agreement
contemplated to be negotiated or reached pursuant to the terms of this
Agreement, shall be valid or binding on either party unless made in writing and
signed by duly authorized representatives of both parties.
11.10 Approvals and Similar Actions. Wherever agreement, approval, acceptance,
consent or similar action by either party hereto is required by any provision of
this Agreement, such action shall not be unreasonably delayed or withheld.
11.11 Force Majeure. In the event of any condition or contingency, existing or
future, which is beyond the reasonable control and without the fault or
negligence of either party ("Event of Force Majeure") which prevents or delays,
or materially increases the cost of, the performance under this Agreement, each
party shall be entitled to an appropriate and reasonable extension of time for
performance and an equitable adjustment of the Purchase Price. Events of Force
Majeure shall include, without limitation, Acts of God, fire, floods, transport
delays, labor disputes, and interference by military or civil authorities. If an
Event of Force Majeure occurs, the party whose performance is affected shall
take reasonable measures to mitigate and minimize the effect of such Event and
to continue with the performance of its obligations under this Agreement.
11.12 Limitation of Liability. Notwithstanding any other provision of this
Agreement including Section 8.3, Diamond shall not be liable to ISR or anyone
claiming through ISR for any special, incidental, indirect or consequential
damages of any kind whatsoever, whether such damages arise from the use,
inability to use, failure of, defects in, the conditions of, delay in delivery
of, or nondelivery of, the Carousel Product or otherwise.
11.13 Entire Agreement. The terms and conditions herein contained constitute the
entire agreement between the parties with respect to the subject matter of this
Agreement and supersede any previous agreements and understandings, whether oral
or written, between the parties hereto with respect to the subject matter
hereof; except as stated in this Agreement, there are no other agreements,
understandings, representations, or promises between the parties with respect to
the subject matter of this Agreements.
11.14 Construction. This Agreement is the result of negotiation between the
parties and their respective counsel. This Agreement will be interpreted fairly
in accordance with its terms and
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<PAGE> 17
conditions and without any strict construction in favor of either party. Any
ambiguity shall not be interpreted against the drafting party.
11.15 Counterparts. This Agreement may be executed in one or more counterparts,
each of which will be deemed an original, but all of which taken together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized representatives as of the Effective
Date.
Intelligent Systems for Retail, Inc. Diamond Phoenix Corporation
By: /s/ Louis H. Borders By: /s/ Thomas F. Coyne
---------------------------- -------------------------------
Name: Louis H. Borders Name: Thomas F. Coyne
---------------------------- -------------------------------
Title: President Title: CEO
---------------------------- -------------------------------
Date: Nov. 24, 1998 Date: 11-24-98
---------------------------- -------------------------------
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<PAGE> 18
LIST OF EXHIBITS
Exhibit A: Carousel Products and Specifications for each Carousel Products
Exhibit B: Price List for Carousel Products
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<PAGE> 19
[Artwork depicting carousel] EXHIBIT A
Specification Sheet
Carousel
FULLY TESTED
All of our carousels are assembled at our factory and tested under power
with complete links, yokes, load bars, and drive units in place. Although it
takes more time, it assures a quality installation.
[Diagram of Carousel]
DIRECT DRIVE
The motor, reducer, and drive sprocket function as a single connected
drive unit producing the highest efficiency, drive speed, and available torque.
CUSTOM BIN DESIGNS
Because we fabricate our own bins, we can offer many application
specific and unique bin designs including:
Custom wire spacing and configurations
Solid steel construction
Peg board
Rack style
Cantilever shelf
Hopper and enclosed container
Angle forward shelves for consolidation
Dual face configurations
MODULAR FRAME DESIGN
Modular frame sections use standard sizes so the carousel can be easily
extended or reduced in size. Expansion of the carousel is simple and economical.
STRUCTURAL STEEL CONSTRUCTION
All frame components are produced with structural steel, making it the
most rugged carousel in the industry. Diamond Phoenix carousels are constructed
for the heaviest applications and most severe duty cycles.
FLOOR LOADING
Base plates maintain full contact with the floor. Independent adjusting
top and bottom tracks easily level a carousel without messy grouting or floor
shims, even with floor variations of up to 6".
STANDARD
BIN HEIGHT*
(IN INCHES)
61"
73"
85"
97"
109"
121"
133"
145"
*Please consult factory for custom bins.
CAROUSEL WIDTH
<TABLE>
<CAPTION>
OVERALL WIDTH SWING RADIUS
MODEL BIN WIDTH -------------------------------------- -------------------------------------
(INSIDE) 12" SHELF 18" SHELF 22" SHELF 12" SHELF 18" SHELF 22" SHELF
<S> <C> <C> <C> <C> <C> <C> <C>
A 14 50 62 70 51 63 70
B 18 50 62 70 51 63 70
C 21 50 62 70 51 63 70
D5 25 50 62 70 54 64 72
E 28 48 60 68 52 66 73
F 32 48 60 68 54 65 72
G 36 48 60 68 58 68 74
</TABLE>
CAROUSEL LENGTH
<TABLE>
<CAPTION>
MODEL 20 BIN 22 BIN 24 BIN 26 BIN 28 BIN 30 BIN 32 BIN 34 BIN 36 BIN 38 BIN 40 BIN 42 BIN 44 BIN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A 14'-8" 16'-2" 17'-7" 19'-0" 20'-5" 21'-10" 23'-4" 24'-9" 26'-2" 27'-7" 29'-0" 30'-6" 31'-11"
B 17'-10" 19'-7" 21'-4" 23'-1" 24'-10" 26'-7" 28'-4" 30'-0" 31'-9" 33'-6" 35'-3" 37'-0" 38'-9"
C 20'-0" 21'-11" 23'-11" 25'-10" 27'-9" 29'-9" 31'-8" 33'-8" 35'-7" 38'-6" 39'-6" 41'-5" 43'-5"
D5 22'-6" 24'-9" 26'-11" 29'-2" 31'-4" 33'-7" 35'-9" 38'-0" 40'-2" 42'-5" 44'-7" 46'-10" 49'-0"
E 26'-9" 29'-4" 32'-0" 34'-7" 37'-2" 39'-10" 42'-5" 45'-0" 47'-8" 50'-3" 52'-10" 55'-6" 58'-1"
F 30'-0" 32'-11" 35'-10" 38'-10" 41'-9" 44'-8" 47'-7" 50'-6" 53'-5" 56'-4" 59'-3" 62'-2" 65'-1"
G 34'-1" 37'-5" 40'-9" 44'-1" 47'-4" 50'-8" 54'-0" 57'-4" 60'-8" 63'-11" 67'-3" 70'-7" 73'-11"
</TABLE>
<TABLE>
<CAPTION>
MODEL 46 BIN 48 BIN 50 BIN 52 BIN 54 BIN 56 BIN 58 BIN 60 BIN 62 BIN 64 BIN 66 BIN 68 BIN 70 BIN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A 33'-4" 34'-9" 36'-3" 37'-8" 39'-1" 40'-6" 41'-11" 43'-5" 44'-10" 46'-3" 47'-8" 49'-2" 50'-7"
B 40'-6" 42'-3" 44'-0" 45'-9" 47'-6" 49'-2" 51'-10" 52'-8" 54'-5" 56'-2" 57'-11" 59'-8" 61'-5"
C 45'-4" 47'-3" 49'-3" 51'-2" 53'-2" 55'-1" 57'-0" 59'-0" 60'-11" 62'-10" 64'-10" 66'-9" 68'-9"
D5 51'-3" 53'-5" 55'-8" 57'-10" 60'-1" 62'-4" 64'-6" 66'-9" 68'-11" 71'-2" 73'-4" 75'-7" 77'-9"
E 60'-9" 63'-4" 65'-11" 68'-7" 71'-2" 73'-9" 76'-5" 79'-0" 81'-7" 84'-3" 86'-10" 89'-5" 92'-1"
F 68'-0" 70'-11" 73'-11" 76'-10" 79'-9" 82'-8" 85'-7" 88'-6" 91'-5" 94'-4" 97'-3" 100'-2" 103'-1"
G 77'-2" 80'-6" 83'-10" 87'-2" 90'-6" 93'-9" 97'-1" 100'-5" 103'-9" 107'-0" 110'-4" 113'-8" 117'-0"
</TABLE>
Standard bin configurations. If odd or unlisted bin configurations are required,
contact factory for lengths. (rounded to nearest inch)
RUGGED FRAME CONSTRUCTION
All models are constructed of the same high capacity track and frame
size providing the fastest delivery in the industry.
The strongest frame in the industry. Heavy gauge stainless track is
welded to 4" x 3" x 1/4" thick structural steel angle, with 4" x 2" x 1/4" thick
steel tubing cross members.
No frame modifications are necessary for double or triple stacking.
Structural mezzanines and multiple conveyor lines are easily supported
on top of our carousel frames.
Bottom track is adjustable allowing bins to be raised to any required
level.
LOW MAINTENANCE
Drive units are accessible, easier to maintain, and need no periodic
adjustments.
All components are accessible from outside the machine.
Direct drives allow easy and inexpensive replacements.
Optional automatic lubricators.
QUALITY CONTROLS
The CCS keypad controller offers multiple levels of manual and
electronic control and functions as the network interface for software driven
systems.
CCS controllers use human readable messages for mechanical,
communication, and diagnostic functions.
A footswitch is standard for manual or back-up control.
Control panels can be mounted in any location.
Standard control panels meet NEC and NEMA 1 standards.
NEMA 12 panels are optional.
1
<PAGE> 20
COMMERCIALLY AVAILABLE COMPONENTS
Commercially available AC drive motors, reducers, controls, and all
electrical components throughout.
SAFETY
Emergency stops in any location including panels, workstations, and
light trees.
Vertical and horizontal photo eyes are available.
Optional safety floor mats.
CE configuration available.
BINS AND SHELVES
Custom size bins and shelves.
Optional bins up to 15 feet tall.
Adjustable shelves down to 2 inch centers with no tools required.
Bin capacity: 600, 1000, 1500, 2000 lbs.
Optional shelf adjustability: 2, 2.5, 3, 3.5, 4, 4.5, 5, 5.5, 6 inches.
Solid, wire, and pass-through bin backs are available.
Each bin is supported from four heavy-duty cast aluminum yokes, load
tested to 3,200 pounds each.
Eight 1.5" diameter x .5" precision ground, lifetime lubricated bearings
with hardened races distribute and carry the load for each bin.
Plated bins and shelves are standard.
SUPERIOR INSTALLATION
All bins are pre-assembled in our factory with sides and backs connected
for easy fold-out installation.
Factory match marked frames are shipped with all chains, yokes, and
drive units in place for accurate, simple, and rapid installation.
[Carousel Height Diagram]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CAROUSEL CURRENT RATINGS
- --------------------------------------------------------------------------------------------------------------
Voltage 230v Voltage 480v
------------------------------------ ------------------------------------
Motor Horsepower No. of Drives System Current Req'd No. of Phases System Current Req'd No. of Phases
<S> <C> <C> <C> <C> <C>
1 HP Single 10A 1 5A 3
1 1/2 HP Single 20A 1 7A 3
2 HP Single 20A 1 7A 3
3 HP Single 15A 3 8A 3
1 HP Dual 20A 1 7A 3
1 1/2 HP Dual 15A 3 8A 3
2 HP Dual 25A 3 15A 3
3 HP Dual 30A 3 20A 3
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------
CAROUSEL OVERALL HEIGHT
- ---------------------------------------------
1 HP Drive Bin Height + 30"
1 1/2-2 HP Drive Bin Height + 30 1/2"
3 HP Drive Bin Height + 31 3/4"
Inverted Drive Bin Height + 19 1/4"
- ---------------------------------------------
[Diamond Phoenix Logo]
<TABLE>
<S> <C>
Diamond Phoenix Corporation Regional Offices
167 River Road
PO Box 1608 Cleveland, OH
Lewiston, ME 04241-1608 Cincinnati, OH
Lynchburg, VA
Phone: (207) 784-1381 Los Angeles, CA
Fax: (207) 786-0271 Dallas, TX
E-mail: [email protected] Charlotte, NC
http://www.diamondphoenix.com Hartford, CT
</TABLE>
-2-
<PAGE> 21
[Artwork depicting Light Tree]
Specification Sheet
Light Tree
[Diagram of Light Tree]
Housing with power and network wiring
Vertically adjustable display unit
Velcro
No tools are required to add and configure displays
Daisy chain RS485 cable with phone style connectors
Removable plexiglass cover
8 and 12 digit displays are clear, bright and readable at a distance of
20 feet
SIMPLICITY
Displays are added by simply connecting power and ground to the previous
display, and setting the display address.
A single RS-485 line routes communications from one device to the other
in the Diamond Phoenix carousel pod. This simplifies controls wiring, repair and
system debugging.
The same displays are used for both the vertical light trees and
horizontal sort bars.
CONFIGURABILITY
8 and 12 digit alpha-numeric displays are the same size, fit into the
same housing, and can be used together on the same light tree.
Each light tree can house up to 24 displays supported by 1 power supply.
A second power supply can support up to 48 displays on a single tree.
HIGH VISIBILITY
Bright yellow LED (dot matrix) displays for unmatched clarity.
ADJUSTABILITY
Displays are infinitely adjustable and can be mounted as tightly as 3"
centers.
No tools are required to take apart a light tree or to adjust the
position of the displays.
Housings disassemble with hand turned clips in seconds.
-3-
<PAGE> 22
Additional displays can be connected with phone style snap connectors
(by hand).
NETWORK
Each display is individually addressed from 1 to 255 by non-volatile
rotary switches, easily accessed on the back of the display.
24V AC power and RS-485 communications are daisy chained from display to
display using simple snap-in connectors.
LTS-6 light trees can support communications up to 19,200 baud for quick
LAN response.
Input ports located on each display can be customized to add various
inputs and data updates to the pod network.
MAINTENANCE
If a display fails the other displays and addresses are not affected.
Displays can be bypassed electronically in seconds through our software
configuration screen.
Shipped complete with configuration and testing software.
<TABLE>
<CAPTION>
DIMENSIONS 8 DIGIT 12 DIGIT
- ---------- ------- --------
<S> <C> <C>
Vertical dots 7 7
Horizontal dots 5 5
Height 1.25" .75"
Width 1" .5"
Full width 8" 7"
Full height 1.25" .75"
Housing width 10.25" 10.25"
Housing depth 2.75" 2.75"
</TABLE>
[Diamond Phoenix Logo]
Diamond Phoenix Corporation
167 River Road
PO Box 1608
Lewiston, ME 014241-1608
Phone: (207) 784-1381
Fax: (207) 786-0271
E-mail: [email protected]
http://www.diamondphoenix.com
REGIONAL OFFICES
Cleveland, OH
Cincinnati, OH
Lynchburg, VA
Los Angeles, CA
Dallas, TX
-4-
<PAGE> 23
Charlotte, NC
Hartford, CT
-5-
<PAGE> 24
EXHIBIT B
Material Handling Systems
DCPS
Diamond Carousel Proposal System
Carousel System Sales
PRICING
REVISION 3.1
Diamond Phoenix Corporation
167 River Road
PO Box 1608
Lewiston, ME 014241-1608
Phone: (207) 784-1381
VERSION 3.1 Copyright 1995 All Rights Reserved
September 4, 1998
[*]
- ---------------
* Certain information in this Exhibit B has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect to
the omitted portions.
<PAGE> 1
EXHIBIT 10.25
November 10, 1998
Chris Mannella
9 Saint Ives Place
Gaithersburg, MD 20877
Dear Chris:
We are very pleased to extend you an offer to serve as the Vice President of
Marketing for Intelligent Systems for Retail, Inc. ("ISR").
We at ISR believe that your skills, experience, and personal attributes will
enable us to be a leader in the development of this internet commerce company.
This letter serves as an offer of employment to you from ISR. The terms of the
offer supersede all prior oral and written communications between you and ISR or
any representative thereof. If the terms below are acceptable, please sign and
return one copy of the letter on or before Friday, November 13, 1998 to accept
our offer of employment.
POSITION
Your job title will be Vice President of Marketing.
EFFECTIVE DATE
Your first date to report to work at ISR, 1241 E. Hillsdale Blvd., Suite 210,
Foster City, CA 94404, will be on or before Monday, December 7, 1998.
DUTIES
You will report to Louis H. Borders, President & CEO of ISR. Your primary
responsibility will be to develop, manage, and implement the marketing
strategies for ISR.
You will also be a member of the Executive Team with responsibility for
determining the long term direction and goals of ISR, and for developing
strategies and tactics to meet those goals, along with all other duties as
assigned.
<PAGE> 2
SALARY
Your salary shall be $18,750.00 per month. This salary shall be paid bi-weekly.
Your salary shall be reviewed each January on an annual basis in accordance with
review procedures established by the ISR Associate Handbook.
Within 90 days of your Commencement Date, by written notice to ISR, you may
elect to reduce your annual salary by up to $50,000 for up to 50,000 additional
shares of Common Stock (at a ratio of 1:1) at an exercise price equal to the
fair market of the Common Stock at the date of grant. The general terms and
conditions of this option will be the same as those for your 420,000 share
grant.
MONTHLY ALLOWANCE
In addition, ISR will pay you $1,000.00 per month, included as part of your base
salary to help cover miscellaneous monthly expenses.
INCENTIVE PLAN
You shall be granted an incentive stock option (the "Option") to purchase
420,000 shares of ISR's common stock at an exercise price based on the company's
fair market value, which will be determined by the Board of Directors as of your
employment commencement date. The Option shall vest at the rate of 25% of the
shares subject to Option at the end of twelve months and at the rate of 6.25% of
the shares subject to Option each three months thereafter, so that 100% of the
Option shall be vested after four years, subject to your continued full-time
employment with the Company as of each vesting date. Except as specified herein,
the Option is in all respects subject to the terms and conditions of the 1997
Stock Plan (the "Stock Plan") and standard form of option agreement (the "Option
Agreement").
BENEFITS
You will receive the standard benefits for full-time Associates at ISR. These
standard benefits are listed and explained in the ISR Associate Handbook,
administered via TriNet Employer Group. A copy of the policies and benefits
section of the handbook will be provided for your information.
In addition, ISR makes available a 401(k) plan to all employees at the beginning
of the month following Employee's date of hire. Eligible Employees may elect to
contribute up to 15% of their salary to the 401(k) plan, subject to the legal
maximum per year. The company will match 100% of the first $500 and 25%
thereafter up to a maximum Employer match of $2,000 per year of qualifying
Employee contributions. Further details will be provided in the 401(k) Plan
Handbook at the time of enrollment.
2
<PAGE> 3
RELOCATION ALLOWANCE
You will receive a relocation allowance of up to $50,000 to cover the costs of
your relocation to California. This relocation allowance shall not exceed
$50,000 and will be paid upon the presentation of actual receipts. In addition,
ISR will pay for all of your personal transportation and lodging costs during
your first 150 days of Employment.
NON-DISCRIMINATION
ISR is an equal-opportunity employer, and will not discriminate against its
employees or applicants in any employment decision or practice because of race,
color, religion, sex, national origin, marital status, pregnancy, age, ancestry,
physical handicaps, or medical condition.
PROPRIETARY INFORMATION
You will be required, as a condition of employment, to sign a Proprietary
Information Agreement. A sample Proprietary Information Agreement is attached
hereto.
OUTSIDE WORK
All ISR Associates are expected to devote their full energies, efforts, and
abilities to their employment. Accordingly, full-time Associates are not
permitted to accept outside employment on a full-time or part-time basis without
first obtaining their supervisor's written approval.
AT-WILL EMPLOYMENT
The relationship between you and ISR will be for an unspecified term and will be
considered at will. No employment contract is created by the existence of any
policy, rule or procedure in the ISR Associate Handbook, any ISR document, or
any verbal statements made to you by representatives of ISR. Consequently, the
employment relationship between you and ISR can be terminated at will, either by
you or ISR, with or without cause or advance notice.
In the event that your employment with ISR is terminated without cause, ISR
agrees that you will receive six months salary and benefits as severance. In
addition to this six month severance package, you will continue to receive full
salary and benefits for a period of up to another six months or until subsequent
employment is obtained.
PERSONNEL POLICIES
ISR has an Associate Handbook. The policies in the Associate Handbook govern the
relationship between ISR and its Associates. The policies are hereby
incorporated by reference. Acceptance of this offer binds the offeree to follow
the policies.
3
<PAGE> 4
This offer is contingent on compliance with the Immigration Reform and Control
Act of 1986, which requires the company to verify that each employee hired is
legally entitled to work in the United States. Enclosed is a copy of the
Employment Verification form I-9, with instructions, as required by such act.
Please review and execute this document and be prepared to bring the appropriate
documentation on the day you first report to work.
We look forward to your favorable consideration of this offer and to the
commencement of a long and rewarding relationship.
Sincerely,
/s/ LOUIS BORDERS
- --------------------
Louis Borders
ISR, President & CEO
I hereby acknowledge that I have reviewed the terms and conditions of this offer
of employment and have had the opportunity to consult with counsel. I hereby
accept the offer of employment upon the terms and conditions contained in this
letter.
Accepted: /s/ CHRIS MANNELLA Date: 11/14/98
------------------
Chris Mannella
4
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 6 to Registration Statement No.
333-84703 of Webvan Group, Inc. of our report dated March 5, 1999 (August 5,
1999 as to the second sentence of Note 1 and as to Note 15 and September 21,
1999 as to the first paragraph of Note 7) appearing in the Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 27, 1999
