<PAGE>
As filed with the Securities and Exchange Commission on October 27, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BUY.COM INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
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<S> <C> <C>
Delaware 5734 33-0816584
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
21 Brookline
Aliso Viejo, California 92656
(949) 425-5200
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
----------------
Gregory J. Hawkins
Chief Executive Officer
BUY.COM INC.
21 Brookline
Aliso Viejo, California 92656
(949) 425-5200
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Bruce R. Hallett, Esq. Larry W. Sonsini, Esq.
Ellen S. Bancroft, Esq. Steven L. Berson, Esq.
Keven F. Baxter, Esq. Michael S. Russell, Esq.
Sean M. Pence, Esq. Thomas M. Dono, Jr., Esq.
Brobeck, Phleger & Harrison LLP Wilson Sonsini Goodrich & Rosati
38 Technology Drive Professional Corporation
Irvine, California 92618 650 Page Mill Road
(949) 790-6300 Palo Alto, California 94304
(650) 493-9300
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=================================================================================================
Title of Each Class of Proposed Maximum Aggregate
Securities to be Registered Offering Price(1) Amount of Registration Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.0001 par value............ $150,000,000 $41,700
=================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
----------------
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 said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated October , 1999
PROSPECTUS
- ----------
Shares
[LOGO OF BUY.COM APPEARS HERE]
Common Stock
-----------
This is BUY.COM INC.'s initial public offering of common stock.
Currently, no public market exists for our stock. We expect the initial
public offering price to be between $ and $ per share. After the pricing of
the offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "BUYC."
Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 5 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price........................... $ $
Underwriting discount........................... $ $
Proceeds, before expenses, to BUY.COM........... $ $
</TABLE>
The underwriters may also purchase up to an additional shares of
common stock at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New
York, on or about , 1999.
-----------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Hambrecht & Quist
-----------
The date of this prospectus is , 1999.
<PAGE>
Inside Front Cover of Prospectus
1. Flap (outside)
A. Graphics: Five screen shots of the BUY.COM shopping and buying
process.
B. Annotations for graphics:
a. "BUY.COM's Online Shopping Experience"
b. The Buy.com home page is designed to allow shoppers to move
easily between stores.
c. From the home page of each Buy.com store, the customer can
view Buy.com's wide selection of products using our search
engine, browsing the numerous category pages, or taking
advantage of special features including Weekly Specials, Top
25 products and Coming Soon.
d. Each Buy.com store has specific product categories to help
the customer shop and purchase online. Each category page
offers access to more specialized sub-categories and
highlights the most popular products within the respective
category.
e. Throughout the shopping process, our customers can reference
specific details and specifications to help make purchasing
decisions.
f. The customer can shop at each of our stores with the
convenience of using one shopping basket for the entire
shopping session.
<PAGE>
2. Flap (inside gatefold)
A. Graphics: Seven screen shots of each of BUY.COM's online stores.
B. Annotations for graphics:
a. "BUY.COM Why Buy Anywhere Else"
b. "Computers" BuyComp.com showcases a comprehensive selection
of high quality computer products.
c. "Software" BuySoft.com offers a wide selection of software
products. Customers can search by title or manufacturer and
explore the weekly specials and the "Great Buys" section to
find particular products.
d. "Games" BuyGames.com features hardware and software for PC,
Dreamcast, Playstation, Nintendo 64, and Gameboy systems,
along with special features such as screenshots, video clips,
and customer reviews.
e. "Music" BuyMusic.com offers audio clips and customer reviews
to help you choose from a wide selection of CDs and
cassettes.
f. "Books" BuyBooks.com offers thousands of books, including
customer reviews, timely promotions and the ability to read
the first chapters of certain selections.
g. "Videos" BuyVideos.com offers thousands of movies and videos
on VHS and DVD, special promotions, video clips and behind-
the-scene information.
h. "Clearance" BuyClearance.com is Buy.com's outlet for excess,
closeout, and used inventory that is obtained through
liquidations, overages, promotions and discontinuations.
<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Selected Unaudited Pro Forma Condensed Combined Statement of Operations
Information............................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 33
Management............................................................... 48
Certain Transactions..................................................... 61
Principal Stockholders................................................... 65
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 71
Underwriting............................................................. 73
Legal Matters............................................................ 75
Experts.................................................................. 76
Where You Can Find More Information...................................... 76
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the consolidated
financial statements and related notes, before making an investment decision.
BUY.COM INC.
Overview
BUY.COM is a leading multi-category Internet superstore, offering a
comprehensive selection of brand name computer hardware and peripherals,
software, books, videos, DVDs, computer games, music and clearance equipment at
everyday low prices. Through our seven online specialty stores, we offer more
than 850,000 stock keeping units or SKUs, using a convenient, intuitive
shopping interface that features extensive product information and multi-media
presentations. Our e-commerce portal, www.buy.com, links our seven specialty
stores and is designed to enhance the customer's online shopping experience 24
hours a day, seven days a week. In addition, we have recently acquired
BuyGolf.com, through which we offer golf equipment and other related golf
accessories on our Web site located at www.buygolf.com. We employ a virtual
operating model that includes outsourcing the majority of our operating
infrastructure to leading national distribution and fulfillment partners. By
leveraging the cost efficiencies and economies of scale of our distribution and
fulfillment partners, we are able to offer a broader selection of products at
lower prices and operate with significantly lower operating expenses than many
of our competitors. This operating model also allows us to add new product
categories easily and rapidly, minimizes our capital investments and eliminates
the costs and risks of carrying inventory.
Since inception, we have sold our products to more than 1.3 million unique
customers, of which 396,000 were added during the third quarter of 1999.
According to a BUY.COM sponsored survey, our customers are primarily between 18
and 35 years old, and 80% of our customers visit our stores at least once a
week. Additionally, according to this survey, 76% of our customers are college
educated and 33% have annual household incomes in excess of $75,000. Media
Metrix estimates that approximately 2.5 million unique visitors came to our
site in August 1999, representing a 25% increase over the estimated 2.0 million
unique visitors to our site in July 1999. Accordingly, our net revenues have
increased to $397.6 million for the nine months ended September 30, 1999 from
$63.8 million for the nine months ended September 30, 1998 and $125.3 million
for the year ended December 31, 1998. This rapid growth in net revenues has
recently enabled us to become one of the top five e-commerce providers
according to a number of industry studies. During September 1999, approximately
48% of our orders and over 55% of our total booked revenues have come from
repeat customers.
The Internet provides online retailers essentially unlimited shelf space
without significant capital investments, allowing them to quickly build large
global customer bases and to potentially achieve superior economic returns over
the long-term. In addition, the Internet has emerged as a unique advertising
medium that provides advertisers with a cost-effective means of targeting
specific customer groups, interacting with and receiving feedback from
customers and measuring the effectiveness of specific advertising campaigns.
Online advertising also provides advertisers a unique opportunity to use a
variety of advertisements and provide substantial product information. We
believe that the high level of traffic on our site, coupled with the favorable
demographics and purchasing behavior of our customers, will enable us to expand
our advertising revenues to complement our product sales.
Our objective is to become the leading e-commerce destination offering a
broad selection of brand name products and services to consumers and small
businesses at everyday low prices, backed by superior customer service. We
intend to use our recognized brand and strong market position in computer
hardware sales to expand our product offerings to include the most popular
product categories on the Internet, encouraging one-stop shopping for multiple
products and repeat purchases. We intend to expand our offerings through
internal growth, as well as by establishing additional strategic relationships
with leading partners, similar to our recently
1
<PAGE>
announced joint venture with United Air Lines, Inc. Among our top priorities is
to continue to offer superior customer service and improve our communications
with customers. We also plan to continue to work with our distribution and
fulfillment partners to obtain more timely and accurate product information,
shipping and fulfillment.
Our business strategy initially focused on using extremely low prices on a
broad range of products to drive traffic to our site. As customer loyalty and
recognition of our brand name have increased, we have begun to modify our
pricing and merchandising strategy to offer a select group of aggressively low
priced, high volume products, while promoting associated higher margin
products. We have added higher margin products to our stores and have also
started to raise prices on many of our SKUs. Since the second quarter of 1999,
we have increased our product margins without experiencing any decline in
overall sales volumes or customer levels. We intend to further refine this
pricing structure over time.
We have recently entered into a binding letter of intent with SOFTBANK
America, Inc. and several of its affiliates and a New Corporation affiliate to
form an international joint venture in the United Kingdom, Australia, New
Zealand and India. In addition, we have binding letters of intent to form
international joint ventures with several SOFTBANK affiliates in other
international territories.
In October 1999, we completed the private placement of our Series B
convertible participating preferred stock to a group of investors led by
SOFTBANK Capital Partners and its affiliates for approximately $90.0 million.
These investors also purchased common stock for approximately $75.0 million
from a trust controlled by our founder.
BUY.COM was formed as a California limited liability company in June 1997
under the name BuyComp LLC and was incorporated in Delaware as Buy Corp. in
August 1998. In November 1998, we changed our name to BUY.COM INC. Our
executive offices are located at 21 Brookline, Aliso Viejo, California 92656,
and our telephone number is (949) 425-5200. Our primary Web site is located at
www.buy.com. Information contained on our Web site does not constitute part of
this prospectus.
The Offering
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<S> <C>
Common stock offered by BUY.COM.................. shares
Common stock to be outstanding after this
offering........................................ shares
Use of proceeds.................................. For repayment of indebtedness and for
working capital and other general
corporate purposes, including
development of our infrastructure to
support growth, sales and marketing
activities, and for acquisitions of
complementary businesses, technologies
and strategic relationships.
Proposed Nasdaq National Market symbol........... BUYC
</TABLE>
The number of shares of common stock outstanding after this offering is
based on 142,922,810 shares outstanding as of September 30, 1999, and does not
include 30,598,875 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price of
$1.85 per share, or warrants to purchase approximately 2,043,550 shares of
common stock, based upon an estimated initial public offering price of $ per
share, at a weighted average exercise price of $ per share.
2
<PAGE>
Summary Consolidated Financial Data
(amounts in thousands, except share and per share data)
The pro forma combined consolidated statement of operations data for the
nine months ended September 30, 1999 show our pro forma results of operations
as if the acquisition of BuyGolf.com had occurred on December 1, 1998, the date
BuyGolf.com commenced its business operations. The pro forma basic and diluted
weighted average shares outstanding gives effect to the issuance of common
shares for the acquisition of BuyGolf.com as though it had occurred on January
1, 1999, and gives effect to the conversion of all of our Series A and B
participating preferred stock into shares of common stock as if all shares were
outstanding and converted on January 1, 1999.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Pro Forma
------------------------ Combined
June 7, 1997 Nine Months
(Inception) to Year Ended Ended
December 31, December 31, September 30,
1997 1998 1998 1999 1999
-------------- ------------ ----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 878 $ 125,290 $ 63,761 $397,601 $ 398,586
Gross profit............ 46 1,763 2,596 (3,613) (3,511)
Operating loss.......... (381) (18,039) (4,685) (79,877) (89,177)
Net loss................ (390) (17,844) (4,668) (80,527) (89,821)
Net loss per share:
Basic and diluted..... $ (0.00) $ (0.14) $ (0.04) $ (0.57) $ (0.50)
Weighted average shares
used in computing net
loss per share:
Basic and diluted..... 130,129,725 130,905,390 130,129,725 141,814,477 181,315,783
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1999 1999 1999
------- ------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Quarterly Statements of
Operations Data:
Net revenues........... $19,233 $34,985 $ 61,529 $107,932 $129,820 $159,849
Gross profit........... 1,051 837 (832) (183) (4,266) 836
Operating loss......... (1,219) (3,031) (13,348) (19,383) (28,060) (32,434)
Net loss............... (1,217) (3,008) (13,175) (19,252) (28,091) (33,184)
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................. $ 3,231 $ 93,231 $
Working capital (deficit).................. (69,954) 20,046
Total assets............................... 33,889 123,889
Long-term debt, net of current portion..... 1,818 1,818
Total stockholders' equity (deficit)....... (58,598) 31,402
</TABLE>
Our pro forma calculations in the summary consolidated balance sheet data
above reflect our receipt of approximately $90.0 million in connection with the
sale of our Series B convertible participating preferred stock to SOFTBANK and
its related entities in October 1999.
3
<PAGE>
Our pro forma as adjusted balance sheet data gives effect to the application
of the estimated net proceeds from the sale of the shares offered by this
prospectus.
- --------
Unless otherwise indicated the information in this prospectus does not give
effect to the issuance of 4,142,927 shares of common stock in connection with
our acquisition of BuyGolf.com, Inc., the issuance of 1,800,000 shares of
common stock in connection with our sponsorship agreement with the PGA TOUR or
warrants issued to another party to purchase 1,000,000 shares of our common
stock. Unless otherwise indicated, all information in this prospectus gives
effect to the 15-for-1 stock split effected in July 1999 and assumes that:
. the initial public offering price will be $ per share;
. all outstanding shares of Series A convertible participating preferred
stock and Series B convertible participating preferred stock will be
converted into an aggregate of 35,358,379 shares of our common stock upon
consummation of this offering; and
. the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding options or warrants.
4
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Additional risks and uncertainties not presently known to us
or that we currently believe are not important may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected, the value of our common stock could decline, and you may lose all or
part of your investment.
We are dependent upon our suppliers and other third parties to supply and
distribute all of our products, and we do not have long-term contractual
relationships with many of them
We depend on Ingram Micro, Inc. to provide all of our computer hardware and
software products to fulfill our customers' orders. To date, a substantial
majority of our product sales revenues were derived from computer hardware and
software products acquired from Ingram Micro. We cannot guarantee that
Ingram Micro will continue to supply a sufficient quantity of inventory on a
timely basis to satisfy our order requirements. If Ingram Micro were to
terminate or refuse to renew our distribution arrangement with them, we would
have to purchase our computer hardware and software products from other
distributors. In addition, in the event we do not purchase a specified annual
minimum dollar volume of product from Ingram Micro, our current pricing
schedules could be revised. Ingram Micro's termination or failure to renew our
contract could cause significant delays in our ability to fulfill our
customers' orders, and we may not be able to locate another distributor that
can provide comparable fulfillment, processing and shipping services in a
timely manner, on acceptable commercial terms, if at all. Our distribution
agreement with Ingram Micro terminates in March 2000. However, Ingram Micro can
terminate this agreement earlier without cause, provided that they give us
notice 120 days prior to the termination.
We are also subject to risks associated with Ingram Micro's ability to
replenish its inventory in a timely manner. To the extent Ingram Micro
maintains computer hardware and software products in-stock, we have an
obligation to purchase these items exclusively from them. Due to this
purchasing arrangement, our customers' orders could be significantly delayed if
we need to seek other distributors to fulfill our customers' orders. Our
distribution agreement with Ingram Micro does not require them to set aside any
amount of inventory to fulfill our orders or to give our orders priority over
other resellers to whom they sell. Furthermore, some vendors may decide, for
reasons outside our control, not to offer particular products for sale on the
Internet. These vendors may also cause Ingram Micro not to sell products to us.
Ingram Micro's delay or inability to supply our orders would substantially harm
our business.
Our future success also depends on our ability to provide timely and
accurate order fulfillment. We depend on Ingram Micro to process and ship
substantially all of the computer hardware and software products that we sell
to our customers. However, we have limited control over their shipping and
processing procedures. Ingram Micro's systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications
failure, physical and electronic break-ins, earthquakes and similar events. We
do not carry sufficient business interruption insurance to compensate us for
any losses that could occur as a result of Ingram Micro's inability to perform
for any reason.
We are currently dependent on our distribution and fulfillment partners to
manage inventory, process orders and distribute products to our customers in a
timely manner. In addition to our contract with Ingram Micro for computer
hardware and software products, we have supply and distribution contracts with
Ingram Entertainment Inc. for videos, DVDs and games, Nashville Computer
Liquidators L.P. for our clearance products and Valley Media, Inc. for music
products. We do not have any long-term agreements with any of these third
parties. We purchase all of our books from the Ingram Book Company, which are
shipped and processed by Ingram Fulfillment Services, Inc. and we use Las Vegas
Golf & Tennis, Inc. as the primary source for the golf equipment and
accessories that we sell. If we do not maintain our existing relationships with
these partners on acceptable commercial terms, we may not be able to continue
to offer a broad selection of merchandise at low prices, and customers may
refuse to shop at our online store. In addition, manufacturers
5
<PAGE>
may decide, for reasons outside our control, not to offer particular products
for sale on the Internet. For example, in February 1999, Compaq Computer Corp.
temporarily suspended its authorization of Internet resellers to sell Compaq
products. Other manufacturers, including Dell Computer Corp., have chosen not
to authorize any Internet resellers. If we are unable to supply products to our
customers, or if other product manufacturers refuse to allow their products to
be sold via the Internet, our business would suffer severely.
We rely on our distributors to fulfill a number of traditional retail
functions, including maintaining inventory and preparing merchandise for
shipment to individual customers. In the future, our vendors may not be willing
to provide these services at competitive rates. In addition, vendors may refuse
to develop the communications technology necessary to support our direct
shipment infrastructure. We also have no effective means to ensure that our
partners will continue to perform these services to our satisfaction. Our
customers could become dissatisfied and cancel their orders or decline to make
future purchases if we or our partners are unable to deliver products on a
timely basis. If our customers become dissatisfied with our distributors and
third party service providers, our reputation and the BUY.COM brand could
suffer.
Our operations are also heavily dependent upon a number of other third
parties, including CyberSource Corporation for credit card processing,
ClientLogic Corporation for customer service and support, and Exodus
Communications, Inc. for hosting our system infrastructure and database
servers. In addition, our distributors and fulfillment partners use the Federal
Express Corporation, United Parcel Service and the United States Postal Service
to deliver substantially all of our products. If the services of any of these
third parties become unsatisfactory, our customers may experience lengthy
delays in receiving their orders, and we may not be able to find a suitable
replacement on a timely basis or on commercially reasonable terms.
We have incurred substantial losses and expect to continue to incur losses for
the foreseeable future
We have not achieved profitability since our inception and incurred net
losses of $17.8 million for the year ended December 31, 1998, and net losses of
$80.5 million for the nine months ended September 30, 1999. We expect to
continue to incur losses for the foreseeable future due to additional costs and
expenses related to:
. the implementation of our virtual operating model and our pricing
strategies;
. the introduction of new product lines or services;
. brand development, marketing and other promotional activities;
. the expansion of our product and service offerings;
. the continued development of our Web site, transaction processing
systems and network infrastructure; and
. the development of strategic relationships.
We sell a substantial portion of our products at very low prices. As a
result, we have extremely low and sometimes negative gross margins on our
product sales. Our ability to become profitable depends on, among other things:
. our ability to generate and sustain substantially higher net sales with
improved gross margins while maintaining reasonable expense levels;
. our ability to generate significant advertising revenue; and
. our ability to provide other higher margin products and services.
We have only been operating our online business since November 1997 and face
challenges related to early stage companies in rapidly evolving markets
We were founded in June 1997 and began our online operations in November
1997. You should consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies in the
6
<PAGE>
rapidly evolving online commerce market. These risks include, but are not
limited to, an unpredictable business environment, the difficulty of managing
growth and the use of our virtual operating model. To address these risks, we
must, among other things:
. expand our customer base;
. enhance our brand recognition;
. expand our product and service offerings;
. access sufficient product inventory to fulfill our customers orders;
. successfully implement our business and marketing strategy;
. provide superior customer service and order processing;
. respond effectively to competitive and technological developments; and
. attract and retain qualified personnel.
We have a very limited operating history upon which to evaluate our business
and our prospects. In view of the rapidly evolving nature of our market and our
limited operating history, we believe that period-to-period comparisons of our
financial results are not necessarily meaningful and should not be relied upon
as an indication of our future performance.
Our future operating results may fluctuate and cause the price of our common
stock to decline
Our limited operating history and the emerging nature of the markets in
which we operate make it difficult to accurately predict our future revenues.
We expect that our quarterly revenues and operating results will fluctuate
significantly from quarter to quarter, due to a variety of factors, many of
which are beyond our control. If our quarterly revenues or operating results
fall below the expectations of investors or securities analysts, the price of
our common stock could significantly decline. The factors that could cause our
operating results to fluctuate include, but are not limited to:
. our ability to build and maintain customer loyalty;
. the introduction of new or enhanced Web pages, services, products and
strategic alliances by us and our competitors;
. price competition on the Internet or higher wholesale prices in general;
. the success of our brand building and marketing campaigns;
. our ability to increase advertising revenues;
. our ability to maintain and expand our distribution relationships;
. fluctuations in the amount of customer spending on the Internet;
. increases in the cost of online or offline advertising;
. unexpected increases in shipping costs or delivery times;
. government regulations related to use of the Internet for commerce;
. our ability to maintain, upgrade and develop our Web site, transaction
processing systems and network infrastructure;
. technical difficulties, system downtime or Internet brownouts;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
and
. general economic conditions and economic conditions specific to the
Internet and online commerce.
7
<PAGE>
Our business model is new and unproven, and we may not be able to achieve
profitability
We are subject to risks due to the unproven and evolving nature of our
virtual operating model and aggressive pricing strategy. The success of our
business model depends on the volume of customers that visit our Web site and
purchase our products, as well as our ability to generate significant online
advertising revenues. To this end, we have worked hard to build our brand name
and enhance our customer loyalty by selling our products at extremely low
prices and maintaining very low, and sometimes negative, gross margins on our
product sales. We intend to implement various strategies to improve our gross
margins going forward, which may include raising prices on products and product
categories from time to time. To the extent we raise the prices on our
merchandise, our product sales may decline. We may also have to increase our
prices if distributors receive pressure from manufacturers to discontinue sales
to us as a result of our low price strategy. If the amount of traffic to our
Web site decreases due to price increases or otherwise, we may become less
attractive to our current and potential advertisers. As a result, our margins
and advertising revenues may decline.
Our recent growth has strained our resources, and if we are unable to manage
and sustain our growth, our operating results will be impaired
We have rapidly expanded our operations and anticipate that we must continue
to expand our operations to address potential market opportunities. If we are
unable to manage growth effectively or if we experience disruptions during our
expansion, our operating results will suffer. Recent increases in our employee
base and the volume of our merchandise sales have placed, and are expected to
continue to place, significant demands on our management, operational and
financial resources. For example, we expanded from seven employees at December
31, 1997 to 196 employees at September 30, 1999. Our new employees include a
number of key managerial and technical employees who have not yet been fully
integrated into our management team, and we expect to add additional key
personnel in the near future. To manage growth in our operations, we will need
to improve or replace our existing Web site, financial systems, procedures and
controls. In addition, we will need to expand, train and manage our increasing
employee base. We will also need to expand our finance, administrative and
operations staff.
System failures could prevent access to our online store and harm our business
and results of operations
Our sales would decline and we could lose existing or potential customers if
they are not able to access our online store or if our online store,
transaction processing systems or network infrastructure do not perform to our
customers' satisfaction. Any network interruptions or problems with our Web
site could:
. prevent customers from accessing our online stores;
. reduce our ability to fulfill orders;
. reduce the number of products that we sell;
. cause customer dissatisfaction; or
. damage our reputation.
We have experienced brief computer system interruptions in the past, and
these interruptions may recur. If the number of customers visiting our Web site
continues to increase, we will need to expand and upgrade our technology,
transaction processing systems and network infrastructure significantly. We may
not be able to make timely upgrades to our systems and infrastructure to
accommodate increases in the number of customers.
Our systems and operations are also vulnerable to damage or interruption
from a number of sources, including fire, flood, power loss, telecommunications
failure, physical and electronic break-ins, earthquakes and other similar
events. For example, all of our servers are currently located in Southern
California, a seismically active region. Our servers are also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. Any
substantial disruption of this sort could completely impair our ability to
generate revenues from our Web site. We do not presently have a formal disaster
recovery plan in effect and do not carry sufficient business interruption
insurance to compensate us for losses that could occur.
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We rely on a relatively new management team and need additional personnel to
grow our business
Several of our executive officers are relatively new, and we intend to
continue to hire key management personnel. For example, our future success
depends in part on the continued services of Gregory J. Hawkins, our Chief
Executive Officer, who was hired in March 1999, and Mitch C. Hill, our Chief
Financial Officer, whose employment will commence with us in November 1999. We
may experience difficulty assimilating our recently hired managers, and we may
not be able to successfully locate, hire, assimilate and retain other qualified
key management personnel. Our business is also largely dependent on the
personal efforts and abilities of other members of senior management, as well
as other key personnel. Any of our officers or employees can terminate their
employment relationship at any time. We do not maintain key person life
insurance on any member of our management team. The loss of any key employee or
our inability to attract or retain other qualified employees could harm our
business and results of operations.
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. We plan to hire additional personnel in all areas
of our business. Competition for these types of personnel is intense,
particularly in the Internet industry. As a result, we may be unable to
successfully attract, assimilate or retain qualified personnel.
Online security risks could seriously harm our business
A significant barrier to e-commerce and online communications is the secure
transmission of confidential information over public networks. Anyone who is
able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
licensed encryption and authentication technology to provide the security and
authentication necessary for secure transmission of confidential information,
including credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments may
result in a compromise or breach of the algorithms that we use to protect
customer transaction data. In the event someone circumvents our security
measures, it could seriously harm our business and reputation, and we could
lose customers. Security breaches could also expose us to a risk of loss or
litigation and possible liability for failing to secure confidential customer
information.
If we are not able to generate significant advertising revenue, we may not be
able to achieve profitability
Our future success will depend in part on the willingness of product
manufacturers and other advertisers to advertise on our Web site. The market
for Internet advertising is new and rapidly evolving. As a result, there is
significant uncertainty about the demand for and market acceptance of Internet
advertising. In addition, the number of Web sites that offer advertising
opportunities has dramatically increased in the last year, thus increasing the
competition for available advertising revenue. We cannot assure you that the
market for Internet advertising will continue to expand, that it will become
sustainable or that we will be able to continue to provide an attractive forum
for advertisers. If the market for Internet advertising fails to develop,
develops more slowly than we expect or if we do not provide an attractive forum
for advertisers, our business may not achieve profitability.
Because our advertising revenues generally carry higher gross margins than
our product sales, any decline in our advertising revenues would have a
disproportionate impact on our overall gross margin. If our current and
potential advertisers find Internet advertising to be less effective for
promoting their products and services than traditional advertising, they may
choose to decrease or discontinue advertising on the Internet or on our Web
site. If our advertising revenues decline, we may not be able to replace these
revenues through other programs or through our product sales.
9
<PAGE>
Our recent and planned expansion into new product categories and business areas
is costly, risky and may not be profitable
We have pursued an aggressive expansion strategy in the past year, opening
six new online stores and acquiring BuyGolf.com. Continued expansion of our
operations requires substantial expenses and development, operations and
editorial resources, and strains our management, financial and operational
resources. We may choose to continue to expand our operations by:
. developing new Web sites;
. pursuing new or complementary products, services or sales formats;
. expanding the breadth and depth of the products and services that we
offer; or
. expanding our market presence through relationships with third parties.
As we expand into other product or service offerings, we risk diluting our
brand name, confusing customers and decreasing interest from our advertisers.
In addition, we could be exposed to additional or unexpected risks as we enter
into new business areas and may be forced to abandon our current business model
or alter our strategic plans. If our expansion efforts are unsuccessful, our
business may suffer, and we may lose potential market opportunities.
In addition, we may pursue the acquisition of new or complementary
businesses or technologies, although we have no present understandings,
commitments or agreements with respect to any material acquisitions or
investments. We may not be able to expand our efforts and operations in a cost-
effective or timely manner and these efforts may not achieve market acceptance.
Furthermore, any new business or Web site that we launch that is not favorably
received by customers could damage our reputation or the BUY.COM brand.
If sales from our computer products decline, our operating results will suffer
Our operating results substantially depend on product revenue from the sale
of computer hardware, software products and peripherals. To date, a substantial
majority of our product sales revenues are derived from computer hardware and
software products. We expect that revenue from these products will continue to
represent more than a majority of our total product revenues during the next
twelve months. We could experience declines in these product sales due to
several factors, including, but not limited to:
. decreased customer demand for computer hardware, software and peripheral
products;
. increased price competition from our competitors;
. technological obsolescence of the computer hardware, software and
peripheral products that we offer; or
. decisions by manufacturers of computer products to curtail or eliminate
the sale of products or categories of products over the Internet by us.
If we are unable to maintain our current sales levels of computer hardware,
software and peripheral products, our financial condition and results of
operations would suffer.
We must continue to develop and maintain the BUY.COM brand, which is costly and
may not generate corresponding revenues
Maintaining and strengthening the BUY.COM brand is an important factor in
attracting new customers, building customer loyalty and attracting advertisers.
Accordingly, we intend to continue to pursue an aggressive
10
<PAGE>
promotional strategy to enhance our brand. These initiatives have involved, and
are expected to continue to require, significant expenditures. If we are
unsuccessful in our promotional efforts, we may never be able to recover these
expenses or increase our revenues or margins. We also believe potential
customers and advertisers are driven to our online store because of our strong
brand recognition. If advertisers do not believe our Web site is an effective
marketing and sales channel for their merchandise, or if customers do not
perceive us as offering a desirable way to purchase merchandise, our branding
efforts will suffer and we may lose customers.
Our ability to build and strengthen the BUY.COM brand depends largely on:
. the success of our advertising and promotional efforts;
. our ability to provide our customers with a broad range of products at
competitive prices; and
. our ability to provide high quality customer service.
To promote the BUY.COM brand in response to competitive pressures, we may
increase our marketing budget or otherwise increase our financial commitment to
creating and maintaining brand loyalty among our customers. For example, we
spent approximately $13.4 million on sales and marketing in the fiscal year
ended December 31, 1998 and approximately $44.1 million for the nine months
ended September 30, 1999, and we expect these expenses to continue to increase
for the remainder of 1999. We cannot be certain that our advertising efforts
will be a successful means of customer acquisition or that this allocation of
resources will provide additional revenues equal to this dedication of our
resources. If we fail to promote and maintain our brand, or if we incur
excessive expenses attempting to promote and maintain our brand, our business
may suffer.
If we do not respond to technological change, our stores could become obsolete,
and we could lose customers
The development of our Web site entails significant technical and business
risks. To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online stores. The Internet
and the e-commerce industry are characterized by:
. rapid technological change;
. changes in customer requirements and preferences;
. frequent new product and service introductions embodying new
technologies; and
. the emergence of new industry standards and practices.
The evolving nature of the Internet could render our existing online stores
and systems obsolete. Our success will depend, in part, on our ability to:
. license or acquire leading technologies useful in our business;
. enhance our existing online stores;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective customers;
and
. adapt to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not use new technologies effectively or adapt
our Web site and transaction processing systems to customer requirements or
emerging industry standards on a timely basis. Our ability to remain
technologically competitive may require substantial expenditures and lead time.
If we are unable to adapt to changing market conditions or user requirements in
a timely manner, our stores may become obsolete and we will lose customers.
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<PAGE>
If the software, hardware, computer technology and other systems and services
we use are not Year 2000 compliant, our operations could suffer and we could
lose customers
Many existing computer systems and software products are coded to accept
only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. If not corrected, there could be system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to become "Year 2000"
compliant.
We use and depend on third party equipment and software that may not be Year
2000 compliant. If Year 2000 issues prevent our customers from accessing the
Internet or our Web site, processing orders or using their credit cards, our
business and operations will suffer. We are also entirely dependent upon
distribution and fulfillment partners to provide and distribute the merchandise
we sell in our online stores directly to our customers. We also rely on Federal
Express, United Parcel Service, United States Postal Service and other third
party carriers to deliver orders to our customers. Any failure of our third
party equipment, software or services to operate properly could require us to
incur unanticipated expenses, which could seriously harm our business and
operating results. Our failure to make our Web site, network infrastructure and
transaction processing systems Year 2000 compliant could result in:
. a decrease in our sales;
. a disruption in our ability to fulfill orders;
. an increase in our allocation of resources to address Year 2000 problems
without additional revenue equal to this dedication of resources; and
. an increase in litigation costs relating to losses suffered by our
customers due to Year 2000 problems.
Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems. These expenditures may result in reduced funds
available to purchase products on our Web site, thus causing a decrease in our
product sales revenues.
We may be subject to liability for sales and other taxes
We currently collect sales or other similar taxes on the shipment of goods
in the States of California, Massachusetts and Tennessee. However, one or more
states could seek to impose additional income tax obligations or sales tax
collection obligations on out-of-state companies, such as ours, which engage in
or facilitate online commerce. A number of proposals have been made at state
and local levels that could impose taxes on the sale of products and services
through the Internet or the income derived from these sales. These proposals,
if adopted, could substantially impair the growth of e-commerce and adversely
affect our ability to become profitable. Furthermore, since our service is
available over the Internet in multiple states and in foreign countries, these
jurisdictions may require us to qualify to do business in these states and
foreign countries. If we fail to qualify in a jurisdiction that requires us to
do so, we could face liabilities for taxes and penalties.
Internet domain names are essential to our business, and we may be unable to
protect our domain names
Internet domain names are critical to our brand recognition and our overall
success. We currently hold over 1,200 domain names relating to our brand,
including BUY.COM and each domain name for our specific online stores and
subcategories. If we are unable to protect these domain names, our competitors
could capitalize on our brand recognition. The acquisition and maintenance of
domain names generally are regulated by governmental agencies and their
designees. The regulation of domain names in the United States and in foreign
countries has changed and is subject to further change in the near future. As a
result, we may be unable to acquire or maintain relevant domain names in the
United States and in other countries where we conduct
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<PAGE>
business. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to protect our own domain names or prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our domain names, trademarks and other
intellectual property rights.
Our operating results could be impaired if we become subject to burdensome
government regulations and legal uncertainties concerning the Internet
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:
. user privacy;
. pricing, usage fees and taxes;
. content;
. copyrights;
. online advertising and marketing
. distribution;
. characteristics and quality of products and services; and
. online advertising and marketing.
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our advertising revenues and
margins and increase our cost of doing business. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many important
issues, including property ownership, intellectual property, export of
encryption technology, libel and personal privacy. The application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services, could also harm our business.
Our growth and operating results could be impaired by the risks associated with
our planned international expansion
A key component of our business strategy is to expand our international
sales, and we intend to establish a physical presence in international markets
in the future. For example, we have already initiated expansion into Europe and
Canada. Conducting business in foreign countries involves inherent risks,
including, but not limited to:
. unexpected changes in regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. difficulties in protecting intellectual property rights;
. difficulties in staffing and managing foreign operations;
. problems collecting accounts receivable;
. longer payment cycles;
. political instability;
. fluctuations in currency exchange rates; and
. potentially adverse tax consequences.
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If we are unable to successfully defend against pending legal actions against
us, we could face substantial liabilities
We are currently a party to pending legal actions against us, the outcomes
of which are uncertain and could result in significant judgments against us. In
March 1999, a class action suit was filed against us in the Orange County
California Superior Court alleging we intentionally mispriced products and
charged for orders knowing the orders could not be fulfilled. Another class
action suit was filed against us in Camden County, New Jersey in March 1999
based on facts similar to the class action pending in Orange County. Defending
against these lawsuits may involve significant expense and diversion of
management's resources. Furthermore, due to the inherent uncertainties of
litigation, we may not prevail in these actions. In addition, the methods that
we use to update our product prices may result in future pricing errors that
may subject us to significant litigation and costs in the future. For a more
detailed description of these litigation matters, see "Business--Legal
Proceedings."
The success of our business depends on the continued growth of the Internet as
a viable commercial marketplace
Our success depends upon the widespread acceptance of the Internet as a
vehicle to purchase products. The e-commerce market is at an early stage of
development, and demand and continued market acceptance is uncertain. We cannot
predict the extent to which customers will shift their purchasing habits from
traditional to online retailers. If customers or manufacturers are unwilling to
use the Internet to conduct business and exchange information, our business
will fail. It is possible that the Internet may not become a viable long-term
commercial marketplace due to the potentially inadequate development of the
necessary network infrastructure, the delayed development of enabling
technologies and performance improvements and the high cost of shipping
products. The commercial acceptance and use of the Internet may not continue to
develop at historical rates, or may not develop as quickly as we expect. In
addition, concerns over security and privacy may inhibit the growth of the
Internet.
Because we face intense competition in various retail segments and operate in
an industry with limited barriers to entry, some of our competitors may be
better positioned to capitalize on the rapidly growing e-commerce market
The e-commerce market is new, rapidly evolving and intensely competitive.
Many of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing, technical, management and other resources than we do.
Some of our competitors have and may continue to use aggressive pricing or
inventory availability practices and devote substantially more resources to Web
site and system development than us. We expect that competition will further
intensify in the future. Because barriers to entry are limited, current and new
competitors can launch Web sites at a relatively low cost and can expand their
operations rapidly. New technologies and the expansion of existing technologies
may also increase the competitive pressure we face. Increased competition may
result in reduced operating margins, loss of market share and diminished brand
recognition.
We believe that the primary competitive factors in the online market include
brand recognition, price, product selection, ease of use, customer service,
available content and value added services. We currently compete with a variety
of online vendors that specialize in computer hardware and software products,
as well as those who sell books, music, videos, DVDs and other entertainment
products. Moreover, all of the products we sell in our online stores are
typically available from traditional retailers. Consequently, we must compete
with companies in the online commerce market as well as the traditional retail
industry. With respect to computer hardware, software, peripheral and clearance
product markets, our competitors include, but are not limited to:
. traditional computer retailers, including CompUSA and MicroCenter;
. catalogue retailers, including Insight and PC Connection;
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. online computer retailers, including Cyberian Outpost, Egghead.com and
Onsale; and
. software and hardware manufacturers that market their products through
their own Web sites, including Apple Computer, Dell Computer and
Gateway.
Our current or potential competitors with respect to books, DVDs and videos,
and other entertainment related products include, but are not limited to:
. traditional entertainment product retailers, including Barnes & Noble,
Blockbuster Video and Borders;
. internet-focused entertainment product retailers, including Amazon.com
and Reel.com; and
. non-entertainment retailers that sell a limited selection of
entertainment products, such as Wal-Mart.
We would also realize significant competitive pressure if any of our
distribution partners were to initiate their own retail operations. Since our
distributors have access to merchandise at very low costs, they could sell
products at lower prices and maintain a higher gross margin on their product
sales than we can. In this event, our current and potential customers may
decide to purchase directly from these distributors. Increased competition from
any distributor capable of maintaining high sales volumes and acquiring product
at lower prices than us could significantly reduce our market share.
Our growth and operating results could be impaired if we are unable to meet our
future capital needs
Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to satisfy
our anticipated needs for working capital, capital expenditures and business
expansion for at least the next twelve months. After that time, we may need
additional capital. Alternatively, we may need to raise additional funds sooner
to:
. fund more rapid expansion;
. develop new product lines or enhanced services;
. fund acquisitions; or
. respond to competitive pressures.
If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our stockholders will be diluted.
Furthermore, any new securities could have rights, preferences and privileges
senior to those of our common stock. We currently do not have any commitments
for additional financing. We cannot be certain that additional financing will
be available when and to the extent required or that, if available, it will be
on acceptable terms. If adequate funds are not available on acceptable terms,
we may not be able to fund our expansion, develop or enhance our products or
services or respond to competitive pressures.
If we are unable to successfully manage the transition of our leadership, our
business could suffer
Scott A. Blum, our founder, majority stockholder and former Chief Executive
Officer and Chairman, recently resigned from our Board of Directors, terminated
his employment relationship with us, deposited all of his shares of our common
stock into a voting trust, which shares as of October 15, 1999 represented
approximately 56% of our outstanding capital stock, and withdrew from
participation in our management, business and operations. To date, Mr. Blum has
been primarily responsible for conceiving, developing and implementing our
virtual operating business model and recruiting our Board of Directors and our
current management team. In addition, Mr. Blum has been directly involved in
the creation, development and implementation of our corporate image and
advertising strategy. Mr. Blum's withdrawal from our business and our inability
to replace Mr. Blum could harm our business.
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If we are unable to protect our trademarks and intellectual property rights,
our reputation and brand could be impaired, and we could lose customers
We regard our trademarks, trade secrets and similar intellectual property as
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners and others to protect our proprietary rights. We cannot be
certain that we have taken adequate steps to protect our proprietary rights,
especially in countries where the laws may not protect our rights as fully as
in the United States. In addition, third parties may infringe or misappropriate
our proprietary rights, and we could be required to incur significant expenses
to preserve them. We have pursued the registration of our trademarks in the
United States and internationally, and have applied for the registration of
some of our trademarks and service marks. We have pending trademark
registrations for many names; however, even if we obtain registrations for
these names, the registrations may not adequately protect us against
infringement by others. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our products
and service are made available online. If we are not able to protect our
trademarks or other intellectual property, we may experience difficulties in
achieving and maintaining brand recognition and customer loyalty.
Intellectual property claims against us could be costly and result in the loss
of significant rights
Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notices of claims of infringement
of intellectual property rights, and we expect to receive other notices in the
future. We cannot predict whether third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will adversely affect our business. If we are forced to defend
against any of these claims, whether meritless or not, are determined in our
favor, we may face costly litigation and diversion of technical and management
personnel. As a result of these disputes, we may have to expend significant
resources to develop or acquire non-infringing property. Alternatively, we may
need to pursue royalty or licensing agreements, which may not be available on
acceptable terms, if at all.
SOFTBANK controls a majority of our outstanding common stock, which will enable
it to control many significant corporate actions and may prevent a change in
control that would otherwise be beneficial to our stockholders
Upon completion of this offering, shares of common stock constituting
approximately % of our outstanding stock will be voted in accordance with the
terms of a voting trust agreement. On significant stockholder actions, as
defined as the voting trust agreement, the trustees are required to vote the
trust shares to mirror the voting of all shares which are not subject to the
terms of the voting trust agreement. On routine stockholder actions, the
trustees have the discretion to vote the trust shares in any manner determined
by a majority of the trustees. As a result, SOFTBANK and its affiliates will
effectively control the votes of approximately % of our common stock on
significant corporate actions and % on routine corporate governance matters
immediately after this offering. This control by SOFTBANK could have a
substantial impact on matters requiring the vote of the stockholders, including
the election of our directors and most of our corporate actions. This control
could delay, defer or prevent others from initiating a potential merger,
takeover or other change in our control, even if these actions would benefit
our stockholders and us. This control could adversely affect the voting and
other rights of our other stockholders and could depress the market price of
our common stock.
We have broad discretion as to the use of proceeds from this offering and may
not use the proceeds effectively
We estimate the net proceeds of this offering to be approximately $138.0
million. Our management team will retain broad discretion as to the allocation
of the proceeds and may spend these proceeds in ways that our stockholders may
not agree.
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Our stock price may be volatile, which may result in losses to our stockholders
The trading price of our common stock is likely to be volatile and could
fluctuate widely in response to many of the following factors, some of which
are beyond our control:
. variations in our operating results;
. announcements of technological innovations, new services or product
lines by us or our competitors;
. changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
. changes in operating and stock price performance of other Internet and
online commerce companies;
. conditions or trends in the Internet industry;
. additions or departures of key personnel; and
. future sales of our common stock.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock. In particular, following initial public offerings,
the market prices for stocks of Internet and technology-related companies often
reach levels that bear no established relationship to the operating performance
of these companies. These market prices are generally not sustainable and could
vary widely. The market prices of the securities of Internet-related and online
companies have been especially volatile. If our common stock trades to high
levels following this offering, it could eventually experience a significant
decline.
A large number of additional shares may be sold into the public market in the
near future, which may cause the market price of our common stock to decline
significantly, even if our business is doing well
After this offering, we will have outstanding shares of common
stock. This includes the we are selling in this offering, which may be
resold in the public market immediately. The remaining %, or 178,281,189
shares, of our total shares outstanding after the offering will become
available for resale in the public market as shown in the chart below. As
restrictions on resale end, the market price could drop significantly if the
holders of these restricted shares sell them or are perceived by the market as
intending to sell them.
<TABLE>
<CAPTION>
Number of shares Date of availability for resale into public market
---------------- --------------------------------------------------
<S> <C>
180 days after the date of this prospectus due to an
agreement these stockholders have with the underwriters.
However, the underwriters can waive this restriction and
allow these stockholders to sell their shares at any time.
Between 180 and 365 days after the date of this prospectus
due to the requirements of the federal securities laws.
</TABLE>
For a more detailed description, see "Shares Eligible for Future Sale."
Our charter documents could defer a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. For a more detailed discussion of
these provisions, see "Description of Capital Stock--Anti-Takeover Provisions."
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify forward
looking statements. These statements include, but are not limited to,
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus concerning, among other things:
. our ability to maintain and expand current distribution, fulfillment and
other partnering relationships and to enter into new relationships;
. our ability to attract advertisers and increase advertising revenue;
. our ability to increase our gross margins;
. our ability to broaden our existing product lines or expand into new
product categories; and
. our Year 2000 readiness.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to publicly update or revise these
forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock sold by
us in this offering are estimated to be approximately $138.0 million based on
an assumed initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
At this time, the principal purposes of this offering are to obtain
additional capital to increase our financial flexibility and to create a public
market for our common stock. We presently intend to use the net proceeds of
this offering in the following ways:
. approximately $20.0 million for capital expenditures associated with
technology and systems upgrades and the expansion of our corporate
headquarters;
. approximately $8.7 million to repay loans from SOFTBANK America, Inc. to
us in connection with the formation of three international joint
ventures; and
. approximately $8.5 million to pay part of our sponsorship fee in
connection with our agreement with the PGA TOUR, Inc.
We also intend to spend a portion of the net proceeds of this offering to
expand our sales and marketing capabilities, particularly for advertising
campaigns and promotions to increase brand recognition, to pursue new product
categories and expand our current product categories, and to expand
internationally.
We may also use an unspecified portion of the net proceeds of this offering
to acquire or invest in complementary businesses, services or technologies, or
to enter into strategic marketing relationships with third parties. From time
to time, in the ordinary course of business, we expect to evaluate potential
acquisitions of these businesses, services or technologies and strategic
relationships. At this time, however, we do not have any present
understandings, commitments or agreements with respect to any material
acquisition.
We have no specific plans at this time for use of the remaining proceeds and
expect to use these proceeds for working capital and general corporate
purposes. Our management will have broad discretion concerning the allocation
and use of a significant portion of the net proceeds of this offering. Pending
the use of the net proceeds of this offering, we intend to invest these
proceeds in short-term, investment grade, interest bearing securities.
The foregoing represents our best estimate of the allocation of the net
proceeds from the sale of the common stock offered by this prospectus, based
upon the current state of our business operations, our current plans for
expansion and the current economic and industry conditions. The net proceeds
are subject to reallocation among the categories stated above. The amount or
timing of our actual expenditures will depend on numerous factors, including
our profitability, the availability of alternative financing, our business
development activities and competition.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to finance the growth and
development of our business. Therefore, we do not anticipate that we will
declare or pay any cash dividends on our common stock in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, restrictions under any
existing indebtedness and other factors the Board of Directors deems relevant.
19
<PAGE>
CAPITALIZATION
The following table indicates our capitalization at September 30, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all of our
Series A preferred stock and the issuance of our Series B preferred stock
into an aggregate of 35,358,379 shares of common stock upon the
completion of this offering; and
. on a pro forma as adjusted basis to reflect this conversion and the
issuance of shares of common stock at an assumed initial public
offering price of $ per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
This table should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(amounts in thousands , except
share and per share data)
<S> <C> <C> <C>
Total long-term debt, net of
current portion................... $ 1,818 $ 1,818 $
Stockholders' equity (deficit):
Convertible preferred stock,
$.0001 par value (Series A and
B); 150,000,000 authorized;
19,481,130 shares issued and
outstanding; no shares issued and
outstanding, pro forma and pro
forma as adjusted; including
additional paid-in capital....... 14,943 --
Common stock, $.0001 par value;
850,000,000 shares authorized;
142,922,810 shares issued and
outstanding, actual; 178,281,189
shares issued and outstanding,
pro forma; shares issued
and outstanding, pro forma as
adjusted ........................ 14 18
Additional paid-in capital,
common........................... 33,593 138,532
Deferred compensation............. (8,387) (8,387)
Accumulated deficit............... (98,761) (98,761)
-------- ------- -------
Total stockholders' equity
(deficit)...................... (58,598) 31,402
-------- ------- -------
Total capitalization........... $(56,780) $ 33,220 $
======== ======= =======
</TABLE>
- --------
These share amounts exclude 30,598,875 shares of common stock issuable upon
the exercise of options outstanding as of September 30, 1999 at a weighted
average exercise price of $1.85 per share and warrants to purchase
approximately 2,043,550 shares of common stock, based upon an estimated initial
public offering price of $ per share, at a weighted average exercise price of
$ per share. For additional information regarding our capital structure,
see "Management--Employee Benefit Plans," "Description of Capital Stock" and
notes 8 and 9 of notes to consolidated financial statements.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999, which
includes actual proceeds of approximately $90.0 million from the issuance of
15,877,249 shares of Series B convertible participating preferred stock, was
approximately $24.2 million, or $0.14 per share of common stock. Our pro forma
net tangible book value does not give effect to the issuance of 4,142,927
shares of common stock in connection with our acquisition of BuyGolf.com or the
issuance of 1,800,000 shares of common stock in connection with our sponsorship
agreement with PGA TOUR. Pro forma net tangible book value per share represents
our total tangible assets less total liabilities divided by the pro forma
number of shares of common stock outstanding as of September 30, 1999, after
giving effect to the conversion of all outstanding shares of our convertible
participating preferred stock, which immediately converts upon the closing of
this offering into 35,358,379 shares of common stock. Without taking into
account any other changes in pro forma net tangible book value other than to
give effect to our sale of the shares of common stock offered by this
prospectus and the receipt and application of those net proceeds, our pro forma
net tangible book value as of September 30, 1999 would have been $ million,
or $ per share of common stock. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing stockholders
and an immediate dilution in pro forma net tangible book value of $ per
share to investors purchasing common stock in this offering.
The following table illustrates this per share dilution (unaudited):
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $
Pro forma net tangible book value per share as of
September 30, 1999...................................... $ 0.14
Increase per share attributable to new investors.........
---------
Pro forma net tangible book value per share after this
offering.................................................
-----
Dilution per share to new investors....................... $
=====
</TABLE>
The following table summarizes as of September 30, 1999, on a pro forma
basis which included the sale of our Series B convertible participating
preferred stock, the difference between the number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid by existing stockholders and by new investors, assuming an initial public
offering price of $ per share and before deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- -------------------- Price
Number Percent Amount Percent per Share
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 178,281,189 % $116,930,000 % $0.66
New investors............
----------- --- ------------ ---
Total................ 100% $ 100%
=========== === ============ ===
</TABLE>
The foregoing tables assume no exercise of the underwriters' over-allotment
option or any stock options or warrants outstanding as of September 30, 1999,
and does not give effect to the issuance of 1,800,000 shares of common stock in
connection with our sponsorship agreement with the PGA TOUR. As of September
30, 1999, options to purchase 30,598,875 shares of common stock were
outstanding at a weighted average exercise price of $1.85 per share. To the
extent that these options are exercised, new investors will experience further
dilution. As of September 30, 1999, warrants to purchase approximately
2,043,550 shares of common stock were outstanding, based upon an estimated
initial public offering price of $ per share, at a weighted average
exercise price of $ per share. For additional information regarding our
stock options, see note 9 of notes to consolidated financial statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(amounts in thousands, except share and per share data)
The following selected consolidated financial data as of December 31, 1997
and 1998 and for the period from June 7, 1997 (Inception) to December 31, 1997
and the year ended December 31, 1998 have been derived from our consolidated
financial statements and related notes audited by Arthur Andersen LLP,
independent public accountants, included elsewhere in this prospectus. The
selected consolidated statement of operations data for the nine months ended
September 30, 1998 and 1999 and the selected consolidated balance sheet data as
of September 30, 1999, are derived from our unaudited financial statements
included elsewhere in this prospectus. Our unaudited financial statements have
been prepared on substantially the same basis as the audited consolidated
financial statements and, in the opinion of our management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial condition as of and results of operations for
these periods. The historical results are not necessarily indicative of future
results. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
June 7, 1997 Nine Months Ended
(Inception) to Year Ended September 30,
December 31, December 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ----------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 878 $ 125,290 $ 63,761 $ 397,601
Cost of goods sold...... 832 123,527 61,165 401,214
----------- ----------- ----------- -----------
Gross profit............ 46 1,763 2,596 (3,613)
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing.... 130 13,430 2,770 44,094
Product development.... 30 950 404 3,851
General and
administrative........ 260 4,250 3,624 12,872
Depreciation and
amortization.......... 7 377 61 3,009
Amortization of
deferred
compensation.......... -- 795 422 5,417
Charge for warrants.... -- -- -- 7,021
----------- ----------- ----------- -----------
Total operating
expenses............ 427 19,802 7,281 76,264
----------- ----------- ----------- -----------
Operating loss.......... (381) (18,039) (4,685) (79,877)
----------- ----------- ----------- -----------
Other income (expense):
Interest income
(expense), net........ (7) 202 78 (721)
Other.................. -- (4) (58) 74
----------- ----------- ----------- -----------
Total other income
(expense).............. (7) 198 20 (647)
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (388) (17,841) (4,665) (80,524)
Provision for income
taxes.................. 2 3 3 3
----------- ----------- ----------- -----------
Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted...... $ (0.00) $ (0.14) $ (0.04) $ (0.57)
Weighted average shares
outstanding:
Basic and diluted...... 130,129,725 130,905,390 130,129,725 141,814,477
<CAPTION>
December 31,
--------------------------- September 30,
1997 1998 1999
-------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 34 $ 9,221 $ 3,231
Working capital
(deficit).............. (391) (3,562) (69,954)
Total assets............ 267 26,837 33,889
Long-term debt, net of
current portion........ -- 1,175 1,818
Total stockholders'
equity (deficit)....... (340) 6,635 (58,598)
</TABLE>
Please refer to note 10 of the notes to consolidated financial statements
for information regarding the method used to compute our basic and diluted net
loss per share. The selected consolidated financial data above does not reflect
our receipt of approximately $90.0 million in connection with the sale of our
Series B convertible participating preferred stock to SOFTBANK and its related
entities in October 1999.
22
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS INFORMATION
(amounts in thousands, except share and per share data)
The following selected unaudited pro forma condensed combined financial
information and related notes contain forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
discussed here. We have no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
The selected unaudited pro forma condensed combined financial information is
based upon, and should be read together with, the historical financial
statements of BUY.COM and BuyGolf.com and the related notes to these financial
statements. The selected unaudited pro forma condensed combined financial
information is based upon tentative allocations of purchase price for the
acquisitions and may not show the results that would have been reported had
such events actually occurred on the dates specified, nor does it indicate our
future results. Purchase accounting is based upon preliminary asset valuations,
which are subject to change.
The selected unaudited pro forma condensed combined statement of operations
information for the nine months ended September 30, 1999 is presented as if
BUY.COM had completed the acquisition of BuyGolf.com as of January 1, 1999.
Since BuyGolf.com did not commence operations until December 1, 1998, the
impact of the acquisition of BuyGolf.com to the selected unaudited pro forma
condensed combined statement of operations information for the year ended
December 31, 1998 is immaterial and has not been shown.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------------------------
BUY.COM BuyGolf.com, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenues............ $ 397,601 $ 1,025 $ (40)(b) $ 398,586
Cost of goods sold...... 401,214 883 -- 402,097
----------- ----------- ----------- -----------
Gross profit............ (3,613) 142 (40) (3,511)
Total operating
expense................ 76,264 3,584 5,818 (c) 85,666
----------- ----------- ----------- -----------
Operating loss.......... (79,877) (3,442) (5,858) (89,177)
Total other income
(expense).............. (647) 7 -- (640)
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (80,524) (3,435) (5,858) (89,817)
Provision for income
taxes.................. 3 1 -- 4
----------- ----------- ----------- -----------
Net loss................ $ (80,527) $ (3,436) $ (5,858) $ (89,821)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted...... $ (0.62)
Weighted average number
of commons shares
outstanding:
Basic and diluted...... 145,642,459
</TABLE>
- --------
(a) The results of operations of BuyGolf.com will be included in our
consolidated results commencing October 1, 1999. This presentation shows
the pro forma effects of the operations of BuyGolf.com as if the
acquisition occurred on January 1, 1999.
(b) Represents advertising revenues/expenses, recorded for the nine months
ended September 30, 1999, that should be eliminated upon the acquisition
of BuyGolf.com by BUY.COM.
(c) Represents the amortization of goodwill that would have been recorded for
the nine months ended September 30, 1999, if the acquisition of
BuyGolf.com occurred on January 1, 1999.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our selected consolidated financial
data and the consolidated financial statements and related notes included
elsewhere in this prospectus.
Overview
BUY.COM is a leading multi-category Internet superstore, offering a
comprehensive selection of brand name computer hardware and peripherals,
software, books, videos, DVDs, computer games and music at everyday low prices.
Through our seven online specialty stores, we offer more than 850,000 stock
keeping units, or SKUs, in a convenient, intuitive shopping interface that
features extensive product information and multi-media presentations. Our e-
commerce portal, www.buy.com, links our seven specialty stores and is designed
to enhance the customer's online shopping experience 24 hours a day, seven days
a week. From our inception in June 1997 through mid November 1997, we had no
sales and our operating activities related primarily to the planning and
development of our original Web site, BUYCOMP.COM, which offered computer
hardware and software products. Beginning with the opening of our BUYCOMP.COM
online computer store in November 1997 through November 1998, we continued to
expand our infrastructure and focused on expanding distributor and vendor
relationships, attracting customers to our Web site, building our brand and
establishing customer service operations.
In December 1998, we acquired Speedserve, Inc., an online retailer of books,
videos, DVDs and video games, and reincorporated BUY.COM in Delaware.
Concurrent with this acquisition, we opened our BUY.COM Web site that
consolidated Speedserve's retail Web site with our existing computer hardware
and software online retail store to create five specialty online retail stores.
In late April 1999, we launched the BUYMUSIC.COM store and an improved version
of our Web site that incorporated increased functionality and speed, broader
content and enhanced customer service. In May 1999, we added our newest online
retail store, BUYCLEARANCE.COM, which offers high quality, brand name, closeout
products at significant discounts.
We derive revenues principally from the sale of products and, to a lesser
extent, from paid advertisements on our Web site. We recognize product revenue
upon shipment of products. We generally recognize advertising revenue straight
line over the period of time an advertisement runs on our site. In some
circumstances, our agreements with advertisers require consumer action, in
which cases, we recognize advertising revenue when the consumer action is
completed.
We have employed a virtual operating model that includes outsourcing the
majority of our infrastructure to leading national distribution and fulfillment
partners with established expertise. Through this model, we capitalize on the
cost efficiencies achieved by our distribution partners and minimize our
infrastructure and operating expenses, enabling us to pass significant savings
on to our customers. Additionally, by aligning with leading distributors in
each of our product categories, we can use their significant inventories and
distribution capabilities to offer a broader selection of products at lower
costs than traditional retailers can. Initially, our strategy has focused on
using extremely low prices together with aggressive marketing and advertising
campaigns to drive traffic to our web site, promote our brand and build sales
momentum. As a result of these advertising and merchandising strategies, our
revenues have grown rapidly. Net revenues were $125.3 million for the year
ended December 31, 1998 and $397.6 million for the nine months ended September
30, 1999.
We have constructed our e-commerce portal to function as a multi-category
Internet superstore, enabling customers to purchase products from each of our
online specialty stores in the same shopping visit and encouraging repeat
purchases. Since inception, we have sold our products to more than 1.4 million
unique customers. In September 1999, repeat customers accounted for
approximately 48% of our orders and over 55% of our booked revenues. We believe
that these percentages will increase as we continue to modify our merchandising
strategy and further cultivate customer loyalty through everyday low prices and
an improved
24
<PAGE>
shopping experience. In view of the rapidly evolving nature of our business and
our limited operating history, we believe that period-to-period comparisons of
our operating results, including our gross profit margin and operating expenses
as a percentage of our net revenues, should not be relied upon as an indication
of our future performance.
Consistent with our merchandising strategy, we have started to raise prices
on many of our SKUs. Since the second quarter of 1999, we have increased our
product margins without experiencing a decline in overall sales volumes or
customer levels. Although we intend to continue these selective price
increases, under our long-term business model we expect to maintain lower
relative product margins than many other online and offline retailers, while
generating high sales volumes. For this reason, our ability to become and
remain profitable depends upon our ability to substantially increase our net
sales. We cannot be certain that our sales growth will continue or that we will
ever become profitable.
To date, our sales of computer hardware and software products have accounted
for the vast majority of our revenues. As we continue to expand into new
product categories, we expect sales of products other than computer hardware
and software to be an increasingly larger component of our business in the
future.
We currently generate additional revenues from vendor co-op advertising as
well as media advertising. Vendor co-op advertising is a standard practice in
the retailing sector, where product vendors set aside certain amounts of
advertising funds to be paid to retailers in exchange for specific marketing
and in-store placement of their products. We work closely with vendors to
develop marketing programs and merchandising initiatives in our online stores.
To date, most of our co-op advertising has come from our technology and
entertainment vendors, although we plan to explore new co-op advertising
opportunities as we expand into new product categories. We also generate
advertising media revenue from click-through advertisements that direct the
customer to the advertiser's Web site. These media advertising revenues are
generally derived from short-term advertising contracts in which we typically
guarantee a minimum number of impressions to be delivered to users over a
specified period of time for a fixed fee. In the cases where we guarantee a
minimum number of impressions, we defer a portion of the advertising revenues
until the minimum number of impressions has been achieved.
We have incurred significant losses since our inception and our cost of
sales and operating expenses have increased dramatically. This trend reflects
the costs associated with the formation of BUY.COM, as well as our increased
efforts to promote the BUY.COM brand, build market awareness, attract new
customers, recruit personnel, build operating infrastructure, and develop and
expand our Web site and related transaction-processing systems. We intend to
continue to invest heavily in marketing and promotion, Web site development,
and technology and operating infrastructure development. We believe that we
will continue to incur substantial operating losses for the foreseeable future.
Although we have experienced significant revenue growth in recent periods, this
growth may not be sustainable, and we may never achieve profitability.
25
<PAGE>
Results of Operations
The following table sets forth statement of operations data expressed as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
June 7, 1997 Nine Months Ended
(Inception) to Year Ended September 30,
December 31, December 31, -------------------
1997 1998 1998 1999
-------------- ------------ -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues................ 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold.......... 94.8 98.6 95.9 100.9
----- ----- -------- --------
Gross profit................ 5.2 1.4 4.1 (0.9)
----- ----- -------- --------
Operating expenses:
Sales and marketing........ 14.8 10.7 4.3 11.1
Product development........ 3.4 0.8 0.6 1.0
General and
administrative............ 29.6 3.4 5.7 3.2
Depreciation and
amortization.............. 0.8 0.3 0.1 0.7
Amortization of deferred
compensation.............. -- 0.6 0.7 1.4
Charge for warrants........ -- -- -- 1.8
----- ----- -------- --------
Total operating
expenses............... 48.6 15.8 11.4 19.2
----- ----- -------- --------
Operating loss.............. (43.4) (14.4) (7.3) (20.1)
----- ----- -------- --------
Other income (expense):
Interest income (expense),
net....................... (0.8) 0.2 0.1 (0.2)
Other...................... -- 0.0 (0.1) 0.0
----- ----- -------- --------
Total other income
(expense).............. (0.8) 0.2 0.0 (0.2)
----- ----- -------- --------
Loss before provision for
income taxes............... (44.2) (14.2) (7.3) (20.3)
Provision for income taxes.. (0.2) 0.0 0.0 0.0
----- ----- -------- --------
Net loss.................... (44.4)% (14.2)% (7.3)% (20.3)%
===== ===== ======== ========
</TABLE>
Net Revenues
Net revenues consist of product sales, advertising revenue and customer
shipping and handling charges. During 1998 and for the nine months ended
September 30, 1999, the vast majority of our net revenues were derived from the
sale of computer hardware and software products. Net revenues increased to
$397.6 million for the nine months ended September 30, 1999 from $63.8 million
for the nine months ended September 30, 1998. This increase was predominantly
driven by computer hardware and software sales as well as the significant
growth in our customer base and repeat purchases from our existing customers.
This increase also reflects, to a lesser extent, the expansion of our Web site
and the launch of our BUYBOOKS.COM, BUYGAMES.COM and BUYVIDEOS.COM specialty
online stores in December 1998 and the launch of our BUYCLEARANCE.COM and
BUYMUSIC.COM online stores during the second quarter of 1999.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of products sold, and the
related distribution and fulfillment costs. Cost of goods sold increased to
$401.2 million for the nine months ended September 30, 1999 from $61.2 million
for the nine months ended September 30, 1998 as a result of the significant
increase in our net revenues. Gross margin declined to (0.9)% for the nine
months ended September 30, 1999 from 4.1% for the nine months ended September
30, 1998. This decline in gross margin reflects our aggressive product pricing
strategy to build brand recognition, as well as our decision to offer select
products as loss leaders to attract customers to our Web site. Our negative
product gross margin in the first three quarters of 1999 was offset in part by
gross profit derived from higher margin advertising revenue and shipping and
handling revenue. While
26
<PAGE>
we plan to increase gross margin in the future by employing more selective
pricing and merchandising strategies, focusing on advertising revenues and
emphasizing higher margin products and services, we may not be able to improve
our profit margins.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of advertising and
promotional expenses, as well as credit card fees, outsourced customer service
fees, and payroll associated with our advertising and marketing personnel.
Sales and marketing expenses increased to $44.1 million for the nine months
ended September 30, 1999 from $2.8 million for the nine months ended September
30, 1998. Sales and marketing expenses as a percentage of net revenues
increased to 11.1% for the nine months ended September 30, 1999 from 4.3% for
the nine months ended September 30, 1998. This increase was primarily
attributable to increased credit card processing fees associated with increased
product sales, the expansion of our online and offline advertising campaigns,
including a comprehensive print and television advertising campaign, as well as
online advertisements with large online portals. In addition, as a result of
the launch of our three new online specialty stores in November 1998 and the
launch of our improved Web site in April 1999, we experienced higher than
expected customer service fees during these periods. The increase in our sales
and marketing expense was also due, to a lesser extent, to increased personnel
and related expenses required to implement our marketing strategy. We intend to
continue to pursue an aggressive branding and marketing campaign and,
therefore, expect marketing and sales expenses to continue to increase
significantly in absolute dollars in future periods.
Product Development Expenses
Product development expenses consist primarily of personnel and other
expenses associated with developing and enhancing our Web site, as well as
associated facilities and related expenses. Product development expenses
increased to $3.9 million for the nine months ended September 30, 1999 from
$404,000 for the nine months ended September 30, 1998. Product development
expenses as a percentage of net revenues increased to 1.0% for the nine months
ended September 30, 1999 from 0.6% for the nine months ended September 30,
1998. This increase was primarily attributable to increased staffing in our
information systems, product management and web development groups and
associated costs related to enhancing the features, content and functionality
of our online stores and transaction-processing systems, as well as increased
investment in systems and telecommunications infrastructure.
General and Administrative Expense
General and administrative expenses consist primarily of payroll and related
expenses for executive and administrative personnel, facilities expenses,
professional fees, telephone charges, and other general corporate expenses.
General and administrative expenses increased to $12.9 million for the nine
months ended September 30, 1999 from $3.6 million for the nine months ended
September 30, 1998. General and administrative expenses as a percentage of net
revenues decreased to 3.2% for the nine months ended September 30, 1999 from
5.7% for the nine months ended September 30, 1998. The increase in absolute
dollars was primarily attributable to additional administrative personnel and
their related expenses, and increased professional fees. We expect general and
administrative expenses to continue to increase in absolute dollars as we
expand our sales, increase our staff and incur additional costs related to the
growth of our business and our operations as a public company.
Depreciation and Amortization
Depreciation and amortization consists primarily of the amortization of
goodwill associated with business acquisitions, as well as fixed asset
depreciation. Depreciation and amortization increased to $3.0 million for the
nine months ended September 30, 1999 from $61,000 for the nine months ended
September 30, 1998. Depreciation and amortization as a percentage of net
revenues increased to 0.7% for the nine months ended September 30, 1999 from
0.1% for the nine months ended September 30, 1998. This increase was primarily
27
<PAGE>
attributable to the amortization of goodwill associated with our acquisition of
Speedserve in December 1998, which is being amortized over a three-year period.
This increase was also attributable, to a lesser extent, to additional
depreciation of fixed assets acquired during the period.
Amortization of Deferred Compensation
Amortization of deferred compensation represents the difference between the
exercise price of stock option grants and the deemed fair value of our stock at
the time of such grants. Such amounts are amortized over the vesting for such
grants, which is typically four years. Amortization of deferred compensation
increased to $5.4 million for the nine months ended September 30, 1999 from
$422,000 for the nine months ended September 30, 1998. Amortization of deferred
compensation increased to 1.4% for the nine months ended September 30, 1999
from 0.7% for the nine months ended September 30, 1998. The increase was
attributable to the grant of stock options to new employees as well as the
increase in the difference between the grant price and the deemed fair market
value of our common stock. At September 30, 1999, we had approximately
$8.4 million in deferred compensation that will be amortized through May 2003.
Charge for Warrants
Charge for warrants primarily represents the cost of warrants granted to
United Air Lines and to a lesser extent warrants issued to a commercial lender.
The charge for warrants was $7.0 million for the nine months ended September
30, 1999 and there was no charge during the previous year.
Other Income (Expense)
Total other income (expense) decreased to ($647,000) for the nine months
ended September 30, 1999 from $20,000 for the nine months ended September 30,
1998. This decrease was largely due to interest expense related to a loan from
our founder and interest expense relating to our revolving credit facility.
Net Loss
Our net loss increased to $80.5 million for the nine months ended September
30, 1999 from $4.7 million for the nine months ended September 30, 1998. The
increase in net loss was due to increased operating expenses and an increase in
amortization of goodwill, amortization of deferred compensation and charge for
warrants.
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<PAGE>
Quarterly Results of Operations
The following tables present unaudited quarterly results of operations, in
dollar amounts and as a percentage of net revenues, for the last six quarters.
This information has been derived from our unaudited consolidated financial
statements and has been prepared by us on a basis consistent with our audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, which management considers necessary for a
fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- ---------
(unaudited)
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues........... $19,233 $34,985 $ 61,529 $107,932 $129,820 $159,849
Cost of goods sold..... 18,182 34,148 62,361 108,115 134,086 159,013
------- ------- -------- -------- -------- --------
Gross profit........... 1,051 837 (832) (183) (4,266) 836
------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 1,370 2,151 9,264 12,322 15,130 16,642
Product development... 120 220 546 830 1,404 1,617
General and
administrative....... 658 1,140 2,019 3,079 4,437 5,356
Depreciation and
amortization......... 16 39 316 854 967 1,188
Amortization of
deferred
compensation......... 106 318 371 2,115 1,856 1,446
Charge for warrants... -- -- -- -- -- 7,021
------- ------- -------- -------- -------- --------
Total operating
expenses........... 2,270 3,868 12,516 19,200 23,794 33,270
------- ------- -------- -------- -------- --------
Operating loss......... (1,219) (3,031) (13,348) (19,383) (28,060) (32,434)
------- ------- -------- -------- -------- --------
Other income (expense):
Interest income
(expense), net....... -- 82 124 114 (39) (796)
Other................. 2 (59) 52 17 8 49
------- ------- -------- -------- -------- --------
Total other income
(expense).......... 2 23 176 131 (31) (747)
------- ------- -------- -------- -------- --------
Loss before provision
for income taxes...... (1,217) (3,008) (13,172) (19,252) (28,091) (33,181)
Provision for income
taxes................. -- -- 3 -- -- 3
------- ------- -------- -------- -------- --------
Net loss............... $(1,217) $(3,008) $(13,175) $(19,252) $(28,091) $(33,184)
======= ======= ======== ======== ======== ========
As a Percentage of Net
Revenues:
Net revenues........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..... 94.5 97.6 101.4 100.2 103.3 99.5
------- ------- -------- -------- -------- --------
Gross profit........... 5.5 2.4 (1.4) (0.2) (3.3) 0.5
------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 7.1 6.1 15.1 11.4 11.7 10.4
Product development... 0.6 0.6 0.9 0.8 1.1 1.0
General and
administrative....... 3.4 3.4 3.2 2.8 3.4 3.4
Depreciation and
amortization......... 0.1 0.1 0.5 0.8 0.7 0.7
Amortization of
deferred
compensation......... 0.6 0.9 0.6 2.0 1.4 0.9
Charge for warrants... -- -- -- -- -- 4.4
------- ------- -------- -------- -------- --------
Total operating
expenses........... 11.8 11.1 20.3 17.8 18.3 20.8
------- ------- -------- -------- -------- --------
Operating loss......... (6.3) (8.7) (21.7) (18.0) (21.6) (20.3)
------- ------- -------- -------- -------- --------
Other income (expense):
Interest income
(expense), net....... -- 0.2 0.2 0.1 0.0 (0.5)
Other................. 0.0 (0.1) 0.1 0.1 0.0 0.0
------- ------- -------- -------- -------- --------
Total other income
(expense).......... 0.0 0.1 0.3 0.2 0.0 (0.5)
------- ------- -------- -------- -------- --------
Loss before provision
for income taxes...... (6.3) (8.6) (21.4) (17.8) (21.6) (20.8)
Provision for income
taxes................. -- -- 0.0 -- -- 0.0
------- ------- -------- -------- -------- --------
Net loss............... (6.3)% (8.6)% (21.4)% (17.8)% (21.6)% (20.8)%
======= ======= ======== ======== ======== ========
</TABLE>
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<PAGE>
Our quarterly operating results have fluctuated in the past and may continue
to fluctuate in the future based on a number of factors, not all of which are
in our control.
Liquidity and Capital Resources
Due to our virtual operating model, we have generally operated with limited
working capital. Most of our customers pay for their purchases by credit card
over the Internet and as a result, we typically receive payment for shipments
within four to five business days of purchase. Additionally, we rely on our
distribution partners to manage inventory and ship products to our customers.
We typically pay our distributors within 30 to 60 days after they have shipped
our products, although we may take advantage of early payment discounts from
time to time. As a result of these factors, our business does not experience
the liquidity constraint faced by traditional retailers who must maintain large
inventories.
Since our inception, we have financed our operations with equity
contributions and loans from our founder, loans from a commercial lender, and
debt and equity financings. Net cash used in operating activities was $4.0
million for the year ended December 31, 1998 and $23.1 million for the nine
months ended September 30, 1999. Net cash used in operating activities in 1998
and for the nine months ended September 30, 1999 was primarily attributable to
the development and launch of our Web site, the expansion of our
infrastructure, our marketing campaigns and operations. Net cash provided by
financing activities was $15.9 million for the year ended December 31, 1998 and
$19.5 million for the nine months ended September 30, 1999. Net cash used in
investing activities was $2.8 million for the year ended December 31, 1998 and
$2.4 million for the nine months ended September 30, 1999. Net cash used in
investing activities was primarily attributable to purchases of property and
equipment, partially offset by sales of equipment in conjunction with sales-
leaseback transactions. We anticipate that we will have negative cash flows for
the foreseeable future. We also currently anticipate that we will invest
approximately $20.0 million in capital expenditures over the next twelve months
to expand our infrastructure. These expenditures will include enhancements in
our Web site to improve functionality and navigation, incorporating features
that are intended to improve the customer shopping experience and scalability
and performance of our Web site. These expenditures will also include, to a
lesser extent, purchases of property and equipment in conjunction with the
relocation of our offices. We expect to fund these expenditures with working
capital, including the proceeds from this offering.
In July 1999, we entered into an agreement with United Air Lines, Inc. to
form BuyTravel.com LLC to market and sell travel services and products on the
Internet. Each of us will own 50% of BuyTravel and will make capital
contributions, in proportion to our respective ownership interest, necessary to
provide advertising and marketing support for BuyTravel. We have each agreed to
pay up to $18.0 million over three years from the effective date of the
agreement.
Subsequent to September 30, 1999, we acquired BuyGolf.com, Inc. in a stock-
for-stock transaction in which the stockholders of BuyGolf.com received
4,142,927 shares of our common stock as consideration for their shares. In
addition to our acquisition of BuyGolf.com, we entered into a sponsorship
agreement with the PGA TOUR, Inc. and issued 1,800,000 shares of common stock
in consideration for this sponsorship. Additionally, we have agreed to pay the
PGA TOUR $8.5 million upon the completion of this offering and to secure a
$17.0 million letter of credit. In October 1999, we also completed the private
placement of our Series B convertible participating preferred stock to a group
of investors led by SOFTBANK Capital Partners, L.P. and its affiliates for
approximately $90.0 million.
We have also entered into a binding letter of intent with SOFTBANK America,
Inc. and its affiliates to form three separate international joint ventures in
various international territories. As a part of these joint ventures, we have
agreed to commit approximately $8.7 million of the proceeds of this offering in
connection with the formation of these international joint ventures. We are not
required to make any further capital contributions to these joint ventures.
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<PAGE>
We believe that the net proceeds from this offering, along with the proceeds
of our Series B financing, will be sufficient to satisfy our working capital
requirements through the next 12 months. Even if additional funds are not
required, we may seek additional equity or debt financing. We may not be able
to obtain additional funds on acceptable terms, if at all.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for our
fiscal year ending December 31, 1999. We do not expect that the adoption of SOP
98-1 will have a material effect on our consolidated financial statements as
our policies currently are substantially in compliance with SOP 98-1.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 is effective
for our fiscal year ending December 31, 1999. SOP 98-5 requires costs of start-
up activities and organization costs to be expensed as incurred. We do not
expect that the adoption of SOP 98-5 will have a material effect on our
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. We do not expect that adoption of SFAS No. 133 will
have a material impact on our consolidated financial statements as we currently
do not hold any derivative financial instruments.
Year 2000 Compliance
Many existing computer systems and software are coded to accept only two
digit entries in the date code field and cannot distinguish 21st century dates
from 20th century dates. If not corrected, there could be system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to make them Year 2000 compliant.
Our State of Readiness. We have assessed the impact that the Year 2000
problem may have on our operations. We have identified the following two areas
of our business that may be affected:
Internal Infrastructure. We have internally developed substantially
all of the systems, transaction processing applications and software, and
networking infrastructure that we use to operate and monitor all aspects
of our business. In addition to these information technology systems, our
non-information technology systems, including heating and air
conditioning, security systems and other embedded technology may be
subject to Year 2000 risks. Although we developed or acquired our
software, systems and applications within the last two years and believe
these systems are substantially Year 2000 compliant, we have hired an
information systems consultant to verify the Year 2000 readiness of our
systems. We have completed the full review of our systems and
infrastructure and believe that our internal infrastructure is Year 2000
compliant.
Third Party Suppliers and Partners. We use third party equipment and
software that may not be Year 2000 compliant. As a result, our ability to
address Year 2000 issues is, to a large extent, dependent upon the Year
2000 readiness of these third parties' hardware and software products. We
have contacted the third parties from whom we have purchased hardware and
software products and they have represented to us that their products are
Year 2000 compliant.
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<PAGE>
We are also entirely dependent on our distribution and fulfillment
partners to provide and distribute the merchandise we sell in our online
stores. We have initiated formal communications with all of our
distributors and fulfillment partners to determine the extent to which we
are vulnerable to those third parties' Year 2000 issues. We have obtained
Year 2000 readiness disclosure statements from each of these partners to
confirm that their systems are Year 2000 compliant. Although we believe
that our distributors and fulfillment partners are Year 2000 compliant,
in the event they do not achieve Year 2000 compliance, we may have to
retain alternative product and service suppliers.
In addition, we have evaluated the Year 2000 compliance of
CyberSource, our credit card processor, and other financial
intermediaries through which our transactions are processed. We have
evaluated the Year 2000 compliance of ClientLogic, our customer service
and support partner, and Exodus Communications, our database server host.
We have initiated formal discussions with, and obtained Year 2000
readiness disclosure statements from, each of these parties to verify the
Year 2000 compliance of their systems. We currently do not have any back-
up systems in place in the event these third party systems become
inoperable.
The Costs of Addressing our Year 2000 Issues. To date, our expenses in
connection with identifying and addressing Year 2000 compliance issues have
been immaterial. Our expenses have generally related to the operation costs
associated with time spent by our employees and a consultant in the evaluation
process and Year 2000 compliance in general. We anticipate that our costs will
continue to include employee expenses and consultant expenses to verify the
Year 2000 compliance of our systems, and that these costs could exceed $100,000
during the year ended December 31, 1999. Notwithstanding any unforeseen Year
2000 readiness issues, the costs of our Year 2000 compliance could be
substantially higher than we anticipate, and therefore have a material adverse
affect on our business.
Our Contingency Plans. We have identified our worst case scenario as the
interruption of our business resulting from Year 2000 failure of our third
party systems to provide access to our Web site and transaction processing
systems, and the failure of our credit card processing agent to process our
orders. We have developed a worst case scenario plan concerning our Year 2000
issues. However, we cannot be certain that this plan will be successful.
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<PAGE>
BUSINESS
General
BUY.COM is a leading multi-category Internet superstore, offering a
comprehensive selection of brand name computer hardware and peripherals,
software, books, videos, DVDs, computer games, music and clearance products at
everyday low prices. Through our seven online specialty stores, we offer more
than 850,000 SKUs in a convenient, intuitive shopping interface that features
extensive product information and multi-media presentations. Our e-commerce
portal, www.buy.com, links all of our seven specialty stores and is designed to
enhance the customer's online shopping experience 24 hours a day, seven days a
week. We use a virtual operating model that includes outsourcing the majority
of our operating infrastructure to leading national distribution and
fulfillment partners with established expertise. This operating model allows us
to add new product categories easily and rapidly and eliminates significant
capital investments and the costs and risks of carrying inventory. We intend to
expand our product offerings by establishing strategic relationships with
leading partners similar to our recently announced joint venture with United
Air Lines, Inc.
Industry Background
Growth of the Internet and E-Commerce
The Internet has rapidly emerged as a significant interactive medium for
worldwide communication, instant access to information and e-commerce.
International Data Corporation estimates that the number of Internet users
worldwide will increase from approximately 142 million at the end of 1998 to
more than 502 million by the end of 2003. We believe this rapid growth is
primarily attributable to the increasing number of personal computers in homes
and offices, technological advancements that provide easier, faster and cheaper
access to the Internet and the proliferation of products, content and services
available on the Internet at competitive prices.
We believe increasing numbers of customers will engage in e-commerce as
online retailers take advantage of the recent technological improvements
associated with the Internet that allow the integration of one-click buying,
intelligent product recommendations and near real-time customer service.
International Data Corporation estimates that the number of customers making
purchases on the Internet will grow from approximately 31 million in 1998 to
approximately 183 million in 2003. In addition, a recent industry survey
predicted that 43% of businesses with fewer than 100 employees will be online
by the end of 1999, and that 63% of small businesses currently on the Internet
are already purchasing products on the Web. As a result, International Data
Corporation predicts the total value of goods and services purchased annually
over the Internet will increase from approximately $50.4 billion in 1998 to
approximately $1.3 trillion in 2003.
Limitations of Traditional and Catalog Retailers
The emergence of the Internet as an alternative shopping channel has
highlighted the limitations associated with shopping at traditional and catalog
retailers. Traditional retailers face inherent structural limitations that may
inhibit their ability to capitalize on the growing worldwide market for their
goods and services. The space available in a traditional retail store limits
merchandising flexibility and constrains the number of SKUs that a traditional
retailer can offer at any given time. Traditional retailers must make
significant investments in inventory that may quickly become obsolete. These
retailers also face challenges in hiring, training and maintaining
knowledgeable sales staff and preventing losses due to theft by customers and
employees. Personnel costs typically limit operating hours, reducing customer
convenience. Furthermore, traditional retailers generally have difficulties
gathering customer demographics and preferences, and their potential customer
base is typically limited to those who live within a reasonable geographic
distance from the retail locations.
While catalog retailers provide customers with the convenience of shopping
from anywhere at anytime, the number of SKUs they can feature and the product
information they can provide is limited due to catalog
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<PAGE>
mailing, printing and other related expenses. Since catalogs must be printed
and mailed far in advance of sales, catalog retailers cannot readily change
their product offerings or prices to adapt to an evolving market. Furthermore,
the catalog shopping experience is, in general, neither interactive nor
personalized, yet requires extensive personnel support to take and process
orders.
The Online Retail Opportunity
In contrast to traditional retail channels, the Internet provides online
retailers with the opportunity to offer a broad and evolving selection of
merchandise to customers worldwide, while enabling customers to shop at their
convenience without leaving their homes or offices. The Internet provides
essentially unlimited shelf space without significant capital investments,
allowing online retailers to build large global customer bases at an
unprecedented pace and to potentially achieve superior economic returns over
the long-term. The flexible structure of the Internet also enables online
retailers to update product descriptions quickly and make new products
immediately available for sale without incurring significant expenses. In
addition, online retailers can easily obtain demographic and behavioral data
about customers, increasing opportunities for targeted marketing.
Forrester Research estimates that the single largest domestic Internet
retail opportunity for the consumer and small office/home office market is the
online sale of computer hardware. According to Forrester Research, annual
online computer hardware sales are expected to grow from approximately $1.1
billion in 1998 to approximately $15.0 billion in 2003, representing
approximately 14% of the entire computer hardware market in 2003. Media
products such as software, books, videos and music also represent a fast
growing segment of the online retail market. Forrester Research estimates that
domestic annual online sales of these products will grow from approximately
$1.6 billion in 1998 to more than $10.0 billion by 2003.
The Online Advertising and Merchandising Opportunity
The significant increase in online shopping has coincided with technological
advances that provide advertisers with cost-effective means of targeting
specific customer groups, interacting with and receiving feedback from
customers and measuring effectiveness of the specific advertising campaigns.
Online advertising also provides advertisers a unique opportunity to use a
variety of advertisements and provide substantial product information. Because
these methods generally are not economically available in traditional media,
the Internet has rapidly emerged as a compelling vehicle for advertisers as Web
sites have begun to aggregate a large number of visitors with attractive
demographics. Accordingly, Forrester Research estimates that the amount of
Internet advertising worldwide will grow from approximately $1.5 billion in
1998 to more than $24.1 billion by 2003.
Challenges Faced by Online Retailers
The Internet addresses many of the limitations faced by traditional and
catalog retailers by providing unlimited shelf space, worldwide geographic
reach for potential customers, customer convenience, significant flexibility
with regard to vendor promotion and cross-merchandising opportunities, and on a
comparable basis, extremely low costs. However, online retailing is new and
evolving and presents a number of challenges, including:
. Limited Brand Awareness and Customer Loyalty. Online retailers must
build their brand recognition to attract potential new customers, to
develop customer trust and loyalty in the absence of face-to-face
interaction and to maintain high levels of customer traffic to their Web
sites. Creating a strong brand, however, can be difficult and expensive,
and many online retailers have had limited success developing their
brand name.
. Significant Price Competition. Online pricing engines enable customers
to easily determine the lowest price for a particular product. Because
online shoppers can quickly access pricing information with little
effort, online retailers must be able to offer competitive prices to
continue to draw traffic to their Web sites.
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. Limited Product Offerings and Customer Convenience. Many online
retailers focus on a single product category, which may frustrate
customers who must visit a variety of online stores and pay multiple
shipping fees to accommodate all of their online shopping needs. Among
those online retailers who provide multiple product offerings, many have
sites that are difficult to navigate, do not use sophisticated search
capabilities and do not allow customers to purchase products using a
single check-out process.
. Inability to Scale Operations and Infrastructure. Many online retailers
choose to handle most aspects of the online retail channel internally,
including maintaining a large inventory of products, shipping and
processing orders, and providing customer service. This requires
significant time, capital investment and operating overhead that
constrain the online retailers' ability to increase sales or expand into
new product categories. Unexpected increases in sales can also strain
the retailer's infrastructure, resulting in delayed or improper
shipments, slow response time and dissatisfied customers.
. Limited Content and Customer Service. Due to the increasing number of
Web sites, online retailers must provide compelling content and other
attractive features to differentiate their sites. Many first time online
shoppers may experience concern over the absence of the face-to-face
communication associated with e-commerce transactions. We believe a
successful online retailer must provide immediate customer support,
timely shipments, frequent status updates and knowledgeable advice.
Competition among online retailers has increased as a result of the
attractive commercial medium provided by the Internet and the relatively low
barriers to enter this market. Therefore, we believe the success of online
retailers will depend on their ability to develop brand awareness, offer
competitive prices on a broad selection of products, and provide compelling
content and superior customer service.
The BUY.COM Solution
BUY.COM is a leading multi-category Internet superstore offering a broad
selection of brand name products to consumers and small businesses at everyday
low prices. Through word of mouth and aggressive online and traditional media
advertising, we are perceived as a low price leader and believe we have one of
the most widely recognized e-commerce brands. Our easy-to-use Web site provides
a rich shopping experience with extensive content and product information,
backed by our commitment to superior customer service. Our key operating
advantages include the following:
. Leading Multi-Category Internet Superstore. We operate seven integrated
online specialty stores that feature a broad range of brand name
products and approximately 850,000 SKUs. Our sophisticated search engine
allows customers to locate products by name or category, and our site
facilitates easy navigation among our stores. Our customers can make
purchases from any of our online stores using a single shopping basket,
simplifying the check-out process. We believe the broad product
offerings at our Internet superstore, combined with our convenient
shopping experience, enables customers to save time by addressing many
of their shopping needs at one site. We believe this one-stop shopping
convenience also encourages repeat purchases from our Web site. During
September 1999, approximately 48% of our orders and over 55% of our
booked revenues have come from repeat customers. In addition, Media
Metrix estimates that the number of unique visitors to our Web site in
August 1999 was approximately 2.5 million, which represents an increase
of 25% over the 2.0 million estimated unique visitors in July 1999. This
rapid growth in customers has lead to a corresponding increase in
revenues, which has enabled us to become one of the top five e-commerce
providers, according to a number of industry studies.
. Highly Scaleable Virtual Model. We use a virtual operating model that
includes outsourcing the majority of our operating infrastructure to
leading national distribution and fulfillment partners with established
expertise. This operating model allows us to scale quickly within
existing product lines and to add new product categories easily and
rapidly without significant capital investments or the costs or risks of
carrying inventory. By aligning with leading distributors in each of our
product categories, we have access to their significant inventories and
distribution capabilities.
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<PAGE>
. Low Operating Costs. We minimize our infrastructure and operating
expenses by taking advantage of the cost efficiencies achieved by our
distribution and fulfillment partners. By keeping our costs low, we are
able to focus our efforts and resources on developing our brand and
enhancing our customers' overall shopping experience. We believe our low
operating overhead will enable us to continue to offer most products at
prices below those of other leading online competitors, while still
making a profit.
. Superior Customer Experience. To build customer loyalty, we provide
compelling content and extensive product information backed by superior
customer service throughout the shopping experience. We are committed to
customer satisfaction and regularly upgrade our services to ensure total
customer care. Our user-friendly Web site provides a seamless shopping
experience across all of our specialty stores and provides expanded
content, including video and sound clips, detailed product information,
professional and customer product reviews, and access to the first
chapter of many of the books offered on our site. Our customer service
representatives provide telephone and e-mail support 24 hours a day,
seven days a week. Shoppers can also engage in e-mail interactions with
our customer service representatives while online to enhance
communication regarding order status, service, returns and product
information.
. Attractive Advertising Vehicle. We believe that our Web site, given the
significant number of visitors, attracts advertisers seeking a large
target audience of likely purchasers who spend relatively large amounts
of money online. During September 1999, our average order size was more
than $209 and our average daily product sales were over $1.7 million.
Advertisers can place many different types of advertisements on our
site, including supplemental product information that reaches customers
at the point of purchase. Furthermore, we provide advertisers with
demographic information and traffic feedback to enable them to evaluate
the effectiveness of an advertising campaign.
We also believe our virtual operating model, the strength of the BUY.COM
brand name and our rich shopping experience provide us with significant
competitive advantages and offer a compelling value proposition to both
customers and advertisers that will enable us to apply our business model to a
broad range of products and services.
Strategy
Our objective is to become the leading e-commerce destination offering a
broad selection of brand name products and services to consumers and small
businesses at everyday low prices. To achieve this objective, the key elements
of our strategy include the following:
. Build the BUY.COM Brand. We believe BUY.COM is one of the most widely
recognized e-commerce brands. We intend to further increase customer
loyalty and brand recognition by offering multiple comprehensive product
lines at everyday low prices backed by superior customer service. In
addition to our aggressive low price strategy, we plan to continue to
promote our brand through a variety of marketing and promotional
campaigns, including television, print, radio, direct mail and outdoor
advertisements, as well as strategically placed online advertisements
and promotional campaigns.
. Pursue Additional E-Commerce Opportunities. We intend to expand our
product offerings to include the most popular product categories on the
Internet, encouraging one-stop shopping for multiple products and repeat
purchases. We plan to use our strong market position in computer
hardware sales to increase sales in other product categories. We also
plan to continue to pursue and expand relationships with leading
distributors in each of our existing product categories and in new
product categories, to establish joint ventures and partnering
relationships with major manufacturers and service providers, and to
enter into referral arrangements with other e-commerce companies.
. Improve Profitability and Achieve Higher Return on Capital. The cost
efficiencies and economies of scale of our distribution and fulfillment
partners enable us to operate with significantly lower operating
expenses than many of our competitors. As our brand strengthens and we
add additional products and
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services, we believe we will be able to capture even greater efficiencies
while improving gross margins on existing products. We will continue to
modify our pricing strategy to maintain a group of aggressively low
priced, high volume items, as well as promoting associated higher margin
products and emphasizing advertising revenues. Because our business model
enables the addition of higher margin products and services without
significant capital investment in distribution infrastructure and
inventory, we should be able to achieve higher returns on invested
capital.
. Continue to Improve the Customer Shopping Experience. Among our top
priorities is to offer superior customer service and to continually
improve our communications with customers. We intend to continuously
update our Web site to increase its speed and functionality and to
provide greater product information in a more user friendly, intuitive
format. We plan to provide increased training for our customer service
representatives and to continue to invest in technology that will
improve our customer service and provide a more enjoyable shopping
experience.
. Expand Advertising and Merchandising Opportunities for Advertisers. We
plan to aggressively pursue high margin advertising revenues by
providing advertisers with opportunities to reach our large and
attractive customer base. We currently offer a variety of options for
advertisers, ranging from banner advertisements to tailored advertising
and merchandising programs that target specific audiences. In addition,
we can provide advertisers with detailed demographic information that
enables them to measure and improve the effectiveness of their
advertisements. We plan to continue to develop innovative programs for
advertisers and expand our sales force to aggressively market these
programs.
. Expand and Improve Relationships with Distribution and Fulfillment
Partners to be a Low Cost Supplier. We plan to continue to work with our
distribution and fulfillment partners to obtain more timely and accurate
product information, shipping and fulfillment. As our sales increase, we
believe we will be able to achieve more favorable terms and pricing from
our partners. We also intend to pursue new relationships with leading
distributors and service providers as we expand into other categories.
. Expand Internationally. The Internet offers a unique opportunity for
retailers to quickly reach the international market. We believe our
virtual retailing model will enable us to pursue this large market
without significant investment by partnering with established
international distributors. We intend to expand our presence in the
international marketplace by initially targeting countries with high
Internet usage and distribution networks complementary to our business
model. We have recently entered into a binding letter of intent with
SOFTBANK America, Inc. and several of its affiliates and a News
Corporation affiliate to form an international joint venture in the
United Kingdom, Australia, New Zealand and India. In addition, we have
binding letters of intent to form international joint ventures with
several SOFTBANK affiliates in other international territories.
The BUY.COM Online Shopping Experience
Our Web site is a multi-category Internet superstore offering a broad range
of products. We have included compelling content in each of our online stores
to allow customers to enjoy their visit to our Web site and make more informed
purchase decisions. We believe that shopping at www.buy.com offers attractive
benefits to customers, including convenience, ease of use, a broad selection,
in-depth product information and content, and everyday low prices. The
following highlights the key features of our online shopping experience:
. Browsing. We have created a seamless interface between each of our seven
online specialty stores that provides consistent functionality, look and
feel. By clicking on the tabs at the top of every Web page, customers
can move between stores quickly and easily. At the home page for each
store, customers can view promotions and featured products or use a
keyword search to locate a specific product. Our Web site also allows
customers to conduct sophisticated searches based on pre-selected
criteria designated in each store. We have organized our product
offerings into a simple set of categories and subcategories within each
store, each using the "BUY[product name]" format to promote a uniform
shopping experience and to make it easier for the customer to link
directly to a particular store. This simple
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structure also allows customers to click on the designated category or
subcategory to go to the desired location immediately.
. Accessing Information. One of the key advantages of online shopping is
the ability to access a broad range of information quickly and easily.
On our Web site, customers can find detailed product information and
specifications, as well as other value added features, including product
pictures, video and music clips, book previews, professional and
customer product reviews, supplemental information from the
manufacturers, gift ideas and specialty shops. We believe this extensive
information enables the customer to make a more educated purchase
decision and enhances the overall shopping experience.
. Selecting a Product and Checking Out. Customers can purchase products
from each of our online stores using the same virtual shopping basket
that is accessible from any product page on our Web site. Similar to a
traditional retail store, customers can add and subtract products from
their shopping basket as they browse, prior to making a final purchase
decision. To execute orders, customers click on the "checkout" button.
New customers are prompted to create an account and supply shipping and
payment information. Repeat customers, through their personally created
username and password, can access their account to view order status,
view their history of previous orders or update their personal
information. We store our customers' account information on our secure
network, including multiple shipping addresses and billing options,
which eliminates the need for repeat customers to complete their order
information during future transactions. We charge our customer's credit
card only after we have shipped the product. When the purchased products
are in stock, we generally ship orders received before 4:00 p.m. Eastern
Time at the BUYCOMP.COM and BUYSOFT.COM stores on the same day as the
order is placed. We generally ship orders for other in-stock products
within twenty-four hours of our receipt of the order.
. Monitoring Order Status. To provide the highest level of customer
service, we attempt to maintain communication with our customers
throughout the purchase and fulfillment process. We confirm each order
via an automatic e-mail within minutes of the order placement. To follow
the progress of their order, we notify our customers via e-mail with the
shipper's tracking number when their product has been shipped. We send
additional e-mail communications to our customers in the event a product
is back ordered, if the customer has requested a special order, when a
change in order status occurs and to follow up after the order has been
received by the customer.
. Obtaining Assistance. Customers can access online assistance from every
page on our site by clicking on either the "Customer Service" button or
the "Help" button on each page in our specialty stores. Our online e-
mail feature also enables customers to ask a customer service
representative questions while online via a chat format. In addition,
customers can call our prominently displayed toll-free phone number
found throughout our Web site to reach our customer service
representatives, 24 hours a day, seven days a week.
Our Online Specialty Stores
We have selected our seven online specialty stores based upon product lines
that have large market potential, that are well suited for e-commerce, and that
are in industries that allow us to partner with a dominant distributor. Our
current online specialty stores include the following:
. BUYCOMP.COM. This store offers over 29,000 computer products, including
computers, printers, monitors, modems and peripherals from manufacturers
such as Compaq, Hewlett-Packard, IBM, Viewsonic and 3COM. Customers may
obtain detailed product descriptions, product pictures and reviews, as
well as rebates and other promotional information. This store also
offers extended warranties and permits customers to link from the store
directly to the manufacturers' technical support pages. In addition,
this store features vendor specific sub-stores that allow customers to
browse products within the manufacturer's designated storefront.
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. BUYSOFT.COM. This store offers over 9,000 computer software titles from
leading manufacturers, including Microsoft, Symantec, Corel and Adobe.
Similar to our BUYCOMP.COM store, we feature manufacturer's sub-stores,
and our customers may link from this store directly to manufacturers'
technical support pages. In addition, customers may obtain information
on weekly specials, rebates and promotions, as well as reviews for top
selling software products.
. BUYBOOKS.COM. This store offers over 480,000 hardback, paperback and
audio book titles. Customers may browse a variety of categories,
including subject matter, New York Times bestsellers and new releases.
Customers may also conduct targeted searches for their favorite authors
or titles. Our site enables customers to read the first chapter of many
books, to submit their own book reviews and to read professional reviews
and reviews submitted by other customers. We also offer customers the
opportunity to preorder upcoming releases.
. BUYVIDEOS.COM. This store offers over 55,000 DVD and VHS titles from
multiple categories, including comedy, action, drama, documentary and
foreign films. The BUYVIDEOS.COM store includes video clips on many
titles, preorder capabilities and a limited selection of video hardware.
Customers may also focus their search to DVD titles within the DVD Only
subcategory, accessible by a direct link from the home page.
. BUYGAMES.COM. This store offers over 1,700 games for the Nintendo64,
PlayStation, Sega Saturn, Dreamcast and Game Boy systems. This store
offers PC and Mac games, strategy guides and gaming hardware. We provide
detailed product descriptions, screen shots, video clips, professional
and customer reviews, codes and game hints, as well as recommendations
for related games.
. BUYMUSIC.COM. This store was launched in April 1999 and offers over
300,000 music titles in both CD and cassette formats. Customers may
order titles from various categories including pop/rock, alternative,
electronica, heavy metal, rhythm and blues/soul, classical, jazz,
country, rap/hip hop, folk, new age and soundtracks. This store offers
detailed product descriptions, music clips, full song listings,
recommended albums and customer reviews. The store also includes
upcoming releases and new artist features.
. BUYCLEARANCE.COM. This store was launched in May 1999 and offers brand
name close-out inventory from some of the most popular manufacturers,
including Compaq, Toshiba, Hewlett-Packard, Philips, NEC and Canon. Our
inventory consists mainly of home electronics and computer hardware. We
obtain this merchandise at substantial discounts through liquidations,
overages and promotions. We also work with our vendor partners to ensure
that this store's product selection serves to complement our other
online stores.
We plan to expand our product offerings within existing product categories
and to add new product categories from time to time, including our recent
acquisition of BuyGolf.com, to increase the overall shopping convenience for
our customers.
Strategic Relationship with United Air Lines, Inc.
In July 1999, we formed a joint venture with United Air Lines, Inc. to
create an online travel service that will offer a full range of airline
tickets, automobile rentals and hotel reservations as well as other travel
related services through the "BUYTRAVEL.COM" Web site. BUYTRAVEL.COM will be
operated through a newly-formed limited liability company, in which we have a
50% ownership interest. In connection with the formation of BUYTRAVEL.COM, we
entered into a Marketing and Services Agreement with United. Under this
agreement, we will provide a storefront on our Web site and various other
services and assistance, and United will provide availability to all of its
fares, including all excess inventory or E-fares that are not widely available
on other sites. United will also coordinate third party relationships with
selected ticketing and infrastructure vendors. In addition, each of us has
agreed to provide specified marketing and advertising support over the initial
three years of the agreement. As consideration for United's commitment to this
venture, we issued to United a warrant to purchase 2,000,000 shares of our
common stock at an exercise price of $10.00
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per share. The BUYTRAVEL.COM operating agreement requires both parties to
approve various matters related to corporate governance. In the event we are
unable to agree with United on one of these matters after the initial three
years of this agreement, United has the right to require us to purchase its
interest in BUYTRAVEL.COM at a price equal to the fair market value of its
interest at the time of our purchase.
Recent Acquisition of BUYGOLF.COM
In October 1999, we acquired BuyGolf.com, Inc. for an aggregate purchase
price of $23.5 million in a stock-for-stock transaction in which the current
stockholders of BuyGolf.com received shares of our common stock as
consideration for their shares. Through the online store located at
www.buygolf.com, we offer a variety of golf equipment and other golf related
products and accessories. As a result of the acquisition, we acquired a four
year supply and distribution agreement with Las Vegas Golf & Tennis, Inc.
through which they are the primary source for the golf equipment and
accessories that we sell. The acquisition will be accounted for as a purchase
transaction and the operating results of BuyGolf.com are included in our
consolidated financial statements from the date of the acquisition.
In October 1999, we also entered into a five year sponsorship agreement with
the PGA TOUR in which we will become the exclusive title sponsor of the
professional tour previously known as the Nike Tour. Our sponsorship of the
BUY.COM Tour provides for television coverage of various BUY.COM Tour events,
prominent featuring in the PGA TOUR's controlled media, including "Inside the
PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA TOUR's Web
site and other sponsorship and media opportunities. We have also agreed with
the PGA TOUR to establish the "Official World Golf Championships Online Store,"
which will be linked to all Web sites owned by the PGA TOUR, including
www.pgatour.com. In connection with this sponsorship we also intend to launch a
non-exclusive PGA TOUR online store and an exclusive BUY.COM Tour online store.
In consideration for this sponsorship agreement, we issued the PGA TOUR
1,800,000 shares of our common stock and agreed to pay $8.5 million upon the
completion of this offering and to secure a $17.0 million letter of credit. We
believe this sponsorship provides an attractive marketing vehicle that enables
us to target a customer demographic that is consistent with the customer
demographics of our other online stores.
International Joint Ventures
In September 1999, we entered into a letter of intent with SOFTBANK America,
Inc. and several of its affiliates and a News Corporation affiliate to form an
international joint venture in the United Kingdom, Australia, New Zealand and
India. In addition, we have a binding letter of intent with SOFTBANK America
and its affiliates and Vivendi to form an international joint venture in
continental Europe, and a joint venture with SOFTBANK America and its
affiliates in Japan. We intend to have a 51% interest in each of these joint
ventures and have committed approximately $8.7 million in connection with their
formation. We are not required to make any further capital contributions to
these joint ventures. Each of the joint ventures will hire its own management
and other personnel and will establish relationships with local distribution
partners for product categories suited for the particular territory. Each joint
venture Web site is expected to have the same look and feel as the BUY.COM Web
site. We intend to license, on a royalty free basis, our e-commerce technology
and the right to use the BUY.COM name to each of these joint venture entities
to use in their respective territories.
Distribution Network
We believe that the ability to maintain a virtual operating infrastructure
is key to an efficient and profitable e-commerce model. As part of this
strategy, we have entered into relationships with leading distribution partners
in each of our product segments, including Ingram Micro for computer hardware
and software, Ingram Entertainment for videos, DVDs and video games, Ingram
Book for books, Valley Media for music and Nashville Computer Liquidators for
our clearance products. These distribution partners carry a vast inventory of
products located in warehouses throughout the country from which products are
picked, packed and shipped directly to our
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customers or our national fulfillment partner. Through this system, we have
been highly effective at leveraging the inventory management and fulfillment
capabilities of each of our partners to deliver products cost-effectively to
our customers nationwide. For example, in September 1999, the average time for
Ingram Micro to ship an in-stock product to a customer was less than one day.
Our key distributors include the following:
. Ingram Micro. In March 1999, we entered into an agreement with Ingram
Micro through which they have agreed to provide, process and distribute
the computer hardware and software products that we sell. Ingram Micro
is one of the leading wholesalers of brand name computer hardware and
software products, with net sales in excess of $22 billion for 1998. As
part of our commitment with Ingram Micro, we have agreed to exclusively
purchase all of our requirements for computer hardware and software from
them to the extent they carry that particular product at the time an
order is placed. This agreement expires in March 2000, but is subject to
automatic one year renewal periods. The agreement may be terminated by
either party for any reason upon 120 days prior written notice. We are
currently in negotiations with Ingram Micro to renew our agreement with
them.
. Ingram Entertainment, Inc. In December 1998, we entered into an
agreement with Ingram Entertainment through which they have agreed to
supply us with the entertainment products for our online stores,
including videos, video games, DVDs, audio books and other multimedia
products and accessories. Ingram Entertainment is a leading distributor
of videos, video games, DVD hardware and software and audio books, with
net sales of over $1 billion in 1998. This agreement expires in December
2001, but they may terminate our contract if we become past due on our
account or otherwise violate our credit terms with them. In August 1999,
we amended this supply agreement to provide for co-op advertising
dollars on certain purchases and include a guarantee that Ingram
Entertainment will ship orders on the same day received if the order is
received before 2:00 p.m. Eastern time, and next day shipment for orders
placed after 2:00 p.m. This amendment also requires earlier fulfillment
and shipment on orders for overnight or second day delivery service.
. Valley Media, Inc. In February 1999, we entered into an agreement with
iFill, a division of Valley Media, Inc., through which we will
exclusively purchase all of our pre-recorded music products from Valley
Media. Valley Media is a full line distributor of music and video
entertainment products, with net sales in excess of $780 million for
1998. Valley Media is solely responsible for the order fulfillment and
distribution of these pre-recorded music products. In addition, they
have agreed to sell their products to us at a discount, provided that we
purchase a designated minimum volume of products from them under this
agreement. In the event we do not meet these volume levels, we will be
required to pay an additional fee for the products that we purchase from
them. This agreement expires in February 2001, but is subject to
automatic one year renewal periods. This agreement may also be
terminated if Valley Media discontinues sales to online vendors, or if
we terminate online sales of pre-recorded music products.
. Ingram Book Company. We have entered into agreements with Ingram Book
Company and Ingram Fulfillment Services Inc., through which these
companies have agreed to supply and distribute the books that we sell.
Ingram Book Company is a leading wholesale distributor of books and
stocks approximately 450,000 titles. These agreements expire in
September 2003.
. Nashville Computer Liquidators L.P. In April 1999, we entered into an
agreement with Nashville Computer Liquidators L.P., a subsidiary of
Ingram Entertainment Inc., through which Nashville Computer Liquidators
has agreed to supply and distribute the liquidation products that we
sell, including computers, consumer electronics and entertainment items.
As part of this agreement, Nashville Computer Liquidators has agreed to
process and deliver all of our orders from our online clearance store.
In addition, as part of our commitment, we have agreed to purchase all
of our liquidation products from them exclusively. This agreement
expires in April 2001, but is subject to automatic one year renewal
periods. Nashville Computer Liquidators may also terminate this
agreement unilaterally if we become more than 15 days past due or
otherwise violate our credit terms with them.
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By using a secure electronic connection with each of our partners, orders
placed by our customers are transmitted directly to the appropriate
distributor. These orders are automatically fed into the distributor's system
where they are processed and sent to a warehouse to be picked, packed and
shipped. Orders are often processed and ready for shipment within minutes from
the time a customer places an order at our Web site. In the event the products
on a customer order are not located in the same warehouse, our system will
cascade the order across several warehouses beginning with the one nearest to
the customers' shipping address. By accessing distributor warehouses throughout
the country, we have become more efficient in minimizing shipping costs as well
as quickly delivering products to the customer.
The integrated electronic connection with each of our distribution partners
also provides us with data on inventory quantities, inventory location,
shipping status, shipper tracking numbers and the estimated time of arrival for
backordered products. Our Web site also provides a direct link from a
customer's order information to both Federal Express and United Parcel Service
to provide up-to-the-minute information on delivery status.
Advertising Revenue
Advertising revenue is a key component of our business model. The large
volume of product sales on our site, together with our ability to attract
proven online buyers, provides a high quality audience for our advertisers.
According to a BUY.COM sponsored survey, our customers are primarily between 18
and 35 years old, and 80% of our customers visit our stores at least once a
week. Additionally, according to this survey, 76% of our customers are college
educated and 33% have annual household incomes in excess of $75,000.
Furthermore, the structure of our Web site encourages impulse purchasing of
products in various categories by shoppers who have come to the site to
purchase a specific item. We believe our ability to deliver a high quality
audience of proven online consumers creates a variety of opportunities for
advertisers.
We provide a range of advertising opportunities to reach Internet buyers. We
presently derive advertising revenue from vendor co-op advertising and media
advertising. Vendor co-op advertising is an industry standard practice that
involves vendors who advertise their products for sale in our online stores in
direct proportion to the amount of products sold in our stores. The primary
objective of vendor co-op advertising is to drive product sales on our Web
site. Vendors measure results in terms of the size, growth, breadth and depth
of their product sales. We sell co-op advertising to the sales and/or channel
groups within our vendors' organizations, often with the cooperation and
support of our distribution partners. Currently, we derive most of our co-op
advertising from our technology and entertainment vendors. However, as we
expand into new product categories, we anticipate additional co-op advertising
opportunities in these new markets.
We derive advertising media revenue from click-through advertisements that
direct the customer to the advertiser's Web site. We sell media advertising to
the marketing groups within our advertisers' organization, as well as the
advertising agencies that represent them. Media advertisers include both
vendors who sell products on our technology or entertainment sites, as well as
other advertisers, such as eBay and Visa, that want to reach our attractive
audience.
Our direct sales organization consists of individuals focused solely on
selling advertising on the BUY.COM network of Web sites. From time to time, we
also engage third party advertising sales representatives to assist us in
selling our Web advertisements. We currently maintain sales offices in San
Francisco and Southern California. Our sales organization is dedicated to
maintaining close relationships with advertisers, advertising agencies and the
sales and marketing organizations of our distribution partners. We work with
our advertisers to build advertising programs that are tailored to their
marketing and merchandising goals. We are also pursuing an increasing number of
opportunities to combine both media and co-op advertising to create synergy for
our vendors.
Merchandising Strategies
We believe that our strong brand and the breadth and depth of our product
selection in our online stores enable us to pursue unique merchandising and
pricing strategies. Each of our online stores provides an
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extensive selection of high quality, name-brand products in an easy-to-use
layout. Since our stores are not restricted by physical capacity limitations,
we have a significant amount of flexibility with regard to the presentation and
organization of our product categories and the product selection within each of
those categories. In addition, we combine value added services and content with
everyday low prices to create a unique value proposition for our customers.
To date our merchandising and pricing efforts have focused on offering
popular products with high brand awareness at low prices to drive traffic to
our site. As customer loyalty and recognition of our brand name has increased,
we have begun to augment this strategy by implementing the following:
. cross-marketing higher margin products and services to our customers
once they are in our online stores. By operating seven integrated online
specialty stores featuring a broad range of brand name products, we can
often present the customer with other higher margin products, including
accessories and other products that are complementary to the customer's
initial purchase as well as popular point-of-purchase impulse buys;
. offering vendors the ability to create specialized promotional "stores
within a store." We believe this will provide us greater flexibility in
promoting higher margin products while capturing additional co-op
advertising revenues available from our manufactures;
. raising prices on selected SKUs. Since June 1999, we have raised prices
on selected SKUs to refine our pricing strategy and increase our gross
margins. For some of these SKUs the increase in price did not result in
any decline in sales volumes. However, for other SKUs sales volumes
declined. By analyzing the results of these selective price increases
and customer buying pattern data, we believe we can identify products
that are characterized by lower degrees of price sensitivity, which will
provide the opportunity to raise margins through targeted price
increases that do not diminish overall sales volumes.
Within each online store, our customers can choose to shop in a particular
product category. For example, our online bookstore allows customers to choose
among multiple subject areas, including fiction, non-fiction and romance, and
our online computer store allows users to choose among various product
categories, such as computers, notebooks, scanners and modems. The intuitive
nature of our stores is also enhanced by other product presentations and
organization within each of our stores. For example, each of our online stores
contains a top 25 list of products for sale, identifies certain "great buys"
and highlights a combination of other featured offers, including new releases
and coming attractions. For customers with a specific interest in a particular
product or manufacturer, we offer the ability to locate products by
manufacturer or product name.
Marketing and Promotions
We have taken a disciplined and selective approach in our marketing strategy
to develop and strengthen the BUY.COM brand. We attempt to maximize the return
from promotional expenditures by choosing advertising media based on the cost
relative to the likely audience and ability to generate increased traffic for
our Web site.
Online Advertising. We place advertisements on various high profile and
high traffic portal Web sites, including AOL, Excite@Home and Yahoo!, as well
as Web sites targeted at a more focused audience, including About.com, CNET,
Computer Shopper, rolling stone.com, Tech Shopper and women.com. Our
advertisements on these sites are typically focused on building brand awareness
or are product-specific permanent placements that encourage visitors to click
through directly to our Web site. In addition, we periodically submit product
data files to search engine Web sites in order to appear within these sites
when visitors conduct product searches. These product listings link directly to
our site and have been an effective means of generating sales.
Traditional Advertising. We advertise in specific major markets and
nationwide in a variety of media focused on our identified demographic of
customers. In an effort to effectively establish the BUY.COM brand in the
marketplace and position ourselves as a leading e-commerce superstore, we are
currently participating in a nationwide media campaign that includes business,
computer trade, general interest and niche publications,
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including Fortune, Men's Journal and PC Magazine; newspapers such as the New
York Times and The Wall Street Journal; national television programs such as
ESPN SportsCenter and NBC Dateline; radio spots with CBS News and Sportstalk;
as well as outdoor billboards located in high traffic areas. We use a variety
of advertising campaigns to target specific demographic customers, including
product specific campaigns, branding and comedy.
Direct Mail. We engage in targeted direct mail campaigns to various
segments of our database. Each month we identify and target a particular
customer demographic for specific promotions designed to increase customer
traffic and sales. In addition to special promotions, the direct mail campaigns
promote our commitment to customer service and include either savings coupons
or a unique gift to reward customers for their support.
Sweepstakes and Giveaways. We have from time to time successfully hosted
sweepstakes that have generated a substantial number of registrants. We
register the entrants, with their approval, in our corporate database for
future marketing opportunities. We plan to continue to offer customers various
sweepstakes opportunities and product giveaways to increase traffic to our Web
site and encourage return visits.
PGA TOUR Sponsorship. We recently entered into a five year sponsorship
agreement with the PGA TOUR in which we will become the exclusive title sponsor
of the professional tour previously known as the Nike Tour. Our sponsorship of
the BUY.COM Tour provides for television coverage of various BUY.COM Tour
events, prominent featuring in the PGA TOUR's controlled media, including
"Inside the PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA
TOUR's Web site and other sponsorship and media opportunities. We believe this
sponsorship provides an attractive marketing vehicle that enables us to target
a customer demographic that is consistent with the customer demographics of our
other online stores.
Customer Service and Support
We are committed to providing superior customer service and plan to continue
to make technological and systems advancements to enhance the overall shopping
experience. We believe customer support throughout the shopping experience is a
key element in providing a convenient shopping forum for our customers and
establishing customer loyalty. As a result, we have made customer service a
focal point of our operations. Customer service representatives are available
for support 24 hours a day, seven days a week. In addition to offering customer
support on existing orders, service representatives are available to assist
shoppers in placing orders online. We believe this educational process builds
customer loyalty and creates comfort and familiarity with the shopping
experience.
To maintain our virtual operating model strategy and enhance our ability to
scale our operations quickly, we have outsourced our first level customer
support to ClientLogic. This strategy also has enabled us to minimize capital
expenditures, while ensuring that we are staffed to meet the service needs of
our customers. We have entered into a four year contract with ClientLogic,
which provides customer support to the high tech industry for organizations
such as Dell, E*Trade, Microsoft and others. We currently maintain call centers
in Albuquerque, New Mexico and Buffalo, New York where ClientLogic has staffed
over 350 dedicated BUY.COM customer service representatives who are trained and
managed on-site by BUY.COM management personnel. In addition to our outsourced
customer support, we maintain a limited in-house staff of high level customer
service representatives to address more complex customer inquiries.
Customers can interact with our representatives by telephone, email or
"chat" responses while the customer is online. Our contract with ClientLogic
requires that at least 80% of all telephone calls be answered within 90 seconds
and e-mail requests be answered in less than 12 hours. We also strive to keep
customers informed concerning the status of their orders. We automatically send
e-mails confirming receipt of an order, as well as follow-up e-mails to notify
the customer of the product shipment, package tracking information, any back
ordering and to confirm the customers' receipt of a product.
In addition to our telephone and e-mail support, we have built an extensive
self-help environment within our Web site. This tool allows customers to
receive all information regarding their current orders and past order history.
Within the Web site customers may track shipped orders with Federal Express and
United Parcel
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Service, check the status of orders being processed, and access links to our
technology partners' Web sites for technical support. By providing this support
through the Web site, we realize significant cost savings while providing the
customer more efficient and timely information and service.
Technology and Systems
We have implemented a combination of proprietary technologies and
commercially available licensed technologies. Our current strategy is to
license available technology whenever possible rather than seek internally-
developed solutions and to focus our internal development efforts on creating
and enhancing our specialized, proprietary software.
Our Web site's front-end is built on industry standard technologies,
including IBM NetFinity servers, the Microsoft NT operating system, Microsoft
Web Servers and Microsoft SQL server databases. The business logic of the site
is contained in a variety of proprietary programs. These programs handle user
interface, ordering and customer communications and operate on redundant IBM
NetFinity servers. We expect to add additional servers and capacity as needed
in the long-term. Our system includes redundant hardware on mission critical
components, which we believe can survive the failure of several entire servers
with relatively little downtime. We also believe we can quickly and easily
expand capacity without significant additional development. We have
historically run our key systems below capacity to support rapid growth.
Consistent with our virtual operating strategy, we outsource the hosting of
our Web servers to an Internet data center specialist, Exodus Communications,
with an extensive national network backbone. Exodus provides redundant Internet
connections to multiple Internet access points, a secure physical environment,
climate control and redundant power. In addition, Exodus provides us with 24
hour a day, seven day a week system monitoring and escalation. Exodus currently
hosts our Web operations in their Irvine, California data center, and we
believe Exodus has adequate available floor space to support our growth in this
facility. In addition, we expect to be able to support a distributed, redundant
site by placing some of our servers in Exodus' other locations across the
country.
Order Processing Applications. We use a set of computer software
applications for processing each customer order. These applications charge
customer credit cards, print order information, transmit order information
electronically to our distributors and deposit transaction information into our
accounting system. All credit card numbers and financial and credit information
are secured using the Internet security protocol Secure Socket Layer, Version
3, an encryption standard, and we maintain credit card numbers behind
appropriate fire walls.
Marketing Applications. We have developed a set of computer software
applications for sending automated broadcast e-mails to customers on a frequent
basis. This software extracts e-mail addresses from our mailing lists, sends e-
mails to the designated recipients and automatically services requests from
customers to remove them from the mailing list.
Ad Reporting. We have developed an application that allows for the
tracking and reporting of customer response to the Web advertisements we place
throughout the Internet. The reports include click-through to the
advertisements and orders and sales from those responses on a daily basis.
These reports allow for comparison of similar site's performance, placements
within a single site and the creative/graphic performance of the ads.
Competition
The e-commerce market is new, rapidly evolving and intensely competitive. We
expect that competition will further intensify in the future. Barriers to entry
are limited, and many traditional retailers are beginning to launch their own
online operations. New technologies and the expansion of existing technologies
may also increase competitive pressures. We currently compete with a variety of
online vendors who specialize in computer hardware and software products, as
well as those who sell books, music, videos, DVDs and other entertainment
products. Moreover, all of the products we sell in our online stores are
available through
45
<PAGE>
traditional and catalog retailers. Consequently, we must compete with companies
in the e-commerce market as well as the traditional retail industry. We believe
that the primary competitive factors in online retailing include brand
recognition, price, product selection, customer service, value-added services
and ease of use.
In the computer hardware, software, peripheral and clearance product
markets, our primary competitors include, but are not limited to:
. traditional computer retailers such as CompUSA and MicroCenter;
. catalogue retailers such as CDW, Insight and PC Connection;
. online computer retailers such as Cyberian Outpost, Egghead.com and
Onsale; and
. software and hardware manufacturers that market their products through
their own Web sites such as Apple Computer, Dell Computer and Gateway
2000 Inc.
Our current or potential competitors with respect to books, DVDs and videos,
and other entertainment related products include, but are not limited to:
. traditional entertainment product retailers such as Barnes & Noble,
Blockbuster Video and Borders;
. Internet-focused entertainment product retailers such as Amazon.com,
CDNow and Reel.com; and
. non-entertainment retailers that sell a limited selection of
entertainment products at low prices, such as Wal-Mart.
We also expect to experience significant competitive pressure if any of our
distribution partners were to initiate their own retail operations. Since our
distributors have access to merchandise at very low costs, they could sell
products at lower prices than us and maintain a higher gross margin on their
product sales than we are able to achieve. If this were to occur, our current
and potential customers may decide to purchase directly from these
distributors, which could reduce our market share.
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks, trade
secrets and other intellectual property rights as critical to our future
success. We rely on various intellectual property laws and contractual
restrictions to protect our proprietary rights in products and services. We
have acquired and registered many of our domain names with regulatory bodies in
an effort to protect these intellectual property rights. We have also entered
into confidentiality and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with our suppliers and strategic
partners in order to limit access to and disclosure of our proprietary
information. We cannot assure you that these contractual arrangements or the
other steps taken by us to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter
independent third party development of similar technologies. In addition, we
have pursued the registration of our key trademarks and service marks in the
U.S. and internationally. We currently have pending trademark registrations for
many marks, both internationally and in the U.S., including, but not limited
to, BUY.COM, BUYBOOKS.COM, BUYCLEARANCE.COM, BUYCOMP.COM, BUYGAMES.COM,
BUYMUSIC.COM, BUYSOFT.COM, BUYTRAVEL.COM, BUYVIDEOS.COM and "BUY.COM THE
INTERNET SUPERSTORE". However, effective intellectual property protection may
not be available in every country in which our services may be made available
in the future. There is also no guarantee that the trademarks or servicemarks
for which we have registered will offer adequate protection under applicable
law.
We have licensed in the past, and expect that we may license in the future,
some of our intellectual property rights, including trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of the
BUY.COM brand is maintained by these licensees, they could take actions that
might materially and adversely affect the value of our intellectual property
rights or reputation, which could harm our business. We also rely on
technologies that we license from third parties. These licenses may not
continue to be available to us on commercially reasonable terms in the future,
if at all. As a result, we may be required to obtain substitute technology of
lower quality or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
46
<PAGE>
As is customary with technology companies, from time to time we have
received, and may continue to receive or become aware of, correspondence
claiming potential infringement of other parties' proprietary rights. We could
incur significant costs and diversion of management time and resources to
defend claims regardless of the validity of these claims. We may not have
adequate resources to defend these claims, and any associated costs and
distractions could have a material adverse effect on our business, financial
condition and results of operations. As an alternative to litigation, we may
seek licenses for other parties' intellectual property rights. We may not be
successful in obtaining any necessary licenses on commercially reasonable
terms, if at all.
Legal Proceedings
From time to time, we have been subject to legal proceedings and claims in
the ordinary course of our business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. In March 1999, a class action suit was filed against us in the
Orange County California Superior Court alleging breach of contract, fraud and
violation of consumer protection laws. The plaintiffs in this action allege
that we intentionally mispriced products and charged for orders knowing the
orders could not be fulfilled. The plaintiffs are seeking compensatory and
punitive damages in addition to injunctive relief. Also in March 1999, another
class action suit was filed against us in Camden County, New Jersey. The New
Jersey plaintiff seeks compensatory and punitive damages for breach of contract
and common law fraud arising out of facts similar to the Orange County case.
The judge in the New Jersey action has granted a temporary stay of the New
Jersey action to monitor the progress of the California action. Discovery is in
its early stages in the California action and a class has not yet been
certified in either action.
We intend to defend these lawsuits vigorously even though they could result
in the expenditure of significant financial and managerial resources. We are
not aware of any other material legal proceedings pending against us.
Employees
As of September 30, 1999, we had 196 full-time employees, including 75
employees engaged in engineering and Web development, 32 engaged in sales and
marketing, and 89 engaged in general and administrative activities. We plan to
continue to expand our workforce in the near future. Our employees are not
represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our employee relations are good.
Facilities
Our principal administrative and engineering facilities are located in two
adjacent facilities in Aliso Viejo, California. We own a 12,000 square foot
facility and currently lease, from our founder, the additional 11,000 square
foot facility under a lease that expires in May 2000. Our monthly rental
payments under this lease are approximately $12,000. We have entered into an
agreement to lease approximately 50,000 square feet in Aliso Viejo, California,
which we expect to occupy in December 1999. The lease expires in January 2006
and requires monthly base rental payments of approximately $92,000 for the
first six months of the lease, and increases to approximately $126,000 per
month thereafter. We believe our existing facility and our planned future
facility will be sufficient for our needs for at least the next twelve months.
47
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table provides information with respect to our executive
officers and directors as of October 15, 1999:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- ----------
<S> <C> <C>
Gregory J. Hawkins........ 44 Chief Executive Officer and Chairman of the Board
Mitch C. Hill(1).......... 40 Chief Financial Officer
Robb Brock................ 35 Vice President, Technology
John C. Herr.............. 33 Vice President, Sales and Marketing
Anthony A. McAlister...... 40 Vice President, Information Services
Brent Rusick.............. 37 Vice President, Sales and Operations
Murray H. Williams........ 29 Vice President, Finance
William L. Burnham........ 28 Director
David B. Ingram........... 36 Director
Donald M. Kendall(2)...... 78 Director
Charles W. Richion........ 63 Director
James B. Roszak(3)........ 58 Director
Edward S. Russell(3)...... 39 Director
John Sculley(3)........... 60 Director
Wayne T. Thorson(2)....... 73 Director
</TABLE>
- --------
(1) Mr. Hill has agreed to join us as soon as reasonably possible, and we
expect his employment as our Chief Financial Officer to commence on
November 1, 1999.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Gregory J. Hawkins has been our Chief Executive Officer and a Director
since March 1999. Mr. Hawkins became our Chairman of the Board in September
1999. From 1991 to February 1999, Mr. Hawkins served as a Senior Vice President
at Ingram Micro, Inc., a large computer hardware and software distributor. Mr.
Hawkins received his B.S. in Business Administration from Oregon State
University.
Mitch C. Hill will be our Chief Financial Officer as of November 1, 1999.
Mr. Hill served as the Chief Financial Officer and Senior Vice President at
Walt Disney Imagineering from May 1996 to October 1999. From March 1995 to May
1996, Mr. Hill served as the Chief Financial Officer and Vice President of
Disney Development Company, and from April 1992 to May 1995 he served as the
Director of Finance and New Business. Mr. Hill received his B.S. in Business
Accounting from Brigham Young University and his M.B.A. from the Harvard
Graduate School of Business Administration.
Robb Brock has been our Vice President, Technology since July 1997. From
April 1985 to December 1996, Mr. Brock served as the Vice President of Software
Development at Data Faction, Inc., a software development company. Mr. Brock
received his B.A. in Computer Science from National University.
John C. Herr has been our Vice President, Sales and Marketing since
December 1998. From 1993 to December 1998, Mr. Herr served in several
management roles at Ziff Davis, Inc., including the Vice President of
International and Executive Vice President of Worldwide Marketing. Mr. Herr's
previous experiences
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<PAGE>
include working in consumer marketing as a Johnson & Johnson brand manager, and
as a strategy consultant at Bain & Company. Mr. Herr received his B.A. in
Economics from Harvard University and his M.B.A. from the Harvard Graduate
School of Business Administration.
Anthony A. McAlister has served as our Vice President, Information
Services since November 1998. Prior to joining us, from January 1998 to
November 1998, he was employed as the Vice President of Information Services
for SpeedServe.com, an online retailer of books, movies and games. From
December 1987 to January 1998, Mr. McAlister served as a Director of
Application Development for Ingram Entertainment, Inc. Mr. McAlister holds an
Associate degree in Data Processing from Nashville State Technical Institute.
Brent Rusick has been our Vice President, Sales and Operations since
November 1997. Prior to that, Mr. Rusick served as a U.S. Channel Sales Manager
at Packard Bell NEC, Inc. from March 1995 to November 1997. From August 1994 to
March 1995, he served as a Regional Sales Manager for Tech Data Corp.
Mr. Rusick received his B.S. in Business Administration and Finance from San
Diego State University.
Murray H. Williams has been our Vice President, Finance since November
1998. Prior to that, Mr. Williams served as our Director of Finance from
February 1998 to November 1998. From January 1993 to February 1998, Mr.
Williams served in various capacities at KPMG Peat Marwick, LLP, most recently
as a Manager. Mr. Williams received his B.A. in Accounting and Real Estate from
the University of Wisconsin, Madison.
William L. Burnham has been a Director since September 1999. Since August
1999, Mr. Burnham has been a General Partner of SOFTBANK Capital Partners LP.
From July 1998 to August 1999, Mr. Burnham was a Vice President at Credit
Suisse First Boston. From May 1998 to July 1998, Mr. Burnham served as a Vice
President at Deutsche Morgan Grenfell, and from April 1997 to May 1998, he
served as a Vice President at US Bancorp Piper Jaffray. Prior to this, Mr.
Burnham served as a Senior Associate at Booz Allen & Hamilton from August 1993
to March 1997. Mr. Burnham was elected to our Board as a representative of
SOFTBANK Capital Partners as a result of our Series B preferred stock financing
in October 1999. Mr. Burnham received his A.B. in Political Science from
Washington University.
David B. Ingram has been a Director since December 1998. Since July 1991,
Mr. Ingram has served in various capacities at Ingram Entertainment Inc., most
recently as its Chairman of the Board and President. Mr. Ingram currently
serves on the board of directors of the Video Software Dealers Association,
First American National Bank, Nashville Community Advisory Board, and is a
board member of several privately held companies. Mr. Ingram was elected to our
Board of Directors as a representative of Ingram Entertainment Inc. under a
voting agreement that will terminate upon the closing of this offering. Mr.
Ingram received his B.A. in History from Duke University and his M.B.A. from
the Owen Graduate School of Management, Vanderbilt University.
Donald M. Kendall has been a Director since August 1998. Since 1991, Mr.
Kendall has served as a Consultant and Ambassador at Large for PepsiCo, Inc.,
and from 1986 to 1991, he served as the Chairman of the Executive Committee for
PepsiCo. From 1965 to 1986, Mr. Kendall served as PepsiCo's Chairman of the
Board and Chief Executive Officer. Mr. Kendall attended Western Kentucky
University before becoming a Navy pilot in World War II.
Charles W. Richion has been a Director since August 1998. From June 1997
to July 1998, Mr. Richion served as the Vice President of Corporate Development
for Identix, Inc. From 1965 to 1996, Mr. Richion served as the Vice President
of U.S. Sales and Vice President of Global Partners at Hewlett Packard, Co.
Mr. Richion currently serves on the board of directors of Identix, Inc. He
received his B.S.E.E. from the University of Pennsylvania.
James B. Roszak has been a Director since August 1998. From June 1991 to
June 1997, Mr. Roszak served as the President of the Life Insurance Division of
Transamerica Life Companies. Mr. Roszak received his B.S. in Business from the
University of Southern California.
49
<PAGE>
Edward S. Russell has been a Director since August 1998. Since October
1996, Mr. Russell has served as a General Partner at SOFTBANK Technology
Ventures, Inc. From 1988 to October 1996, Mr. Russell served as the Executive
Director at SBC Warburg. Mr. Russell was elected to our Board as a
representative of SOFTBANK Technology Ventures as a result of our Series A
preferred stock financing in August 1998. Mr. Russell received his B.S. in
Computer Science from Carnegie Mellon University.
John Sculley has been a Director since August 1998. Since 1994, Mr.
Sculley has served as a partner in the investment firm of Sculley Brothers LLC.
From November 1993 to February 1994, Mr. Sculley served as the Chief Executive
Officer of Spectrum Information Technologies, Inc. In January 1995, Spectrum,
together with three of its four operating subsidiaries, filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Eastern District of New
York. From 1983 to 1993, Mr. Sculley served as the Chief Executive Officer of
Apple Computer, Inc. Since 1984, Mr. Sculley has also been the Chief Executive
Officer of Sculley Bros., Inc. Mr. Sculley serves on the board of directors of
Netobjects Inc., Talk City, Inc. and NFO Worldwide, Inc. Mr. Sculley received
his B.S. in Architecture from Brown University and his M.B.A. from the Wharton
School of Business.
Wayne T. Thorson has been a Director since August 1998. Since 1958, Mr.
Thorson has served as the Chief Executive Officer of Thorson, Inc., a highway
construction company. Mr. Thorson attended Concordia College where he studied
business administration.
Classified Board of Directors
Our Board of Directors will be divided into three classes of directors
serving staggered three-year terms upon the closing of this offering. As a
result, approximately one-third of the Board of Directors will be elected each
year. These provisions, together with the provisions of our certificate of
incorporation, allow the Board of Directors to fill vacancies of or increase
the size of the Board of Directors, and may deter our stockholders from
removing incumbent directors and filling these vacancies with its own nominees
to gain control of the Board.
Our Board of Directors has designated that Messrs. ,
and will serve as Class I Directors, whose terms expire at the
2000 annual meeting of stockholders. Messrs. , and
will serve as Class II Directors whose terms expire at the 2001
annual meeting of stockholders. Messrs. , and
will serve as Class III Directors whose terms expire at the 2002
annual meeting of stockholders.
Committees of the Board
The Board of Directors has established two standing committees: the audit
committee and the compensation committee. The audit committee consists of
Messrs. Roszak, Russell and Sculley. The audit committee recommends the
appointment of independent public accountants for the annual audit of our
financial statements to the Board of Directors. The audit committee reviews the
scope of the annual audit and other services the auditors are asked to perform.
This committee also reviews the report on our financial statements prepared by
the auditors following the audit, and our accounting and financial policies in
general. The audit committee also reviews management's procedures and policies
with respect to our internal accounting controls.
The compensation committee consists of Messrs. Kendall and Thorson. The
compensation committee reviews and approves salaries, benefits and bonuses for
all executive officers. It reviews and recommends to the Board of Directors on
matters relating to employee compensation and benefit plans. The compensation
committee also administers our stock purchase, equity incentive and stock
option plans.
Compensation Committee Interlocks and Insider Participation
We did not have a compensation committee for the fiscal year ended December
31, 1998. For the fiscal year ended December 31, 1998, all decisions regarding
executive compensation were made by our Board of
50
<PAGE>
Directors. We created our compensation committee in February 1999 and elected
Messrs. Blum, Kendall and Thorson to serve as members of that committee. Mr.
Blum served as our President and Chief Executive Officer and Director during
the fiscal year ended December 31, 1998; however, Mr. Blum resigned his
position as President in December 1998, his position as Chief Executive Officer
on March 1, 1999, and his position as a Director in September 1999. No other
interlocking relationship exists between any of our executive officers or any
member of our compensation committee and any member of any other company's
board of directors or compensation committee.
Director Compensation
Our directors receive no cash remuneration for serving on the Board of
Directors or any Board committee. However, Directors are reimbursed for all
reasonable expenses incurred by them in attending Board and committee meetings.
Directors who are also employees are eligible to receive options and be issued
shares of common stock directly under our 1999 Stock Incentive Plan.
Nonemployee directors will also receive automatic option grants under our 1999
Stock Incentive Plan.
Employment Contracts and Termination of Employment and Change of Control
Arrangements
As of March 1, 1999, Gregory J. Hawkins entered into a one year employment
agreement with us to serve as our Chief Executive Officer. Mr. Hawkins' base
salary under this agreement is $240,000 per year. We also granted Mr. Hawkins
options to purchase 7,267,650 shares of our common stock at an exercise price
of $2.39 per share, the fair market value on the grant date. We provide Mr.
Hawkins with health and related benefits that are generally made available to
our other senior executives and a monthly car allowance of $800. Mr. Hawkins is
an at will employee and his employment can be terminated at any time by him or
by us. If we terminate Mr. Hawkins' employment for any reason, other than for
cause, Mr. Hawkins will have the right to exercise 1,635,225 options that would
otherwise vest in February, 2000, and will be entitled to receive health
benefits and monthly payments of his base salary for the remainder of his one
year term, or six months, whichever is longer.
Mitch C. Hill's employment as our Chief Financial Officer will commence on
November 1, 1999. He will receive an annual base salary of $220,000. Our board
also approved an option grant to Mr. Hill of 1,958,194 shares of our common
stock at an exercise price of $5.71 per share, to be effective upon the
commencement of his employment. If we terminate Mr. Hill's employment for any
reason, other than willful wrongdoing or gross negligence, Mr. Hill will have
the right to receive his annual base salary for one year and the right to
exercise 498,548 options.
We do not currently have any other employment contracts with any of our
named executive officers. Accordingly, our Board of Directors may terminate the
employment of any named executive officer at any time at its discretion. Our
compensation committee has the authority to provide for an accelerated vesting
of any outstanding options if an individual's employment is terminated
following an acquisition or a hostile change in control of BUY.COM.
Executive Compensation
The following table summarizes the compensation earned by, and paid to, our
Chief Executive Officer, our former Chief Executive Officer and founder, our
Chief Financial Officer and our other two most highly compensated executive
officers who received compensation in excess of $100,000 for the year ended
December 31, 1998. We provide our officers with non-cash group life and health
benefits generally available to all salaried employees. These benefits are not
included in the table below due to applicable Securities and Exchange
Commission rules. No named executive officer received personal benefits or
perquisites that exceeded the lesser of $50,000 or 10% of his total annual
salary and bonus for 1998.
51
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ----------------
Shares of Common
Other Annual Stock Underlying
Name and Principal Position Salary Bonus Compensation Options
- --------------------------- -------- ------- ------------ ----------------
<S> <C> <C> <C> <C>
Gregory J. Hawkins(1)........... $ -- $ -- $ -- --
Chief Executive Officer
Scott A. Blum(2)................ 24 218 23,000(4) --
Founder
Mitch C. Hill(3)................ -- -- -- --
Chief Financial Officer
Brent Rusick.................... 180,000 203 -- 750,000
Vice President of Sales and
Operations
Murray H. Williams.............. 67,500 60,203 3,000(4) 1,125,000
Vice President of Finance
</TABLE>
- --------
(1) Mr. Hawkins became our Chief Executive Officer in March 1999. Mr. Hawkins'
annual salary for 1999 is currently $240,000. In March 1999, we granted
Mr. Hawkins an option to purchase a total of 7,267,650 shares at an
exercise price of $2.39 per share.
(2) Mr. Blum served as our Chief Executive Officer from October 1996 until
March 1999. Mr. Blum resigned from the Board of Directors in September
1999.
(3) Mr. Hill has agreed to join us as soon as reasonably possible and we
expect his employment to commence on November 1, 1999. Mr. Hill's annual
salary for 1999 will be $220,000 and we have approved an option grant to
purchase 1,958,194 shares of common stock at an exercise price of $5.71
per share, to be effective upon the commencement of his employment.
(4) Consists of automobile lease payments.
Option Grants in Last Fiscal Year
Each option listed in the table below was granted under, or has been assumed
under, the 1998 Stock Option/Stock Issuance Plan. All options granted under the
1998 plan are immediately exercisable. The following table indicates
information regarding options granted to the named executive officers during
1998. We have not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of Stock
Securities Options Market Price Appreciation for Option
Underlying Granted to Exercise Price on Term
Options Employees Price Per Grant Expiration ------------------------------
Name Granted in 1998 Share Date Date 0% 5% 10%
- ---- ---------- ---------- --------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gregory J. Hawkins...... -- -- -- -- -- -- -- --
Scott A. Blum........... -- -- -- -- -- -- -- --
Mitch C. Hill........... -- -- -- -- -- -- -- --
Brent Rusick............ 750,000 4.2% $0.10 $1.03 06/01/08 $765,000 $1,249,249 $1,992,181
Murray H. Williams...... 750,000 4.2% $0.10 $0.10 02/09/08 -- $ 47,167 $ 119,493
375,000 2.1% $0.10 $1.03 06/01/08 $382,500 $ 624,624 $ 996,091
</TABLE>
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<PAGE>
Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. The 0%, 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent our estimate or projection of our future common
stock prices. These amounts represent assumed rates of appreciation in the
value of the common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises are dependent on the future
performance of our common stock and overall stock market conditions. The
amounts reflected in the table may not necessarily be achieved.
All of the options in the foregoing table are immediately exercisable, but
are subject to our right to repurchase the shares at their exercise price if
the optionee ceases to be employed by us. This repurchase right lapses over a
period of time. Our repurchase right for Mr. Hill's shares lapses in four
annual installments. However, this repurchase right lapses as to 391,639 shares
upon the completion of this offering. Our right of repurchase for Mr. Rusick's
shares lapses over a three year period. Our right of repurchase for
Mr. William's shares lapses equally over a three year period as to 750,000
shares. As for his remaining 375,000 shares, our right of repurchase lapses in
five equal installments over a five year period. However, upon the completion
of this offering, our repurchase right will lapse, as to any unvested portion
of this option grant, in 36 equal monthly installments.
Upon commencement of Mr. Hawkins' employment with us in March 1999, he was
granted an option to purchase an aggregate of 7,267,650 shares of common stock
at an exercise price of $2.39 per share. All of these options are immediately
exercisable, and 6,540,884 of the shares are subject to our right to repurchase
these shares at the exercise price in the event Mr. Hawkins ceases to be
employed by us; 726,766 options were immediately vested upon the commencement
of Mr. Hawkins employment. This repurchase right lapses equally over a four
year period.
Year-End Option Holdings
The following table indicates aggregated option information for the named
executive officers for the year ended December 31, 1998. There was no public
trading market for our common stock as of December 31, 1998. Accordingly, we
have calculated these values on the basis of the assumed initial public
offering price of $ per share, less the applicable exercise price per
share, multiplied by the number of shares underlying the options. No officers
exercised any options during 1998.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Holdings
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options In-the-Money Options
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory J. Hawkins.......... -- -- -- --
Scott A. Blum............... -- -- -- --
Mitch C. Hill............... -- -- -- --
Brent Rusick................ 750,000 -- --
Murray Williams............. 1,125,000 -- --
</TABLE>
All of the options in the table above are immediately exercisable, but are
subject to our right of repurchase which lapses periodically over time and in
some cases upon the completion of our initial public offering. See "--Option
Grants in Last Fiscal Year."
Employee Benefit Plans
1998 Stock Option/Stock Issuance Plan
In August 1998, we adopted the 1998 Stock Option/Stock Issuance Plan. The
Board of Directors and our stockholder approved the 1998 plan in August 1998. A
total of 34,539,960 shares of common stock have been
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<PAGE>
authorized and reserved for issuance under the 1998 plan. As of October 15,
1999, options to purchase an aggregate of 30,095,265 shares were outstanding
and 1,276,695 shares are available for option grants under the 1998 plan. To
the extent we cancel, terminate or repurchase any unvested shares of common
stock issued under the 1998 plan, these shares will become available for future
issuance under this plan.
The 1998 plan is divided into two separate components: (i) the discretionary
option grant program under which employees, non-employee members of the Board
and consultants may be granted options to purchase shares of common stock; and
(ii) the stock issuance program under which eligible individuals may purchase
shares of common stock at a price not less than 85% of the fair market value at
the time of issuance, or be issued shares of common stock as a bonus tied to
the performance of services rendered. Both of these programs are administered
by the Board of Directors or one or more committees appointed by the Board of
Directors. The Board of Directors has complete discretion to determine which
eligible individuals will receive option grants or stock issuances under those
programs, determine the type, number, vesting requirements and other features
and conditions of awards under the 1998 plan, interpret this plan and make all
other decisions relating to the operation of the 1998 plan.
Options may be either incentive stock options within the meaning of Section
422 of the Internal Revenue Code, which permits the deferral of taxable income
related to the exercise of these options, or nonqualified options not entitled
to this deferral. Incentive stock options may only be granted to employees and
the term of an incentive stock option cannot exceed ten years. The exercise
price of incentive stock options granted under the 1998 plan will in no event
be less than 100% of the fair market value of the common stock on the date of
grant, and the exercise price for non-statutory stock options will be no less
than 85% of the fair market value of the common stock on the grant date. The
exercise price for the shares of common stock subject to the option grants made
under the 1998 plan may be paid in cash, check or in shares of common stock
valued at the fair market value on the exercise date. The option may also be
exercised through a same day sale program or delivery of a full recourse,
interest bearing promissory note.
In the event we are acquired by merger or sale of substantially all of our
assets, each outstanding option under the discretionary option grant program
not assumed by the successor corporation or otherwise continued in effect will
automatically accelerate and become immediately vested and exercisable. Also,
any outstanding repurchase rights will automatically terminate, and the shares
subject to those repurchase rights will immediately vest, except to the extent
our repurchase rights with respect to those shares are assigned to the
successor corporation or otherwise prohibited at the time the option was
granted or the repurchase right was created. Vesting under outstanding options
will automatically accelerate in the event of the termination of the optionee's
services within a designated period, not to exceed 18 months, following an
acquisition in which those options are assumed or continued in effect and do
not otherwise accelerate. Also, outstanding repurchase rights will
automatically lapse and cease to be exercisable in the event the optionee or
participant's service is terminated within a designated period, not to exceed
18 months, following the effective date of an acquisition in which those
repurchase rights are assigned or otherwise continued.
In some cases, a change in control of BUY.COM by acquisition of beneficial
ownership of securities possessing more than 50% of the total combined voting
power of our outstanding securities will result in each outstanding option
accelerating and becoming vested. Also, any outstanding repurchase rights shall
automatically terminate and these unvested shares shall become fully vested.
The Board of Directors may amend or modify the 1998 plan at any time subject
to any required stockholder approval. The 1998 plan will terminate on the
earliest of (a) August 10, 2008, (b) the date on which all shares available for
issuance under the 1998 plan shall have been issued as fully vested shares, or
(c) the termination of all outstanding options in connection with a change in
control or ownership of BUY.COM.
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BuyGolf.com, Inc. 1998 Stock Option Plan
In connection with our acquisition of BuyGolf.com, Inc., we assumed the
BuyGolf.com, Inc. 1998 Stock Option Plan. Participation in the assumed BuyGolf
plan is limited to officers, key employees, directors and services providers of
BuyGolf, and a reserve of 520,000 shares of our common stock has been set aside
for issuance under the assumed BuyGolf plan. As of , 1999, options for
shares of common stock were outstanding under the assumed BuyGolf plan, and
shares remained available for future issuance.
Special Executive Stock Option Plan
Our Special Executive Stock Option Plan was adopted by the Board of
Directors in October 1999 and approved by our shareholders in , 1999.
Participation in the executive plan is limited to our non-employee directors,
officers and other highly compensated employees, and a reserve of 5,000,000
shares of our common stock has been set aside for issuance under the executive
plan. As of October 15, 1999, options for 2,713,194 shares of common stock were
outstanding under the executive plan, and 2,286,806 shares remained available
for future issuance. To the extent we cancel, terminate or repurchase any
unvested shares of common stock issued under the executive plan, those shares
will become available for future issuance under this plan.
All outstanding options under the executive plan will be transferred to the
successor 1999 Stock Incentive Plan at the time the underwriting agreement for
this offering is signed, and no further option grants or share issuances will
be made under the executive plan.
Our executive plan is administered by our Board of Directors. The Board of
Directors has complete discretion under the executive plan to determine which
eligible individuals are to receive option grants, the time or times when such
grants are to be made, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a non-
statutory option under the federal tax laws, the vesting schedule (if any) to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding.
Incentive stock options permit the deferral of taxable income related to the
exercise of those options. Non-statutory options are not entitled to this
deferral. Incentive stock options may only be granted to employees, and the
term of an incentive stock option cannot exceed ten years. The exercise price
of an incentive stock option will in no event be less than 100% of the fair
market value of the common stock on the date of grant. Each non-statutory
option will have an exercise price per share not less than 85% of the fair
market value per share of common stock on the option grant date, and will not
have a term in excess of ten years.
The options granted under the executive plan generally have been structured
so that those options are immediately exercisable for all the option shares.
However, any shares purchased under those options will be subject to repurchase
by us, at the exercise price paid per share, if the optionee ceases service
with us prior to vesting in those shares. Vesting of the option shares
generally occurs over a four year period of service.
The exercise price may be paid in cash, check or in shares of our common
stock. The Board of Directors may allow one or more optionees to pay the
exercise price by delivering a full-recourse note payable to us and secured by
the purchased shares. Following the initial public offering of the common
stock, outstanding options may also be exercised through a same-day sale
program pursuant to which a designated brokerage firm will effect an immediate
sale of the shares purchased under the option and pay over to us, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
exercise price for the purchased shares plus all applicable withholding taxes.
In the event that we are acquired by merger or asset sale, the shares
subject to each outstanding option under the executive plan will vest, unless
our repurchase rights with respect to those option shares are assigned to the
acquiring entity, and the option will terminate except to the extent assumed by
that entity. In addition, all unvested shares under the executive plan will
immediately vest prior to such merger or asset sale, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
acquiring entity.
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Options held by several of our officers have special vesting acceleration
provisions which will result in the immediate vesting of their option shares in
the event their employment terminates within a designated period following a
merger or asset sale in which the vesting of their options does not accelerate.
The Board of Directors may amend or modify the executive plan at any time,
subject to any shareholder approval required under applicable law or
regulation.
1999 Stock Option/Stock Issuance Plan
1999 Stock Incentive Plan
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to our 1998 Stock Option/Stock Issuance Plan and our Special
Executive Stock Option Plan. The 1999 plan was adopted by the Board and
approved by the stockholders on , 1999. The 1999 plan will become
effective when the underwriting agreement for this offering is signed. At that
time, all outstanding options under our existing 1998 Stock Option/Stock
Issuance Plan and our Special Executive Stock Option Plan will be transferred
to the 1999 plan, and no further option grants will be made under either the
1998 plan or the executive plan. The transferred options will continue to be
governed by their existing terms, unless our compensation committee decides to
extend one or more features of the 1999 plan to those options.
Share Reserve. We have authorized shares of our common stock
for issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1998 plan and the executive
plan plus an additional increase of approximately shares. The
share reserve under our 1999 plan will automatically increase on the first
trading day in January each calendar year, beginning with calendar year 2000,
by an amount equal to three percent of the total number of shares of our common
stock outstanding on the last trading day of December in the prior calendar
year, but in no event will this annual increase exceed 10,000,000 shares. In
addition, no participant in the 1999 plan may be granted stock options or
direct stock issuances for more than shares of common stock in
total in any calendar year.
Programs. Our 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified period of
service or as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
Board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our Board members and any consultants
we hire.
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Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The compensation committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
Plan Features. Our 1999 plan will include the following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1998 plan, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock.
Change in Control. The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 plan
may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our Board through one or more contested elections. This
accelerated vesting may occur either at the time of the transaction or
upon the subsequent termination of the individual's service.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
this election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date. As a result, the option will be structured so
that the fair market value of the option shares on the
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grant date less the exercise price payable for those shares will be equal to
the amount of the salary reduction. The option will become exercisable in a
series of twelve equal monthly installments over the calendar year for which
the salary reduction is to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-
employee Board member at any time after the effective date of this offering
will receive an option grant to purchase 150,000 shares of common stock on the
date the individual joins the Board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee Board member who is to continue to serve as a non-employee Board
member, including each of our current non-employee Board members, will
automatically be granted an option to purchase 15,000 shares of common stock,
provided that the individual has served on the Board for at least six months.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of Board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per share, any shares purchased under the option which are not vested at the
time of the optionee's cessation of Board service. The shares subject to each
initial 150,000 share automatic option grant will vest in a series of six
successive semi-annual installments upon the optionee's completion of each six-
month period of Board service over the thirty-six month period measured from
the grant date. However, the shares will immediately vest in full upon changes
in control or ownership or upon the optionee's death or disability while a
Board member. The shares subject to each annual 15,000 share automatic grant
will be fully-vested when granted.
Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee Board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee Board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the number
of shares subject to the option will be determined by dividing the amount of
the retainer fee applied to the program by two-thirds of the fair market value
per share of our common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
portion of the retainer fee applied to that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while serving as a Board member.
Additional Program Features. Our 1999 plan will also have the following
features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our Board
through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.
. The Board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than June 30, 2009.
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1999 Employee Stock Purchase Plan.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
Board and approved by the stockholders in September 1999. This plan will become
effective immediately upon the signing of the underwriting agreement for this
offering. The plan is designed to allow our eligible employees and the eligible
employees of our participating subsidiaries to purchase shares of our common
stock, at semi-annual intervals, with their accumulated payroll deductions.
Share Reserve. We have initially reserved 6,000,000 shares of our common
stock for issuance under this purchase plan. The reserve will automatically
increase on the first trading day in January each calendar year, beginning in
calendar year 2000, by an amount equal to one percent of the total number of
outstanding shares of our common stock on the last trading day in December in
the prior calendar year. In no event will any annual increase exceed 1,000,000
shares.
Administration. The purchase plan will be administered by our compensation
committee. The compensation committee shall have full authority to interpret
and construe any provisions of the purchase plan and adopt such rules and
regulations for administering the purchase plan as it may deem necessary in
order to comply with the requirements of Section 423 of the Internal Revenue
Code.
Offering Periods. The purchase plan will have a series of successive
offering periods, each with a maximum duration of 24 months. The initial
offering period will start on the date the underwriting agreement for this
offering is signed and will end on the last business day in October 2001. The
next offering period will start on the first business day in November 2001, and
subsequent offering periods will set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 20% of his or her
base salary through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. However, a participant may not purchase more than 30,000 shares on
any purchase date, and not more than 1,500,000 shares may be purchased in total
by all participants on any purchase date. Our compensation committee will have
the authority to change these limitations for any subsequent offering period.
Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Change in Control. Should we be acquired by merger or sale of
substantially all of our assets or more than fifty percent of our voting
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to the lesser of 85% of the market value per share
on the participant's entry date into the offering period in which an
acquisition occurs or 85% of the fair market value per share immediately prior
to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of October
2009.
. The Board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
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Limitation on Liability and Indemnification Matters
The certificate of incorporation that we will adopt immediately prior to the
closing of this offering provides that, except to the extent prohibited by the
Delaware General Corporation Law, our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of fiduciary duty
as directors. Under the Delaware General Corporation Law, the directors have a
fiduciary duty to BUY.COM which is not eliminated by this provision of the
certificate of incorporation and, in appropriate circumstances, equitable
remedies including injunctive or other forms of nonmonetary relief will remain
available. In addition, each director will continue to be subject to liability
under the Delaware law for:
. breach of the director's duty of loyalty;
. acts or omissions which are found by a court of competent jurisdiction
to be not in good faith or which involve intentional misconduct, or
knowing violations of law;
. actions leading to improper personal benefit to the director; and
. payment of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law.
This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws. We have obtained liability insurance for our officers and
directors.
Section 145 of the Delaware law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided
that this provision shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware law; or
. for any transaction from which the director derived an improper personal
benefit.
The Delaware law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of
incorporation provides that we will indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that the person is or was a
director or officer, or is or was serving at our request as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses, judgements, fines and
amounts paid in settlement actually and reasonably incurred by the person in
the action, suit or proceeding.
We plan to enter into indemnification agreements with our directors and our
executive officers containing provisions that may require us, among other
things, to indemnify our directors and officers against liabilities that may
arise by reason of their status or service as directors or officers other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors and officers' liability
insurance if maintained for other directors or officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
The Securities and Exchange Commission is of the opinion that
indemnification of directors, officers and persons controlling BUY.COM for
violations of the Securities Act is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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CERTAIN TRANSACTIONS
Since our formation in June 1997, there has not been, nor is there any
proposed transaction where we were or will be a party in which the amount
involved exceeded or will exceed $60,000 and in which any director, executive
officer, holder of more than 5% of any class of our voting securities, or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest, other than the compensation agreements
and other agreements and transactions which are described in "Management" and
the transactions described below.
Sales of Securities
In June 1997, BuyComp, LLC, a California limited liability company and our
predecessor, issued 9,000,000 units to Scott and Audrey Blum in exchange for
$50,000. In August 1998, we issued 130,129,725 shares of common stock to the
Scott A. Blum Separate Property Trust u/d/t 8/2/95 ("The Blum Trust") in
exchange for a majority of Scott and Audrey Blum's interest in BuyComp, LLC.
Scott A. Blum is our founder and served as our President until December 1998,
our Chief Executive Officer until March 1999, and one of our directors until
September 1999.
In August 1998, we issued (i) 4,870,275 shares of Series A convertible
participating preferred stock to The Blum Trust; and (ii) 14,610,855 shares of
Series A convertible participating preferred stock to SOFTBANK Technology
Ventures IV L.P. and SOFTBANK Technology Advisors Fund L.P. at a purchase price
of $1.03 per share. The Blum Trust sold a total of 4,870,275 shares of Series A
convertible participating preferred stock to SOFTBANK Technology Ventures IV
L.P. and SOFTBANK Technology Advisors Fund L.P. at $1.03 per share, and in
September 1998, a total of 16,730,835 shares of common stock to SOFTBANK
Holdings, Inc., SOFTBANK Ventures, Inc. and SOFTBANK Contents Fund at $2.39 per
share.
In December 1998, we issued a total of 8,847,315 shares of common stock in
connection with our acquisition of SpeedServe, Inc. In connection with this
acquisition, BUY.COM and its wholly-owned subsidiary, BUY.COM ENTERTAINMENT
Inc., entered into various agreements with Ingram Entertainment Inc. and, with
regard to a Non-Competition Agreement, David Ingram. David Ingram, who is one
of our directors, is a majority stockholder, Chairman and President of Ingram
Entertainment Inc., the majority stockholder of SpeedServe, Inc. Mr. Ingram is
also a minority stockholder of Ingram Micro, our largest distributor.
Between March 1999 and July 1999, we issued a total of 502,674 shares of
common stock to Ingram Entertainment Inc., SOFTBANK Technology Ventures IV,
L.P. and SOFTBANK Technology Advisors Fund, L.P. in connection with their
exercise of a contractual right to purchase shares of our common stock upon our
issuance of additional securities to third parties. Edward S. Russell, who is
one of our directors, is a General Partner of these SOFTBANK Technology
Ventures funds.
In October 1999, we issued 15,877,249 shares of our Series B convertible
participating preferred stock at a purchase price of $5.67 per share to a group
of investors led by SOFTBANK Capital and its affiliates. In this financing, The
Blum Trust also sold an aggregate of 13,188,700 shares of our common stock to
SOFTBANK Capital and its affiliates at a purchase price of $5.67 per share.
Transactions with Ingram
In June 1998, and again in March 1999, we entered into a contract with
Ingram Micro to supply and distribute the computer hardware, software and
peripheral products that we sell in our stores. We also maintain a line of
credit with Ingram Micro to purchase these goods and merchandise. As a part of
that line of credit, we granted Ingram Micro a security interest in the
inventory we purchase from them, the proceeds from this inventory and all of
our accounts receivable.
In December 1998, we entered into an agreement with Ingram Entertainment,
under which they supply the videos, DVDs and video games that we sell. In
August 1999, we amended this agreement to provide for certain
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co-op advertising dollars and to include certain guarantees for the shipping of
the products that we sell through them. In April 1999, we entered into an
agreement with Nashville Computer Liquidators to supply and distribute the
products we sell in our online clearance store. Nashville Computer Liquidators
is a subsidiary of Ingram Entertainment.
In October 1999, we issued a total of 4,142,927 shares of common stock in
connection with our acquisition of BUYGOLF.COM, Inc. Both Scott Blum and David
Ingram were directors of BUYGOLF.COM. Ingram Holdings, Inc., of which David
Ingram is the Chairman and President, and The Blum Trust were stockholders of
BUYGOLF.COM and received a total of 436,252 shares of our common stock in the
merger.
Transactions with Scott Blum and His Immediate Family
On December 31, 1997, BuyComp LLC borrowed approximately $211,000 from Scott
Blum. The loan was payable upon demand and accrued interest at the rate of
10.00% per annum. On October 7, 1998, we loaned Mr. Blum $1.0 million. This
loan was also payable on demand and accrued interest at the rate of 8.00% per
annum. Both of these loans have been repaid in full. In May 1999, we borrowed
$10.0 million from The Blum Trust. The loan was payable upon demand and accrued
interest at a rate of 10.00% per annum. This loan was repaid in July 1999 with
the proceeds from our credit facility with a commercial lending institution. In
August 1999, we borrowed $5.0 million from The Blum Trust pursuant to a note
that is payable upon demand and accrues interest at a rate of 10.00% per annum.
In addition, The Blum Trust has guaranteed our $15.0 million credit facility
and our $1.2 million loan from The Bank of Yorba Linda.
In May 1999, we entered into a one year lease agreement with The Blum Trust
for our facility located at 27 Brookline, Aliso Viejo, California. Under this
lease, our monthly rental obligation is approximately $12,000. This lease
expires in May 2000.
In October 1999, we entered into a voting trust agreement with Scott A.
Blum, The Blum Trust, and three other trusts affiliated with Scott A. Blum, as
grantor, and our outside directors, Donald Kendall, James Roszak and Wayne
Thorson, as trustees under the voting trust agreement. At the time the voting
trust agreement was executed, The Blum Trust and the other affiliated trusts
held a total of 99,372,465 shares of our common stock, which represented
approximately 56% of our total shares outstanding after giving effect to the
conversion of all of our outstanding preferred stock into our common stock. At
that time and as of the date of this prospectus, Mr. Blum did not directly own
any shares of our capital stock.
The voting trust agreement established a trust into which all shares held by
The Blum Trust and the other affiliated trusts were deposited. The voting trust
agreement requires that any shares of our capital stock that are acquired by
The Blum Trust, the other affiliated trusts, Mr. Blum or his "affiliates," as
that term is defined in the voting trust agreement, after the date of the
voting trust agreement be immediately deposited into the trust. The voting
trust agreement further requires that any shares of our capital stock
previously deposited into The Blum Trust or the other affiliated trusts that
are purchased by any individual or entity affiliated with Mr. Blum also be
immediately deposited into the voting trust. This voting trust terminates upon
the earlier of (a) the unanimous approval of our Board, two-thirds vote of our
stockholders and the consent of our independent auditors, or (b) on the tenth
anniversary of the closing of this offering, unless otherwise required by law
or regulation.
The voting trust agreement does not restrict the ability of The Blum Trust,
the other affiliated trusts, Mr. Blum or any of his affiliates to sell, assign,
transfer or pledge any of the shares deposited into the voting trust, nor does
it prohibit The Blum Trust, the other affiliated trusts, Mr. Blum or his
affiliates from purchasing additional shares of our common stock, provided any
shares purchased by such parties also become subject to the voting trust
agreement.
The trustees of the voting trust agreement are required to be outside
directors of BUY.COM who are not affiliated with Mr. Blum, or individuals
nominated by our outside directors. On significant stockholder actions the
trustees are required to vote all of the shares in the voting trust for the
matter, against the matter or abstain
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<PAGE>
or cause to have the same effect as broker non-votes, in the same proportion as
the non-affiliated votes are cast on such matter. The voting trust agreement
provides that significant stockholder actions include the election of
directors, the dissolution, consolidation, merger, reorganization, or
recapitalization of BUY.COM, the lease, sale or license of all or a substantial
portion of our assets, the issuance or sale of securities by us or our
affiliate or the amendment to the voting trust agreement, in each case to the
extent a stockholder vote is otherwise required by law. The voting trust
agreement provides that non-affiliated shares include all shares of our
outstanding capital stock other than shares held in the voting trust. On
routine stockholder actions the trustees have the discretion to vote the shares
held in the trust in any manner determined by a majority of the trustees.
Mr. Blum resigned as our Chief Executive Officer in March 1999, and resigned
from our Board of Directors in September 1999. He is not an employee of the
Company and he has no authority to bind us as to any contracts, to commit funds
or resources, or supervise or direct the activities of any of our officers or
employees. In accordance with the terms of the voting trust agreement, Mr. Blum
has withdrawn from participating in the management, business and operations of
BUY.COM, and is required to cease all involvement with BUY.COM and with our
operations, our advertising and product sales activities or efforts, our
investor relations program and our financial and accounting matters, including
personnel matters, accounting methodologies or practices.
In July 1999, Scott Blum's father, William Blum, purchased 45,000 shares of
common stock from one of our employees at a purchase price of $2.39 per share.
Transactions With Pinnacle Micro
On October 1, 1997, we entered into a consulting agreement with Pinnacle
Micro, Inc. Scott Blum's father, William Blum, was the President, Chief
Executive Officer and Chairman of the Board of Directors of Pinnacle Micro at
the time this agreement was executed. In addition, before founding BUY.COM
INC., Scott Blum served as an Executive Vice President of Pinnacle Micro. The
payments made under this agreement suspended Pinnacle Micro's severance
payments to Mr. Blum. On March 21, 1998, we entered into another consulting
agreement with Pinnacle Micro, Inc. under which Scott Blum agreed to provide
marketing and consulting services to Pinnacle Micro. In addition, several of
our other employees consulted for Pinnacle Micro during the three month
duration of this agreement. Under both consulting agreements, Pinnacle Micro
made total payments of approximately $161,000 to us between October 1997 and
June 1998.
From September 1997 through December 1998, we made payments of approximately
$155,000 on behalf of Pinnacle Micro for advertisements. Pinnacle Micro has
repaid all such payments in full.
Dividend of BUYNOW, INC.
In October 1999, we declared a common stock dividend of 75% of the capital
stock, on an as converted basis, of one of our wholly-owned subsidiaries,
BUYNOW INC., to all of our stockholders of record as of October 13, 1999.
Several of our directors and executive officers were stockholders as of the
record date and participated in the dividend. We have retained Series A
preferred stock representing 25% of the capital stock of BUYNOW on an as
converted basis. The Series A preferred stock has a $7.5 million liquidation
preference over the common stock and is convertible into common stock of
BUYNOW.
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<PAGE>
We will be entering into a voting agreement with the other stockholders of
BUYNOW that will provide for a five member Board of Directors and will grant us
the right to elect two directors and will grant SOFTBANK the right to elect one
director.
We will be entering into a license agreement with BUYNOW under which we will
license our e-commerce technology related to the BUYNOW business to BUYNOW on a
royalty free basis. In addition, we will license to BUYNOW, on a royalty free
basis, the "BUYNOW" trademark and domain name rights, which license may be
terminated by us at any time.
BUYNOW will be entering into a non-competition agreement prohibiting BUYNOW
from soliciting any of our employees without obtaining our prior consent or
from providing services to any computer equipment manufacturer without first
obtaining our consent.
International Joint Ventures
In September 1999, we entered into a binding letter of intent with SOFTBANK
America, Inc. to form three separate international joint ventures in various
international territories in which we will have 51% ownership interests.
Messrs. Burnham and Russell are affiliated with SOFTBANK and are directors of
BUY.COM.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table indicates information as of October 15, 1999 regarding
the ownership of our common stock by:
. each person who is known by us to own more than 5% of our shares of
common stock;
. each named executive officer;
. each of our directors; and
. all of our directors and executive officers as a group.
The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 178,281,189 shares of common stock outstanding
as of October 15, 1999, and shares of common stock outstanding
upon consummation of this offering. Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission. Shares subject to options that are exercisable currently or within
60 days following October 15, 1999 are deemed to be outstanding and
beneficially owned by the optionee for the purpose of computing share and
percentage ownership of that optionee, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table, and as affected by applicable
community property laws, all persons listed have sole voting and investment
power for all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially
Owned
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owners (1) Beneficially Owned Offering Offering
- ----------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Scott A. Blum(2)(13)...................... 99,164,465 55.6%
SOFTBANK Affiliates(3).................... 61,272,462 34.4
William L. Burnham(4)..................... 38,783,101 21.8
Edward S. Russell(5)...................... 22,489,361 12.6
David B. Ingram(6)........................ 8,185,560 4.6
Gregory J. Hawkins(7)..................... 7,267,650 3.9
Mitch C. Hill(8).......................... 1,958,194 1.1
Brent Rusick(9)........................... 1,500,000 *
Murray H. Williams(10).................... 1,125,000 *
Donald M. Kendall(11)..................... 494,145 *
Charles W. Richion(11).................... 494,145 *
James B. Roszak(11)....................... 494,145 *
John Sculley(11).......................... 494,145 *
Wayne T. Thorson(11)...................... 494,145 *
All directors and officers as a group
(16 persons)(12)(13)..................... 186,581,556 96.2%
</TABLE>
- --------
* Less than one percent
(1) The address for each of our officers and directors is c/o BUY.COM at 21
Brookline, Aliso Viejo, California 92656. The address for the SOFTBANK
Technology Funds is 200 West Evelyn Avenue, Suite 200, Mountain View,
California 94043. The address for the other SOFTBANK funds is 10 Langley
Road, Suite 403, Newton Center, Massachusetts 02159.
(2) Consists of shares held by the Scott A. Blum Separate Property Trust, the
Will Scott Blum Trust, the Emma Rose Blum Trust and the Scott Blum GRAT.
The address for the Blum Trusts is 33971 Selva Road, Suite 200, Dana
Point, California 92629.
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<PAGE>
(3) Includes 17,186,120 shares, 3,346,170 shares, 5,019,240 shares, 20,768,685
shares, 397,932 shares, 13,042,359 shares, 189,212 shares, 1,267,454
shares, 34,524 shares and 20,767 shares held by SOFTBANK America, Inc.,
SOFTBANK Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Technology
Ventures IV, L.P. and SOFTBANK Technology Advisors Fund, L.P., SOFTBANK
Capital Partners L.P., SOFTBANK Capital Partners Advisors Fund L.P.,
SOFTBANK Technology Ventures V, L.P., SOFTBANK Technology Ventures
Advisors Fund V and SOFTBANK Technology Ventures Entrepreneurs Fund V,
respectively.
(4) Includes 17,186,120 shares, 3,346,170 shares, 5,019,240 shares, 13,042,359
shares and 189,212 shares held by SOFTBANK America, Inc., SOFTBANK
Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Capital Partners LP and
SOFTBANK Capital Advisors Fund, respectively. William Burnham is a
Managing Director of the general partner of each of these SOFTBANK
entities. Mr. Burnham disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest.
(5) Includes 20,768,685 shares, 397,932 shares and 1,267,454 shares, 34,524
shares and 20,767 shares held by SOFTBANK Technology Ventures IV, L.P.,
SOFTBANK Technology Advisors Fund, L.P., and SOFTBANK Technology Ventures
V, L.P., SOFTBANK Technology Ventures Advisors Fund V and SOFTBANK
Technology Ventures Entrepreneurs Fund V, respectively. Edward S. Russell
is the Managing Director of the general partner of each of these SOFTBANK
entities. Mr. Russell disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest.
(6) Includes 7,785,615 shares held by Ingram Capital, Inc. and 144,945 shares
held by Ingram Entertainment Inc. Mr. Ingram is the majority stockholder
of Ingram Entertainment, Inc., which is the sole stockholder of Ingram
Capital, Inc. Mr. Ingram disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest. Also includes 255,000
shares issuable upon exercise of an option that is exercisable within 60
days of October 15, 1999.
(7) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of October 15, 1999.
(8) Our Board of Directors has approved an option grant to Mr. Hill of
1,958,194 shares of our common stock to be effective upon the date his
employment commences with us. The option is exercisable within 60 days of
October 15, 1999.
(9) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of October 15, 1999.
(10) This amount also includes a total of 67,500 shares of common stock
transferred to the Murray Williams Children's Trust, the Murray Williams
Sibling's Trust and the Murray Williams College Fund Trust.
(11) Includes 285,000 shares issuable upon exercise of an option that is
exercisable within 60 days of October 15, 1999.
(12) Includes 15,532,844 shares issuable upon exercise of options that are
exercisable within 60 days of October 15, 1999.
(13) Includes Mr. Blum's shares of common stock that are held in a voting trust
for which three of our outside directors serve as trustees. The voting
trust, among other things, provides that the trustees of the voting trust
will have the discretion to vote all of Mr. Blum's shares on issues
related to routine corporate governance. However, in some instances, the
trustees must vote Mr. Blum's shares in the same proportion as the votes
cast for and against by the non-affiliated shares. For a more detailed
discussion of this voting trust, see "Certain Transactions--Transactions
with Scott Blum and His Immediate Family."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and provisions of our
certificate of incorporation and bylaws is only a summary. You should also
refer to the copies of our certificate and bylaws which have been filed with
the Securities and Exchange Commission as exhibits to our registration
statement, of which this prospectus forms a part. The description of common
stock and preferred stock reflect changes to our capital structure that will
occur upon the closing of this offering in accordance with the terms of the
certificate of incorporation that will be adopted by us immediately prior to
the closing of this offering.
Upon the closing of this offering, our authorized capital stock will consist
of 850,000,000 shares of common stock, par value $0.0001, and 150,000,000
shares of preferred stock, par value $0.0001.
Common Stock
We are authorized to issue 850,000,000 shares of common stock. At October
15, 1999, 142,922,810 shares of common stock were deemed outstanding and held
of record by approximately 44 holders. Under the certificate of incorporation
and bylaws, holders of common stock do not have cumulative voting rights.
Holders of shares representing a majority of the voting power of common stock
can elect all of the directors. The holders of the remaining shares will not be
able to elect any directors. The shares of common stock offered by this
prospectus, when issued, will be fully paid and non-assessable and will not be
subject to any redemption or sinking fund provisions. Holders of common stock
do not have any preemptive, subscription or conversion rights.
Holders of common stock are entitled to receive dividends declared by the
Board of Directors out of legally available funds, subject to the rights of
preferred stockholders and the terms of any existing or future agreements
between us and our lenders. Since our inception, we have not declared or paid
any cash dividends on our common stock. We presently intend to retain future
earnings, if any, for use in the operation and expansion of our business. We do
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, common
stockholders are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities, and subject to
the prior rights of any holders of outstanding shares of preferred stock.
Preferred Stock
Upon the closing of this offering, all 19,481,130 shares of our Series A
convertible participating preferred stock and 15,877,249 shares of our Series B
convertible participating preferred stock will convert into shares of common
stock. Thereafter, the Board of Directors is authorized to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each of these
series, including the dividend rights, dividend rates, conversion rights,
voting rights, term of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of a series without further vote or
action by the stockholders. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of BUY.COM without
further action by the stockholders and may adversely affect the voting and
other rights of the holders of common stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently have no plans to issue any shares of preferred stock.
We believe that the ability to issue preferred stock without the expense and
delay of a special stockholders' meeting will provide us with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that might arise. This also permits the Board of
Directors to issue preferred stock containing terms which could impede the
completion of a takeover attempt, subject to limitations imposed by the
securities laws. The Board of Directors will make any determination to issue
these
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<PAGE>
shares based on its judgment as to the best interests of BUY.COM and its
stockholders at the time of issuance. This could discourage an acquisition
attempt or other transaction which stockholders might believe to be in their
best interests or in which they might receive a premium for their stock over
the then market price of the stock.
Anti-Takeover Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years from the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained this status with the approval of the Board of
Directors or unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to exceptions, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or
more of the corporation's voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control attempts
with respect to us and, accordingly, may discourage attempts to acquire us.
Provisions of the certificate of incorporation and bylaws may make it more
difficult to acquire control of BUY.COM. These provisions could deprive
stockholders of the opportunity to realize a premium on the shares of common
stock owned by them. In addition, these provisions may adversely affect the
prevailing market price of the stock and are intended to:
. enhance the likelihood of continuity and stability in the composition of
the Board and in the policies formulated by the Board;
. discourage transactions which may involve an actual or threatened change
in control of BUY.COM;
. discourage tactics that may be used in proxy fights;
. encourage persons seeking to acquire control of BUY.COM to consult first
with the Board of Directors to negotiate the terms of any proposed
business combination or offer; and
. reduce our vulnerability to an unsolicited proposal for a takeover that
does not contemplate the acquisition of all of our outstanding shares or
that is otherwise unfair to our stockholders.
Classified Board of Directors; Removal; Filling Vacancies and
Amendment. Upon the closing of this offering, the certificate of incorporation
and bylaws will provide for the Board to be divided into three classes of
directors serving staggered, three-year terms. The classification of the Board
has the effect of requiring at least two annual stockholder meetings, instead
of one, to replace a majority of members of the Board. Subject to the rights of
the holders of any outstanding series of preferred stock, the certificate of
incorporation will authorize only the Board to fill vacancies, including newly
created directorships. Accordingly, this provision could prevent a stockholder
from obtaining majority representation on the Board by enlarging the Board of
Directors and filling the new directorships with its own nominees. The
certificate of incorporation will also provide that directors may be removed by
stockholders only for cause and only by the affirmative vote of holders of two-
thirds of the outstanding shares of voting stock.
Special Stockholder Meetings. The certificate of incorporation will provide
that special meetings of the stockholders for any purpose or purposes, unless
required by law, shall be called by:
. the President or Secretary following a request in writing of the
President;
. a majority of the entire Board; or
. stockholders owning not less than 50% of the entire voting stock of
BUY.COM then issued and outstanding.
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<PAGE>
A special meeting of the stockholders may not be held absent a written request
of this nature. The request shall state the purpose or purposes of the proposed
meeting. This limitation on the right of stockholders to call a special meeting
could make it more difficult for stockholders to initiate actions that are
opposed by the Board of Directors. These actions could include the removal of
an incumbent director or the election of a stockholder nominee as a director.
They could also include the implementation of a rule requiring stockholder
ratification of specific defensive strategies that have been adopted by the
Board of Directors with respect to unsolicited takeover bids. In addition, the
limited ability of the stockholders to call a special meeting of stockholders
may make it more difficult to change the existing Board and management.
Written Consent; Special Meetings of Stockholders. The certificate of
incorporation will prohibit the taking of stockholder action by written consent
without a meeting. These provisions will make it more difficult for
stockholders to take action opposed by the Board of Directors.
Amendment of Provisions in the Certificate of Incorporation. The
certificate of incorporation will generally require the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock in order to
amend any provisions of the certificate of incorporation concerning:
. the removal or appointment of directors;
. the authority of stockholders to act by written consent;
. the required vote to amend the certificate of incorporation;
. calling a special meeting of stockholders;
. procedure and content of stockholder proposals concerning business to be
conducted at a meeting of stockholders; and
. director nominations by stockholders.
These voting requirements will make it more difficult for minority stockholders
to make changes in the certificate of incorporation that could be designed to
facilitate the exercise of control over us. Furthermore,
SOFTBANK and its affiliates will effectively control the voting power with
respect to approximately % of our common stock, based on the terms of the
voting trust agreement covering shares beneficially owned by our founder. This
gives them absolute power with respect to any stockholder action or approval
requiring either a two-thirds vote or a simple majority. For a more detailed
discussion of this voting trust, see "Certain Transactions--Transactions with
Scott Blum and His Immediate Family."
Warrants
In July 1999, we issued a warrant to United Air Lines to purchase 2,000,000
shares of common stock at an exercise price of $10.00 per share. This warrant
is fully vested and may be exercised at any time and expires in July 2004.
In July 1999, we issued a warrant to our commercial lending institution to
purchase shares of common stock at an exercise price of $ . This
warrant is exercisable any time after the completion of this offering and
expires in July 2001. However, this warrant terminates if the lender perfects a
security interest in Mr. Blum's investment portfolio or otherwise enforces any
of its rights under its credit facility with us. In October 1999, we issued a
warrant to another party to purchase 1,000,000 shares of common stock at an
exercise price of $5.67 per share. This warrant may be exercised at any time
and expires in December 2001.
Registration Rights
After this offering, holders of 158,090,672 shares of common stock will be
entitled to registration rights with respect to their shares. Subject to
conditions, these holders can require us to register all or part of their
shares. In addition, these holders may require us to include their shares in
future registration statements that we
69
<PAGE>
file and may require us to register their shares on Form S-3. Upon
registration, these shares will be freely tradable in the public market without
restriction.
United Air Lines also holds registration rights with respect to the
2,000,000 shares of common stock subject to their outstanding warrant, and
subject to conditions, may require us to register all or a part of their
shares. Our commercial lender holds piggyback registration rights with respect
to the common stock issuable under their warrants and we intend to grant
another party similar piggyback registration rights with respect to their
warrant.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have shares of common
stock outstanding assuming no exercise of options after October 15, 1999. Of
this amount, the shares offered by this prospectus will be available
for immediate sale in the public market as of the date of this prospectus.
Following the expiration of 180-day lockup agreements with the representatives
of the underwriters or BUY.COM, shares will be available for sale
in the public market, subject in some cases to compliance with the volume and
other limitations of Rule 144.
<TABLE>
<CAPTION>
Approximate Number
Days after the Date of Shares Eligible
of this Prospectus for Future Sale Comment
------------------- ------------------ -----------------------------------
<C> <C> <S>
Upon Freely tradable shares sold in this
effectiveness..... offering
180 days........... Lock-up released; shares saleable
under Rule 144, 144(k) or 701
Over 180 days...... Restricted securities held for less
than one year
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock; or
. the average weekly trading volume during the four calendar weeks
preceding the sale, subject to the filing of a Form 144 with respect to
the sale.
A person who is not deemed to have been an affiliate of ours at any time during
the 90 days immediately preceding the sale and who has beneficially owned his
or her shares for at least two years is entitled to sell his or her shares
under Rule 144(k) without regard to the limitations described above. Persons
deemed to be affiliates must always sell under Rule 144, even after the
applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
BUY.COM, its directors, executive officers, stockholders with registration
rights and other stockholders and optionholders have agreed, under the purchase
agreement and other agreements, that they will not sell any common stock
without the prior written consent of Merrill Lynch for a period of 180 days
from the date of this prospectus, except that we may, without consent, grant
options and sell shares under our stock plans.
Any employee or consultant who purchased his or her shares under a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701, which permits nonaffiliates to sell their Rule 701 shares without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and permits affiliates to sell their Rule 701
shares without having to comply with the Rule 144 holding period restrictions,
in each case commencing 90 days after the date of this prospectus. As of
October 15, 1999, the holders of options to purchase approximately 32,808,459
shares of common stock will be eligible to sell their shares upon the
expiration of the 180-day lockup period, subject to the vesting of those
options.
We intend to file a registration statement on Form S-8 under the Securities
Act as soon as practicable after the completion of the offering to register
39,539,960 shares of common stock subject to outstanding stock options or
reserved for issuance under our 1998 Stock Option/Stock Issuance Plan and the
Special Executive Option Plan. This registration will permit the resale of
these shares by nonaffiliates in the public market
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<PAGE>
without restriction under the Securities Act, upon completion of the lock-up
period described above. Shares registered under the Form S-8 registration
statement held by affiliates will be subject to Rule 144 volume limitations.
See "Management--Executive Compensation," "--1998 Stock Option/Stock Issuance
Plan" and "--Special Executive Option Plan."
In addition, holders of 158,090,672 shares of common stock have registration
rights with respect to their shares. Registration of these securities would
enable these shares to be freely tradable without restriction under the
Securities Act. We also have given, or intend to give, registration rights to
our warrant holders with respect to shares of common stock. See
"Risk Factors--A large number of additional shares may be sold into the public
market in the near future. These sales could cause the market price of our
common stock to decline significantly, even if our business is doing well."
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<PAGE>
UNDERWRITING
General
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns & Co. Inc.
and Hambrecht & Quist LLC are acting as representatives of each of the
underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement among us and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from us, the number of shares of common stock set forth opposite
its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Bear Stearns & Co. Inc.............................................
Hambrecht & Quist LLC..............................................
---
Total.........................................................
===
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
its terms and conditions, to purchase all of the shares of common stock being
sold under the terms of the agreement if any of the shares of common stock are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase commitments of the non-
defaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify this offer and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $ per share of
common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
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<PAGE>
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price... $ $ $
Underwriting discount... $ $ $
Proceeds, before
expenses, to BUY.COM... $ $ $
</TABLE>
The expenses of this offering (exclusive of the underwriting discount and
commissions) are estimated at $ and are payable by us.
Over-Allotment Option
We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise this option solely to cover over-allotments, if any, made on the
sale of the common stock offered hereby. To the extent that the underwriters
exercise this option, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
Reserved Shares
At the request of BUY.COM, the underwriters have reserved for sale, at the
initial public offering price, up to of the shares offered hereby to
be sold to certain directors, officers, employees, distributors, dealers,
business associates and related persons of BUY.COM. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which
are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered in this prospectus.
No Sales of Similar Securities
For a period of 180 days after the date of this prospectus, we, our
executive officers, directors and other stockholders beneficially owning
substantially all of the outstanding shares of common stock have agreed,
subject to certain exceptions, not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any
shares of common stock or securities convertible into or exchangeable or
exercisable for common stock, whether now owned or thereafter acquired by
the person executing the agreement or with respect to which the person
executing the agreement thereafter acquires the power of disposition, or
file a registration statement under the Securities Act with respect to
the foregoing;
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock whether
any swap or transaction is to be settled by delivery of common stock or
other securities, in cash or otherwise; or
. make any demand for, or exercise any right with respect to, the
registration of any share of common stock or any securities convertible
into or exchangeable for common stock, without the prior written consent
of Merrill Lynch on behalf of the underwriters.
Nasdaq National Market Listing
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the representatives. The factors to be considered
74
<PAGE>
in determining the initial offering price, in addition to prevailing market
conditions, include the valuation multiples of publicly-traded companies that
the representatives believe to be comparable to us, certain of our financial
information, the history of, and the prospects for, our company and the
industry in which we compete, and an assessment of our management, its past and
present operations, the prospects for, and timing of, our future revenues, the
present state of our development and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market subsequent to this offering at or above the initial public offering
price.
We have applied to list our common stock for quotation on the Nasdaq
National Market under the symbol "BUYC."
The underwriters do not expect sales of the common stock to be made to any
accounts over which they exercise discretionary authority to exceed five
percent of the number of shares being offered in this offering.
Price Stabilization and Short Positions
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase our common stock. As
an exception to these rules, the representatives are permitted to engage in
certain transactions that stabilize the price of our common stock in connection
with this offering. These transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering contemplated hereby, i.e., if they sell more
shares of common stock than are set forth on the cover page of this prospectus,
the representatives may reduce that short position by purchasing our common
stock in the open market. The representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
Penalty Bids
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the representatives purchase
shares of our common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that
it discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP,
Irvine, California. Legal matters relating to the sale of common stock in this
offering will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
75
<PAGE>
EXPERTS
The consolidated balance sheets of BUY.COM INC. as of December 31, 1997 and
1998 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the period from June 7, 1997 (Inception) to
December 31, 1997, and the year ended December 31, 1998, included in this
prospectus and elsewhere in the registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports.
The balance sheets of BuyGolf.com, Inc. as of December 31, 1998 and June 30,
1999 and the related statements of operations, stockholders' equity, and cash
flows for the period from December 1, 1998 (Inception) to December 31, 1998,
and the six months ended June 30, 1999, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving such reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information in the registration statement and its exhibits and schedules. For
further information with respect to us and our common stock, please see the
registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or other document referred to are not necessarily
complete. Please refer to the copies of these contracts or other documents
filed as an exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference. The registration statement,
including its exhibits and schedules, may be inspected without charge at the
principal office of the Commission in Washington, D.C. Copies of all or any
part of the registration statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. These copies may also be inspected and
copied at the Commission's Regional Offices located at:
. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and
. 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of this material may be obtained at prescribed rates by mail from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Securities and Exchange Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including us, that file electronically.
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
FINANCIAL STATEMENTS OF BUYGOLF.COM, INC.
Report of Independent Public Accountants................................. F-25
Balance Sheets........................................................... F-26
Statements of Operations................................................. F-27
Statements of Stockholders' Equity....................................... F-28
Statements of Cash Flows................................................. F-29
Notes to Financial Statements............................................ F-30
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation.................................................... PF-1
Unaudited Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1999.................................... PF-2
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
BUY.COM INC.:
We have audited the accompanying consolidated balance sheets of BUY.COM INC. (a
Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity (deficit) and cash
flows for the period from June 7, 1997, (Inception) to December 31, 1997, and
the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BUY.COM INC. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from June 7, 1997, (Inception)
to December 31, 1997, and the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
October 26, 1999
F-2
<PAGE>
BUY.COM INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro forma
December 31, Stockholders'
--------------------------------- September 30, Equity (Deficit) at
1997 1998 1999 September 30, 1999
--------------- ---------------- ---------------- -------------------
(unaudited) (unaudited)
(see note 8)
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash................... $ 34 $ 9,221 $ 3,231
Accounts receivable,
net of allowances of
$0 and $50 at
December 31, 1997 and
1998, respectively,
and $766 at September
30, 1999.............. 178 4,986 16,062
Prepaid expenses and
other current assets.. 4 1,258 1,422
--------------- ---------------- ----------------
Total current
assets.............. 216 15,465 20,715
Property and equipment,
net.................... 50 2,895 5,286
Intangibles, net........ -- 8,212 7,187
Other noncurrent
assets................. 1 265 701
--------------- ---------------- ----------------
$ 267 $ 26,837 $ 33,889
=============== ================ ================
Liabilities and
Stockholders' Equity
(Deficit)
Current Liabilities:
Accounts payable....... $ 361 $ 16,270 $ 68,455
Line of credit......... -- -- 12,377
Accrued expenses....... 11 438 3,695
Deferred revenue....... 22 2,295 826
Income taxes payable... 2 3 3
Note payable to
stockholder........... 211 -- 5,000
Current portion of
long-term debt........ -- 21 313
--------------- ---------------- ----------------
Total current
liabilities......... 607 19,027 90,669
--------------- ---------------- ----------------
Long-Term Debt, net of
current portion........ -- 1,175 1,818
--------------- ---------------- ----------------
Commitments and
Contingencies
Stockholders' Equity
(Deficit):
Convertible preferred
stock--Series A,
$0.0001 par value;
Authorized shares--
19,481,130 at December
31, 1998 and
150,000,000 at
September 30, 1999;
Issued and
outstanding--
19,481,130 at December
31, 1998 and at
September 30, 1999,
and 0 pro forma
(unaudited), including
additional paid-in
capital............... -- 14,943 14,943 $ --
Common stock, $0.0001
par value;
Authorized shares--
189,998,130 at
December 31, 1998 and
850,000,000 at
September 30, 1999;
Issued and
outstanding--
138,977,040 at
December 31, 1998,
142,922,810 at
September 30, 1999,
and 162,403,940
pro forma
(unaudited)........... -- 14 14 16
Additional paid-in
capital............... -- 12,351 33,593 48,534
Deferred compensation.. -- (2,439) (8,387) (8,387)
Members' capital, no
par value; Authorized
units--11,000,000 at
December 31, 1997;
Issued and
outstanding--9,000,000
at December 31, 1997.. 50 -- -- --
Accumulated deficit.... (390) (18,234) (98,761) (98,761)
--------------- ---------------- ---------------- ----------------
Total stockholders'
equity (deficit).... (340) 6,635 (58,598) $ (58,598)
--------------- ---------------- ---------------- ================
$ 267 $ 26,837 $ 33,889
=============== ================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
<PAGE>
BUY.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 7, 1997 Nine Months Ended
(Inception) to Year Ended September 30,
December 31, December 31, ------------------------
1997 1998 1998 1999
-------------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues............ $ 878 $ 125,290 $ 63,761 $ 397,601
Cost of goods sold...... 832 123,527 61,165 401,214
----------- ----------- ----------- -----------
Gross profit (loss)..... 46 1,763 2,596 (3,613)
Operating expenses:
Sales and marketing.... 130 13,430 2,770 44,094
Product development.... 30 950 404 3,851
General and
administrative........ 260 4,250 3,624 12,872
Depreciation and
amortization.......... 7 377 61 3,009
Amortization of
deferred
compensation.......... -- 795 422 5,417
Charge for warrants.... -- -- -- 7,021
----------- ----------- ----------- -----------
Total operating
expenses............. 427 19,802 7,281 76,264
----------- ----------- ----------- -----------
Operating loss.......... (381) (18,039) (4,685) (79,877)
Other income (expense):
Interest income
(expense), net........ (7) 202 78 (721)
Other.................. -- (4) (58) 74
----------- ----------- ----------- -----------
Total other income
(expense)............ (7) 198 20 (647)
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (388) (17,841) (4,665) (80,524)
Provision for income
taxes.................. 2 3 3 3
----------- ----------- ----------- -----------
Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted...... $ (0.00) $ (0.14) $ (0.04) $ (0.57)
Weighted average number
of common shares
outstanding:
Basic and diluted...... 130,129,725 130,905,390 130,129,725 141,814,477
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BUY.COM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Convertible
Members' Capital Preferred Stock Common Stock
------------------- -------------------- --------------------------- Total
Additional Stockholders'
Preferred Paid-in Deferred Accumulated Equity
Units Capital Shares Stock Shares Par Capital Compensation Deficit (Deficit)
---------- ------- ---------- --------- ----------- ---- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inception of
Company, June 7,
1997
Members'
contributions.... 9,000,000 $ 50 -- $ -- -- $ -- $ -- $ -- $ -- $ 50
Net loss......... -- -- -- -- -- -- -- -- (390) (390)
---------- ---- ---------- ------- ----------- ---- ------- -------- -------- --------
Balance, December
31, 1997......... 9,000,000 50 -- -- -- -- -- -- (390) (340)
Reorganization of
Company, August
3, 1998:
Retirement of
members' units.. (9,000,000) (50) -- -- -- -- -- -- -- (50)
Issued Series A
Preferred
stock........... -- -- 4,870,275 2 -- -- -- -- -- 2
Issued Common
stock........... -- -- -- -- 130,129,725 13 35 -- -- 48
Issuance of
Series A
preferred stock
for cash......... -- -- 14,610,855 14,941 -- -- -- -- -- 14,941
Issuance of
common stock for
acquisition of
Speedserve....... -- -- -- -- 8,847,315 1 9,082 -- -- 9,083
Deferred
compensation
related to stock
options granted.. -- -- -- -- -- -- 3,234 (3,234) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 795 -- 795
Net loss......... -- -- -- -- -- -- -- -- (17,844) (17,844)
---------- ---- ---------- ------- ----------- ---- ------- -------- -------- --------
Balance, December
31, 1998......... -- -- 19,481,130 14,943 138,977,040 14 12,351 (2,439) (18,234) 6,635
Exercise of stock
options for
cash............. -- -- -- -- 3,168,000 -- 21 -- -- 21
Issuance of
common stock for
cash............. -- -- -- -- 507,675 -- 1,974 -- -- 1,974
Common stock
issued for
purchases of
domain names for
cash and common
stock............ -- -- -- -- 270,095 -- 861 -- -- 861
Issuance of
warrants for
supply and debt
agreements....... -- -- -- -- -- -- 7,021 -- -- 7,021
Deferred
compensation
related to stock
options granted.. -- -- -- -- -- -- 11,365 (11,365) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 5,417 -- 5,417
Net loss......... -- -- -- -- -- -- -- -- (80,527) (80,527)
---------- ---- ---------- ------- ----------- ---- ------- -------- -------- --------
Balance,
September 30,
1999
(unaudited)...... -- $ -- 19,481,130 $14,943 142,922,810 $ 14 $33,593 $ (8,387) $(98,761) $(58,598)
========== ==== ========== ======= =========== ==== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
BUY.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
June 7, 1997 Nine Months Ended
(Inception) to Year Ended September 30,
December 31, December 31, ----------------------
1997 1998 1998 1999
-------------- ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $ (390) $ (17,844) $ (4,668) $ (80,527)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 7 377 61 3,009
Gain on sale of fixed
assets................... -- -- -- (249)
Amortization of deferred
compensation............. -- 795 422 5,417
Charge for warrants....... -- -- -- 7,021
Changes in assets and
liabilities:
Accounts receivable...... (178) (4,211) (3,176) (11,076)
Prepaid expenses and
other current assets.... (4) (1,128) (121) (164)
Other noncurrent assets.. (1) (264) (19) (478)
Accounts payable......... 361 15,641 5,170 52,185
Accrued expenses......... 11 384 85 3,257
Deferred revenue......... 22 2,272 1,006 (1,469)
Income taxes payable..... 2 1 (2) --
---------- ---------- ---------- ----------
Net cash used in
operating activities... (170) (3,977) (1,242) (23,074)
---------- ---------- ---------- ----------
Cash flows from investing
activities:
Purchase of property and
equipment................ (57) (2,681) (737) (2,728)
Proceeds from sale of
equipment................ -- -- -- 735
Costs incurred in
connection with
acquisition.............. -- (81) -- --
Acquisition of domain
names.................... -- -- -- (380)
---------- ---------- ---------- ----------
Net cash used in
investing activities... (57) (2,762) (737) (2,373)
---------- ---------- ---------- ----------
Cash flows from financing
activities:
Formation of Company...... 50 -- -- --
Borrowings from
(repayments to)
stockholder, net......... 211 (211) (211) 5,000
Proceeds from issuance of
preferred stock.......... -- 14,941 14,941 --
Proceeds from issuance of
common stock............. -- -- -- 1,974
Exercise of stock
options.................. -- -- -- 21
Borrowings under line of
credit, mortgage and
other obligations........ -- 1,196 42 12,462
---------- ---------- ---------- ----------
Net cash provided by
financing activities... 261 15,926 14,772 19,457
---------- ---------- ---------- ----------
Net increase (decrease) in
cash and cash
equivalents............... 34 9,187 12,793 (5,990)
Cash, beginning of period.. -- 34 34 9,221
---------- ---------- ---------- ----------
Cash, end of period........ $ 34 $ 9,221 $ 12,827 $ 3,231
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BUY.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
(amounts in thousands)
<TABLE>
<CAPTION>
June 7, 1997 Nine Months Ended
(Inception) to Year Ended September 30,
December 31, December 31, ---------------------
1997 1998 1998 1999
-------------- ------------ --------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Supplemental cash flow
information:
Cash paid during the year
for:
Interest................... $ -- $ 15 $ -- $ 306
========= =========== ========= ===========
Income taxes............... $ -- $ 2 $ -- $ 7
========= =========== ========= ===========
Summary of non-cash
investing and financing
activity:
Equipment acquired under
capital lease............. $ -- $ -- $ -- $ 850
========= =========== ========= ===========
Domain name purchases...... $ -- $ -- $ -- $ 861
========= =========== ========= ===========
ACQUISITIONS:
1998--Acquired all of the
outstanding capital
stock
of Speedserve.com,
Inc.
The following table outlines
the assets acquired,
liabilities assumed and
cash paid:
Fair value of assets
acquired.................. $ -- $ 9,476 $ -- $ --
Less:
Liabilities assumed....... -- (312) -- --
Fair value of common stock
issued................... -- (9,083) -- --
--------- ----------- --------- -----------
Cash paid in connection
with acquisitions......... $ -- $ 81 $ -- $ --
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
BUY.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Background
BUY.COM Inc. and subsidiaries, collectively (the "Company" or "BUY.COM"), is
a multi-category Internet superstore, offering a selection of brand name
computer hardware and peripherals, software, books, videos, DVDs, computer
games and music. Through seven online specialty stores, the Company offers
products through a shopping interface that features extensive product
information and multi-media presentations. The Company's e-commerce portal,
www.buy.com, links all of the seven specialty stores and is designed to enhance
the customer's online shopping experience 24 hours a day, seven days a week.
BUY.COM uses a virtual operating model that includes outsourcing the majority
of its operating infrastructure to national distribution and fulfillment
partners.
BUY.COM (formerly BuyComp, LLC and Buy Corp.) was formed in June 1997 and
began offering products for sale through its web site in November 1997. From
BUY.COM's inception through mid-November 1997, the Company had no sales. During
this period, the Company's operating activities primarily involved the
development of the necessary infrastructure and the original BuyComp.com web
site. In August 1998, the Company changed its web site designation to
www.buy.com.
In December 1998, the Company formed BUY.COM Entertainment, Inc., a wholly
owned subsidiary, for the purpose of acquiring Speedserve, Inc. ("Speedserve"),
an online retailer of books, videos, DVD's and video games. As a result,
effective December 1998, the operations of Speedserve's retail web sites were
consolidated with the operations of the Company's existing computer hardware,
software and peripheral retail web sites.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority controlled subsidiaries, including, BuyCorp
Europe, Inc., BUY.COM Entertainment, Inc., Computerstore.com Inc., BuyNow, Inc.
and InternetComputerstore.com, Inc. The Company's investments in joint ventures
and related companies that represent a 20% to 50% ownership interest over which
the Company has significant influence, but not control, are accounted for using
the equity method. All significant intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable consist of credit card and trade receivables arising in
the normal course of business as well as an accrual for products shipped to
customers but not yet billed by the Company.
Substantially all of the Company's accounts receivable serve as collateral
for purchases made from Ingram Micro, Inc. ("Ingram"), one of the Company's
vendors.
F-8
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets. Fixed assets purchased under capital leases are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset
or the lease term. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed and any gain or loss is
reflected in the results of operations. Maintenance and repair expenditures are
charged to operations as incurred.
Intangibles
Intangible assets consist of the portion of the purchase price of businesses
acquired in excess of the fair value of identifiable net tangible assets
acquired and the cost of internet domain names acquired. Amortization is
computed using the straight-line method over the estimated useful lives of the
assets.
Long-Lived Assets
The Company assesses the recoverability of its long-lived assets on an
annual basis or whenever adverse events of changes in circumstances or business
climate indicate that expected undiscounted future cash flows related to such
long-lived assets may not be sufficient to support the net book value of such
assets. If undiscounted cash flows are not sufficient to support the recorded
assets, an impairment is recognized to reduce the carrying value of the long-
lived assets to the estimated fair value. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Additionally, in conjunction with the review for impairment, the remaining
estimated lives of certain of the Company's long-lived assets are assessed.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period or expected term of the debt and are
included in prepaid expenses and other current assets.
Fair Value of Financial Instruments
The carrying amounts for the Company's cash, prepaid expenses and other
current assets, accounts payable, accrued expenses, long-term debt, and other
liabilities approximate fair value.
Revenue Recognition
The Company recognizes revenue from product sales, net of discounts and
estimated sales returns, when the products are shipped to customers. Outbound
shipping and handling charges are included in net sales. The Company provides
an allowance for sales returns, which is based on historical experience.
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
December 31, 1997 and 1998, and for the nine months ended September 30, 1999,
the Company incurred advertising expense of $70,000, $7.8 million, and $23.6
million, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
F-9
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
effect when the differences are expected to be recovered. Under the Tax Reform
Act of 1986, the benefits from net operating losses carried forward may be
impaired or limited in certain circumstances. In addition, a valuation
allowance has been provided for deferred tax assets when it is more likely than
not that all or some portion of the deferred tax asset will not be realized.
The Company has established a full valuation allowance on the aforementioned
deferred tax assets due to the uncertainty of realization.
Loss Per Share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common stock and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation if their effect is antidilutive.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes
standards for the reporting and display of comprehensive income (loss) and its
components in the financial statements. Components of comprehensive income
(loss) include amounts that, under SFAS No. 130, are included in comprehensive
income (loss) but are excluded from net income (loss). There were no
significant differences between the Company's net loss and comprehensive loss.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by SFAS No. 123, Accounting for
Stock-Based Compensation. APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based on the
intrinsic value of stock options granted. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact
of applying the fair value method of SFAS No. 123. This method recognizes the
fair value of stock options granted at the date of grant in earnings over the
vesting period of the options.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency. Assets and liabilities of subsidiaries with international operations
are translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average exchange rates prevailing as they occur.
Translation adjustments, if material, are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Transaction gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved, which are
immaterial, are included in the consolidated statements of operations. The
Company has not entered into any foreign currency exchange contracts or other
derivative financial instruments.
Segment and Geographic Information
The Company operates in one principal business segment across domestic
markets. Substantially all of the operating results and identifiable assets are
in the United States.
Concentration Risks
At December 31, 1997 and 1998, the Company had no significant concentrations
of credit risk.
F-10
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company purchases substantially all of its products from four major
vendors: Ingram, Ingram Entertainment, Inc. ("Ingram Entertainment"), Ingram
Book Company, Inc. ("Ingram Book") and Valley Media, Inc. ("Valley Media"). The
Company does not have long-term contracts or arrangements with any of these
vendors. Loss of any of these vendors could have a material adverse effect on
the Company's operations.
The Company is heavily dependent upon a number of other third parties for
credit card processing, customer service and support, and hosting its system
infrastructure and database servers. In addition, Federal Express Corporation,
the United Parcel Service of America, Inc. and the United States Postal Service
deliver substantially all of the Company's products. If the services of any of
these third parties is interrupted, it could have a material adverse impact on
the Company's operations.
Unaudited Interim Financial Information
The accompanying financial information for the nine months ended September
30, 1998 and 1999, is unaudited. In the opinion of management, this information
has been prepared on substantially the same basis as the annual consolidated
financial statements and contains all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position and
results of operations as of such date and for such periods.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
all costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 was adopted by the Company on January 1, 1999. Adoption did not have a
material effect on the Company's consolidated financial position or results of
operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and
requires costs of start-up activities and organization costs to be expensed as
incurred. Adoption did not have a material effect on the Company's consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. The Company does not expect that adoption of SFAS
No. 133 will have a material impact on its consolidated financial position or
results of operations as the Company does not currently hold any derivative
financial instruments.
3. Business Acquisitions, Dispositions and Investments
Business Acquisitions
In December 1998, the Company acquired all of the outstanding capital stock
of Speedserve. Speedserve was an internet retailer of books, videos, DVD's and
video games. The aggregate purchase price of the
F-11
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
acquisition was approximately $9.1 million. The consideration for the
acquisition consisted of 8,847,315 shares of the Company's common stock, with
an estimated value of $1.03 per share. The Speedserve acquisition was accounted
for under the purchase method of accounting, with approximately $8.4 million of
the purchase price allocated to goodwill.
In October 1999, the Company issued a total of 4,142,927 shares of common
stock to acquire the remaining 95% of the outstanding common stock of
BuyGolf.com, Inc. ("BuyGolf") that it did not previously own. BuyGolf is a
retailer of golf supplies and equipment.
The pro forma combined consolidated financial information, as though the
acquisitions had occurred on June 7, 1997 (Inception) would have resulted in
operating results as follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
June 7, 1997 (Inception) Year ended
to December 31, 1997 December 31, 1998
------------------------ -----------------
<S> <C> <C>
Net revenues.................... $ 992 $ 126,568
Net loss........................ $ 2,319 $ 22,519
Basic and diluted weighted
average net loss per share..... $ (0.02) $ (0.17)
</TABLE>
The pro forma net losses include amortization of goodwill and purchased
intangibles of approximately $1.6 million and $2.8 million for the period ended
December 31, 1997 and the year ended December 31, 1998, respectively. This
unaudited pro forma combined consolidated financial information is presented
for illustrative purposes only and is not necessarily indicative of the
consolidated results of operations in future periods or the results that
actually would have been realized had BUY.COM and Speedserve been a combined
company during the specified periods.
Business Disposition
In October 1999, the Company declared a common stock dividend of 75% of the
capital stock, on an "as converted" basis, of one wholly owned subsidiary,
BuyNow, Inc. ("BuyNow") to all stockholders of record as of October 13, 1999.
The Company has retained preferred stock representing 25% of the capital stock
of BuyNow, on an "as converted" basis. The BuyNow preferred stock has a
liquidation preference over the common stock and is convertible into BuyNow
common stock.
Joint Ventures
In July 1999, the Company entered into an agreement with United Airlines
Inc. ("UA") to form BuyTravel.com LLC ("Buy Travel") to market and sell travel
services and products on the internet. The Company and UA will each own 50% of
BuyTravel. The Company and UA have each agreed to provide advertising and
marketing support to BuyTravel up to a gross amount of $18.0 million over three
years from the effective date of the agreement. Furthermore, the Company and UA
have each committed to contribute capital of $2.0 million within the first four
months of the agreement to establish and support continuing operations. In
addition, the Company granted UA warrants to purchase 2,000,000 shares of the
Company's common stock at an exercise price of $10.00 per share. The estimated
fair market value of these warrants of $7.0 million was expensed as contract
costs in the period the warrants were issued. The BuyTravel operating agreement
requires both parties to approve various matters related to corporate
governance. In the event the Company is unable to agree with UA on one of these
matters after the initial three years of this agreement, UA has the right to
require the Company to purchase UA's interest in BuyTravel at a price equal to
the fair market value of UA's interest at the time of the Company's purchase.
In September 1999, the Company entered into a letter of intent with SOFTBANK
America, Inc. ("SOFTBANK America") to form three separate international joint
ventures in which the Company will have 51% ownership interests.
F-12
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Domain Name Transactions
During 1999, the Company entered into several agreements to purchase
internet domain names. Domain names were purchased in various transactions for
270,095 shares of the Company's common stock and approximately $380,000 in
cash.
On April 15, 1999, the Company entered into an agreement with BuyFlowers.com
LLC ("BuyFlowers"). Under the agreement, the Company granted BuyFlowers an
exclusive, non-transferable, non-sublicensable and royalty-free license to use
domain names owned by the Company solely in connection with the operation of an
internet retail florist selling floral products and related hard goods, gifts,
greeting cards, etc., within the florist category. In consideration for the
license, BuyFlowers agreed to issue the Company a 5% ownership in BuyFlowers.
The Company's investment in this entity has been recorded at cost and is
immaterial to the consolidated statements of position and results of operations
for all periods.
On May 24, 1999, the Company entered into an agreement with BuyGolf to grant
an exclusive, non-transferable and non-sublicensable license to use domain
names owned by the Company solely in connection with the operation of an
internet golf product retailer. In consideration for the license, the Company
receives a fee of $1 per three-month term and any renewal thereof.
Additionally, the Company received approximately 5% (subject to anti-dilution
provisions) of the outstanding common stock of BuyGolf. Furthermore, the
Company signed a twelve-month portal sponsorship/advertising contract with
BuyGolf. This contract commences on June 1, 1999 at a rate of $10,000 per
month. The Company's investment in this entity has been recorded at cost and is
immaterial to the consolidated statements of position and results of operations
for all periods.
4. Property and Equipment
Property and equipment consists of the following (dollar amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
Useful ---------------- September 30,
Lives 1997 1998 1999
------ ------- ------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Building and improvements.......... 20-40 $ -- $ 1,341 $ 1,446
Computers and equipment............ 3-5 47 1,168 3,536
Furniture and fixtures............. 7 10 404 636
Leasehold improvements............. 1-6 -- 131 452
------- ------- -------
57 3,044 6,070
Less--accumulated depreciation.... (7) (149) (784)
------- ------- -------
Property and equipment, net........ $ 50 $ 2,895 $ 5,286
======= ======= =======
5. Intangible Assets
Intangible assets consist of the following (dollar amounts in thousands):
<CAPTION>
December 31,
Useful ---------------- September 30,
Lives 1997 1998 1999
------ ------- ------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Domain names....................... 3 $ -- $ -- $ 1,241
Goodwill........................... 3 -- 8,447 8,447
------- ------- -------
-- 8,447 9,688
Less--accumulated amortization.... -- (235) (2,501)
------- ------- -------
Intangibles, net................... $ -- $ 8,212 $ 7,187
======= ======= =======
</TABLE>
F-13
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Long-Term Debt
In December 1998, the Company borrowed $1.2 million from a bank for the
purchase of an office building. The building serves as collateral on the loan.
Monthly installments of principal and interest are $10,000. The loan bears
interest at a rate of prime plus 1.00% and matures in 2024.
On July 20, 1999, the Company obtained a $15.0 million revolving credit
facility with a commercial bank. The interest rate on the amounts drawn on this
facility is prime plus 2.00% or LIBOR plus 3.00%, at the Company's election. In
connection with this credit facility, the Company must pay a non-refundable
supplemental fee of $675,000 at the earlier of an initial public offering of
the Company's stock or the six month anniversary of the facility. Additionally,
the Company issued to the bank warrants to purchase a number of shares of the
Company's common stock to be determined by an agreed-upon formula at an
exercise price per share equal to the price per share of the Company's initial
public offering. The estimated fair market value of these warrants of $71,000
was allocated to deferred financing costs and amortized over the life of the
related debt. On July 27, 1999, the Company drew $12.4 million against this
credit facility. In October 1999, the Company repaid the amounts drawn on this
facility along with $229,000 in interest.
On July 21, 1999, the Company obtained an irrevocable standby letter of
credit in the amount of $2.6 million from a commercial bank in order to secure
additional office space to be used by the Company.
7. Commitments and Contingencies
Leases
During 1997 and 1998, the Company leased office facilities and fixed assets
under non-cancelable operating leases. Rental expense under operating lease
agreements for 1997 and 1998 was approximately $12,000 and $195,000,
respectively.
In June 1999, the Company entered into a five-year non-cancelable capital
lease agreement for office furniture and equipment with monthly lease payments
of approximately $5,000. In July 1999, the Company also entered into a three-
year non-cancelable capital lease agreement for computer software with monthly
lease payments of approximately $18,000. In September 1999, the Company entered
into a two-year non-cancelable capital lease agreement for telephone systems
with monthly payments of approximately $6,700.
Future minimum commitments on leases, including those leases entered into
subsequent to December 31, 1998, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31,
1999................................................... $ 173 $ 629
2000................................................... 363 1,851
2001................................................... 335 1,721
2002................................................... 173 1,514
2003................................................... 63 1,511
Thereafter............................................. 51 2,141
------ ------
Total minimum lease payments............................. 1,158 $9,367
======
Less--Amount representing interest....................... 156
------
Present value of net minimum lease payments.............. 1,002
Less--Current portion.................................... 173
------
$ 829
======
</TABLE>
F-14
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Supply, Fulfillment and Other Arrangements
In June 1998, and again in March 1999, the Company entered into a contract
with Ingram to supply and distribute the computer hardware, software and
peripheral products that are sold in the Company's web stores. The Company also
maintains a line of credit with Ingram to purchase these goods and merchandise.
As a part of that line of credit, the Company granted Ingram a security
interest in the inventory purchased from them, the proceeds from this
inventory, and all of the Company's accounts receivable.
In December 1998, the Company acquired Speedserve in exchange for shares of
the Company's common stock. In conjunction with this acquisition, the Company
obtained a three-year supply commitment from Ingram Entertainment, Speedserve's
former parent company.
On January 18, 1999, the Company entered into an agreement to provide
extended warranties to customers on computer hardware products sold on the
Company's web site. In accordance with the terms of the agreement, the
Company's liability on the extended warranties is assumed by a national
insurance provider. The extended warranties are sold on the Company's web site
and payments are received by the Company. The Company remits a fixed fee based
upon the type of warranty purchased by the customer as mutually agreed upon in
the agreement.
On February 1, 1999, the Company entered into a two-year agreement to
outsource the picking, packing and shipping functions for orders placed on the
Company's BuyMusic.com web site. Pricing is based on a fee that is contingent
upon sales volume levels, which increase over the term of the agreement.
On March 11, 1999, the Company entered into a five-year agreement to
outsource certain services and functions related to the fulfillment of customer
orders made on the Company's BuyBooks.com web site. Consideration for the
services is based on a fixed, per-order fee. The Company must be notified
within six months of any rate increases to be in effect after the first year of
the agreement. The rate increases cannot exceed 8% of the preceding year's
rates. The agreement is terminable by either party with 90 days notice.
On March 19, 1999, the Company entered into an agreement with Nashville
Computer Liquidators L.P. ("NCL"). Under the terms of the agreement, NCL will
merchandise and supply refurbished, open-box and end-of-life computer hardware,
electronics and exceptional value household products to the Company. The
products are offered on the Company's BuyClearance.com web site, which was
launched in the second quarter of 1999. BuyClearance.com changed its name from
BuySurplus.com in October 1999.
F-15
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In October 1999, the Company entered into agreements with a third party
supplier whereby the Company will be entitled to certain programs and services.
In connection with these agreements, the Company has issued warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise price of
$5.67 per share. The estimated fair market value of these warrants of $2.7
million will be recorded as a current asset and will be amortized over the
initial term of the contract.
In connection with the acquisition of BuyGolf, the Company acquired a supply
and distribution contract with Las Vegas Golf & Tennis, Inc. to be the
Company's primary source of the golf equipment and accessories the Company
sells.
In October 1999, the Company entered a five-year sponsorship agreement with
the PGA TOUR in which the Company will become the exclusive title sponsor of a
circuit of golf tournaments. In consideration for this agreement, the Company
issued 1,800,000 shares of common stock. The Company has agreed to make an
advance payment of $17.0 million, which will be refunded upon obtaining a
letter of credit, and to pay $8.5 million upon the completion of an initial
public offering as payment for the first year sponsorship fee. The Company will
take a $8.5 million charge per year in connection with this agreement.
The Company will enter into a license and services agreement with BuyNow
under which the Company will license technology, trademarks and domain names as
well as provide certain administrative and customer support services.
Legal Proceedings
From time to time, the Company has been subject to legal proceedings and
claims in the ordinary course of business. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
In March 1999, a class action suit was filed against the Company in the
Orange County California Superior Court alleging breach of contract, fraud and
violation of consumer protection laws. The plaintiffs in this action allege
that the Company intentionally mispriced products and charged for orders
knowing the orders could not be fulfilled. The plaintiffs are seeking
compensatory and punitive damages in addition to injunctive relief. Also in
March 1999, another class action suit was filed against the Company in Camden
County, New Jersey. The New Jersey plaintiff seeks compensatory and punitive
damages for breach of contract and common law fraud arising out of facts
similar to the Orange County case. The judge in the New Jersey action has
granted a temporary stay of the New Jersey action to monitor the progress of
the California action. Discovery is in its early stages in the California
action and a class has not yet been certified in either action.
The Company intends to defend all of these lawsuits vigorously even though
they could result in the expenditure of significant financial and managerial
resources. Management is not aware of any other material legal proceedings
pending against the Company.
8. Stockholders' Equity
Incorporation and Authorized Capital
Effective August 3, 1998, the Company terminated its status as a limited
liability company ("LLC") and incorporated in the State of Delaware as Buy
Corp. On November 16, 1998, the Company changed its name to BUY.COM INC. In
conjunction with the reorganization, the State of Delaware authorized the
Company to issue 189,998,130 shares of common stock and 19,481,130 shares of
Series A convertible participating preferred
F-16
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
stock ("Series A Preferred Stock"). The 9,000,000 issued membership units of
the LLC converted into 130,129,725 shares of $0.0001 par value common stock and
4,870,275 shares of $0.0001 par value Series A Preferred Stock.
Each share of Series A Preferred Stock is convertible into one share of the
Company's common stock (subject to antidilution protections). Series A
Preferred Stock is convertible at the option of the holder or automatically
upon the consummation of a corporate transaction that meets certain minimum
conditions.
On March 10, 1999, the Board of Directors approved an increase in the number
of authorized common stock, par value $0.0001 per share, from 189,998,130
shares to 850,000,000 shares. In addition, the Board of Directors approved an
increase in the number of authorized Series A preferred stock, par value
$0.0001 per share, from 19,481,130 to 150,000,000 shares. These increases in
authorized shares were approved by the stockholders of the Company by written
consent dated March 22, 1999.
On June 29, 1999, the Board of Directors declared a fifteen-for-one common
stock split and a fifteen-for-one Series A preferred stock split for all issued
and outstanding shares which was distributed July 14, 1999 to the Company's
stockholders. All share and per share data included in the consolidated
financial statements and the accompanying notes have been adjusted to reflect
the stock split.
SOFTBANK Investment
The Company and a trust controlled by Scott A. Blum (the
"Founder/Shareholder") entered into an agreement with SOFTBANK Technology
Ventures IV L.P., and SOFTBANK Technology Advisors Fund L.P., ("SOFTBANK") for
an aggregate investment of $20.0 million. In accordance with the terms of the
Series A Preferred Stock Purchase Agreement, dated August 18, 1998, SOFTBANK
received 14,610,855 shares of Series A Preferred Stock for cash of $14.9
million paid to the Company. Additionally, SOFTBANK received 4,870,275 shares
of Series A Preferred Stock in consideration for its $5.0 million payment to
the trust controlled by the Founder/Shareholder.
On September 2, 1999, the Company entered into an agreement with SOFTBANK.
SOFTBANK received 15,877,249 shares of Series B convertible participating
preferred stock ("Series B Preferred Stock") from the Company for $90.0
million. This agreement has a provision which will result in the issuance or
transfer of additional shares and/or an adjustment in the Series B Preferred
Stock conversion rate if the valuation of a proposed initial public offering of
the Company's common stock or of other financing is less than 125% of the
Series B Preferred Stock valuation. This transaction was completed in October
1999.
Unaudited Pro forma Stockholders' Equity (Deficit)
Concurrent with the consummation of an initial public offering of the
Company's common stock as defined by the Series A Preferred Stock Purchase
Agreement described above, the Company will cause the conversion of all
existing Series A Preferred Stock into 19,481,130 shares of the Company's
common stock. The unaudited pro forma stockholders' equity (deficit) at
September 30, 1999 gives effect to this conversion.
9. Stock and Stock Option Plans
1998 Stock Option/Issuance Plan
In August 1998, the Company adopted and approved an incentive stock option
plan (the "1998 ISO Plan"). Under the 1998 ISO Plan, the number of shares of
the Company's common stock to be granted or subject to options or rights may
not exceed 34,539,960 shares.
F-17
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Subject to Internal Revenue Service limitations, options granted under the
ISO Plan generally become exercisable immediately. Shares issued upon exercise
of options that are unvested are restricted and subject to repurchase by the
Company upon termination of employment or services, and such restrictions lapse
over the original vesting schedule. At December 31, 1998, there were no shares
subject to repurchase.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
June 7, 1997
(Inception) to Year Ended Nine Months Ended
December 31, 1997 December 31, 1998 September 30, 1999
------------------ ------------------- --------------------
(unaudited)
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
Beginning of period... -- $ -- 3,375,000 $0.01 23,263,470 $1.03
Granted.............. 3,375,000 0.01 19,888,470 1.21 12,007,155 2.90
Exercised............ -- -- -- -- (3,168,000) 0.01
Forfeited/expired.... -- -- -- -- (1,503,750) 1.58
--------- ----- ---------- ----- ---------- -----
Options outstanding,
End of period........... 3,375,000 $0.01 23,263,470 $1.03 30,598,875 $1.85
========= ===== ========== ===== ========== =====
</TABLE>
The following table summarizes all stock options outstanding as of September
30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- --------------------------
Weighted Average
Number of Remaining Weighted Number of Weighted
Range of Shares Contractual Life Average Shares Average
Exercise Price Outstanding (years) Exercise Price Exercisable Exercise Price
-------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01 8,142,000 9.48 $0.01 3,103,390 $0.01
$ 1.03 1,837,500 9.69 $1.03 456,180 1.03
$ 2.38 to $2.39 18,924,855 7.83 $2.39 -- --
$ 4.24 to $5.71 1,694,520 9.50 $5.51 -- --
---------- ---------
30,598,875 3,559,570
========== =========
</TABLE>
F-18
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Had compensation cost for stock options awarded under this plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have reflected the following pro forma amounts (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
September 30,
December 31, December 31, ----------------------
1997 1998 1998 1999
------------ ------------ ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss, as reported....... $ (390) $(17,844) $(4,668) $(80,527)
Pro forma compensation
expense.................... -- (281) -- (2,090)
------ -------- ------- --------
Pro forma net loss.......... $ (390) $(18,125) $(4,668) $(82,617)
====== ======== ======= ========
Basic and diluted net loss
per share, as reported..... $(0.00) $ (0.14) $ (0.04) $ (0.57)
Basic and diluted net loss
per share, pro forma....... $(0.00) $ (0.13) $ (0.04) $ (0.58)
</TABLE>
The weighted average fair value at the date of grant for options granted
during fiscal 1997, 1998, and the nine months ended September 30, 1999, were
$0.001, $0.33 and $0.54, respectively, and were estimated using the minimum
value method with the following assumptions used: weighted average risk-free
interest rate of 6.04%, 4.89%, and 5.21%, respectively; expected life of 3.00
years, 3.82 years, and 4.00 years, respectively; and weighted average
volatility and weighted average dividend yield of 0.00% for all periods.
On March 1, 1999, 9,622,635 common stock options were approved by the Board
of Directors for grants to employees from the Company's 1998 ISO Plan. Of the
additional 9,622,635 stock options approved, 7,267,650 were issued to a key
employee hired in February 1999.
Special Executive Stock Option Plan
In October 1999, the Company adopted and approved the Special Executive
Stock Option Plan (the "Executive Plan"). Participation in the Executive Plan
is limited to non-employee directors, officers and other highly-compensated
employees of the Company. A reserve of 5,000,000 shares of the Company's common
stock has been made for issuances under the Executive Plan. All options
outstanding under the Executive Plan will be transferred to a successor plan at
the time an underwriting agreement for an initial public offering of the
Company's common stock is signed, at which time no further option grants or
stock issuances will be made under the Executive Plan.
The options may be issued as "Incentive Stock Options" (as defined by the
Internal Revenue Code of 1986) or as nonqualified options. The plan provides
that the exercise price for all Incentive Stock Options shall not be less than
100%, and all nonqualified options shall not be less than 85%, of the fair
market value of the shares on the date of grant. Further, no portion of the
options may be exercised beyond 10 years from the grant date. For Incentive
Stock Options granted to individuals who own more than 10% of the total
combined voting power of all classes of the stock of the Company, the option
price shall be at least 110% of the fair value at the date of grant. Options
vest over a period determined by the Company's board of directors. Subject to
Internal Revenue Service limitations, options granted under the Executive Plan
generally become exercisable immediately.
1999 Stock Incentive Plan
The Company expects to adopt and approve the 1999 Stock Incentive Plan (the
"1999 Plan") in November 1999. The 1999 Plan is intended to be the successor
plan to the 1998 ISO Plan and the Executive Plan. The 1999 Plan will become
effective at the time an underwriting agreement for an initial public offering
of the Company's common stock is signed.
F-19
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of common stock
at an exercise price not less than the fair market value of those shares
on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified period of
service or as a bonus for past services;
. the salary investment option grant program, under which executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which non-employee board
members may be given the opportunity to apply a portion of any retainer
fee otherwise payable to them in cash each year to the acquisition of
special below-market option grants.
The exercise price for any options granted under the 1999 Plan may be paid
in cash or in shares of the Company's common stock valued at fair market value
at the exercise date. The 1999 Plan also includes provisions which may result
in the accelerated vesting of outstanding option grants and stock issuances
upon a change in control of the Company.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted and approved by the Company in September 1999. The Stock Purchase Plan
will become effective at the time an underwriting agreement for an initial
public offering of the Company's common stock is signed. The Stock Purchase
Plan is designed to allow eligible employees of the Company to purchase shares
of common stock at semi-annual intervals with accumulated payroll deductions.
BuyGolf Stock Option Plan
In connection with the acquisition of BuyGolf in October 1999, the Company
has assumed the incentive stock option plan of BuyGolf.
Stock Option Deferred Compensation
The Company recorded aggregate deferred compensation of $0, $3.2 million,
and $11.4 million in the period ended December 31, 1997, the year ended
December 31, 1998, and the nine month period ended September 30, 1999,
respectively. The amounts recorded represent the difference between the grant
price and the estimated fair value of the Company's common stock based upon
independent appraisals. Deferred stock option compensation is charged to
operations using the straight-line method over the vesting period of the
underlying options, which is typically three or four years. Total amortization
recognized was $0, $795,000, and $5.4 million, respectively, for the period
ended December 31, 1997, the year ended December 31, 1998, and the nine months
ended September 30, 1999.
F-20
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Loss Per Share
The following is the calculation for net loss per share (amounts in
thousands):
<TABLE>
<CAPTION>
June 7, 1997 Nine Months Ended
(Inception) to Year Ended September 30,
December 31, December 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Basic:
Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527)
Weighted average common
shares................. 130,129,725 130,905,390 130,129,725 141,814,477
------------ ------------ ------------ ------------
Net loss per common
share.................. $ (0.00) $ (0.14) $ (0.04) $ (0.57)
============ ============ ============ ============
Diluted:
Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527)
Weighted average common
shares................. 130,129,725 130,905,390 130,129,725 141,814,477
Stock options
adjustment............. -- -- -- --
Convertible preferred
stock adjustment....... -- -- -- --
------------ ------------ ------------ ------------
Average common shares
outstanding............ 130,129,725 130,905,390 130,129,725 141,814,477
------------ ------------ ------------ ------------
Net loss per common
share.................. $ (0.00) $ (0.14) $ (0.04) $ (0.57)
============ ============ ============ ============
</TABLE>
At December 31, 1997, December 31, 1998, and September 30, 1999,
respectively, options to purchase 3,375,000, 23,263,470, and 30,598,875 shares
of common stock, as well as preferred shares convertible into 0, 19,481,130,
and 19,481,130 shares of common stock were not included in the computation of
diluted earnings per share as the effect would be antidilutive.
11. Income Taxes
The Company incurred taxable losses for federal and state purposes for the
period ended December 31, 1997, the year ended December 31, 1998, and the nine
months ended September 30, 1999. Accordingly, the Company did not incur any
federal income tax expense for those periods other than the minimum required
taxes for certain state and local jurisdictions.
Prior to August 3, 1998, the Company was taxed as a limited liability
company. All tax benefits arising from operating losses as a limited liability
company were passed to the individual shareholders.
At December 31, 1998, and September 30, 1999, the Company has net operating
loss carryforwards of approximately $12.8 million and $84.6 million
respectively, related to federal and state income taxes which can be used to
offset future federal and state taxable income from operations. Substantially
all of these carryforwards will begin to expire in 2004.
F-21
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Significant components of the Company's deferred tax asset at December 31,
1997 and 1998, and September 30, 1999, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Net operating loss carryforwards............. $ -- $ 5,128 $ 33,838
Depreciation and amortization................ -- 1,758 1,666
Other........................................ -- 47 717
------- -------- --------
Gross deferred tax assets.................. -- 6,933 36,221
Valuation allowance.......................... -- (6,933) (36,221)
------- -------- --------
Net deferred tax assets.................... $ -- $ -- $ --
======= ======== ========
</TABLE>
12. Related Party Transactions
Transactions with the Founder/Shareholder and Directors
At December 31, 1997, a loan to the Founder/Shareholder in the amount of
$211,000 was outstanding. This loan was paid in full in 1998. Interest income
earned during 1998 in connection with this loan was $7,000.
On October 8, 1998, the Company loaned the Founder/Shareholder $1.0 million.
The loan was repaid in two equal installments of $500,000 during October 1998.
Interest income earned during 1998 in connection with this loan was $4,000.
On October 15, 1998, the Company paid $125,000 to an unrelated party as
consideration to terminate a building lease early. The Founder/Shareholder
purchased the building with the intent of leasing the building to the Company.
This lease commenced in 1999.
In December 1998, the Company acquired all of the outstanding capital stock
of Speedserve. Speedserve was a subsidiary of Ingram Entertainment, a company
controlled by an outside director of the Company. Ingram Entertainment supplies
books, videos, DVD's and video games to the Company.
In December 1998, the Company borrowed $1.2 million for the purchase of an
office building. A trust controlled by the Founder/Shareholder guaranteed this
loan.
In five separate transactions, the Founder/Shareholder sold 209,145 shares
of common stock to each of five independent directors of the Company. These
sales occurred on various dates from October 1998 through March 1999 and were
at the estimated fair values of the Company's stock based upon independent
appraisals and other third party transactions.
The Company leased three automobiles for use by the Founder/Shareholder and
other key employees of the Company. Total lease expense incurred by the Company
during fiscal year 1998 in connection with these automobiles was approximately
$26,000.
On May 26, 1999, a trust controlled by the Founder/Shareholder loaned the
Company $10.0 million. This loan bears interest at a rate of 10.00% per annum
and is payable on demand or subsequent to the closing and funding of a credit
facility obtained from a commercial bank. This loan was repaid in full in
August 1999. Interest paid in connection with this loan was approximately
$194,000.
F-22
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In May 1999, the Company entered into an agreement with a trust controlled
by the Founder/Shareholder to lease office space in a building owned by the
trust. The lease, which commenced on June 1, 1999, has a term of twelve months
with rent payments, consistent with current market value, of approximately
$12,000 per month.
In July 1999, the Founder/Shareholder's father purchased 45,000 shares of
common stock from an employee of the Company at a purchase price of $2.39 per
share.
On July 20, 1999, a trust controlled by the Founder/Shareholder guaranteed a
$15.0 million credit facility obtained by the Company from a commercial bank.
On August 16, 1999, a trust controlled by the Founder/Shareholder loaned the
Company $5.0 million. This loan bears interest at a rate of 10.00% per annum
and is payable upon the Company's receipt of qualified financing. Interest
accrued in connection with this loan was approximately $63,000 at September 30,
1999.
In October 1999, the Founder/Shareholder entered into an agreement to
transfer all of his shares of the Company's common stock, as well as those of
certain of his affiliates, into an irrevocable voting trust. This agreement
also provides that all shares of the Company's common stock acquired by the
Founder/Shareholder or any of his affiliates be transferred to the trust. The
trustees of the irrevocable voting trust consist of three outside directors of
the Company.
In October 1999, the Company acquired all of the outstanding capital stock
(95%) of BuyGolf, which it did not own at the time of acquisition, in exchange
for shares of the Company's common stock. The Company issued a total of
4,142,927 shares of common stock in connection with our acquisition of BuyGolf.
The Founder/Shareholder of the Company owned 400,000 shares or 4.7% of the
total outstanding shares of BuyGolf prior to the acquisition by the Company.
The Founder/Shareholder and an outside director were stockholders and directors
of BuyGolf and received a total of 436,253 shares of the Company's common stock
in the merger. Shares of the Company received by the Founder/Shareholder
resulting from this transaction are subject to the terms of the irrevocable
voting trust.
In October 1999, the Company declared a dividend of 75% of the capital stock
of BuyNow. Several directors and officers of the Company were shareholders of
BuyNow.
The Founder/Shareholder performed consulting services for Pinnacle Micro,
Inc. ("Pinnacle Micro"), a related party, totaling approximately $44,000 and
$117,000 in consulting revenue in 1997 and 1998, respectively.
During 1997 and 1998, the Company paid $8,000 and $147,000, respectively, in
operating expenses on behalf of Pinnacle Micro. These expenses were reimbursed
to the Company by Pinnacle Micro in 1998.
Transactions with SOFTBANK
On September 30, 1998, the trust controlled by the Founder/Shareholder
entered into an agreement with SOFTBANK Holdings, Inc. ("SOFTBANK Holdings") to
sell 16,730,835 shares of the common stock owned by the trust controlled by the
Founder/Shareholder for $40.0 million. This transaction was completed on
October 30, 1998. The Company received no proceeds from this sale.
In October 1998, the Company entered into an agreement with Upgrade
Corporation of America d/b/a Softbank Services Group ("SSG"), a related party
to SOFTBANK. Under this agreement, SSG provides
F-23
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
certain customer relations services on the Company's behalf for a monthly fee,
a portion of which is based upon usage volume. These services include, but are
not limited to, servicing questions concerning orders, shipment returns,
refunds, inventory levels, and marketing and demographic surveys. The contract
extends through October 2002 with an automatic annual renewal unless terminated
by either party. Amounts paid to SSG for services provided to the Company were
$905,000 and $7.2 million for the year ended December 31, 1998 and the nine
months ended September 30, 1999, respectively.
In September 1999, the Company entered into a letter of intent to form three
international joint ventures with SOFTBANK America. Two outside directors of
the Company are affiliated with SOFTBANK America.
In September 1999, SOFTBANK purchased 13,231,040 shares of common stock from
a trust controlled by the Founder/Shareholder, the Founder/Shareholder as an
individual, and two other employee/shareholders for $75.0 million. This
transaction was completed in October 1999. The Company received no proceeds
from the sale of common shares from this sale.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
BuyGolf.com, Inc.:
We have audited the accompanying balance sheets of BuyGolf.com Inc. (a Delaware
corporation) as of December 31, 1998, and June 30, 1999, and the related
statements of operations, stockholders' equity and cash flows for the period
from December 1, 1998, (Inception) to December 31, 1998, and for the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BuyGolf.com Inc. as of
December 31, 1998 and June 30, 1999, and the results of their operations and
their cash flows for the period from December 1, 1998, (Inception) to December
31, 1998, and for the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
October 26, 1999
F-25
<PAGE>
BUYGOLF.COM, INC.
BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
Assets
Current Assets:
Cash................................................. $ 125 $ 635
Accounts receivable, net of allowance of $2.......... -- 83
Prepaid expenses and other current assets............ -- 72
---------- ----------
Total current assets.............................. 125 790
Property and equipment, net........................... -- 149
Intangibles, net...................................... -- 648
---------- ----------
$ 125 $ 1,587
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable..................................... $ -- $ 299
Accrued expenses..................................... -- 16
---------- ----------
Total current liabilities......................... -- 315
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.0001 par value;
Authorized shares--10,000,000 at December 31, 1998,
and June 30, 1999; Issued and outstanding--6,500,000
at December 31, 1998, and 8,340,000 at June 30, 1999
.................................................... 1 1
Additional paid-in capital........................... 125 2,985
Accumulated deficit.................................. (1) (1,714)
---------- ----------
Total stockholders' equity........................ 125 1,272
---------- ----------
$ 125 $ 1,587
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
BUYGOLF.COM, INC.
STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 1, 1998 Six Months
(Inception) to Ended
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
Net revenues.................................. $ -- $ 220
Cost of goods sold............................ -- 192
---------- ----------
Gross profit.................................. -- 28
Operating expenses:
Sales and marketing.......................... -- 680
General and administrative................... 1 928
Depreciation and amortization................ -- 134
---------- ----------
Total operating expenses.................... 1 1,742
---------- ----------
Operating loss.............................. (1) (1,714)
Other income:
Interest income, net......................... -- 2
---------- ----------
Total other income.......................... -- 2
---------- ----------
Loss before provision for income taxes........ (1) (1,712)
Provision for income taxes.................... -- 1
---------- ----------
Net loss.................................... $ (1) $ (1,713)
========== ==========
Net loss per share:
Basic and diluted............................ $ -- $ (0.24)
========== ==========
Weighted average number of common shares
outstanding:
Basic and diluted............................ 6,456,667 7,086,298
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
BUYGOLF.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Additional
Paid-in Accumulated Stockholders'
Shares Par Capital Deficit Equity
--------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Inception of Company,
December 1, 1998....... -- $ -- $ -- $ -- $ --
Initial capital
contribution........... 6,000,000 1 -- -- 1
Issuance of common stock
in connection with
obtaining license of
domain names........... 400,000 -- -- -- --
Issuance of common stock
for cash............... 100,000 -- 125 -- 125
Net loss................ -- -- -- (1) (1)
--------- -------- -------- -------- --------
Balance, December 31,
1998................... 6,500,000 1 125 (1) 125
Issuance of common stock
for cash............... 1,300,000 -- 1,625 -- 1,625
Issuance of common stock
for services........... -- -- 500 -- 500
Issuance of common stock
for purchase of domain
names.................. -- -- 60 -- 60
Issuance of common stock
in connection with
supply and fulfillment
agreement.............. 540,000 -- 675 -- 675
Net loss................ -- -- -- (1,713) (1,713)
--------- -------- -------- -------- --------
Balance, June 30, 1999.. 8,340,000 $ 1 $ 2,985 $ (1,714) $ 1,272
========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
BUYGOLF.COM, INC.
STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
December 1, 1998 Six Months
(Inception) to Ended
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (1) $(1,713)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization................. -- 134
Non cash expenditure for services............. -- 500
Changes in assets and liabilities:
Accounts receivable.......................... -- (83)
Prepaid expenses and other current assets.... -- (72)
Accounts payable............................. -- 299
Accrued expenses............................. -- 16
Income taxes payable......................... -- --
------- -------
Net cash used in operating activities....... (1) (919)
------- -------
Cash flows from investing activities:
Purchase of property and equipment............ -- (165)
Acquisition of domain names................... -- (31)
------- -------
Net cash used in investing activities....... -- (196)
------- -------
Cash flows from financing activities:
Formation of Company.......................... 126 --
Proceeds from issuance of common stock........ -- 1,625
------- -------
Net cash provided by financing activities... 126 1,625
------- -------
Net increase in cash and cash equivalents...... 125 510
Cash, beginning of period...................... -- 125
------- -------
Cash, end of period............................ $ 125 $ 635
======= =======
Supplemental cash flow information:
Cash paid during the year for income taxes.... $ -- $ 1
======= =======
Summary of non-cash investing and financing
activity:
Common stock issued in conjunction with supply
and fulfillment agreement.................... $ -- $ 675
======= =======
Common stock issued in conjunction with domain
name purchase................................ $ -- $ 60
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Company Background
BuyGolf.com Inc. (the "Company") is an internet golf superstore offering a
selection of brand name golf equipment and accessories. Through its online
specialty store, the Company offers golf equipment and golf related products in
a convenient, intuitive shopping interface 24 hours a day, seven days a week.
The Company uses a virtual operating model that includes outsourcing the
majority of its operating infrastructure to a national supply and fulfillment
partner.
The Company was formed in December 1998 and began offering products for sale
through its web site in May 1999.
In October 1999, the Company was acquired by BUY.COM INC. ("BUY.COM") in a
purchase transaction. In connection with this transaction, BUY.COM acquired all
of the outstanding capital stock (95%) of the Company that BUY.COM did not own
at the time of acquisition, in exchange for 4,142,927 shares of BUY.COM's
common stock.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable consist of credit card and trade receivables arising in
the normal course of business as well as an accrual for products shipped to
customers but not yet billed by the Company.
Deposits
The Company is required to maintain a security deposit in connection with
its credit card merchant account. The balance of this deposit is approximately
$51,000 at June 30, 1999, and is included in prepaid expenses and other current
assets.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed and any gain or loss is reflected in the results of
operations. Maintenance and repair expenditures are charged to operations as
incurred.
Intangibles
Intangible assets reflect the value of an exclusive supply and fulfillment
agreement and internet domain names acquired. Amortization is computed using
the straight-line method over the estimated useful lives of the assets.
Long-Lived Assets
The Company assesses the recoverability of its long-lived assets on an
annual basis or whenever adverse events of changes in circumstances or business
climate indicate that expected undiscounted future cash flows related to such
long-lived assets may not be sufficient to support the net book value of such
assets. If undiscounted cash flows are not sufficient to support the recorded
assets, an impairment is recognized to reduce
F-30
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
the carrying value of the long-lived assets to the estimated fair value. Cash
flow projections, although subject to a degree of uncertainty, are based on
trends of historical performance and management's estimate of future
performance, giving consideration to existing and anticipated competitive and
economic conditions. Additionally, in conjunction with the review for
impairment, the remaining estimated lives of certain of the Company's long-
lived assets are assessed.
Fair Value of Financial Instruments
The carrying amounts for the Company's cash, prepaid expenses and other
current assets, accounts payable and accrued expenses approximate fair value.
Revenue Recognition
The Company recognizes revenue from product sales, net of discounts and
estimated sales returns, upon shipment to its customers. Outbound shipping and
handling charges are included in net sales.
Advertising Costs
The cost of advertising is expensed as incurred. No advertising expense was
incurred in the period ended December 31, 1998. For the six months ended June
30, 1999, the Company incurred advertising expense of approximately $618,000.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered.
Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. A
valuation allowance has been provided for the deferred tax asset when it is
more likely than not that all or some portion of the deferred tax asset will
not be realized. The Company has established a full valuation allowance on the
aforementioned deferred tax asset due to the uncertainty of realization.
Loss Per Share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common stock and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation if their effect is antidilutive.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by the Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
APB No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123.
F-31
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Segment and Geographic Information
The Company operates in one principal business segment across domestic
markets. Substantially all of the operating results and identifiable assets are
in the United States.
Concentration Risks
At December 31, 1998, the Company has no significant concentrations of
credit risk.
The Company purchases substantially all of its products from one major
vendor, Las Vegas Golf and Tennis, Inc. The Company has a long-term contract or
arrangement with this vendor. Loss of this vendor could have a material adverse
effect on the Company's operations.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
all costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 was adopted by the Company on January 1, 1999. Adoption did not have a
material effect on the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and
requires costs of start-up activities and organization costs to be expensed as
incurred. Adoption did not have a material effect on the Company's financial
position or results of operations.
3. Property and Equipment
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
Useful December 31, June 30,
Lives 1998 1999
------ ------------ --------
<S> <C> <C> <C>
Computers and equipment......................... 3-5 $ -- $148
Furniture and fixtures.......................... 7 -- 17
---- ----
-- 165
Less--accumulated depreciation.................. -- (16)
---- ----
Property and equipment, net................... $ -- $149
==== ====
</TABLE>
4. Intangibles
Intangibles consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
Useful December 31, June 30,
Lives 1998 1999
------ ------------ --------
<S> <C> <C> <C>
Supply and fulfillment agreement................ 1 $ -- $ 675
Domain names.................................... 3 -- 91
---- -----
-- 766
Less--accumulated amortization.................. -- (118)
---- -----
Intangibles, net.............................. $ -- $ 648
==== =====
</TABLE>
F-32
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Commitments and Contingencies
Leases
Future minimum commitments on leases, including those leases entered into
subsequent to June 30, 1999, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Year ending December 31,
1999.......................................................... $22
2000.......................................................... 28
2001.......................................................... 2
2002.......................................................... --
2003.......................................................... --
Thereafter.................................................... --
---
Total future minimum lease payments............................. $52
===
</TABLE>
During the six months ended June 30, 1999, the Company leased office
facilities under non-cancelable operating leases. Rental expense under
operating lease agreements for the six months ended June 30, 1999, was $13,000.
Supply and Fulfillment and Arrangement
On May 3, 1999, the Company entered into an exclusive one-year agreement
with Las Vegas Golf and Tennis, Inc. ("LVG"). This agreement provides that LVG
sell goods to the Company at cost plus shipping costs and a $1 per order
packaging fee. Per this agreement, LVG received 7.5% of the Company's
outstanding common stock. An intangible asset has been recognized (based on the
value of the common stock at the time of the transaction) related to this
agreement that is being amortized over the life of the agreement. Amortization
expense related to this agreement was $112,000 in the six months ended June 30,
1999.
Marketing Agreements
The Company has entered into certain marketing agreements, which include
fixed fees payable through the year 2000. The total of these commitments are
$1.0 million for the remaining six months ended December 31, 1999 and $652,000
for the year ended December 31, 2000.
6. Stockholders' Equity
Effective December 1, 1998, the Company incorporated in the State of
Delaware as BuyGolf.com, Inc. The State of Delaware authorized the Company to
issue 10,000,000 shares of common stock and 5,000,000 shares of preferred
stock.
In December 1998 the Company commenced negotiations with BUY.COM to acquire
a non-transferable and non-sublicensable license to use domain names owned by
BUY.COM, solely in connection with the operation of an internet retail
operation selling golf equipment and golf-related products. In consideration
for the license, the Company agreed to issue BUY.COM a 5% ownership (subject to
anti-dilution provisions) in the Company. The distribution of said shares
occurred at the time negotiations commenced. In May 1999, the Company finalized
the agreement with BUY.COM for such license.
F-33
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
During the six months ended June 30, 1999, the Company entered into various
stock purchase agreements with private investors to sell an aggregate of
1,300,000 shares of common stock at $1.25 per share. Total capital raised in
these agreements was $1.6 million. Subsequent to June 30, 1999, the Company has
entered into a stock purchase agreement with a private investor to sell 219,473
shares of common stock at $2.28 per share.
In accordance with the domain name acquisition agreement between the Company
and BUY.COM, and in conjunction with the shares of common stock issued during
the six months ended June 30, 1999, the Company is liable to issue BUY.COM
47,632 shares of common stock to maintain the agreed-upon five percent
ownership, on a fully-diluted basis, of BUY.COM. As of June 30, 1999 the
Company has not issued these shares. BUY.COM's ownership is reflected in
additional paid-in capital at June 30, 1999.
7. Stock Option Plans
On December 2, 1998, the Company adopted and approved an incentive stock
option plan (the "ISO Plan"). Under the ISO Plan, the number of shares of the
Company's common stock to be granted or subject to options or rights may not
exceed 1,000,000 shares.
The options may be issued as "Incentive Stock Options" (as defined by the
Internal Revenue Code of 1986) or as nonqualified options. The plan provides
that the exercise price for all Incentive Stock Options shall not be less than
100%, and all nonqualified options shall not be less than 85%, of the fair
market value of the shares on the date of grant. Further, no portion of the
options may be exercised beyond 10 years from the grant date. For Incentive
Stock Options granted to individuals who own more than ten percent of the total
combined voting power of all classes of the stock of the Company, the option
price shall be at least 110 percent of the fair value at the date of grant.
Options vest ratably over three to four years from the date of grant. No
compensation expense was recognized during 1998 and the six months ended June
30, 1999, as the exercise price of the options was equal to the estimated fair
value of the Company's common stock on the date of grant.
Subject to Internal Revenue Service limitations, options granted under the
ISO Plan generally become exercisable immediately. Shares issued upon exercise
of options that are unvested are restricted and subject to repurchase by the
Company upon termination of employment or services, and such restrictions lapse
over the original vesting schedule. At December 31, 1998, there were no shares
subject to repurchase.
F-34
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
December 1, 1998
(Inception) to Six Months Ended
December 31, 1998 June 30, 1999
----------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Options outstanding,
Beginning of period.................. -- $ -- -- $ --
Granted............................. -- -- 665,000 1.25
Exercised........................... -- -- -- --
Forfeited........................... -- -- (182,000) 1.25
-------- -------- -------- --------
Options outstanding,
End of period........................ -- $ -- 483,000 $ 1.25
======== ======== ======== ========
</TABLE>
At June 30, 1999, all options outstanding have an exercise and weighted
average exercise price of $1.25, a weighted average remaining contractual life
of 9.15 years, and none of these options are exercisable.
Had compensation cost for stock options awarded under this plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have reflected the following pro forma amounts (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
December 1,
1998 (Inception) Six Months
to December 31, Ended
1998 June 30, 1999
---------------- -------------
<S> <C> <C>
Net loss, as reported..................... $ (1) $ (1,713)
Pro forma compensation expense............ -- (14)
------------ ------------
Pro forma net loss........................ $ (1) $ (1,727)
============ ============
Basic and diluted net loss per share, as
reported................................. $ -- $ (0.24)
Basic and diluted net loss per share, pro
forma.................................... $ -- $ (0.24)
</TABLE>
The weighted average fair value at the date of grant for options granted
through the six months ended June 30, 1999, was $0.17, and was estimated using
the minimum value method with the following assumptions used: weighted average
risk-free interest rate of 5.00%; weighted average volatility of 0.00%;
expected life of 3.0 years; and weighted average dividend yield of 0.00%.
Subsequent to June 30, 1999, the Company issued 53,000 options to purchase
common shares with an exercise price of $1.25 and 13,000 options to purchase
common shares with an exercise price of $2.28.
F-35
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
8. Loss Per Share
The following is the calculations for net loss per share (amounts in
thousands):
<TABLE>
<CAPTION>
December 1,
1998 (Inception) Six Months
to December 31, Ended
1998 June 30, 1999
---------------- -------------
<S> <C> <C>
Basic:
Net loss.................................... $ (1) $ (1,713)
Weighted average common shares.............. 6,456,667 7,086,298
--------- ---------
Net loss per common share................... $ (0.00) $ (0.24)
========= =========
Diluted:
Net loss.................................... $ (1) $ (1,713)
Weighted average common shares.............. 6,456,667 7,086,298
Stock option adjustments.................... -- --
--------- ---------
Average common shares outstanding........... 6,456,667 7,086,298
--------- ---------
Net loss per common share................... $ (0.00) $ (0.24)
========= =========
</TABLE>
At December 31, 1998, and June 30, 1999, respectively, options to purchase 0
and 483,000 shares of common stock were not included in the computation of
diluted earnings per share as the effect would be antidilutive.
9. Income Taxes
At June 30, 1999, the Company has net operating loss carryforwards of
approximately $1.7 million related to federal and state income taxes which can
be used to offset future federal and state taxable income from operations.
Substantially all of these carryforwards will begin to expire in 2006.
Significant components of the Company's deferred tax asset at December 31,
1998, and June 30, 1999, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Net operating loss carryforwards....................... $ -- $ 690
Depreciation, amortization and other................... -- (7)
---- -----
-- 683
Valuation allowance.................................... -- (683)
---- -----
Net deferred tax assets.............................. $ -- $ --
==== =====
</TABLE>
10. Related Party Transactions
In December 1998 Bradford W. Allen (the "Founder/Shareholder") allocated
400,000 shares of common stock owned by the Founder/Shareholder to a director
in exchange for consulting services to be rendered to the Company from January
through June 1999. These shares were issued in June 1999.
During 1999 the Founder/Shareholder loaned the Company $9,000. The loan was
paid in full prior to June 30, 1999.
F-36
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In May 1999, the Company entered into a one-year agreement with BUY.COM to
purchase advertising of $10,000 per month commencing in June 1999 and ending in
May 2000. As of June 30, 1999, the Company had incurred $10,000 in advertising
fees under this agreement.
In August 1999, the Company and the Founder/Shareholder entered into a stock
purchase agreement with Ingram Entertainment Holdings, Inc. ("Ingram"), a
company controlled by a director/shareholder, to sell 438,946 shares of common
stock for an aggregate purchase price of $1.0 million. The agreement also
includes preemptive rights for Ingram to purchase additional shares on a pro
rata basis for any new stock issuances.
Effective September 11, 1999, the Company amended its supply and fulfillment
agreement with LVG. The amended terms include an extension of the existing
contract until March 31, 2003, and new pricing terms commencing April 1, 2000.
The new pricing terms call for LVG to sell its products to the Company at its
cost plus a specified percentage.
F-37
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following Unaudited Pro Forma Condensed Combined Financial Statements
and related notes contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed
herein. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
In the opinion of our management, all adjustments necessary to fairly
present this pro forma information have been made. The Unaudited Pro Forma
Condensed Combined Financial Statements are based upon, and should be read in
conjunction with, the historical financial statements of BUY.COM and
BuyGolf.com, and the respective notes to such financial statements presented
elsewhere in this Prospectus. The pro forma information is based upon tentative
allocations of purchase price for the acquisitions and may not be indicative of
the results that would have been reported had such events actually occurred on
the dates specified, nor is it indicative of the Company's future results.
Purchase accounting is based upon preliminary asset valuations, which are
subject to change.
The Unaudited Pro Forma Condensed Combined Statements of Operations for the
nine months ended September 30, 1999 are presented as if BUY.COM had completed
the acquisition as of January 1, 1999. The impact of the acquisition of
BuyGolf.com to the Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998, is immaterial and therefore
has not been shown.
In addition, the Unaudited Pro Forma Condensed Combined Financial Statements
do not reflect purchase price adjustments and future contingent payments
contained in the agreements relating to certain acquisitions. You should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PF-1
<PAGE>
BUY.COM INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------------
Buy.com BuyGolf. com, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
-------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................... $397,601 $ 1,025 $ (40)(b) $398,586
Cost of goods sold............. 401,214 883 -- 402,097
-------- ------- ------- --------
Gross profit................... (3,613) 142 (40) (3,511)
-------- ------- ------- --------
Operating expenses:
Sales and marketing.......... 44,094 1,841 (40)(b) 45,895
Product development.......... 3,851 -- -- 3,851
General and administrative... 12,872 1,402 -- 14,274
Depreciation and
amortization................ 3,009 341 5,858 (c) 9,208
Amortization of deferred
compensation................ 5,417 -- -- 5,417
Charge for warrants.......... 7,021 -- -- 7,021
-------- ------- ------- --------
Total operating expenses... 76,264 3,584 5,818 85,666
-------- ------- ------- --------
Operating loss............. (79,877) (3,442) (5,858) (89,177)
-------- ------- ------- --------
Other income (expense):
Interest income (expense),
net......................... (721) 7 -- (714)
Other........................ 74 -- -- 74
-------- ------- ------- --------
Total other income
(expense)................. (647) 7 -- (640)
-------- ------- ------- --------
Loss before provision for
income taxes.................. (80,524) (3,435) (5,858) (89,817)
Provision for income taxes..... 3 1 -- 4
-------- ------- ------- --------
Net loss....................... $(80,527) $(3,436) $(5,858) $(89,821)
======== ======= ======= ========
Net loss per share:
Basic and diluted.................................. $ (0.62)
Weighted average number of common shares outstanding:
Basic and diluted.................................. 145,642,459
</TABLE>
- --------
(a) The results of operations of BuyGolf.com will be included in our
consolidated results commencing October 1, 1999. This presentation shows
the pro forma effects of the operations of BuyGolf.com as if the
acquisition occurred on January 1, 1999.
(b) Represents advertising revenues/expenses recorded for the nine months ended
September 30, 1999, that should be eliminated upon the acquisition of
BuyGolf.com by BUY.COM.
(c) Represents the amortization of goodwill that would have been recorded for
the nine months ended September 30, 1999, if the acquisition of BuyGolf.com
occurred on January 1, 1999.
PF-2
<PAGE>
[Inside Back Cover]
Inside Back Cover of Prospectus
1. BUY.COM LOGO (center)
2. Annotation for logo:
a. "BUY.COM"
b. "The Internet Superstore"
<PAGE>
===========================================================================
Through and including , 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 the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Shares
[LOGO OF BUY.COM APPEARS HERE]
Common Stock
-------------------
P R O S P E C T U S
-------------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Hambrecht & Quist
October , 1999
===========================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the SEC and NASD registration fees. All of the expenses below will be
paid by us.
<TABLE>
<CAPTION>
Item
----
<S> <C>
SEC Registration fee................................................ $41,700
NASD filing fee..................................................... 15,500
Nasdaq National Market listing fee.................................. 90,000
Blue sky fees and expenses.......................................... 5,000
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Transfer Agent and Registrar fees................................... *
Miscellaneous....................................................... *
-------
Total........................................................... $
=======
</TABLE>
--------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our bylaws (Exhibit 3.4 to this registration statement)
provide that we will indemnify our directors and officers to the fullest extent
permitted by law and require us to advance litigation expenses upon our receipt
of an undertaking by the director or officer to repay such advances if it is
ultimately determined that the director or officer is not entitled to
indemnification. Our bylaws further provide that rights conferred under such
bylaws do not exclude any other right such persons may have or acquire under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Our certificate of incorporation (Exhibit 3.2 to this registration
statement) provides that, pursuant to Delaware law, our directors shall not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to us and our stockholders. This provision in the certificate of incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
In addition, our certificate of incorporation provides that we shall
indemnify our directors and officers if such persons acted (1) in good faith,
(2) in a manner reasonably believed to be in or not opposed to our best
interests, and (3) with respect to any criminal action or proceeding, with
reasonable cause to believe such conduct was lawful. The certificate of
incorporation also provides that, pursuant to Delaware law, our directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to us and our stockholders. This provision in the certificate of
incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of non-
monetary relief will
II-1
<PAGE>
remain available under Delaware law. In addition, each director will continue
to be subject to liability for breach of the director's duty of loyalty to us
for acts or omissions not in good faith or involving intentional misconduct,
for knowing violations of law, for actions leading to improper personal benefit
to the director, and for payment of dividends or approval of stock repurchases
or redemptions that are unlawful under Delaware law. The provision also does
not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws. The certificate
of incorporation further provides that we are authorized to indemnify our
directors and officers to the fullest extent permitted by law through the
bylaws, agreement, vote of stockholders or disinterested directors, or
otherwise. We intend to obtain directors' and officers' liability insurance in
connection with this offering.
In addition, we have entered or, concurrently with this offering, will
enter, into agreements to indemnify our directors and certain of our officers
in addition to the indemnification provided for in the certificate of
incorporation and bylaws. These agreements will, among other things, indemnify
our directors and some of our officers for certain expenses (including
attorneys fees), judgments, fines and settlement amounts incurred by such
person in any action or proceeding, including any action by or in our right, on
account of services by that person as a director or officer of BUY.COM or as a
director or officer of any of our subsidiaries, or as a director or officer of
any other company or enterprise that the person provides services to at our
request.
The purchase agreement (Exhibit 1.1 to this registration statement) provides
for indemnification by the underwriters of us and our officers and directors,
and by us of the underwriters, for certain liabilities arising under the
Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of our transactions since our formation in June
1997, involving sales of our securities that were not registered under the
Securities Act of 1933, as amended:
(1) In June 1997, BuyComp, LLC issued 9,000,000 units to Scott and Audrey
Blum for $50,000.
(2) In August 1998, we sold 130,129,725 shares of common stock and 4,870,275
shares of Series A convertible participating preferred stock to The Scott A.
Blum Separate Property Trust u/t/d 8/2/95 in exchange for 9,000,000 units of
BuyComp, LLC.
(3) In August 1998, we sold an aggregate of 14,610,855 shares of Series A
convertible participating preferred stock to SOFTBANK Technology Ventures IV,
L.P. and SOFTBANK Technology Advisors Fund L.P. for $1.03 per share.
(4) In December 1998, a wholly-owned subsidiary of BUY.COM, BUY.COM
ENTERTAINMENT, Inc., acquired SpeedServe, Inc. in a stock-for-stock
transaction. As consideration for all 10,000 outstanding shares of SpeedServe,
Inc., we issued 8,847,315 shares of our common stock to the shareholders of
SpeedServe, Inc.
(5) In March 1999, we issued 180,000 shares of our common stock, valued at
$2.39 per share, to the Benson York Group, Inc. in exchange for certain domain
names.
(6) In March 1999, we issued an aggregate of 260,894 shares of common stock
to Ingram Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and
SOFTBANK Technology Ventures IV, L.P. for $2.39 per share.
(7) In April 1999, we issued an aggregate of 40,110 shares of common stock
to Ingram Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and
SOFTBANK Technology Ventures IV, L.P. for $2.12 per share.
(8) In April 1999, we issued 25,094 shares of common stock to Harrison Uhl
in exchange for a domain name.
II-2
<PAGE>
(9) In June 1999, we issued an aggregate of 206,670 shares of common stock
to Ingram Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and
SOFTBANK Technology Ventures IV, L.P. for $5.71 per share.
(10) In July 1999, we issued a warrant to purchase 2,000,000 shares of
common stock to United Airlines, Inc. for $10.00 per share. We also issued
another warrant for shares of common stock at an exercise price of
$ (determined by IPO price).
(11) In August 1999, we issued 65,000 shares of common stock to Raj Patel in
exchange for a domain name.
(12) In October 1999, we sold an aggregate of 15,877,249 shares of our
Series B convertible participating preferred stock to SOFTBANK Capital Partners
L.P., SOFTBANK Capital Advisors Fund L.P., SOFTBANK Technology Ventures IV
L.P., SOFTBANK Technology Advisors Fund L.P., SOFTBANK Technology Ventures V,
L.P., ePartners and Vivendi for $5.67 per share.
(13) In October 1999, we issued a warrant to purchase 1,000,000 shares of
common stock for $5.67 per share.
(14) In October 1999, we acquired BuyGolf.com, Inc. in a stock for stock
transaction. As consideration for all of the outstanding capital stock of
BuyGolf.com, we issued 4,142,927 shares of our common stock to the stockholders
of BuyGolf.com.
(15) In October 1999, we issued 1,800,000 shares of common stock to the PGA
TOUR, Inc. in exchange for a sponsorship agreement with them.
(16) Between July 1, 1997 and June 19, 1998, our predecessor entity,
BuyComp, LLC granted 12,187,500 options to employees, non-employee directors
and consultants to purchase units of BuyComp LLC at an exercise price of $0.14
per unit. All options were assumed under our 1998 Stock Option/Stock Issuance
Plan and currently represent options to purchase an aggregate of shares of our
common stock of BUY.COM.
(17) Between September 1, 1998 and September 14, 1998, we granted options to
purchase 1,837,500 shares of our common stock at an exercise price of $1.03 per
share to certain employees and consultants. Between October 6, 1998 and March
10, 1999, we granted options to purchase 19,251,105 shares of common stock at
an exercise price of $2.39 per share to employees, non-employee directors and
consultants. On November 23, 1998 and December 15, 1998 we granted options to
purchase an aggregate of 37,500 shares of common stock at an exercise price of
$2.50 per share to a consultant. From April 1, 1999 to April 29, 1999, we
granted options to purchase 237,000 shares of common stock at an exercise price
of $4.24 per share to certain employees and a consultant. On June 29, 1999, we
granted options to purchase 1,101,000 shares of common stock at an exercise
price of $5.71 per share to employees and consultants. On August 1, 1999, we
granted options to purchase 619,020 shares of common stock at an exercise price
of $5.71 per share to employees and consultants. Between September 2, 1999 and
October 11, 1999, we granted options to purchase 5,051,194 shares of common
stock at an exercise price per share of $5.71 to employees and consultants.
(18) Between January 1, 1999 and July 31, 1999, we issued and sold
45,787,500 shares of common stock upon the exercise of stock options for
aggregate consideration of $20,350.
The sale and issuance of securities in the above transactions were deemed to
be exempt from registration under the Securities Act by virtue of Section 4(2)
or Rule 701 thereof, or Regulation D, as transactions by an issuer not
involving a public offering. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about BUY.COM or had access, through
employment or other relationships, to such information.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
1.1* Form of Purchase Agreement.
2.1 Agreement and Plan of Merger and Reorganization dated October
26, 1998 by and among BUY.COM, Speedserve.com Inc., Ingram
Entertainment Inc., David C. Mason and Michael G. Mason.
2.2 Agreement and Plan of Merger and Reorganization dated October
25, 1999 by and among BUY.COM INC., BGLF Acquisition
Corporation, BuyGolf.com, Inc. and all of the stockholders
listed therein.
3.1 Amended and Restated Certificate of Incorporation of BUY.COM.
3.2* Proposed Amended and Restated Certificate of Incorporation of
BUY.COM.
3.3 Bylaws of BUY.COM INC.
3.4* Proposed Bylaws of BUY.COM.
4.1* See Exhibit 3.1, 3.2, 3.3 and 3.4 for provisions of the
BUY.COM's Certificate of Incorporation and Bylaws defining the
rights of holders of BUY.COM's common stock.
4.2* Specimen common stock certificates.
5.1* Opinion of Brobeck, Phleger and Harrison LLP.
9.1* Voting Trust Agreement dated June 7, 1999 by and between Scott
Blum, The Scott A. Blum Separate Property Trust, BUY.COM and
certain of BUY.COM's outside directors.
9.2* Amended and Restated Voting Trust Agreement dated October 26,
1999 by and between Scott Blum, The Scott A. Blum Separate
Property Trust, BUY.COM and certain of BUY.COM's outside
directors.
10.1 Third Amended and Restated Investors' Rights Agreement dated
September 2, 1999 by and among BUY.COM and the parties named
therein.
10.2 Voting Agreement dated December 3, 1998 by and among BUY.COM
and the Stockholders named therein.
10.3* Supply Agreement dated December 3, 1998 by and between Ingram
Entertainment Inc. and BUY.COM's wholly-owned subsidiary.
10.4* Order Fulfillment Agreement dated February 1, 1999 by and
between BUY.COM and i.FILL, a division of Valley Media, Inc.
10.5* Merchandising and Supply Agreement dated April 19, 1999 by and
between BUY.COM and Nashville Computer Liquidators, L.P.
10.6* Fulfillment Services Agreement dated March 11, 1999 by and
between BUY.COM and National Fulfillment Incorporated.
10.7* Master Service Agreement dated October 1, 1998 by and between
BUY.COM and SOFTBANK Services Group.
10.8* Resale Agreement dated March 10, 1999 by and between BUY.COM
and Ingram Micro, Inc.; Amendment dated August 11, 1999.
10.10* Employment Agreement dated March 1, 1999 by and between BUY.COM
and Gregory Hawkins; Amendment No. 1 to the Employment
Agreement dated July , 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
10.11 1998 Stock Option/Stock Issuance Plan.
10.12* 1999 Stock Incentive Plan.
10.13* 1999 Employee Stock Purchase Plan.
10.14 Deed of Trust dated December 23, 1998 by and between BUY.COM
and the Bank of Yorba Linda for the property located at 21
Brookline, Aliso Viejo, California 92656.
10.15 Loan Agreement and related documents dated December 23, 1998 by
and between BUY.COM and the Bank of Yorba Linda.
10.16 Industrial Lease dated May 12, 1999 by and between BUY.COM and
The Scott A. Blum Separate Property Trust u/d/t 8/2/95.
10.17 Summit Lease dated June 1999 by and between BUY.COM and
AEW/Parker II, LLC.
10.18 Operating Agreement of BUYTRAVEL.COM LLC dated July 19, 1999.
10.19 Marketing and Services Agreement dated July 19, 1999 by and
between BUY.COM and United Air Lines, Inc.
10.20 Common Stock Purchase Warrant dated July 19, 1999 by and
between BUY.COM and United Air Lines, Inc.
10.21 Credit Agreement dated July 20, 1999 by and between BUY.COM and
certain commercial lending institutions and The Bank of Nova
Scotia.
10.22 Promissory Note dated July 20, 1999 by and between BUY.COM and
The Bank of Nova Scotia.
10.23 Common Stock Purchase Warrant dated July 20, 1999 by and
between BUY.COM and The Bank of Nova Scotia.
10.24* Series A Convertible Participating Preferred Stock Agreement
dated August 18, 1998 by and between BUY.COM and certain
investors.
10.25 Promissory Note dated May 26, 1999 by and between BUY.COM and
The Scott A. Blum Separate Property Trust u/d/t 8/2/95.
10.26 Agreement dated May 26, 1999 by and between BUY.COM and The
Scott A. Blum Separate Property Trust u/d/t 8/2/95, Waiver of
Certain Rights, dated August 5, 1999.
10.27 Form of Option Agreement pursuant to 1998 Stock Option/Stock
Issuance Plan.
10.28 Non-Competition Agreement dated December 3, 1998 by and between
BUY.COM, BUY.COM's wholly-owned subsidiary, Ingram
Entertainment, Inc. and David Ingram.
10.29 Promissory Note dated August 16, 1999 by and between the Scott
A. Blum Separate Property Trust u/d/t 8/2/95.
10.30 Series B Convertible Participating Preferred Stock Purchase
Agreement dated September 2, 1999 by and between BUY.COM and
certain investors.
10.31 Common Stock Purchase Warrant dated October 8, 1999 by and
between BUY.COM and Harpeth Holdings Inc.
10.32 Non-Competition Agreement dated October 25, 1999 by and between
BUY.COM INC., BuyGolf.com, Inc. and Bradford W. Allen.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
10.33* Letter of Intent dated September 2, 1999 by and between BUY.COM
INC. and SOFTBANK America, Inc.
10.34* Common Stock Issuance Agreement dated October 22, 1999 by and
between BUY.COM INC. and PGA TOUR, Inc.
10.35* Sponsorship Letter Agreement dated October 22, 1999 by and
between BUY.COM INC. and PGA TOUR, Inc.
21.1* Subsidiaries of BUY.COM.
23.1* Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit
5.1 hereto).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Purchase Agreement certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
BUY.COM pursuant to the foregoing provisions, or otherwise, BUY.COM 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 BUY.COM of expenses
incurred or paid by a director, officer or controlling person of BUY.COM in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, BUY.COM will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by BUY.COM 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 this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, BUY.COM has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Aliso Viejo, State of
California, on the 27th day of October 1999.
BUY.COM INC.
/s/ Gregory J. Hawkins
By: _________________________________
Gregory J. Hawkins,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Greg Hawkins and Murray H. Williams, and each of them, his true and
lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, or any related registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said attorneys-
in-fact and agents, or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gregory J. Hawkins Chief Executive Officer and October 24, 1999
____________________________________ Director (principal executive
Gregory J. Hawkins officer)
/s/ Murray H. Williams Vice President, Finance October 24, 1999
____________________________________ (principal financial officer)
Murray H. Williams
/s/ William L. Burnham Director October 25, 1999
____________________________________
William L. Burnham
/s/ David B. Ingram Director October 20, 1999
____________________________________
David B. Ingram
/s/ Donald M. Kendall Director October 20, 1999
____________________________________
Donald M. Kendall
/s/ Charles W. Richion Director October 21, 1999
____________________________________
Charles W. Richion
/s/ James B. Roszak Director October 21, 1999
____________________________________
James B. Roszak
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward S. Russell Director October 24, 1999
____________________________________
Edward S. Russell
/s/ John Sculley Director October 21, 1999
____________________________________
John Sculley
/s/ Wayne T. Thorson Director October 22, 1999
____________________________________
Wayne T. Thorson
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
1.1* Form of Purchase Agreement.
2.1 Agreement and Plan of Merger and Reorganization dated October
26, 1998 by and among BUY.COM, Speedserve.com Inc., Ingram
Entertainment Inc., David C. Mason and Michael G. Mason.
2.2 Agreement and Plan of Merger and Reorganization dated October
25, 1999 by and among BUY.COM INC., BGLF Acquisition
Corporation, BuyGolf.com, Inc. and all of the stockholders
listed therein.
3.1 Amended and Restated Certificate of Incorporation of BUY.COM.
3.2* Proposed Amended and Restated Certificate of Incorporation of
BUY.COM.
3.3 Bylaws of BUY.COM INC.
3.4* Proposed Bylaws of BUY.COM.
4.1* See Exhibit 3.1, 3.2, 3.3 and 3.4 for provisions of the
BUY.COM's Certificate of Incorporation and Bylaws defining the
rights of holders of BUY.COM's common stock.
4.2* Specimen common stock certificates.
5.1* Opinion of Brobeck, Phleger and Harrison LLP.
9.1* Voting Trust Agreement dated June 7, 1999 by and between Scott
Blum, The Scott A. Blum Separate Property Trust, BUY.COM and
certain of BUY.COM's outside directors.
9.2* Amended and Restated Voting Trust Agreement dated October ,
1999 by and between Scott Blum, The Scott A. Blum Separate
Property Trust, BUY.COM and certain of BUY.COM's outside
directors.
10.1 Third Amended and Restated Investors' Rights Agreement dated
September 2, 1999 by and among BUY.COM and the parties named
therein.
10.2 Voting Agreement dated December 3, 1998 by and among BUY.COM
and the Stockholders named therein.
10.3* Supply Agreement dated December 3, 1998 by and between Ingram
Entertainment Inc. and BUY.COM's wholly-owned subsidiary.
10.4* Order Fulfillment Agreement dated February 1, 1999 by and
between BUY.COM and i.FILL, a division of Valley Media, Inc.
10.5* Merchandising and Supply Agreement dated April 19, 1999 by and
between BUY.COM and Nashville Computer Liquidators, L.P.
10.6* Fulfillment Services Agreement dated March 11, 1999 by and
between BUY.COM and National Fulfillment Incorporated.
10.7* Master Service Agreement dated October 1, 1998 by and between
BUY.COM and SOFTBANK Services Group.
10.8* Resale Agreement dated March 10, 1999 by and between BUY.COM
and Ingram Micro, Inc.; Amendment dated August 11, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
10.10* Employment Agreement dated March 1, 1999 by and between BUY.COM
and Gregory Hawkins; Amendment No. 1 to the Employment
Agreement dated July , 1999.
10.11 1998 Stock Option/Stock Issuance Plan.
10.12* 1999 Stock Incentive Plan.
10.13* 1999 Employee Stock Purchase Plan.
10.14 Deed of Trust dated December 23, 1998 by and between BUY.COM
and the Bank of Yorba Linda for the property located at 21
Brookline, Aliso Viejo, California 92656.
10.15 Loan Agreement and related documents dated December 23, 1998 by
and between BUY.COM and the Bank of Yorba Linda.
10.16 Industrial Lease dated May 12, 1999 by and between BUY.COM and
The Scott A. Blum Separate Property Trust u/d/t 8/2/95.
10.17 Summit Lease dated June 1999 by and between BUY.COM and
AEW/Parker II, LLC.
10.18 Operating Agreement of BUYTRAVEL.COM LLC dated July 19, 1999.
10.19 Marketing and Services Agreement dated July 19, 1999 by and
between BUY.COM and United Air Lines, Inc.
10.20 Common Stock Purchase Warrant dated July 19, 1999 by and
between BUY.COM and United Air Lines, Inc.
10.21 Credit Agreement dated July 20, 1999 by and between BUY.COM and
certain commercial lending institutions and The Bank of Nova
Scotia.
10.22 Promissory Note dated July 20, 1999 by and between BUY.COM and
The Bank of Nova Scotia.
10.23 Common Stock Purchase Warrant dated July 20, 1999 by and
between BUY.COM and The Bank of Nova Scotia.
10.24* Series A Convertible Participating Preferred Stock Agreement
dated August 14, 1998 by and between BUY.COM and certain
investors.
10.25 Promissory Note dated May 26, 1999 by and between BUY.COM and
The Scott A. Blum Separate Property Trust u/d/t 8/2/95.
10.26 Agreement dated May 26, 1999 by and between BUY.COM and The
Scott A. Blum Separate Property Trust u/d/t 8/2/95, Waiver of
Certain Rights, dated August 5, 1999.
10.27 Form of Option Agreement pursuant to 1998 Stock Option/Stock
Issuance Plan.
10.28 Non-Competition Agreement dated December 3, 1998 by and between
BUY.COM, BUY.COM's wholly-owned subsidiary, Ingram
Entertainment, Inc. and David Ingram.
10.29 Promissory Note dated August 16, 1999 by and between the Scott
A. Blum Separate Property Trust u/d/t 8/2/95.
10.30 Series B Convertible Participating Preferred Stock Purchase
Agreement dated September 2, 1999 by and between BUY.COM and
certain investors.
10.31 Common Stock Purchase Warrant dated October 8, 1999 by and
between BUY.COM and Harpeth Holdings Inc.
10.32 Non-Competition Agreement dated October 25, 1999 by and between
BUY.COM INC., BuyGolf.com, Inc. and Bradford W. Allen.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
10.33* Letter of Intent dated September 2, 1999 by and between BUY.COM
INC. and SOFTBANK America, Inc.
10.34* Common Stock Issuance Agreement dated October 22, 1999 by and
between BUY.COM INC. and PGA Tour, Inc.
10.35* Sponsorship Letter Agreement dated October 22, 1999 by and
between BUY.COM INC. and PGA Tour, Inc.
21.1* Subsidiaries of BUY.COM.
23.1* Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit
5.1 hereto).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
by and among
BUY CORP.,
SPEEDSERVE.COM INC. and
SPEEDSERVE INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I THE MERGER.........................................................1
1.1 The Merger.......................................................1
1.2 Closing; Effective Time..........................................1
1.3 Effect of the Merger.............................................2
1.4 Certificate of Incorporation; Bylaws.............................2
1.5 Directors and Officers............................. .............2
1.6 Effect on Capital Stock..........................................2
1.7 No Further Ownership Rights in Target Common Stock...............3
1.8 Taking of Necessary Action; Further Action.......................3
1.9 Surrender of Certificates........................................3
1.10 Consent to Merger; Waiver of Dissenters'Rights...................4
1.11 Lost, Stolen or Destroyed Certificates...........................4
1.12 Minute Books, Stock Ledger and Other Corporate Records...........4
1.13 Legends on BC Stock..............................................5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND SI..............1
2.1 Corporate Existence, Good Standing and Authority.................5
2.2 Capitalization...................................................5
2.3 Subsidiaries.....................................................6
2.4 Financial Statements.............................................6
2.5 Absence of Certain Changes.......................................6
2.6 Properties.......................................................7
2.7 Inventories......................................................7
2.8 Accounts and Notes Receivable....................................7
2.9 Indebtedness.....................................................8
2.10 Litigation.......................................................8
2.11 Taxes............................................................8
2.12 No Breach........................................................8
2.13 Employees........................................................9
2.14 Insurance........................................................9
2.15 Contracts and Permits............................................9
2.16 Powers of Attorney; Bank Accounts................ ...............11
2.17 Compliance with Law; Governmental Consents.......................11
2.18 Intentionally Omitted............................................11
2.19 Intentionally Omitted............................................11
2.20 Intellectual Property Rights.....................................11
2.21 Year 2000 Compliance.............................................12
2.22 Purchase for Investment..........................................12
2.23 BC Stock Not Registered..........................................12
2.24 Economic Risk....................................................12
2.25 Access to Information............................................12
2.26 No Undisclosed Liabilities.......................................12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BC AND MERGER
SUB..............................................................13
3.1 Incorporation....................................................13
</TABLE>
<PAGE>
Table of Contents (continued)
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.2 Capitalization...................................................13
3.3 BC Stock Fully Paid and Non-Assessable...........................13
3.4 Corporate Power and Authority....................................13
3.5 Intentionally Omitted............................................13
3.6 Financial Statements.............................................13
3.7 Properties.......................................................14
3.8 Litigation.......................................................14
3.9 No Breach........................................................14
3.10 Compliance with Law; Governmental Consents.......................15
3.11 No Undisclosed Liabilities.......................................15
3.12 Taxes............................................................15
3.13 Year 2000 Compliance.............................................16
3.14 Intellectual Property Rights.....................................16
3.15 Absence of Certain Changes.......................................17
ARTICLE IV COVENANTS OF THE SELLERS AND SI...................................18
4.1 Maintenance of Business..........................................18
4.2 Conduct of Business..............................................18
4.3 Necessary Consents...............................................20
4.4 Access to Information............................................20
4.5 Certain Defaults; Litigation.....................................20
4.6 Other Negotiations...............................................20
4.7 Capital Infusion.................................................21
4.8 Best Efforts.....................................................21
4.9 Market Stand-Off.................................................21
ARTICLE V COVENANTS OF BC AND MERGER SUB.....................................21
5.1 Necessary Consents....................... .......................21
5.2 BC Board of Directors............................................21
5.3 Best Efforts.....................................................22
5.4 Indemnification..................................................22
5.5 Maintenance of Business..........................................22
5.6 Access to Information............................................22
5.7 Certain Defaults; Litigation.....................................23
5.8 Other Negotiations...............................................23
5.9 Conduct of Business..............................................23
ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF BC AND
MERGER SUB.......................................................24
6.1 Certificates for Shares..........................................24
6.2 Representations and Warranties True..............................24
6.3 Covenants Performed..............................................24
6.4 Certificate......................................................24
6.5 No Violations; No Actions........................................24
6.6 Proceedings and Documents........................................24
6.7 Delivery of Documents............................................24
6.8 Required Consents................................................24
</TABLE>
ii
<PAGE>
Table of Contents (continued)
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.9 Repayment of IE Indebtedness.....................................25
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS...............25
7.1 Representations and Warranties True..............................25
7.2 Covenants Performed..............................................25
7.3 Certificate......................................................25
7.4 No Violations; No Actions........................................25
7.5 Proceedings and Documents........................................25
7.6 Delivery of Documents............................................25
7.7 Required Consents................................................26
7.8 Closing of Purchase of Shares by Softbank........................26
7.9 Repayment of IE Indebtedness.....................................26
ARTICLE VIII CLOSING.........................................................26
8.1 Time and Place...................................................26
8.2 Deliveries of the Sellers........................................26
8.3 Deliveries of BC.................................................27
8.4 Certificate of Merger, Articles of Merger and Plan of Merger.....28
8.5 Tax Opinion of Bass, Berry & Sims PLC............................29
ARTICLE IX OBLIGATIONS OF THE SELLERS AND BC AFTER CLOSING...................29
9.1 Indemnification by the Sellers...........................29
9.2 Indemnification by BC, Merger Sub and Surviving Corporation......29
9.3 Indemnification Procedure for Claims.............................30
9.4 Defense by Indemnifying Party....................................30
9.5 Arbitration......................................................31
9.6 Limitations on Indemnification...................................32
9.7 Indemnification for Genesys Partners Letter Agreement............
ARTICLE X TERMINATION........................................................32
10.1 Termination by Mutual Consent....................................32
10.2 Termination by Default...........................................32
10.3 Effectiveness of Termination.....................................32
10.4 Effect of Termination............................................32
ARTICLE XI GENERAL PROVISIONS................................................33
11.1 Survival.........................................................33
11.2 Intentionally Omitted............................................33
11.3 No Broker or Finder..............................................33
11.4 Transaction Costs................................................33
11.5 Headings.........................................................33
11.6 Entire Agreement; Wa.............................................33
11.7 Third Parties....................................................33
11.8 Successors and Assigns...........................................34
11.9 Notices..........................................................34
11.10 Attorneys' Fees..................................................34
11.11 Governing Law....................................................35
</TABLE>
iii
<PAGE>
Table of Contents (continued)
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
11.12 Counterparts.....................................................35
11.13 Severability.....................................................35
11.14 Publicity........................................................35
11.15 Schedules........................................................35
</TABLE>
iv
<PAGE>
EXHIBITS
--------
Exhibit A - Certificate of Merger
Exhibit B-1 - Articles of Merger
Exhibit B-2 - Plan of Merger
Exhibit C - Non-Competition Agreement
Exhibit D - Amended and Restated Investors' Rights Agreement
Exhibit E - Amended and Restated Stockholders' Agreement
Exhibit F - Voting Agreement
Exhibit G - Employment Agreements
Exhibit H - Non-Disclosure Agreement
Exhibit I - System Use Agreement
Exhibit J - Intercompany Service Agreement
Exhibit K - Supply Agreement
Exhibit L - Sublease
Exhibit M - Master Database License Agreement
Exhibit N - Form of Bass, Berry & Sims PLC Legal Opinion
Exhibit O - Form of Brobeck, Phleger & Harrison LLP Legal Opinion
v
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
-----------------------------------------------
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement")
---------
is entered into as of October 26, 1998, by and among Buy Corp., a Delaware
corporation ("BC"), Speedserve.com Inc., a Delaware corporation and wholly owned
--
subsidiary of BC ("Merger Sub"), SpeedServe Inc., a Tennessee corporation
----------
("SI"), Ingram Entertainment Inc., a Tennessee corporation ("IE"), David C.
-- --
Mason ("DMason"), and Michael G. Mason ("MMason", together with IE and DMason,
------ ------
the "Sellers").
-------
RECITALS
A. The Boards of Directors of BC and SI believe it is in the best
interests of their respective companies and the stockholders of their respective
companies that SI and Merger Sub combine into a single company through the
statutory merger of SI with and into Merger Sub (the "Merger") and, in
------
furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares
of SI Common Stock, no par value ("SI Common Stock"), shall be converted into
---------------
shares of BC Common Stock, $.0001 par value ("BC Stock"), at the rate set forth
--------
herein.
C. SI, BC and Merger Sub desire to make certain representations and
warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
----
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code.
NOW, THEREFORE, in consideration of the covenants and representations
set forth herein, and for other good and valuable consideration, the parties
agree as follows:
ARTICLE I
THE MERGER
----------
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, SI shall be
merged with and into Merger Sub, the separate corporate existence of SI shall
cease and Merger Sub shall continue as the surviving corporation. Merger Sub as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
---------------------
1.2 Closing; Effective Time. The closing of the transactions
-----------------------
contemplated hereby (the "Closing") shall take place as soon as practicable
-------
after the satisfaction or waiver of each of the conditions set forth in Article
VI hereof or at such other time as the parties hereto agree (the "Closing
-------
Date"). The Closing shall take place at the offices of Brobeck, Phleger &
- ----
Harrison LLP, 38 Technology Drive, Irvine, California 92618, or at such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by properly executing
and filing the Certificate of Merger in the form attached
1
<PAGE>
hereto as Exhibit A (the "Certificate of Merger") with the Delaware Secretary of
--------- ---------------------
State in accordance with the applicable provisions of the Delaware General
Corporation Law (the "Delaware Law") and Articles of Merger and a Plan of
------------
Merger, in the forms attached hereto as Exhibits B-1 and B-2, respectively (the
------------ ---
"Articles of Merger and Plan of Merger"), with the Tennessee Secretary of State
-------------------------------------
in accordance with the provisions of the Tennessee Business Corporation Act (the
"Tennessee Law"). The Merger shall become effective upon the filing of the
-------------
Certificate of Merger with the Delaware Secretary of State and the Articles of
Merger and Plan of Merger with the Tennessee Secretary of State (the time of
such filings being the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in this Agreement, the Certificate of Merger, the
Articles of Merger and Plan of Merger and the applicable provisions of Delaware
and Tennessee Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of SI and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of SI and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. At the Effective Time, the directors and
----------------------
officers of the Merger Sub shall become the directors and officers of the
Surviving Corporation, until their respective successors are duly elected or
appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
-----------------------
action on the part of Merger Sub, SI or the holders of any of the following
securities:
(a) Conversion of Target Common Stock. At the Effective Time,
---------------------------------
each share of SI Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of SI Common Stock to be canceled pursuant
to Section 1.6(b)) will be canceled and extinguished and be converted
automatically into the right to receive 58.9819 validly issued, fully paid and
non-assessable shares of BC Stock (the "Exchange Ratio").
--------------
(b) Cancellation of Target Common Stock Owned by SI. At the
-----------------------------------------------
Effective Time, all shares of SI Common Stock that are owned by SI as treasury
stock and or any direct or indirect wholly owned subsidiary of SI immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Capital Stock of Merger Sub. At the Effective Time, each
share of Common Stock, $.0001 par value, of Merger Sub ("Merger Sub Common
-----------------
Stock") issued and
- -----
2
<PAGE>
outstanding immediately prior to the Effective Time shall remain issued and
outstanding. Each stock certificate of Merger Sub evidencing ownership of any
such shares shall continue to evidence ownership of such shares of capital stock
of the Surviving Corporation.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
BC Stock or SI Common Stock), reorganization, recapitalization or other like
change with respect to BC Stock or SI Common Stock occurring after the date
hereof and prior to the Effective Time.
(e) Fractional Shares. No fraction of a share of BC Stock will be
-----------------
issued in the Merger and the number of shares of BC Stock issuable to a Seller
hereunder shall be rounded upward to the nearest whole share of BC Stock.
1.7 No Further Ownership Rights in Target Common Stock. All shares of BC
--------------------------------------------------
Stock issued upon the surrender for exchange of shares of SI Common Stock in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of SI Common Stock, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of SI Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.8 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of SI and Merger Sub, the officers and directors of SI and Merger
Sub are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action, so long
as such action is not inconsistent with this Agreement.
1.9 Surrender of Certificates.
-------------------------
(a) Exchange Procedures. Promptly after the Effective Time, each
holder of record of a certificate or certificates ("Certificates") which
------------
immediately prior to the Effective Time represented outstanding shares of SI
Common Stock, whose shares were converted into the right to receive shares of BC
Stock (and cash in lieu of fractional shares) shall surrender such Certificates
(duly endorsed in favor of BC or accompanied by stock powers duly executed in
favor of and in a form reasonably acceptable to BC and its counsel, free from
any charge, lien, encumbrance or adverse claim of any kind whatsoever) in
exchange for certificates representing shares of BC Stock (and cash in lieu of
fractional shares). Upon surrender of a Certificate for cancellation to BC, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of whole shares of BC Stock and payment in
lieu of fractional shares which such holder has the right to receive pursuant to
Section 1.6 of this Agreement, and the Certificate so surrendered shall
forthwith be canceled. Until so surrendered, each outstanding Certificate that,
prior to the Effective Time, represented shares of SI Common Stock will be
deemed from and after the Effective Time, for all corporate
3
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purposes, other than the payment of dividends, to evidence the ownership of the
number of full shares of BC Stock into which such shares of Target Common Stock
shall have been so converted in accordance with Article I hereof.
(b) Distributions With Respect to Unexchanged Shares. No
------------------------------------------------
dividends or other distributions with respect to BC Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of BC Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of BC
Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of any such dividends or other distributions with a record
date after the Effective Time theretofore payable (but for the provisions of
this Section 1.9(b)) with respect to such shares of BC Stock.
(c) Transfers of Ownership. If any certificate for shares of BC
----------------------
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to BC or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of BC
Stock in any name other than that of the registered holder of the Certificate
surrendered, or established to the satisfaction of BC or any agent designated by
it that such tax has been paid or is not payable.
(d) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.9, neither the Surviving Corporation nor any party hereto shall
be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.10 Consent to Merger; Waiver of Dissenters' Rights. By their
-----------------------------------------------
execution of this Agreement, each Seller (a) consents to the Merger and to the
taking of shareholder action to approve the Merger without a meeting; (b)
acknowledges that he or it is aware of his or its right to dissent to the Merger
and demand payment for shares of SI Common Stock in accordance with Tennessee
Law; and (c) waives such rights to dissent and demand payment with respect to
the Merger.
1.11 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, BC shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of BC Stock as may be
required pursuant to Section 1.6; provided, however, that BC may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against BC or the Surviving Corporation or with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.12 Minute Books, Stock Ledger and Other Corporate Records. At the
------------------------------------------------------
Closing, SI shall deliver to BC, in addition to those items set forth in Section
8.2, the minute books, stock ledger and other corporate records of SI.
4
<PAGE>
1.13 Legends on BC Stock. In addition to any other legend that may be
-------------------
required by federal or state securities laws, each certificate for BC Stock that
is issued hereunder shall bear a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE ISSUER OF SUCH SECURITIES
THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS
IN FULL COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 UNDER
SUCH ACT."
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND SI
----------------------------------------------------
Each of the Sellers and SI agrees with and represents and warrants to
BC and Merger Sub as follows:
2.1 Corporate Existence, Good Standing and Authority. SI is a
------------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Tennessee. SI has full corporate power and corporate
authority to carry on its business as now being conducted and to own, lease or
operate the property and assets now owned, leased or operated by it. SI is
qualified to do business, is in good standing and has all required and
appropriate licenses in each jurisdiction in which its failure to obtain or
maintain such qualification, good standing or licensing would, individually or
in the aggregate, have a material adverse effect on the assets, liabilities,
business, financial condition or results of operations of SI (a "Material
--------
Adverse Effect"). SI and each Seller have all requisite power and authority to
- --------------
enter into this Agreement and all agreements and other documents to be entered
into in connection herewith and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by the Sellers and
SI, has been authorized by all necessary corporate and other action of SI and
the Sellers and constitutes a legal, valid and binding obligation of each of the
Sellers and SI, enforceable against each such party in accordance with its
terms, except as enforcement may be limited by equitable principles or
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally.
2.2 Capitalization. Except as set forth in Schedule 2.2, the
--------------
authorized capital stock of SI consists of Ten Thousand (10,000) shares of
common stock, no par value, of which Ten Thousand (10,000) shares are issued and
outstanding (the "Shares"). All of the Shares are owned, beneficially and of
------
record by the Sellers, and immediately prior to the Closing, all of the Shares
will be owned, beneficially and of record, by the Sellers. The Shares are free
from any
5
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charge, lien, encumbrance, restriction or adverse claim of any kind whatsoever,
other than restrictions imposed by applicable securities laws. All of the Shares
have been duly authorized and validly issued and are fully paid and
nonassessable. There are no options, warrants, conversion rights, rights of
exchange, or other rights, plans, agreements or commitments of any nature
whatsoever (including, without limitation, conversion or preemptive rights)
providing for the purchase, issuance or sale of any shares of capital stock of
SI or any securities convertible into or exchangeable for any shares of capital
stock of SI.
2.3 Subsidiaries. SI does not presently own, directly or indirectly,
------------
any interest in any other corporation, association, joint venture or other
business entity. On the Closing Date, SI will not own, directly or indirectly,
any interest in any foreign sales corporation.
2.4 Financial Statements. The unaudited balance sheet and related
--------------------
statements of income and cash flows of SI at and for its fiscal year ended
December 31, 1997 and the unaudited balance sheet and related statement of
income and cash flow of SI for the period from January 1, 1998 through August
28, 1998 (collectively the "SI Financial Statements") have been delivered to BC.
-----------------------
The internal books and records of SI from which the SI Financial Statements were
prepared are complete and correct in all material respects and have been
maintained in accordance with sound business practices. The SI Financial
Statements (i) were prepared in accordance with such books and records; (ii)
were prepared in accordance with the accounting policies and principles of SI,
and are in accordance with generally accepted accounting principles ("GAAP"),
----
applied on a consistent basis throughout the periods presented; and (iii)
present fairly the financial position and results of operations of SI at the
dates and for the periods reflected therein.
2.5 Absence of Certain Changes. Except as set forth in Schedule 2.5,
--------------------------
since August 28, 1998, there has not been:
(a) Any Material Adverse Effect;
(b) Any increase in the compensation paid or payable by SI,
other than in the ordinary course of business, to any of its officers,
directors, employees, agents or shareholders;
(c) Any declaration, setting aside or payment of dividends, or
any direct or indirect redemption, purchase or other acquisition of any capital
stock or any agreement to do any of the foregoing;
(d) Any indebtedness incurred by SI in excess of Fifty Thousand
Dollars ($50,000), other than indebtedness permitted pursuant to Section
4.2(a)(i) hereof and indebtedness incurred in the ordinary course of business
consistent with SI's past practices;
(e) Any loan made by SI other than travel loans or advances made
to its employees in the ordinary course of business consistent with SI's past
practices, nor has SI become liable or agreed to become liable as a guarantor
with respect to any loan;
(f) Any waiver or compromise by SI of any right or rights of
material value, or any payment, direct or indirect, of any material debt,
liability or other obligation;
6
<PAGE>
(g) Any change in the accounting methods, practices or policies
followed by SI since its inception, other than as disclosed in the Notes to the
SI Financial Statements;
(h) Any sale, assignment, or transfer of any patents,
trademarks, copyrights, trade secrets or other proprietary rights of material
value other than in the ordinary course of business consistent with SI's past
practices;
(i) Any purchase or other acquisition of, or any sale,
disposition of, or subjection to any lien or encumbrance on, any material
property or asset, tangible or intangible, of SI other than in the ordinary
course of business consistent with SI's past practices;
(j) Any actual or threatened amendment, termination or loss of
(i) any material contract, lease, license or other agreement to which SI was or
is a party; (ii) any certificate, license or other authorization required for
the continued operation by SI of any material portion of any of its business; or
(iii) any material customer or other revenue source;
(k) Any resignation or termination of employment of any key
officer or employee of SI, and the Sellers and SI do not know of the impending
resignation or termination of employment of any such officer or employee; or
(l) Any agreement or commitment by SI, or the Sellers on behalf
of SI, to do any of the things described in this Section 2.5.
2.6 Properties. SI does not own or hold title to any real property.
----------
With respect to the property and assets it leases, SI is in compliance in all
material respects with such leases and holds a valid leasehold interest in such
property and assets free of any liens or encumbrances of any kind whatsoever,
except those for taxes not yet due and payable or such liens or other
imperfections of title, if any, as do not materially detract from the value of
or interfere with the present use of the property, or assets affected thereby.
There is set forth in Schedule 2.6 hereto: (i) a list of all leases or rental
contracts under which SI is a lessee, lessor, sublessee or sublessor and (ii) a
list of all equipment used by SI in the operation of its business which is owned
or leased by SI and which had an original cost of Fifty Thousand Dollars
($50,000) or more. All real and tangible personal property currently used by SI
in, and necessary for the conduct of, the operation of its business is, and at
the time of Closing will be, in good operating condition and repair, ordinary
wear and tear excepted, and is adequate and suitable for the purposes for which
it is presently being used. All improvements on leased property used by SI in
the operation of its business and their present use comply in all material
respects with all applicable laws and the agreements under which such
improvements are leased.
2.7 Inventories. Any inventory of SI consists, and at the time of
-----------
Closing will consist, solely of inventory of the kind and quality regularly and
currently used in its business, subject to normal allowances for excess and
obsolete inventory in accordance with standard business practices.
2.8 Accounts and Notes Receivable. The Sellers have delivered (i) a
-----------------------------
complete and accurate list of the accounts payable, accrued liabilities and
accounts and notes receivable of SI as of October 2, 1998, and (ii) a complete
and accurate schedule showing the aging of such
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<PAGE>
accounts and notes receivable. Such accounts payable, accrued liabilities and
accounts receivable and notes receivable arose in bona-fide arms length
transactions in the normal course of business. The accounts receivable are and
will be at the Closing valid and binding obligations of the account debtors
without counterclaims, set-offs or other defenses thereto except in the ordinary
course of business, and to the knowledge of the Sellers and SI, such accounts
receivable are (except to the extent of the reserves thereon as set forth in the
SI Financial Statements or in the accounting records of SI on the date of this
Agreement) collectible in the ordinary course of business. The values at which
accounts receivable are carried on the books and records of SI accounts payable,
accrued liabilities and are consistent with SI's past practice and in accordance
with GAAP, applied on a consistent basis.
2.9 Indebtedness. Schedule 2.9 hereto contains a complete list of each
------------
and every agreement or other instrument under or pursuant to which SI has
outstanding indebtedness for borrowed money. SI (and the Sellers to the extent
responsible for the payment of the obligations thereunder) are not in default in
any material respect under any such agreement or instrument. Existing defaults,
if any, do not trigger acceleration of such indebtedness.
2.10 Litigation. No litigation, arbitration or other proceeding is
----------
pending or, to the knowledge of the Sellers and SI, threatened by or against SI,
its properties or assets, or the Shares before any court or any governmental
agency and, to the knowledge of the Sellers and SI, no facts exist which might
form the basis for any such litigation, arbitration or proceeding. To the
knowledge of the Sellers and SI, SI is not the subject of any investigation for
violation of any laws, regulations or administrative orders applicable to its
business. There is no judgment, writ, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against SI, its properties or assets or the Shares.
2.11 Taxes. SI has (i) timely filed or caused to be filed all federal,
-----
state and local tax returns required to be filed by SI prior to the date of this
Agreement which relate to SI or with respect to which SI is liable or otherwise
in any way subject, and all such tax returns (A) are complete, accurate and in
all material respects in accordance with all legal requirements applicable
thereto and (B) as of the time of filing, correctly reflected the facts
regarding the income, business assets, operations, activities, status or other
matters of SI required to be shown thereon, (ii) paid, when due, all taxes shown
to be due and payable on such returns, or pursuant to any assessment or
otherwise, or is contesting in good faith the payment thereof and (iii) properly
accrued, charged or established adequate reserves for all taxes assessed or
assessable against SI (including amounts being contested in good faith) relating
to the business, assets or employees or independent contractors of SI arising in
respect of any fiscal year of SI or portion thereof ended prior to the Closing.
No tax liabilities, disallowances or assessments relating to the business,
assets or employees or independent contractors of SI have been assessed against
SI or are such to the knowledge of the Sellers and SI proposed as of the date
hereof, and to the knowledge of the Sellers and SI there is no basis for any
such liabilities, disallowances or assessments. SI is not a party to or bound by
(nor will SI become a party to or bound by prior to the Closing) any tax
indemnity, tax sharing or tax allocation agreement.
2.12 No Breach. Except as set forth on Schedule 2.12 hereto, the
---------
consummation of the transactions contemplated by this Agreement will not result
in or constitute any of the following: (i) a conflict, violation or default with
or an event that, with notice or lapse
8
<PAGE>
of time or both, would be a default, breach, or violation of the Charter or
Bylaws of SI, any License (as hereinafter defined) or any material contract or
other material agreement, instrument or arrangement to which SI is a party or by
which SI or its assets or the Shares are bound; (ii) an event that would permit
any party to terminate any material agreement to which SI is a party or by which
SI or its assets or the Shares are bound or to accelerate the maturity of or
permit the subordination of any material indebtedness or other material
obligation of SI; (iii) the creation or imposition of any material lien, charge,
or encumbrance on the assets of SI or the Shares; or (iv) conflict with or
result in the violation or breach of any law, rule or regulation of any
governmental authority, or any judgment, order, injunction or decree applicable
to SI, its assets or the Shares.
2.13 Employees. Schedule 2.13 contains a listing of (i) each
---------
collective bargaining agreement and other labor agreement to which SI is a party
or by which it is bound; (ii) each employment, consulting, severance, deferred
compensation, bonus, and any other employee benefit plan, contract, agreement,
or other arrangement (whether or not in writing) providing for compensation or
other benefits to employees (including officers), or independent contractors,
individually or as a group, to which SI is a party or by which it is bound;
(iii) each "employee pension benefit plan" as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974 ("ERISA") and not exempted under
-----
Section 4(b) or 201 of ERISA maintained by SI or to which SI is required to
contribute including any multi-employer pension plan; and (iv) each "employee
welfare benefit plan" as defined in Section 3(1) of ERISA maintained by SI or to
which SI contributes or is required to contribute, including any multi-employer
welfare plan, and each other plan under which "fringe benefits" (including,
without limitation, vacation plans or programs, severance benefits, sick leave
plans or programs, dental or medical plans or programs, and related or similar
benefits) are afforded to employees of, or otherwise required to be provided by,
SI. SI has complied in all material respects with all applicable laws, rules and
regulations relating to employment, including those relating to wages, hours,
collective bargaining and the payment and withholding of taxes and other sums as
required by appropriate governmental authorities.
2.14 Insurance. SI, or the Sellers on behalf of SI, maintains policies
---------
of insurance covering SI's assets, properties and business in types and amounts
that are consistent with SI's past practices. Neither SI nor, to the extent that
the Sellers maintain policies on behalf of SI, the Sellers are in default under
any of such policies, and neither SI or the Sellers have failed to give any
notice or to present any claim under any such policy in a due and timely
fashion.
2.15 Contracts and Permits. There is set forth in Schedule 2.15 hereto
---------------------
a complete and accurate list of:
(a) Each customer contract, whether written or oral, between SI
and any party to whom SI provides products or services which involved payments
to SI of more than Fifty Thousand Dollars ($50,000) during SI's last fiscal year
or can reasonably be expected to involve payments to SI of more than Fifty
Thousand Dollars ($50,000) during SI's next fiscal year ;
9
<PAGE>
(b) Each contract (except for leases or rental contracts,
evidence of indebtedness and insurance contracts), whether written or oral,
between SI and any party to whom SI is obligated, or can reasonably be expected
to pay more than Fifty Thousand Dollars ($50,000) for any twelve (12)-month
period commencing on or after the Closing Date; and
(c) Each material permit, license, franchise, certificate or
authorization issued to SI by any governmental or other authority having
jurisdiction in any area where SI provides products or services (individually, a
"License" and collectively, the "Licenses").
------- --------
The contracts and agreements which are required to be identified in
Schedule 2.6 or in Schedule 2.15 pursuant to subsections (a) and (b) above are
hereinafter referred to as the "Contracts." Except as set forth in Schedules
---------
2.6 or 2.15:
(i) Each of the Contracts is a valid, binding and
enforceable agreement of SI and, to the knowledge of the Sellers and SI, the
other parties thereto, and to their knowledge will continue to be a valid,
binding and enforceable agreement of Merger Sub after the Closing Date;
(ii) As of the date hereof, the Sellers and SI have no
reason to believe that SI will not be able to fulfill all of its obligations
under the Contracts which remain to be performed after the date hereof to the
extent BC's operation of the business of SI after the Closing Date is consistent
with SI's past practices, and neither the Sellers nor SI has been notified by
any governmental or other party that such parties intend to cancel, terminate or
modify any of such Contracts or the basis upon which SI is paid thereunder, and
neither the Sellers nor SI knows of any valid grounds for any such cancellation,
termination or modification;
(iii) There has not occurred any material default (or event
which upon the provision of notice or lapse of time or both would become a
material default) by SI under any of the Contracts;
(iv) To the knowledge of the Sellers and SI, the Licenses
are the only permits, licenses, franchises, certificates and authorizations that
may be issued by any governmental or other authority having jurisdiction in any
area where SI provides products or services that are required for and are
material to the operation of the business of SI as such business is conducted;
(v) The Licenses are, and as of the Closing will be, in full
force and effect and the continuing validity and effectiveness of such Licenses
will not be affected by the Merger as herein contemplated; and
(vi) The Sellers and SI are and have been in compliance in
all material respects with all material conditions or requirements of the
Licenses, and neither the Sellers nor SI has been notified by any governmental
or licensing authority that such parties intend to cancel, terminate or modify
any of such Licenses, and neither the Sellers nor SI knows of any valid grounds
for any such cancellation, termination or modification.
10
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2.16 Powers of Attorney; Bank Accounts. Schedule 2.16 hereto
---------------------------------
lists (i) the names and addresses of all persons holding a power of attorney on
behalf of SI; and (ii) the names and addresses of all banks or other financial
institutions in which SI has an account, deposit, or safe-deposit box, with the
number and a description of the account and the names of all persons authorized
to draw on such accounts or deposits or to have access to such boxes.
2.17 Compliance with Law; Governmental Consents. The business and
------------------------------------------
operations of SI have been and are being conducted in material compliance with
all laws, rules, regulations and licensing requirements applicable thereto,
including, without limitation, federal, state and local laws and regulations
affecting the protection of the environment, the health and safety of employees
and equal employment opportunities. The Sellers and SI are unaware of any facts
which might form the basis for a claim that any material violation by SI of such
laws exists. Except for (i) the filing of a pre-merger notification and
termination or expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the
-------
filing of the Certificate of Merger and (iii) the filing of the Articles of
Merger and Plan of Merger, no consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of SI or the Sellers
is required in connection with the execution, delivery and performance by the
Sellers and SI of this Agreement, the consummation of the transactions
contemplated hereby or BC's operation of the business of SI following the
Closing Date in a manner that is consistent with SI's past practices.
2.18 Intentionally Omitted.
---------------------
2.19 Intentionally Omitted.
---------------------
2.20 Intellectual Property Rights.
----------------------------
(a) Except as set forth in Schedule 2.20, SI has sufficient
title and ownership of all patents, trademarks, service marks, trade names,
Internet domain names, copyrights, trade secrets, customer lists, information,
proprietary rights and processes, registrations and applications therefor
(collectively, "Intellectual Property") necessary for and material to its
---------------------
business as now conducted and as proposed to be conducted, including all
Intellectual Property used in connection with or contained in any SI site on the
world wide web, without any conflict with or infringement of the rights of
others. Neither the Sellers nor SI has received any communications nor is either
of the Sellers or SI aware of any entity alleging that SI or any SI employee has
violated or, by conducting its business in a manner that is consistent with SI's
past practices, would violate any Intellectual Property of any other person or
entity. Neither the Sellers nor SI is aware that any of SI's employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of SI or that would conflict with the
operation of SI's business consistent with SI's past practices. SI does not
believe it is or will be necessary in connection with its business to utilize
any inventions of any of its employees (or persons it currently intends to hire)
made prior to their employment by SI. To the knowledge of the Sellers and SI,
all of the Intellectual Property is vested in (or, if applicable, leased or
licensed by) SI free and clear of any equities, claims, liens, encumbrances or
restrictions of any kind
11
<PAGE>
whatsoever. Schedule 2.20 sets forth all patents, patent applications, copyright
registrations, copyright applications, trademarks and trade names (registered or
unregistered), Internet domain names and any other Intellectual Property owned
or licensed by SI or in which SI has any material interest.
(b) Except as set forth in Schedule 2.20, SI does not currently
use nor, to the knowledge of the Sellers and SI, does it propose to use any
Intellectual Property, invention or confidential information in which any of the
Sellers and other employees of SI claims a proprietary interest.
(c) Except as set forth in Schedule 2.20, to the knowledge of the
Sellers and SI, SI is not making use of any Intellectual Property, invention or
any confidential information in which any of its present or past employees has
claimed a proprietary interest; and the Sellers and SI are not actually aware of
any facts that would give rise to such a claim.
2.21 Year 2000 Compliance. SI has reviewed the areas within its
--------------------
business and operations which could be adversely affected by Year 2000 issues
and evaluated the costs associated with modifying and testing its systems for
the Year 2000. To the knowledge of SI, the cost of Year 2000 compliance for its
internal information systems will not have a Material Adverse Effect on SI.
2.22 Purchase for Investment. Each Seller acknowledges that he or it
-----------------------
is acquiring the BC Stock in the Merger for his or its own account and not with
a view to, or present intention of, distribution thereof in violation of the
Securities Act of 1933, as amended (the "1933 Act") or any state securities
--------
laws, and the BC Stock will not be disposed of in contravention of the 1933 Act
or state securities laws.
2.23 BC Stock Not Registered. Each Seller acknowledges that the BC
-----------------------
Stock has not been registered under the 1933 Act or any state securities laws
and, therefore, cannot be sold, and must be held indefinitely, unless
subsequently registered under the 1933 Act and state securities laws or unless
an exemption from such registration is available.
2.24 Economic Risk. Each Seller acknowledges that his or its
-------------
investment in the BC Stock involves a high degree of risk and represents that he
or it is able to bear the economic risk of his or its investment in the BC Stock
for an indefinite period of time.
2.25 Access to Information. Each Seller acknowledges that he or it has
---------------------
made such investigations and inquiries as he or it has deemed necessary for the
purpose of informing himself or itself about BC or its businesses prior to
entering into this Agreement.
2.26 No Undisclosed Liabilities. To the knowledge of the Sellers and
--------------------------
SI, SI does not have, or as of the Closing Date will not have, any material
liabilities, obligations or commitments (absolute, accrued, contingent or
otherwise) matured or unmatured ("Liabilities") except (i) Liabilities which are
-----------
adequately reflected or fully reserved against in the SI Financial
Statements; (ii) Liabilities incurred after the date of the SI Financial
Statements that were incurred in the ordinary course of SI's business and are
consistent with past practices; (iii) Liabilities disclosed in the Schedules
hereto and (iv) Liabilities permitted under Section 4.2(a)(i) hereof.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BC AND MERGER SUB
---------------------------------------------------
BC and Merger Sub, jointly and severally, represent and warrant to
each of the Sellers that:
3.1 Incorporation. Each of BC and Merger Sub has been duly
-------------
incorporated and is validly existing and in good standing under the laws of the
State of Delaware. Prior to the date hereof, Merger Sub has not engaged in any
activity other than the transactions contemplated by this Agreement. Each of BC
and Merger Sub has full corporate power and corporate authority to carry on its
business as now being conducted and to own, lease or operate the property and
assets now owned, leased or operated by it. Each of BC and Merger Sub is
qualified to do business, is in good standing and has all required and
appropriate licenses in each jurisdiction in which its failure to obtain or
maintain such qualification, good standing or licensing (i) would, individually
or in the aggregate, have or reasonably could be expected to have a material
adverse effect on the assets, liabilities, business, financial condition,
results of operations, or prospects of BC and its subsidiaries (including Merger
Sub) taken together, or (ii) would result in a material breach of any of the
other representations, warranties or covenants of BC set forth in this
Agreement.
3.2 Capitalization. Immediately prior to the Closing, the authorized
--------------
capital stock of BC will consist of 12,666,542 shares of Common Stock, $.0001
par value, of which 8,675,315 shares are issued and outstanding, and 1,298,742
shares of Series A Preferred Stock, $.0001 par value, all of which are issued
and outstanding. The authorized capital of Merger Sub consists of 1,000 shares
of Common Stock, $.001 par value, all of which are issued and outstanding and
held by BC. All outstanding shares of BC and Merger Sub capital stock have been
duly authorized and validly issued and are fully paid and nonassessable. Except
as set forth on Schedule 3.2 hereof and as of the date of this Agreement, BC
does not own, directly or indirectly, or have any obligation to acquire, any
interest or investment in any corporation, partnership, joint venture, business
trust, limited liability company or other entity. Schedule 3.2 sets forth the
aggregate number of all options, warrants, conversion rights, rights of
exchange, or other rights, plans, agreements or commitments of any nature
whatsoever (including, without limitation, conversion or preemptive rights)
providing for the purchase, issuance, or sale of any capital stock of BC or any
securities convertible or exchangeable for any shares of capital stock of BC.
3.3 BC Stock Fully Paid and Non-Assessable. The BC Stock deliverable
--------------------------------------
pursuant to Section 1.6, when issued and delivered as herein provided, will be
duly authorized, validly issued and outstanding shares of Common Stock of BC,
fully paid and non-assessable, free and clear of all liens, encumbrances,
restrictions and claims of every kind.
3.4 Corporate Power and Authority. Each of BC and Merger Sub has full
-----------------------------
corporate power and authority to enter into, deliver, perform its obligations
under and carry out this Agreement and all agreements and documents contemplated
hereby. This Agreement constitutes, and all agreements and documents
contemplated hereby when executed and delivered pursuant hereto will constitute,
the valid and legally binding obligations of BC and Merger Sub enforceable in
accordance with their terms, subject as to enforcement to bankruptcy,
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insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
3.5 Intentionally Omitted.
---------------------
3.6 Financial Statements. The unaudited balance sheet and related
--------------------
statements of income and cash flows of BC at and for its fiscal year ended
December 31, 1997 and the unaudited balance sheet and related statement of
income and cash flow of SI for the period from January 1, 1998 through July 31,
1998 (collectively the "BC Financial Statements") have been delivered to
-----------------------
Sellers. The internal books and records of BC from which the BC Financial
Statements were prepared are complete and correct in all material respects and
have been maintained in accordance with sound business practice. The BC
Financial Statements (i) were prepared in accordance with such books and
records; (ii) were prepared in accordance with the accounting policies and
principles of BC, and are in accordance with GAAP, applied on a consistent basis
throughout the periods presented; and (iii) present fairly the financial
position and results of operations of BC at the dates and for the periods
reflected therein.
3.7 Properties. Neither BC nor Merger Sub owns or holds title to any
----------
real property. With respect to the property and assets it leases, each of BC and
Merger Sub is in compliance in all material respects with such leases and holds
a valid leasehold interest in such property and assets free of any liens or
encumbrances of any kind whatsoever, except those for taxes not yet due and
payable or such liens or other imperfections of title, if any, as do not
materially detract from the value of or interfere with the present use of the
property, or assets affected thereby. All real and tangible personal property
currently used by each of BC and Merger Sub in, and necessary for the conduct
of, the operation of their respective businesses is, and at the time of Closing
will be, in good operating condition and repair, ordinary wear and tear
excepted, and is adequate and suitable for the purposes for which it is
presently being used. All improvements on leased property used by each of BC and
Merger Sub in the operation of their respective businesses and the present use
comply in all material respects with all applicable laws and the agreements
under which such improvements are leased.
3.8 Litigation. No litigation, arbitration or other proceeding is
----------
pending or, to the knowledge of BC or Merger Sub, threatened by or against BC or
Merger Sub, their respective properties or assets before any court or any
governmental agency, and, to the knowledge of BC or Merger Sub, no facts exist
which might form the basis for any such litigation, arbitration or proceeding.
To the knowledge of BC or Merger Sub, neither BC nor Merger Sub is the subject
of any investigation for violation of any laws, regulations or administrative
orders applicable to their respective businesses. There is no judgment, writ,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against either BC
or Merger Sub, their respective properties or assets.
3.9 No Breach. The consummation of the transactions contemplated by
---------
this Agreement will not result in or constitute any of the following: (i) a
conflict, violation or default with or an event that, with notice or lapse of
time or both, would be a default, breach, or violation of the Certificate of
Incorporation or Bylaws of BC or Merger Sub, or any material contract or other
material agreement, instrument or arrangement to which BC or Merger Sub is a
party or by which BC or Merger Sub or their respective assets are bound; (ii) an
event that would
14
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permit any party to terminate any material agreement to which BC or Merger Sub
is a party or by which BC of Merger Sub or their respective assets are bound or
to accelerate the maturity of or permit the subordination of any material
indebtedness or other material obligation of BC or Merger Sub; (iii) the
creation or imposition of any lien, charge, or encumbrance on the assets of BC
or Merger Sub, except for such item that would not have a BC Material Adverse
Effect; or (iv) conflict with or result in the violation or breach of any law,
rule or regulation of any governmental authority, or any judgment, order,
injunction or decree applicable to BC or Merger Sub or their respective assets.
3.10 Compliance with Law; Governmental Consents. The business and
------------------------------------------
operations of BC and Merger Sub have been and are being conducted in material
compliance with all laws, rules, regulations and licensing requirements
applicable thereto, including, without limitation, federal, state and local laws
and regulations affecting the protection of the environment, the health and
safety of employees and equal employment opportunities. Neither BC nor Merger
Sub is aware of any facts which might form the basis for a claim that any
material violation by BC or Merger Sub of such laws exists. Except for (i) the
filing of a pre-merger notification and termination or expiration of the waiting
period under the HSR Act, (ii) the filing of the Certificate of Merger and (iii)
the filing of the Articles of Merger and Plan of Merger, no consent, approval,
order or authorization of, or registration, qualification, designation,
declaration or filing with, any federal, state or local governmental authority
on the part of BC or the Merger Sub is required in connection with the
execution, delivery and performance by BC and the Merger Sub of this Agreement
or the consummation of the transactions contemplated hereby.
3.11 No Undisclosed Liabilities. Except as set forth on Schedule 3.11
--------------------------
hereof, to the knowledge of BC and Merger Sub, neither BC nor Merger Sub has, or
as of the Closing Date will have, any material liabilities, obligations or
commitments (absolute, accrued, contingent or otherwise) matured or unmatured
("BC Liabilities") except (i) BC Liabilities which are adequately reflected or
--------------
fully reserved against in the BC Financial Statements; (ii) BC Liabilities
incurred after the date of the BC Financial Statements that were incurred in the
ordinary course of BC's business and are consistent with past practices; and
(iii) BC Liabilities disclosed in the Schedules hereto.
3.12 Taxes. BC has (i) timely filed or caused to be filed all federal,
-----
state and local tax returns required to be filed by BC prior to the date of this
Agreement which relate to BC or with respect to which BC is liable or otherwise
in any way subject, and all such tax returns (A) are complete, accurate and in
all material respects in accordance with all legal requirements applicable
thereto and (B) as of the time of filing, correctly reflected the facts
regarding the income, business assets, operations, activities, status or other
matters of BC required to be shown thereon, (ii) paid, when due, all taxes shown
to be due and payable on such returns, or pursuant to any assessment or
otherwise, or is contesting in good faith the payment thereof and (iii) properly
accrued, charged or established adequate reserves for all taxes assessed or
assessable against BC (including amounts being contested in good faith) relating
to the business, assets or employees or independent contractors of BC arising in
respect of any fiscal year of BC or portion thereof ended prior to the Closing.
No tax liabilities, disallowances or assessments relating to the business,
assets or employees or independent contractors of BC have been assessed against
BC or are such to the knowledge of BC proposed as of the date hereof, and to the
knowledge of
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BC there is no basis for any such liabilities, disallowances or assessments.
BC is not a party to or bound by (nor will BC become a party to or bound by
prior to the Closing) any tax indemnity, tax sharing or tax allocation
agreement.
3.13 Year 2000 Compliance. BC has reviewed the areas within its business
--------------------
and operations which could be adversely affected by Year 2000 issues and
evaluated the costs associated with modifying and testing its systems for the
Year 2000. To the knowledge of BC, the cost of Year 2000 compliance for its
internal information systems will not have a Material Adverse Effect on BC.
3.14 Intellectual Property Rights.
----------------------------
(a) Except as set forth in Schedule 3.14, each of BC and Merger Sub
has sufficient title and ownership of all patents, trademarks, service marks,
trade names, Internet domain names, copyrights, trade secrets, customer lists,
information, proprietary rights and processes, registrations and applications
therefor (collectively, "Intellectual Property") necessary for and material to
---------------------
its business as now conducted and as proposed to be conducted, including all
Intellectual Property used in connection with or contained in any BC site on the
world wide web, without any conflict with or infringement of the rights of
others. BC has not received any communications nor is BC aware of any entity
alleging that BC, Merger Sub or any BC employee has violated or, by conducting
its business in a manner that is consistent with BC's past practices, would
violate any Intellectual Property of any other person or entity. BC is not aware
that any of BC's or Merger Sub's employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to promote
the interests of BC or that would conflict with the operation of BC's business
consistent with BC's past practices. BC does not believe it is or will be
necessary in connection with its business to utilize any inventions of any of
its employees (or persons it currently intends to hire) made prior to their
employment by BC. To the knowledge of BC, all of the Intellectual Property is
vested in (or, if applicable, leased or licensed by) BC or Merger Sub free and
clear of any equities, claims, liens, encumbrances or restrictions of any kind
whatsoever. Schedule 3.14 sets forth all patents, patent applications, copyright
registrations, copyright applications, trademarks and trade names (registered or
unregistered), Internet domain names and any other Intellectual Property owned
or licensed by BC or Merger Sub or in which BC or Merger Sub has any material
interest.
(b) Except as set forth in Schedule 3.14, neither BC nor Merger Sub
currently uses nor, to the knowledge of BC, does either BC or Merger Sub propose
to use any Intellectual Property, invention or confidential information in which
any employees of BC or Merger Sub claims a proprietary interest.
(c) Except as set forth in Schedule 3.14, to the knowledge of BC,
neither BC nor Merger Sub is making use of any Intellectual Property, invention
or any confidential information in which any of its present or past employees
has claimed a proprietary interest; and BC is not actually aware of any facts
that would give rise to such a claim.
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3.15 Absence of Certain Changes. Except as set forth in Schedule 3.15,
--------------------------
since August 28, 1998, there has been:
(a) Any Material Adverse Effect;
(b) Any increase in the compensation paid or payable by BC or Merger
Sub, other than in the ordinary course of business, to any of their respective
officers, directors, employees, agents or shareholders;
(c) Any declaration, setting aside or payment of dividends, or any
direct or indirect redemption, purchase or other acquisition of any capital
stock of BC or Merger Sub or any agreement to do any of the foregoing;
(d) Any indebtedness incurred by BC or Merger Sub in excess of Fifty
Thousand Dollars ($50,000), other than indebtedness incurred in the ordinary
course of business consistent with BC's or Merger Sub's past practices;
(e) Any loan made by BC or Merger Sub other than travel loans or
advances made to its employees in the ordinary course of business consistent
with BC's or Merger Sub's past practices, nor has BC or Merger Sub become liable
or agreed to become liable as a guarantor with respect to any loan;
(f) Any waiver or compromise by BC or Merger Sub of any right or
rights of material value, or any payment, direct or indirect, of any material
debt, liability or other obligation;
(g) Any change in the accounting methods, practices or policies
followed by BC since its inception, other than as disclosed in the Notes to the
BC Financial Statements;
(h) Any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets or other proprietary rights of material value other
than in the ordinary course of business consistent with BC's past practices;
(i) Any purchase or other acquisition of, or any sale, disposition of,
or subjection to any lien or encumbrance on, any material property or asset,
tangible or intangible, of BC or Merger Sub other than in the ordinary course of
business consistent with BC's or Merger Sub's past practices;
(j) Any actual or threatened amendment, termination or loss of (i) any
material contract, lease, license or other agreement to which BC or Merger Sub
was or is a party; (ii) any certificate, license or other authorization required
for the continued operation by BC or Merger Sub of any material portion of any
of its business; or (iii) any material customer or other revenue source;
(k) Any resignation or termination of employment of any key officer or
employee of BC or Merger Sub, and BC does not know of the impending resignation
or termination of employment of any such officer or employee; or
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(l) Any agreement or commitment by BC or Merger Sub to do
any of the things described in this Section 3.15.
ARTICLE IV
COVENANTS OF THE SELLERS AND SI
-------------------------------
4.1 Maintenance of Business. From the date hereof until the Closing,
-----------------------
each of the Sellers and SI shall use its diligent, good faith efforts, to cause
SI to carry on and preserve the business, goodwill and the relationships of SI
with suppliers, employees, agents and others in substantially the same manner as
they have been prior to the date hereof.
4.2 Conduct of Business.
-------------------
(a) From the date hereof until the Closing, except as expressly
permitted hereby, SI shall not, and the Sellers shall not permit SI to, without
BC's prior express written consent:
(i) incur any additional indebtedness, or guarantee any
indebtedness or obligation of any other party, except (A) in the ordinary
course of business or (B) for indebtedness to IE in an amount not to exceed
$1,000,000 in the aggregate, which amount: (1) shall only be advanced by IE
to SI in incremental amounts necessary, in the good faith judgment of the
Sellers, to comply with Section 4.1 hereof; (2) will bear interest at a
rate not to exceed the prime lending rate as reported in the Wall Street
Journal from time to time; and (3) SI agrees to repay by wire transfer of
immediately available funds immediately prior to the Closing;
(ii) except in connection with the capital contribution
contemplated by Section 4.7, issue, redeem, pledge, sell or repurchase any
capital stock of SI or securities convertible into its capital stock or
grant or issue any options, warrants or rights to subscribe for its capital
stock or securities convertible into its capital stock or commit to do any
of the foregoing;
(iii) enter into or terminate any material agreement or
arrangement;
(iv) increase the compensation or bonuses payable or to
become payable to any officers, employees or agents of SI, or adopt or
amend any employee benefit plan or arrangement;
(v) enter into any employment contract or agreement with
any existing or prospective employee which is not terminable at will;
(vi) pay any obligation or liability, fixed or contingent,
other than current liabilities or except as such payment becomes due;
(vii) cancel, without full payment, any note, loan or other
obligation owing to SI, or waive any rights of material value;
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(viii) acquire or dispose of any properties, assets or
business except in the ordinary course of its business;
(ix) create or suffer to be imposed any lien, mortgage,
security interest or other charge on or against the properties or assets of
SI, other than in the ordinary course of business consistent with SI's past
practices, or the Shares;
(x) engage in any activities or transactions outside the
ordinary course of SI's e-commerce business as conducted at the date
hereof;
(xi) make or adopt any change in the Charter or Bylaws of
SI as in force and effect on the date hereof;
(xii) declare or pay any dividends on or make any other
distributions in respect of any shares of its capital stock; or
(xiii) pay, agree to pay or make any accrual or arrangement
for payment of any pension, retirement allowance or other employee benefit
pursuant to any plan, agreement or arrangement to any officer, director or
employee.
(b) From the date hereof until the Closing, except as expressly
permitted hereby, SI shall, and the Sellers shall cause SI to, unless otherwise
expressly consented to in writing by BC :
(i) maintain the existing insurance policies of SI, unless
comparable insurance is substituted therefor, and shall not take any action
to terminate or modify those insurance policies ;
(ii) maintain the books and records of SI consistent with
past practices and policies and in accordance with GAAP ;
(iii) maintain in good working condition, ordinary wear and
tear excepted, and in compliance in all material respects with all
applicable laws and regulations, all fixed assets owned, leased or
operated, as the case may be, by SI ;
(iv) observe and perform, and remain in compliance with, all
obligations of SI in agreements and contracts the breach or violation of
which would have, individually or in the aggregate, a Material Adverse
Effect and not enter into any agreements or contracts which would require
payments by SI of more than Fifty Thousand Dollars ($50,000) over any
period of twelve (12) months, except for inventory purchased in the
ordinary course of business disclosed in advance to BC and customer
contracts and purchase orders entered in the ordinary course of business
consistent with SI's past practices; and
(v) maintain compliance with the terms and conditions of all
Licenses held by SI or under which it operates or conducts its business and
use best efforts to maintain all such Licenses in full force and effect.
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4.3 Necessary Consents. Prior to the Closing, the Sellers and SI
------------------
will obtain such written consents and take such other actions as may be
necessary or appropriate to allow the consummation of the transactions
contemplated hereby and to allow the continuation of the business of SI by BC
and Merger Sub after the Closing as conducted at the date hereof in all material
respects.
4.4 Access to Information. The Sellers shall cause SI to give BC
---------------------
and its accountants, legal counsel and other representatives reasonable access,
during normal business hours throughout the period prior to the Closing, to all
of the properties, books, contracts, commitments and records relating to the
business, assets and liabilities of SI, and will furnish BC, its accountants,
legal counsel and other representatives during such period all such information
concerning its affairs as BC may reasonably request; provided that any
furnishing of such information pursuant hereto or any investigation by BC shall
not affect BC's right to rely on the representations, warranties and covenants
made by the Sellers and SI in this Agreement except to the extent BC had, as of
the Closing Date, actual knowledge (based upon its investigation of written
information) of any misrepresentation, breach or alleged breach thereof on or
prior to the Closing Date. BC and its accountants, legal counsel and other
representatives (as "Representatives" of Buycomp LLC under the Confidentiality
---------------
Agreement, dated as August 28, 1998, as amended September 16, 1998, between
BuyComp LLC and SI (the "Confidentiality Agreement")) shall keep all such
-------------------------
information confidential accordance with the terms of the Confidentiality
Agreement.
4.5 Certain Defaults; Litigation. The Sellers and SI will give prompt
----------------------------
notice to BC of:
(a) any notice of default or other notice received by the Sellers
or SI subsequent to the date of this Agreement and prior to the Closing under
any instrument or agreement to which SI is a party or by which its assets are
bound or otherwise, which default could, if not remedied, result in a Material
Adverse Effect or which would render incorrect any representation made herein,
and
(b) any suit, action, proceeding or investigation instituted or
threatened against or affecting SI subsequent to the date of this Agreement and
prior to the Closing which could result in a Material Adverse Effect or which
would render incorrect any representation made herein.
4.6 Other Negotiations. Prior to the Closing, or such earlier date on
------------------
which this Agreement is terminated in accordance with its terms, the Sellers
will not, and the Sellers will cause SI and the officers, directors, employees,
agents and representatives of SI not to, directly or indirectly, initiate
discussions or negotiate, or authorize any person or entity to discuss or
negotiate on behalf of the Sellers or SI, with any other party, or entertain or
consider any inquiries or proposals received from any other party, concerning
the possible disposition of SI, its business, assets or capital stock, in whole
or in part. The Sellers and SI will not furnish any information concerning SI to
any person other than BC for the purpose of, or with the intent of, permitting
such person or entity to evaluate a possible acquisition of SI, its business,
assets or capital stock, in whole or in part.
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4.7 Capital Infusion. Immediately prior to the Closing, IE shall make
----------------
a capital contribution to SI in the amount of $1,000,000, payable by wire
transfer in immediately available funds .
4.8 Best Efforts. The Sellers and SI will each use their best efforts
------------
to perform and fulfill all obligations on their respective parts to be performed
and fulfilled under this Agreement, and to cause all the conditions precedent to
the consummation of the transactions to be timely satisfied, to the end that the
transactions contemplated by this Agreement shall be effected substantially in
accordance with its terms, including the "tax-free" reorganization status of the
transactions. The Sellers and SI shall each cooperate with BC in such actions
and in securing requisite approvals and shall deliver such further documents as
BC may reasonably request as necessary to evidence such transactions.
4.9 Market Stand-Off. Each Seller hereby agrees that, during the one
----------------
hundred twenty (120) period following the effective date of a registration
statement of BC filed under the 1933 Act (the "Market Stand-Off Period"), he or
-----------------------
it shall not, to the extent requested by BC and/or the managing underwriter,
sell or otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of BC held by him or it at any time during such
period except common stock included in such registration; provided, that
officers and directors of BC (as determined by the managing underwriter) enter
into similar agreements. Each of the Sellers agrees to increase the Market
Stand-Off Period to 180 days at the request of the managing underwriter;
provided, that officers and directors of BC (as determined by the managing
underwriter) agree to the same increase. The Sellers agree that, as a condition
to any transfer or disposition of the BC securities held by the Sellers, any
transferee or assignee of the BC securities shall agree in writing to be bound
by the terms of this Section 4.9.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the BC securities held by each Seller
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such one hundred twenty (120) day or longer
period.
ARTICLE V
COVENANTS OF BC AND MERGER SUB
------------------------------
5.1 Necessary Consents. Prior to the Closing, BC and Merger Sub will
------------------
obtain such consents and take such other actions as may be necessary or
appropriate to allow the consummation of the transactions contemplated hereby.
5.2 BC Board of Directors. At the Closing, BC shall take such actions
---------------------
as may be necessary to appoint David B. Ingram ("Ingram") to its Board of
------
Directors and, assuming acceptance of such position, to grant Ingram an option
to purchase 10,000 shares of Common Stock of BC at a price per share equal to
the fair market value of such stock as determined by BC's Board of Directors. So
long as Ingram remains on BC's Board of Directors, BC agrees (i) to maintain
Directors and Officer's liability insurance; (ii) engage outside auditors that
are reasonably acceptable to Ingram; provided that any of the Big 5 public
accounting firms shall be deemed acceptable by Ingram; and (iii) to compensate
and reimburse Ingram to the same extent as other non-employee directors of BC.
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5.3 Best Efforts. Each of BC and Merger Sub will use its best efforts
------------
to perform and fulfill all obligations on its part to be performed and fulfilled
under this Agreement, and to cause all the conditions precedent to the
consummation of the transactions to be timely satisfied, to the end that the
transactions contemplated by this Agreement shall be effected substantially in
accordance with its terms. Each of BC and Merger Sub shall cooperate with the
Sellers and SI in such actions and in securing requisite approvals and shall
deliver such further documents as the Sellers and SI may reasonably request as
necessary to evidence such transactions.
5.4 Indemnification. After the Closing, BC shall cause the Surviving
---------------
Corporation to, and the Surviving Corporation shall, indemnify and hold harmless
each present and former employee, agent, director or officer of SI (the
"Indemnified Parties") to the full extent required or permitted under (a)
-------------------
Delaware Law, (b) as provided in the Surviving Corporation's Certificate of
Incorporation and Bylaws, and (c) as otherwise provided for or permitted
pursuant to any agreement or arrangement in effect at the date hereof (to the
extent consistent with applicable law), which rights to be indemnified and held
harmless shall survive the Closing and shall continue in full force and effect
for a period of not less than six years from the Closing Date, provided, that,
in the event any claim or claims (a "Claim or Claims") are asserted or made
----- ------
within such six-year period, all rights to indemnification in respect of any
such Claim or Claims shall continue until disposition of any and all such Claim
or Claims. Without limiting the foregoing, to the extent permitted by applicable
law, BC shall cause the Surviving Corporation to, and the Surviving Corporation
shall, periodically (no less than on a quarterly basis) advance expenses as
incurred with respect to any Claim to the fullest extent permitted by applicable
law, provided the person to whom the expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
person is not entitled to indemnification.
5.5 Maintenance of Business. From the date hereof until the Closing,
-----------------------
BC shall use its diligent, good faith efforts, to carry on and preserve the
business, goodwill and the relationships of BC with suppliers, employees, agents
and others in substantially the same manner as they have been prior to the date
hereof.
5.6 Access to Information. BC shall give the Sellers and their
accountants, legal counsel and other representatives reasonable access, during
normal business hours throughout the period prior to the Closing, to all of the
properties, books, contracts, commitments and records relating to the business,
assets and liabilities of BC, and will furnish the Sellers, their accountants,
legal counsel and other representatives during such period all such information
concerning its affairs as the Sellers may reasonably request; provided that any
furnishing of such information pursuant hereto or any investigation by the
Sellers shall not affect the Sellers' right to rely on the representations,
warranties and covenants made by BC in this Agreement except to the extent SI or
the Sellers had, as of the Closing Date, actual knowledge (based upon their
investigation of written information) of any misrepresentation, breach or
alleged breach thereof on or prior to the Closing Date. The Sellers, SI and
their accountants, legal counsel and other representatives (as "Representatives"
---------------
of SI under the Confidentiality Agreement) shall keep all such information
confidential in accordance with the terms of the Confidentiality Agreement.
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5.7 Certain Defaults; Litigation. BC will give prompt notice to the
----------------------------
Sellers of:
(a) any notice of default or other notice received by BC
subsequent to the date of this Agreement and prior to the Closing under any
instrument or agreement to which BC is a party or by which its assets are bound
or otherwise, which default could, if not remedied, result in a material adverse
effect on the assets, liabilities, business, financial condition or results of
operations of BC (a "BC Material Adverse Effect") or which would render
--------------------------
incorrect any representation made herein, and
(b) any suit, action, proceeding or investigation instituted or
threatened against or affecting BC subsequent to the date of this Agreement and
prior to the Closing which could result in a BC Material Adverse Effect or which
would render incorrect any representation made herein.
5.8 Other Negotiations. Prior to the Closing, or such earlier date on
------------------
which this Agreement is terminated in accordance with its terms, BC will not,
and BC will cause the officers, directors, employees, agents and representatives
of BC not to, directly or indirectly, initiate discussions or negotiate, or
authorize any person or entity to discuss or negotiate on behalf of BC, with any
other party, or entertain or consider any inquiries or proposals received from
any other party, concerning the possible acquisition by BC (including, without
limitation, any reorganization, merger or sale of assets) of any business that
is competitive with the business of SI.
5.9 Conduct of Business. From the date hereof until the Closing,
-------------------
except as expressly permitted hereby, BC shall not, without SI's prior express
written consent:
(a) incur any additional indebtedness, or guarantee any
indebtedness or obligation of any other party, except in the ordinary course of
business;
(b) dispose of any properties, assets or business except in the
ordinary course of its business ;
(c) make or adopt any change in the Certificate of Incorporation
or Bylaws of BC as in force and effect on the date hereof; provided, however,
that BC may amend its Certificate of Incorporation to (i) change its name; (ii)
reduce the number of options that may be issued by BC which do not result in an
adjustment to the conversion price of Series A Preferred Stock (Section 6E of
the Certificate of Incorporation); (iii) increase the authorized capital stock
of BC to accommodate a stock split or stock dividend by BC and (iv) increase the
authorized capital stock of BC to accommodate the sale and issuance of shares of
BC capital stock to John Ingram; or
(d) issue additional shares of capital stock without first
offering IE the opportunity to purchase up to five percent (5%) of any such
additional shares proposed to be issued by BC; provided that, IE shall have five
days from the receipt of notice delivered pursuant to Section 11.9 hereof of a
proposed issuance to elect to purchase shares under this subsection (d); and
provided further that, the right of first offer provided to IE under this
subsection (d) shall not apply to any stock split or stock dividend effected by
BC.
23
<PAGE>
ARTICLE VI
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF BC AND MERGER SUB
--------------------------------
The obligation of each of BC and Merger Sub to consummate the
transactions contemplated by this Agreement is subject to the satisfaction, at
or before the Closing, of all the following conditions, unless waived in writing
by BC:
6.1 Certificates for Shares. BC shall have received for cancellation
-----------------------
in the Merger certificates for the Shares, which shall constitute all of the
issued and outstanding capital stock of SI.
6.2 Representations and Warranties True. All representations and
-----------------------------------
warranties of the Sellers and SI in this Agreement or the Schedules and Exhibits
hereto, or in any written statement or certificate that shall be delivered to BC
by the Sellers or SI under this Agreement, shall be true and correct on and as
of the date made and as of the Closing Date as if made on the date thereof
(except to the extent such representation or warranty relates to an earlier
date).
6.3 Covenants Performed. The Sellers and SI shall have performed,
-------------------
satisfied, and complied in all material respects with all covenants, agreements,
and conditions required by this Agreement to be performed or complied with by
the Sellers and SI on or before the Closing Date.
6.4 Certificate. BC shall have received from the Sellers a
-----------
certificate, dated the Closing Date, certifying that the conditions specified in
this Article VI have been satisfied.
6.5 No Violations; No Actions. Consummation of the transactions
-------------------------
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction and no action or
proceeding shall have been instituted or threatened by any person, entity or
governmental agency which, in any such case, in the sole judgment of BC, has a
reasonable probability of resulting in (i) the obtaining of material damages
from BC or SI; (ii) an order, judgment or decree restraining, prohibiting or
rendering unlawful the consummation of the transactions contemplated by this
Agreement; or (iii) other relief in connection therewith.
6.6 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be in form and substance
reasonably satisfactory to BC and its counsel, and BC shall have received all
such counterpart originals or certified or other copies of such documents as it
may reasonably request.
6.7 Delivery of Documents. BC shall have received all documents and
---------------------
other items to be delivered by the Sellers under Section 8.2.
6.8 Required Consents. All consents, approvals and waivers from third
-----------------
parties and governmental authorities necessary to the transactions as
contemplated hereby, including, without limitation, the expiration or
termination of applicable waiting periods under the HSR
24
<PAGE>
Act, and to the continued validity and effectiveness of the Licenses shall have
been obtained without the imposition on BC or SI of any burdensome conditions,
restrictions, or obligations.
6.9 Repayment of IE Indebtedness. SI shall have repaid in full, by
----------------------------
wire transfer of immediately available funds, any amounts owed to IE that have
been incurred prior to the date hereof or otherwise in accordance with Section
4.2(a)(i) of this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF THE SELLERS
--------------------------
The obligation of the Sellers to consummate the transactions
contemplated by this Agreement is subject to the satisfaction, at or before the
Closing, of all the following conditions, unless waived in writing by a majority
in interest of the Sellers:
7.1 Representations and Warranties True. All representations and
-----------------------------------
warranties by BC and Merger Sub in this Agreement or the Schedules and Exhibits
hereto, or in any written statement or certificate that shall be delivered to
the Sellers by BC under this Agreement, shall be true and correct on and as of
the date made and as of the Closing Date as if made on the date thereof (except
to the extent such representation or warranty relates to an earlier date).
7.2 Covenants Performed. BC and Merger Sub shall have performed,
-------------------
satisfied, and complied in all material respects with all covenants, agreements,
and conditions required by this Agreement to be performed or complied with by BC
and Merger Sub in all material respects on or before the Closing Date.
7.3 Certificate. The Sellers shall have received from BC a certificate
-----------
signed by the Chief Financial Officer of BC, dated the Closing Date, certifying
that the conditions specified in this Article VII have been satisfied.
7.4 No Violations; No Actions. Consummation of the transactions
-------------------------
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction and no action or
proceeding shall have been instituted or threatened by any person, entity or
governmental agency which, in any such case, in the sole judgment of the
Sellers, has a reasonable probability of resulting in (i) the obtaining of
material damages from the Sellers or BC, (ii) an order, judgment or decree
restraining, prohibiting or rendering unlawful the consummation of the
transactions contemplated by this Agreement, or (iii) other relief in connection
therewith.
7.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be in form and substance
reasonably satisfactory to the Sellers and their counsel, and the Sellers shall
have received all such counterpart originals or certified or other copies of
such documents as they may reasonably request.
7.6 Delivery of Documents. The Sellers shall have received (a) all
---------------------
documents and other items to be delivered by BC under Section 8.3 and (b) the
tax opinion of Bass, Berry & Sims PLC to be delivered under Section 8.5.
25
<PAGE>
7.7 Required Consents. All consents, approvals and waivers from third
-----------------
parties and governmental authorities necessary to the transactions as
contemplated hereby shall have been obtained, including, without limitation, the
expiration or termination of applicable waiting periods under the HSR Act.
7.8 Closing of Purchase of Shares by Softbank. The sale of shares of
-----------------------------------------
BC Stock by The Scott A. Blum Separate Property Trust u/d/t 8/2/95 to Softbank
Holdings Inc. pursuant to a certain Stock Purchase Agreement dated as of
September 30, 1998 shall have been consummated.
7.9 Repayment of IE Indebtedness. SI shall have replied in full, by
----------------------------
wire transfer of immediately available funds, any amounts owed to IE that have
been incurred prior to the date hereof or otherwise in accordance with Section
4.2(a)(i) of this Agreement.
ARTICLE VIII
CLOSING
-------
8.1 Time and Place. The Closing shall occur at the time and place
--------------
specified in Section 1.2 of this Agreement.
8.2 Deliveries of the Sellers. At the Closing, the Sellers will
-------------------------
execute and deliver or cause to be executed and delivered to BC:
(a) Stock Certificates. Certificates representing the Shares,
------------------
presented to BC for conversion into BC Stock ;
(b) Corporate Documents. The Charter of SI, certified by the Secretary
-------------------
of State of Tennessee as of a recent date and the Bylaws of SI, certified by the
Secretary of SI as in effect at the Closing;
(c) Certificates of Good Standing. Certificates of Good Standing,
-----------------------------
dated as of a recent date, with respect to SI, issued by the Secretary of State
of each of the States listed in Schedule 8.2(c);
(d) Books and Records. All of the minute books, stock ledgers and
-----------------
similar corporate records of SI;
(e) The Sellers' Certificate. A certificate from the Sellers, dated
------------------------
the Closing Date, containing the information required pursuant to Section 6.4;
(f) Non-Competition Agreements. Non-Competition Agreements dated the
--------------------------
Closing Date between BC and Merger Sub, on the one hand, and each of DMason,
MMason, IE and Ingram, on the other hand, substantially in form of Exhibit C
attached hereto (the "Non-Competition Agreements");
(g) Amended and Restated Investors' Rights Agreement. An Amended and
------------------------------------------------
Restated Investors' Rights Agreement dated the Closing Date among BC, the
26
<PAGE>
Sellers and other BC stockholders named therein substantially in the form of
Exhibit D attached hereto (the "Amended and Restated Investors' Rights
--------------------------------------
Agreement");
- ---------
(h) Amended and Restated Stockholders' Agreement. An Amended and
--------------------------------------------
Restated Stockholders' Agreement dated the Closing Date among BC, the Sellers
and other BC stockholders named therein substantially in the form of Exhibit E
attached hereto (the "Amended and Restated Stockholders' Agreement");
(i) Voting Agreement. A voting agreement dated the Closing Date among
----------------
BC, the Sellers and other BC stockholders named therein substantially in the
form of Exhibit F attached hereto (the "Voting Agreement");
----------------
(j) Employment Agreements. Employment Agreements between Merger Sub
---------------------
and each of DMason and MMason, substantially in the form of Exhibit G attached
hereto (the "Employment Agreements");
---------------------
(k) Intercompany Agreements. IE and SI (or Merger Sub, if more
-----------------------
appropriate) shall enter into the System Use Agreement in the form attached
hereto as Exhibit I, the Intercompany Services Agreement in the form attached
hereto as Exhibit J, the Supply Agreement in the form attached hereto as Exhibit
K, the Sublease in the form attached hereto as Exhibit L, and the Master
Database License Agreement in the form attached hereto as Exhibit M (the
"Intercompany Agreements").
-----------------------
(l) Non-Disclosure Agreements. Non-disclosure agreements between
-------------------------
Merger Sub, on the one hand, and the persons listed on Schedule 8.2 who accept
employment with Merger Sub as of the Closing on the other hand, substantially in
the form of Exhibit H attached hereto ;
(m) Resolutions. A copy of the resolutions of the Board of Directors
-----------
of SI, certified by the Secretary thereof as having been duly and validly
adopted and being in full force and effect, and a copy of shareholder
resolutions or consents authorizing execution and delivery of this Agreement and
performance of the transactions contemplated hereby by SI;
(n) Legal Opinion. A legal opinion of Bass, Berry & Sims PLC
-------------
substantially in the form of Exhibit N attached hereto; and
(o) Other Documents. Such other documents and instruments as BC or
---------------
its counsel reasonably shall deem necessary to consummate the transactions
contemplated hereby.
All documents delivered to BC shall be in form and substance
reasonably satisfactory to BC and its counsel.
8.3 Deliveries of BC. At the Closing, BC and/or Merger Sub will execute and
----------------
deliver or cause to be executed and delivered to the Sellers simultaneously with
delivery of the items referred to in Section 8.2 above:
27
<PAGE>
(a) BC Stock. Certificates representing the BC Stock issuable in
--------
accordance with Article I hereof;
(b) Resolutions. A copy of the resolutions of the Board of Directors
-----------
of each of BC and Merger Sub, certified by the Secretary thereof as having been
duly and validly adopted and being in full force and effect, and a copy of
stockholder consents for Merger Sub authorizing execution and delivery of this
Agreement and performance of the transactions contemplated hereby by BC;
(c) Corporate Documents. The Amended and Restated Certificate of
-------------------
Incorporation of BC and the Certificate of Incorporation of Merger Sub,
certified by the Secretary of State of Delaware as of a recent date and the
Bylaws of BC and Merger Sub, certified by the secretaries of BC and Merger Sub,
respectively, as in effect at the Closing;
(d) Officer's Certificate. A certificate dated the Closing Date
---------------------
containing the information required pursuant to Section 7.3;
(e) Non-Competition Agreements. The Non-Competition Agreements;
--------------------------
(f) Amended and Restated Investors' Rights Agreement. The Amended and
------------------------------------------------
Restated Investors' Rights Agreement;
(g) Amended and Restated Stockholders' Agreement. The Amended and
--------------------------------------------
Restated Stockholders' Agreement ;
(h) Voting Agreement. The Voting Agreement;
----------------
(i) Employment Agreements. The Employment Agreements;
---------------------
(j) Intercompany Agreements. The Intercompany Agreements;
-----------------------
(k) Legal Opinion. A legal opinion of Brobeck, Phleger & Harrison LLP
-------------
substantially in the form of Exhibit O attached hereto; and
(l) Other Documents. Such other documents and instruments as the
Sellers or their counsel reasonably shall deem necessary to consummate the
transactions contemplated hereby.
All documents delivered to the Sellers shall be in form and substance
reasonably satisfactory to the Sellers and their counsel.
8.4 Certificate of Merger, Articles of Merger and Plan of Merger. At the
Closing, the parties hereto shall cause to filed the Certificate of Merger with
the Delaware Secretary of State in accordance with the Delaware Law and the
Articles of Merger and Plan of Merger with the Tennessee Secretary of State in
accordance with the Tennessee Law.
28
<PAGE>
8.5 Tax Opinion of Bass, Berry & Sims PLC. A tax opinion of Bass,
-------------------------------------
Berry & Sims PLC to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
ARTICLE IX
OBLIGATIONS OF THE SELLERS AND BC AFTER CLOSING
-----------------------------------------------
9.1 Indemnification by the Sellers. The Sellers shall severally
------------------------------
indemnify and hold harmless BC, Merger Sub and the Surviving Corporation and
their respective officers, directors, employees, successors and assigns in
respect of any and all claims, actions, suits or other proceedings and any and
all losses, costs, expenses, liabilities, fines, penalties, interest, and
damages, whether or not arising out of any claim, action, suit or other
proceeding (and including reasonable counsel and accountants' fees and expenses
and all other reasonable costs and expenses of investigation, defense or
settlement of claims and amounts paid in settlement) incurred by, imposed on or
borne by BC, Merger Sub, the Surviving Corporation or such other parties
(collectively "Damages") resulting from:
-------
(a) The breach of any of the representations or warranties made
by the Sellers or SI in this Agreement; and
(b) The payment of any taxes (including interest and penalties)
of any kind or nature imposed, whether before or after the Closing, by any
governmental agency upon SI or its business, assets or employees or independent
contractors of SI, or otherwise resulting from or relating to the business or
operations of SI prior to the Closing or upon any of its properties or assets as
they existed as of or any time prior to the Closing Date, or as a result of the
transactions contemplated by this Agreement.
Damages shall exclude any amount with respect to which BC or SI as the
case may be shall have received under any insurance policy which provides
coverage for the liability to which such amount relates.
9.2 Indemnification by BC, Merger Sub and Surviving Corporation. Each
-----------------------------------------------------------
of BC, Merger Sub and the Surviving Corporation, jointly and severally, shall
indemnify and hold harmless the Sellers, in respect of any and all claims,
actions, suits or other proceedings and any and all losses, costs, expenses,
liabilities, fines, penalties, interest, and damages, whether or not arising out
of any claim, action, suit or other proceeding (and including reasonable counsel
and accountants' fees and expenses and all other reasonable costs and expenses
of investigation, defense or settlement of claims and amounts paid in
settlement) incurred by, imposed on or borne by the Sellers resulting from the
breach of any of the representations, warranties or agreements made by BC and
Merger Sub in this Agreement.
9.3 Indemnification Procedure for Claims. Whenever any claim shall
------------------------------------
arise for indemnification hereunder, the party entitled to indemnification (the
"indemnified party") shall promptly notify in writing the other party or parties
-----------------
(the "indemnifying party") of the claim and, when known, the facts constituting
------------------
the basis for such claim; provided, that the indemnified party's failure to give
such written notice shall not affect any rights or remedies of an indemnified
party hereunder with respect to indemnification for damages except to the extent
29
<PAGE>
that the indemnifying party is materially prejudiced thereby. In the event of
any claim for indemnification hereunder resulting from or in connection with any
claim or legal proceedings by a third party, the written notice to the
indemnifying party shall specify, if known, the amount or an estimate of the
amount of the liability arising therefrom. The indemnified party shall not
settle or compromise any claim by a third party for which it is entitled to
indemnification hereunder, without the prior written consent of the indemnifying
party (which shall not be unreasonably withheld), unless suit shall have been
instituted against it and the indemnifying party shall not have taken control of
and conducted in a diligent manner the defense of such suit after notification
thereof as provided in Section 9.4 of this Agreement.
9.4 Defense by Indemnifying Party. In connection with any claim giving
-----------------------------
rise to indemnity hereunder or resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
indemnifying party at its sole cost and expense may, upon written notice to the
indemnified party, assume the defense of any such claim or legal proceeding if
it acknowledges to the indemnified party in writing its obligations to indemnify
the indemnified party with respect to all elements of such claim, and thereafter
diligently conducts the defense thereof with counsel reasonably acceptable to
the indemnified party. If the indemnifying party acknowledges in writing as
specified above that it shall assume the defense of any such action, then the
indemnifying party shall keep the indemnified party informed with respect to the
defense of such action and the indemnified party shall be entitled to
participate in (but not control) the defense of such action, with its counsel
and at its own expense. If (A) the indemnifying party does not acknowledge in
writing as specified above that it shall assume or fails to conduct in a
diligent manner the defense of any such claim or litigation resulting therefrom,
or (B) the indemnified party shall have reasonably concluded that there may be
one or more legal defenses available to it which are different from, or,
additional to those available to the indemnifying party or other indemnified
parties with respect to such claim or litigation, then, (i) the indemnified
party may defend against such claim or litigation, in such manner as it may deem
appropriate, including, without limitation, settling such claim or litigation,
after giving notice of the same to the indemnifying party, on such terms as the
indemnified party may deem appropriate, and (ii) the indemnifying party shall be
entitled to participate in (but not control) the defense of such action, with
its counsel and at its own expense. If the indemnifying party thereafter seeks
to question the manner in which the indemnified party defended such third party
claim or the amount or nature of any such settlement, the indemnifying party
shall have the burden to prove by a preponderance of the evidence that the
indemnified party did not defend or settle such third party claim in a
reasonably prudent manner. Each party agrees to cooperate fully with the other,
such cooperation to include, without limitation, attendance at depositions and
the provision of relevant documents as may be reasonably requested by the
indemnifying party; provided, that the indemnifying party will hold the
indemnified party harmless from all of its expenses, including reasonable
attorneys' fees, incurred in connection with such cooperation by the indemnified
party .
9.5 Arbitration. The rights of the indemnified party to
-----------
indemnification and the estimated amount thereof, as set forth in the notice,
shall be deemed objected to by the indemnifying party unless the indemnifying
party notified the indemnified party in writing as specified in Section 9.4
above that the indemnifying party accepts and agrees with the right of the
indemnified party to indemnification or that the indemnifying party elects to
defend such claim. If the claim to indemnification is deemed objected to, the
parties shall attempt to settle
30
<PAGE>
and compromise the same, or if unable to do so within sixty (60) days of
receipt of the notice of the claim, such dispute shall be submitted to and
resolved by prompt binding arbitration in a mutually agreed location or, absent
agreement in New York, New York, and any rights of indemnification established
by reason of such settlement, compromise or arbitration shall promptly
thereafter be paid and satisfied by the indemnifying party. Arbitration shall
be final and binding according to the Commercial Arbitration Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any state or federal court in Orange County,
California.
9.6 Limitations on Indemnification.
------------------------------
(a) Notwithstanding any provision of this Agreement to the
contrary,
(i) the Sellers shall have no obligation to indemnify any
person entitled to indemnity under Section 9.1 unless the persons so
entitled to indemnity thereunder have suffered Damages in an aggregate
amount in excess of One Hundred Thousand Dollars ($100,000) (the
"Deductible") and then only to the extent of such excess;
----------
(ii) each of MMason's and DMason's liability under Section
9.1 shall in no event exceed the lesser of (A) the fair market value on the
Closing Date of the BC Stock received by each under Section 1.6 or (B) the
fair market value of BC Stock received by each under Section 1.6 on the
date DMason, MMason or both are required to satisfy any obligation under
this Article IX; and
(iii) IE's liability under Section 9.1 shall in no event
exceed the fair market value on the Closing Date of the BC Stock received
by IE under Section 1.6.
Notwithstanding the foregoing, there shall be no Deductible applied against
indemnification for any of the matters set forth in subsection 9.1(c) or any
breach of the representations of the Sellers and SI in Section 2.2. Each of
DMason and MMason shall satisfy any obligation to BC under this Article IX only
by return to BC of BC Stock with a fair market value equal to the amount of such
obligation. IE shall have the right to satisfy any obligation to BC under this
Article IX by return to BC of BC Stock with a fair market value equal to the
amount of such obligation; provided, however, that if the fair market value of
such BC Stock is less than IE's liability under this Article IX, IE shall pay
any difference to BC by wire transfer in immediately available funds.
(b) Notwithstanding any provision of this Agreement to the contrary,
BC shall have no obligation to indemnify any person entitled to indemnity under
Section 9.2, (i) unless the persons so entitled to indemnity thereunder have
suffered Damages in an aggregate amount in excess of One Hundred Thousand
Dollars ($100,000) and then only to the extent of such excess and (ii) BC's
liability under Section 9.2 shall in no event exceed the fair market value on
the Closing Date of the BC Stock to be delivered by BC under Section 1.2.
(c) No party to this Agreement shall have any right to indemnification
under this Article IX or otherwise for damages relating to any untruth or
inaccuracy in any representation or warranty herein in the event and to the
extent such party had actual knowledge
31
<PAGE>
(based upon its investigation of written materials) of such untruth or
inaccuracy prior to the Closing Date.
9.7 Indemnification for Genesys Partners Letter Agreement. The
-----------------------------------------------------
Sellers shall, jointly and severally, indemnify and hold harmless BC, Merger Sub
and the Surviving Corporation and their respective officers, directors,
employees, successors and assigns in respect of any and all claims, actions,
suits or other proceedings and any and all losses, costs, expenses, liabilities,
fines, penalties, interest, and damages, whether or not arising out of any
claim, action, suit or other proceeding (and including reasonable counsel and
accountants' fees and expenses and all other reasonable costs and expenses of
investigation, defense or settlement of claims and amounts paid in settlement)
incurred by, imposed on or borne by BC, Merger Sub, the Surviving Corporation or
such other parties resulting from that certain Letter Agreement dated August 17,
1998 between SI and Genesys Partners, Inc. The obligations of the Sellers under
this Section 9.7 shall be in addition to any other liability or obligation of
the Sellers under this Article IX.
ARTICLE X
TERMINATION
-----------
10.1 Termination by Mutual Consent. At any time prior to the Closing,
-----------------------------
this Agreement may be terminated by written consent of BC and the Sellers.
10.2 Termination by Default. At the Closing this Agreement may be
----------------------
terminated and abandoned:
(a) By BC if (i) any of SI or the Sellers has violated or
breached in any material respect any of the agreements, representations or
warranties contained in this Agreement which violation or breach has not been
waived in writing and has not been cured within ten (10) business days following
BC's written notice thereof; and (ii) any of the conditions precedent to BC's
obligations set forth in Article VI above had not been fulfilled or waived at
and as of the Closing;
(b) By SI and/or the Sellers if (i) BC or Merger Sub has
violated or breached in any material respect any of the agreements,
representations or warranties contained in this Agreement which violation or
breach has not been waived in writing and has not been cured within ten (10)
business days following SI's written notice thereof; and (b) any of the
conditions precedent to SI's and/or the Sellers' obligations set forth in
Article VII above have not been fulfilled or waived at and as of the Closing; or
(c) By either party in the event the Closing has not occurred
on or before December 15, 1998.
10.3 Effectiveness of Termination. Any termination of this Agreement
----------------------------
under this Article X will be effective upon the delivery of notice by the
terminating party to the other parties hereto.
10.4 Effect of Termination. In the event of termination as provided
---------------------
above, this Agreement shall forthwith become of no further force or effect and
all parties hereto shall bear their own costs associated with this Agreement and
all transactions mentioned herein; provided,
32
<PAGE>
that such termination shall not relieve any person of liability for breach of or
interference with this Agreement.
ARTICLE XI
GENERAL PROVISIONS
------------------
11.1 Survival. All representations and warranties made by the parties
--------
herein or in any instrument or document furnished in connection herewith shall
survive until the first year anniversary of the Closing Date. No claim or action
for indemnity pursuant to Sections 9.1 or 9.2 hereof shall be asserted or
maintained by any party hereto after the first year anniversary of the Closing
Date except for claims made in writing prior to such date and actions (whether
instituted before or after such date) based on any claim made in writing prior
to such date. No claim or action for indemnity pursuant to Section 9.7 hereof
shall be asserted or maintained by any party hereto after the statute of
limitations applicable to any claim under Section 9.7 has run except for claims
made in writing prior to such date and actions (whether instituted before or
after such date) based on any claim made in writing prior to such date.
11.2 Intentionally Omitted.
---------------------
11.3 No Broker or Finder. Each of the parties represents and warrants
-------------------
that, except as set forth on Schedule 11.3, it has dealt with no broker or
finder in connection with any of the transactions contemplated by this
Agreement, and, insofar as it knows, no broker or other person is entitled to
any conversion or finder's fee, in connection with these transactions.
11.4 Transaction Costs. BC shall pay all costs and expenses incurred
-----------------
or to be incurred by it in negotiating and preparing this Agreement and carrying
out the transactions contemplated by this Agreement. The Sellers and SI shall
pay their respective costs and expenses incurred or to be incurred by SI or the
Sellers in negotiating and preparing this Agreement and carrying out the
transactions contemplated by this Agreement.
11.5 Headings. The subject headings of the Articles and Sections of
--------
this Agreement are included for purposes of convenience only, and shall not
affect the construction or interpretation of any of its provisions.
11.6 Entire Agreement; Waivers. This Agreement, the Exhibits and
-------------------------
Schedules hereto and the Confidentiality Agreement constitute the entire
agreement between the parties pertaining to the contemporaneous agreements,
representations, and understandings of the parties. No waiver of any of the
provisions of this Agreement shall be deemed, or shall constitute, a waiver of
any other provision, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver shall be binding unless executed in writing by the
party making the waiver.
11.7 Third Parties. Except as set forth in Article IX, nothing in
-------------
this Agreement, whether express or implied, is intended to confer any rights or
remedies under or by reason of this Agreement on any persons other than the
parties to it and their respective successors and assigns, nor is anything in
this Agreement intended to relieve or discharge the obligation or liability of
any third person to any party to this Agreement, nor shall any provision give
any third persons any right of subrogation or action over against any party to
this Agreement.
33
<PAGE>
11.8 Successors and Assigns. This Agreement shall be binding on, and
----------------------
shall inure to the benefit of, the parties to it and their respective heirs,
legal representatives, successors, and assigns.
11.9 Notices. All notices, requests, demands, and other
-------
communications under this Agreement shall be in writing and shall be delivered
during normal business hours by hand, by Federal Express, Express Mail, United
Parcel Service or other reputable overnight delivery service, by telecopy
(confirmation of receipt received) or by first class mail, certified, postage
prepaid, and shall be deemed delivered when so delivered by hand, overnight
delivery or telecopy, or if mailed, five (5) days after the date of mailing,
properly addressed as follows:
To the Sellers at: Ingram Entertainment Inc.
Attn: President
Two Ingram Blvd.
La Vergne, TN 37089
Facsimile (615) 287-4985
With a copy to: Ingram Entertainment Inc.
Attn: General Counsel
Two Ingram Blvd.
La Vergne, TN 37089
Facsimile (615) 287-4465
To SI at: SpeedServe Inc.
Attn: President
Two Ingram Blvd.
La Vergne, TN 37089
Facsimile (615) 793-2225
To BC or Merger Sub at: Buy Corp.
Attn: Chief Financial Officer
21 Brookline
Aliso Viejo, CA 92656
Facsimile (949) 425-5300
Any party may change its address for purposes of this paragraph by giving notice
of the new address to each of the other parties in the manner set forth above.
Rejection or other refusal to accept, or the inability to deliver because of a
changed address of which no notice was given, shall not affect the date of such
notice sent in accordance with the foregoing provisions.
11.10 Attorneys' Fees. If any party to this Agreement shall bring any
---------------
action, suit, counterclaim or appeal for any relief against the other,
declaratory or otherwise, to enforce the terms hereof or to declare rights
hereunder (collectively, an "Action"), the Prevailing Party (as defined herein)
------
shall be entitled to recover as part of any such Action its reasonable
attorneys' fees and costs, including any fees and costs incurred in bringing and
prosecuting such Action and/or enforcing any order, judgment, ruling or award
granted as part of such Action. "Prevailing Party" within the meaning of this
Section 11.10 includes the party whose prayer for
34
<PAGE>
relief is granted by the tribunal, or which obtains a judgment or equitable
relief, and includes, without limitation, a party who agrees to dismiss an
Action upon the other party's payment of all or a portion of the sums allegedly
due or performance of the covenants allegedly breached, or a party which obtains
substantially the relief sought by the party.
11.11 Governing Law. The terms of this Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of Delaware without
reference to the choice of law principles thereof.
11.12 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
11.13 Severability. All provisions contained herein are severable and
------------
in the event that any of them shall be held to be to any extent invalid or
otherwise unenforceable by any court of competent jurisdiction, such provision
shall be construed as if it were written so as to effectuate to the greatest
possible extent the parties' expressed intent; and in every case the remainder
of this Agreement shall not be affected thereby and shall remain valid and
enforceable, as if such affected provision were not contained herein.
11.14 Publicity. None of the parties shall issue or make, or cause to
---------
have issued or made, any press release or announcement concerning, or otherwise
disclose to any third person, the terms of the transactions contemplated hereby
(including the existence of the Merger and the transactions contemplated hereby)
without the advance approval in writing of the form and substance thereof by the
other parties, unless otherwise required by applicable law, it being understood
that the parties will use their best efforts not to disclose the terms or
existence of the transaction prior to the Closing. Further, prior to and
following the Closing none of the parties shall disclose the material terms of
this Agreement or the Merger to any third party other than a third party which
must have such information in rendering financial, business, or tax advice to
such party, as required by law, or with the written consent (not, following the
Closing, to be unreasonably withheld) of each other party hereto.
11.15 Schedules. All schedules, exhibits, appendices and documents
---------
referred to in or attached to this Agreement are integral parts of this
Agreement as if fully set forth herein, and all statements appearing therein
shall be deemed disclosed for all purposes and not only in connection with the
specific representation to which they are explicitly referenced.
[Signature Page to Follow]
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
and Plan of Merger and Reorganization as of the date first above written.
THE SELLERS
INGRAM ENTERTAINMENT INC.
By: ______________________________________
John J. Fletcher
Vice President and General Counsel
__________________________________________
David C. Mason
__________________________________________
Michael G. Mason
SPEEDSERVE INC.
By: ______________________________________
John J. Fletcher
Vice President and General Counsel
BUY CORP.
By: ______________________________________
Scott A. Blum
President/CEO
SPEEDSERVE.COM INC.
By: ______________________________________
Murray Williams
Chief Financial Officer
Signature Page For Agreement And Plan Of Merger And Reorganization
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
by and among
BUY.COM INC.,
BGLF Acquisition Corporation and
BUYGOLF.COM INC.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
ARTICLE I THE MERGER............................................... 2
1.1 The Merger............................................. 2
1.2 Closing; Effective Time................................ 2
1.3 Effect of the Merger................................... 2
1.4 Certificate of Incorporation; Bylaws................... 2
1.5 Directors and Officers................................. 2
1.6 Effect on Capital Stock................................ 2
1.7 No Further Ownership Rights in BuyGolf Common Stock.... 3
1.8 Options to Purchase BuyGolf Common Stock............... 3
1.9 Taking of Necessary Action; Further Action............. 4
1.10 Surrender of Certificates.............................. 4
1.11 Consent to Merger; Waiver of Dissenters'Rights......... 5
1.12 Lost, Stolen or Destroyed Certificates................. 5
1.13 Minute Books, Stock Ledger and Other Corporate Records. 5
1.14 Legends on BC Stock.................................... 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS...... 6
2.1 Organization, Good Standing and Qualification.......... 6
2.2 Capitalization; Voting Rights.......................... 6
2.3 Authority; No Violation................................ 7
2.4 Consents and Approvals................................. 8
2.5 Financial Statements................................... 8
2.6 Absence of Undisclosed Liabilities..................... 9
2.7 Agreements; Action..................................... 9
2.8 Obligations to Related Parties......................... 9
2.9 Title to Properties and Assets; Liens, Etc............. 10
2.10 Patents and Trademarks................................. 10
2.11 Compliance with Other Instruments...................... 10
2.12 Litigation............................................. 11
2.13 Tax Returns and Payments............................... 11
2.14 Employees.............................................. 11
2.15 Nondisclosure and Developments Agreements.............. 12
2.16 Registration Rights.................................... 12
2.17 Compliance with Laws; Permits.......................... 12
2.18 Absence of Breaches or Defaults........................ 12
2.19 Brokers................................................ 12
2.20 No Misstatements....................................... 13
2.21 Environmental and Safety Laws.......................... 13
2.22 Year 2000 Compliance................................... 13
2.23 Securities Law Exemption............................... 13
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BC AND MERGER
SUB.................................................... 14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3.1 Organization, Good Standing and Qualification.......... 14
3.2 Capitalization; Voting Rights.......................... 15
3.3 Authority; No Violation................................ 15
3.4 Consents and Approvals................................. 16
3.5 Financial Statements................................... 16
3.6 Absence of Undisclosed Liabilities..................... 16
3.7 Agreements; Action..................................... 16
3.8 Obligations to Related Parties......................... 17
3.9 Title to Properties and Assets; Liens, Etc............. 17
3.10 Patents and Trademarks................................. 18
3.11 Compliance with Other Instruments...................... 18
3.12 Litigation............................................. 18
3.13 Tax Returns and Payments............................... 19
3.14 Employees.............................................. 19
3.15 Nondisclosure and Developments Agreements.............. 19
3.16 Registration Rights.................................... 19
3.17 Compliance with Laws; Permits.......................... 20
3.18 Absence of Breaches or Defaults........................ 20
3.19 Brokers................................................ 20
3.20 No Misstatements....................................... 20
3.21 Environmental and Safety Laws.......................... 20
3.22 Year 2000 Compliance................................... 21
3.23 Tax-Free Organization.................................. 21
ARTICLE IV ADDITIONAL AGREEMENTS................................... 21
4.1 Information Statement; Restricted Securities........... 21
4.2 Stockholder Approval................................... 22
4.3 Access to Information.................................. 22
4.4 Expenses............................................... 23
4.5 Public Disclosure...................................... 23
4.6 Approvals.............................................. 23
4.7 Notification of Certain Matters........................ 23
4.8 Additional Documents and Further Assurances............ 23
4.9 Maintenance of Business................................ 24
4.10 Conduct of Business.................................... 24
4.11 Confidentiality........................................ 25
4.12 "Market Stand-Off"Agreement............................ 26
4.13 BuyGolf's 1998 Stock Option Plan....................... 26
4.14 Necessary Filings...................................... 27
ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF BC AND
MERGER SUB.............................................. 27
5.1 Certificates for BuyGolf Common Stock.................. 27
5.2 Representations and Warranties True.................... 27
5.3 Covenants Performed.................................... 27
5.4 Certificate............................................ 27
5.5 No Violations; No Actions.............................. 27
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
5.6 Proceedings and Documents.............................. 27
5.7 Delivery of Documents.................................. 28
5.8 Required Consents...................................... 28
5.9 Private Placement...................................... 28
5.10 Tax-Free Reorganization................................ 28
5.11 Limitation on Dissent.................................. 28
ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYGOLF AND THE
STOCKHOLDERS........................................... 28
6.1 Representations and Warranties True.................... 28
6.2 Covenants Performed.................................... 28
6.3 Certificate............................................ 28
6.4 No Violations; No Actions.............................. 28
6.5 Proceedings and Documents.............................. 29
6.6 Delivery of Documents.................................. 29
6.7 Required Consents...................................... 29
ARTICLE VII CLOSING................................................ 29
7.1 Time and Place......................................... 29
7.2 Deliveries of the Stockholders......................... 29
7.3 Deliveries of BC....................................... 31
7.4 Certificate of Merger.................................. 32
ARTICLE VIII INDEMNIFICATION....................................... 32
8.1 Indemnification by the Stockholders.................... 32
8.2 Indemnification by BC, Merger Sub and Surviving
Corporation............................................ 32
8.3 Indemnification Procedure for Claims................... 33
8.4 Defense by Indemnifying Party.......................... 33
8.5 Arbitration............................................ 34
8.6 Limits on Indemnification.............................. 34
ARTICLE IX GENERAL PROVISIONS...................................... 34
9.1 Survival of Representations, Warranties and Agreements. 34
9.2 Notices................................................ 35
9.3 Governing Law.......................................... 35
9.4 Severability........................................... 36
9.5 Assignment; Binding Effect; Benefit.................... 36
9.6 Headings............................................... 36
9.7 Entire Agreement....................................... 36
9.8 Counterparts........................................... 37
9.9 Waivers................................................ 37
9.10 Third Parties.......................................... 37
9.11 Publicity.............................................. 37
9.12 Schedules.............................................. 37
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
-----------------------------------------------
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement")
---------
is entered into as of October 25, 1999, by and among BUY.COM INC., a Delaware
corporation ("BC"), BGLF Acquisition Corporation a Delaware corporation and
--
wholly owned subsidiary of BC ("Merger Sub"), BuyGolf.com Inc., a Delaware
----------
corporation ("BuyGolf"), and each of BuyGolf's current stockholders listed on
-------
Schedule A hereto (individually, a "Stockholder," collectively, the
- ---------- -----------
"Stockholders").
------------
RECITALS
A. The Boards of Directors of BC and BuyGolf believe it is in the
best interest of their respective companies and the stockholders of their
respective companies that BuyGolf and Merger Sub combine into a single company
through the statutory merger of Merger Sub with and into BuyGolf (the "Merger")
------
and, in furtherance thereof, have approved the Merger.
B. BuyGolf is a duly incorporated Delaware corporation; its
authorized capital stock consists of: (i) 10,000,000 shares of common stock,
$0.0001 par value, 8,367,166 of which are issued and outstanding; and (ii)
5,000,000 shares of preferred stock, $0.0001 par value, none of which are issued
and outstanding (collectively, the outstanding shares of Common Stock shall be
referred to as the "BuyGolf Common Stock").
--------------------
C. Pursuant to the Merger, among other things, all BuyGolf Common
Stock owned by the Stockholders, as set forth on Schedule A hereto, shall be
----------
converted into the right to receive shares of BC Common Stock, $.0001 par value
("BC Stock"), at the rate set forth herein.
--------
D. There are currently outstanding options to purchase 449,000
shares of Common Stock of BuyGolf (the "Outstanding Options"), and all of the
Outstanding Options are owned by the optionholders as set forth on Schedule B
----------
attached hereto.
E. BC shall assume the Outstanding Options to purchase shares of
BuyGolf Common Stock.
F. BuyGolf, BC and Merger Sub desire to make certain representations
and warranties and other agreements in connection with the Merger.
G. BC, Merger Sub and BuyGolf intend that the Merger shall
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, and in furtherance thereof intend that this Agreement shall be a
"Plan of Reorganization" within the meaning of Sections 354(a) and 361(a) of the
Internal Revenue Code.
NOW, THEREFORE, in consideration of the covenants and representations
set forth herein, and for other good and valuable consideration, the parties
agree as follows:
1
<PAGE>
ARTICLE I
THE MERGER
----------
1.1 The Merger. At the Effective Time (as defined in Section 1.2)
----------
and subject to and upon the terms and conditions of this Agreement, Merger Sub
shall be merged with and into BuyGolf, the separate corporate existence of
Merger Sub shall cease and BuyGolf shall continue as the surviving corporation.
BuyGolf as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation."
---------------------
1.2 Closing; Effective Time. The closing of the transactions
-----------------------
contemplated hereby (the "Closing") shall take place as soon as practicable
-------
after the satisfaction or waiver of each of the conditions set forth in Articles
V and VI hereof or at such other time as the parties hereto agree (the
"Closing Date"). The Closing shall take place at the offices of Brobeck,
------------
Phleger & Harrison LLP, 38 Technology Drive, Irvine, California 92618, or at
such other location as the parties hereto agree. In connection with the Closing,
the parties hereto shall cause the Merger to be consummated by properly
executing and filing the Certificate of Merger in the form attached hereto as
Exhibit A (the "Certificate of Merger") with the Delaware Secretary of State in
- --------- ---------------------
accordance with the applicable provisions of the Delaware General Corporation
Law (the "Delaware Law"). The Merger shall become effective upon the filing of
------------
the Certificate of Merger with the Delaware Secretary of State (the time of such
filing being the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of BuyGolf and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of BuyGolf and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. At the Effective Time, the directors and
----------------------
officers of the Merger Sub shall become the directors and officers of the
Surviving Corporation, until their respective successors are duly elected or
appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
-----------------------
action on the part of Merger Sub, BuyGolf or the holders of any of the following
securities:
(a) Conversion of BuyGolf Common Stock. At the Effective Time,
----------------------------------
each share of BuyGolf Common Stock issued and outstanding immediately prior to
the Effective Time (other than the Outstanding Options) will be canceled and
extinguished and will be
2
<PAGE>
converted automatically into the right to receive 0.520 validly issued, fully
paid and non-assessable shares of BC Stock (the "Exchange Ratio").
--------------
(b) Assumption of Outstanding Options. At the Effective Time,
---------------------------------
BuyGolf's 1998 Stock Option Plan (the "BuyGolf Stock Option Plan") and all
Outstanding Options to purchase BuyGolf Common Stock then outstanding under the
BuyGolf Stock Option Plan shall be assumed by BC in accordance with Sections 1.8
and 4.13 of this Agreement. Pursuant to this assumption of the Outstanding
Options, each optionholder of the Company shall after the Closing hold an option
to purchase the number of shares of the BC's Common Stock set forth opposite
such optionholder's name on Schedule B. Each optionholder shall enter into an
----------
Option Assumption Agreement which shall govern the assumption of options by BC.
(c) Cancellation of BC-Owned and BuyGolf-Owned Stock. Each
------------------------------------------------
share of BuyGolf Common Stock owned by BC or BuyGolf or any subsidiary of BC or
BuyGolf immediately prior to the Effective Time shall be automatically canceled
and extinguished without any conversion thereof and without any further action
on the part of BC, Merger Sub or BuyGolf.
(d) Capital Stock of Merger Sub. At the Effective Time, each
---------------------------
share of Common Stock, $.0001 par value, of Merger Sub
("Merger Sub Common Stock") issued and outstanding immediately prior to the
-----------------------
Effective Time shall be converted into and exchanged for one validly issued,
fully paid and nonassessable share of Common Stock of the Surviving Corporation.
Each stock certificate of Merger Sub evidencing ownership of any such shares
shall evidence ownership of such shares of capital stock of the Surviving
Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
BC Stock or BuyGolf Common Stock), reorganization, recapitalization or other
like change with respect to BC Stock or BuyGolf Common Stock occurring after the
date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of BC Stock will
-----------------
be issued in the Merger and the number of shares of BC Stock issuable to a
Stockholder hereunder shall be rounded upward to the nearest whole share of BC
Stock.
1.7 No Further Ownership Rights in BuyGolf Common Stock. All shares
---------------------------------------------------
of BC Stock issued upon the surrender for exchange of shares of BuyGolf Common
Stock in accordance with the terms hereof shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of BuyGolf Common
Stock, and there shall be no further registration of transfers on the records of
the Surviving Corporation of shares of BuyGolf Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates (as defined below) are presented to the Surviving Corporation
for any reason, they shall be canceled and exchanged as provided in this Article
I.
1.8 Options to Purchase BuyGolf Common Stock. At the Effective Time,
----------------------------------------
each option granted by BuyGolf to purchase shares of BuyGolf Common Stock (each,
a "BuyGolf Stock Option") which is outstanding and unexercised immediately prior
--------------------
to the Effective Time shall be assumed by BC and converted into an option to
purchase shares of BC
3
<PAGE>
Stock in such number and at such exercise price as provided below and otherwise
having the same terms and conditions as in effect immediately prior to the
Effective Time (except to the extent that such terms, conditions and
restrictions may be altered in accordance with their terms as a result of the
Merger):
(a) the number of shares of BC Stock to be subject to the new
option shall be equal to the product of (i) the number of shares of BuyGolf
Common Stock subject to the original option and (ii) the Exchange Ratio;
(b) the exercise price per share of BC Stock under the new
option shall be equal to the quotient of (i) the exercise price per share of
BuyGolf Common Stock under the original option divided by (ii) the Exchange
Ratio; and
(c) upon each exercise of options by a holder thereof, the
aggregate number of shares of BC Stock deliverable upon such exercise shall be
rounded down, if necessary, to the nearest whole share and the aggregate
exercise price shall be rounded up, if necessary, to the nearest cent.
The adjustments provided herein with respect to any options which are "incentive
---------
stock options" (as defined in Section 422 of the Code) shall be effected in a
- -------------
manner consistent with the requirements of Section 424(a) of the Code.
1.9 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of BuyGolf and Merger Sub, the officers and directors of BuyGolf
and Merger Sub are fully authorized in the name of their respective corporations
or otherwise to take, and will take, all such lawful and necessary action, so
long as such action is not inconsistent with this Agreement.
1.10 Surrender of Certificates.
-------------------------
(a) Exchange Procedures. Promptly after the Effective Time, each
-------------------
holder of record of a certificate or certificates ("Certificates") which
------------
immediately prior to the Effective Time represented outstanding shares of
BuyGolf Common Stock, whose shares were converted into the right to receive
shares of BC Stock, shall surrender such Certificates (duly endorsed in favor of
BC or accompanied by stock powers duly executed in favor of and in a form
reasonably acceptable to BC and its counsel, free from any charge, lien,
encumbrance or adverse claim of any kind whatsoever) in exchange for
certificates representing shares of BC Stock (and cash in lieu of fractional
shares). Upon surrender of a Certificate for cancellation to BC, the holder of
such Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of BC Stock which such holder has the
right to receive pursuant to Section 1.6 of this Agreement, and the Certificate
so surrendered shall forthwith be canceled. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time, represented shares of
BuyGolf Common Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of BC Stock into which such shares of
BuyGolf Common Stock shall have been so converted in accordance with Article I
hereof.
4
<PAGE>
(b) Distributions With Respect to Unexchanged Shares. No
------------------------------------------------
dividends or other distributions with respect to BC Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of BC Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of BC
Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of any such dividends or other distributions with a record
date after the Effective Time theretofore payable (but for the provisions of
this Section 1.10(b)) with respect to such shares of BC Stock.
(c) Transfers of Ownership. If any certificate for shares of BC
----------------------
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to BC or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of BC
Stock in any name other than that of the registered holder of the Certificate
surrendered, or established to the satisfaction of BC or any agent designated by
it that such tax has been paid or is not payable.
(d) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.10, neither the Surviving Corporation nor any party hereto shall
be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.11 Consent to Merger; Waiver of Dissenters' Rights. By their
-----------------------------------------------
execution of this Agreement, each Stockholder (a) consents to the Merger and to
the taking of stockholder action to approve the Merger without a meeting; (b)
acknowledges that he or it is aware of his or its right to dissent to the Merger
and demand payment for shares of BuyGolf Common Stock in accordance with
Delaware Law; and (c) waives such rights to dissent and demand payment with
respect to the Merger.
1.12 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, BC shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of BC Stock as may be
required pursuant to Section 1.6; provided, however, that BC may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against BC or the Surviving Corporation or with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.13 Minute Books, Stock Ledger and Other Corporate Records. At the
------------------------------------------------------
Closing, BuyGolf shall deliver to BC, in addition to those items set forth in
Section 7.2, the minute books, stock ledger and other corporate records of
BuyGolf.
1.14 Legends on BC Stock. In addition to any other legend that may be
-------------------
required by federal or state securities laws, each certificate for BC Stock that
is issued hereunder shall bear a legend in substantially the following form:
5
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE ISSUER OF SUCH SECURITIES
THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS
IN FULL COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 UNDER
SUCH ACT."
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
--------------------------------------------------
Except as set forth on the Disclosure Schedule delivered to BC, which
has been executed by an officer of BuyGolf on behalf of the Stockholders (the
"BuyGolf Disclosure Schedule"), each of the Stockholders jointly and severally
---------------------------
represent and warrant to BC as follows:
2.1 Organization, Good Standing and Qualification. BuyGolf is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. BuyGolf has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and to carry out the provisions of this Agreement, and to carry
on its business as presently conducted and as presently proposed to be
conducted. BuyGolf is duly qualified and is authorized to do business and is in
good standing as a foreign corporation in all jurisdictions in which the nature
of its activities and of its properties (both owned and leased) make such
qualifications necessary, except for those jurisdictions in which failure to do
so would not have a material adverse effect on BuyGolf or its business. BuyGolf
owns no equity securities of any other corporation, limited partnership or
similar entity. BuyGolf is not a participant in any joint venture, partnership
or similar arrangement. BuyGolf has made available to BC true, correct and
complete copies of BuyGolf's Certificate of Incorporation and Bylaws, each as
amended to date and presently in effect.
2.2 Capitalization; Voting Rights.
-----------------------------
(a) The authorized capital stock of BuyGolf, immediately prior
to the Closing, will consist of (a) 10,000,000 shares of Common Stock, 8,367,166
of which are issued and outstanding, 499,000 shares of which are currently
reserved for issuance pursuant to outstanding option agreements, and 401,000 of
which will be reserved in the future for issuance to key employees, consultants
and others affiliated with BuyGolf pursuant to stock grant, stock purchase
and/or option plans or any other stock incentive program, arrangement or
agreement approved by BuyGolf's Board of Directors and (b) 5,000,000 shares of
Preferred Stock (the "Preferred Stock"), none of which are issued and
---------------
outstanding. All issued and outstanding shares of BuyGolf's Common Stock (i)
have been duly authorized and validly issued, (ii) are fully paid
6
<PAGE>
and nonassessable, (iii) are free of liens and encumbrances created by BuyGolf
and (iv) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. The rights, preferences, privileges and
restrictions of the BuyGolf Common Stock are as stated in BuyGolf's Certificate
of Incorporation. Except for BuyGolf's Outstanding Options, there are no
outstanding options, warrants, puts, calls, rights (including conversion or
preemptive rights and rights of first refusal), or agreements of any kind for
the purchase or acquisition from BuyGolf of any of its securities or other
restrictions on the incidents of ownership or transfer created by statute, the
charter documents of BuyGolf or any agreement to which BuyGolf is a party or by
which it is bound. There are no amounts owed to any person by BuyGolf as a
result of any repurchase or redemption by BuyGolf of its Common Stock.
(b) Stockholders own all the BuyGolf Common Stock free and clear
of all liens, encumbrances, rights, charges and assessments of every nature and
no shares of BuyGolf Common Stock are subject to any restriction on
transferability. Stockholders have not granted any option, warrant or right to
purchase or acquire any of the BuyGolf Common Stock nor have Stockholders
entered into any contract, agreement, commitment, understanding or arrangement
relating to the BuyGolf Common Stock, or by which Stockholders are or may be
bound or obligated to transfer or dispose of any of the BuyGolf Common Stock. No
Stockholder has been married since formation of BuyGolf except to the persons
signing Spousal Consents to this Agreement, a form of which is attached hereto
as Exhibit B.
---------
(c) Stockholders shall transfer to BC hereunder good and
marketable legal and beneficial title to the BuyGolf Common Stock, free and
clear of all liens, encumbrances, rights, charges and assessments of any nature
whatsoever.
(d) There are no outstanding proxies, stockholders' agreements,
voting trusts or other agreements of any kind whatsoever restricting,
controlling, directing or otherwise affecting the voting of the BuyGolf Common
Stock.
2.3 Authority; No Violation.
-----------------------
(a) BuyGolf has full corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly approved by the Board of Directors of BuyGolf. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by
stockholders representing one hundred percent of the outstanding shares of
BuyGolf's capital stock. No other corporate proceeding on the part of BuyGolf is
necessary to approve this Agreement and to consummate the transactions
contemplated hereby. This Agreement and all other agreements and documents to be
entered into in connection herewith have been duly and validly executed and
delivered by BuyGolf and each of the Stockholders and (assuming due
authorization, execution and delivery by BC) constitute valid and binding
obligations of BuyGolf and each of the Stockholders, enforceable against BuyGolf
and each of the Stockholders in accordance with their respective terms, except
as enforcement may be limited by general principles of equity whether applied in
a court of law or a court of equity and by bankruptcy, insolvency and similar
laws affecting creditors' rights and remedies generally.
7
<PAGE>
(b) Stockholders have the power and authority to enter into this
Agreement and to perform their obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Stockholders and constitutes a legal, valid and binding
obligation of the Stockholders, enforceable against the Stockholders in
accordance with the terms hereof.
(c) Neither the execution and delivery of this Agreement by
BuyGolf and each of the Stockholders, nor the consummation by BuyGolf and each
of the Stockholders of the transactions contemplated hereby, nor compliance by
BuyGolf and each of the Stockholders with any of the terms or provisions hereof,
will (i) violate any provision of the Certificate of Incorporation or Bylaws of
BuyGolf, or (ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to BuyGolf or any of the
Stockholders or any of their respective properties or assets, or (iii) violate,
conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or a right
of termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of BuyGolf or any of the
Stockholders under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which BuyGolf or any of the Stockholders is a party,
or by which BuyGolf or any of the Stockholders or any of their respective
properties or assets may be bound or affected.
2.4 Consents and Approvals. No consents or approvals, orders or
----------------------
authorizations of or filings or registrations with any court, administrative
agency or commission or other governmental authority or instrumentality (each a
"Governmental Entity") or with any third party are necessary with respect to
-------------------
BuyGolf or any of the Stockholders in connection with (1) the execution and
delivery of this Agreement and (2) the consummation of the Merger and the other
transactions contemplated hereby.
2.5 Financial Statements. BuyGolf has delivered true and correct
--------------------
copies of its audited balance sheet as of December 31, 1998 and audited
statements of operations, stockholders equity and cash flows for the one month
period from inception and ended December 31, 1998 and the unaudited balance
sheet ("Balance Sheet") as of June 30, 1999 (the "Balance Sheet Date") and the
------------- ------------------
unaudited statements of operations, stockholders' equity and cash flows for the
six-month period ended June 30, 1999 (collectively, the "Financial Statements").
--------------------
Such Financial Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
----
the periods indicated and with each other (in the case of Financial Statements,
subject to normal year-end adjustments and the absence of footnote disclosures).
The Financial Statements (a) are complete and correct in all material respects,
(b) are in accordance with BuyGolf's books and records, and (c) fairly present
the financial condition and operating results of BuyGolf as of the dates, and
for the periods indicated therein. Since the Balance Sheet Date, there has not
been any material adverse change in the business, operations or financial
condition of BuyGolf. Except as disclosed in the Financial Statements, BuyGolf
is not a guarantor or indemnitor of any indebtedness of any other person, firm
or corporation. The books and records of BuyGolf have been, and are being,
maintained in accordance with GAAP and any other applicable legal and accounting
requirements.
8
<PAGE>
2.6 Absence of Undisclosed Liabilities. BuyGolf has no material
----------------------------------
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet, (ii) those incurred in the ordinary course of business and not
required to be set forth in the Balance Sheet under GAAP, (iii) those incurred
in the ordinary course of business since the Balance Sheet Date and consistent
with past practice, and (iv) those incurred in connection with the execution of
this Agreement.
2.7 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby, there
are no agreements, understandings or proposed transactions between BuyGolf and
any of its officers, directors, affiliates or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
BuyGolf is a party or to its knowledge by which it is bound which may involve
(i) obligations (contingent or otherwise) of, or payments to, BuyGolf (other
than obligations of, or payments to, BuyGolf arising in the ordinary course of
business), or (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from BuyGolf (other than licenses arising from the
purchase of "off the shelf" or other standard products), or (iii) provisions
restricting or affecting the development, manufacture or distribution of
BuyGolf's products or services, or (iv) indemnification by BuyGolf with respect
to infringements of proprietary rights.
(c) BuyGolf has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities (other than with respect to dividend obligations,
distributions, indebtedness and other obligations incurred in the ordinary
course of business or as disclosed in the Financial Statements), (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business,
(v) entered into any material contract, other than in the ordinary course of
business and as provided to BC, and there has not occurred any amendment,
termination or default under any material contract to which BuyGolf is a party
or by which it is bound, (vi) made any change in its accounting practices or
made any revaluation of its assets, (vii) made any purchase or other acquisition
of, sale, lease, disposition, or other transfer of, or mortgage, pledge or
subjection to any material encumbrance or lien on any material asset, tangible
or intangible, of BuyGolf, other than in the ordinary course of business, or
(viii) made any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets, other than in the ordinary
course of business.
2.8 Obligations to Related Parties. There are no obligations of
------------------------------
BuyGolf to officers, directors, stockholders, or employees of BuyGolf other than
(a) for payment of salary for services rendered, (b) reimbursement for
reasonable expenses incurred on behalf of BuyGolf and (c) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of BuyGolf). No officer, director or, to the best of BuyGolf's and
the Stockholders knowledge, stockholder, or any member of their immediate
families, are indebted to BuyGolf or have any direct or indirect ownership
interest in any firm or corporation with
9
<PAGE>
which BuyGolf is affiliated or with which BuyGolf has a business relationship,
or any firm or corporation which competes with BuyGolf, except that officers,
directors and/or stockholders of BuyGolf may own stock in publicly traded
companies which may compete with BuyGolf. No such officer, director or
stockholder, or any member of their immediate families is, directly or
indirectly, interested in any material contract with BuyGolf (other than such
contracts related to any such person's ownership of capital stock or other
securities of BuyGolf).
2.9 Title to Properties and Assets; Liens, Etc. BuyGolf has good and
------------------------------
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than (i) those resulting from taxes which have not yet become
delinquent, (ii) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of BuyGolf and (iii) those that have otherwise arisen in the ordinary
course of business. All facilities, machinery, equipment, fixtures, vehicles and
other properties owned, leased or used by BuyGolf are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used. BuyGolf is in compliance with all material terms of
each lease to which it is a party or is otherwise bound.
2.10 Patents and Trademarks. BuyGolf owns or possesses sufficient
----------------------
legal rights to all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information and other proprietary rights and processes necessary
for its business as now conducted and as proposed to be conducted, without any
known infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing, nor is BuyGolf
bound by or a party to any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes
of any other person or entity other than such licenses or agreements arising
from the purchase of "off the shelf" or standard products. BuyGolf has not
received any communications alleging that BuyGolf has violated or, by conducting
its business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity. BuyGolf is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments or
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with their duties to
BuyGolf's business by the employees of BuyGolf, nor the conduct of BuyGolf's
business as proposed, will, to BuyGolf's knowledge, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
any contract, covenant or instrument under which any employee is now obligated.
BuyGolf does not believe it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior to
their employment by BuyGolf, except for inventions, trade secrets or proprietary
information that have been assigned to BuyGolf.
2.11 Compliance with Other Instruments. BuyGolf is not in violation
---------------------------------
or default of any term of its Certificate of Incorporation or Bylaws, or of any
provision of any mortgage, indenture, contract, agreement, instrument or
contract to which it is party or by which it is bound or of any judgment,
decree, order, writ or, to its knowledge, any statute, rule or regulation
applicable to BuyGolf which, individually or in the aggregate, would materially
and adversely affect the business, assets, liabilities, financial condition,
operations or prospects of BuyGolf. The execution, delivery, and performance of
and compliance with this Agreement and the related
10
<PAGE>
agreements, and the Merger pursuant hereto, will not, with or without the
passage of time or giving of notice, result in any such material violation, or
be in conflict with or constitute a default under any such term, or result in
the creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of BuyGolf or the suspension, revocation, impairment,
forfeiture or nonrenewal of any permit, license, authorization or approval
applicable to BuyGolf, its business or operations or any of its assets or
properties.
2.12 Litigation. There is no action, suit, proceeding or
----------
investigation pending or to BuyGolf's knowledge currently threatened against
BuyGolf that questions the validity of this Agreement, or the right of BuyGolf
to enter into such agreement, or to consummate the transactions contemplated
hereby, or which might result, either individually or in the aggregate, in any
material adverse change in the assets, condition, affairs or prospects of
BuyGolf, financially or otherwise, or any change in the current equity ownership
of BuyGolf, nor is BuyGolf aware that there is any basis for the foregoing. The
foregoing includes, without limitation, actions pending or threatened (or any
basis therefor known to BuyGolf) involving the prior employment of any of
BuyGolf's employees, their use in connection with BuyGolf's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers.
BuyGolf is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by
BuyGolf currently pending or which BuyGolf intends to initiate.
2.13 Tax Returns and Payments. BuyGolf has timely filed all tax
------------------------
returns (federal, state and local) required to be filed by it. All taxes shown
to be due and payable on such returns, any assessments imposed, and to BuyGolf's
knowledge all other taxes due and payable by BuyGolf on or before the Closing
have been paid or will be paid prior to the time they become delinquent. BuyGolf
has not been advised (i) that any of its returns, federal, state or other, have
been or are being audited as of the date hereof, or (ii) of any deficiency in
assessment or proposed judgment to its federal, state or other taxes. BuyGolf
has no knowledge of any liability of any tax to be imposed upon its properties
or assets as of the date of this Agreement that is not adequately provided for.
2.14 Employees. BuyGolf has no collective bargaining agreements with
---------
any of its employees. There is no labor union organizing activity pending or, to
BuyGolf's knowledge, threatened with respect to BuyGolf. No employee has any
agreement or contract, written or verbal, regarding his employment. To BuyGolf's
knowledge, no employee of BuyGolf, nor any consultant with whom BuyGolf has
contracted, is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any such
individual to be employed by, or to contract with, BuyGolf because of the nature
of the business to be conducted by BuyGolf; and to BuyGolf's knowledge the
continued employment by BuyGolf of its present employees, and the performance of
BuyGolf's contracts with its independent contractors, will not result in any
such violation. BuyGolf has not received any notice alleging that any such
violation has occurred. No employee of BuyGolf has been granted the right to
continued employment by BuyGolf or to any material compensation following
termination of employment with BuyGolf. BuyGolf is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with BuyGolf, nor does BuyGolf have a present intention to terminate
the employment of any officer, key employee or group of key employees.
11
<PAGE>
2.15 Nondisclosure and Developments Agreements. Each current employee
-----------------------------------------
and officer of BuyGolf has executed, or will execute prior to or at Closing, a
Proprietary Information and Inventions Agreement in the form attached hereto as
Exhibit C. To BuyGolf's knowledge, no current employee, officer or consultant of
BuyGolf has excluded works or inventions made prior to his or her employment
with BuyGolf from his or her assignment of inventions pursuant to such employee,
officer or consultant's agreement. BuyGolf, after reasonable investigation, is
not aware that any of its employees, officers or consultants is in violation
thereof and BuyGolf will use its best efforts to prevent any such violation.
2.16 Registration Rights. BuyGolf is presently not under any
-------------------
obligation, and has not granted any rights, to register any of BuyGolf's
presently outstanding securities or any of its securities that may hereafter be
issued.
2.17 Compliance with Laws; Permits. BuyGolf is not in violation of
-----------------------------
any applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which violation would
materially and adversely affect the business, assets, liabilities, financial
condition, operations or prospects of BuyGolf. No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection with
the execution and delivery of this Agreement and the sale and delivery of the
BuyGolf Common Stock, or the other transactions to be consummated at the
Closing, as contemplated in this Agreement. BuyGolf has all franchises, permits,
licenses and any similar authority necessary for the conduct of its business as
now being conducted by it, the lack of which, individually or in the aggregate,
could materially and adversely affect the business, properties, prospects or
financial condition of BuyGolf and believes it can obtain, without undue burden
or expense, any similar authority for the conduct of its business as planned to
be conducted.
2.18 Absence of Breaches or Defaults. BuyGolf is not and, to the
-------------------------------
knowledge of BuyGolf, no other party is, in default under, or in breach or
violation of, any material contract and, to the knowledge of the Stockholders,
no event has occurred which, with the giving of notice or passage of time or
both would constitute a default under any such material contract. Other than
contracts which have terminated or expired in accordance with their terms, each
of BuyGolf's material contracts is valid, binding and enforceable in accordance
with its terms (subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered on a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing) and is in full force and effect, and assuming all
consents required by the terms thereof or applicable law have been obtained,
such contracts will continue to be valid, binding and enforceable in accordance
with their respective terms and in full force and effect immediately following
the consummation of the transactions contemplated hereby. No event has occurred
which either entitles, or would, on notice or lapse of time or both, entitle the
holder of any indebtedness for borrowed money affecting BuyGolf to accelerate,
or which does accelerate, the maturity of any indebtedness affecting BuyGolf.
2.19 Brokers. Neither BuyGolf nor any of its officers or directors
-------
has employed any broker or finder or incurred any liability for any broker's
fees, commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement.
12
<PAGE>
2.20 No Misstatements. Neither this Agreement, nor any other
----------------
document, certificate or written statement prepared by BuyGolf and/or the
Stockholders and furnished to BC in connection herewith, contain any untrue
statement of material fact or omits to state a material fact known to BuyGolf or
any Stockholder necessary in order to make the statements contained herein and
therein not misleading as of the date thereof or hereof. There is no fact known
to any Stockholder, in a Stockholder's individual capacity or in a Stockholder's
capacity as an officer and/or director of BuyGolf, which adversely affects the
business or financial condition or operations of BuyGolf, which has not been set
forth in this Agreement.
2.21 Environmental and Safety Laws. BuyGolf is not in violation of
-----------------------------
any applicable statute, law or regulation relating to the environment or
occupational health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.
2.22 Year 2000 Compliance. BuyGolf has reviewed the areas within its
--------------------
business and operations which could be adversely affected by Year 2000 issues
and evaluated the costs associated with modifying and testing its systems for
the Year 2000. BuyGolf does not believe that the cost of Year 2000 compliance
for its internal information systems will be material to BuyGolf or that it will
have a material adverse effect on BuyGolf's business, financial condition or
results of operations.
2.23 Securities Law Exemption. Each Stockholder as to itself
severally and not jointly hereby represents and warrants to BC that:
(a) Purchase Entirely for Own Account. This Agreement is made
with each Stockholder in reliance upon such Stockholder's representation to BC,
which by such execution of this Agreement such Stockholder hereby confirms, that
the BC Stock will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the resale or distribution of any part
thereof, and that such Stockholder has no present intention of selling, granting
any participation in, or otherwise distributing the same. By executing this
Agreement, each Stockholder further represents that such Stockholder does not
have any contract, undertaking, agreement or arrangement with any third party to
sell, transfer or grant participations to such third party or to any third
person, with respect to any of the BC Stock .
(b) Reliance Upon Stockholders' Representations. Each
-------------------------------------------
Stockholder understands that the BC Stock is not registered under the Securities
Act of 1933 (the "Securities Act") on the ground that the sale provided for in
this Agreement and the issuance of securities hereunder is exempt from
registration under the Securities Act pursuant to section 4(2) thereof and
Regulation D promulgated thereunder, and that BC's reliance on such exemption is
predicated on the Stockholder's representations set forth herein.
(c) Receipt of Information. Each Stockholder believes he/she
has received all the information necessary or appropriate for deciding whether
to acquire the BC Stock. Each Stockholder further represents that it has had an
opportunity to ask questions and receive answers from BC regarding the terms and
conditions of the acquisition of BuyGolf and the business, properties, prospects
and financial condition of BC and to obtain additional information (to the
extent BC possessed such information or could acquire it without unreasonable
effort or expense) necessary to verify the accuracy of any information furnished
to
13
<PAGE>
it or to which it had access.
(d) Investment Experience. Each Stockholder acknowledges that his or
---------------------
her investment in BC Stock involves a high degree of risk. Further, each
Stockholder represents that he/she is experienced in evaluating and investing in
securities of companies in the development stage and acknowledges that he/she is
able to fend for himself/herself, can bear the economic risk of his/her
investment, and has such knowledge and experience in financial or business
matters that he/she is capable of evaluating the merits and risks of the
investment in the BC Stock.
(e) Accredited Investor. Each Stockholder is an "accredited
-------------------
investor" within the meaning of SEC Rule 501 of Regulation D, as presently in
effect.
(f) Restricted Securities. Each Stockholder understands that the BC
---------------------
Stock may not be sold, transferred, or otherwise disposed of without
registration under the Securities Act or an exemption therefrom, and that in the
absence of an effective registration statement covering the BC Stock or an
available exemption from registration under the Securities Act, the BC Stock
must be held indefinitely. In particular, each Stockholder is aware that the BC
Stock may not be sold pursuant to Rule 144 promulgated under the Securities Act
unless all of the conditions of that Rule are met. Among the conditions for use
of Rule 144 is the availability of current information to the public about BC.
Such information is not now available.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BC AND MERGER SUB
---------------------------------------------------
Except as set forth on the BC Disclosure Schedule attached hereto (the "BC
--
Disclosure Schedule") BC and Merger Sub, jointly and severally, represent and
- -------------------
warrant to BuyGolf and the Stockholders as follows:
3.1 Organization, Good Standing and Qualification. Each of BC and Merger
---------------------------------------------
Sub is a duly organized corporation, validly existing and in good standing under
the laws of the State of Delaware. Prior to the date hereof, Merger Sub has not
engaged in any activity other than the transactions contemplated by this
Agreement. Each of BC and Merger Sub has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and to carry out the provisions of this Agreement, and to carry
on its business as presently conducted and as presently proposed to be
conducted. Each of BC and Merger Sub is duly qualified and is authorized to do
business and is in good standing as a foreign corporation in all jurisdictions
in which the nature of its activities and of its properties (both owned and
leased) make such qualifications necessary, except for those jurisdictions in
which failure to do so would not have a material adverse effect on BC, Merger
Sub or their businesses. Neither BC nor Merger Sub owns equity securities of any
other corporation, limited partnership or similar entity. Neither BC nor Merger
Sub is a participant in any joint venture, partnership or similar arrangement.
BC and Merger Sub have each made available to BuyGolf true, correct and complete
copies of their Certificates of Incorporation and Bylaws, each as amended to
date and presently in effect.
14
<PAGE>
3.2 Capitalization; Voting Rights. The authorized capital stock of
-----------------------------
BC, immediately prior to the Closing, will consist of (a) eight hundred fifty
million (850,000,000) shares of Common Stock, one hundred forty-two million nine
hundred twenty-two thousand eight hundred ten (142,922,810) shares of which are
issued and outstanding, thirty million five hundred eighty-three thousand five
hundred (30,583,500) shares of which are currently reserved for issuance
pursuant to outstanding option agreements, and seven hundred eighty-eight
thousand four hundred sixty (788,460) shares of which will be reserved in the
future for issuance to key employees, consultants and others affiliated with BC
pursuant to stock grant, stock purchase and/or option plans or any other stock
incentive program, arrangement or agreement approved by BC's Board of Directors
and (b) one hundred fifty million (150,000,000) shares of Preferred Stock (the
"Preferred Stock") , 19,481,130 of which are designated Series A Convertible
Participating Preferred Stock, all of which are issued and outstanding and
15,877,249 of which are designated Series B Convertible Participating Preferred
Stock, all of which are issued and outstanding. The authorized capital stock of
Merger Sub consists of one thousand (1,000) shares of common stock, $0.0001 par
value, all of which are issued and outstanding and held by BC. All issued and
outstanding shares of BC and Merger Sub capital stock (i) have been duly
authorized and validly issued, (ii) are fully paid and nonassessable, (iii) are
free of liens and encumbrances created by BC or Merger Sub and (iv) were issued
in compliance with all applicable state and federal laws concerning the issuance
of securities. Except as may be granted pursuant to this Agreement and except as
set forth above, there are no outstanding options, warrants, puts, calls, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or agreements of any kind for the purchase or
acquisition from BC or Merger Sub of any of their securities or other
restrictions on the incidents of ownership or transfer created by statute, the
charter documents of BC or Merger Sub or any agreement to which BC or Merger Sub
is a party or by which they are bound.
3.3 Authority; No Violation.
-----------------------
(a) Each of BC and Merger Sub has full corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of BC. No other corporate proceedings on the part of BC or Merger Sub
are necessary to approve this Agreement or to consummate the transactions
contemplated hereby. This Agreement and all other agreements and documents to be
entered into in connection herewith have been duly and validly executed and
delivered by BC and Merger Sub, and (assuming due authorization, execution and
delivery by BuyGolf) constitute valid and binding obligations of BC and Merger
Sub, enforceable against BC and Merger Sub in accordance with their respective
terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(b) Neither the execution and delivery of this Agreement by BC
or Merger Sub, nor the consummation by BC or Merger Sub of the transactions
contemplated hereby, nor compliance by BC or Merger Sub with any of the terms or
provisions hereof, will (i) violate any provision of the Certificate of
Incorporation or Bylaws of BC or Merger Sub, or (ii) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to BC or Merger Sub or any of its respective properties or assets, or
15
<PAGE>
(iii) violate, conflict with, result in a breach of any provision of or the loss
of any benefit under, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate the
performance required by, or result in the creation of any lien, pledge, security
interest, charge or other encumbrance upon any of the properties or assets of BC
or Merger Sub under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which BC or Merger Sub is a party, or by which BC or
Merger Sub or any of their respective properties or assets may be bound or
affected.
3.4 Consents and Approvals. No consents or approvals, orders or
----------------------
authorizations of or filings or registrations with any court, administrative
agency or commission or other governmental authority or instrumentality or with
any third party are necessary with respect to BC or Merger Sub in connection
with (1) the execution and delivery of this Agreement and (2) the consummation
of the Merger and the other transactions contemplated hereby.
3.5 Financial Statements. BC's unaudited balance sheet as of
--------------------
December 31, 1998 and unaudited statements of operations and cash flows of BC
for the 12-month period ended December 31, 1998 and BC's unaudited balance sheet
as of June 30, 1999 (the Latest Balance Sheet") and unaudited statements of
operations and cash flows of BC for the six-month period ending June 30, 1999
(the "BC Financial Statements") delivered to the Stockholders in connection with
the investment contemplated hereby have been prepared in accordance with GAAP
consistently applied (in the case of BC Financial Statements, subject to normal
year-end adjustments and the absence of footnote disclosures) and fairly present
in all material respects the financial position and the results of operations of
BC for the periods covered thereby, and BC has no material liabilities or
obligations of any nature (absolute, accrued, contingent or otherwise) that are
not either reflected or fully reserved against on the Latest Balance Sheet or
incurred in the ordinary course of the business of BC subsequent to the date
thereof. Since the date of the Latest Balance Sheet, there has not been any
material adverse change in the business, operations, financial condition or
business of BC.
3.6 Absence of Undisclosed Liabilities. Neither BC nor Merger
----------------------------------
Sub has any material obligations or liabilities of any nature (matured or
unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the Balance Sheet, (ii) those incurred in the ordinary course of
business and not required to be set forth in the Balance Sheet under GAAP, (iii)
those incurred in the ordinary course of business since the Balance Sheet Date
and consistent with past practice, and (iv) those incurred in connection with
the execution of this Agreement.
3.7 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby,
there are no agreements, understandings or proposed transactions between BC and
any of its officers, directors, affiliates or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
BC or Merger Sub is a party or to its knowledge by which it is bound which may
involve (i) obligations (contingent or otherwise) of, or payments to, BC or
Merger Sub (other than obligations of, or payments to, BC
16
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or Merger Sub arising in the ordinary course of business), or (ii) the license
of any patent, copyright, trade secret or other proprietary right to or from BC
or Merger Sub (other than licenses arising from the purchase of "off the shelf"
or other standard products), or (iii) provisions restricting or affecting the
development, manufacture or distribution of BC's or Merger Sub's products or
services, or (iv) indemnification by BC or Merger Sub with respect to
infringements of proprietary rights.
(c) Neither BC nor Merger Sub has (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than with respect to dividend
obligations, distributions, indebtedness and other obligations incurred in the
ordinary course of business or as disclosed in the BC Financial Statements),
(iii) made any loans or advances to any person, other than ordinary advances for
travel expenses, (iv) sold, exchanged or otherwise disposed of any of its assets
or rights, other than the sale of its inventory in the ordinary course of
business, (v) entered into any material contract, other than in the ordinary
course of business, and there has not occurred any amendment, termination or
default under any material contract to which BC or Merger Sub is a party or by
which it is bound, (vi) made any change in its accounting practices or made any
revaluation of its assets, (vii) made any purchase or other acquisition of,
sale, lease, disposition, or other transfer of, or mortgage, pledge or
subjection to any material encumbrance or lien on any material asset, tangible
or intangible, of BC or Merger Sub, other than in the ordinary course of
business, or (viii) made any sale, assignment, or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets, other than in
the ordinary course of business.
3.8 Obligations to Related Parties. There are no obligations of BC or
------------------------------
Merger Sub to its officers, directors, stockholders, or employees other than (a)
for payment of salary for services rendered, (b) reimbursement for reasonable
expenses incurred on behalf of BC or Merger Sub and (c) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of BC). No officer, director or, to the best of BC's or Merger
Sub's knowledge, stockholder, or any member of their immediate families, are
indebted to BC or Merger Sub or have any direct or indirect ownership interest
in any firm or corporation with which BC or Merger Sub is affiliated or with
which BC or Merger Sub has a business relationship, or any firm or corporation
which competes with BC or Merger Sub, except that officers, directors and/or
stockholders of BC and Merger Sub may own stock in publicly traded companies
which may compete with BC or Merger Sub. No such officer, director or
stockholder, or any member of their immediate families is, directly or
indirectly, interested in any material contract with BC or Merger Sub (other
than such contracts related to any such person's ownership of capital stock or
other securities of BC).
3.9 Title to Properties and Assets; Liens, Etc. Each of BC and Merger
------------------------------------------
Sub has good and marketable title to its properties and assets, and good title
to its leasehold estates, in each case subject to no mortgage, pledge, lien,
lease, encumbrance or charge, other than (i) those resulting from taxes which
have not yet become delinquent, (ii) minor liens and encumbrances which do not
materially detract from the value of the property subject thereto or materially
impair the operations of BC or Merger Sub and (iii) those that have otherwise
arisen in the ordinary course of business. All facilities, machinery, equipment,
fixtures, vehicles and other properties owned, leased or used by BC and Merger
Sub are in good operating condition and
17
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repair and are reasonably fit and usable for the purposes for which they are
being used. BC and Merger Sub are in compliance with all material terms of each
lease to which it is a party or is otherwise bound.
3.10 Patents and Trademarks. Each of BC and Merger Sub owns or
----------------------
possesses sufficient legal rights to all patents, trademarks, service marks,
trade names, copyrights, trade secrets, information and other proprietary rights
and processes necessary for its business as now conducted and as proposed to be
conducted, without any known infringement of the rights of others. There are no
outstanding options, licenses or agreements of any kind relating to the
foregoing, nor is BC or Merger Sub bound by or a party to any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes of any other person or entity other than such
licenses or agreements arising from the purchase of "off the shelf" or standard
products. BC has not received any communications alleging that BC or Merger Sub
has violated or, by conducting its business as proposed, would violate any of
the patents, trademarks, service marks, trade names, copyrights or trade secrets
or other proprietary rights of any other person or entity. BC is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments or any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with their duties to BC's business by the employees of BC, nor the
conduct of BC's business as proposed, will, to BC's knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any employee is
now obligated. BC does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by BC, except for inventions, trade secrets or
proprietary information that have been assigned to BC.
3.11 Compliance with Other Instruments. Neither BC nor Merger Sub is
---------------------------------
in violation or default of any term of its Certificate of Incorporation or
Bylaws, or of any provision of any mortgage, indenture, contract, agreement,
instrument or contract to which it is party or by which it is bound or of any
judgment, decree, order, writ or, to its knowledge, any statute, rule or
regulation applicable to BC or Merger Sub which, individually or in the
aggregate, would materially and adversely affect the business, assets,
liabilities, financial condition, operations or prospects of BC or Merger Sub.
The execution, delivery, and performance of and compliance with this Agreement
and the related agreements, and the issuance of the BC Stock pursuant hereto,
will not, with or without the passage of time or giving of notice, result in any
such material violation, or be in conflict with or constitute a default under
any such term, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of BC or Merger Sub
or the suspension, revocation, impairment, forfeiture or nonrenewal of any
permit, license, authorization or approval applicable to BC or Merger Sub, its
business or operations or any of its assets or properties.
3.12 Litigation. There is no action, suit, proceeding or
----------
investigation pending or to BC's or Merger Sub's knowledge currently threatened
against BC or Merger Sub that questions the validity of this Agreement or the
right of BC or Merger Sub to enter into such agreement, or to consummate the
transactions contemplated hereby, or which might result, either individually or
in the aggregate, in any material adverse change in the assets, condition,
affairs or prospects of BC or Merger Sub, financially or otherwise, or any
change in the current equity
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ownership of BC or Merger Sub, nor is BC or Merger Sub aware that there is any
basis for the foregoing. The foregoing includes, without limitation, actions
pending or threatened (or any basis therefor known to BC or Merger Sub)
involving the prior employment of any of BC's employees, their use in connection
with BC's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers. Neither BC nor Merger Sub is a party or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by BC or Merger Sub currently pending or which BC or Merger Sub intends to
initiate.
3.13 Tax Returns and Payments. BC has timely filed all tax returns
------------------------
(federal, state and local) required to be filed by it. All taxes shown to be due
and payable on such returns, any assessments imposed, and to BC's knowledge all
other taxes due and payable by BC on or before the Closing have been paid or
will be paid prior to the time they become delinquent. BC has not been advised
(i) that any of its returns, federal, state or other, have been or are being
audited as of the date hereof, or (ii) of any deficiency in assessment or
proposed judgment to its federal, state or other taxes. BC has no knowledge of
any liability of any tax to be imposed upon its properties or assets as of the
date of this Agreement that is not adequately provided for.
3.14 Employees. BC has no collective bargaining agreements with any
---------
of its employees. There is no labor union organizing activity pending or, to
BC's knowledge, threatened with respect to BC. No employee has any agreement or
contract, written or verbal, regarding his employment. To BC's knowledge, no
employee of BC, nor any consultant with whom BC has contracted, is in violation
of any term of any employment contract, proprietary information agreement or any
other agreement relating to the right of any such individual to be employed by,
or to contract with, BC because of the nature of the business to be conducted by
BC; and to BC's knowledge the continued employment by BC of its present
employees, and the performance of BC's contracts with its independent
contractors, will not result in any such violation. BC has not received any
notice alleging that any such violation has occurred. No employee of BC has been
granted the right to continued employment by BC or to any material compensation
following termination of employment with BC. BC is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with BC, nor does BC have a present intention to terminate the
employment of any officer, key employee or group of key employees.
3.15 Nondisclosure and Developments Agreements. Each current employee
-----------------------------------------
and officer of BC has executed, or will execute prior to or at Closing, an
Employee Nondisclosure and Developments Agreement in the form attached hereto as
Exhibit D. To BC's knowledge, no current employee, officer or consultant of
- ---------
BC has excluded works or inventions made prior to his or her employment with BC
from his or her assignment of inventions pursuant to such employee, officer or
consultant's agreement. BC, after reasonable investigation, is not aware that
any of its employees, officers or consultants is in violation thereof and BC
will use its best efforts to prevent any such violation.
3.16 Registration Rights. BC is presently not under any obligation,
-------------------
and has not granted any rights, to register any of BC's presently outstanding
securities or any of its securities that may hereafter be issued.
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3.17 Compliance with Laws; Permits. Neither BC nor Merger Sub is in
-----------------------------
violation of any applicable statute, rule, regulation, order or restriction of
any domestic or foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its properties which
violation would materially and adversely affect its business, assets,
liabilities, financial condition, operations or prospects. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement and the offer,
issuance, sale and delivery of the BC Stock, or the other transactions to be
consummated at the Closing, as contemplated in this Agreement. BC and Merger Sub
have all franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which,
individually or in the aggregate, could materially and adversely affect the
business, properties, prospects or financial condition of BC or Merger Sub and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted.
3.18 Absence of Breaches or Defaults. Neither BC nor Merger Sub is
-------------------------------
and, to the knowledge of BC and Merger Sub, no other party is, in default under,
or in breach or violation of, any material contract and no event has occurred
which, with the giving of notice or passage of time or both would constitute a
default under any such material contract. Other than contracts which have
terminated or expired in accordance with their terms, each of BC's and Merger
Sub's material contracts is valid, binding and enforceable in accordance with
its terms (subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered on a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing) and is in full force and effect, and assuming all
consents required by the terms thereof or applicable law have been obtained,
such contracts will continue to be valid, binding and enforceable in accordance
with their respective terms and in full force and effect immediately following
the consummation of the transactions contemplated hereby. No event has occurred
which either entitles, or would, on notice or lapse of time or both, entitle the
holder of any indebtedness for borrowed money affecting BC or Merger Sub to
accelerate, or which does accelerate, the maturity of any indebtedness affecting
BC or Merger Sub.
3.19 Brokers. Neither BC nor any of its officers or directors has
-------
employed any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement.
3.20 No Misstatements. Neither this Agreement, nor any other
----------------
document, certificate or written statement prepared by BC or Merger Sub and
furnished to BuyGolf in connection herewith, contain any untrue statement of
material fact or omits to state a material fact known to BC necessary in order
to make the statements contained herein and therein not misleading as of the
date thereof or hereof.
3.21 Environmental and Safety Laws. BC is not in violation of any
-----------------------------
applicable statute, law or regulation relating to the environment or
occupational health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.
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3.22 Year 2000 Compliance. BC has reviewed the areas within its
--------------------
business and operations which could be adversely affected by Year 2000 issues
and evaluated the costs associated with modifying and testing its systems for
the Year 2000. BC does not believe that the cost of Year 2000 compliance for its
internal information systems will be material to BC or that it will have a
material adverse effect on BC's business, financial condition or results of
operations.
3.23 Tax-Free Organization.
---------------------
(a) Prior to the Closing, all of the shares of capital stock of
the Merger Sub are owned by BC.
(b) BC has no current plan or intention to (i) reacquire any of
the BC Stock issued in connection with the transactions contemplated by this
Agreement such as would result in the BuyGolf stockholders not to satisfy the
continuity of interest requirements of Treasury Regulation Section 1.368-1 and
1.368-1T; (ii) liquidate the Surviving Corporation; (iii) merge the Surviving
Corporation with or into another entity; (iv) sell a number of shares of BuyGolf
Common Stock which would cause BC to no longer have control of the Surviving
Corporation within the meaning of Section 368(c) of the Code; (v) sell or
otherwise dispose of its assets following the Closing, except in the ordinary
course of business; or (vi) cause the Surviving Corporation to issue any
additional stock or securities in amounts which would cause BC to no longer have
control of the Surviving Corporation within the meaning of Section 368(c) of the
Code.
(c) Other than the five percent (5%) ownership interest in
BuyGolf held by BC immediately prior to the Closing, BC has never owned any
BuyGolf Common Stock.
Neither Parent nor Merger Sub is an investment company subject to
regulation under the Investment Company Act of 1940.
ARTICLE IV
ADDITIONAL AGREEMENTS
---------------------
4.1 Information Statement; Restricted Securities.
--------------------------------------------
(a) BC and BuyGolf shall distribute the Information Statement
for the stockholders of BuyGolf to approve this Agreement and the transactions
contemplated hereby and thereby (the "Information Statement"). The Information
Statement shall constitute a disclosure document for the offer and issuance of
the shares of BC Stock to be received by the holders of BuyGolf Common Stock in
the Merger. BC and BuyGolf shall each use reasonable commercial efforts to cause
the Information Statement to comply with applicable federal and state securities
laws requirements. Each of BC and BuyGolf agrees to provide promptly to the
other such information concerning its business and financial statements and
affairs as, in the reasonable judgment of the providing party or its counsel,
may be required or appropriate for inclusion in the Information Statement, or in
any amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Information Statement. BuyGolf will promptly advise BC, and BC will promptly
advise BuyGolf, in writing if at any time prior to the Effective Time either
BuyGolf or BC shall obtain knowledge of any facts that might make it necessary
or appropriate to amend or
21
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supplement the Information Statement in order to make the statements contained
or incorporated by reference therein not misleading or to comply with applicable
law. Anything to the contrary contained herein notwithstanding, BuyGolf shall
not include in the Information Statement any information with respect to BC or
its affiliates or associates, the form and content of which information shall
not have been approved by BC prior to such inclusion.
4.2 Stockholder Approval. BuyGolf shall promptly after the date
--------------------
hereof take all action necessary in accordance with Delaware Law and its
Certificate of Incorporation and Bylaws to secure the written consent of its
stockholders approving this Agreement and the transactions and ancillary
agreements contemplated herein within five (5) days following the date of this
Agreement. BuyGolf shall use all commercially reasonable efforts required to
obtain from stockholders of BuyGolf executed actions by written consent
approving the Merger. Any materials submitted to the stockholders of BuyGolf in
connection with the solicitation of their approval of the Merger shall have been
subject to prior review and comment by BC and shall include information
regarding BuyGolf, the terms of the Merger and this Agreement, the unanimous
recommendation of the Board of Directors of BuyGolf in favor of the Merger, this
Agreement and the transactions contemplated hereby and such other documents
(including but not limited to the Stockholder Certificate) in order to satisfy
the requirements of Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder in connection with the issuance and sale of
BC Stock in the Merger.
4.3 Access to Information. Between the date of this Agreement and the
---------------------
earlier of the Effective Time or the termination of this Agreement, upon
reasonable notice, BuyGolf and BC shall, during normal business hours, (i) give
each other and their respective officers, employees, accountants, counsel,
financing sources and other agents and representatives full access to their
buildings, offices, and other facilities and to all their books and records,
whether located on their premises or at another location; (ii) permit the other
party to make such inspections as they may require; (iii) cause its officers to
furnish the other party such financial, operating, technical and product data
and other information with respect to the business and assets and properties of
BuyGolf as they from time to time may request, including financial statements
and schedules; (iv) allow each other the opportunity to interview their
employees and other personnel and Affiliates (as defined below) with their prior
written consent, which consent shall not be unreasonably withheld or delayed;
and (v) assist and cooperate with BC and Merger Sub in the development of
integration plans for implementation by BC and the Surviving Corporation
following the Effective Time; provided, however, that no investigation pursuant
to this Section 4.3 shall affect or be deemed to modify any representation or
warranty made by BuyGolf and BC herein. Materials furnished to BC and BuyGolf
pursuant to this Section 4.3 may be used by each party for strategic and
integration planning purposes relating to accomplishing the transactions
contemplated hereby. For purposes of this Agreement, "Affiliate" means, as
---------
applied to any person or entity, (a) any other person or entity directly or
indirectly controlling, controlled by or under common control with, that person
or entity, (b) any other person or entity that owns or controls (i) 10% or more
of any class of equity securities of that person or entity or any of its
Affiliates or (ii) 10% or more of any class of equity securities (including any
equity securities issuable upon the exercise of any option or convertible
security) of that person or entity or any of its Affiliates, or (c) any
director, partner, officer, manager, agent, employee or relative of such person
or entity. For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling", "controlled by", and "under
common control with") as applied to any person or entity, means the possession,
directly
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or indirectly, of the power to direct or cause the direction of the management
and policies of that person or entity, whether through ownership of voting
securities or by contract or otherwise.
4.4 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including all legal, accounting,
financial advisory, consulting and all other fees and expenses of third parties
incurred by a party in connection with the negotiation and effectuation of the
terms and conditions of this Agreement and the transactions contemplated hereby,
shall be the obligation of the respective party incurring such fees and
expenses; provided that if the Merger is consummated, BC shall be responsible
for the reasonable fees and expenses of Rutan & Tucker, not to exceed $20,000,
incurred by BuyGolf in the negotiation and preparation of this Agreement and the
consummation of the Merger.
4.5 Public Disclosure. Unless otherwise required by law (including
-----------------
federal and state securities laws) prior to the Effective Time (in which case BC
and BuyGolf shall have a prior opportunity to review and comment on the proposed
disclosure), no disclosure (whether or not in response to any inquiry) of the
existence of any subject matter of, or the terms and conditions of, this
Agreement shall be made by any party hereto unless approved by BC and BuyGolf
prior to release; provided, however, that such approval shall not be
unreasonably withheld or delayed.
4.6 Approvals. BuyGolf shall use all commercially reasonable efforts
---------
required to obtain all approvals from governmental or regulatory authorities or
under any of the contracts or other agreements as may be required in connection
with the Merger (all of such approvals are set forth in the BuyGolf Disclosure
Schedule) so as to preserve all rights of and benefits to BuyGolf thereunder and
BC shall provide BuyGolf with such assistance and information as is reasonably
required to obtain such approvals.
4.7 Notification of Certain Matters. BuyGolf shall give prompt notice
-------------------------------
to BC, and BC shall give prompt notice to BuyGolf, of (i) the occurrence or non-
occurrence of any event, the occurrence or non-occurrence of which is likely to
cause any representation or warranty of BuyGolf, BC or Merger Sub, respectively,
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Closing Date and (ii) any failure of BuyGolf, BC or Merger
Sub, as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice pursuant to this Section 4.7 shall not limit or
otherwise affect any remedies available to the party receiving such notice.
4.8 Additional Documents and Further Assurances. Each party hereto,
-------------------------------------------
at the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things (including, but not
limited to, all action reasonably necessary to seek and obtain any and all
consents and approvals of any government or regulatory authority or person
required in connection with the Merger; provided, however, that BC shall not be
obligated to consent to any divestitures or operational limitations or
activities in connection therewith and no party shall be obligated to make a
payment of money as a condition to obtaining any such condition or approval) as
may be necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
23
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4.9 Maintenance of Business. From the date hereof until the Closing,
-----------------------
each of the Stockholders and BuyGolf shall use its diligent, good faith efforts,
to cause BuyGolf to carry on and preserve the business, goodwill and the
relationships of BuyGolf with suppliers, employees, agents and others in
substantially the same manner as they have been prior to the date hereof. In
addition, from the date hereof until the Closing, BC shall use its diligent,
good faith efforts to carry on and preserve the business, goodwill and the
relationships of BC with suppliers, employees, agents and others in
substantially the same manner as they have been prior to the date hereof.
4.10 Conduct of Business.
-------------------
(a) From the date hereof until the Closing, except as expressly
permitted hereby, BuyGolf shall not, and the Stockholders shall not permit
BuyGolf to, without BC's prior express written consent:
(i) incur any additional indebtedness, or guarantee any
indebtedness or obligation of any other party, except in the ordinary
course of business, and which amount BuyGolf agrees to repay immediately
prior to the Closing;
(ii) issue, redeem, pledge, sell or repurchase any
capital stock of BuyGolf or securities convertible into its capital stock
or grant or issue any options, warrants or rights to subscribe for its
capital stock or securities convertible into its capital stock or commit to
do any of the foregoing;
(iii) enter into or terminate any material agreement or
arrangement;
(iv) increase the compensation or bonuses payable or to
become payable to any officers, employees or agents of BuyGolf, or adopt or
amend any employee benefit plan or arrangement;
(v) enter into any employment contract or agreement with
any existing or prospective employee which is not terminable at will;
(vi) pay any obligation or liability, fixed or
contingent, other than current liabilities or except as such payment
becomes due;
(vii) cancel, without full payment, any note, loan or
other obligation owing to BuyGolf, or waive any rights of material value;
(viii) acquire or dispose of any properties, assets or
business except in the ordinary course of its business;
(ix) create or suffer to be imposed any lien, mortgage,
security interest or other charge on or against the properties or assets of
BuyGolf, other than in the ordinary course of business consistent with
BuyGolf's past practices, or the BuyGolf Common Stock;
24
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(x) engage in any activities or transactions outside the
ordinary course of BuyGolf's e-commerce business as conducted at the date
hereof;
(xi) make or adopt any change in the Charter or Bylaws of
BuyGolf as in force and effect on the date hereof;
(xii) declare or pay any dividends on or make any other
distributions in respect of any shares of its capital stock; or
(xiii) pay, agree to pay or make any accrual or arrangement
for payment of any pension, retirement allowance or other employee benefit
pursuant to any plan, agreement or arrangement to any officer, director or
employee.
(b) From the date hereof until the Closing, except as expressly
permitted hereby, BuyGolf shall, and the Stockholders shall cause BuyGolf to,
unless otherwise expressly consented to in writing by BC:
(i) maintain the existing insurance policies of BuyGolf,
unless comparable insurance is substituted therefor, and shall not take any
action to terminate or modify those insurance policies;
(ii) maintain the books and records of BuyGolf consistent
with past practices and policies and in accordance with GAAP;
(iii) maintain in good working condition, ordinary wear and
tear excepted, and in compliance in all material respects with all
applicable laws and regulations, all fixed assets owned, leased or
operated, as the case may be, by BuyGolf;
(iv) observe and perform, and remain in compliance with,
all obligations of BuyGolf in agreements and contracts the breach or
violation of which would have, individually or in the aggregate, a material
adverse effect and not enter into any agreements or contracts which would
require payments by BuyGolf of more than Fifty Thousand Dollars ($50,000)
over any period of twelve (12) months, except for inventory purchased in
the ordinary course of business and disclosed in advance to BC and customer
contracts and purchase orders entered in the ordinary course of business
consistent with BuyGolf's past practices; and
(v) maintain compliance with the terms and conditions of
all material contracts or licenses held by BuyGolf or under which it
operates or conducts its business and use best efforts to maintain all such
material contracts and licenses in full force and effect.
4.11 Confidentiality. Each party will cause its directors, affiliates,
---------------
officers, employees or authorized representatives to hold in strict confidence,
and not disclose to any third party, without prior written consent of the other
party, all confidential information received by it in connection with the
transactions contemplated hereby, except as may be required by applicable law or
as otherwise contemplated herein. The parties acknowledge that BC and BuyGolf
have previously executed a non-disclosure agreement dated August 2, 1999 (the
25
<PAGE>
"Confidentiality Agreement"), which Confidentiality Agreement shall continue in
full force and effect in accordance with its terms.
4.12 "Market Stand-Off" Agreement. Each Stockholder hereby
---------------------------
agrees that, during the period of duration specified by BC and an underwriter of
Common Stock or other securities of BC, it shall not, to the extent requested by
BC and such underwriter, directly or indirectly sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees who agree to
be similarly bound) any securities of BC held by it at any time during such
period except Common Stock included in such registration; provided, however,
that:
(a) such market stand-off time period shall not exceed 180
days;
(b) all officers and directors of BC enter into similar
agreements.
In order to enforce the foregoing covenant, BC may impose stop-
transfer instructions with respect to any securities of BC held by any
Stockholder or his transferee until the end of such period. If requested to do
so by BC, each Stockholder shall execute an underwriter's letter in the
customary form prior to the registration of BC's initial public offering.
4.13 BuyGolf's 1998 Stock Option Plan. At the Effective Time,
--------------------------------
the BuyGolf Stock Option Plan and each outstanding option to purchase shares of
BuyGolf Common Stock under such plan, whether vested or unvested, will be
assumed by BC and any outstanding repurchase rights shall be assigned to BC.
Section 4.13 of the BuyGolf Disclosure Schedule sets forth a true and complete
list as of the date hereof of all holders of outstanding options under the
BuyGolf Stock Option Plan including the number of shares of BuyGolf Common Stock
subject to each such option, the date of grant of each such option, the exercise
or vesting schedule, the exercise price per share and the term of each such
option. On the Closing Date, BuyGolf shall deliver to BC an updated Section 4.13
of the BuyGolf Disclosure Schedule current as of such date. Each such option so
assumed by BC under this Agreement shall continue to have, and be subject to,
the same terms and conditions set forth in the BuyGolf Stock Option Plan
immediately prior to the Effective Time, except that (i) such option will be
exercisable for that number of whole shares of BC Stock equal to the product of
the number of shares of BuyGolf Common Stock that were issuable upon exercise of
such option immediately prior to the Effective Time multiplied by the Exchange
Ratio and rounded down to the nearest whole number of shares of BC Stock, and
(ii) the per share exercise price for the shares of BC Stock issuable upon
exercise of such assumed option will be equal to the quotient determined by
dividing the exercise price per share of BuyGolf Common Stock at which such
option was exercisable immediately prior to the Effective Time by the Exchange
Ratio, rounded up to the nearest whole cent. Consistent with the terms of the
BuyGolf Stock Option Plan and the documents governing the outstanding options
under such plan, the Merger will not terminate any of the outstanding options
under the BuyGolf Stock Option Plan or accelerate the exercisability or vesting
of such options. It is the intention of the parties that the options so assumed
by BC qualify following the Effective Time as incentive stock options as defined
in Section 422 of the Code to the extent such options qualified as incentive
stock options prior to the Effective Time. Within ten (10) business days after
the Effective Time, BC will issue to each person who, immediately prior to the
Effective Time was a holder of an outstanding option under the BuyGolf Stock
Option Plan a
26
<PAGE>
document in form and substance satisfactory to BuyGolf evidencing the foregoing
assumption of such option by BC.
4.14 Necessary Filings. BC, Merger Sub, and each of the
-----------------
Stockholders of BuyGolf shall use all commercially reasonable efforts to
promptly make all necessary filings required by the Internal Revenue Code or
otherwise and to take any reasonable actions to cause the Merger to be treated
as a "tax-free" organization under the Internal Revenue Code.
ARTICLE V
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF BC AND MERGER SUB
--------------------------------
The obligation of each of BC and Merger Sub to consummate the
transactions contemplated by this Agreement is subject to the satisfaction, at
or before the Closing, of all the following conditions, unless waived in writing
by BC:
5.1 Certificates for BuyGolf Common Stock. BC shall have
-------------------------------------
received for cancellation in the Merger certificates for the BuyGolf Common
Stock, which shall constitute all of the issued and outstanding capital stock of
BuyGolf.
5.2 Representations and Warranties True. All representations and
-----------------------------------
warranties of the Stockholders and BuyGolf in this Agreement or the Schedules
and Exhibits hereto, or in any written statement or certificate that shall be
delivered to BC by the Stockholders or BuyGolf under this Agreement, shall be
true and correct on and as of the date made and as of the Closing Date as if
made on the date thereof (except to the extent such representation or warranty
relates to an earlier date).
5.3 Covenants Performed. The Stockholders and BuyGolf shall have
-------------------
performed, satisfied, and complied in all material respects with all covenants,
agreements, and conditions required by this Agreement to be performed or
complied with by the Stockholders and BuyGolf on or before the Closing Date.
5.4 Certificate. BC shall have received from the Stockholders a
-----------
certificate signed by the President of BuyGolf, dated the Closing Date,
certifying that the conditions specified in this Article V have been satisfied.
5.5 No Violations; No Actions. Consummation of the transactions
-------------------------
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction and no action or
proceeding shall have been instituted or threatened by any person, entity or
governmental agency which, in any such case, in the sole judgment of BC, has a
reasonable probability of resulting in (i) the obtaining of material damages
from BC or BuyGolf; (ii) an order, judgment or decree restraining, prohibiting
or rendering unlawful the consummation of the transactions contemplated by this
Agreement; or (iii) other relief in connection therewith.
5.6 Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated hereby and all
documents and instruments incident to such transactions shall be in form and
substance reasonably satisfactory to BC and its
27
<PAGE>
counsel, and BC shall have received all such counterpart originals or certified
or other copies of such documents as it may reasonably request.
5.7 Delivery of Documents. shall have received all documents
---------------------
and other items to be delivered by the Stockholders under Section 7.2.
5.8 Required Consents. All consents, approvals and waivers from
-----------------
third parties and governmental authorities necessary to the transactions as
contemplated by this Agreement.
5.9 Private Placement. The parties shall be reasonably
-----------------
satisfied that the shares of BC Stock to be issued in connection with the Merger
pursuant to Section 1.6(a) are issuable without registration pursuant to Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
5.10 Tax-Free Reorganization. The Merger will constitute a tax-
-----------------------
free reorganization within the meaning of Section 368(a) of the Internal Revenue
Code
5.11 Limitation on D issent. No holders of the outstanding
----------------------
shares of BuyGolf Common Stock shall have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
ARTICLE VI
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF BUYGOLF AND THE STOCKHOLDERS
-------------------------------------------
The obligation of the Stockholders to consummate the transactions
contemplated by this Agreement is subject to BC's and/or Merger Sub's
satisfaction, at or before the Closing, of all the following conditions, unless
waived in writing by a majority in interest of the Stockholders:
6.1 Representations and Warranties True. All representations
-----------------------------------
and warranties by BC and Merger Sub in this Agreement or the Schedules and
Exhibits hereto, or in any written statement or certificate that shall be
delivered to the Stockholders by BC under this Agreement, shall be true and
correct on and as of the date made and as of the Closing Date as if made on the
date thereof (except to the extent such representation or warranty relates to an
earlier date).
6.2 Covenants Performed. BC and Merger Sub shall have
-------------------
performed, satisfied, and complied in all material respects with all covenants,
agreements, and conditions required by this Agreement to be performed or
complied with by BC and Merger Sub in all material respects on or before the
Closing Date.
6.3 Certificate. The Stockholders shall have received from BC a
-----------
certificate signed by the Chief Executive Officer of BC, dated the Closing Date,
certifying that the conditions specified in this Article VI have been satisfied.
6.4 No Violations; No Actions. Consummation of the transactions
-------------------------
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction and no action or
proceeding shall have been
28
<PAGE>
instituted or threatened by any person, entity or governmental agency which, in
any such case, in the sole judgment of the Stockholders, has a reasonable
probability of resulting in (i) the obtaining of material damages from the
Stockholders or BC, (ii) an order, judgment or decree restraining, prohibiting
or rendering unlawful the consummation of the transactions contemplated by this
Agreement, or (iii) other relief in connection therewith.
6.5 Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated hereby and all
documents and instruments incident to such transactions shall be in form and
substance reasonably satisfactory to the Stockholders and their counsel, and the
Stockholders shall have received all such counterpart originals or certified or
other copies of such documents as they may reasonably request.
6.6 Delivery of Documents. The Stockholders shall have received
---------------------
all documents and other items to be delivered by BC under Section 7.3.
6.7 Required Consents. All consents, approvals and waivers from
-----------------
third parties and governmental authorities necessary to consummate the
transactions contemplated by this Agreement shall have been obtained.
ARTICLE VII
CLOSING
-------
7.1 Time and Place. The Closing shall occur at the time and
--------------
place specified in Section 1.2 of this Agreement.
7.2 Deliveries of the Stockholders. At the Closing, the
------------------------------
Stockholders will execute and deliver or cause to be executed and delivered to
BC:
(a) Stock Certificates. Certificates representing the
------------------
BuyGolf Common Stock, presented to BC for conversion into BC Stock;
(b) Corporate Documents. The Charter of BuyGolf, certified
-------------------
by the Secretary of State of Delaware as of a recent date and the Bylaws of
BuyGolf, certified by the Secretary of BuyGolf as in effect at the Closing;
(c) Certificates of Good Standing. Certificates of Good
-----------------------------
Standing, dated as of a recent date, with respect to BuyGolf, issued by the
Secretary of State of California and Delaware;
(d) The Stockholders' Certificate. A certificate from the
-----------------------------
Stockholders, dated the Closing Date, containing the information required
pursuant to Section 5.4;
(e) Representations and Warranties; Performance. At the
-------------------------------------------
Closing, Stockholders shall deliver to BC a certificate dated as of the Closing
Date signed by the President of BuyGolf certifying (i) that each of the
representations and warranties made by the Stockholders herein are true and
correct in all material respects on the Closing Date with the same effect as
though made on such date; (ii) that BuyGolf and the Stockholders have performed
and complied with all agreements, covenants and conditions required by this
Agreement to be performed and complied with by BuyGolf and the Stockholders
prior to the Closing Date; and
29
<PAGE>
(iii) that there has been no material adverse change since the Balance Sheet
Date in the business, condition (financial or otherwise) or operations of
BuyGolf or its assets;
(f) Books and Records. At the Closing, the Stockholders
-----------------
shall deliver to BC (i) the stock books, minute books, corporate seals and other
corporate record-keeping documentation of BuyGolf; (ii) certificates
representing all outstanding BuyGolf Common Stock, free of any restrictive
legends, except for transfer restrictions which may be imposed by the Securities
Act, all stock certificates to be duly endorsed and guaranteed for transfer to
BC; (iii) such other instruments of transfer as in the opinion of BC's counsel
shall be necessary or desirable to effectively vest in BC good and marketable
title to the BuyGolf Common Stock; and (iv) all other opinions, instruments and
documents contemplated by this Agreement;
(g) Release of Claims. At the Closing, each Stockholder
-----------------
and optionholder shall sign and deliver to BC a certificate of release
("Release") of all claims or rights of such Stockholder against BuyGolf, except
-------
for claims or rights arising pursuant to the agreements and documents executed
and delivered in connection with the transactions contemplated herein, in the
form attached hereto as Exhibit E;
---------
(h) Board and Stockholder Approval. At the Closing,
------------------------------
Stockholders shall deliver to BC evidence that this Agreement and the
transactions contemplated hereby have been approved by BuyGolf's Board of
Directors and, if such approval is required under applicable law, BuyGolf's
Stockholders in form reasonably acceptable to BC's counsel;
(i) Resignation of Directors and Officers. At the Closing,
-------------------------------------
the directors and officers of BuyGolf in office immediately prior to the Closing
shall resign as directors and officers of BuyGolf effective immediately
following the Closing;
(j) Termination of Employment Agreements. Prior to or at
------------------------------------
the Closing, BuyGolf shall have terminated the employment agreements and
Stockholder agreements with John Gilles, Greg Van Ginkel, Arti Dua, Steve Jess,
Bradley O'Hearne, Jack Souders, Lucy Wojskowicz, Miriam Price, Lori Stewart,
Mark Brown, Jeffrey Allen, C. Keith Allen, Steve Davis, and Donald Harris;
(k) Termination of Agreements with Ingram. Prior to or at
-------------------------------------
the Closing, BuyGolf and Ingram Entertainment Holdings, Inc. shall have
terminated that certain Common Stock Purchase Agreement, Voting Agreement and
Registration Rights Agreement, each dated August 5, 1999.
(l) Stock Restriction Agreement. A Stock Restriction
---------------------------
Agreement, substantially in the form attached hereto as Exhibit F, shall have
---------
been executed and delivered by the parties named therein;
(m) Non-Competition Agreement. A Non-Competition
Agreement, substantially in the form attached hereto as Exhibit G, shall have
---------
been executed and delivered by the parties named therein;
(n) Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated at the Closing
hereby, all documents and instruments incident to such transactions and all
documents, instruments and proceedings related
30
<PAGE>
to BuyGolf's business, technical and legal due diligence shall be reasonably
satisfactory in substance and form to BC and its counsel, and BC and its counsel
shall have received all such counterpart originals or certified or other copies
of such documents as they may reasonably request;
(o) Consents, Permits and Waivers. BuyGolf shall have
-----------------------------
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement;
(p) Non-Disclosure Agreements. Non-disclosure agreements
-------------------------
between Merger Sub, on the one hand, and any person who accepts employment with
the Surviving Corporation as of the Closing on the other hand, substantially in
the form of Exhibit H attached hereto;
---------
(q) Option Assumption Agreements. An Option Assumption
----------------------------
Agreement, substantially in the form attached hereto as Exhibit I, shall have
---------
been executed and delivered by each optionholder listed on Schedule B hereto;
----------
(r) Optionholder Questionnaire. An Optionholder
--------------------------
Questionnaire, substantially in the form attached hereto as Exhibit J shall have
---------
been completed, executed and delivered by each optionholder listed on Schedule B
----------
hereto; and
(s) Other Documents. Such other documents and instruments
---------------
as BC or its counsel reasonably shall deem necessary to consummate the
transactions contemplated hereby.
All documents delivered to BC shall be in form and substance
reasonably satisfactory to BC and its counsel.
7.3 Deliveries of BC. At the Closing, BC and/or Merger Sub will
----------------
execute and deliver or cause to be executed and delivered to the Stockholders
simultaneously with delivery of the items referred to in Section 7.2 above:
(a) BC Stock. Certificates representing the BC Stock to
--------
each Stockholder as set forth on Schedule A, issuable in accordance with Article
----------
I hereof;
(b) Representations and Warranties; Performance. At the
------------------------------
Closing, BC shall deliver to Stockholders a certificate dated as of the Closing
Date signed by the Chief Executive Officer of BC certifying (i) that each of the
representations and warranties made by BC herein are true and correct in all
material respects on the Closing Date with the same effect as though made on
such date; and (ii) that BC has performed and complied with all agreements,
covenants and conditions required by this Agreements to be performed and
complied with by BC prior to the Closing Date;
(c) Board Approval. At the Closing, BC shall deliver to
--------------
Stockholders evidence that this Agreement and the transactions contemplated
hereby shall have been approved by the BC's Board of Directors;
31
<PAGE>
(d) Consents, Permits and Waivers. BC shall have obtained
-----------------------------
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement;
(e) Corporate Documents. The Amended and Restated
-------------------
Certificate of Incorporation of BC and the Certificate of Incorporation of
Merger Sub, certified by the Secretary of State of Delaware as of a recent date
and the Bylaws of BC and Merger Sub, certified by the secretaries of BC and
Merger Sub, respectively, as in effect at the Closing; and
(f) Officer's Certificate. A certificate dated the Closing
---------------------
Date containing the information required pursuant to Section 6.3.
All documents delivered to the Stockholders shall be in form and
substance reasonably satisfactory to the Stockholders and their counsel.
7.4 Certificate of Merger. At the Closing, the parties hereto
---------------------
shall cause to filed the Certificate of Merger with the Delaware Secretary of
State in accordance with the Delaware Law.
ARTICLE VIII
INDEMNIFICATION
---------------
8.1 Indemnification by the Stockholders. The Stockholders shall
-----------------------------------
jointly and severally indemnify and hold harmless BC, Merger Sub and the
Surviving Corporation and their respective officers, directors, employees,
successors and assigns in respect of any and all claims, actions, suits or other
proceedings and any and all losses, costs, expenses, liabilities, fines,
penalties, interest, and damages, whether or not arising out of any claim,
action, suit or other proceeding (and including reasonable counsel and
accountants' fees and expenses and all other reasonable costs and expenses of
investigation, defense or settlement of claims and amounts paid in settlement)
incurred by, imposed on or borne by BC, Merger Sub, the Surviving Corporation or
such other parties (collectively "Damages") resulting from the breach of any of
-------
the representations or warranties made by the Stockholders or BuyGolf in this
Agreement. Notwithstanding the foregoing, each Stockholder's liability for
Damages shall be determined by, and shall not exceed, each Stockholder's
percentage ownership of BuyGolf held by the Stockholders immediately prior to
the Closing. For example, in the event Damages totaled $10,000,000, a
Stockholder that owns ten percent (10%) of BuyGolf prior to the Closing shall be
liable for no more than $1,000,000 of the Damages.
8.2 Indemnification by BC, Merger Sub and Surviving
-----------------------------------------------
Corporation. Each of BC, Merger Sub and the Surviving Corporation, jointly and
- -----------
severally, shall indemnify and hold harmless the Stockholders, in respect of any
and all claims, actions, suits or other proceedings and any and all losses,
costs, expenses, liabilities, fines, penalties, interest, and damages, whether
or not arising out of any claim, action, suit or other proceeding (and including
reasonable counsel and accountants' fees and expenses and all other reasonable
costs and expenses of investigation, defense or settlement of claims and amounts
paid in settlement) incurred by, imposed on or borne by the Stockholders
resulting from the breach of any of the representations, warranties or
agreements made by BC and Merger Sub in this Agreement.
32
<PAGE>
8.3 Indemnification Procedure for Claims. Whenever any claim
------------------------------------
shall arise for indemnification hereunder, the party entitled to indemnification
(the "indemnified party") shall promptly notify in writing the other party or
-----------------
parties (the "indemnifying party") of the claim and, when known, the facts
------------------
constituting the basis for such claim; provided, that the indemnified party's
failure to give such written notice shall not affect any rights or remedies of
an indemnified party hereunder with respect to indemnification for damages
except to the extent that the indemnifying party is materially prejudiced
thereby. In the event of any claim for indemnification hereunder resulting from
or in connection with any claim or legal proceedings by a third party, the
written notice to the indemnifying party shall specify, if known, the amount or
an estimate of the amount of the liability arising therefrom. The indemnified
party shall not settle or compromise any claim by a third party for which it is
entitled to indemnification hereunder, without the prior written consent of the
indemnifying party (which shall not be unreasonably withheld), unless suit shall
have been instituted against it and the indemnifying party shall not have taken
control of and conducted in a diligent manner the defense of such suit after
notification thereof as provided in Section 8.4 of this Agreement.
8.4 Defense by Indemnifying Party. In connection with any claim
-----------------------------
giving rise to indemnity hereunder or resulting from or arising out of any claim
or legal proceeding by a person who is not a party to this Agreement, the
indemnifying party at its sole cost and expense may, upon written notice to the
indemnified party, assume the defense of any such claim or legal proceeding if
it acknowledges to the indemnified party in writing its obligations to indemnify
the indemnified party with respect to all elements of such claim, and thereafter
diligently conducts the defense thereof with counsel reasonably acceptable to
the indemnified party. If the indemnifying party acknowledges in writing as
specified above that it shall assume the defense of any such action, then the
indemnifying party shall keep the indemnified party informed with respect to the
defense of such action and the indemnified party shall be entitled to
participate in (but not control) the defense of such action, with its counsel
and at its own expense. If (A) the indemnifying party does not acknowledge in
writing as specified above that it shall assume or fails to conduct in a
diligent manner the defense of any such claim or litigation resulting therefrom,
or (B) the indemnified party shall have reasonably concluded that there may be
one or more legal defenses available to it which are different from, or,
additional to those available to the indemnifying party or other indemnified
parties with respect to such claim or litigation, then, (i) the indemnified
party may defend against such claim or litigation, in such manner as it may deem
appropriate, including, without limitation, settling such claim or litigation,
after giving notice of the same to the indemnifying party, on such terms as the
indemnified party may deem appropriate, and (ii) the indemnifying party shall be
entitled to participate in (but not control) the defense of such action, with
its counsel and at its own expense. If the indemnifying party thereafter seeks
to question the manner in which the indemnified party defended such third party
claim or the amount or nature of any such settlement, the indemnifying party
shall have the burden to prove by a preponderance of the evidence that the
indemnified party did not defend or settle such third party claim in a
reasonably prudent manner. Each party agrees to cooperate fully with the other,
such cooperation to include, without limitation, attendance at depositions and
the provisions of relevant documents as may be reasonably requested by the
indemnifying party; provided, that the indemnifying party will hold the
indemnified party harmless from all of its expenses, including reasonable
attorneys' fees, incurred in connection with such cooperation by the indemnified
party.
33
<PAGE>
8.5 Arbitration. The rights of the indemnified party to
-----------
indemnification and the estimated amount thereof, as set forth in the notice,
shall be deemed objected to by the indemnifying party unless the indemnifying
party notified the indemnified party in writing as specified in Section 8.4
above that the indemnifying party accepts and agrees with the right of the
indemnified party to indemnification or that the indemnifying party elects to
defend such claim. If the claim to indemnification is deemed objected to, the
parties shall attempt to settle and compromise the same, or if unable to do so
within sixty (60) days of receipt of the notice of the claim, such dispute shall
be submitted to and resolved by prompt binding arbitration in a mutually agreed
location or, absent agreement in Orange County, California, and any rights of
indemnification established by reason of such settlement, compromise or
arbitration shall promptly thereafter be paid and satisfied by the indemnifying
party. Arbitration shall be final and binding according to the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrator(s) may be entered in any state or federal court
in Orange County, California.
8.6 Limits on Indemnification.
-------------------------
(a) Notwithstanding any provision of this Agreement to the
contrary, the Stockholders shall have no obligation to indemnify any person
entitled to indemnity under Section 8.1 unless the persons so entitled to
indemnity thereunder have suffered Damages in an aggregate amount in excess of
Twenty Five Thousand Dollars ($25,000) and then only to the extent of such
excess and (ii) the Stockholders' liability under Section 8.1 shall in no event
exceed Ten Million Dollars ($10,000,000);
(b) Notwithstanding any provision of this Agreement to the
contrary, BC shall have no obligation to indemnify any person entitled to
indemnity under Section 8.2, (i) unless the persons so entitled to indemnity
thereunder have suffered Damages in an aggregate amount in excess of Twenty Five
Thousand Dollars ($25,000) and then only to the extent of such excess and (ii)
BC's liability under Section 8.2 shall in no event exceed Ten Million Dollars
($10,000,000).
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1 Survival of Representations, Warranties and Agreements. All
------------------------------------------------------
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Closing
and shall terminate twenty-four (24) months after the Closing Date. No claim or
action for indemnity pursuant to Sections 8.1 or 8.2 hereof shall be asserted or
maintained by any party hereto after the second anniversary of the Closing Date,
except for claims made in writing prior to such date and actions (whether
constituted before or after such date) based on any claim made in writing prior
to such date. Each party agrees that, except for the representations and
warranties contained in this Agreement and BC Disclosure Schedule and the
BuyGolf Disclosure Schedule, no party hereto has made any other representations
and warranties, and each party hereby disclaims any other representations and
warranties made by itself or any of its officers, directors, employees, agents,
financial and legal advisors or other representatives, with respect to execution
and delivery of this Agreement or the transactions contemplated herein,
notwithstanding the delivery or
34
<PAGE>
disclosure to any other party or any party's representatives of any
documentation or other information with respect to any one or more of the
foregoing.
9.2 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given if delivered personally,
telecopied (with confirmation), mailed by registered or certified mail (return
receipt requested) or delivered by an express courier (with confirmation) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to BC, to:
BUY.COM INC.
21 Brookline
Aliso Viejo, California 92656
Attention: Gregory Hawkins
with a copy to:
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Attention: Bruce R. Hallett, Esq.
and
(b) if to BuyGolf, or the Stockholders, to:
BuyGolf, Com Inc.
1705 South Coast Highway
Laguna Beach, California 92651
Attention: Bradford W. Allen
with a copy to:
Rutan & Tucker
611 Anton Boulevard
Suite 1400
Costa Mesa, California 92626
Attention: Natalie Sibbald Dundas, Esq.
9.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
(WITHOUT REFERENCE TO CONFLICT OF LAW PRINCIPLES OTHER THAN THOSE DIRECTING
CALIFORNIA LAW) EXCEPT TO THE EXTENT MANDATORILY GOVERNED BY THE LAWS OF THE
STATE OF DELAWARE. BC AND EACH OF THE STOCKHOLDERS HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF ANY CALIFORNIA STATE OR FEDERAL COURT SITTING IN ORANGE
COUNTY, CALIFORNIA, IN ANY ACTION OR PROCEEDING ARISING OUT
35
<PAGE>
OF OR RELATING TO THIS AGREEMENT, AND BUYER AND THE STOCKHOLDERS EACH HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN SUCH CALIFORNIA STATE COURT OR SUCH FEDERAL COURT. BC
AND THE STOCKHOLDERS EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT
MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE
OF SUCH ACTION OR PROCEEDING.
EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY
IN ANY PROCEEDING (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION OR AGREEMENT CONTEMPLATED
HEREBY OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION,
PERFORMANCE OR ENFORCEMENT HEREOF.
9.4 Severability. If any term or other provision of this Agreement is
------------
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner to the fullest extent permitted by applicable law in order that the
Merger may be consummated as originally contemplated to the fullest extent
possible.
9.5 Assignment; Binding Effect; Benefit. Neither this Agreement nor
-----------------------------------
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties hereto. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing in
this Agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and permitted assigns any
rights or remedies under or by reason of this Agreement.
9.6 Headings. The descriptive headings contained in this Agreement
--------
are included for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
9.7 Entire Agreement. This Agreement (including the Exhibits, the BC
----------------
Disclosure Schedule and the BuyGolf Disclosure Schedule and other Schedules
referenced herein) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
36
<PAGE>
9.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement. Execution and delivery of
this Agreement by exchange of facsimile copies bearing the facsimile signature
of a party hereto shall constitute a valid and binding execution and delivery of
this Agreement by such party.
9.9 Waivers. No waiver of any of the provisions of this Agreement
-------
shall be deemed, or shall constitute, a waiver of any other provisions, whether
or not similar, nor shall any waiver constitute a continuing waiver. No waiver
shall be binding unless executed in writing by the party making the waiver.
9.10 Third Parties. Nothing in this Agreement, whether express or
-------------
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
9.11 Publicity. None of the Stockholders or BuyGolf shall issue or
---------
make, or cause to have issued or made, any press release or announcement
concerning, or otherwise disclose to any third person, the terms of the
transactions contemplated hereby (including the existence of the transactions
contemplated hereby) without the advance approval in writing of the form and
substance thereof by BC, unless otherwise required by applicable law, it being
understood that the Stockholders and BuyGolf will use their best efforts not to
disclose the terms or existence of the transaction prior to the Closing.
Further, prior to and following the Closing none of the parties shall disclose
the material terms of this Agreement to any third party other than a third party
which must have such information in rendering financial, business, legal or tax
advice to such party, as required by law or regulatory authority, or with the
written consent (not, following the Closing, to be unreasonably withheld) of
each other party hereto.
9.12 Schedules. All schedules, exhibits, appendices and documents
---------
referred to in or attached to this Agreement are integral parts of this
Agreement as if fully set forth herein, and all statements appearing therein
shall be deemed disclosed for all purposes, and not only in connection with the
specific representation to which they are explicitly referenced.
[Signature page to follow]
37
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the date first written above.
BC: BUYGOLF:
BUY.COM INC. BUYGOLF.COM INC.
By:______________________________ By:_______________________________
Name: Gregory Hawkins Name: Bradford W. Allen
Title: Chief Executive Officer Title: Chief Executive Officer
STOCKHOLDERS:
Bradford W. Allen Scott A. Blum
By:______________________________ By:_______________________________
Thomas Monaco Joseph and April Kramer
By:______________________________ By:_______________________________
Sinocorp Investment Ltd. Las Vegas Golf & Tennis, Inc.
By:______________________________ By:_______________________________
Name: Name:
Title: Title:
Wait 1999 Long-Term Trust Ingram Entertainment Holdings Inc.
By:______________________________ By:_______________________________
Name: Younghee Waite Name:
Title: Trustee Title:
SIGNATURE PAGE FOR AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
38
<PAGE>
SCHEDULE A
SCHEDULE OF STOCKHOLDERS
------------------------
<TABLE>
<CAPTION> Aggregate BUY.COM
Number of Shares to be Issued and
Stockholder Shares of BuyGolf/1/ Delivered at Closing
- ------------------------------------ --------------------------- --------------------------
<S> <C> <C>
Bradford W. Allen 5,188,219 2,697,874
Thomas Monaco 200,000 104,000
Joseph and April Kramer 400,000 208,000
Sinocorp Investment Ltd. 400,000 208,000
Las Vegas Golf & Tennis, Inc. 540,000 280,800
Scott A. Blum 400,000 208,000
Younghee Wait, Trustee of the Wait 1999 400,000 208,000
Long-term Trust
Ingram Entertainment Inc. 438,947 228,253
--------------------------- --------------------------
Total: 7,967,166 4,142,927
Exchange Ratio: 0.520
</TABLE>
______________________
/1/ Buy.Com Inc. has a five percent (5%) ownership interest in BuyGolf
prior to the Merger.
<PAGE>
SCHEDULE B
SCHEDULE OF OPTIONHOLDERS
-------------------------
Aggregate BUY.COM Options
Number of to be Issued Upon the
BuyGolf Shares Assumption and Replacement
Optionholders Subject to Options of the BuyGolf Options
- ------------------------- ----------------------- ----------------------------
Don Harris 200,000 104,000
Keith Allen 160,000 83,200
Lucy Wojskowicz 20,000 10,400
Jack Souders 35,000 18,200
Steve Jess 40,000 20,800
Jeff Allen 25,000 13,000
Arti Dua 3,000 1,560
Miriam Price 3,000 1,560
Greg Van Ginkel 2,000 1,040
Lori Stewart 1,000 520
Mark Brown 10,000 5,200
------------------------- ----------------------------
Total: 499,000 259,480
<PAGE>
EXHIBITS
--------
Exhibit A - Certificate of Merger
Exhibit B - Form of Spousal Consent
Exhibit C - Form of Proprietary Information and Inventions Agreement
Exhibit D - Form of Employee Nondisclosure and Developments Agreement
Exhibit E - Form of Release Agreement
Exhibit F - Stock Restriction Agreement
Exhibit G - Form of Non-Competition Agreement
Exhibit H - Non-Disclosure Agreement
Exhibit I - Form of Option Assumption Agreement
Exhibit J - Form of Optionholder Questionnaire
<PAGE>
SPOUSAL CONSENT
The undersigned, the spouse of Stockholder, acknowledges that he/she
is familiar with the substance of the Agreement and Plan of Merger and
Reorganization, dated the date hereof, between BuyGolf.com Inc., BUY.COM INC.
and the Stockholders (the "Agreement") that his/her spouse has signed today.
Without modifying any rights between himself/herself and his/her spouse, the
undersigned hereby (i) agrees to be bound by the Agreement; (ii) agrees that
his/her spouse may enter into the Agreement and consummate the transactions
contemplated thereby; and (iii) agrees that his/her spouse may amend or modify
the Agreement without further consent on his/her part.
Dated: October ___, 1999 ___________________________________
Print Name:________________________
<PAGE>
EXHIBIT 3.1
AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION
OF
BUY.COM INC.
BUY.COM INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of Buy Corp. was
-----
filed with the Secretary of State of Delaware on August 3, 1998.
SECOND: The Amended and Restated Certificate of Incorporation of
------
BUY.COM INC. in the form attached hereto as Exhibit A has been duly adopted in
accordance with the provisions of Sections 245 and 242 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
THIRD: The Amended and Restated Certificate of Incorporation so
-----
adopted reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, BUY.COM INC. has caused this Certificate to be
signed this 2nd day of September, 1999.
BUY.COM INC.
By ____________________________
Murray Williams
Secretary
<PAGE>
AMENDED
AND
RESTATED CERTIFICATE OF INCORPORATION
OF
BUY.COM INC.
FIRST: The name of the corporation (hereinafter called the
-----
"Corporation") is BUY.COM INC.
SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is 9 East Loockerman Street, City of Dover, County of
Kent, and the name of the registered agent of the Corporation in the State of
Delaware at such address is National Registered Agents, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH:
------
A. This Corporation is authorized to issue two classes of shares to
be designated respectively Preferred Stock ("Preferred Stock") and Common Stock
("Common Stock"). The total number of shares of capital stock that the
Corporation is authorized to issue is One Billion (1,000,000,000). The total
number of shares of Preferred Stock this Corporation shall have authority to
issue is One Hundred Fifty Million (150,000,000). The total number of shares of
Common Stock this Corporation shall have authority to issue is Eight Hundred
Fifty Million (850,000,000). The Preferred Stock shall have a par value of
$.0001 per share and the Common Stock shall have a par value of $.0001 per
share. The Preferred Stock shall be divided into series. The first series shall
consist of Nineteen Million Four Hundred Eighty-One Thousand One Hundred Thirty
(19,481,130) shares and is designated "Series A Convertible Participating
Preferred Stock" and the second series shall consist of Fifteen Million Eight
Hundred Seventy Seven Thousand Two Hundred Forty Nine (15,877,249) shares and is
designated "Series B Convertible Participating Preferred Stock." The remaining
shares of Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Corporation (the "Board of Directors") is
expressly authorized to provide for the issue of all or any of the remaining
shares of the Preferred Stock in one or more series, and to fix the number of
shares and to determine or alter, for each such series, such voting powers, full
or limited, or no voting powers, and such designations, preferences, and
relative, participating, optional, or other rights and such qualifications,
limitations, or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of such shares (a "Preferred Stock Designation") and as may be permitted
by the General Corporation Law of the State of Delaware. The Board of Directors
is also expressly authorized to increase or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any series,
other than the Series A Convertible Participating Preferred Stock and the Series
B Convertible Participating Preferred Stock, subsequent to the issue of shares
of that
2
<PAGE>
series. In case the number of shares of such series shall be so decreased, the
shares constituting such decrease shall resume the status that they had prior to
the adoption of the resolution originally fixing the number of shares of such
series.
B. The powers, preferences, rights, restrictions, and other matters
relating to the Series A Convertible Participating Preferred Stock and the
Series B Convertible Participating Preferred Stock are as follows:
1. Number of Shares. The series of Preferred Stock designated and known
----------------
as "Series A Convertible Participating Preferred Stock" shall consist of
19,481,130 shares and the series of Preferred Stock designated and known as
"Series B Convertible Participating Preferred Stock" shall consist of 15,877,249
shares.
2. Voting.
------
2A. General. Except as may be otherwise provided in these terms of
-------
the Series A Convertible Participating Preferred Stock (the "Series A Stock")
and the Series B Convertible Participating Preferred Stock (the "Series B
Stock") or by law, the Series A Stock and the Series B Stock shall vote together
with all other classes and series of stock of the Corporation as a single class
on all actions to be taken by the stockholders of the Corporation, including but
not limited to, actions amending the Certificate of Incorporation to increase
the number of authorized shares of Common Stock. Each share of Series A Stock
and Series B Stock shall entitle the holder thereof to such number of votes per
share on each such action as shall equal the number of shares of Common Stock
(including fractions of a share) into which each share of Series A Stock and
Series B Stock is then convertible.
2B. Board Size. The Corporation shall not, without the written
----------
consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Stock and Series B Stock, given in writing or by
vote at a meeting, consenting or voting (as the case may be) together as a
single class, increase the maximum number of directors constituting the Board of
Directors to a number in excess of nine (9).
2C. Board Seats. So long as ten percent (10%) of the Series A Stock
-----------
and the Series B Stock remains outstanding, the holders of the Series A Stock,
voting as a separate series, shall be entitled to elect one director of the
Corporation and the holders of Series B Stock, voting as a separate series,
shall be entitled to elect one director of the Corporation. The holders of the
Common Stock, voting as a separate class, shall be entitled to elect one
director of the Corporation. The holders of the Series A Stock, the Series B
Stock and the Common Stock, voting together as a single class, shall be entitled
to elect the remainder of the directors of the Corporation. At any meeting (or
in a written consent in lieu thereof) held for the purpose of electing
directors, (i) the presence in person or by proxy (or the written consent) of
the holders of a majority of the total shares of the Series A Stock then
outstanding shall constitute a quorum of the Series A Stock for the election of
directors to be elected solely by the holders of the Series A Stock, (ii) the
presence in person or by proxy (or the written consent) of the holders of a
majority of the
3
<PAGE>
total shares of the Series B Stock then outstanding shall constitute a quorum of
the Series B stock for the election of directors to be elected solely by the
holders of the Series B Stock, (iii) the presence in person or by proxy (or the
written consent) of the holders of a majority of the total shares of Common
Stock then outstanding shall constitute a quorum of the Common Stock for the
election of directors to be elected solely by the holders of the Common Stock,
and (iv) the presence in person or by proxy (or the written consent) of the
holders of a majority of the total shares of Series A Stock, Series B Stock and
Common Stock, voting as a single class on an as-if converted basis, then
outstanding shall constitute a quorum of the Series A Stock, Series B Stock and
Common Stock for the election of directors to be elected solely by the holders
of Series A Stock, Series B Stock and Common Stock, voting as a single class. A
vacancy in any directorship elected by the holders of the Series A Stock shall
be filled only by vote or written consent of the holders of the Series A Stock;
a vacancy in any directorship elected by the holders of the Series B Stock shall
be filled only by vote or written consent of the holders of the Series B Stock;
a vacancy in any directorship elected by the holders of the Common Stock shall
be filled only by vote or written consent of the holders of the Common Stock;
and a vacancy in the directorship elected jointly by the holders of the Series A
Stock, the Series B Stock and the Common Stock shall be filled only by vote or
written consent of the Series A Stock, the Series B Stock and the Common Stock
as provided above.
3. Dividends. The holders of the Series A Stock and the Series B Stock
---------
shall be entitled to receive, out of funds legally available therefor, when and
if declared by the Board of Directors, quarterly dividends at the rate per annum
of $0.0616 per share (the "Accruing Dividends"), appropriately adjusted, for
stock splits, recapitalizations and the like subsequent to the date of this
Amended and Restated Certificate of Incorporation. Accruing Dividends shall
accrue from day to day, whether or not earned or declared, and shall be
cumulative.
4. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Corporation resulting in aggregate proceeds of less than $340,000,000, whether
voluntary or involuntary, the holders of the shares of Series A Stock and Series
B Stock shall first be entitled, before any distribution or payment is made upon
liquidation on any stock ranking junior to the Series A Stock and the Series B
Stock, to be paid an amount equal to $1.0266 per share and $5.6685 per share,
respectively, plus, in the case of each share, an amount equal to all Accruing
Dividends unpaid thereon (whether or not declared) and any other dividends
declared but unpaid thereon, computed to the date payment thereof is made
available, such amount payable with respect to one share of Series A Stock and
Series B Stock, respectively, being sometimes referred to as the "Series A
Liquidation Preference Payment" or the "Series B Liquidation Preference
Payment," as applicable, and with respect to all shares of Series A Stock or
Series B Stock, being sometimes referred to as the "Series A Liquidation
Preference Payments" and "Series B Liquidation Preference Payments,"
respectively. If upon such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series A Stock and Series B Stock shall be insufficient to
permit payment in full to the holders of Series A Stock and Series B Stock of
the Series A Liquidation Preference Payments and the Series B Liquidation
Preference Payments, respectively, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series A
Stock and Series B Stock (with each share of Series A Stock and Series B Stock
being deemed, for such purpose, to be equal to the number of shares of Common
Stock (including fractions of a share) into which such share of Series A Stock
or Series B Stock is convertible immediately prior to the close of business on
the business day fixed for such distribution). Upon any such liquidation,
dissolution or winding up of the Corporation, immediately after the holders of
4
<PAGE>
Series A Stock and Series B Stock shall have been paid in full the Series A
Liquidation Preference Payments and the Series B Liquidation Preference
Payments, respectively, the remaining net assets of the Corporation available
for distribution shall be distributed ratably among the holders of Series A
Stock, Series B Stock and Common Stock (with each share of Series A Stock and
Series B Stock being deemed, for such purpose, to be equal to the number of
shares of Common Stock (including fractions of a share) into which such share of
Series A Stock or Series B Stock is convertible immediately prior to the close
of business on the business day fixed for such distribution). Written notice of
such liquidation, dissolution or winding up, stating a payment date and the
place where said payments shall be made, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 20 days prior to the payment date stated therein, to the
holders of record of Series A Stock and Series B Stock, such notice to be
addressed to each such holder at its address as shown by the records of the
Corporation. The consolidation or merger of the Corporation into or with any
other entity or entities which results in the exchange of outstanding shares of
the Corporation for securities or other consideration issued or paid or caused
to be issued or paid by any such entity or affiliate thereof (other than a
merger to reincorporate the Corporation in a different jurisdiction), and the
sale, lease, abandonment, transfer or other disposition by the Corporation of
all or substantially all its assets, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of the
provisions of this paragraph 4. For purposes hereof, the Common Stock shall
rank junior to the Series A Stock and the Series B Stock in the event of
liquidation.
5. Restrictions. So long as ten percent (10%) of the Series A Stock and
------------
the Series B Stock remains outstanding, except where the vote or written consent
of the holders of a greater number of shares of the Corporation is required by
law or by the Certificate of Incorporation, and in addition to any other vote
required by law or the Certificate of Incorporation, without the approval of the
holders of at least a majority of the then outstanding total shares of each of
the Series A Stock and the Series B Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be), separately as series, the
Corporation will not:
5A. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A Stock and
the Series B Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of the Series A Stock or Series B Stock or increase the authorized amount of any
additional class or series of shares of stock unless the same ranks junior to
the Series A Stock and the Series B Stock as to the distribution of assets on
the liquidation, dissolution or winding up of the Corporation, or create or
authorize any obligation or security convertible into shares of Series A Stock
or Series B Stock or into shares of any other class or series of stock unless
the same ranks junior to the Series A Stock and the Series B Stock as to the
distribution of assets on the liquidation, dissolution or winding up of the
Corporation, whether any such creation, authorization or increase shall be by
means of amendment to the Certificate of Incorporation or by merger,
consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities or
sell, lease, abandon, transfer or
5
<PAGE>
otherwise dispose of all or substantially all its assets if the Corporation's
valuation for purposes of such transaction is less than One Billion Dollars
($1,000,000,000);
5C. Amend, alter or repeal its Certificate of Incorporation or By-laws
in a manner that would materially affect the Series A Stock or the Series B
Stock;
5D. Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than the Series
A Stock and the Series B Stock, except for dividends or other distributions
payable on the Common Stock solely in the form of additional shares of Common
Stock and except for the purchase of shares of Common Stock from former
employees of the Corporation who acquired such shares directly from the
Corporation, if each such purchase is made pursuant to contractual rights held
by the Corporation relating to the termination of employment of such former
employee and the purchase price does not exceed the original issue price paid by
such former employee to the Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Series A Stock or Series B
Stock except as expressly authorized in paragraph 7 hereof or pursuant to a
purchase offer made pro rata to all holders of the shares of Series A Stock and
Series B Stock on the basis of the aggregate number of outstanding shares of
Series A Stock and Series B Stock then held by each such holder.
In addition, the consent of the holders of a majority of the outstanding Series
B Stock, voting as a separate class, shall be required for: (i) any amendment
or change of the rights, preferences or powers of the Series B Stock; (ii) any
action that reclassifies any outstanding shares into shares having rights as to
dividends or assets senior to or on a parity with the Series B Stock; (iii) any
amendment of the Company's Certificate of Incorporation that modifies the rights
of the Series B Stock in an adverse manner; (iv) any material change in the
Corporation's line of business provided that expanding into new markets and new
products and services categories or expanding into other e-commerce activities
shall not be deemed a material change; (v) any agreement between the Corporation
and any officer or director other than in the ordinary course of business; (vi)
any issuance of debt in excess of $100,000,000 in the aggregate.
In addition, the consent of the holders of a majority of the outstanding Series
A Stock, voting as a separate class, shall be required for: (i) any amendment
or change of the rights, preferences or powers of the Series A Stock; (ii) any
action that reclassifies any outstanding shares into shares having rights as to
dividends or assets senior to or on a parity with the Series A Stock; (iii) any
amendment of the Company's Certificate of Incorporation that modifies the rights
of the Series A Stock in an adverse manner.
6. Conversions. The holders of shares of Series A Stock and Series B
-----------
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 6, the holder of any share or shares of Series A Stock or Series B
Stock shall have the right, at its option at any time, to convert any such
shares of Series A Stock or Series B Stock (except that
6
<PAGE>
upon any liquidation of the Corporation the right of conversion shall terminate
at the close of business on the business day fixed for payment of the amount
distributable on the Series A Stock and Series B Stock) into such number of
fully paid and nonassessable shares of Common Stock as is obtained by (i)
multiplying, in the case of the Series A Stock, the number of shares of Series A
Stock so to be converted by $1.0266 or, in the case of the Series B Stock, the
number of shares of Series B Stock so to be converted by $5.6685 and (ii)
dividing the result, in the case of the Series A Stock, by the conversion price
of $1.0266 per share or, in the case of the Series B Stock, by the conversion
price of $5.6685 or, in case an adjustment of either such conversion price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series A Stock or Series B Stock are surrendered for conversion (such price,
or such price as last adjusted, being referred to as the "Series A Conversion
Price" or the "Series B Conversion Price" as applicable). Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert a stated number of shares of Series A Stock
and/or Series B Stock into Common Stock and by surrender of a certificate or
certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series A
Stock and the Series B Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name or names
(with address) in which the certificate or certificates for shares of Common
Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected. Promptly after
--------------------------------------------------
the receipt of the written notice referred to in subparagraph 6A and surrender
of the certificate or certificates for the share or shares of Series A Stock
and/or Series B Stock to be converted, the Corporation shall issue and deliver,
or cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series A Stock and/or Series B Stock. To the extent permitted by law,
such conversion shall be deemed to have been effected and the Series A
Conversion Price and/or the Series B Conversion Price shall be determined as of
the close of business on the date on which such written notice shall have been
received by the Corporation and the certificate or certificates for such share
or shares shall have been surrendered as aforesaid, and at such time the rights
of the holder of such share or shares of Series A Stock and/or Series B Stock
shall cease, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares
represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of Series A Stock or Series B Stock into
Common Stock, and no payment or adjustment shall be made upon any conversion on
account of any cash dividends on the Common Stock issued upon such conversion.
At the time of each conversion, the Corporation shall pay in cash an amount
equal to all dividends, excluding Accruing Dividends, accrued and unpaid on the
shares of Series A Stock and/or Series B Stock surrendered for conversion to the
date upon which such conversion is deemed to take place as provided in
subparagraph 6B. In case the number of shares of Series A Stock and/or Series B
Stock represented by the certificate or certificates surrendered pursuant to
subparagraph 6A exceeds the
7
<PAGE>
number of shares converted, the Corporation shall, upon such conversion, execute
and deliver to the holder, at the expense of the Corporation, a new certificate
or certificates for the number of shares of Series A Stock and/or Series B Stock
represented by the certificate or certificates surrendered which are not to be
converted. If any fractional share of Common Stock would, except for the
provisions of the first sentence of this subparagraph 6C, be delivered upon such
conversion, the Corporation, in lieu of delivering such fractional share, shall
pay to the holder surrendering the Series A Stock and/or the Series B Stock for
conversion an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in subparagraph 6E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 6D(1) through 6D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Conversion Price with respect to any series of Preferred Stock in
effect on the date of and immediately prior to such issuance or sale, then and
in such event, the Conversion Price for such series of Preferred Stock shall be
automatically reduced, concurrently with such issuance or sale, to the price
determined by dividing (i) an amount equal to the sum of (a) the number of
shares of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the then existing Conversion Price for such series of Preferred
Stock and (b) the consideration, if any, received by the Corporation upon such
issuance or sale, by (ii) the total number of shares of Common Stock and Series
A Stock or Series B Stock, as the case may be, outstanding immediately after
such issuance or sale.
For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to
6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or
exchangeable stock or securities being called "Convertible Securities")
whether or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such Options or
upon the conversion or exchange of such Convertible Securities (determined
by dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale
of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon
the exercise of such
8
<PAGE>
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options) shall be less than
the Conversion Price of any series of Preferred Stock in effect immediately
prior to the time of the granting of such Options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such Options
or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of
granting of such Options or the issuance of such Convertible Securities and
thereafter shall be deemed to be outstanding. Except as otherwise provided
in subparagraph 6D(3), no adjustment of the Conversion Price of any series
of Preferred Stock shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon exercise of such Options or
upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case the
----------------------------------
Corporation shall in any manner issue (whether directly or by assumption in
a merger or otherwise) or sell any Convertible Securities, whether or not
the rights to exchange or convert any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (i) the
total amount received or receivable by the Corporation as consideration for
the issuance or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the
Conversion Price of any series of Preferred Stock in effect immediately
prior to the time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to have been issued for such price
per share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding, provided that
(a) except as otherwise provided in subparagraph 6D(3), no adjustment of
the Conversion Price of any series of Preferred Stock shall be made upon
the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities and (b) if any such issuance or sale of such
Convertible Securities is made upon exercise of any Options to purchase any
such Convertible Securities for which adjustments of the Conversion Price
of any Series of Preferred Stock have been or are to be made pursuant to
other provisions of this subparagraph 6D, no further adjustment of the
Conversion Price shall be made by reason of such issuance or sale.
6D(3) Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely, if the purchase price provided for
in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the
rate at which Convertible Securities referred to in subparagraph 6D(1) or
6D(2) are convertible into or exchangeable for Common Stock shall change at
any time (including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Conversion Price of
any series of Preferred Stock in effect at the time of such event shall
forthwith be readjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securitiesstill
outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time initially
granted, issued or sold, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby reduced; and on the
termination of any such Option or any such right to convert or exchange
such Convertible Securities, the
9
<PAGE>
Conversion Price for such series of Preferred Stock then in effect
hereunder shall forthwith be increased to the Conversion Price for such
series of Preferred Sock which would have been in effect at the time of
such termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the
Common Stock), Options or Convertible Securities, any Common Stock, Options
or Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold
without consideration.
6D(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors of
the Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any Options shall be issued in connection
with the issue and sale of other securities of the Corporation, together
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be
deemed to have been issued for such consideration as determined in good
faith by the Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issuance or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purpose of
this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price of any series of Preferred Stock in the case
of the issuance from and after the date of filing of these terms of the Series A
Stock and the Series B Stock of (i) shares of Common Stock
10
<PAGE>
issuable upon exercise of options granted to directors, officers, employees or
consultants of the Corporation in connection with their service as directors of
the Corporation, their employment by the Corporation or their retention as
consultants by the Corporation, (ii) such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant to
contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor, (iii) Common Stock or Common Stock Equivalents issued as
consideration in a merger, (iv) Common Stock or Common Stock Equivalents issued
pursuant to an adjustment in the Conversion Price of the Series B Stock pursuant
to Section 6P, (v) Common Stock or Common Stock Equivalents issued or issuable
(I) in a public offering before or in connection with which all outstanding
shares of Preferred Stock will be converted to Common Stock or (II) upon the
exercise of warrants or rights granted to underwriters in connection with such a
public offering, or (vi) Common Stock or Common Stock Equivalents issued to a
potential or existing customer or supplier or other strategic relationship or
issued in connection with a credit facility or equipment lease transaction,
including without limitation, warrants previously issued to The Bank of Nova
Scotia and United Air Lines, Inc.
6F. Subdivision or Combination of Common Stock. In case the Corporation
------------------------------------------
shall at any time subdivide (by any stock split, stock dividend or otherwise
subsequent to the date of this Amended and Restated Certificate of
Incorporation) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price of any series of Preferred Stock in effect
immediately prior to such subdivision shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Conversion Price of any series of Preferred
Stock in effect immediately prior to such combination shall be proportionately
increased. In the case of any such subdivision, no further adjustment shall be
made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital reorganization
----------------------------------
or reclassification of the capital stock of the Corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate
provisions shall be made whereby each holder of a share or shares of Series A
Stock and Series B Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion of
such share or shares of Series A Stock and Series B Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore receivable upon such
conversion had such reorganization or reclassification not taken place, and in
any such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Conversion Price,
--------------------
then and in each such case the Corporation shall give written notice thereof, by
delivery in person,
11
<PAGE>
certified or registered mail, return receipt requested, telecopier or telex,
addressed to each holder of shares of Series A Stock and Series B Stock at the
address of such holder as shown on the books of the Corporation, which notice
shall state the Conversion Price for each series of Preferred Stock resulting
from such adjustment, setting forth in reasonable detail the method upon which
such calculation is based.
6I. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the
holders of its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of
the Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all of
the assets of the Corporation; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series A Stock and Series B
Stock at the address of such holder as shown on the books of the Corporation,
(a) at least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times reserve and
--------------------
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Stock and Series B Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Stock and Series B Stock.
The Corporation covenants that all shares of Common Stock which shall be so
issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, and,
without limiting the generality
12
<PAGE>
of the foregoing, the Corporation covenants that it will from time to time take
all such action as may be requisite to assure that the par value per share of
the Common Stock is at all times equal to or less than the Conversion Price in
effect at the time. The Corporation will take all such action as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirement of
any national securities exchange or automated quotation system upon which the
Common Stock may be listed. The Corporation will not take any action which
results in any adjustment of the Conversion Price of any series of Preferred
Stock if the total number of shares of Common Stock issued and issuable after
such action upon conversion of the Series A Stock and Series B Stock would
exceed the total number of shares of Common Stock then authorized by the
Certificate of Incorporation.
6K. No Reissuance of Series A Stock or Series B Stock. Shares of Series
-------------------------------------------------
A Stock and Series B Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.
6L. Issue Tax. The issuance of certificates for shares of Common Stock
---------
upon conversion of Series A Stock and Series B Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series A Stock and/or
Series B Stock which is being converted.
6M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series A Stock and/or Series B Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Stock or Series B Stock in any manner which interferes with
the timely conversion of such Series A Stock and/or Series B Stock, except as
may otherwise be required to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this paragraph 6, the term
--------------------------
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
par value $.0001 per share, as constituted on the date of filing of these terms
of the Series A Stock and Series B Stock, and shall also include any capital
stock of any class of the Corporation thereafter authorized which shall neither
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends nor entitled to a preference in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Series A Stock and/or Series B
Stock shall include only shares designated as Common Stock of the Corporation on
the date of filing of this instrument, or in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation shall effect a
--------------------
firm commitment underwritten public offering ("IPO") of shares of Common Stock
in which (i) the aggregate price paid for such shares by the public shall be at
least $30,000,000 and (ii) the price paid by the public for such shares shall be
at least $2.053 per share (appropriately adjusted to
13
<PAGE>
reflect the occurrence of any event described in subparagraph 6F subsequent to
the date of this Amended and Restated Certificate of Incorporation), then
effective upon the closing of the sale of such shares by the Corporation
pursuant to such public offering, all outstanding shares of Series A Stock and
Series B Stock shall automatically convert to shares of Common Stock on the
basis set forth in this paragraph 6. Holders of shares of Series A Stock and
Series B Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the Corporation as the Corporation may
designate by notice in writing to such holders) during its usual business hours,
the certificate or certificates for the shares so converted. As promptly as
practicable thereafter, the Corporation shall issue and deliver to such holder a
certificate or certificates for the number of whole shares of Common Stock to
which such holder is entitled, together with any cash dividends and payment in
lieu of fractional shares to which such holder may be entitled pursuant to
subparagraph 6C. Until such time as a holder of shares of Series A Stock and/or
Series B Stock shall surrender his or its certificates therefor as provided
above, such certificates shall be deemed to represent the shares of Common Stock
to which such holder shall be entitled upon the surrender thereof.
6P. Adjustment to Series B Stock Conversion Price Upon IPO. In the
------------------------------------------------------
event the Corporation consummates an IPO and the IPO Price Per Share is less
than the Target Price, then the Series B Conversion Price in effect immediately
prior to the IPO shall be adjusted according to the calculation below. In the
event the IPO Price Per Share equals or exceeds the Target Price, no adjustment
to the Series B Conversion Price shall occur under this Section 6P. This
special one-time adjustment shall apply only to the Series B Conversion Price
and shall not apply to the Series A Conversion Price. Notwithstanding anything
contained herein to the contrary, in no event shall the Series B Conversion
Price be adjusted below $2.8343 per share (as adjusted for subsequent stock
splits, combinations, stock dividends and the like).
Step 1:
- ------
Target Price - the IPO Price Per Share = Shortfall
Step 2:
- ------
Shortfall = Alpha
---------
Target Price
Step 3:
- ------
Alpha x the Series B Issue Price = Beta
Step 4:
- ------
The Series B Issue Price - Beta = New Series B Conversion Price
Definitions:
" Target Price" shall equal $7.0856 per share (as adjusted for
subsequent stock splits, combinations, stock dividends and the like).
14
<PAGE>
"Series B Issue Price" shall equal $5.6685 (as adjusted for subsequent
stock splits, combinations, stock dividends and the like).
"IPO Price Per Share" shall equal the initial public offering price
per share at which the Corporation's Common Stock is first sold to the public
pursuant to a Registration Statement on Form S-1 which has been declared
effective by the Securities and Exchange Commission.
7. Redemption. The shares of Series A Stock and Series B Stock shall be
----------
redeemed as follows:
7A. Redemption. On August 18, 2003 (the "Series A Redemption Date"),
----------
the Corporation shall at the option of the holders of a majority of the
outstanding Series A Stock, redeem all outstanding shares of Series A Stock. On
September 2, 2004 (the "Series B Redemption Date"), the Corporation shall at the
option of the holders of a majority of the outstanding Series B Stock, redeem
all outstanding shares of Series B Stock. The Series A Redemption Date and the
Series B Redemption Date shall each be referred to as a "Redemption Date."
7B. Redemption Price and Payment. The shares of Series A Stock to be
----------------------------
redeemed on the Series A Redemption Date shall be redeemed by paying for each
share in cash an amount equal to $1.0266 per share plus, in the case of each
share, an amount equal to all dividends, excluding Accruing Dividends, declared
but unpaid thereon, computed to such Series A Redemption Date, such amount being
referred to as a "Redemption Price" or more specifically the "Series A
Redemption Price". Such payment shall be made in full on the Series A
Redemption Date to the holders entitled thereto. The shares of Series B Stock
to be redeemed on the Series B Redemption Date shall be redeemed by paying for
each share in cash an amount equal to $5.6685 per share plus, in the case of
each share, an amount equal to all dividends, excluding Accruing Dividends,
declared but unpaid thereon, computed to such Series B Redemption Date, such
amount being referred to as a "Redemption Price" or more specifically the
"Series B Redemption Price". Such payment shall be made in full on the Series B
Redemption Date to the holders entitled thereto.
7C. Redemption Mechanics. At least 20 but not more than 30 days prior
--------------------
to any Redemption Date, written notice (the "Redemption Notice") shall be given
by the Corporation by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, to each holder of record (at the close
of business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Series A Stock or Series B Stock, as the case may
be, notifying such holder of the redemption and specifying the Series A
Redemption Price or Series B Redemption Price, the Series A Redemption Date or
Series B Redemption Date, the number of shares of Series A Stock or Series B
Stock to be redeemed from such holder (computed on a pro rata basis in
accordance with the number of such shares held by all holders thereof) and the
place where said Series A Redemption Price or Series B Redemption Price shall be
payable. The Redemption Notice shall be addressed to each holder at his address
as shown by the records of the Corporation. From and after the close of business
on a Redemption Date, unless there shall have been a default in the payment of
the applicable Redemption Price, all rights of holders of shares of Series A
Stock or Series B Stock, as the case may be, (except the
15
<PAGE>
right to receive the applicable Redemption Price) shall cease with respect to
the shares redeemed on such Redemption Date, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Series A Stock or Series B Stock on the
applicable Redemption Date are insufficient to redeem the total number of shares
of Series A Stock or Series B Stock to be redeemed on such Redemption Date, the
holders of such shares shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which would be
payable to them if the full number of shares to be redeemed on such Redemption
Date were actually redeemed. The shares of Series A Stock or Series B Stock not
so redeemed shall remain outstanding and entitled to all rights and preferences
provided herein. At any time thereafter when additional funds of the Corporation
are legally available for the redemption of such shares of Series A Stock and/or
Series B Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available, on the basis set forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares
---------------------------------------------------
of Series A Stock and/or Series B Stock redeemed pursuant to this paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be
cancelled and shall not under any circumstances be reissued; and the Corporation
may from time to time take such appropriate corporate action as may be necessary
to reduce accordingly the number of authorized shares of Series A Stock and/or
Series B Stock.
8. Amendments. No provision of these terms of the Series A Stock and/or
----------
Series B Stock may be amended, modified or waived without the written consent or
affirmative vote of the holders of at least a majority of the then outstanding
total shares of each of the Series A Stock and the Series B Stock, voting as
separate series.
C. The powers, preferences, rights, restrictions, and other matters
relating to the Common Stock are as follows:
1. Dividends. Subject to the rights of holders of all classes of stock
---------
at the time outstanding having prior rights as to dividends, the holders of the
Common Stock shall be entitled to receive, when, if and as declared by the Board
of Directors, out of any assets of the Corporation legally available therefor,
such dividends as may be declared from time to time by the Board of Directors.
2. Liquidation. The liquidation rights of the holders of the Common
-----------
Stock shall be as set forth in paragraph B4 above.
3. Voting. The holder of each share of Common Stock shall have the
------
right to one vote for each such share of Common Stock and shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation, and shall be entitled to vote upon such matters and in such manner
as may be provided by law.
FIFTH: In furtherance and not in limitation of the powers conferred
-----
by statute, the Board of Directors shall have the power, subject to the
provisions of paragraphs B.5 of
16
<PAGE>
Article FOURTH, both before and after receipt of any payment for any of the
Corporation's capital stock, to adopt, amend, repeal or otherwise alter the
Bylaws of the Corporation without any action on the part of the stockholders;
provided, however, that the grant of such power to the Board of Directors shall
not divest the stockholders of nor limit their power, subject to the provisions
of paragraph C.5 of Article FOURTH, to adopt, amend, repeal or otherwise alter
the Bylaws.
SIXTH: Elections of directors need not be by written ballot unless
-----
the Bylaws of the Corporation shall so provide.
SEVENTH: The Corporation reserves the right to adopt, repeal, rescind
-------
or amend in any respect any provisions contained in this Amended and Restated
Certificate of Incorporation in the manner now or hereafter prescribed by
applicable law, and all rights conferred on stockholders herein are granted
subject to this reservation.
EIGHTH: A director of the Corporation shall, to the full extent
------
permitted by the Delaware General Corporation Law as it now exists or as it may
hereafter be amended, not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Neither any
amendment nor repeal of this Article EIGHTH, nor the adoption of any provision
of this Amended and Restated Certificate of Incorporation inconsistent with the
Article EIGHTH, shall eliminate or reduce the effect of this Article EIGHTH in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article EIGHTH, would accrue or arise, prior to such amendment, repeal
or adoption of an inconsistent provision.
NINTH. Meetings of stockholders may be held within or without the
-----
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws of the
Corporation.
17
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
BUY CORP.
a Delaware corporation
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be at the office
-----------------
of National Registered Agents, Inc.
Section 2. Other Offices. The corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may on an annual basis determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders for the
--------------
election of directors shall be held at such place either within or without the
State of Delaware as shall be designated on an annual basis by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Notice of Annual Meeting. Written notice of the annual meeting
------------------------
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.
Section 3. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare and make, or cause a third party to prepare and
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any
<PAGE>
stockholder who is present.
Section 4. Special Meetings. Special meetings of the stockholders of this
----------------
corporation, for any purpose or purposes, unless otherwise prescribed by statute
or by the Certificate of Incorporation, shall be called by the President or
Secretary at the request in writing of the President, a majority of the members
of the Board of Directors or holders of at least 20% of the total voting power
of all outstanding shares of stock of this corporation then entitled to vote,
and may not be called absent such a request. Such request shall state the
purpose or purposes of the proposed meeting.
Section 5. Notice of Special Meetings. As soon as reasonably practicable
--------------------------
after receipt of a request as provided in Section 4 of this Article II, written
notice of a special meeting, stating the place, date (which shall be not less
than ten (10) nor more than sixty (60) days from the date of the notice) and
hour of the special meeting and the purpose or purposes for which the special
meeting is called, shall be given to each stockholder entitled to vote at such
special meeting.
Section 6. Scope of Business at Special Meeting. Business transacted at any
------------------------------------
special meeting of stockholders shall be limited to the purposes stated in the
notice.
Section 7. Quorum. The holders of a majority of the stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the chairman of the meeting or
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting as provided in Section 5
of this Article II.
Section 8. Qualifications to Vote. The stockholders of record on the books
----------------------
of the corporation at the close of business on the record date as determined by
the Board of Directors and only such stockholders shall be entitled to vote at
any meeting of stockholders or any adjournment thereof.
Section 9. Record Date. The Board of Directors may fix a record date for
-----------
the determination of the stockholders entitled to notice of or to vote at any
stockholders' meeting and at any adjournment thereof, and to fix a record date
for any other purpose. The record date shall not be more than sixty (60) nor
less than ten (10) days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or
if notice is waived, at the close of
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business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 10. Action at Meetings. When a quorum is present at any meeting,
------------------
the vote of the holders of a majority of the stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of
applicable law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 11. Voting and Proxies. Unless otherwise provided in the
------------------
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one (1) vote in person or by proxy for each share of
the capital stock having voting power held by such stockholder, but no proxy
shall be voted on after three (3) years from its date, unless the proxy provides
for a longer period. Each proxy shall be revocable unless expressly provided
therein to be irrevocable and unless it is coupled with an interest sufficient
in law to support an irrevocable power
Section 12. Nominations for Board of Directors. Nominations for election to
----------------------------------
the Board of Directors must be made by the Board of Directors or by any
stockholder of any outstanding class of capital stock of the corporation
entitled to vote for the election of directors. Nominations, other than those
made by the Board of Directors of the corporation, must be preceded by
notification in writing in fact received by the Secretary of the corporation not
less than sixty (60) days prior to any meeting of stockholders called for the
election of directors. Such notification shall contain the written consent of
each proposed nominee to serve as a director if so elected and the following
information as to each proposed nominee and as to each person, acting alone or
in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age,residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any
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future transaction to which the corporation will or may be a party.
The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a nomination not preceded by notification made
in accordance with the foregoing procedure shall be disregarded.
Section 13. Stockholder Proposals for Meetings. At any meeting of the
----------------------------------
stockholders, only such business shall be conducted as shall be properly before
the meeting. To be properly before a meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
a meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal place of business of the
corporation not less than thirty (30) days nor more than sixty (60) days prior
to the meeting; provided, however, that in the event that less than forty (40)
days notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. A stockholder's written notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address as
they appear on the corporation's books of the stockholder proposing such
business, (c) the class and number of shares of the corporation which are
beneficially owned by such stockholder, and (d) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at a meeting unless properly brought
before such meeting in accordance with the procedures set forth in this Section
13 of Article II. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 13 of
Article II and if it shall be so determined, the chairman of the meeting shall
so declare this to the meeting and such business not properly brought before the
meeting shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. Powers. The business of the corporation shall be managed by or
------
under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
applicable law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 2. Number; Election; Tenure and Qualification. The number of
------------------------------------------
directors which shall constitute the whole Board of Directors shall be fixed
from time to time by resolution of the Board of Directors or by the stockholders
at an annual meeting of the stockholders provided that
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the number of directors shall be not less than one (1) nor more than eight (8).
With the exception of the first Board of Directors, which shall be elected by
the incorporator, and except as provided in the corporation's Certificate of
Incorporation or in Section 3 of this Article III, the directors shall be
elected at the annual meeting of the stockholders by a plurality vote of the
shares represented in person or by proxy and each director elected shall hold
office until his successor is elected and qualified unless he shall resign,
become disqualified, disabled, or otherwise removed. Directors need not be
stockholders.
Section 3. Vacancies and Newly Created Directorships. Unless otherwise
-----------------------------------------
provided in the Certificate of Incorporation, vacancies and newly-created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen shall serve for
the remainder of the term of the vacated directorships being filled and until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
Section 4. Location of Meetings. The Board of Directors of the corporation
--------------------
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 5. Meeting of Newly Elected Board of Directors. The first meeting
-------------------------------------------
of each newly elected Board of Directors shall be held immediately following the
annual meeting of stockholders and no notice of such meeting shall be necessary
to the newly elected directors in order legally to constitute the meeting,
provided a quorum shall be present. In the event such meeting is not held at
such time, the meeting may be held at such time and place as shall be specified
in a notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by all of the
directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held upon at least seven (7) days prior written notice at such time and
at such place as shall from time to time be determined by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of such location. Notice may be waived in accordance
with Section 229 of the Delaware General Corporation Law.
Section 7. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the President on seven (7) days' notice to each director by
mail or two (2) days' notice to each director by overnight courier service or
facsimile; special meetings shall be called by the President or Secretary in a
like manner and on like notice on the written request of two (2) directors
unless the Board of Directors consists of only one (1) director, in which case
special meetings shall be called by the President or Secretary in a like manner
and on like notice on the written request of the sole director. Notice may be
waived in accordance with Section 229 of the Delaware General Corporation Law.
Section 8. Quorum and Action at Meetings. At all meetings of the Board of
-----------------------------
Directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall
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be the act of the Board of Directors, except as may be otherwise specifically
provided by statute or by the Certificate of Incorporation. If a quorum shall
not be present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Action Without a Meeting. Unless otherwise restricted by the
------------------------
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or committee.
Section 10. Telephonic Meeting. Unless otherwise restricted by the
------------------
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, upon proper notice duly
given, by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting.
Section 11. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one (1) or more of the directors of the corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence of disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Section 12. Committee Authority. Any such committee, to the extent
-------------------
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
amending the Bylaws of the corporation, or any action requiring unanimous
consent of the Board of Directors pursuant to the terms of the Certificate of
Incorporation; and, unless the resolution or the Certificate of Incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
Section 13. Committee Minutes. Each committee shall keep regular minutes
-----------------
of its meetings and report the same to the Board of Directors when required.
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Section 14. Directors Compensation. Unless otherwise restricted by
----------------------
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
Section 15. Resignation. Any director or officer of the corporation
-----------
may resign at any time. Each such resignation shall be made in writing and
shall take effect at the time specified therein, or, if no time is specified, at
the time of its receipt by either the Board of Directors, the President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless expressly so provided in the resignation.
ARTICLE IV
NOTICES
Section 1. Notice to Directors and Stockholders. Whenever, under the
------------------------------------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the corporation that the notice
has been given shall in the absence of fraud, be prima facie evidence of the
facts stated therein. Notice to directors may also be given by telephone,
facsimile or telegram.
Section 2. Waiver. Whenever any notice is required to be given under
------
the provisions of the statutes or of the Certificate of Incorporation or of
these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. The written waiver need not specify the business
to be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors. Attendance of
a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
ARTICLE V
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be
-----------
chosen by the Board of
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Directors and shall be a President and a Secretary and such other officers with
such other titles as the Board of Directors shall determine. The Board of
Directors may elect from among its members a Chairman or Chairmen of the Board
and a Vice Chairman of the Board. The Board of Directors may also choose one (1)
or more Vice-Presidents, a Treasurer or Chief Financial Officer, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person, unless the Certificate of Incorporation or these Bylaws otherwise
provide.
Section 2. Election. The Board of Directors at its first meeting
--------
after each annual meeting of stockholders shall elect a President and a
Secretary and such other officers with such other titles as the Board of
Directors shall determine.
Section 3. Appointment of Other Agents. The Board of Directors may
---------------------------
appoint such other officers and agents as it shall deem necessary, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
Section 4. Compensation. The salaries of all officers of the
------------
corporation shall be fixed by the Board of Directors or a committee thereof.
The salaries of agents of the corporation shall, unless fixed by the Board of
Directors, be fixed by the President or any Vice-President of the corporation.
Section 5. Tenure. The officers of the corporation shall hold office
------
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the directors of the Board of Directors. Any vacancy occurring in
any office of the corporation shall be filled by the Board of Directors.
Section 6. Chairman of the Board and Vice-Chairman of the Board. The
----------------------------------------------------
Chairman or Chairmen of the Board, if any, shall preside at all meetings of the
Board of Directors and of the stockholders at which he or they shall be present.
He or they shall have and may exercise such powers as are, from time to time,
assigned to him or them by the Board and as may be provided by law. In the
absence of the Chairman of the Board, the Vice Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He shall have and may exercise such powers as
are, from time to time, assigned to him by the Board of Directors and as may be
provided by law.
Section 7. President. The President shall be the Chief Executive
---------
Officer of the corporation unless such title is assigned to another officer of
the corporation; in the absence of a Chairman and Vice Chairman of the Board,
the President shall preside as the chairman of meetings of the stockholders and
the Board of Directors; and the President shall have general and active
management of the business of the corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The President or
any Vice-President shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
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other officer or agent of the corporation.
Section 8. Vice-President. In the absence of the President or in the
--------------
event of his inability or refusal to act, the Vice-President, if any (or in the
event there be more than one Vice-President, the Vice-Presidents in the order
designated by the Board of Directors, or in the absence of any designation, then
in the order of their election) shall perform the duties of the President, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the President. The Vice-President shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
Section 9. Secretary. The Secretary shall attend all meetings of the
---------
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall be subject. He
shall have custody of the corporate seal of the corporation and he, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
Section 10. Assistant Secretary. The Assistant Secretary, or if
-------------------
there be more than one (1), the Assistant Secretaries in the order determined by
the Board of Directors (or if there be no such determination, then in the order
of their election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 11. Chief Financial Officer. The Chief Financial Officer may
-----------------------
also be known as the Treasurer and shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the corporation as may be ordered
by the Board of Directors, President or Chief Executive Officer, taking proper
vouchers for such disbursements, and shall render to the President, Chief
Executive Officer and the Board of Directors, at its regular meetings, or when
the Board of Directors so requires, an account of all his transactions as Chief
Financial Officer and of the financial condition of the corporation. If
required by the Board of Directors, the Chief Financial Officer shall give the
corporation a bond (which shall be renewed every six (6) years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his office and for the restoration
to the corporation, in case of his death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
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ARTICLE VI
CAPITAL STOCK
Section 1. Certificates. Every holder of stock in the corporation
------------
shall be entitled to have a certificate, signed by, or in the name of the
corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the
President or a Vice-President and the Treasurer or the Secretary or an Assistant
Secretary of the corporation, certifying the number of shares owned by him in
the corporation. Certificates may be issued for partly paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor
and the amount paid thereon shall be specified.
Section 2. Class or Series. If the corporation shall be authorized
---------------
to issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in Section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 3. Signature. Any of or all of the signatures on the
---------
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 4. Lost Certificates. The Board of Directors may direct a
-----------------
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. Transfer of Stock. Upon surrender to the corporation or
-----------------
the transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of
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succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 6. Record Date. In order that the corporation may determine
-----------
the stockholders entitled to notice of or to vote at any meeting of stockholder
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 7. Registered Stockholders. The corporation shall be
-----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
---------
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
Board of Directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the corporation, or for such other
purposes as the Board of Directors shall think conducive to the interest of the
corporation, and the Board of Directors may modify or abolish any such reserve
in the manner in which it was created.
Section 2. Checks. All checks or demands for money and notes of the
------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the corporation shall be
-----------
fixed by resolution of the Board of Directors.
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Section 4. Seal. The Board of Directors may adopt a corporate seal
----
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
Section 5. Loans. The Board of Directors of this corporation may,
-----
without stockholder approval, authorize loans to, or guaranty obligations of, or
otherwise assist, including, without limitation, the adoption of employee
benefit plans under which loans and guarantees may be made, any officer or other
employee of the corporation or of its subsidiary, including any officer or
employee who is a director of the corporation or its subsidiary, whenever, in
the judgment of the Board of Directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other
assistance may be with or without interest, and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.
ARTICLE VIII
INDEMNIFICATION
Section 1. Scope. The corporation shall, to the fullest extent
-----
permitted by Section 145 of the Delaware General Corporation Law, as that
Section may be amended and supplemented from time to time, indemnify any
director, officer, employee or agent of the corporation, against expenses
(including attorneys' fees), judgments, fines, amounts paid in settlement and/or
other matters referred to in or covered by that Section, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
Section 2. Advancing Expenses. Expenses incurred by a director of
------------------
the corporation in defending a civil or criminal action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation (or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant provisions of the Delaware General
Corporation Law; provided, however, the corporation shall not be required to
advance such expenses to a director (i) who commences any action, suit or
proceeding as a plaintiff unless such advance is specifically approved by a
majority of the Board of Directors, or (ii) who is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board of
Directors which alleges willful misappropriation of corporate assets by such
director, disclosure of confidential information in violation of such director's
fiduciary or contractual obligations to the corporation, or any other willful
and deliberate breach in bad faith of such director's duty to the corporation or
its stockholders.
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<PAGE>
Section 3. Liability Offset. The corporation's obligation to provide
----------------
indemnification under this Article VIII shall be offset to the extent the
indemnified party is indemnified by any other source including, but not limited
to, any applicable insurance coverage under a policy maintained by the
corporation, the indemnified party or any other person.
Section 4. Continuing Obligation. The provisions of this Article
---------------------
VIII shall be deemed to be a contract between the corporation and each director
of the corporation who serves in such capacity at any time while this bylaw is
in effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts.
Section 5. Nonexclusive. The indemnification and advancement of
------------
expenses provided for in this Article VIII shall (i) not be deemed exclusive of
any other rights to which those indemnified may be entitled under any by-law,
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in their official capacities and as to action in another capacity
while holding such office, (ii) continue as to a person who has ceased to be a
director and (iii) inure to the benefit of the heirs, executors and
administrators of such a person.
Section 6. Other Persons. In addition to the indemnification rights
-------------
of directors, officers, employees, or agents of the corporation, the Board of
Directors in its discretion shall have the power on behalf of the corporation to
indemnify any other person made a party to any action, suit or proceeding who
the corporation may indemnify under Section 145 of the Delaware General
Corporation Law.
Section 7. Definitions. The phrases and terms set forth in this
-----------
Article VIII shall be given the same meaning as the identical terms and phrases
are given in Section 145 of the Delaware General Corporation Law, as that
Section may be amended and supplemented from time to time.
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<PAGE>
ARTICLE IX
AMENDMENTS
Except as otherwise provided in the Certificate of Incorporation,
these Bylaws may be altered, amended or repealed, or new Bylaws may be adopted,
by the holders of a majority of the outstanding voting shares or by the Board of
Directors, when such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the stockholders or of
the Board of Directors or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new Bylaws be contained in the notice of such special meeting. If the power
to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the
Certificate of Incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal Bylaws.
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<PAGE>
FIRST AMENDMENT TO BYLAWS
OF
BUY.COM INC.
Amendment to Article III, Section 2 of the Bylaws
(Amended Bylaws as Adopted March 1, 1999)
Article III, Section 2 of the Bylaws of the Corporation be amended in full to
read as follows:
"Section 3.2 Number of Directors. The number of directors which shall
-------------------
constitute the whole Board of Directors shall be fixed from time to time by
resolution of the Board of Directors or by the stockholders at an annual meeting
of the stockholders provided that the number of directors shall not be less than
one (1) nor more than nine (9). With the exception of the first Board of
Directors, which shall be elected by the incorporator, and except as provided in
the corporation's Certificate of Incorporation or in Section 3 of this Article
III, the directors shall be elected at an annual meeting of the stockholders by
a plurality vote of the shares represented in person or by proxy and each
director elected shall hold office until his successor is elected and qualified
unless he shall resign, become disqualified, disabled, or otherwise removed.
Directors need not be stockholders.
-----------------------------------
Murray Williams, Secretary
<PAGE>
EXHIBIT 10.1
BUY.COM INC.
THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
September 2, 1999
<PAGE>
BUY.COM INC.
THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Third amended and Restated Investors' Rights Agreement (the
"Agreement") is entered into as of the 2nd day of September, 1999, by and among
Buy.Com Inc., a Delaware corporation (the "Company"), the holders of the
Company's Series A Convertible Participating Preferred Stock (the "Series A
Stock") set forth on Exhibit A hereto, the holders of the Company's Series B
---------
Convertible Participating Preferred Stock (the "Series B Stock") and Common
Stock set forth on Exhibit B hereto, the Founders set forth on Exhibit C hereto,
--------- ---------
Ingram Capital Inc. ("Ingram") as the assignee of Ingram Entertainment Inc., The
Bank of Nova Scotia ("Nova Scotia") and United Air Lines, Inc. ("UA"). The
holders of the Series A Stock shall be referred to hereinafter as the "Series A
Investors" and each individually as a "Series A Investor." The holders of the
Series B Stock shall be referred to hereinafter as the "Series B Investors" and
each individually as a "Series B Investor." The Series A Investors and the
Series B Investors shall be referred to collectively as the "Investors" and each
individually as an "Investor." The Founders shall be referred to hereinafter
together as the "Founders" and each individually as a "Founder." As a matter of
clarity, a list of all Holders and the Registrable Securities held by each is
attached hereto as Exhibit D.
---------
WHEREAS, the Company (under its previous name: "Buy Corp."), the
Series A Investors and the Founders were parties to an Investors' Rights
Agreement, dated as of August 18, 1998 (the "Original Agreement").
WHEREAS, the Company acquired SpeedServe, Inc. ("SpeedServe") by way
of a merger ("Merger") of SpeedServe with and into a wholly owned subsidiary of
the Company in which Ingram, as the principal stockholder of SpeedServe,
received shares of the Company's Common Stock.
WHEREAS, the Original Agreement was amended and restated to extend to
Ingram certain registration rights, information rights and other rights pursuant
to that certain Amended and Restated Investors' Rights Agreement dated December
3, 1998 (the "First Amended and Restated Agreement").
WHEREAS, the Company secured a credit facility with Nova Scotia
pursuant to a Credit Agreement (the "Credit Agreement") dated July 20, 1999 in
connection with which Nova Scotia received a warrant (the "Nova Scotia Warrant")
to purchase shares of the Company's Common Stock.
WHEREAS, the Company effected a 15 for 1 stock split of its Common
Stock and Preferred Stock (the "Stock Split"), effective as of July 14, 1999 and
the share numbers in the Second Amended and Restated Agreement were adjusted to
give effect to the Stock Split.
WHEREAS, the Company and UA formed a Delaware limited liability
company ("BuyTravel.com") to operate an internet based travel service, and in
connection with the BuyTravel.com joint venture, the Company issued to UA a
warrant to purchase 2,000,000 shares of the Company's Common Stock (the "UA
Warrant").
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<PAGE>
WHEREAS, the First Amended and Restated Agreement was amended and
restated to extend to Nova Scotia and UA certain registration rights and other
rights pursuant to that certain Second Amended and Restated Investors' Rights
Agreement dated July 20, 1999 (the "Second Amended and Restated Agreement").
WHEREAS, pursuant to the terms and conditions of that certain Series B
Convertible Participating Preferred Stock Purchase Agreement, of even date
herewith, the Series B Investors have purchased an aggregate of 15,877,249
shares of Series B Stock.
WHEREAS, it is a condition to the purchase of the Series B Stock by
the Series B Investors that the Series B Investors be granted certain
registration rights, information rights and other rights.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, the Series A
Investors, the Series B Investors, Ingram, Nova Scotia, UA and the Founders who
are parties to the Second Amended and Restated Agreement hereby agree that the
Second Amended and Restated Agreement shall be superseded and replaced by this
Agreement, and the parties hereto further mutually agree as follows:
1. General
1.1 Definitions.
(a) "Common Stock" shall mean the common stock, $.0001 par value per
share, of the Company.
(b) "Equity Securities" shall mean (i) any Common Stock, Preferred
Stock or other equity security of the Company, (ii) any security convertible
into any Common Stock, Preferred Stock or other equity security (including any
option to purchase such a security), (iii) any security carrying any warrant or
right to subscribe to or purchase any Common Stock, Preferred Stock or other
equity security or (iv) any such warrant or right.
(c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(d) "Form S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
(e) "Holder" means any Investor, Founder, Ingram, Nova Scotia or UA
owning of record Registrable Securities that have not been sold to the public or
any assignee of record of such Registrable Securities in accordance with Section
3.9 hereof.
(f) "Initial Offering" shall mean the Company's first Qualified Public
Offering.
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<PAGE>
(g) "Investor Holders" means the holders of Registrable Securities
owned of record by the Investors.
(h) "Preferred Stock" shall mean the preferred stock, including the
Series A Stock and Series B Stock of the Company.
(i) "Qualified Public Offering" shall mean an underwritten public
offering covering the offer and sale of Common Stock of the Company in which the
per share price to the public is at least $2.053 per share (as adjusted for
stock splits, recapitalizations and the like subsequent to the Stock Split Date)
and the net cash proceeds to the Company (after underwriting discounts,
commissions and fees) are at least $30,000,000.
(j) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of
effectiveness of such registration statement or document.
(k) The term "Registrable Securities" shall mean (i) Common Stock held
by the Founders, (ii) the Common Stock of the Company issued or issuable upon
conversion of the Shares, (iii) the Common Stock purchased by the Investors from
the Scott A. Blum Separate Property Trust, David Mason and Michael Mason
pursuant to that certain Stock Purchase Agreement dated as of the date hereof,
(iv) Common Stock held by Ingram and acquired in connection with the Merger, (v)
the Common Stock acquired by Ingram Entertainment, Inc. and the Series A
Investors upon their exercise of the right of first offer on March 10, 1999,
April 5, 1999 and June 29, 1999, (vi) except for purposes of Section 3.1 and
Section 3.3, the Common Stock issuable to Nova Scotia upon exercise of the Nova
Scotia Warrant, (vii) Common Stock issued to UA upon the exercise of the UA
Warrant, and (viii) any Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, (i), (ii), (iii), (iv), (v), (vi) or (vii) above.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144 or sold in a private transaction in which the transferor's
rights under Section 3 of this Agreement with respect to such registration
rights are not assigned. As a matter of clarity, Nova Scotia shall not have
demand registration rights or Form S-3 registration rights pursuant to Section
3.1 and 3.3.
(l) "Registrable Securities then outstanding" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (i) are then issued and
outstanding or (ii) are issuable pursuant to then exercisable or convertible
securities.
(m) "Rule 144" shall mean Rule 144 of the rules and regulations
promulgated under the Securities Act.
(n) "SEC" means the Securities and Exchange Commission.
(o) "Securities Act" shall mean the Securities Act of 1933, as
amended.
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<PAGE>
(p) "Shares" shall mean the Company's Series A Stock and Series B
Stock issued or sold to and held by the Investors listed on Exhibits A and B
----------------
hereto and their permitted assigns.
2. Restrictions On Transfer.
2.1 Restrictions on Transfer.
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until the transferee
has agreed in writing for the benefit of the Company to be bound by this
Agreement unless and until:
(i) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(ii) (A) Such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition and (B)
if reasonably requested by the Company, such Holder shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such shares
under the Securities Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(iii) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder which is (A) a partnership to any or
all of its partners or former partners, (B) a corporation to its
stockholders in accordance with their interests in the corporation, (C) a
limited liability company to its members or former members in accordance
with their membership interests, (D) by a trust to its beneficiaries in
accordance with their interests in the trust or (E) to the Holder's family
member or trust for the benefit of an individual Holder; provided, however
-------- -------
that, notwithstanding anything in this Section 2.1 to the contrary, (I) the
Investors shall be permitted to sell, transfer, assign or pledge all or any
part of the Shares to (i) any direct or indirect, wholly-owned subsidiary
of SOFTBANK Corp. or of such Investor or (ii) any partnership or other
entity of which any direct or indirect subsidiary of SOFTBANK Corp. is a
general partner (any person or entity referred to in clause (i) or (ii)
being herein referred to as a "SOFTBANK Entity"), (II) UA shall be
permitted to sell, transfer, assign or pledge all or any part of the UA
Warrant or Common Stock issuable upon exercise thereof to any direct or
indirect, subsidiary of UA or any entity which controls, is controlled by,
or is under common control with UA or any direct or indirect subsidiary of
UA, and (III) Ingram Entertainment, Inc. shall be permitted to transfer the
Common Stock described in Section 1.1(k)(v) to Ingram and Ingram shall be
permitted to sell, transfer, assign or pledge all or any part of the Common
Stock held by Ingram to any direct or indirect, wholly owned subsidiary of
Ingram or any entity which controls, is controlled by or under common
control with Ingram or any direct or indirect subsidiary of Ingram;
provided, further that,
4
<PAGE>
the transferee will be subject to the terms of this Agreement to the same
extent as if he were an original Holder hereunder.
(b) Each certificate representing Shares or Registrable Securities
shall (unless otherwise permitted by the provisions of this Agreement) be
stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws or as provided elsewhere in this Agreement):
First Legend:
-------------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED.
Second Legend:
--------------
THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE
THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT, DATED SEPTEMBER 2, 1999
AS AMENDED FROM TIME TO TIME, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE
ISSUER.
(c) The Company shall reissue promptly unlegended certificates at the
request of any holder thereof if the holder shall have obtained an opinion of
counsel (which counsel may be counsel to the Company) reasonably acceptable to
the Company to the effect that the securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
2.2 "Market Stand Off" Agreement. Each Holder hereby agrees that during
the one hundred twenty (120)-day period following the effective date of a
registration statement of the Company filed under the Securities Act (the
"Market Stand Off Period"), it shall not, to the extent requested by the Company
and/or the managing underwriter, sell or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any Common Stock of the Company
held by it at any time during such period except Common Stock included in such
registration; provided, that, officers and directors of the Company (as
determined by the managing underwriter) enter into similar agreements. The
Holders agree to increase the Market Stand Off Period to one hundred eighty
(180) days at the request of the managing underwriter.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or
5
<PAGE>
securities of every other person subject to the foregoing restriction) until the
end of such one hundred twenty (120)-day or longer period as provided above.
3. Registration.
3.1 Demand Registration.
(a) Subject to the conditions of this Section 3.1:
(i) If the Company shall receive a written request from the
Series A Investor Holders of at least forty percent (40%) of the total
Registrable Securities then outstanding and held by the Series A Investors
("Series A Investor Initiating Holders") that the Company file a
registration statement under the Securities Act covering the registration
of Registrable Securities covering at least twenty percent (20%) of the
Registrable Securities then held by the Series A Investors (or any lesser
percentage if the anticipated aggregate offering price to the public would
exceed $5,000,000), then the Company shall, within fifteen (15) days of the
receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(ii) If the Company shall receive a written request from the
Series B Investor Holders of at least forty percent (40%) of the total
Registrable Securities then outstanding and held by the Series B Investor
Holders ("Series B Investor Initiating Holders") that the Company file a
registration statement under the Securities Act covering the registration
of Registrable Securities covering at least twenty percent (20%) of the
Registrable Securities then held by the Series B Investors (or any lesser
percentage if the anticipated aggregate offering price to the public would
exceed $5,000,000), then the Company shall, within fifteen (15) days of the
receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(iii) If the Company shall receive a written request from
Ingram ("Ingram Initiating Holder") that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities covering at least forty percent (40%) of the Common Stock issued
to and held by Ingram in connection with the Merger (or any lesser
percentage if the anticipated aggregate offering price to the public would
exceed $5,000,000), then the Company shall, within fifteen (15) days of the
receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(iv) If the Company shall receive a written request from UA
("UA Initiating Holder") that the Company file a registration statement
under the Securities Act covering the registration of Registrable
Securities covering at least forty percent
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<PAGE>
(40%) of the Common Stock issued or issuable upon the exercise of the UA
Warrant held by UA (or any lesser percentage if the anticipated aggregate
offering price to the public would exceed $5,000,000), then the Company
shall, within fifteen (15) days of the receipt thereof, give written notice
of such request to all Holders, and subject to the limitations of this
Section 3.1, use its best efforts to effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that
the Holders request to be registered.
(v) If the Company shall receive a written request from a
Founder ("Founder Initiating Holder") that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities covering at least forty percent (40%) of the Common Stock held
by Founder (or any lesser percentage if the anticipated aggregate offering
price to the public would exceed $5,000,000), then the Company shall,
within fifteen (15) days of the receipt thereof, give written notice of
such request to all Holders, and subject to the limitations of this Section
3.1, use its best efforts to effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that
the Holders request to be registered.
(b) If the Initiating Holders (for purposes of this Section 3.1, the
term "Initiating Holder" shall mean a Series A Investor Initiating Holder, a
Series B Investor Initiating Holder, the Ingram Initiating Holder, the UA
Initiating Holder or the Founder Initiating Holder, as applicable) intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 3.1, and the Company shall include such information in
the written notice referred to in Section 3.1(a). In such event, the right of
any Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders (which underwriter or underwriters shall be reasonably acceptable to the
Company). In the event the underwriter determines in good faith that marketing
factors require a limitation of the number of shares to be underwritten, the
number of shares that may be included in the underwriting shall be allocated
among the Holders in accordance with Section 3.2. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from the
registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 3.1:
(i) in the case of a demand by a Series A Investor Initiating
Holder, prior to the earlier of (A) the consummation by the Company of an
Initial Offering and (B) August 18, 2001; or
(ii) in the case of a demand by a Series B Investor Initiating
Holder, prior to the earlier of (A) the consummation by the Company of an
Initial Public Offering and (B) September 2, 2002; or
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<PAGE>
(iii) in the case of a demand by the Ingram Initiating Holder,
prior to the earlier of (A) the first anniversary of the consummation by
the Company of an Initial Offering and (B) December 3, 2001; or
(iv) in the case of a demand by the UA Initiating Holder,
prior to the earlier of (A) the 6 months anniversary of the consummation by
the Company of an Initial Offering and (B) July 20, 2002; or
(v) in the case of a demand by the Founder Initiating
Holder, prior to the earlier of (A) the 6 months anniversary of the
consummation by the Company of an Initial Offering and (B) the third
anniversary of the date hereof; or
(vi) in the case of a demand by a Series A Investor
Initiating Holder, after the Company has filed three (3) registration
statements at the request of the Series A Investor Initiating Holder
pursuant to Section 3.1(a)(i), and such registrations have been declared or
ordered effective; or
(vii) in the case of a demand by a Series B Investor
Initiating Holder, after the Company has filed three (3) registration
statements at the request of the Series B Investor Initiating Holder
pursuant to Section 3.1(a)(ii), and such registrations have been declared
or ordered effective; or
(viii) in the case of a demand by Ingram, after the Company has
filed one (1) registration statement pursuant to Section 3.1(a)(iii), and
such registration has been declared or ordered effective; or
(ix) in the case of a demand by UA, after the Company has
filed one (1) registration statement pursuant to Section 3.1(a)(iv), and
such registration statement has been declared or ordered effective; or
(x) in the case of a demand by Founder, after the Company
has filed two (2) registration statements pursuant to Section 3.1(a)(v),
and such registration statements have been declared or ordered effective;
or
(xi) during the period starting with the date of filing of,
and ending on the date one hundred eighty (180) days following the closing
of the Company's Initial Offering; provided, that, the Company makes
reasonable good faith efforts to cause such registration statement to
become effective; or
(xii) if within fifteen (15) days of receipt of a written
request from Initiating Holders pursuant to Section 3.1(a), the Company
gives notice to the Holders of the Company's intention to make an Initial
Offering within ninety (90) days; or
(xiii) if the Company shall furnish to the Investor Holders
requesting a registration statement pursuant to this Section 3.1, a
certificate signed by the President and Chairman of the Board stating that
in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be effected at such time, in which event
8
<PAGE>
the Company shall have the right to defer such filing for a period of not
more than ninety (90) days after receipt of the request of the Initiating
Holders; provided, that, the right to delay a request may be exercised by
the Company not more than once in any twelve (12)-month period.
3.2 Piggyback Registrations. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to initial or secondary offerings of securities
of the Company and to offerings of securities of the Company initiated by any
party exercising its demand registration rights, but excluding registration
statements relating to employee benefit plans and corporate reorganizations or
other transactions under Rule 145 of the Securities Act) and will afford each
such Holder an opportunity to include in such registration statement all or part
of such Registrable Securities held by such Holder. Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Securities held by it shall, within fifteen (15) days after receipt of the
above-described notice from the Company, so notify the Company in writing. Such
notice shall state the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
If the registration statement under which the Company gives notice under
this Section 3.2 is for an underwritten offering, the Company shall so advise
the Holders of Registrable Securities. In such event, the right of any such
Holder to be included in a registration pursuant to this Section 3.2 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this
Agreement, if the underwriter determines in good faith that marketing factors
require a limitation of the number of shares to be underwritten, the number of
shares that may be included in the underwriting shall be allocated as follows:
(i) first, to the Company, up to fifty percent (50%) of the aggregate offering
amount; (ii) second, to Founder, the Investor Holders, Ingram, Nova Scotia and
UA on an Adjusted Pro Rata (as defined below) basis; (iii) third, to Founder,
the Investor Holders, Ingram, Nova Scotia and UA on a pro rata basis based on
the total number of Registrable Securities respectively held by the Founder, the
Investor Holders, Ingram, Nova Scotia and UA; (iv) fourth, to the Company, and
(v) fifth, to any stockholder of the Company (other than a Holder) on a pro rata
basis. No such reduction shall (i) reduce the securities being offered by the
Company for its own account to be included in the registration and underwriting
below fifty percent (50%) of the total amount of securities included in such
registration, unless the Company elects to offer less than 50% of the total
amount of securities included in such registration or (ii) reduce the amount of
securities of the selling Holders included in the registration below fifty
percent (50%) of the total amount of securities included in such registration,
unless the Holders elect to offer less than 50% of the total amount of
securities included in such registration or (iii) reduce the amount of
securities of the Founder
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included in the registration and underwriting below fifty percent (50%) of the
total amount of securities included in such registration, unless the Company
elects to offer less than 50% of the total amount of securities included in such
registration or (ii) reduce the amount of securities of the selling Holders
included in the registration below fifty percent (50%) of the total amount of
securities included in such registration, unless the Holders elect to offer less
than 50% of the total amount of securities included in such registration or
(iii) reduce the amount of securities of the Founder included in the
registration and underwriting below seven and one half percent (7.5%) of the
total amount of the securities included in such registration, unless the Founder
elects to offer less than seven and one half percent (7.5%) of the total amount
of securities included in such registration; provided, however, if such offering
is the Initial Offering and such registration does not include shares of any
other selling stockholders, then any or all of the Registrable Securities of the
Holders may be excluded at the request of the underwriter. In no event will
shares of any other selling stockholder be included in such registration which
would reduce the number of shares which may be included by the Investor Holders,
Founder, Ingram, Nova Scotia or UA, without the written consent of a majority in
interest of the Registrable Securities proposed to be sold in the offering by
the Series A Investors, a majority in interest of the Registrable Securities
proposed to be sold in the offering by the Series B Investors, the written
consent of Founder, the written consent of Ingram, the written consent of Nova
Scotia and the written consent of UA. For purposes of this Section 3.2,
"Adjusted Pro Rata" shall mean, with respect to each of Founder, any Series A
Investor, any Series B Investor, Ingram, Nova Scotia or UA, the fraction of
which (A) the numerator ("Numerator") is equal to the number of shares of
Registrable Securities then held by Founder, any Series A Investor, any Series B
Investor, Ingram, Nova Scotia or UA, as applicable, (B) the denominator
("Denominator") is equal to the aggregate number of Registrable Securities then
held by Founder, the Series A Investors, the Series B Investors, Ingram, Nova
Scotia and UA; provided, that so long as Softbank Technology Ventures IV LP,
Softbank Technology Ventures V, LP Softbank Technology Advisors Fund V, LP,
Softbank Technology Entrepreneurs Fund V, LP and Softbank Technology Advisors
Fund LP (collectively, "Softbank Tech") holds or beneficially owns Registrable
Securities, (A) the Numerator in any calculation of Adjusted Pro Rata share for
Founder shall be equal to the number of Registrable Securities then held or
beneficially owned by Softbank Tech and (B) the Denominator in any calculation
of Adjusted Pro Rata share for Founder, any Series A Investor, any Series B
Investor, Ingram, Nova Scotia or UA shall be reduced by the difference obtained
by subtracting (i) the number of Registrable Securities then held or
beneficially owned by Softbank Tech from (ii) the number of Registrable
Securities then held or beneficially owned by Founder; provided, further, that
in no event shall Founder's Adjusted Pro Rata share equal less than 15%. The
Company shall have the right to terminate or withdraw any registration initiated
by it under this Section 3.2 prior to the effectiveness of such registration
whether or not any Holder has elected to include securities in such
registration. The registration expenses of such withdrawn registration shall be
borne by the Company in accordance with Section 3.4 hereof.
3.3 Form S-3 Registration. In case the Company shall receive a written
request from the Holders (other than Nova Scotia) that the Company effect a
registration on Form S-3 (or any successor to Form S-3) or any similar short-
form registration statement and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holders,
the Company will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders
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joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 3.3:
(i) if Form S-3 (or any successor or similar form) is not
available for such offering by the Holders; or
(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any)
at an aggregate price to the public of less than $3,000,000; or
(iii) if the Company shall furnish to the Holders a certificate
signed by the President and Chairman of the Board of Directors of the
Company stating that, in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the
Form S-3 registration statement for a period of not more than ninety (90)
days after receipt of the request of the Holders under this Section 3.3;
provided, that, the right to delay a request may be exercised by the
Company not more than once in any twelve (12)-month period.
(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All such registration expenses incurred in
connection with registrations requested pursuant to this Section 3.3 after the
first three (3) registrations per calendar year shall be paid by the selling
Holders pro rata in proportion to the number of shares sold by each.
3.4 Registration Expenses. Except as set forth in Section 3.3(c), the
Company shall bear all fees and expenses incurred in connection with any
registration under this Agreement, including without limitation all
registration, filing, qualification, printers' and accounting fees, fees and
disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder; if the Company counsel does not make itself available
for this purpose, the Company will pay the reasonable fees and disbursements of
a single special counsel for the Holders, except that each participating Holder
shall bear its proportionate share of all amounts payable to underwriters in
connection with such offering for discounts and commissions. The Company shall
not, however, be required to pay for expenses of any registration proceeding
begun pursuant to Sections 3.1 or 3.3, the request of which has been
subsequently withdrawn by the Founder, the Investor Holders, Ingram, or UA, as
applicable, unless the withdrawal is based upon material adverse information
concerning the Company of which the Founder, the Investor Holders, Ingram, or
UA, as applicable, initiating the registration request were not aware at the
time of such request. If the Holders are required to pay their registration
expenses, such expenses shall be borne by the holders of securities (including
Registrable Securities) requesting such registration in proportion to the number
of shares for which registration was requested.
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3.5 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder which have not
yet been sold, keep such registration statement effective for up to one hundred
eighty (180) days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing.
3.6 Termination of Registration Rights. All registration rights granted
under this Section 3 shall terminate and be of no further force and effect five
(5) years after the Company has completed its Initial Offering. In addition,
the right of any Holder to request inclusion of Registrable Securities in any
registration pursuant to this Section 3 shall terminate when (i) all Registrable
Securities held by and issuable to such Holder (and its affiliates, partners and
former partners) may be sold under Rule 144 during any ninety (90)-day period
and (ii) the Company has completed its Initial Offering and is subject to the
provisions of the Exchange Act.
3.7 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 3 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
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3.8 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 3.
3.9 Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Section 3 may be assigned by a
Holder to a transferee or assignee of Registrable Securities which (a) is a
subsidiary, parent, general partner, limited partner, retired partner,
shareholder, member, retired member, affiliate or trust beneficiaries of a
Holder, (b) is a Holder's family member or trust for the benefit of an
individual Holder, (c) acquires at least twenty percent (20%) of the Holder's
Registrable Securities (as adjusted for stock dividends, stock splits and
combination s); provided, that, notwithstanding anything in this Section 3.9 to
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the contrary, but subject to Section 2.1 hereof, the Investors shall be
permitted to assign the rights to cause the Company to register Registrable
Securities to any transferee or assignee of Registrable Securities that is a
SOFTBANK Entity; provided, further, (A) the transferor shall, within ten (10)
days after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (B) such transferee shall agree
in writing to be subject to the terms of this Agreement.
3.10 Amendment or Waiver of Registration Rights. Any provision of this
Section 3 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, Ingram, at least a
majority in interest of the Registrable Securities owned by the Series A
Investors, and at least a majority in interest of the Registrable Securities
owned by the Series B Investors, provided that any amendment or modification of
the registration rights of UA, Nova Scotia or Founder that would adversely
effect the rights of UA, Nova Scotia or Founder, as the case may be, shall
require the prior written consent of UA, Nova Scotia or Founder, as the case may
be. Any amendment or waiver effected in accordance with this Section 3.10 shall
be binding upon each Holder and the Company. By acceptance of any benefits
under this Agreement, Holders of Registrable Securities hereby agree to be bound
by the provisions hereunder.
3.11 Indemnification. In the event any Registrable Securities are included
in a registration statement under Sections 3.1, 3.2 or 3.3:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of each Holder,
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Securities Act or the Exchange Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "Violation") by the Company: (i) any untrue statement or
alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not
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misleading, or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any Rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law in connection with the offering covered by such registration
statement; and the Company will reimburse each such Holder, partner, officer or
director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, the Company
shall not be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Holder, partner,
officer, director, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration qualifications or compliance is being effected, indemnify and hold
harmless the Company, each of its directors and its officers, and each person,
if any, who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Holder, or partner,
director, officer or controlling person of such other Holder may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will reimburse any legal
or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 3.11(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; provided further, that in no event
shall any indemnity under this Section 3.11(b) exceed the net proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
3.11 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 3.11, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to actual or
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reasonably likely differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 3.11, but the omission to so deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
3.11.
(d) If the indemnification provided for in this Section 3.11 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that, in no event shall any contribution by a
Holder hereunder exceed the proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this Section 3.11
shall survive completion of any offering of Registrable Securities in a
registration statement. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, which
consent shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
3.12 Rule 144 Reporting. With a view to making available to the Holders the
benefits of certain rules and regulations of the SEC which may permit the sale
of the Registrable Securities to the public without registration, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous Rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public.
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at
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any time after it has become subject to such reporting requirements); a copy of
the most recent annual or quarterly report of the Company; and such other
reports and documents as a Holder may reasonably request in availing itself of
any Rule or regulation of the SEC allowing it to sell any such securities
without registration.
3.13 Other Registration Rights. After the date hereof, the Company shall
not grant to any holder of securities of the Company or to any person as an
inducement to become a holder of securities of the Company, any registration
rights that have a priority greater than or that otherwise adversely affect the
registration rights of the Holders hereunder without the prior written consent
of the Holders of a majority in interest of the Registrable Securities,
excluding the Registrable Securities held by Founder; provided, however, that if
any of Founder, Ingram, UA or Nova Scotia's registration rights are affected in
an adverse manner which is different from the manner in which all Holders'
registration rights are affected as a result of the grant of new registration
rights or the subordination of the Holders' registration rights pursuant to the
prior sentence of this Section 3.13, such Holder must consent in writing to the
grant of new registration rights or to the subordination of such Holder's
registration rights.
4. Covenants Of The Company.
4.1 Basic Financial Information and Reporting.
(a) The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, the Company will
furnish each Investor and Ingram an audited consolidated balance sheet of the
Company, as at the end of such fiscal year, an audited consolidated statement of
income and an audited consolidated statement of cash flows of the Company, for
such year, all prepared in accordance with generally accepted accounting
principles and setting forth in each case, in comparative form, the figures for
the previous fiscal year, all in reasonable detail.
(c) The Company will furnish each Investor and Ingram, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, an unaudited consolidated balance sheet of the Company as
of the end of each such quarterly period, an unaudited consolidated statement of
income and an unaudited consolidated statement of cash flows of the Company for
such period and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles, with the exception that no notes need
be attached to such statements and year-end audit adjustments may not have been
made.
(d) The Company will furnish each Investor and Ingram at least thirty
(30) days prior to the beginning of each fiscal year an annual budget and
operating plan for such fiscal year (and as soon as available, any subsequent
revisions thereto).
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4.2 Inspection Rights. Each Investor and Ingram shall have the right to
visit and inspect any of the properties of the Company or any of its
subsidiaries, and to discuss the affairs, finances and accounts of the Company
or any of its subsidiaries with its officers, and to review such information as
is reasonably requested all at such reasonable times and as often as may be
reasonably requested; provided, however, that the Company shall not be obligated
to provide access to information which it deems in good faith to be trade secret
or similar confidential information.
4.3 Confidentiality of Records. Each Investor, Founder and Ingram agree
to use, and to use its best efforts to insure that its authorized
representatives use, the same degree of care as such Investor, Ingram or Founder
uses to protect its own confidential information to keep confidential any
information furnished to it which the Company identifies as being confidential
or proprietary (so long as such information is not in the public domain), except
that such Investor and Ingram may disclose such proprietary or confidential
information to any partner, subsidiary or parent of such Investor for the
purpose of evaluating its investment in the Company as long as such partner,
subsidiary or parent is advised of the confidentiality provisions of this
Section 4.3.
4.4 Reservation of Common Stock. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
Series A Stock and Series B Stock, all Common Stock issuable from time to time
upon such conversion.
4.5 SEC Compliance. During any time that the Company is subject to the
reporting requirements of the Exchange Act, the Company shall timely file all
required reports pursuant to the Exchange Act. Additionally, the Company shall
make available to Investors, Ingram, Nova Scotia and UA the information
contemplated by Rule 144A. At such time that any stock held by an Investor,
Ingram, Nova Scotia or UA is eligible for transfer pursuant to Rule 144(k), the
Company shall, upon the request of such Investor, Ingram, Nova Scotia and UA
remove any restrictive legend from the applicable stock certificate at no cost
to such Investor, Ingram, Nova Scotia and UA.
4.6 NonDisclosure and Developments Agreement. The Company shall require
all employees and consultants to execute and deliver Employee NonDisclosure and
Developments Agreements in substantially the forms attached to the Purchase
Agreement.
4.7 Committees. In the event that the Board of Directors establishes any
committees of the Board of Directors pursuant to the authority granted in the
Company's Bylaws, each such committee shall include the board representatives of
the Investors.
4.8 Expenses; Compensation. The Company shall reimburse the reasonable
out-of-pocket travel expenses of each director incurred to attend Board or
committee meetings, as well as any other travel expenses approved by the
Company's Board of Directors.
4.9 Stock Vesting. Unless otherwise approved by the Board of Directors
(including the representatives of the Investors) all stock options and other
stock equivalents issued after the date of this Agreement to employees,
directors, consultants and other service providers shall be subject to vesting
that is no less favorable to the Company than as follows: no more than twenty-
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five percent (25%) of such stock options and stock equivalents shall vest on
each anniversary of the date of grant.
4.10 Visitation Rights. In addition to its representation on the Board
of Directors, for so long as SOFTBANK Technology Ventures (or its affiliates)
hold at least ten percent (10%) of the Shares, including shares of Common Stock
issued upon conversion of the Shares, the Company shall allow one representative
designated by SOFTBANK Technology Ventures IV L.P. to attend all meetings of the
board and committees thereof in a nonvoting capacity, and in connection
therewith, the Company shall give such representative copies of all notices,
minutes, consents and other materials, financial or otherwise, which the Company
provides to its board of directors; provided, that, any such representative
shall agree to leave all or any portion of a meeting of the Board of Directors
or any committee thereof if allowing such representative to remain in such
meeting would result in a waiver of the attorney-client privilege or if, in the
reasonable good faith belief of the Board of Directors, allowing such
representative to remain in the meeting would otherwise result in a conflict of
interest.
4.11 Termination of Covenants. All covenants of the Company contained in
Section 4 of this Agreement shall expire and terminate as to each Investor,
Ingram, Nova Scotia and UA on the effective date of the registration statement
pertaining to the Initial Offering.
5. Rights of First Offer.
5.1 Subsequent Offerings of Equity Securities. So long as the Investors
hold at least ten percent (10%) of the Shares (the "Investor Threshold"),
including shares of Common Stock issued upon conversion of the Shares or so long
as Ingram holds at least twenty percent (20%) (the "Ingram Threshold") of the
shares of Common Stock acquired by it in the Merger, in the event the Company
proposes to issue any Equity Securities, including, without limitation, any
preferred stock (other than Equity Securities excluded by Section 5.6 hereof),
the Company shall first offer to sell all of such Equity Securities (the
"Offered Securities") to the Investors (provided that the Investors meet or
exceed the Investor Threshold) and to Ingram (provided that Ingram meets or
exceeds the Ingram Threshold) on a pro rata basis, as set forth herein, and each
Investor and Ingram shall have a right to purchase up to its pro rata share of
the Offered Securities. For purposes of this Section 5 only, each Investor's and
Ingram's pro rata share is equal to the ratio of (A) the number of shares of the
Company's Common Stock (including all shares of Common Stock issued or issuable
upon conversion of the Shares) which such Investor or Ingram owns or is deemed
to own immediately prior to the offering of the Offered Securities to (B) the
total number of shares of the Company's outstanding Common Stock on a fully
diluted basis (including all shares of Common Stock issued or issuable upon
conversion of the Shares and excluding all stock options and shares of Common
Stock issuable upon the exercise of such stock options) immediately prior to the
offering of the Offered Securities.
5.2 Exercise of Rights. The Company shall give each Investor and Ingram
written notice of its intention to issue any Equity Securities, which notice
shall describe the Offered Securities, the price, and the terms and conditions
upon which the Company proposes to issue the Offered Securities. Each Investor
and Ingram shall have fifteen (15) days from the receipt of such notice to agree
to purchase up to its pro rata share of the Offered Securities for the price and
upon the terms and conditions specified in the notice by giving written notice
to the Company
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and stating therein the quantity of Offered Securities to be purchased.
Notwithstanding the foregoing, the Company shall not be required to offer or
sell any Offered Securities to any Investor or to Ingram if such sale would
cause the Company to be in violation of applicable federal securities laws by
virtue of such offer or sale.
5.3 Issuance of Offered Securities to Other Investors. If not all of the
Investors and Ingram elect to purchase their pro rata share of the Offered
Securities, then the Company shall promptly notify in writing the Investors and
Ingram who do so elect and shall offer such Investors and Ingram the right to
acquire such unsubscribed shares. The Investors and Ingram shall have ten (10)
days after receipt of such notice to notify the Company of their respective
election to purchase all or a portion thereof of the unsubscribed shares. If
the Investors and Ingram fail to exercise in full their rights of first offer as
set forth herein, the Company shall have ninety (90) days thereafter to sell the
Offered Securities in respect of which such rights were not exercised, at a
price and upon terms and conditions no more favorable to the purchasers thereof
than specified in the Company's notice to the Investors and Ingram pursuant to
Section 5.2 hereof. If the Company has not sold such Offered Securities within
one hundred twenty (120) days of the notice provided pursuant to Section 5.2,
the Company shall not thereafter issue or sell any Offered Securities, without
first offering such securities to the Investors and Ingram in the manner
provided by this Section 5.
5.4 Termination of Rights of First Offer. The rights of first offer
established by this Section 5 shall not apply to, and shall terminate upon the
effective date of the registration statement pertaining to a Qualified Public
Offering.
5.5 Transfer of Rights of First Offer. The rights of first offer granted
to each Investor and Ingram under this Section 5 may be transferred to the same
parties, subject to the same restrictions, as any transfer of registration
rights pursuant to Section 3.9.
5.6 Excluded Securities. The rights of first offer established by this
Section 5 shall have no application to any of the following Equity Securities:
(a) shares of Common Stock (and/or options, warrants or other Common
Stock purchase rights issued pursuant to such options, warrants or other rights)
issued or to be issued to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors,
including the representatives designated by the holders of the Shares but
excluding the Founders;
(b) stock issued pursuant to any rights or agreements outstanding as
of the date of this Agreement, options, warrants (including the Nova Scotia and
UA Warrants) and convertible promissory notes outstanding as of the date of this
Agreement; and stock issued pursuant to any such rights or agreements granted
after the date of this Agreement, provided, that, the rights of first offer
established by this Section 5 applied with respect to the initial sale or grant
by the Company of such rights or agreements;
(c) any Equity Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination;
19
<PAGE>
(d) after the date hereof, any Equity Securities which in the
aggregate exceed ten percent (10%) of the Company's outstanding capital stock on
a fully diluted basis issued to a potential or existing customer or supplier or
other strategic relationship or issued in connection with a credit facility or
equipment lease transaction;
(e) shares of Common Stock issued in connection with any stock split,
stock dividend or recapitalization by the Company;
(f) shares of Common Stock issued upon conversion of the Shares;
(g) any Equity Securities that are issued by the Company pursuant to a
registration statement filed under the Securities Act.
6. Miscellaneous.
6.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Delaware without regard to principles of conflict of
laws.
6.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
6.3 Severability. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
6.4 Amendment and Waiver.
(a) Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of (i) the Company; (ii) the
holders of a majority in interest of the Registrable Securities owned of record
by the Series A Investors; (iii) the holders of a majority in interest of the
Registrable Securities owned of record by the Series B Investors; and (iv) any
party whose rights and interests under this Agreement would be adversely
affected by such an amendment or modification.
(b) Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of a majority in interest of the Registrable Securities
owned of record by the Series A Investors; and the holders of a majority in
interest of the Registrable Securities owned of record by the Series B
Investors; provided, however, no waiver shall be effective without the consent
of any party whose rights and interests under this Agreement would be adversely
affected by such waiver.
20
<PAGE>
6.5 Notices, Etc. All notices required or permitted hereunder shall be
deemed effectively given: (i) upon personal delivery to the party to be
notified, (ii) when sent by confirmed telex or facsimile if sent during normal
business hours of the recipient; if not, then on the next business day, (iii)
five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (iv) one (1) day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address set forth on the signature pages hereto or Exhibit
-------
A, Exhibit B or Exhibit C hereto or at such other address as such party may
- - --------- ---------
designate by ten (10) days advance written notice to the other parties hereto.
6.6 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6.7 Complete Agreement. This Agreement constitutes the entire agreement
and supersedes all other prior and contemporaneous agreements and undertakings,
both written and oral, between the parties hereto with regard to the subject
matter hereof.
6.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.9 Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.10 Supersedence. This Agreement supersedes in its entirety the Second
Amended and Restated Agreement by and between the Company, the Investors,
Ingram, Nova Scotia, UA and the Founder, and the Second Amended and Restated
Agreement shall be of no further force or effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
In Witness Whereof, the parties hereto have executed this Third Amended and
Restated Investors' Rights Agreement as of the date set forth in the first
paragraph hereof.
COMPANY:
BUY.COM INC.
By: ______________________________________
Name:
Title:
INVESTORS:
SOFTBANK Technology Ventures IV L.P.
By: STV IV LLC
Its General Partner
By: ______________________________________
Name:
Title:
SOFTBANK Technology Advisors Fund L.P.
By: STV IV LLC
Its: General Partner
By: ______________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
SOFTBANK CAPITAL PARTNERS LP
By: Softbank Capital Partners LLC
Its: General Partner
By: __________________________________
Name:
Title:
SOFTBANK CAPITAL ADVISORS
FUND LP
By: Softbank Capital Partners LLC
Its: General Partner
By: __________________________________
Name:
Title:
SOFTBANK America Inc.
By: __________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
SOFTBANK Technology Ventures V LP
By: SBTV V LLC
Its: General Partner
By: ________________________________________
Name: Edward Scott Russell
Title: Managing Director
SOFTBANK Technology Advisors Fund V LP
By: SBTV V LLC
Its: General Partner
By: ________________________________________
Name: Edward Scott Russell
Title: Managing Director
SOFTBANK TECHNOLOGY ENTREPRENEURS FUND V LP
By: SBTV V LLC
Its: General Partner
By: ________________________________________
Name: Edward Scott Russell
Title: Managing Director
Investors' Rights Agreement
<PAGE>
E Partners
By: ______________________________________
Name:
Title:
VIVENDI
By: ______________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
INGRAM:
INGRAM CAPITAL INC.
By: ______________________________________
Name:
Title:
Address: Two Ingram Blvd.
La Vergne, TN 37089
Attn: President
NOVA SCOTIA:
THE BANK OF NOVA SCOTIA
By: ______________________________________
Name:
Title:
Address: ___________________
___________________
___________________
UA:
UNITED AIR LINES, INC.
By: ______________________________________
Name:
Title:
Address: ___________________
___________________
___________________
Investors' Rights Agreement
<PAGE>
FOUNDERS:
The Scott A. Blum Separate Property Trust
u/d/t 8/2/95
By: ______________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
Exhibit A
BUY COM INC.
Investors' Rights Agreement
Series A Preferred Stock Purchasers
<TABLE>
<CAPTION>
Name and Address Series A
Shares
- -----------------------------------------------------------
<S> <C>
SOFTBANK Technology Ventures IV L.P. 19,114,890
c/o STV IV LLC
333 W. San Carlos
San Jose, CA 95110
SOFTBANK Technology Advisors Fund L.P. 366,240
c/o STV IV LLC
333 W. San Carlos
San Jose, CA 95110
----------
Total: 19,481,130
</TABLE>
<PAGE>
EXHIBIT B
BUY COM INC.
Investors' Rights Agreement
Series B Preferred Stock Purchasers
<TABLE>
<CAPTION>
Common Series B
Name and Address Shares(1) Shares
- ------------------------------------------------------------------------------
<S> <C> <C>
SOFTBANK Capital Partners LP 2,835,295 10,207,063
SOFTBANK Capital Advisors Fund LP 41,133 148,079
SOFTBANK America Inc. 8,820,694 --
SOFTBANK Technology Ventures IV LP 282,154 1,015,735
SOFTBANK Technology Advisors Fund LP 5,405 19,462
SOFTBANK Technology Ventures V LP 287,549 1,035,196
e Partners 575,109 2,070,393
Vivendi 383,700 1,381,321
--------------------------------------
Total: 13,231,040 15,877,249
</TABLE>
(1) Reflects Common Stock purchased from the Scott A. Blum Separate Property
Trust and the Masons pursuant to a Stock Purchase Agreement dated as of the
date hereof.
<PAGE>
Exhibit C
BUY COM INC.
Investors' Rights Agreement
Founders
<TABLE>
<CAPTION>
Name and Address Shares
- --------------------------------------------------------------------------------
<S> <C>
The Scott A. Blum Separate Property Trust u/d/t 8/2/95 99,164,464
3 Ritz Cove
Monarch Beach, CA 92629
</TABLE>
<PAGE>
Exhibit D
BUY COM INC.
Investors' Rights Agreement
Schedule of Registrable Securities
<TABLE>
<CAPTION>
Total
Registrable
Holder Warrant Common(2) Series A Series B Securities
------ ------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
SOFTBANK Technology Ventures IV LP -- 638,059 19,114,890 1,015,735 20,768,684
SOFTBANK Technology Advisors Fund LP -- 12,230 366,240 19,462 397,932
SOFTBANK Technology Ventures V LP -- 287,549 -- 1,035,196 1,322,745
SOFTBANK Capital Partners LP -- 2,835,295 -- 10,207,063 13,042,358
SOFTBANK Capital Advisors Fund LP -- 41,133 -- 148,079 189,212
SOFTBANK America Inc. -- 8,820,694 -- 0 8,820,694
e Partners -- 575,109 -- 2,070,393 2,645,502
Vivendi -- 383,700 -- 1,381,321 1,765,021
United Air Lines Inc. 2,000,000 -- -- -- 2,000,000
The Bank of Nova Scotia(1) 43,500 -- -- -- 43,500
The Scott A. Blum Separate Property Trust -- 99,164,464 -- -- 99,164,464
Ingram Capital -- 7,930,560 -- -- 7,930,560
Total 2,043,500 120,688,793 19,481,130 15,877,249 158,090,672
</TABLE>
(1) The Bank of Nova Scotia shares are based upon an estimate. The actual
number of shares may vary based upon the terms of the Warrant.
(2) Reflects ownership after closing of the Series B Convertible Participating
Preferred Stock financing and the sale of 13,231,040 shares of Common Stock.
Also includes shares of Common Stock acquired by Ingram and the Series A
Investors upon the exercise of their right of first offer on March 10, April
5, and June 29, 1999.
<PAGE>
EXHIBIT 10.2
VOTING AGREEMENT
----------------
This Voting Agreement (this "Agreement") is made as of the 3rd day of
December, 1998, by and among Buy.Com Inc., a Delaware corporation (the
"Company"), Ingram Entertainment Inc., a Tennessee corporation ("Ingram"), The
Scott A. Blum Separate Property Trust u/d/t 8/2/95 (the "Trust"), SOFTBANK
Technology Ventures IV L.P. ("SOFTBANK Ventures"), SOFTBANK Technology Advisors
Fund L.P. ("SOFTBANK Advisors"), and SOFTBANK Holdings Inc. ("SOFTBANK
Holdings") (each of Ingram, the Trust, SOFTBANK Ventures, SOFTBANK Advisors, and
SOFTBANK Holdings are referred to herein individually as a "Stockholder" and,
collectively, as the "Stockholders").
RECITALS
WHEREAS, the Company has acquired SpeedServe Inc. ("SpeedServe") by
way of the merger (the "Merger") of SpeedServe with and into a wholly owned
subsidiary of the Company;
WHEREAS, prior to the Merger, Ingram was the principal stockholder of
SpeedServe;
WHEREAS, it was a condition to the Merger that David B. Ingram ("David
Ingram") be elected to the Company's Board of Directors (the "Board") and that
the parties hereto enter into this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and agreements
contained herein, the parties hereto mutually agree as follows:
1. Board Representation.
--------------------
1.1 Designation of Ingram Representative to the Board of
----------------------------------------------------
Directors. During the term of this Agreement as set forth in Section 7, the
- ---------
Board of Directors, so long as it is consistent with the Board's fiduciary
duties, shall nominate David Ingram and recommend that the stockholders of the
Company vote in favor of David Ingram for election to the Board at each annual
or special meeting of stockholders at which directors are to be elected, or in
connection with any consent actions in lieu of such meeting, and the
Stockholders shall vote all of their shares of Stock in favor of his election to
the Board. Nothing herein shall be deemed to require David Ingram to accept such
nomination or election; provided, however that if David Ingram does not accept
such nomination or election, this Agreement shall terminate at such time.
1.2 Definition of "Stock." For purposes of this Agreement, the
---------------------
term "Stock" shall mean all shares of voting securities of the Company then
issued and outstanding including, without limitation, all shares of Common Stock
and Series A Convertible Participating Preferred Stock.
1.3 Failure to Vote per Agreement. In the event that any
-----------------------------
Stockholder
1.
<PAGE>
shall fail to vote its shares of Stock in favor of the election of David Ingram
to the Board as set forth in Section 1.1 above, such Stockholder shall be deemed
immediately upon the existence of such a breach to have granted to Ingram a
proxy to its shares of Stock to ensure that such shares will be voted for the
election of David Ingram. Each of the Stockholders acknowledges that each proxy
deemed to be granted hereby, including any successive proxy if need be, is given
to secure the performance of a duty, is coupled with an interest, and shall be
irrevocable until the duty is performed.
2. Certain Resignations or Removals. Other than for cause, only
--------------------------------
Ingram shall have the right to request the resignation or removal of David
Ingram. In such event, David Ingram shall immediately resign or be subject to
removal by a vote of the Stockholders and the Stockholders shall vote all of
their shares of Stock entitled to vote in favor of such removal. If David Ingram
shall fail to resign if requested to do so by Ingram or if grounds exist to
remove David Ingram for cause, then any Stockholder shall have the right to call
a special meeting of stockholders for the purpose of removing such director and
the Stockholders shall vote all their shares of Stock entitled to vote at such
meeting in favor of removal.
3. [Reserved]
4. Notice of Certain Board Meetings. Ingram shall receive prior
--------------------------------
notice, consistent with the notice provided members of the Board pursuant to the
Company's Bylaws, of any meeting of the Board at which it is proposed that a
vacancy on the Board be filled unless such notice shall have been waived in
accordance with the Delaware General Corporation Law.
5. Covenant to Vote. Each of the Stockholders shall appear in
----------------
person or by proxy at any annual or special meeting of stockholders for the
purpose of obtaining a quorum and shall vote the shares of Stock owned by such
Stockholder entitled to vote, either in person or by proxy, at any annual or
special meeting of stockholders of the Company called for the purpose of voting
on the election of directors or by consensual action of stockholders with
respect to the election of directors, in favor of the election of the directors
nominated in accordance with Sections 1.1 hereof. In addition, each Stockholder
shall appear in person or by proxy at any annual or special meeting of
stockholders for the purpose of obtaining a quorum and shall vote the shares of
Stock owned by such Stockholder and entitled to vote upon any other matter
submitted to a vote of the Stockholders of the Company in a manner so as to be
consistent and not in conflict with, and to implement, the terms of this
Agreement.
6. No Voting or Conflicting Agreements. No Stockholder shall grant
-----------------------------------
any proxy or enter into or agree to be bound by any voting trust with respect to
the Stock held by such Stockholder nor shall any Stockholder enter into any
stockholder agreements or arrangements of any kind with any person with respect
to the Stock inconsistent with the provisions of this Agreement (whether or not
such agreements and arrangements are with other stockholders of the Company that
are not parties to this Agreement). The foregoing prohibition includes, but is
not limited to, agreements or arrangements with respect to the acquisition,
disposition or voting of shares of Series A Convertible Participating Preferred
Stock and Common Stock held by such Stockholders to the extent such agreements
or arrangements are inconsistent with the provisions of this Agreement. No
Stockholder shall act, for any reason, as a member of a group or in concert
2.
<PAGE>
with any other persons in connection with the acquisition, disposition or voting
of shares of the Company's capital stock in any manner which is inconsistent
with the provisions of this Agreement.
7. Term. This Agreement will terminate upon the earlier of (i) the
----
closing of an underwritten public offering covering the offer and sale of Common
Stock of the Company in which the per share price to the public is at least
$30.799 per share (as adjusted for stock splits, recapitalizations and the like)
and the net cash proceeds to the Company (after underwriting discounts,
commissions and fees) are at least $30,000,000; (ii) the occurrence of the
merger or consolidation of the Company into, or the sale of all or substantially
all of the Company's assets to another corporation, unless the stockholders of
the Company shall own at least 51% of the capital stock of such other
corporation immediately after such merger, consolidation or sale; (iii) the date
on which Ingram's ownership of the Common Stock of the Company drops below 50%
of the number of shares (as such number may be adjusted to account for stock
splits and reverse stock splits) of Common Stock of the Company acquired by
Ingram in connection with the Merger; or (iv) upon the death of David Ingram or
any disability which renders him unable to serve as a director of the Company.
8. Injunctive Relief. It is acknowledged that it will be impossible
-----------------
to measure in money the damages that would be suffered if the parties fail to
comply with any of the obligations herein imposed on them and that in the event
of any such failure, an aggrieved person will be irreparably damaged and will
not have an adequate remedy at law. Any such person shall, therefore, be
entitled to injunctive relief, including specific performance, to enforce such
obligations, and if any action shall be brought in equity to enforce any of the
provisions of this Agreement, none of the parties hereto shall raise the defense
that there is an adequate remedy at law.
9. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns. If any
Stockholder or any transferee of any Stockholder shall acquire any securities of
the Company which are entitled to voting rights, whether upon exercise,
conversion or otherwise, in any manner, whether by operation of law or
otherwise, such securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such securities such person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement.
10. Governing Law. Regardless of the place of execution, this
-------------
Agreement shall be governed by and construed in accordance with the laws of the
State of Delaware, applicable to agreements made and to be wholly performed in
such State, without regard to the conflicts-of-law principles thereof.
11. Headings. Section headings are inserted herein for convenience
--------
only and do not form a part of this Agreement.
12. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement among the parties hereto with respect to the matters contemplated
herein, supersedes all prior written agreements and negotiations and oral
understandings, if any, and may not be
3.
<PAGE>
discharged except by performance and may not be amended or supplemented except
by an instrument in writing signed by the Company and each other party hereto.
13. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. Further Assurances. Each of the parties hereto agrees to execute
------------------
such further instruments and to take such further action as may reasonably be
requested by any other party hereto to carry out the intent of this Agreement.
4.
<PAGE>
VOTING AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
"COMPANY"
BUY.COM INC.
By: __________________________________
Scott A. Blum
President
"STOCKHOLDERS"
THE SCOTT A. BLUM SEPARATE PROPERTY
TRUST, u/d/t/ 8/2/95
By: __________________________________
Scott A. Blum
Trustee
SOFTBANK TECHNOLOGY VENTURES IV L.P.
By: STV IV LLC
Its General Partner
By: __________________________________
Edward Scott Russell
General Partner
SOFTBANK TECHNOLOGY ADVISORS FUND L.P.
By: STV IV LLC
Its General Partner
By: __________________________________
Edward Scott Russell
General Partner
5.
<PAGE>
SOFTBANK HOLDINGS INC.
By: __________________________________
Name:
Title:
INGRAM ENTERTAINMENT INC.
By: __________________________________
Name:
Title:
6.
<PAGE>
EXHIBIT 10.11
BUY.COM, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Option/Stock Issuance Plan (the "Plan") is intended to
promote the interests of Buy.Com, Inc., a Delaware corporation (the
"Corporation"), by providing eligible persons with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the Corporation's service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
(i) the "Discretionary Option Grant Program" under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the "Stock Issuance Program" under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. Except as provided in Paragraph B of this Section III, the Plan
shall be administered by the Board or one or more committees appointed by the
Board, provided that (1) beginning with the Section 12 Registration Date, the
Primary Committee shall have sole and exclusive authority to administer the Plan
with respect to Section 16 Insiders, and (2) administration of the Plan may
otherwise, at the Board's discretion, be vested in the Primary Committee or a
Secondary Committee.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
1
<PAGE>
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant
Program and the Stock Issuance Program and to make such determinations under,
and issue such interpretations of, the provisions of such programs and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Discretionary Option Grant Program and/or
the Stock Issuance Program under its jurisdiction or any option or stock
issuance thereunder.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant Program and the Stock Issuance Program are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors
of any Parent or Subsidiary of the Corporation, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary of the Corporation).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine:
(i) with respect to option grants under the Discretionary Option Grant Program,
which eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times when each option is to become exercisable,
the vesting schedule (if any) applicable to the option shares and the maximum
term for which the option is to remain outstanding and (ii) with respect to
stock issuances under the Stock Issuance Program, which eligible persons are to
receive stock issuances, the time or times when such issuances are to be made,
the number of shares to be issued to each Participant, the vesting schedule (if
any) applicable to the issued shares and the consideration for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
2
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
2,302,664 shares. Such authorized share reserve includes the number of
shares subject to the outstanding options which are hereby incorporated into the
Plan.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to being exercised in full. Unvested
shares issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan.
C. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to: (i) the maximum number and/or class of securities issuable under the
Plan; (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year; and (iii) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option under the Plan. Such adjustments to the outstanding options
are to be effected in a manner which shall preclude the enlargement or dilution
of rights and benefits under such options. The adjustments determined by the
Plan Administrator shall be final, binding and conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
-----------------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
______________________
/1/ On October 8, 1998 the Board of Directors approved a resolution
reducing the amount of shares of Common Stock reserved for issuance unnder the
Plan from 2,692,485 to 2,102,664 shares of common Stock. On March 22, 1999 the
Board of Directors approved a resolution increasing the number of shares of
Common Stock reserved for issuance under the Plan from 2,102,664 to 2,302,664
shares of Common Stock.
3
<PAGE>
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator at a price not less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date; provided,
--------
however, that the Plan Administrator may fix the exercise price at less than 85%
- -------
if the Optionee, at the time of the option grant, shall have made a payment to
the Corporation (including payment made by means of a salary reduction) equal to
the excess of the Fair Market Value of the Common Stock on the option grant date
over such exercise price.
2. The exercise price shall become immediately due upon exercise
of the option and may, subject to the provisions of Section I of Article Four
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) with respect to the exercise of options after the
Section 12 Registration Date, shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) with respect to the exercise of options for vested
shares after the Section 12 Registration Date and to the extent the sale
complies with all applicable laws relating to the regulation and sale of
securities, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written instructions to (a)
a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise, and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such period of
time thereafter as shall be determined by the Plan Administrator and set forth
in the documents evidencing the
4
<PAGE>
option (which shall in no event be less than six (6) months in the case of death
or disability nor less than thirty (30) days in the case of any other cessation
of Service), provided no such option shall be exercisable after the expiration
of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution.
(iii) Subject to clause C.2.(ii) below of this Section I, during
the applicable post-Service exercise period, the option may not be exercised in
the aggregate for more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon the
expiration of the applicable exercise period or (if earlier) upon the expiration
of the option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period otherwise in effect for that option to such greater period of
time as the Plan Administrator shall deem appropriate, but in no event beyond
the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested had the Optionee continued
in Service.
D. Shareholder Rights. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock and to reserve the right to repurchase any or all of those unvested shares
should the Optionee thereafter cease to be in Service to the Corporation. The
terms upon which such repurchase right shall be exercisable (including the
period and procedure for exercise and the appropriate vesting schedule for the
purchased shares) shall be established by the Plan Administrator and set forth
in the document evidencing such repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
5
<PAGE>
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or a
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new grant date.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
6
<PAGE>
II. STOCK ISSUANCE TERMS
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program may,
in the discretion of the Plan Administrator, be fully and immediately vested
upon issuance or may vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives. The
elements of the vesting schedule applicable to any unvested shares of Common
Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or the
performance objectives to be attained,
(ii) the number of installments in which the shares are to vest,
(iii) the interval or intervals (if any) which are to lapse between
installments, and
(iv) the effect which death, Permanent Disability or other event
designated by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
7
<PAGE>
3. The Participant shall have full shareholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding one
or more unvested shares of Common Stock issued under the Stock Issuance Program
or should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further shareholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant's purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the non-
attainment of the performance objectives applicable to those shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares as to which the waiver applies. Such waiver may be effected at any time,
whether before or after the Participant's cessation of Service or the attainment
or non-attainment of the applicable performance objectives.
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. SHARE ESCROW/LEGENDS
Unvested shares issued under the Plan may, in the Plan Administrator's
discretion, be held in escrow by the Corporation until the Participant's
interest in such shares vests or may be issued directly to the Participant with
restrictive legends on the certificates evidencing those unvested shares.
8
<PAGE>
III. CORPORATE TRANSACTION
A. Except as otherwise provided in the agreements evidencing an
option, each outstanding option under the Discretionary Option Grant Program
shall automatically accelerate in the event of a Corporate Transaction so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock, provided that an
outstanding option shall not so accelerate if and to the extent: (i) such
option is, in connection with the Corporate Transaction, either to be assumed by
the successor corporation (or parent thereof) or to be replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. The determination of option comparability under clause (i)
above shall be made by the Plan Administrator, and its determination shall be
final, binding and conclusive.
B. Except as otherwise provided in the agreements creating the
repurchase rights, outstanding repurchase rights, if any, shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
provided that such repurchase right shall not lapse to the extent: (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed by the Plan Administrator at
the time the option is issued or the repurchase right is created.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.
E. Repurchase rights which are assigned in connection with a
Corporate Transaction shall be exercisable with respect to the property issued
to the Optionee or Participant upon consummation of such Corporate Transaction
in exchange for the Common Stock held by
9
<PAGE>
the Optionee or Participant subject to the repurchase rights immediately prior
to the Corporate Transaction.
F. Except as otherwise limited by the Plan Administrator at the time
an Option is granted, vesting under outstanding options will automatically
accelerate in the event the Optionee's Service subsequently terminates by reason
of an Involuntary Termination within eighteen (18) months following the
effective date of any Corporate Transaction in which those options are assumed
or replaced and do not otherwise accelerate. Any options so accelerated shall
remain exercisable for fully-vested shares until the earlier of (i) the
-------
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination. The portion of
any Incentive Option accelerated in connection with a Corporate Transaction or
Change in Control shall remain exercisable as an Incentive Option only to the
extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not
exceeded and the provisions governing the exercise and holding period are met
provided that such option is exercised within ninety (90) days of the
Involuntary Termination. To the extent the applicable dollar limitation is
exceeded or the options are not exercised within the applicable ninety (90) day
period, such option shall be exercisable as a Non-Statutory Option.
G. Except as otherwise limited by the Plan Administrator at the time
the option is granted under the Discretionary Option Program or the repurchase
rights are created, the outstanding repurchase rights with respect to shares
held by an Optionee or Participant will automatically lapse and cease to be
exercisable in the event the Optionee's or the Participant's Service
subsequently terminates by means of an Involuntary Termination within eighteen
(18) months following the effective date of any Corporate Transaction in which
those repurchase rights are assigned or otherwise continue.
H. The outstanding options or repurchase rights shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. CHANGE IN CONTROL
A. In the event of any Change in Control, each outstanding option
under the Discretionary Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Change in Control, become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock.
B. Outstanding repurchase rights, if any, shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control.
10
<PAGE>
V. VESTING
Notwithstanding any other provision of this agreement, the vesting
schedule imposed with respect to any option grant or share issuance shall not
result in the Optionee or Participant vesting in fewer than 20% per year for
five years from the date of the option grant or share issuance.
VI. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Taxes incurred by such holders in connection with the exercise of their
options or the vesting of their shares. Such right may be provided to any such
holder in either or both of the following formats:
1. Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
2. Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
VII. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant
Program at any time on or after the Plan Effective Date. However, no options
granted under the Plan may be exercised, and no shares shall be issued under the
Plan, until the Plan is approved by the Corporation's shareholders. If such
shareholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. All options outstanding as of the Plan Effective Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or
11
<PAGE>
otherwise modify the rights or obligations of the holders of such incorporated
options with respect to their acquisition of shares of Common Stock.
C. The Plan shall terminate upon the earliest of (i) the tenth
--------
anniversary of the Plan Effective Date, (ii) the date on which all shares
available for issuance under the Plan shall have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such plan termination, all outstanding option
grants and unvested stock issuances shall thereafter continue to have force and
effect in accordance with the provisions of the documents evidencing such grants
or issuances.
VIII. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
if so determined by the Board or pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained any required approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
approval is not obtained within twelve (12) months after the date the first such
excess issuances are made, then (i) any unexercised options granted on the basis
of such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.
IX. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
X. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
12
<PAGE>
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
XI. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
XII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under the
Plan, unless such individual is a key Employee whose duties in connection with
the Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.
13
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's shareholders which
the Board does not recommend such shareholders to accept, or
(ii) a change in the composition of the Board over a period of thirty-
six (36) consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the time the Board
approved such election or nomination.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following
---------------------
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets.
F. Corporation shall mean Buy.Com, Inc., a Delaware corporation, and
-----------
its successors.
G. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under the Plan.
14
<PAGE>
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the Corporation
-------------
shall have received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant
-----------------
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question, as such price
is reported on the Nasdaq National Market or any successor system. If there is
no closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per share
at which the Common Stock is to be sold in the initial public offering pursuant
to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it deems appropriate.
K. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
L. Involuntary Termination shall mean the termination of the
-----------------------
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change
in his or her position with the Corporation which materially reduces his or her
level of responsibility, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and participation in any corporate-
performance based bonus or incentive programs) by more than fifteen percent
(15%) or (C) a relocation of such individual's place of employment by more than
15
<PAGE>
fifty (50) miles, provided and only if such change, reduction or relocation is
effected by the Corporation without the individual's consent.
M. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
O. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
P. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant Program.
Q. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
R. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
S. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
T. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance
----
Plan, as set forth in this document.
U. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
V. Plan Effective Date shall mean the date on which the Plan was
-------------------
adopted by the Board.
W. Primary Committee shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant
16
<PAGE>
and Stock Issuance Programs with respect to Section 16 Insiders following the
Section 12 Registration Date.
X. Secondary Committee shall mean a committee of two (2) or more
-------------------
Board members appointed by the Board to administer any aspect of Plan not
required hereunder to be administered by the Primary Committee. The members of
the Secondary Committee may be Board members who are Employees eligible to
receive discretionary option grants or direct stock issuances under the Plan or
any other stock option, stock appreciation, stock bonus or other stock plan of
the Corporation (or any Parent or Subsidiary).
Y. Section 12 Registration Date shall mean the date on which the
----------------------------
Common Stock is first registered under Section 12(g) or Section 15 of the 1934
Act.
Z. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AA. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
BB. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
CC. Stock Issuance Agreement shall mean the agreement entered into by
------------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
DD. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
EE. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
FF. Taxes shall mean the Federal, state and local income and
-----
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.
GG. 10% Shareholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
HH. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
17
<PAGE>
II. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
18
<PAGE>
EXHIBIT 10.14
<TABLE>
<S> <C>
WHEN RECORDED MAIL TO:
Bank of Yorba Linda, a division of BYL Bank
Group
26137 La Paz Road
Suite 102
Mission Viejo, CA 92691
SPACE ABOVE THIS LINE IS FOR RECORDER'S USE ONLY
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
DEED OF TRUST
THIS DEED OF TRUST IS DATED DECEMBER 23, 1998, among Buy.Com Inc., a Delaware
Corporation, whose address is 21 Brookline, Aliso Viejo, CA 92656 (referred to
below as "Trustor"); Bank of Yorba Linda, a division of BYL Bank Group, whose
address is 26137 La Paz Road, Suite 102, Mission Viejo, CA 92691 (referred to
below sometimes as "Lender" and sometimes as "Beneficiary"); and Bank of Yorba
Linda, a division of BYL Bank Group, whose address is 26137 La Paz Road, Suite
102, Mission Viejo, CA 92691 (referred to below as "Trustee").
CONVEYANCE AND GRANT. For valuable consideration, Trustor Irrevocably grants,
transfers and assigns to Trustee in trust, with power of sale, for the benefit
of Lender as Beneficiary, all of Trustor's right, title, and interest in and to
the following described real property, together with all existing or
subsequently erected or affixed buildings, improvements and fixtures; all
easements, rights of way, and appurtenances; all water, water rights and ditch
rights (including stock in utilities with ditch or irrigation rights); and all
other rights, royalties, and profits relating to the real property, including
without limitation all minerals, oil, gas, geothermal and similar matters,
located in Orange County, State of California (the "Real Property"):
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF
The Real Property or its address is commonly known as 21 Brookline, Aliso Viejo,
CA 92656. The Assessor's Parcel Number for the Real Property is 623-132-05 and
623-123-06.
Trustor presently assigns to Lender (also known as Beneficiary in this Deed of
Trust) all of Trustor's right, title, and interest in and to all present and
future leases of the Property and all Rents from the Property. This is an
absolute assignment of Rents made in connection with an obligation secured by
real property pursuant to California Civil Code Section 2938. In addition,
Trustor grants Lender a Uniform Commercial Code security interest in the Rents
and the Personal Property defined below.
DEFINITIONS. The following words shall have the following meanings when used In
this Deed of Trust. Terms not otherwise defined in this Deed of Trust shall
have the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Beneficiary. The word "Beneficiary" means Bank of Yorba Linda, a division of
BYL Bank Group, its successors and assigns. Bank of Yorba Linda, a division
of BYL Bank Group also is referred to as "Lender" in this Deed of Trust.
Deed of Trust. The words "Deed of Trust" mean this Deed of Trust among
Trustor, Lender, and Trustee and include without limitation all assignment and
security interest provisions relating to the Personal Property and Rents.
Guarantor. The word "Guarantor" means and includes without limitation any and
all guarantors, sureties, and accommodation parties in connection with the
Indebtedness.
Improvements. The word "Improvements" means and includes without limitation
all existing and future improvements, buildings, structures, mobile homes
affixed on the Real Property, facilities, additions, replacements and other
construction on the Real Property.
Indebtedness. The word "Indebtedness" means all principal and interest payable
under the Note and any amounts expended or advanced by Lender to discharge
obligations of Trustor or expenses incurred by Trustee or Lender to enforce
obligations of Trustor under this Deed of Trust, together with interest on
such amounts as provided in this Deed of Trust.
Lender. The word "Lender" means Bank of Yorba Linda, a division of BYL Bank
Group, its successors and assigns.
Note. The word "Note" means the Note dated December 23,1998, in the principal
amount of $1,155,500.00 from Trustor to Lender, together with all renewals,
extensions, modifications, refinancings, and substitutions for the Note.
NOTICE TO TRUSTOR: THE NOTE CONTAINS A VARIABLE INTEREST RATE.
Personal Property. The words "Personal Property" mean all equipment, fixtures,
and other articles of personal property now or hereafter owned by Trustor, and
now or hereafter attached or affixed to the Real Property; together with all
accessions, parts, and additions to, all replacements of,
<PAGE>
and all substitutions for, any of such property; and together with all
proceeds (including without limitation all insurance proceeds and refunds of
premiums) from any sale or other disposition of the Property.
Property. The word "Property" means collectively the Real Property and the
Personal Property.
Real Property. The words "Real Property" mean the property, interests and
rights described above in the "Conveyance and Grant" section.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Rents. The word "Rents" means all present and future leases, rents, revenues,
income, issues, royalties, profits, and other benefits derived from the
Property together with the cash proceeds of the Rents.
Trustee. The word "Trustee" means Bank of Yorba Linda, a division of BYL Bank
Group and any substitute or successor trustees.
Trustor. The word "Trustor" means any and all persons and entities executing
this Deed of Trust, including without limitation all Trustors named above.
THIS DEED OF TRUST, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST
IN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (1) PAYMENT OF THE
INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND ALL OBLIGATIONS OF TRUSTOR UNDER THE
NOTE, THE RELATED DOCUMENTS, AND THIS DEED OF TRUST. THIS DEED OF TRUST IS
GIVEN AND ACCEPTED ON THE FOLLOWING TERMS:
PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust,
Trustor shall pay to Lender all amounts secured by this Deed of Trust as they
become due, and shall strictly and in a timely manner perform all of Trustor's
obligations under the Note, this Deed of Trust, and the Related Documents.
POSSESSION AND MAINTENANCE OF THE PROPERTY. Trustor agrees that Trustor's
possession and use of the Property shall be governed by the following
provisions:
Possession and Use. Until the occurrence of an Event of Default, or until
Lender exercises its right to collect Rents as provided for in the Assignment
of Rents form executed by Grantor in connection with the Property, Trustor may
(a) remain in possession and control of the Property, (b) use, operate or
manage the Property, and (c) collect any Rents from the Property.
Duty to Maintain. Trustor shall maintain the Property in tenantable condition
and promptly perform all repairs, replacements, and maintenance necessary to
preserve its value.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Deed of
Trust, shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA'), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5
through 7.7 of Division 20 of the California Health and Safety Code, Section
25100, et seq., or other applicable state or federal laws, rules, or
regulations adopted pursuant to any of the foregoing. The terms "hazardous
waste" and "hazardous substance" shall also include, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos.
Trustor represents and warrants to Lender that: (a) During the period of
Trustor's ownership of the Property, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release of
any hazardous waste or substance by any person on, under, about or from the
Property; (b) Trustor has no knowledge of, or reason to believe that there has
been, except as previously disclosed to and acknowledged by Lender in writing,
(i) any use, generation, manufacture, storage, treatment, disposal, release,
or threatened release of any hazardous waste or substance on, under, about or
from the Property by any prior owners or occupants of the Property or (ii) any
actual or threatened litigation or claims of any kind by any person relating
to such matters; and (c) except as previously disclosed to and acknowledged by
Lender in writing, (i) neither Trustor nor any tenant, contractor, agent or
other authorized user of the Property shall use, generate, manufacture, store,
treat, dispose of, or release any hazardous waste or substance on, under,
about or from the Property and (ii) any such activity shall be conducted in
compliance with all applicable federal, state, and local laws, regulations and
ordinances, including without limitation those laws, regulations, and
ordinances described above. Trustor authorizes Lender and its agents to enter
upon the Property to make such inspections and tests, at Trustor's expense, as
Lender may deem appropriate to determine compliance of the Property with this
section of the Deed of Trust. Any inspections or tests made by Lender shall
be for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Trustor or to any other
person. The representations and warranties contained herein are based on
Trustor's due diligence in investigating the Property for hazardous waste and
hazardous substances. Trustor hereby (a) releases and waives any future
claims against Lender for indemnity or contribution in the event Trustor
becomes liable for cleanup or other costs under any such laws, and (b) agrees
to indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Deed of Trust or as a consequence of any use, generation, manufacture,
storage, disposal, release or threatened release of a hazardous waste or
substance on the properties. The provisions of this section of the Deed of
Trust, including the obligation to indemnify, shall survive the payment of the
Indebtedness and the satisfaction and reconveyance of the lien of this Deed of
Trust and shall not be affected by Lender's acquisition of any interest in the
Property, whether by foreclosure or otherwise.
Nuisance, Waste. Trustor shall not cause, conduct or permit any nuisance nor
commit, permit, or suffer any stripping of or waste on or to the Property or
any portion of the Property. Without limiting the generality of the
foregoing, Trustor will not remove, or grant to any other party the right to
remove, any timber, minerals (including oil and gas), soil, gravel or rock
products without the prior written consent of Lender.
<PAGE>
Removal of Improvements. Trustor shall not demolish or remove any
Improvements from the Real Property without the prior written consent of
Lender. As a condition to the removal of any Improvements, Lender may require
Trustor to make arrangements satisfactory to Lender to replace such
Improvements with Improvements of at least equal value.
Lender's Right to Enter. Lender and its agents and representatives may enter
upon the Real Property at all reasonable times to attend to Lender's interests
and to inspect the Property for purposes of Trustor's compliance with the
terms and conditions of this Deed of Trust.
Compliance with Governmental Requirements. Trustor shall promptly comply with
all laws, ordinances, and regulations, now or hereafter in effect, of all
governmental authorities applicable to the, use, or occupancy of the Property,
including without limitation, the Americans With Disabilities Act. Trustor
may contest in good faith any such law, ordinance, or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Trustor has notified Lender in writing prior to doing so and so long as, in
Lender's sole opinion, Lender's interests in the Property are not jeopardized.
Lender may require Trustor to post adequate security or a surety bond,
reasonably satisfactory to Lender, to protect Lender's interest.
Duty to Protect. Trustor agrees neither to abandon nor leave unattended the
Property. Trustor shall do all other acts, in addition to those acts set forth
above in this section, which from the character and use of the Property are
reasonably necessary to protect and preserve the Property.
DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, declare immediately
due and payable all sums secure by this Deed of Trust upon the sale or transfer,
without the Lender's prior written consent, of all or any part of the Real
Property, or any interest in the Real Property. A "sale or transfer" means the
conveyance of Real Property or any right, title or interest therein; whether
legal, beneficial or equitable; whether voluntary or involuntary; whether by
outright sale, deed, installment sale contract, land contract, contract for
deed, leasehold interest with a term greater than three (3) years, lease-option
contract, or by sale, assignment, or transfer of any beneficial interest in or
to any land trust holding title to the Real Property, or by any other method of
conveyance of Real Property interest. If any Trustor is a corporation,
partnership or limited liability company, transfer also includes any change in
ownership of more than twenty-five percent (25%) of the voting stock,
partnership interests or limited liability company interests, as the case may
be, of Trustor. However, this option shall not be exercised by Lender if such
exercise is prohibited by applicable law.
TAXES AND LIENS. The following provisions relating to the taxes and liens on
the Property are a part of this Deed of Trust.
Payment. Trustor shall pay when due (and in all events at least ten (10) days
prior to delinquency) all taxes, special taxes, assessments, charges
(including water and sewer), fines and impositions levied against or on
account of the Property, and shall pay when due all claims for work done on or
for services rendered or material furnished to the Property. Trustor shall
maintain the Property free of all liens having priority over or equal to the
interest of Lender under this Deed of Trust, except for the lien of taxes and
assessments not due and except as otherwise provided in this Deed of Trust.
Right To Contest. Trustor may withhold payment of any tax, assessment, or
claim in connection with a good faith dispute over the obligation to pay, so
long as Lender's interest in the Property is not jeopardized. If a lien
arises or is filed as a result of nonpayment, Trustor shall within fifteen
(15) days after the lien arises or, if a lien is filed, within fifteen (15)
days after Trustor has notice of the filing, secure the discharge of the lien,
or if requested by Lender, deposit with Lender cash or a sufficient corporate
surety bond or other security satisfactory to Lender in an amount sufficient
to discharge the lien plus any costs and attorneys' fees or other charges that
could accrue as a result of a foreclosure or sale under the lien. In any
contest, Trustor shall defend itself and Lender and shall satisfy any adverse
judgment before enforcement against the Property. Trustor shall name Lender
as an additional obligee under any surety bond furnished in the contest
proceedings.
Evidence of Payment. Trustor shall upon demand furnish to Lender satisfactory
evidence of payment of the taxes or assessments and shall authorize the
appropriate governmental official to deliver to Lender at any time a written
statement of the taxes and assessments against the Property.
Notice of Construction. Trustor shall notify Lender at least fifteen (15)
days before any work is commenced, any services are furnished, or any
materials are supplied to the Property, if any mechanic's lien, materialmen's
lien, or other lien could be asserted on account of the work, services, or
materials. Trustor will upon request of Lender furnish to Lender advance
assurances satisfactory to Lender that Trustor can and will pay the cost of
such improvements.
PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring the
Property are a part of this Deed of Trust.
Maintenance of Insurance. Trustor shall procure and maintain policies of fire
insurance with standard extended coverage endorsements on a replacement basis
for the full insurable value covering all Improvements on the Real Property in
an amount sufficient to avoid application of any coinsurance clause, and with
a standard mortgagee clause In favor of Lender. Trustor shall also procure
and maintain comprehensive general liability insurance in such coverage
amounts as Lender may request with Trustee and Lender being named as
additional insureds in such liability insurance policies. Additionally,
Trustor shall maintain such other insurance, including but not limited to
hazard, business interruption, and boiler insurance, as Lender may reasonably
require. Notwithstanding the foregoing, in no event shall Trustor be required
to provide hazard insurance in excess of the replacement value of the
improvements on the Real Property. Policies shall be written in form,
amounts, coverages and basis reasonably acceptable to Lender and issued by a
company or companies reasonably acceptable to Lender. Trustor, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Trustor or
any other person. Should the Real Property at any time become located in an
area designated by the Director of the Federal Emergency Management Agency as
a special flood hazard area, Trustor agrees to obtain and maintain Federal
Flood Insurance for the full unpaid principal balance of the loan, up to the
maximum policy limits set under the National Flood Insurance Program, or as
otherwise required by Lender, and to maintain such insurance for the term of
the loan.
<PAGE>
Application of Proceeds. Trustor shall promptly notify Lender of any loss or
damage to the Property. Lender may make proof of loss if Trustor fails to do
so within fifteen (15) days of the casualty. If in Lender's sole judgment
Lender's security interest in the Property has been impaired, Lender may, at
its election, receive and retain the proceeds of any insurance and apply the
proceeds to the reduction of the Indebtedness, payment of any lien affecting
the Property, or the restoration and repair of the Property. If the proceeds
are to be applied to restoration and repair, Trustor shall repair or replace
the damaged or destroyed Improvements in a manner satisfactory to Lender.
Lender shall, upon satisfactory proof of such expenditure, pay or reimburse
Trustor from the proceeds for the reasonable cost of repair or restoration if
Trustor is not in default under this Deed of Trust. Any proceeds which have
not been disbursed within 180 days after their receipt and which Lender has
not committed to the repair or restoration of the Property shall be used first
to pay any amount owing to Lender under this Deed of Trust, then to pay
accrued interest, and the remainder, if any, shall be applied to the principal
balance of the Indebtedness. If Lender holds any proceeds after payment in
full of the Indebtedness, such proceeds shall be paid to Trustor as Trustor's
interests may appear.
Unexpired Insurance at Sale. Any unexpired insurance shall inure to the
benefit of, and pass to, the purchaser of the Property covered by this Deed of
Trust at any trustee's sale or other sale held under the provisions of this
Deed of Trust, or at any foreclosure sale of such Property.
Trustor's Report on Insurance. Upon request of Lender, however not more than
once a year, Trustor shall furnish to Lender a report on each existing policy
of insurance showing: (a) the name of the insurer; (b) the risks insured; (c)
the amount of the policy; (d) the property insured, the then current
replacement value of such property, and the manner of determining that value;
and (e) the expiration date of the policy. Trustor shall, upon request of
Lender, have an independent appraiser satisfactory to Lender determine the
cash value replacement cost of the Property.
EXPENDITURES BY LENDER. If Trustor fails to comply with any provision of this
Deed of Trust, or if any action or proceeding is commenced that would materially
affect Lender's interests in the Property, Lender on Trustor's behalf may, but
shall not be required to, take any action that Lender
<PAGE>
furtherance of this right, Lender may require any tenant or other user of the
Property to make payments of rent or use fee's directly to Lender. If the
Rents are collected by Lender, then Trustor irrevocably designates Lender as
Trustor's attorney-in-fact to endorse Instruments received in payment thereof
in the name of Trustor and to negotiate the same and collect the proceeds.
Payments by tenants or other users to Lender in response to Lender's demand
shall satisfy the obligations for which the payments are made, whether or not
any proper grounds for the demand existed. Lender may exercise its rights
under this subparagraph either in person, by agent, or through a receiver.
Appoint Receiver. Lender shall have the right to have a receiver appointed to
take possession of all or any part of the property, with the power to protect
and preserve the Property, to operate the Property preceding foreclosure or
sale, and to collect the Rents from the Property and apply the proceeds, over
and above the cost of the receivership, against the Indebtedness. The
receiver may serve without bond if permitted by law. Lender's right to the
appointment of a receiver shall exist whether or not the apparent value of the
Property exceeds the Indebtedness by a substantial amount. Employment by
Lender shall not disqualify a person from serving as a receiver.
Tenancy at Sufferance. If Trustor remains in possession of the Property after
the Property is sold as provided above or Lender otherwise becomes entitled to
possession of the Property upon default of Trustor, Trustor shall become a
tenant at sufferance of Lender or the purchaser of the Property and shall, at
Lender's option, either (a) pay a reasonable rental for the use of the
Property, or (b) vacate the Property immediately upon the demand of Lender.
Other Remedies. Trustee or Lender shall have any other right or remedy
provided in this Deed of Trust or the Note or by law.
Notice of Sale. Lender shall give Trustor reasonable notice of the time and
place of any public sale of the Personal Property or of the time after which
any private sale or other intended disposition of the Personal Property is to
be made. Reasonable notice shall mean notice given at least five (5) days
before the time of the sale or disposition. Any sale of Personal Property may
be made in conjunction with any sale of the Real Property.
Sale of the Property. To the extent permitted by applicable law, Trustor
hereby waives any and all rights to have the Property marshalled. In
exercising its rights and remedies, the Trustee or Lender shall be free to
sell all or any part of the Property together or separately, in one sale or by
separate sales. Lender shall be entitled to bid at any public sale on all or
any portion of the Property.
Waiver; Election of Remedies. A waiver by any party of a breach of a
provision of this Deed of Trust shall not constitute a waiver of or prejudice
the party's rights otherwise to demand strict compliance with that provision
or any other provision. Election by Lender to pursue any remedy provided in
this Deed of Trust, the Note, in any Related Document, or provided by law
shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Trustor under this
Deed of Trust after failure of Trustor to perform shall not affect Lender's
right to declare a default and to exercise any of its remedies.
Attorneys' Fees; Expenses. If Lender institutes any suit or action to enforce
any of the terms of this Deed of Trust, Lender shall be entitled to recover
such sum as the court may adjudge reasonable as attorneys' fees at trial and
on any appeal. Whether or not any court action is involved, all reasonable
expenses incurred by Lender which in Lender's opinion are necessary at any
time for the protection of its interest or the enforcement of its rights shall
become a part of the Indebtedness payable on demand and shall bear interest at
the Note rate from the date of expenditure until repaid. Expenses covered by
this paragraph include, without limitation, however subject to any limits
under applicable law, Lender's attorneys' fees whether or not there is a
lawsuit, including attorneys' fees for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals and any
anticipated post-judgment collection services, the cost of searching records,
obtaining title reports (including foreclosure reports), surveyors' reports,
appraisal fees, title insurance, and fees for the Trustee, to the extent
permitted by applicable law. Trustor also will pay any court costs, in
addition to all other sums provided by law.
Rights of Trustee. Trustee shall have all of the rights and duties of Lender
as set forth in this section.
POWERS AND OBLIGATIONS OF TRUSTEE. The following provisions relating to the
powers and obligations of Trustee are part of this Deed of Trust.
Powers of Trustee. In addition to all powers of Trustee arising as a matter
of law, Trustee shall have the power to take the following actions with
respect to the Property upon the written request of Lender and Trustor: (a)
join in preparing and filing a map or plat of the Real Property, including the
dedication of streets or other rights to the public; (b) join in granting any
easement or creating any restriction on the Real Property; and (c) join in any
subordination or other agreement affecting this Deed of Trust or the interest
of Lender under this Deed of Trust.
Obligations to Notify. Trustee shall not be obligated to notify any other
party of a pending sale under any other trust deed or lien, or of any action
or proceeding in which Trustor, Lender, or Trustee shall be a party, unless
the action or proceeding is brought by Trustee.
Trustee. Trustee shall meet all qualifications required for Trustee under
applicable law. In addition to the rights and remedies set forth above, with
respect to all or any part of the Property, the Trustee shall have the right
to foreclose by notice and sale, and Lender shall have the right to foreclose
by judicial foreclosure, in either case in accordance with and to the full
extent provided by applicable law.
Successor Trustee. Lender, at Lender's option, may from time to time appoint
a successor Trustee to any Trustee appointed hereunder by an instrument
executed and acknowledged by Lender and recorded in the office of the recorder
of Orange County, California. The instrument shall contain, in addition to
all other matters required by state law, the names of the original Lender,
Trustee, and Trustor, the book and page where this Deed of Trust is recorded,
and the name and address of the successor trustee, and the instrument shall be
executed and acknowledged by Lender or its successors in interest. The
successor trustee, without conveyance of the Property, shall succeed to all
the title, power, and duties conferred upon the Trustee in this Deed of Trust
and by applicable law. This procedure for substitution of trustee shall
govern to the exclusion of all other provisions for substitution.
<PAGE>
NOTICES TO TRUSTOR AND OTHER PARTIES. Any notice under this Deed of Trust shall
be in writing, may be sent by telefacsimile (unless otherwise required by law),
and shall be effective when actually delivered, or when deposited with a
nationally recognized overnight courier, or, if mailed, shall be deemed
effective when deposited in the United States mail first class, certified or
registered mail, postage prepaid, directed to the addresses shown near the
beginning of this Deed of Trust. Any party may change its address for notices
under this Deed of Trust by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address. All
copies of notices of foreclosure from the holder of any lien which has priority
over this Deed of Trust shall be sent to Lender's address, as shown near the
beginning of this Deed of Trust. For notice purposes, Trustor agrees to keep
Lender and Trustee informed at all times of Trustor's current address. Each
Trustor requests that copies of any notices of default and sale be directed to
Trustor's address shown near the beginning of this Deed of Trust.
STATEMENT OF OBLIGATION. Lender may collect a fee, in an amount not to exceed
the statutory maximum, for furnishing the statement of obligation as provided by
Section 2943 of the Civil Code of California.
ADDITIONAL PROVISIONS REGARDING SBA LOAN. SEE EXHIBIT "B" ATTACHED HERETO AND
MADE A PART HEREOF.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Deed of Trust:
Amendments. This Dead of Trust, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth In this Deed of Trust. No alteration of or amendment to
this Deed of Trust shall be effective unless given In writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Annual Reports. If the Property is used for purposes other than Trustors
residence, Trustor shall furnish to Lender, upon request, a certified
statement of net operating Income received from the Property during Trustor's
previous fiscal year In such form and detail as Lender shall require. "Net
operating Income" shall mean all cash receipts from the Property less all cash
expenditures made In connection with the operation of the Property.
Acceptance by Trustee. Trustee accepts this Trust when this Deed of Trust,
duly executed and acknowledged, is made a public record as provided by law.
Applicable Law. This Deed of Trust has been delivered to Lender and accepted
by Lender In the State of California. This Deed of Trust shall be governed by
and construed In accordance with the laws of the State of California.
Caption Headings. Caption headings in this Deed of Trust are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Deed of Trust.
Merger. There shall be no merger of the interest or estate created by this
Deed of Trust with any other Interest or estate in the Property at any time
held by or for the benefit of Lender in any capacity, without the written
consent of Lender.
Multiple Parties; Corporate Authority. All obligations of Trustor under this
Deed of Trust shall be joint and several, and all references to Trustor shall
mean each and every Trustor. This means that each of the persons signing
below Is responsible for all obligations in this Deed of Trust.
Severablilty. If a court of competent jurisdiction finds any provision of
this Deed of Trust to be Invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision Invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Deed of Trust
in all other respects shall remain valid and enforceable.
Successors and Assigns. Subject to the limitations stated in this Deed of
Trust on transfer of Trustor's interest, this Deed of Trust shall be binding
upon and inure to the benefit of the parties, their successors and assigns.
If ownership of the Property becomes vested in a person other than Trustor,
Lender, without notice to Trustor, may deal with Trustor's successors with
reference to this Deed of Trust and the Indebtedness by way of forbearance or
extension without releasing Trustor from the obligations of this Deed of Trust
or liability under the Indebtedness.
Time Is of the Essence. Time is of the essence in the performance of this
Deed of Trust.
Waivers and Consents. Lender shall not be deemed to have waived any rights
under this Deed of Trust (or under the Related Documents) unless such waiver
is in writing and signed by Lender. No delay or omission on the part of
Lender in exercising any right shall operate as a waiver of such right or any
other right. A waiver by any party of a provision of this Deed of Trust shall
not constitute a waiver of or prejudice the party's right otherwise to demand
strict compliance with that provision or any other provision. No prior waiver
by Lender, nor any course of dealing between Lender and Trustor, shall
constitute a waiver of any of Lender's rights or any of Trustor's obligations
as to any future transactions. Whenever consent by Lender is required in this
Deed of Trust, the granting of such consent by Lender in any instance shall
not constitute continuing consent to subsequent instances where such consent
is required.
EACH TRUSTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS DEED OF TRUST,
AND EACH TRUSTOR AGREES TO ITS TERMS, INCLUDING THE VARIABLE RATE PROVISIONS OF
THE NOTE SECURED BY THIS DEED OF TRUST.
TRUSTOR:
Buy.Com Inc.
By:______________________________ By:______________________________
Scott A . Blum, President Murray Williams, Secretary
<PAGE>
CERTIFICATE OF ACKNOWLEDGMENT
STATE OF )
)SS
COUNTY OF )
On __________________ before me, ___________ personally appeared Scott A. Blum
and Murray Williams, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within Instrument and acknowledged to me that he/she/they executed the same
In his/her/their authorized signature(s) on the Instrument the person(s) or the
entity upon behalf of which the person(s) acted, executed the Instrument.
WITNESS my hand and official seal.
Signature ___________________________________________ (Seal)
- -------------------------------------------------------------------------------
(DO NOT RECORD)
REQUEST FOR FULL RECONVEYANCE
(To be used only when obligations have been paid in full)
To:_______________________ Trustee
The undersigned Is the legal owner and holder of all Indebtedness secured by
this Deed of Trust. All sums secured by this Deed of Trust have been fully paid
and satisfied. You are hereby directed, upon payment to you of any sums owing
to you under the terms of this Deed of Trust or pursuant to any applicable
statute, to cancel the Note secured by this Deed of Trust (which is delivered to
you together with this Deed of Trust), and to reconvey, without warranty, to the
parties designated by the terms of this Deed of Trust, the estate now held by
you under this Deed of Trust. Please mail the reconveyance and Related
Documents to:
_____________________________________________________
Date:____________________________________ Beneficiary:_____________________
By:_________________________
Its:________________________
<PAGE>
EXHIBIT A
ALL THAT CERTAIN LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE, AND
IS DESCRIBED AS FOLLOWS:
PARCEL 5 OF PARCEL MAP NO. 93-134 AS SHOWN ON A MAP FILED IN BOOK 300 PAGES 11
TO 13 OF PARCEL MAPS, RECORDS OF ORANGE COUNTY, CALIFORNIA.
EXCEPTING THEREFROM, ONE HUNDRED PERCENT (100%) OF ALL RIGHTS TO OIL, GAS AND
OTHER HYDROCARBON AND MINERAL SUBSTANCES LYING UNDER OR THAT MAY BE PRODUCED
FROM THE ABOVE DESCRIBED LAND, TOGETHER WITH ONE HUNDRED PERCENT (100%) OF ALL
RIGHTS TO THE PROCEEDS THEREFROM AND ONE HUNDRED PERCENT (100%) OF ALL RENTS,
BONUSES AND PROFITS ACCRUING THEREFROM; WITHOUT HOWEVER, ANY RIGHTS INCLUDING
RIGHTS OF ENTRY IN OR WITH RESPECT TO ANY PORTION OF THE SURFACE OR SUBSURFACE
TO A VERTICAL DEPTH OF 500 FEET FROM THE SURFACE AS THE SAME MAY FROM TIME TO
TIME EXIST, AS RESERVED BY DEEPS FROM LLOYDS BANK CALIFORNIA, FORMERLY FIRST
WESTERN BANK AND TRUST COMPANY, A CORPORATION, SUCCESSOR TO FIRST NATIONAL BANK
IN SANTA ANA, A CORPORATION, AND IVAR O. HANSON AND LOUISE M. HANSON, WHO
ACQUIRED TITLE AS LOUISE M. WINEMAN, HUSBAND AND WIFE, RECORDED SEPTEMBER 30,
1976 IN BOOK 11908, PAGE 527 AND OTHERS, OF OFFICIAL RECORDS.
ALSO EXCEPTING THEREFROM ALL PREVIOUSLY UNRESERVED MINERALS, OIL, GAS,
PETROLEUM, OTHER HYDROCARBON SUBSTANCES AND ALL UNDERGROUND WATER IN OR UNDER
WHICH MAY BE PRODUCED FROM SAID PROPERTY WHICH UNDERLIES A PLANE PARALLEL TO AND
FIVE HUNDRED FEET (500') BELOW THE PRESENT SURFACE OF SAID PROPERTY FOR THE
PURPOSE OF PROSPECTING FOR, THE EXPLORATION, DEVELOPMENT, PRODUCTIONS,
EXTRACTION AND TAKING OF SAID MINERALS, OIL, GAS, PETROLEUM, OTHER HYDROCARBON
SUBSTANCES AND WATER FROM SAID PROPERTY BUT WITHOUT THE RIGHT TO ENTER UPON THE
SURFACE OR ANY PORTION THEREOF ABOVE SAID PLAN PARALLEL TO AND FIVE HUNDRED
(500') BELOW THE PRESENT SURFACE OF THE SAID PROPERTY FOR ANY PURPOSE WHATSOEVER
AS RESERVED BY MISSION VIEJO COMPANY, A CALIFORNIA CORPORATION, IN A DEED
RECORDED FEBRUARY 25, 1997 AS INSTRUMENT NO. 19970084551 OF OFFICIAL RECORDS OF
ORANGE COUNTY, CALIFORNIA.
EXCEPTING THEREFROM ALL WATER RIGHTS, CLAIMS OR TITLE TO WATER, WHETHER OR NOT
SHOWN BY THE PUBLIC RECORDS.
<PAGE>
EXHIBIT "B"
The Loan secured by this lien was made under a United States Small Business
Administration (SBA) nationwide program which uses tax dollars to assist small
business owners. If the United States is seeking to enforce this document, then
under SBA regulations:
a) When SBA is the holder of the Note, this document and all documents
evidencing or securing this Loan will be construed in accordance with federal
law.
b) Lender or SBA may use local or state procedures for purposes such as filing
papers, recording documents, giving notice, foreclosing liens, and other
purposes. By using these procedures, SBA does not waive any federal immunity
from local or state control, penalty, tax or liability. No Borrower or
Guarantor may claim or assert against SBA any local or state law to deny any
obligation of Borrower, or defeat any claim of SBA with respect to this
Loan.
Any clause in this document requiring arbitration is not enforceable when SBA is
the holder of the Note secured by this instrument.
Buy.Com Inc.
By:____________________________________________
Scott A. Blum, President
By:____________________________________________
Murray Williams, Secretary
Date: December 23, 1998
<PAGE>
EXHIBIT 10.15
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT ("Agreement") is made December 23, 1998, between the
Borrower and Lender identified in the attached Authorization issued by the U.S.
Small Business Administration ("SBA") to Lender, dated December 15, 1998
("Authorization").
SBA has authorized a guaranty of a loan from Lender to Borrower for the
amount and under the terms stated in the attached Authorization (the "Loan").
In consideration of the promises in this Agreement and for other good and
valuable consideration, Borrower and Lender agree as follows:
1. Subject to the terms and conditions of the Authorization and SBA's
Participating Lender Rules as defined in the Guarantee Agreement
between Lender and SBA, Lender agrees to make the Loan if Borrower
complies with the following "Borrower Requirements." Borrower must:
a. Provide Lender with all certifications, documents or other
information Lender is required by the Authorization to obtain
from Borrower or any third party;
b. Execute a note and any other documents required by Lender; and
c. Do everything necessary for Lender to comply with the terms and
conditions of the Authorization.
2. The terms and conditions of this Agreement:
a. Are binding on Borrower and Lender and their successors and
assigns; and
b. Will remain in effect after the closing of the Loan.
3. Failure to abide by any of the Borrower Requirements will constitute
an event of default under the note and other loan documents.
Borrower: Buy Com Inc.
By:_________________________________
Scott A. Blum, President
By:_________________________________
Murray Williams, Secretary
Dated: December 23, 1998
Lender: Bank of Yorba Linda, a division of BYL Bank Group
By:______________________________________________________
Cynthia J. Gutierrez, Assistant Vice President
Dated: December 29, 1998
<PAGE>
Borrower's Certification
In order to induce Bank of Yorba Linda, a division of BYL Bank Group, ("Lender")
to make a U. S. Small Business Administration ("SBA") guaranteed Loan ("Loan")
to Buy.Com Inc. ("Borrower"), Borrower certifies:
_____a. Adverse Change - That there has been no adverse change in Borrower's
financial condition, organization, operations or fixed assets since
the date the Loan application was signed.
_____b. Child Support - That no principal who owns at least 50% of the voting
interest of the company is delinquent more than 60 days under the
terms of any (a) administrative order, (b) court order, or (c)
repayment agreement requiring payment of child support.
_____c. Current Taxes - That Borrower (and Operating Company) are current on
all federal, state, and local taxes, including but not limited to
income taxes, payroll taxes, real estate taxes, and sales taxes.
_____d. Environmental - That
1) At the time Borrower submitted the Loan application, Borrower was
in compliance with all local, state, and federal environmental
laws and regulations pertaining to environmental contamination;
2) Borrower has, and will continue to comply with these laws and
regulations;
3) Borrower has no knowledge of any environmental contamination of
any real or personal property pledged as collateral for the Loan
which violates any such laws and regulations, (other than what
was disclosed in connection with the Environmental Investigation
of the property);
4) Borrower assumes full responsibility for all costs incurred in
any clean-up of environmental contamination and agrees to
indemnify Lender and SBA against payment of any such costs
(Lender or SBA may require Borrower to execute a separate
indemnification agreement);
5) Until full repayment of Loan, Borrower will promptly notify
Lender and SBA if it knows, suspects or believes there may be any
environmental contamination in or around the real property
securing the Loan, or if Borrower and/or such property are
subject to any investigation or enforcement action by any
Governmental agency pertaining to any environmental contamination
of the property.
e. That Borrower (and Operating Company) will:
______1) Reimbursable Expenses- Reimburse Lender for expenses
incurred in the making and administration of the Loan.
______2) Books, Records, and Reports-
(a) Keep proper books of account in a manner satisfactory
to Lender;
(b) Furnish year-end statements to Lender within 120 days
of fiscal year end;
(c) Furnish additional financial statements or reports
whenever Lender requests them;
(d) Allow Lender or SBA to:
(1) Inspect and audit books, records and papers
relating to Borrower's financial or business
condition; and
(2) Inspect and appraise any of Borrower's assets; and
(3) Allow all government authorities to furnish
reports of examinations, or any records pertaining
to Borrower, upon request by Lender or SBA.
______3) Equal Opportunity - Post SBA Form 722, Equal Opportunity
Poster, where it is clearly visible to employees, applicants
for employment and the general public, and comply with SBA
Form 793, Notice to New SBA Borrowers.
______4) American-made Products - To the extent feasible, purchase
only American-made equipment and products with the proceeds
of the Loan.
______5) Taxes - Pay all federal, state, and local taxes, including
income, payroll, real estate and sales taxes of the business
when they come due.
______6) Occupancy - Occupy at least 51% of the square footage of
rentable property at all times during the term of the Loan.
Borrower certifies that it will not use Loan proceeds to
improve or renovate any of the space leased to third
parties.
<PAGE>
f. That Borrower (and Operating Company) will not, without Lender's prior
written consent:
_____1) Distributions- Make any distribution of company assets that will
adversely affect the financial condition of the Borrower (and/or
Operating Company).
_____2) Ownership Changes - Change the ownership structure or interests
in the business during the term of the Loan.
_____3) Transfer of Assets - Sell, lease, pledge, encumber (except by
purchase money liens on property acquired after the date of the
Note), or otherwise dispose of any of Borrower's property or
assets, except in the ordinary course of business.
Buy.Com Inc. 12/23/98
- ----------------------
(Borrower) Date
By: _______________________________
Scott A. Blum, President
By: _______________________________
Murray Williams, Secretary
<PAGE>
U.S. Small Business Administration U.S. Small Business Administration
SBA Authorization
(SBA Guaranteed Loan)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SBA Loan # PLP 260-805-4007
- --------------------------------------------------------------------------------
SBA Loan Name Buy.Com, Inc.
- --------------------------------------------------------------------------------
Approval Date 12/15/98
- --------------------------------------------------------------------------------
Lender: U. S. Small Business Administration (SBA):
Bank of Yorba Linda, Santa Ana District Office
a division of BYL Bank Group 200 West Santa Ana Boulevard - Suite 700
26137 La Paz Road, Suite 102 Santa Ana, CA 92701
Mission Viejo, CA 92691
SBA approves, under Section 7(a) of the Small Business Act as amended, Lender's
application,
received 12/14/98, for SBA to guarantee 64.9% of a loan ("Loan") in the amount
of $1,155,500.00 to assist:
Borrower:
1. Buy.Com Inc.
21 Brookline
Aliso Viejo, CA 92656
A. THE GUARANTEE FEE IS $25,934.38. Lender must pay the guarantee fee within
90 days of the date of this Authorization or immediately after initial
disbursement, whichever comes first. The 90-day deadline may not be
extended. Lender must send the guarantee fee to the Small Business
Administration, Denver, CO 80259-0001. Lender may collect this fee from
Borrower after initial disbursement of Loan. Borrower may use Loan proceeds
to pay the fee. No part of the guarantee fee is refundable if Lender has
made any disbursement.
B. ONGOING SERVICING FEE - Lender agrees to pay an ongoing fee equal to one-
half of one percent per year of the guaranteed portion of the outstanding
balance. Lender may not charge this fee to Borrower.
C. IT IS LENDER'S SOLE RESPONSIBILITY TO:
1. Close the Loan in accordance with the terms and conditions of this
Authorization.
2. Obtain valid and enforceable Loan documents, including obtaining the
signature or written consent of any obligor's spouse if such consent
or signature is necessary to bind the marital community or create a
valid lien on marital property.
3. Retain all Loan closing documents. Lender must submit these documents,
along with other required documents, to SBA for review if Lender
requests SBA to honor its guarantee on the Loan, or at any time SBA
requests the documents for review.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 1
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
D. REQUIRED FORMS
1. Lender may use its own forms except as otherwise instructed in this
Authorization. Lender must use the following SBA forms for the Loan:
SBA Form 147, Note
SBA Form 1050, Settlement Sheet, for each disbursement
SBA Form 159, Compensation Agreement, for each representative
SBA Form 2004, Lender's Certification
SBA Form 722, Equal Opportunity Poster
SBA Form 793, Notice to New Borrowers
SBA Form 148, Guarantee
SBA Form 148, Limited Guarantee (use 148L if available)
2. Lender may use computer-generated versions of mandatory SBA Forms, as
long as these versions are exact reproductions.
3. Lenders must submit completed SBA Forms 159 and 2004 for non-PLP loans
to the SBA immediately after final disbursement.
E. CONTINGENCIES - SBA issues this Authorization in reliance on
representations in the Loan application, including supporting documents.
The guarantee is contingent upon Lender:
1. Complying with the current SBA Standard Operating Procedures (SOP) and
SBA Loan Guarantee Agreement (SBA Form 750, dated 01/26/82), and any
supplemental agreements, between Lender and SBA;
2. Making initial disbursement of the Loan no later than 6 months, and
completing disbursement no later than 12 months, from the date of this
Authorization, unless SBA extends the time in writing;
3. Having no evidence since the date of the Loan application, or any
preceding disbursement, of any unremedied adverse change in the
financial condition, organization, operations, or fixed assets of
Borrower which would warrant withholding or not making any further
disbursement, and;
4. Satisfying all of the conditions in this Authorization.
F. NOTE TERMS:
1. Maturity: This Note will mature in 25 year(s) from date of initial
disbursement.
2. Repayment Terms: Lender must insert onto SBA Note, Form 147, to be
executed by Borrower, the following repayment terms, without
modification. Lender must complete all blank terms on the Note at time
of closing:
The interest rate on this Note will fluctuate. The initial interest
rate is 8.75% per year. This initial rate is the prime rate on the
date SBA received the loan application, plus 1.%.
Borrower must pay principal and interest payments of $9,500.00
every month, beginning one month from the month of initial
disbursement on this Note; payments must be made on the first
calendar day in the months they are due.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 2
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
Lender will apply each installment payment first to pay interest
accrued to the day Lender receives the payment, then to bring
principal current, then to pay any late fees, and will apply any
remaining balance to reduce principal.
Lender may adjust the interest rate for the first time no earlier
than the first calendar day of the first month after initial
disbursement. The interest rate will then be adjusted each
calendar quarter (the "change period").
The "Prime Rate" is the prime rate published in the Wall Street
-----------
Journal, in effect on the first business day of the month in
-------
which a change occurs.
The adjusted interest rate will be 1.% above the Prime Rate.
Lender will adjust the interest rate on the first calendar day of
each change period. The change in interest rate is effective on
that day whether or not Lender gives Borrower notice of the
change.
Lender must adjust the payment amount at least annually as needed
to amortize principal over the remaining term of the note.
If SBA purchases the guaranteed portion of the unpaid principal
balance, the interest rate becomes fixed at the rate in effect at
the time of the earliest uncured payment default. If there is no
uncured payment default, the rate becomes fixed at the rate in
effect at the time of purchase.
All remaining principal and accrued interest is due and payable
25 year(s) from date of initial disbursement.
Borrower agrees that if default occurs on this Note or on any
other outstanding SBA or SBA-guaranteed loan, Lender has the
option to make this Note and such other loans immediately due and
payable.
Late Charge: If a payment on this Note is more than 10 days late,
Lender may charge Borrower a late fee of up to 5% of the unpaid
portion of the regularly scheduled payment.
3. Lender must include in the Note the following language for residential
property located in California:
"Borrower acknowledges this Note is secured by a Deed of Trust in
favor of Lender on real property located in _____________________
County, State of California. That Deed of Trust contains the
following due-on-sale provision:..." (Lender must add to the Note
the due on sale clause exactly as it appears in the Deed of
Trust.)
G. USE OF PROCEEDS
1. $1,125,374.00 to purchase land and improvements located at 21
Brookline, Aliso Viejo, CA 92656.
2. $30,126.00 for closing costs.
All amounts listed above are approximate. Lender may not disburse Loan
proceeds solely to pay the guarantee fee. Lender may disburse to Borrower,
as working capital only, funds not spent for the listed purposes as long as
these funds do not exceed 10% of the specific purpose authorized or
$10,000.00, whichever is less. An Eligible Passive Company may not receive
working capital funds.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 3
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
Lender must complete SBA Form 1050, Settlement Sheet, for each disbursement
and retain these forms in its Loan file. Lender must document that Borrower
used the loan proceeds for the purposes stated in this Authorization.
H. COLLATERAL CONDITIONS
Lender must obtain a lien on 100% of the interests in the following
collateral and properly perfect all lien positions:
1. First Deed of Trust (including due on sale clause and assignment of
rents) on land and improvements located at 21 Brookline, Aliso Viejo,
CA. This property is commercial.
a. Subject to no other liens.
b. Evidence of title and priority of lien must be based upon:
(1) ALTA Loan Policy, insuring lender and assigns, in the amount
of $1,155,500.00, with 100 and 116 endorsements.
2. Guarantee on SBA Form 148, by Scott A. Blum, resident in California.
3. Limited Guarantee on SBA Form 148 (use 148L if available), by Scott A.
Blum Trustee of the Scott A. Blum Separate Property Trust dated August
2, 1995, resident in California.
COLLATERAL/RECOURSE LIMITATION: The guarantee is limited to the amount
Lender obtains from the following collateral pledged by Guarantor:
$349,500.00.
Secured by
a. First Deed of Trust (including due on sale clause and assignment
of rents) on land and improvements located at 27 Brookline, Aliso
Viejo, CA. This property is commercial.
(1) Subject to no other liens.
(2) Evidence of title and priority of lien must be based upon
(a) ALTA Loan Policy, insuring lender and assigns, in the
amount of $349,500.00, with 100 and 116 endorsements.
The following language must appear in all lien instruments including
Mortgages, Deeds of Trust, and Security Agreements:
"The Loan secured by this lien was made under a United
States Small Business Administration (SBA) nationwide
program which uses tax dollars to assist small business
owners. If the United States is seeking to enforce this
document, then under SBA regulations:
a) When SBA is the holder of the Note, this document and
all documents evidencing or securing this Loan will be
construed in accordance with federal law.
b) Lender or SBA may use local or state procedures for
purposes such as filing papers, recording documents,
giving notice, foreclosing liens, and other purposes.
By using these procedures, SBA does not waive any
federal immunity from local or state control, penalty,
tax or liability. No Borrower or Guarantor may claim or
assert against SBA any local or state law to deny any
obligation of Borrower, or defeat any claim of SBA with
respect to this Loan.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 4
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
Any clause in this document requiring arbitration is
not enforceable when SBA is the holder of the Note
secured. by. this instrument."
California Mandatory Provision - The following language must appear in all
guarantees if any borrower or any real estate is located in California:
"Guarantor waives its rights of subrogation, reimbursement,
indemnification, and contribution nd any other rights and defenses
that are or may become available to the guarantor by reason of
California Civil Code Sections 2787 to 2855, inclusive.
Guarantor waives all rights and defenses that the guarantor may have
because the debtor's debt is secured by real property. This means,
among other things:
1. The creditor may collect from the guarantor without first
foreclosing on the real or personal property collateral pledged
by the debtor.
2. If the creditor forecloses on any real property collateral
pledged by the debtor:
a) The amount of the debt may be reduced by only the price for
which that collateral is sold at the foreclosure sale, even
if the collateral is worth more than the sale price.
b) The creditor may collect from the guarantor even if the
creditor, foreclosing on the real property collateral, has
destroyed any right the guarantor may have to collect from
the debtor.
This is an unconditional and irrevocable waiver of any rights and
defenses the guarantor may have because the debtor's debt is secured
by real property. These rights and defenses include, but are not
limited to, any rights or defenses based upon Section 580a, 580b,
580d, or 726 of the Code of Civil Procedure.
Guarantor waives all rights and defenses arising out of an election of
remedies by the creditor, even though that election of remedies, such
as nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the guarantor's rights of subrogation and
reimbursement against the principal by operation of Section 580d of
the Code of Civil Procedure or otherwise."
If Guarantee is secured by Deed of Trust on residential property in
California, Lender must also include in the guarantee the following
language:
"Guarantor acknowledges that this Guarantee is secured by a Deed of
Trust in favor of Lender on real property located in _________________
County, California. That Deed of Trust contains the .following due-on-
sale provision:... " (Lender must add to the Guarantee the due on sale
clause exactly as it appears in the Deed of Trust.)
I. ADDITIONAL CONDITIONS
1. Insurance Requirements
Prior to disbursement, Lender must require Borrower to obtain the
following insurance coverage and maintain this coverage for the life
of Loan:
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 5
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
a. Flood Insurance. If FEMA Form 81-93 reveals that any portion of
the collateral is located in a special flood hazard zone, Federal
flood insurance or other appropriate special hazard insurance in
amounts equal to the lesser of tile insurable value of the
property or the maximum limit of coverage available is required.
(Borrower will be ineligible for any future SBA disaster
assistance or business loan assistance if Borrower does not
maintain flood insurance for the entire term of the Loan.)
b. Real Estate Hazard Insurance coverage on all real estate that is
collateral for the Loan in the amount of the full replacement
cost. If full replacement cost insurance is not available,
coverage should be for maximum insurable value. This policy must
contain a MORTGAGEE CLAUSE (or substantial equivalent) in favor
----------------
of Lender. This clause must provide that any act or neglect of
the mortgagor or owner of the insured property will not
invalidate the interest of Lender. The policy or endorsements
must provide for at least 10 days prior written notice to Lender
of policy cancellation.
2. Environmental Requirements
a. Lender may not disburse the Loan until it has:
(1) completed the review for potential environmental
contamination required in SOP 50 10(4) ("Environmental
Investigation") on each commercial real property site that
is:
(a) acquired or improved with proceeds from Loan, or
(b) taken as collateral if the site represents over 50% of
the value of all collateral securing the Loan; and
(2) sufficiently minimized the risk from any adverse
environmental findings discovered in the Environmental
Investigation, or otherwise, as required by SOP 50 10(4),
Subpart A, Chapter 5 (Environmental Conditions).
b. Lender should consult with the local SBA office where the real
property collateral is located to ascertain any state or local
environmental requirements.
3. Borrower, Guarantor and Operating Company Documents
a. Prior to closing, Lender must obtain from Borrower, Guarantor and
Operating Company a current copy of each of the following as
appropriate:
(1) Corporate Documents - Articles or Certificate of
Incorporation (with amendments), any By-laws, Certificate of
Good Standing (or equivalent), Corporate Borrowing
Resolution, and, if a foreign corporation, current authority
to do business within this state.
(2) Limited Liability Company (LLQ Documents - Articles of
Organization (with amendments), Fact Statement or
Certificate of Existence, Operating Agreement, Borrowing
Resolution, and evidence of any state-required registration.
(3) General Partnership Documents - Partnership Agreement,
Certificate as to Partners, and Certificate of Partnership
or Good Standing (or equivalent), as applicable.
(4) Limited Partnership Documents - Partnership Agreement,
Certificate as to Partners, and Certificate of Partnership
or Good Standing (or equivalent), as applicable, Certificate
of Limited Partnership, and evidence of registration with
the appropriate state authority.
(5) Limited Liability Partnership (LLP) Documents - Partnership
Agreement, Certificate as to Partners, Certificate of
Partnership or Good Standing (or equivalent) as applicable,
and evidence of registration with the appropriate state
authority.
(6) Trustee Certification - A Certificate from the trustee
warranting that:
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 6
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
(a) The trust will not be revoked or substantially amended
for the term of the Loan without the consent of SBA;
(b) The trustee has authority to act;
(c) The trust has the authority to borrow funds, guarantee
loans, and pledge trust assets;
(d) If the trust is an Eligible Passive Company, the
trustee has authority to lease the property to the
Operating Company;
(e) There is nothing in the trust agreement that would
prevent Lender from realizing on any security interest
in trust assets;
(f) The trustee has provided accurate, pertinent language
from the trust agreement confirming the above; and
(g) The trustee has provided and will continue to provide
SBA with a true and complete list of all trustors and
donors.
4. Operating Information
Prior to any disbursement of Loan proceeds, Lender must obtain:
a. Verification of Financial Information - Lender must submit IRS
Form 4506 to the Internal Revenue Service to obtain federal
income tax information on Borrower for the last three (3) years
(unless Borrower is a startup business). If the business has been
operating for less than 3 years Lender must obtain the
information for all years in operation. This requirement does not
include tax information for the most recent fiscal year if the
fiscal year-end is within 6 months of the application date.
Lender must compare the tax data received from the IRS with the
financial data or tax returns submitted with the Loan
application, and relied upon in approving the loan. Borrower must
resolve any significant differences to the satisfaction of Lender
and SBA before Lender disburses Loan proceeds.
b. Trade Name - Evidence Borrower has complied with state
requirements for registration of Borrower's trade name (or
fictitious name).
c. Authority to Conduct Business - Evidence that the Borrower has an
Employer Identification Number and all insurance, licenses,
permits and other approvals necessary to lawfully operate the
business.
d. Flood Hazard Determination - A completed Standard Flood Hazard
Determination (FEMA Form 81-93).
5. Injection
Lender must obtain evidence that prior to disbursement:
a. Cash Injection - At least $128,416.00 cash has been injected into
tile business as equity capital. This cash is for purchase of
commercial property in Aliso Viejo, California and closing costs.
6. Certifications and Agreements
Lender must require Borrower to certify:
a. Child Support - That no principal who owns at least 50% of the
voting interest of tile company is delinquent more than 60 days
under the terms of any (1) administrative order, (2) court order,
or (3) repayment agreement requiring payment of child support.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 7
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
b. Current Taxes - Borrower is current on all federal, state, and
local taxes, including but not limited to income taxes, payroll
taxes, real estate taxes, and sales taxes.
c. Environmental - For real estate located at 21 Brookline, Aliso
Viejo, California, Borrower must warrant that:
(1) At the time Borrower submitted the Loan application,
Borrower was in compliance with all local, state, and
federal environmental laws and regulations pertaining to
environmental contamination;
(2) Borrower has and will continue to comply with these laws and
regulations;
(3) Borrower has no knowledge of any environmental contamination
of any real or personal property pledged as collateral for
the Loan which violates any such laws and regulations (other
than what was disclosed in connection with the Environmental
Investigation of the property);
(4) Borrower assumes full responsibility for all costs incurred
in any clean-up of environmental contamination and agrees to
indemnify Lender and SBA against payment of any such costs
(Lender or SBA may require Borrower to execute a separate
indemnification agreement);
(5) Until full repayment of Loan, Borrower will promptly notify
Lender and SBA if it knows, suspects or believes there may
be any environmental contamination in or around the real
property securing the Loan, or if Borrower or such property
are subject to any investigation or enforcement action by
any Governmental agency pertaining to any environmental
contamination of the property.
d. That Borrower will:
(1) Reimbursable Expenses - Reimburse Lender for expenses
incurred in the making and administration of the Loan.
(2) Books, Records, and Reports -
(a) Keep proper books of account a manner satisfactory to
Lender;
(b) Furnish year-end statements to Lender within 120 days
of fiscal year end;
(c) Furnish additional financial statements or reports
whenever Lender requests them;
(d) Allow Lender or SBA, at Borrower's expense, to:
[1] Inspect and audit books, records and papers
relating to Borrower's financial or business
condition; and
[2] Inspect and appraise any of Borrower's assets; and
[3] Allow all government authorities to furnish
reports of examinations, or any records pertaining
to Borrower, upon request by Lender or SBA.
(3) Equal Opportunity - Post SBA Form 722, Equal Opportunity
Poster, where it is clearly visible to employees, applicants
for employment and the general public, and comply with the
requirements of SBA Form 793, Notice to New SBA Borrowers.
(4) American-made Products - To the extent feasible, purchase
only American-made equipment and products with the proceeds
of the Loan.
(5) Taxes - Pay all federal, state, and local taxes, including
income, payroll, real estate and sales taxes of the business
when they come due.
(6) Occupancy - Occupy, at all times during the term of the
Loan, at least 51% of the total square footage and 100% of
the renovated square footage of rentable property. Borrower
certifies that it will not use Loan proceeds to improve or
renovate any of the space leased to third parties.
e. That Borrower will not, without Lender's prior written consent:
(1) Distributions - Make any distribution of company assets that
will adversely affect the financial condition of Borrower.
(2) Ownership Changes - Change the ownership structure or
interests in the business during the term of the Loan.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 8
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
(3) Transfer of Assets - Sell, lease, pledge, encumber (except
by purchase money liens on property acquired after the date
of the Note), or otherwise dispose of any of Borrower's
property or assets, except in the ordinary course of
business.
ADMINISTRATOR
SMALL BUSINESS ADMINISTRATION
12/15/98
- --------------------------------------------------------------------------------
By: David H. Scherer, Executive Vice President, Date
a Preferred Lender, as an Agent of and on Behalf of the SBA for the purpose
of executing this Authorization.
_______________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 9
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
ACKNOWLEDGMENT BY BORROWER
- --------------------------
Borrower acknowledges that:
1. Borrower has received a copy of this Authorization and SBA Form 793, Notice
to New SBA Borrower, from Lender.
2. SBA requires the above conditions to guarantee Loan.
3. This Authorization is not a commitment by Lender to make a loan to
---
Borrower;
4. This Authorization is between Lender and SBA and creates no third party
rights or benefits to Borrower;
5. The Loan Note will require Borrower to give Lender prior notice of intent
to prepay.
6. If Borrower defaults on Loan, SBA may be required to pay Lender under the
SBA guarantee. SBA may then seek recovery of these funds from Borrower.
Under SBA regulations, 13 CFR Part 101, Borrower may not claim or assert
against SBA any immunities or defenses available under local law to defeat,
modify or otherwise limit Borrower's obligation to repay to SBA any funds
advanced by Lender to Borrower.
7. Payments by SBA to Lender under SBA's guarantee will not apply to the Loan
account of Borrower, or diminish the indebtedness of Borrower under its
Note or the obligations of any personal guarantor of the Note.
BUY.COM INC.
12/23/1998
- --------------------------------------------------------------------------------
By: Scott A. Blum, President Date
12/23/1998
- --------------------------------------------------------------------------------
By: Murray Williams Date
________________________________________________________________________________
SBA Loan Number: PLP 260-805-4007 Page 10
SBA Loan Name: Buy.Com Inc. (7a Wizard 2. 1b)
<PAGE>
U.S. Small Business Administration U.S. Small Business Administration
SBA NOTE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SBA Loan # PLP 260-805-4007
- --------------------------------------------------------------------------------
SBA Loan Name Buy.Com, Inc.
- --------------------------------------------------------------------------------
Date December 23, 1998
- --------------------------------------------------------------------------------
Loan Amount 1,155,500.00
- --------------------------------------------------------------------------------
Interest Rate Prime plus 1%, variable
- --------------------------------------------------------------------------------
Borrower Buy.Com Inc.
- --------------------------------------------------------------------------------
Operating Company N/A
- --------------------------------------------------------------------------------
Lender Bank of Yorba Linda, a division of BYL Bank Group
- --------------------------------------------------------------------------------
1. PROMISE TO PAY:
In return for the Loan, Borrower promises to pay to the order of
Lender the amount of
One Million One Hundred Fifty-Five Thousand and 00/100 Dollars,
---------------------------------------------------------
interest on the unpaid principal balance, and all other amounts
required by Note.
2. DEFINITIONS:
"Collateral" means any property taken as security for payment of this
Note or any guarantee of this Note.
"Guarantor" means each person or entity that signs a guarantee of
payment of this Note.
"Loan" means the loan evidenced by this Note.
"Loan Documents" means the documents related to this loan signed by
Borrower, any Guarantor, or anyone who pledges collateral.
"SBA" means the Small Business Administration, an Agency of the United
States of America.
3. PAYMENT TERMS:
Borrower must make all payments at the place Lender designates. The
payment terms for this Note are:
The interest rate on this Note will fluctuate. The initial interest rate is
8.75% per year. This initial rate is the prime rate on the date SBA
received the loan application, plus 1.%.
Borrower must pay principal and interest payments of $9,500.00 every month,
beginning one month from the initial disbursement on this Note; payments
must be made on the first calendar day in the months they are due.
Lender will apply each installment payment first to pay interest accrued to
the day Lender receives the payment, then to bring principal current, then
to pay any late fees, and will apply any remaining balance to reduce
principal.
Lender may adjust the interest rate for the first time no earlier than the
first calendar day of the first month after initial disbursement. The
interest rate will then be adjusted each calendar quarter (the "change
period").
The "Prime Rate" is the prime rate published in the Wall Street Journal, in
effect on the first business day of the month in which a change occurs.
The adjusted interest rate will be 1.% above the Prime Rate. Lender will
adjust the interest rate on the first calendar day of each change period.
The change in interest rate is effective on that day whether or not Lender
gives Borrower notice of the change.
Lender must adjust the payment amount at least annually as needed to
amortize principal over the remaining term of the note.
If SBA purchases the guaranteed portion of the unpaid principal balance,
the interest rate becomes fixed at the rate in effect at the time of the
earliest uncured payment default. If there is no uncured payment default,
the rate becomes fixed at the rate in effect at the time of purchase.
All remaining principal and accrued interest is due and payable 25 year(s)
from date of initial disbursement.
Borrower agrees that if default occurs on this Note or on any other
outstanding SBA or SBA-guaranteed loan, Lender has the option to make this
Note and such other loans immediately due and payable.
Late Charge: If a payment on this Note is more than 10 days late, Lender
may charge Borrower a late fee of up to 5% of the unpaid portion of the
regularly scheduled payment.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Small Business Administration OMB APPROVAL NO.: 3245-0200
Settlement Sheet EXPIRATION DATE 5/31/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Lender (Name and Address - Include Zip Code)
Bank of Yorba Linda, a division of BYL Bank Group 26137 La Paz Road, Suite 102 Mission Viejo CA 92691
- ------------------------------------------------------------------------------------------------------------------------------------
Borrower (Name)
Buy.Com Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
SBA Loan Number (10 digits) PLP 260-805-4007 Lender Computed Interest on a 365 day basis.
---
- ------------------------------------------------------------------------------------------------------------------------------------
Sum of Prior disbursements $_________________ + This Disbursement $ 1,155,500.00 = Total $ 1,155,500.00
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
The provisions of 18 U.S.C. 1001 and 15 U.S.C. 645 provide certain criminal penalties for making false statements, willfully
overvaluing collateral, or other prohibited acts. To induce SBA, directly or indirectly, to participate in this loan, the Borrower,
subject to these provisions, acknowledges receipt of $1,255,500.00 on 12/28/98 and certifies (1) that the proceeds at this
------------ --------
disbursement will be, and all previous disbursements have been, used in accordance with the Loan Authorization, (2) that there has
been no substantial adverse change in financial condition, organization, operations, or fixed assets since application for this loan
was filed or since the previous disbursement, and (3) that there are no liens or encumbrances against the real or personal property
securing the loan except those disclosed in the application for this loan.
Lender certifies that disbursement of the loan proceeds was made and the loan proceeds were used as set forth below and in
accordance with the Loan Authorization by issuance of joint payee checks as detailed below, except checks for cash operating
-------------------------------------------------------------------------------------
capital, cash to reimburse borrower for evidenced expenditures made after loan approval date for such authorized use of proceeds, or
- ------------------------------------------------------------------------------------------------------------------------------------
as otherwise directed by the Loan Authorization, and that construction, paid with loan proceeds as listed below, has been completed.
- -----------------------------------------------
(Any deviation from the Loan Authorization must be authorized in writing by SBA prior to expenditure of the loan funds.)
See Paragraph G , of Authorization, "Use of Proceeds"
------
Subparagraph Name of Payee Date and Amount of Payment Purpose
G.1 First American Title Company 1,125,374.00 Purchase land and improvements
G.2 First American Title Company 30,126.00 Closing Costs
To further induce SBA to participate in the loan, Lender certifies that neither the Lender nor its Associates, officers, agents,
affiliates or attorneys have charged or will charge or receive, directly or indirectly, any bonus, fee, commission, or other payment
or benefit, or require a compensating balance, Certificate of Deposit, or other security in connection with making or servicing of
this loan (other than those reported on SBA Forms 4 or 159 "Compensation Agreement"). It is understood that all fees not approved by
SBA are prohibited, except as may be specifically permitted by the Loan Authorization, SBA regulations or the SBA Form 750 "Guaranty
Agreement."
Lender:
Bank of Yorba Linda, a division of BYL Bank Group
----------------------------------------------------
Borrower Buy.Com Inc.
---------------------------------------------------------------
By _______________________________________________ Signed __________________________________________________________
Cynthia J. Gutierrez Assistant Vice President Scott A. Blum, President Murray Williams, Secretary
Date 12/28/98 Date 12/28/98
--------------------------------------------------- -----------------------------------------------------
This Certification must be signed and returned to the SBA immediately after each disbursement. If there is a large number of checks,
itemize on separate sheets, sign and attach hereto.
- ------------------------------------------------------------------------------------------------------------------------------------
SBA Review By Title Date
- ------------------------------------------------------------------------------------------------------------------------------------
The estimated burden for the completion of this form is 1 hour per response. If you have any questions or comments concerning this
estimate or any other aspects of this information, please contact Chief, Administrative Information Branch, U.S. Small Business
Administration, Washington, D.C. 20416 and Clearance Officer, Paperwork Reduction Project (3245-0200), Office of Management and
Budget, Washington, D.C. 20503.
SBA Form 1050 (8-93) REF 70 50 Use 5-91 Edition Until Exhausted. TSoft Financial Software, Inc. @ 1994-1996
</TABLE>
<PAGE>
OMB APPROVAL NO. 3245-0201
Expiration Date: 12-31-87
--------------------------------
SBA LOAN NO.
--------------------------------
PLP 260-805-4007
--------------------------------
(For Corporate Applicants)
U.S. Small Business Administration
RESOLUTION OF BOARD OF DIRECTORS OF
Buy.Com Inc.
- --------------------------------------------------------------------------------
(Name of Applicant)
(1) RESOLVED, that the officers of this corporation names below, or any
one of them, or their, or any one of their, duly elected or appointed successors
in office, be and they are hereby authorized and empowered in the name and on
behalf of this corporation and under its corporate seal to execute and deliver
to the Bank of Yorba Linda, a division of BYL Bank Group (hereinafter called
-------------------------------------------------
"Lender") or the Small Business Administration (hereinafter called "SBA"), as
the case may be, in the form required by Lender or SBA, the following documents:
(a) application for a loan or loans, the total thereof not to exceed in
principal amount $1,155,500, maturing upon such date or dates and bearing
---------
interest at such rate or rates, as may be prescribed by Lender or SBA; (b)
applications for any renewals or extensions of all or any part of such loan or
loans and of any other loans, heretofore and hereinafter made by Lender or SBA
to this corporation; (c) the promissory note or notes of this corporation
evidencing such loan or loans or any renewals or extensions thereof; and (d) any
other instruments or agreements of this corporation which may be required by
Lender or SBA in connection with such loans, renewals, and/or extensions; and
that said officers in their discretion may accept any such loan or loans in
installments and give one or more notes of this corporation therefore, and may
receive and endorse in the name of this corporation any checks or drafts
representing such loan or loans or any such installments;
(2) FURTHER RESOLVED, that the aforesaid officers or any one of them, or
their duly elected or appointed successors in office, be and they are hereby
authorized and empowered to do any acts, including but not limited to the
mortgage, pledge, or hypothecation from time to time with Lender or SBA of any
or all assets of this corporation to secure such loan or loans, renewals and
extensions, deemed necessary or proper by Lender of SBA, in respect of the
collateral securing any indebtedness of this corporation.
(3) FURTHER RESOLVED, that any indebtedness heretofore contracted and any
contracts or agreements heretofore made with Lender or SBA on behalf of this
corporation, and all acts of officers or agents of this corporation in
connection with said indebtedness or said contacts or agreements, are hereby
ratified and confirmed;
(4) FURTHER RESOLVED, that the officers referred to in the foregoing
resolutions are as follows:
Scott A. Blum President
- ----------------------- ---------------------- --------------------
(Typewrite name) (Title) (Signature)
Murray Williams Secretary
- ----------------------- ---------------------- --------------------
(Typewrite name) (Title) (Signature)
- ----------------------- ---------------------- --------------------
(Typewrite name) (Title) (Signature)
- ----------------------- ---------------------- --------------------
(Typewrite name) (Title) (Signature)
(5) FURTHER RESOLVED, that Lender or SBA is authorized to rely upon the
aforesaid resolutions until receipt of written notice of any change.
CERTIFICATION
I HEREBY CERTIFY that the foregoing is a true and correct copy of a resolution
regularly presented to and adopted by the Board of Directors of
Buy.Com Inc. at a meeting duly called and held at 9:00 a.m. on the 23rd
- ------------------- -------- ----
(Name of Applicant)
day of December, 1998, at which a quorum was present and voted, and that such
-------- ----
resolution is duly recorded in the minute book of this corporation; that the
officers names in said resolution have been duly elected or appointed to, and
are the present incumbents of, the respective offices set after their respective
names; and that the signatures set opposite their respective names are their
true and genuine signatures.
(Seal) Secretary _________________________________
Murray Williams
SBA Form 160 (11-85) REF. SOP 50 10 EDITION OF 11-67 WILL BE USED UNTIL STOCK IS
EXHAUSTED
*U.S. Government Printing Office 1966-619-370/40191 TSoft Financial Software,
Inc. (C) 1994 - 1996
<PAGE>
EXHIBIT 10.16
INDUSTRIAL LEASE
(Single Tenant; Net; Stand-Alone)
BETWEEN
___________________
AND
__________________
<PAGE>
INDEX TO INDUSTRIAL LEASE
(Single Tenant; Net; Stand-Alone)
<TABLE>
<S> <C>
ARTICLE I. BASIC LEASE PROVISIONS...........................................1
ARTICLE II. PREMISES.........................................................2
Section 2.1. Leased Premises..................................................2
Section 2.2. Acceptance of Premises...........................................2
Section 2.3. Building Name and Address........................................2
ARTICLE III. TERM.............................................................2
Section 3.1. General..........................................................2
Section 3.2. Delay in Possession..............................................2
ARTICLE IV. RENT AND OPERATING EXPENSES......................................2
Section 4.1. Basic Rent.......................................................2
Section 4.2. Operating Expenses...............................................3
Section 4.3. Security Deposit.................................................4
ARTICLE V. USES.............................................................4
Section 5.1. Use..............................................................4
Section 5.2. Signs............................................................4
Section 5.3. Hazardous Materials..............................................4
ARTICLE VI. SERVICES.........................................................6
Section 6.1. Utilities and Services...........................................6
Section 6.2. Parking..........................................................6
ARTICLE VII. MAINTAINING THE PREMISES.........................................6
Section 7.1. Tenant's Maintenance and Repair..................................6
Section 7.2. Landlord's Maintenance and Repair................................7
Section 7.3. Alterations......................................................7
Section 7.4. Mechanic's Liens.................................................7
Section 7.5. Entry and Inspection.............................................8
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY.......................8
ARTICLE IX. ASSIGNMENT AND SUBLETTING........................................8
Section 9.1. Rights of Parties................................................8
Section 9.2. Effect of Transfer...............................................9
Section 9.3. Sublease Requirements............................................9
Section 9.4. Certain Transfers...............................................10
ARTICLE X. INSURANCE AND INDEMNITY.........................................10
Section 10.1. Tenant's Insurance..............................................10
Section 10.2. Landlord's Insurance............................................10
Section 10.3. Tenant's Indemnity..............................................10
Section 10.4. Landlord's Nonliability.........................................10
Section 10.5. Waiver of Subrogation...........................................10
ARTICLE XI. DAMAGE OR DESTRUCTION...........................................11
Section 11.1. Restoration.....................................................11
Section 11.2. Lease Governs...................................................11
ARTICLE XII. EMINENT DOMAIN..................................................11
Section 12.1. Total or Partial Taking.........................................11
Section 12.2. Temporary Taking................................................12
Section 12.3. Taking of Parking Area..........................................12
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS.................12
Section 13.1. Subordination...................................................12
Section 13.2. Estoppel Certificate............................................12
Section 13.3. Financials......................................................12
ARTICLE XIV. DEFAULTS AND REMEDIES...........................................13
Section 14.1. Tenant's Defaults...............................................13
Section 14.2. Landlord's Remedies.............................................13
Section 14.3. Late Payments...................................................14
Section 14.4. Right of Landlord to Perform....................................14
Section 14.5. Default by Landlord.............................................15
Section 14.6. Expenses and Legal Fees.........................................15
Section 14.7. Waiver of Jury Trial............................................15
Section 14.8. Satisfaction of Judgment........................................15
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C>
Section 14.9. Limitation of Actions Against Landlord..........................15
ARTICLE XV. END OF TERM.....................................................15
Section 15.1. Holding Over....................................................15
Section 15.2. Merger on Termination...........................................15
Section 15.3. Surrender of Premises; Removal of Property......................15
ARTICLE XVI. PAYMENTS AND NOTICES............................................16
ARTICLE XVII. RULES AND REGULATIONS...........................................16
ARTICLE XVIII. BROKER'S COMMISSION.............................................16
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST.................................16
ARTICLE XX. INTERPRETATION..................................................17
Section 20.1. Gender and Number...............................................17
Section 20.2. Headings........................................................17
Section 20.3. Joint and Several Liability.....................................17
Section 20.4. Successors......................................................17
Section 20.5. Time of Essence.................................................17
Section 20.6. Controlling Law.................................................17
Section 20.7. Severability....................................................17
Section 20.8. Waiver and Cumulative Remedies..................................17
Section 20.9. Inability to Perform............................................17
Section 20.10. Entire Agreement................................................17
Section 20.11. Quiet Enjoyment.................................................17
Section 20.12. Survival........................................................17
ARTICLE XXI. EXECUTION AND RECORDING.........................................18
Section 21.1. Counterparts....................................................18
Section 21.2. Corporate and Partnership Authority.............................18
Section 21.3. Execution of Lease; No Option or Offer..........................18
Section 21.4. Recording.......................................................18
Section 21.5. Amendments......................................................18
Section 21.6. Executed Copy...................................................18
Section 21.7. Attachments.....................................................18
ARTICLE XXII. MISCELLANEOUS...................................................18
Section 22.1. Nondisclosure of Lease Terms....................................18
Section 22.2. Guaranty........................................................18
Section 22.3. Changes Requested by Lender.....................................18
Section 22.4. Mortgagee Protection............................................18
Section 22.5. Covenants and Conditions........................................18
Section 22.6. Security Measures...............................................19
</TABLE>
EXHIBITS
Exhibit A Description of Premises
Exhibit A-1 Description of the Site
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit X Work Letter
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INDUSTRIAL LEASE
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(Single Tenant; Net; Stand-Alone)
THIS LEASE is made as of the ______________ day of ___________________,
1999, by and between ________________, hereafter called "Landlord," and
_________________ hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section 2.1.
2. Address of Building:
3. Use of Premises:
4. Estimated Commencement Date:
5. Lease Term: months, plus such additional days as may be required to
cause this Lease to terminate on the final day of the calendar month.
6. Basic Rent: Dollars ($) per month.
Basic Rent is subject to adjustment as follows: ______________________
7. Guarantor(s):
8. Floor Area of Premises: approximately rentable square feet
9. Security Deposit: $
10. Broker(s):
11. Additional Insureds: __________________.
12. Address for Payments and Notices:
LANDLORD TENANT
___________________ ____________________
13. Tenant's Liability Insurance Requirement: $
14. Vehicle Parking Spaces:
1.
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ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in EXHIBIT A (the "Premises"), including the
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building identified in Item 2 of the Basic Lease Provisions (which together with
the underlying real property, is called the "Building"), and containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that neither
Landlord nor any representative of Landlord has made any representation or
warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, including without limitation any
representations or warranties regarding zoning or other land use matters. Tenant
further acknowledges that neither Landlord nor any representative of Landlord
has agreed to undertake any alterations or additions or construct any
improvements to the Premises except as expressly provided in this Lease. The
taking of possession or use of the Premises by Tenant for any purpose other than
construction shall conclusively establish that the Premises and the Building
were in satisfactory condition and in conformity with the provisions of this
Lease in all respects, except for those matters which Tenant shall have brought
to Landlord's attention on a written punch list. The list shall be limited to
any items required to be accomplished by Landlord under the Work Letter attached
as Exhibit X, and shall be delivered to Landlord within thirty (30) days after
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the term ("Term") of this Lease commences as provided in Article III below. If
no items are required of Landlord under the Work Letter, by taking possession of
the Premises Tenant accepts the improvements in their existing condition, and
waives any right or claim against Landlord arising out of the condition of the
Premises. Nothing contained in this Section shall affect the commencement of the
Term or the obligation of Tenant to pay rent. Landlord shall diligently complete
all punch list items of which it is notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Landlord shall have the right to
change the name, address, number or designation of the Building without
liability to Tenant.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in Item 5 of
the Basic Lease Provisions. Subject to the provisions of Section 3.2 below, the
Term shall commence ("Commencement Date") on the earlier of (a) the date upon
which all relevant governmental authorities have approved the Tenant
Improvements in accordance with applicable building codes, as evidenced by
written approval thereof in accordance with the building permits issued for the
Tenant Improvements or issuance of a temporary or final certificate of occupancy
for the Premises, or (b) the date Tenant acquires possession or commences use of
the Premises for any purpose other than construction of Tenant Improvements by
Tenant under the Work Letter. Within ten (10) days after possession of the
Premises is tendered to Tenant, the parties shall memorialize on a form provided
by Landlord the actual Commencement Date and the expiration date ("Expiration
Date") of this Lease. Tenant's failure to execute that form shall not affect the
validity of Landlord's determination of those dates.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the Estimated
Commencement Date, this Lease shall not be void or voidable nor shall Landlord
be liable to Tenant for any resulting loss or damage. However, Tenant shall not
be liable for any rent and the Commencement Date shall not occur until Landlord
delivers possession of the Premises and the Premises are in fact available for
Tenant's occupancy with any Tenant Improvements that have been approved as per
Section 3.1(a) above, except that if Landlord's failure to so deliver possession
on the Estimated Commencement Date is attributable to any action or inaction by
Tenant (including without limitation any Tenant Delay described in the Work
Letter, if any, attached to this Lease), then the Commencement Date shall not be
advanced to the date on which possession of the Premises is tendered to Tenant,
and Landlord shall be entitled to full performance by Tenant (including the
payment of rent) from the date Landlord would have been able to deliver the
Premises to Tenant but for Tenant's delay(s).
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant shall
pay to Landlord without deduction or offset, Basic Rent for the Premises in the
total amount shown (including subsequent adjustments, if any) in Item 6 of the
Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be deemed to
occur on the specified monthly anniversary of the Commencement Date, whether or
not that date occurs at the end of a calendar month. The rent shall be due and
payable in advance commencing on the Commencement Date (as prorated for any
partial month) and continuing thereafter on the first day of each successive
calendar month of the Term. No demand, notice or invoice shall be required for
the payment of Basic Rent. An installment of rent in the amount of one (1) full
month's Basic Rent at the initial rate specified in Item 6 of the Basic Lease
Provisions shall be delivered to Landlord concurrently with Tenant's execution
of this Lease and shall be applied against the Basic Rent first due hereunder.
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SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, "Building
Costs" and "Property Taxes," as those terms are defined below, incurred by
Landlord in the operation of the Building. For convenience of reference,
Property Taxes and Building Costs shall be referred to collectively as
"Operating Expenses".
(b) Commencing prior to the start of the first full "Expense Recovery
Period" (as defined below) of the Lease, and prior to the start of each full or
partial Expense Recovery Period thereafter, Landlord shall give Tenant a written
estimate of the amount of Operating Expenses for the Expense Recovery Period.
Tenant shall pay the estimated amounts to Landlord in equal monthly
installments, in advance, with Basic Rent. If Landlord has not furnished its
written estimate for any Expense Recovery Period by the time set forth above,
Tenant shall continue to pay cost reimbursements at the rates established for
the prior Expense Recovery Period, if any; provided that when the new estimate
is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any
accrued cost reimbursements based upon the new estimate. For purposes hereof,
"Expense Recovery Period" shall mean every twelve month period during the Term
(or portion thereof for the first and last lease years) commencing January 1 and
ending December 31.
(c) Within one hundred twenty (120) days after the end of each
Expense Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to Tenant's actual owed amounts as shown by the annual statement. Any delay
or failure by Landlord in delivering any statement hereunder shall not
constitute a waiver of Landlord's right to require Tenant to pay Operating
Expenses pursuant hereto. Any amount due Tenant shall be credited against
installments next coming due under this Section 4.2, and any deficiency shall be
paid by Tenant together with the next installment. If Tenant has not made
estimated payments during the Expense Recovery Period, any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance
with Article XVI. Should Tenant fail to object in writing to Landlord's
determination of actual Operating Expenses within sixty (60) days following
delivery of Landlord's expense statement, Landlord's determination of actual
Operating Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to the contrary
shall be barred.
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Operating Expenses for the
Expense Recovery Period in which the Lease terminates, Tenant shall upon notice
pay the entire increase due over the estimated expenses paid. Conversely, any
overpayment made in the event expenses decrease shall be rebated by Landlord to
Tenant.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then the estimate of Operating Expenses shall be increased for the month
in which such rate(s) or amount(s) becomes effective and for all succeeding
months by an amount equal to the increase. Landlord shall give Tenant written
notice of the amount or estimated amount of the increase, the month in which the
increase will become effective, and the month for which the payments are due.
Tenant shall pay the increase to Landlord as a part of Tenant's monthly payments
of estimated expenses as provided in paragraphabove, commencing with the month
in which effective.
(f) The term "Building Costs" shall include all expenses of operation
and maintenance of the Building and all landscaping, walkways, parking areas and
lighting of the Site to the extent such expenses are not billed to and paid
directly by Tenant, and shall include the following charges by way of
illustration but not limitation: water and sewer charges; insurance premiums or
reasonable premium equivalents should Landlord elect to self-insure any risk
that Landlord is authorized to insure hereunder; license, permit, and inspection
fees; heat; light; power; air conditioning; supplies; materials; equipment;
tools; the cost of any environmental, insurance, tax or other consultant
utilized by Landlord in connection with the Building; costs incurred in
connection with compliance of any laws or changes in laws applicable to the
Building; the cost of any capital investments (other than tenant improvements
for specific tenants) to the extent of the amortized amount thereof over the
useful life of such capital investments calculated at a market cost of funds,
all as determined by Landlord, for each such year of useful life during the
Term; labor; reasonably allocated wages and salaries, fringe benefits, and
payroll taxes for administrative and other personnel directly applicable to the
Building, including both Landlord's personnel and outside personnel; any expense
incurred pursuant to Sections 6.1, 6.2, 7.2, and 10.2; and a reasonable
overhead/management fee for the professional operation of the Building.
Notwithstanding anything to the contrary contained herein, the amount of such
overhead/management fee to be charged to Tenant shall be determined by
multiplying the actual fee charged (which from time to time may be with respect
to the Building only or the Building together with other properties owned by
Landlord and/or its affiliates) by a fraction, the numerator of which is the
floor area of the Premises (as set forth in Item No. 8 of the Basic Lease
Provisions) and the denominator of which is the total square footage of space
charged with such fee actually leased to tenants (including Tenant). It is
understood that Building Costs shall include competitive charges for direct
services provided by any subsidiary or division of Landlord, and may include the
Building's or the Site's proportionate share of the cost of maintenance or
repair contracts which cover the Building and/or the Site and other buildings
and/or projects in Landlord's portfolio, as reasonably allocated by Landlord.
(g) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease, to the
Building or to the Site, and any improvements, fixtures and equipment and other
property of Landlord located in the Building or on the Site, except that general
net income and franchise taxes imposed against Landlord shall be excluded; and
(iii) all assessments
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and fees for public improvements, services, and facilities and impacts thereon,
including without limitation arising out of any Community Facilities Districts,
"Mello Roos" districts, similar assessment districts, and any traffic impact
mitigation assessments or fees; and (iv) any tax, surcharge or assessment which
shall be levied in addition to or in lieu of real estate or personal property
taxes, other than taxes covered by Article VIII; and (v) costs and expenses
incurred in contesting the amount or validity of any Property Tax by appropriate
proceedings.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this
Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of
the Basic Lease Provisions, to be held by Landlord as security for the full and
faithful performance of Tenant's obligations under this Lease (the "Security
Deposit"). Subject to the last sentence of this Section, the Security Deposit
shall be understood and agreed to be the property of Landlord upon Landlord's
receipt thereof, and may be utilized by Landlord in its discretion towards the
payment of all prepaid expenses by Landlord for which Tenant would be required
to reimburse Landlord under this Lease, including without limitation brokerage
commissions and Tenant Improvement costs. Upon any default by Tenant, including
specifically Tenant's failure to pay rent or to abide by its obligations under
Sections 7.1 and 15.3 below, whether or not Landlord is informed of or has
knowledge of the default, the Security Deposit shall be deemed to be
automatically and immediately applied, without waiver of any rights Landlord may
have under this Lease or at law or in equity as a result of the default, as a
setoff for full or partial compensation for that default. If any portion of the
Security Deposit is applied after a default by Tenant, Tenant shall within five
(5) days after written demand by Landlord deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount.
Landlord shall not be required to keep this Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on the Security
Deposit. If Tenant fully performs its obligations under this Lease, the Security
Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest in this Lease) after the
expiration of the Term, provided that Landlord may retain the Security Deposit
to the extent and until such time as all amounts due from Tenant in accordance
with this Lease have been determined and paid in full.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities. The
parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not use or allow
the Premises to be used for any unlawful purpose, nor shall Tenant permit any
nuisance or commit any waste in the Premises. Tenant shall not do or permit to
be done anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building or its contents, and shall comply with all
applicable insurance underwriters rules and the requirements of the Pacific Fire
Rating Bureau or any other organization performing a similar function. Tenant
shall comply at its expense with all present and future laws, ordinances,
restrictions, regulations, orders, rules and requirements of all governmental
authorities that pertain to Tenant or its use of the Premises, including without
limitation all federal and state occupational health and safety requirements,
whether or not Tenant's compliance will necessitate expenditures or interfere
with its use and enjoyment of the Premises. Tenant shall comply at its expense
with all present and future covenants, conditions, easements or restrictions now
or hereafter affecting or encumbering the Building, and any amendments or
modifications thereto, including without limitation the payment by Tenant of any
periodic or special dues or assessments charged against the Premises or Tenant
which may be allocated to the Premises or Tenant in accordance with the
provisions thereof. Tenant shall promptly upon demand reimburse Landlord for any
additional insurance premium charged by reason of Tenant's failure to comply
with the provisions of this Section, and shall indemnify Landlord from any
liability and/or expense resulting from Tenant's noncompliance.
SECTION 5.2. SIGNS. Except as approved in writing by Landlord, in its sole
discretion, Tenant shall have no right to maintain identification signs in any
location in, on or about the Premises or the Building and shall not place or
erect any signs, displays or other advertising materials that are visible from
the exterior of the Building. The size, design, graphics, material, style, color
and other physical aspects of any permitted sign shall be subject to Landlord's
written approval prior to installation (which approval may be withheld in
Landlord's discretion), any covenants, conditions or restrictions encumbering
the Premises, Landlord's signage program, if any, as in effect from time to time
("Signage Criteria"), and any applicable municipal or other governmental permits
and approvals. Tenant acknowledges having received and reviewed a copy of the
current Signage Criteria, if applicable. Tenant shall be responsible for the
cost of any permitted sign, including the fabrication, installation, maintenance
and removal thereof. If Tenant fails to maintain its sign, or if Tenant fails to
remove same upon termination of this Lease and repair any damage caused by such
removal, Landlord may do so at Tenant's expense.
SECTION 5.3. HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous Materials to be
brought upon, stored, used, generated, released or disposed of on, under, from
or about the Premises or the Site (including without
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limitation the soil and groundwater thereunder) without the prior written
consent of Landlord. Notwithstanding the foregoing, Tenant shall have the right,
without obtaining prior written consent of Landlord, to utilize within the
Premises standard office products that may contain Hazardous Materials (such as
photocopy toner, "White Out", and the like), provided however, that (i) Tenant
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shall maintain such products in their original retail packaging, shall follow
all instructions on such packaging with respect to the storage, use and disposal
of such products, and shall otherwise comply with all applicable laws with
respect to such products, and (ii) all of the other terms and provisions of this
Section 5.3 shall apply with respect to Tenant's storage, use and disposal of
all such products. Landlord may, in its sole discretion, place such conditions
as Landlord deems appropriate with respect to any such Hazardous Materials, and
may further require that Tenant demonstrate that any such Hazardous Materials
are necessary or useful to Tenant's business and will be generated, stored, used
and disposed of in a manner that complies with all applicable laws and
regulations pertaining thereto and with good business practices. Tenant
understands that Landlord may utilize an environmental consultant to assist in
determining conditions of approval in connection with the storage, generation,
release, disposal or use of Hazardous Materials by Tenant on or about the
Premises, and/or to conduct periodic inspections of the storage, generation,
use, release and/or disposal of such Hazardous Materials by Tenant on and from
the Premises, and Tenant agrees that any costs incurred by Landlord in
connection therewith shall be reimbursed by Tenant to Landlord as additional
rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B attached
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hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing the names and amounts of all Hazardous Materials
which were stored, generated, used, released and/or disposed of on, under or
about the Premises for the twelve-month period prior thereto, and which Tenant
desires to store, generate, use, release and/or dispose of on, under or about
the Premises for the succeeding twelve-month period. In addition, to the extent
Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant
shall promptly provide Landlord with complete and legible copies of all the
following environmental documents relating thereto: reports filed pursuant to
any self-reporting requirements; permit applications, permits, monitoring
reports, workplace exposure and community exposure warnings or notices and all
other reports, disclosures, plans or documents (even those which may be
characterized as confidential) relating to water discharges, air pollution,
waste generation or disposal, and underground storage tanks for Hazardous
Materials; orders, reports, notices, listings and correspondence (even those
which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other legal
documents filed by or against Tenant related to Tenant's use, handling, storage,
release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises, the Site and/or the
soil or groundwater thereunder at any time to determine whether Tenant is
complying with the terms of this Section 5.3, and in connection therewith Tenant
shall provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Section 5.3, or in the event of a release of any Hazardous Material on, under or
about the Premises and/or the Site caused or permitted by Tenant, its agents,
employees, contractors, licensees or invitees, Landlord and its agents shall
have the right, but not the obligation, without limitation upon any of
Landlord's other rights and remedies under this Lease, to immediately enter upon
the Premises and/or the Site without notice and to discharge Tenant's
obligations under this Section 5.3 at Tenant's expense, including without
limitation the taking of emergency or long-term remedial action. Landlord and
its agents shall endeavor to minimize interference with Tenant's business in
connection therewith, but shall not be liable for any such interference. In
addition, Landlord, at Tenant's expense, shall have the right, but not the
obligation, to join and participate in any legal proceedings or actions
initiated in connection with any claims arising out of the storage, generation,
use, release and/or disposal by Tenant or its agents, employees, contractors,
licensees or invitees of Hazardous Materials on, under, from or about the
Premises and/or the Site.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises and/or the Site caused or permitted by Tenant or its agents,
employees, contractors, licensees or invitees results in (i) injury to any
person, (ii) injury to or any contamination of the Premises and/or the Site, or
(iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises, the Site and any other affected real or personal property
owned by Landlord to the condition existing prior to the introduction of such
Hazardous Materials and to remedy or repair any such injury or contamination,
including without limitation, any cleanup, remediation, removal, disposal,
neutralization or other treatment of any such Hazardous Materials.
Notwithstanding the foregoing, Tenant shall not, without Landlord's prior
written consent, take any remedial action in response to the presence of any
Hazardous Materials on, under or about the Premises, the Site or any other
affected real or personal property owned by Landlord or enter into any similar
agreement, consent, decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided however, Landlord's prior
written consent shall not be necessary in the event that the presence of
Hazardous Materials on, under or about the Premises, the Site or any other
affected real or personal property owned by Landlord (i) imposes an immediate
threat to the health, safety or welfare of any individual or (ii) is of such a
nature that an immediate remedial response is necessary and it is not possible
to obtain Landlord's consent before taking such action. To the fullest extent
permitted by law, Tenant shall indemnify, hold harmless, protect and defend
(with attorneys acceptable to Landlord) Landlord and any successors to all or
any portion of Landlord's interest in the Premises, the Site and any other real
or personal property owned by Landlord from and against any and all liabilities,
losses, damages, diminution in value, judgments, fines, demands, claims,
recoveries, deficiencies, costs and expenses (including without limitation
attorneys' fees, court costs and other professional expenses), whether
foreseeable or unforeseeable, arising directly or indirectly out of the use,
generation, storage, treatment, release, on- or off-site disposal or
transportation of Hazardous Materials on, into, from, under or about the
Premises, the Site and any other real or personal property owned by Landlord
caused or
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permitted by Tenant, its agents, employees, contractors, licensees or invitees,
specifically including without limitation the cost of any required or necessary
repair, restoration, cleanup or detoxification of the Premises, the Site and any
other real or personal property owned by Landlord, and the preparation of any
closure or other required plans, whether or not such action is required or
necessary during the Term or after the expiration of this Lease. If Landlord at
any time discovers that Tenant or its agents, employees, contractors, licensees
or invitees may have caused or permitted the release of a Hazardous Material on,
under, from or about the Premises, the Site or any other real or personal
property owned by Landlord, Tenant shall, at Landlord's request, immediately
prepare and submit to Landlord a comprehensive plan, subject to Landlord's
approval, specifying the actions to be taken by Tenant to return the Premises,
the Site or any other real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Landlord's approval of such cleanup plan, Tenant shall, at its expense, and
without limitation of any rights and remedies of Landlord under this Lease or at
law or in equity, immediately implement such plan and proceed to cleanup such
Hazardous Materials in accordance with all applicable laws and as required by
such plan and this Lease. The provisions of this subsection (e) shall expressly
survive the expiration or sooner termination of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Premises
and/or the Site known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit C attached hereto. Tenant shall have no
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liability or responsibility with respect to the Hazardous Materials facts
described in Exhibit C, nor with respect to any Hazardous Materials which Tenant
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proves were not caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees. Notwithstanding the preceding two sentences,
Tenant agrees to notify its agents, employees, contractors, licensees, and
invitees of any exposure or potential exposure to Hazardous Materials at the
Premises and/or the Site that Landlord brings to Tenant's attention.
ARTICLE VI. SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for water,
gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used by
Tenant in, on or about the Premises during the Term, together with any taxes
thereon. Landlord shall not be liable for damages or otherwise for any failure
or interruption of any utility or other service furnished to the Premises, and
no such failure or interruption shall be deemed an eviction or entitle Tenant to
terminate this Lease or withhold or abate any rent due hereunder. Landlord shall
at all reasonable times have free access to all electrical and mechanical
installations of Landlord.
SECTION 6.2. PARKING. Tenant shall be entitled to the number of vehicle
parking spaces on the Site set forth in Item 14 of the Basic Lease Provisions.
Tenant shall not use more parking spaces than such number. Tenant shall not
permit or allow any vehicles that belong to or are controlled by Tenant or
Tenant's employees, suppliers, shippers, customers or invitees to be loaded,
unloaded or parked in areas other than those designated by Landlord for such
activities. If Tenant permits or allows any of the prohibited activities
described above, then Landlord shall have the right, without notice, in addition
to such other rights and remedies that Landlord may have, to remove or tow away
the vehicle involved and charge the costs to Tenant. Parking shall be limited to
striped parking stalls, and no parking shall be permitted in any driveways,
access ways or in any similar area. Nothing contained in this Lease shall be
deemed to create liability upon Landlord for any damage to motor vehicles of
visitors or employees, for any loss of property from within those motor
vehicles, or for any injury to Tenant, its visitors or employees, unless
ultimately determined to be caused by the sole active negligence or willful
misconduct of Landlord, its agents, servants and employees. Landlord shall have
the right to establish, and from time to time amend, and to enforce against all
users all reasonable rules and regulations (including the designation of areas
for employee parking) that Landlord may deem necessary and advisable for the
proper and efficient operation and maintenance of parking. Landlord shall have
the right to construct, maintain and operate lighting facilities within the
parking areas; to change the area, level, location and arrangement of the
parking areas and improvements therein; and to do and perform such other acts in
and to the parking areas and improvements therein as, in the use of good
business judgment, Landlord shall determine to be advisable. Parking areas shall
be used only for parking vehicles. Washing, waxing, cleaning or servicing of
vehicles, or the storage of vehicles for 24-hour periods, is prohibited unless
otherwise authorized by Landlord. Tenant shall be liable for any damage to the
parking areas caused by Tenant or Tenant's employees, suppliers, shippers,
customers or invitees, including without limitation damage from excess oil
leakage. Tenant shall have no right to install any fixtures, equipment or
personal property in the parking areas.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense
shall comply with all applicable laws and governmental regulations governing the
Premises and make all repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the improvements may
have been installed), excepting ordinary wear and tear, including without
limitation the electrical and mechanical systems, any air conditioning,
ventilating or heating equipment which serves the Premises, all walls, glass,
windows, doors, door closures, hardware, fixtures, electrical, plumbing, fire
extinguisher equipment and other equipment. Any damage or deterioration of the
Premises shall not be deemed ordinary wear and tear if the same could have been
prevented by good maintenance practices by Tenant. As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request, provide Landlord
with copies of all maintenance schedules, reports
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and notices prepared by, for or on behalf of Tenant. Tenant shall obtain
preventive maintenance contracts from a licensed heating and air conditioning
contractor to provide for regular inspection and maintenance of the heating,
ventilating and air conditioning systems servicing the Premises, all subject to
Landlord's approval. All repairs shall be at least equal in quality to the
original work, shall be made only by a licensed contractor approved in writing
in advance by Landlord and shall be made only at the time or times approved by
Landlord. Any contractor utilized by Tenant shall be subject to Landlord's
standard requirements for contractors, as modified from time to time. Landlord
shall have the right at all times to inspect Tenant's maintenance of all
equipment (including without limitation air conditioning, ventilating and
heating equipment), and may impose reasonable restrictions and requirements with
respect to repairs, as provided in Section 7.3, and the provisions of Section
7.4 shall apply to all repairs. Alternatively, Landlord may elect to make any
repair or maintenance required hereunder on behalf of Tenant and at Tenant's
expense, and Tenant shall promptly reimburse Landlord for all costs incurred
upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1 and
Article XI, Landlord shall provide service, maintenance and repair with respect
to the roof, foundations, and footings of the Building, all landscaping,
walkways, parking areas, exterior lighting of the Site, and the exterior
surfaces of the exterior walls of the Building, except that Tenant at its
expense shall make all repairs which Landlord deems reasonably necessary as a
result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or designate
any reputable person or firm, including any employee or agent of Landlord or any
of Landlord's affiliates or divisions, to perform any service, repair or
maintenance function. Landlord need not make any other improvements or repairs
except as specifically required under this Lease, and nothing contained in this
Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Tenant further understands that Landlord shall not be
required to make any repairs to the roof, foundations or footings unless and
until Tenant has notified Landlord in writing of the need for such repair and
Landlord shall have a reasonable period of time thereafter to commence and
complete said repair, if warranted. All costs of any maintenance and repairs on
the part of Landlord provided hereunder shall be considered part of Building
Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which cost
less than One Dollar ($1.00) per square foot of the improved portions of the
Premises (excluding warehouse square footage) and do not (i) affect the exterior
of the Building or outside areas (or be visible from adjoining sites), or (ii)
affect or penetrate any of the structural portions of the Building, including
but not limited to the roof, or (iii) require any change to the basic floor plan
of the Premises, any change to any structural or mechanical systems of the
Premises, or any governmental permit as a prerequisite to the construction
thereof, or (iv) interfere in any manner with the proper functioning of or
Landlord's access to any mechanical, electrical, plumbing or HVAC systems,
facilities or equipment located in or serving the Building, or (v) diminish the
value of the Premises. Landlord may impose, as a condition to its consent, any
requirements that Landlord in its discretion may deem reasonable or desirable,
including but not limited to a requirement that all work be covered by a lien
and completion bond satisfactory to Landlord and requirements as to the manner,
time, and contractor for performance of the work. Tenant shall obtain all
required permits for the work and shall perform the work in compliance with all
applicable laws, regulations and ordinances, all covenants, conditions and
restrictions affecting the Premises, and the Rules and Regulations (hereafter
defined). Tenant understands and agrees that Landlord shall be entitled to a
supervision fee in the amount of five percent (5%) of the cost of the work. If
any governmental entity requires, as a condition to any proposed alterations,
additions or improvements to the Premises by Tenant, that improvements be made
to the outside areas, and if Landlord consents to such improvements to the
outside areas, then Tenant shall, at Tenant's sole expense, make such required
improvements to the outside areas in such manner, utilizing such materials, and
with such contractors (including, if required by Landlord, Landlord's
contractors) as Landlord may require in its sole discretion. Under no
circumstances shall Tenant make any improvement which incorporates any Hazardous
Materials, including without limitation asbestos-containing construction
materials into the Premises. Any request for Landlord's consent shall be made in
writing and shall contain architectural plans describing the work in detail
reasonably satisfactory to Landlord. Unless Landlord otherwise agrees in
writing, all alterations, additions or improvements affixed to the Premises
(excluding moveable trade fixtures and furniture) shall become the property of
Landlord and shall be surrendered with the Premises at the end of the Term,
except that Landlord may, by notice to Tenant, require Tenant to remove by the
Expiration Date, or sooner termination date of this Lease, all or any
alterations, decorations, fixtures, additions, improvements and the like
installed either by Tenant or by Landlord at Tenant's request and to repair any
damage to the Premises arising from that removal. Except as otherwise provided
in this Lease or in any Exhibit to this Lease, should Landlord make any
alteration or improvement to the Premises for Tenant, Landlord shall be entitled
to prompt reimbursement from Tenant for all costs incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from any
liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it deems proper, including payment of or
defense against the claim giving rise to the lien. All expenses so incurred by
Landlord, including Landlord's attorneys' fees, and any consequential or other
damages incurred by Landlord arising out of such lien, shall be reimbursed by
Tenant promptly following Landlord's demand, together with interest from the
date of payment by Landlord at the maximum rate permitted by law until paid.
Tenant shall give Landlord no less than twenty (20) days' prior notice in
writing before commencing construction of any kind on the Premises so that
Landlord may post and maintain notices of nonresponsibility on the Premises.
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SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times,
upon written or oral notice (except in emergencies, when no notice shall be
required) have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests of Landlord in
the Premises, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when an uncured Tenant default exists, to prospective tenants), all
without being deemed to have caused an eviction of Tenant and without abatement
of rent except as provided elsewhere in this Lease. Landlord shall have the
right, if desired, to retain a key which unlocks all of the doors in the
Premises, excluding Tenant's vaults and safes, and Landlord shall have the right
to use any and all means which Landlord may deem proper to open the doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord shall not under any circumstances be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction of Tenant from the Premises.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, and against any alterations, additions or like
improvements made to the Premises by or on behalf of Tenant. When possible
Tenant shall cause its personal property and alterations to be assessed and
billed separately from the real property of which the Premises form a part. If
any taxes on Tenant's personal property and/or alterations are levied against
Landlord or Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the inclusion of a value
placed upon the personal property and/or alterations of Tenant and if Landlord
pays the taxes based upon the increased assessment, Tenant shall pay to Landlord
the taxes so levied against Landlord or the proportion of the taxes resulting
from the increase in the assessment. In calculating what portion of any tax bill
which is assessed against Landlord separately, or Landlord and Tenant jointly,
is attributable to Tenant's alterations and personal property, Landlord's
reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the contrary,
Tenant will not, either voluntarily or by operation of law, assign, sublet,
encumber, or otherwise transfer all or any part of Tenant's interest in this
lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1.(b). No assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, any such assignment or subletting or attempted assignment
or subletting shall constitute a material default of this Lease. Landlord shall
not be deemed to have given its consent to any assignment or subletting by any
other course of action, including its acceptance of any name for listing in the
Building directory. To the extent not prohibited by provisions of the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section
365(f)(1), Tenant on behalf of itself and its creditors, administrators and
assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless
the proposed assignee of the Trustee for the estate of the bankrupt meets
Landlord's standard for consent as set forth in Section 9.1(b) of this Lease. If
this Lease is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, any and all monies or other considerations to be delivered in
connection with the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed to have assumed all of the obligations
arising under this Lease on and after the date of the assignment, and shall upon
demand execute and deliver to Landlord an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this Lease, it shall
first notify Landlord of its desire and shall submit in writing to Landlord: (i)
the name and address of the proposed transferee; (ii) the nature of any proposed
subtenant's or assignee's business to be carried on in the Premises; (iii) the
terms and provisions of any proposed sublease or assignment, including a copy of
the proposed assignment or sublease form; (iv) evidence of insurance of the
proposed assignee or subtenant complying with the requirements of Exhibit D
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hereto; (v) a completed Environmental Questionnaire from the proposed assignee
or subtenant; and (vi) any other information requested by Landlord and
reasonably related to the transfer. Except as provided in Subsection (e) of this
Section, Landlord shall not unreasonably withhold its consent, provided: (1) the
use of the Premises will be consistent with the provisions of this Lease; (2)
the proposed assignee or subtenant has not been required by any prior landlord,
lender or governmental authority to take remedial action in connection with
Hazardous Materials contaminating a property arising out of the proposed
assignee's or subtenant's actions or use of the property in question and is not
subject to any enforcement order issued by any governmental authority in
connection with the use, disposal or storage of a Hazardous Material; (3) at
Landlord's election, insurance requirements shall be brought into conformity
with Landlord's then current leasing practice; (4) any proposed subtenant or
assignee demonstrates that it is financially responsible by submission to
Landlord of all reasonable information as Landlord may request concerning the
proposed subtenant or assignee, including, but not limited to, a balance sheet
of the proposed subtenant or assignee as of a date within ninety (90) days of
the request for Landlord's consent and statements of income or profit and loss
of the proposed subtenant or assignee for the two-year period preceding the
request for Landlord's consent, and/or a certification signed by the proposed
subtenant or assignee that it has not been evicted or been in arrears in rent at
any other leased premises for the 3-year period preceding the request for
Landlord's consent; (5) any
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proposed subtenant or assignee demonstrates to Landlord's reasonable
satisfaction a record of successful experience in business; and (6) the proposed
transfer will not impose additional burdens or adverse tax effects on Landlord.
If Tenant has any exterior sign rights under this Lease, such rights are
personal to Tenant and may not be assigned or transferred to any assignee of
this Lease or subtenant of the Premises without Landlord's prior written
consent, which may be withheld in Landlord's sole and absolute discretion.
If Landlord consents to the proposed transfer, Tenant may within
ninety (90) days after the date of the consent effect the transfer upon the
terms described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set forth
in this Section. Landlord shall approve or disapprove any requested transfer
within thirty (30) days following receipt of Tenant's written request, the
information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, in lieu
of consenting to a proposed assignment or subletting, Landlord may elect to (i)
sublease the Premises (or the portion proposed to be subleased), or take an
assignment of Tenant's interest in this Lease, upon the same terms as offered to
the proposed subtenant or assignee (excluding terms relating to the purchase of
personal property, the use of Tenant's name or the continuation of Tenant's
business), or (ii) terminate this Lease as to the portion of the Premises
proposed to be subleased or assigned with a proportionate abatement in the rent
payable under this Lease, effective on the date that the proposed sublease or
assignment would have become effective. Landlord may thereafter, at its option,
assign or re-let any space so recaptured to any third party, including without
limitation the proposed transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by the
assignee or subtenant, however described, in excess of (i) the Basic Rent
payable by Tenant hereunder, or in the case of a sublease of a portion of the
Premises, in excess of the Basic Rent reasonably allocable to such portion, plus
(ii) Tenant's direct out-of-pocket costs which Tenant certifies to Landlord have
been paid to provide occupancy related services to such assignee or subtenant of
a nature commonly provided by landlords of similar space, shall be the property
of Landlord and such amounts shall be payable directly to Landlord by the
assignee or subtenant or, at Landlord's option, by Tenant. At Landlord's
request, a written agreement shall be entered into by and among Tenant, Landlord
and the proposed assignee or subtenant confirming the requirements of this
subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant. Such fee is
hereby acknowledged as a reasonable amount to reimburse Landlord for its costs
of review and evaluation of a proposed assignee/sublessee, and Landlord shall
not be obligated to commence such review and evaluation unless and until such
fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its obligation to pay rent and to
perform all its other obligations under this Lease. Moreover, Tenant shall
indemnify and hold Landlord harmless, as provided in Section 10.3, for any act
or omission by an assignee or subtenant. Each assignee, other than Landlord,
shall be deemed to assume all obligations of Tenant under this Lease and shall
be liable jointly and severally with Tenant for the payment of all rent, and for
the due performance of all of Tenant's obligations, under this Lease. No
transfer shall be binding on Landlord unless any document memorializing the
transfer is delivered to Landlord and both the assignee/subtenant and Tenant
deliver to Landlord an executed consent to transfer instrument prepared by
Landlord and consistent with the requirements of this Article. The acceptance by
Landlord of any payment due under this Lease from any other person shall not be
deemed to be a waiver by Landlord of any provision of this Lease or to be a
consent to any transfer. Consent by Landlord to one or more transfers shall not
operate as a waiver or estoppel to the future enforcement by Landlord of its
rights under this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than with
respect to the payment of rent hereunder) is incorporated by reference into and
made a part of such sublease, with "Landlord" hereunder meaning the sublandlord
therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by reason
of this assignment or the collection of sublease rentals, be deemed liable to
the subtenant for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon
receipt of a written notice from Landlord stating that an uncured default exists
in the performance of Tenant's obligations under this Lease, to pay to Landlord
all sums then and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord.
(c) In the event of the termination of this Lease, Landlord may, at
its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease,
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including without limitation those pertaining to insurance and indemnification,
shall be deemed incorporated by reference into the sublease despite the
termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially all of
Tenant's assets (other than bulk sales in the ordinary course of business) or,
if Tenant is a corporation, an unincorporated association, or a partnership, the
transfer, assignment or hypothecation of any stock or interest in such
corporation, association, or partnership in the aggregate of twenty-five percent
(25%) (except for publicly traded shares of stock constituting a transfer of
twenty-five percent (25%) or more in the aggregate, so long as no change in the
controlling interest of Tenant occurs as a result thereof) shall be deemed an
assignment within the meaning and provisions of this Article. Notwithstanding
the foregoing, Landlord's consent shall not be required for the assignment of
this Lease as a result of a merger by Tenant with or into another entity, so
long as (i) the net worth of the successor entity after such merger is at least
equal to the greater of the net worth of Tenant as of the execution of this
Lease by Landlord or the net worth of Tenant immediately prior to the date of
such merger, evidence of which, satisfactory to Landlord, shall be presented to
Landlord prior to such merger, (ii) Tenant shall provide to Landlord, prior to
such merger, written notice of such merger and such assignment documentation and
other information as Landlord may request in connection therewith, and (iii) all
of the other terms and requirements of this Article shall apply with respect to
such assignment.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in Exhibit D.
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Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide
any or all of the following types of insurance, with or without deductible and
in amounts and coverages as may be determined by Landlord in its discretion:
"all risk" property insurance, subject to standard exclusions, covering the
Building, and such other risks as Landlord or its mortgagees may from time to
time deem appropriate, including leasehold improvements made by Landlord, and
commercial general liability coverage. Landlord shall not be required to carry
insurance of any kind on Tenant's property, including leasehold improvements,
trade fixtures, furnishings, equipment, plate glass, signs and all other items
of personal property, and shall not be obligated to repair or replace that
property should damage occur. All proceeds of insurance maintained by Landlord
upon the Building shall be the property of Landlord, whether or not Landlord is
obligated to or elects to make any repairs. At Landlord's option, Landlord may
self-insure all or any portion of the risks for which Landlord elects to provide
insurance hereunder.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by law,
Tenant shall defend, indemnify, protect, save and hold harmless Landlord, its
agents, and any and all affiliates of Landlord, including, without limitation,
any corporations or other entities controlling, controlled by or under common
control with Landlord, from and against any and all claims, liabilities, costs
or expenses arising either before or after the Commencement Date from Tenant's
use or occupancy of the Premises or the Building, or from the conduct of its
business, or from any activity, work, or thing done, permitted or suffered by
Tenant or its agents, employees, invitees or licensees in or about the Premises
or the Building, or from any default in the performance of any obligation on
Tenant's part to be performed under this Lease, or from any act or negligence of
Tenant or its agents, employees, visitors, patrons, guests, invitees or
licensees. Landlord may, at its option, require Tenant to assume Landlord's
defense in any action covered by this Section through counsel satisfactory to
Landlord. The provisions of this Section shall expressly survive the expiration
or sooner termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable to
Tenant, its employees, agents and invitees, and Tenant hereby waives all claims
against Landlord for loss of or damage to any property, or any injury to any
person, or loss or interruption of business or income, or any other loss, cost,
damage, injury or liability whatsoever (including without limitation any
consequential damages and lost profit or opportunity costs) resulting from, but
not limited to, Acts of God, acts of civil disobedience or insurrection, fire,
explosion, falling plaster, steam, gas, electricity, water or rain which may
leak or flow from or into any part of the Building or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building. It is understood that any such condition may require the temporary
evacuation or closure of all or a portion of the Building. Except as provided in
Sections 11.1 and 12.1 below, there shall be no abatement of rent and no
liability of Landlord by reason of any injury to or interference with Tenant's
business (including without limitation consequential damages and lost profit or
opportunity costs) arising from the making of any repairs, alterations or
improvements to any portion of the Building, including repairs to the Premises,
nor shall any related activity by Landlord constitute an actual or constructive
eviction; provided, however, that in making repairs, alterations or
improvements, Landlord shall interfere as little as reasonably practicable with
the conduct of Tenant's business in the Premises. Neither Landlord nor its
agents shall be liable for interference with light or other similar intangible
interests. Tenant shall immediately notify Landlord in case of fire or accident
in the Premises or the Building and of defects in any improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives
all rights of recovery against the other and the other's agents on account of
loss and damage occasioned to the property of such waiving party to the extent
only that such loss or damage is required to be insured against under any "all
risk" property insurance policies required by this Article X; provided however,
that (i) the foregoing waiver shall not apply to the extent of Tenant's
obligations to pay deductibles under any such policies and this Lease, and (ii)
if any loss is due to the act, omission or negligence or willful misconduct of
Tenant or its agents, employees, contractors,
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guests or invitees, Tenant's liability insurance shall be primary and shall
cover all losses and damages prior to any other insurance hereunder. By this
waiver it is the intent of the parties that neither Landlord nor Tenant shall be
liable to any insurance company (by way of subrogation or otherwise) insuring
the other party for any loss or damage insured against under any "all-risk"
property insurance policies required by this Article, even though such loss or
damage might be occasioned by the negligence of such party, its agents,
employees, contractors, guests or invitees. The provisions of this Section shall
not limit the indemnification provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall repair that damage as
soon as reasonably possible, at its expense, unless: (i) Landlord reasonably
determines that the cost of repair is not covered by Landlord's fire and
extended coverage insurance plus such additional amounts Tenant elects, at its
option, to contribute, excluding however the deductible (for which Tenant shall
be responsible for Tenant's proportionate share); (ii) Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be fully
repaired by Landlord (or cannot be safely repaired because of the presence of
hazardous factors, including without limitation Hazardous Materials, earthquake
faults, and other similar dangers) within two hundred seventy (270) days after
the date of the damage; (iii) an event of default by Tenant has occurred and is
continuing at the time of such damage; or (iv) the damage occurs during the
final twelve (12) months of the Term. Should Landlord elect not to repair the
damage for one of the preceding reasons, Landlord shall so notify Tenant in
writing within sixty (60) days after the damage occurs and this Lease shall
terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in accordance with
subsection (a) above, this Lease shall continue in effect for the remainder of
the Term; provided that so long as Tenant is not in default under this Lease, if
the damage is so extensive that Landlord reasonably determines that the Premises
cannot, with reasonable diligence, be repaired by Landlord (or cannot be safely
repaired because of the presence of hazardous factors, earthquake faults, and
other similar dangers) so as to allow Tenant's substantial use and enjoyment of
the Premises within two hundred seventy (270) days after the date of damage,
then Tenant may elect to terminate this Lease by written notice to Landlord
within the sixty (60) day period stated in subsection (a).
(c) Commencing on the date of any damage to the Building, and ending
on the sooner of the date the damage is repaired or the date this Lease is
terminated, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Building that is rendered unusable by the
damage from time to time bears to the total floor area of the Building, but only
to the extent that any business interruption insurance proceeds are received by
Landlord therefor from Tenant's insurance described in Exhibit D.
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(d) Notwithstanding the provisions of subsections (a), (b) and (c) of
this Section, and subject to the provisions of Section 10.5 above, the cost of
any repairs shall be borne by Tenant, and Tenant shall not be entitled to rental
abatement or termination rights, if the damage is due to the fault or neglect of
Tenant or its employees, subtenants, invitees or representatives. In addition,
the provisions of this Section shall not be deemed to require Landlord to repair
any improvements or fixtures that Tenant is obligated to repair or insure
pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing Tenant's
personal property and any debris from the Premises to facilitate all inspections
of the Premises and the making of any repairs. Notwithstanding anything to the
contrary contained in this Lease, if Landlord in good faith believes there is a
risk of injury to persons or damage to property from entry into the Building or
Premises following any damage or destruction thereto, Landlord may restrict
entry into the Building or the Premises by Tenant, its employees, agents and
contractors in a non-discriminatory manner, without being deemed to have
violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of,
or evicted Tenant from, the Premises. Upon request, Landlord shall consult with
Tenant to determine if there are safe methods of entry into the Building or the
Premises solely in order to allow Tenant to retrieve files, data in computers,
and necessary inventory, subject however to all indemnities and waivers of
liability from Tenant to Landlord contained in this Lease and any additional
indemnities and waivers of liability which Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the
Premises is taken by any lawful authority by exercise of the right of eminent
domain, or sold to prevent a taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
the authority. In the event title to a portion of the Premises is taken or sold
in lieu of taking, and if Landlord elects to restore the Premises in such a way
as to alter the Premises materially, either party may terminate this Lease, by
written notice to the other party, effective on the date of vesting of title. In
the event neither party has elected to terminate this Lease as provided above,
then Landlord shall promptly, after receipt of a sufficient condemnation
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award, proceed to restore the Premises to substantially their condition prior to
the taking, and a proportionate allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of the taking and restoration. In the event
of a taking, Landlord shall be entitled to the entire amount of the condemnation
award without deduction for any estate or interest of Tenant; provided that
nothing in this Section shall be deemed to give Landlord any interest in, or
prevent Tenant from seeking any award against the taking authority for, the
taking of personal property and fixtures belonging to Tenant or for relocation
or business interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed one hundred
eighty (180) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking
of the parking area such that Landlord can no longer provide sufficient parking
to comply with this Lease, Landlord may substitute reasonably equivalent parking
in a location reasonably close to the Building; provided that if Landlord fails
to make that substitution within one hundred eighty (180) days following the
taking and if the taking materially impairs Tenant's use and enjoyment of the
Premises, Tenant may, at its option, terminate this Lease by written notice to
Landlord. If this Lease is not so terminated by Tenant, there shall be no
abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease shall be
either superior or subordinate to all ground or underlying leases, mortgages and
deeds of trust, if any, which may hereafter affect the Premises, and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, that so long as Tenant is not in default under this Lease, this Lease
shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in
the event of termination of any such ground or underlying lease, or the
foreclosure of any such mortgage or deed of trust, to which Tenant has
subordinated this Lease pursuant to this Section. In the event of a termination
or foreclosure, Tenant shall become a tenant of and attorn to the successor-in-
interest to Landlord upon the same terms and conditions as are contained in this
Lease, and shall execute any instrument reasonably required by Landlord's
successor for that purpose. Tenant shall also, upon written request of Landlord,
execute and deliver all instruments as may be required from time to time to
subordinate the rights of Tenant under this Lease to any ground or underlying
lease or to the lien of any mortgage or deed of trust (provided that such
instruments include the nondisturbance and attornment provisions set forth
above), or, if requested by Landlord, to subordinate, in whole or in part, any
ground or underlying lease or the lien of any mortgage or deed of trust to this
Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10) days prior
written notice from Landlord, execute, acknowledge and deliver to Landlord, in
any form that Landlord may reasonably require, a statement in writing (i)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of the modification and certifying that this Lease,
as modified, is in full force and effect) and the dates to which the rental,
additional rent and other charges have been paid in advance, if any, and (ii)
acknowledging that, to Tenant's knowledge, there are no uncured defaults on the
part of Landlord, or specifying each default if any are claimed, and (iii)
setting forth all further information that Landlord may reasonably require.
Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than one month's
rental has been paid in advance.
SECTION 13.3. FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of this
Lease and thereafter at any time upon Landlord's request, Tenant's current tax
returns and financial statements, certified true, accurate and complete by the
chief financial officer of Tenant, including a balance sheet and profit and loss
statement for the most recent prior year (collectively, the "Statements"), which
Statements shall accurately and completely reflect the financial condition of
Tenant. Landlord agrees that it will keep the Statements confidential, except
that Landlord shall have the right to deliver the same to any proposed purchaser
or encumbrancer of the Premises.
(b) Tenant acknowledges that Landlord is relying on the Statements in
its determination to enter into this Lease, and Tenant represents to Landlord,
which representation shall be deemed made on the date of this Lease and again on
the Commencement Date, that no material change in the financial condition of
Tenant, as reflected in the Statements, has occurred since the date Tenant
delivered the Statements to Landlord. The Statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of submission by any Statements to
Landlord.
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ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default
set forth in this Lease, the occurrence of any one or more of the following
events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of three (3) days after written notice from Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure Section 1161
and 1161(a) as amended. For purposes of these default and remedies provisions,
the term "additional rent" shall be deemed to include all amounts of any type
whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of
this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the Lease
by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy, or other means, without the prior
written consent of Landlord.
(c) The discovery by Landlord that any financial statement provided
by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or perform any of
the express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature
of the failure is such that more than thirty (30) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences the cure within thirty (30) days, and thereafter diligently pursues
the cure to completion.
(f) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) the filing by or against Tenant of a petition to have
Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within thirty (30) days; or (v) Tenant's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Landlord shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Landlord, nor
shall there be any presumption attributable to Landlord of Tenant's insolvency.
In the event that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. Such
termination shall not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the Premises and
remove all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which
the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that Tenant
proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by which
the unpaid rent and additional rent for the balance of the Term after the time
of award exceeds the amount of such loss that Tenant proves could be reasonably
avoided;
(4) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result from Tenant's default, including, but not limited to, the cost
of recovering possession of the Premises, refurbishment of the Premises,
marketing costs, commissions and other expenses of reletting, including
necessary repair, the unamortized portion of any tenant improvements and
brokerage
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commissions funded by Landlord in connection with this Lease, reasonable
attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other amounts in addition
to or in lieu of the foregoing as may be permitted by law. The term "rent" as
used in this Lease shall be deemed to mean the Basic Rent and all other sums
required to be paid by Tenant to Landlord pursuant to the terms of this Lease.
Any sum, other than Basic Rent, shall be computed on the basis of the average
monthly amount accruing during the twenty-four (24) month period immediately
prior to default, except that if it becomes necessary to compute such rental
before the twenty-four (24) month period has occurred, then the computation
shall be on the basis of the average monthly amount during the shorter period.
As used in subparagraphs (1) and (2) above, the "worth at the time of award"
shall be computed by allowing interest at the rate of ten percent (10%) per
annum. As used in subparagraph (3) above, the "worth at the time of award" shall
be computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce all
of its rights and remedies under this Lease, including the right to collect all
rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet
the Premises, or the appointment of a receiver to protect the Landlord's
interests under this Lease, shall not constitute a termination of the Tenant's
right to possession of the Premises. In the event that Landlord elects to avail
itself of the remedy provided by this subsection (ii), Landlord shall not
unreasonably withhold its consent to an assignment or subletting of the Premises
subject to the reasonable standards for Landlord's consent as are contained in
this Lease.
(b) Landlord shall be under no obligation to observe or perform any
covenant of this Lease on its part to be observed or performed which accrues
after the date of any default by Tenant unless and until the default is cured by
Tenant, it being understood and agreed that the performance by Landlord of its
obligations under this Lease are expressly conditioned upon Tenant's full and
timely performance of its obligations under this Lease. The various rights and
remedies reserved to Landlord in this Lease or otherwise shall be cumulative
and, except as otherwise provided by California law, Landlord may pursue any or
all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of the right or remedy or of any default by
Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment without prejudice to
Landlord's right to recover the balance of the rent or pursue any other remedy
available to it. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease, and
the delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within five (5) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any default by Tenant under this Lease. In addition,
Tenant acknowledges that the late payment by Tenant to Landlord of rent will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult and impracticable to ascertain. Those costs
may include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Landlord by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Tenant shall not be received by Landlord or Landlord's designee
within five (5) days after the date due, then Tenant shall pay to Landlord, in
addition to the interest provided above, a late charge in a sum equal to the
greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars
($250.00) for each delinquent payment. Acceptance of a late charge by Landlord
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor shall it prevent Landlord from exercising any of its other rights
and remedies.
(b) Following each second consecutive installment of rent that is not
paid within five (5) days following notice of nonpayment from Landlord, Landlord
shall have the option (i) to require that beginning with the first payment of
rent next due, rent shall no longer be paid in monthly installments but shall be
payable quarterly three (3) months in advance and/or (ii) to require that Tenant
increase the amount, if any, of the Security Deposit by one hundred percent
(100%). Should Tenant deliver to Landlord, at any time during the Term, two (2)
or more insufficient checks, the Landlord may require that all monies then and
thereafter due from Tenant be paid to Landlord by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to
be performed by Tenant under this Lease shall be performed at Tenant's sole cost
and expense and without any abatement of rent or right of set-off. If Tenant
fails to pay any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure continues
beyond any applicable grace period set forth in Section 14.1, then in addition
to any other available remedies, Landlord may, at its election make the
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payment or perform the other act on Tenant's part. Landlord's election to make
the payment or perform the act on Tenant's part shall not give rise to any
responsibility of Landlord to continue making the same or similar payments or
performing the same or similar acts. Tenant shall, promptly upon demand by
Landlord, reimburse Landlord for all sums paid by Landlord and all necessary
incidental costs, together with interest at the maximum rate permitted by law
from the date of the payment by Landlord. Landlord shall have the same rights
and remedies if Tenant fails to pay those amounts as Landlord would have in the
event of a default by Tenant in the payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease or
holding over of possession by Tenant after the expiration or earlier termination
of this Lease, including without limitation all costs, expenses and actual
accountants, appraisers, attorneys and other professional fees, and any
collection agency or other collection charges, shall be due and payable by
Tenant to Landlord on demand, and shall bear interest at the rate of ten percent
(10%) per annum. Should either Landlord or Tenant bring any action in connection
with this Lease, the prevailing party shall be entitled to recover as a part of
the action its reasonable attorneys' fees, and all other costs. The prevailing
party for the purpose of this paragraph shall be determined by the trier of the
facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord do not
constitute the personal obligations of the individual partners, trustees,
directors, officers or shareholders of Landlord or its constituent partners.
Should Tenant recover a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Building and out of the rent or other income from such property receivable
by Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Building, and no action for any deficiency may be sought or obtained by Tenant.
SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim, demand or
right of any kind by Tenant which is based upon or arises in connection with
this Lease shall be barred unless Tenant commences an action thereon within six
(6) months after the date that the act, omission, event or default upon which
the claim, demand or right arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be the greater of (a) two
hundred percent (200%) of the Basic Rent for the month immediately preceding the
date of termination or (b) the then currently scheduled Basic Rent for
comparable space in the Building. If Tenant fails to surrender the Premises upon
the expiration of this Lease despite demand to do so by Landlord, Tenant shall
indemnify and hold Landlord harmless from all loss or liability, including
without limitation, any claims made by any succeeding tenant relating to such
failure to surrender. Acceptance by Landlord of rent after the termination shall
not constitute a consent to a holdover or result in a renewal of this Lease. The
foregoing provisions of this Section are in addition to and do not affect
Landlord's right of re-entry or any other rights of Landlord under this Lease or
at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the
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Premises to Landlord in as good order, condition and repair as when received or
as hereafter may be improved by Landlord or Tenant, reasonable wear and tear and
repairs which are Landlord's obligation excepted, and shall, without expense to
Landlord, remove or cause to be removed from the Premises all personal property
and debris, except for any items that Landlord may by written authorization
allow to remain. Tenant shall repair all damage to the Premises resulting from
the removal, which repair shall include the patching and filling of holes and
repair of structural damage, provided that Landlord may instead elect to repair
any structural damage at Tenant's expense. If Tenant shall fail to comply with
the provisions of this Section, Landlord may effect the removal and/or make any
repairs, and the cost to Landlord shall be additional rent payable by Tenant
upon demand. If Tenant fails to remove Tenant's personal property from the
Premises upon the expiration of the Term, Landlord may remove, store, dispose of
and/or retain such personal property, at Landlord's option, in accordance with
then applicable laws, all at the expense of Tenant. If requested by Landlord,
Tenant shall execute, acknowledge and deliver to Landlord an instrument in
writing releasing and quitclaiming to Landlord all right, title and interest of
Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either party to the other may be delivered in person or by courier
or overnight delivery service to the other party, or may be deposited in the
United States mail, duly registered or certified, postage prepaid, return
receipt requested, and addressed to the other party at the address set forth in
Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from
and after the Commencement Date, at the Premises (whether or not Tenant has
departed from, abandoned or vacated the Premises), or may be delivered by
telegram, telex or telecopy, provided that receipt thereof is telephonically
confirmed. Either party may, by written notice to the other, served in the
manner provided in this Article, designate a different address. If any notice or
other document is sent by mail, it shall be deemed served or delivered twenty-
four (24) hours after mailing. If more than one person or entity is named as
Tenant under this Lease, service of any notice upon any one of them shall be
deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory
---------
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the Premises. Landlord shall not be liable to Tenant
for any violation of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's agents, employees,
contractors, quests or invitees. One or more waivers by Landlord of any breach
of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a
waiver of any subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a default under this
Lease. In the case of any conflict between the Rules and Regulations and this
Lease, this Lease shall be controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by Tenant in connection with
the negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease. If Tenant fails to take possession of the Premises or
if this Lease otherwise terminates prior to the Expiration Date as the result of
failure of performance by Tenant, Landlord shall be entitled to recover from
Tenant the unamortized portion of any brokerage commission funded by Landlord in
addition to any other damages to which Landlord may be entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or deed
of trust to which this Lease is or may be subordinate, and no landlord under a
so-called sale-leaseback, shall be responsible in connection with the Security
Deposit, unless the mortgagee or holder of the deed of trust or the
16.
<PAGE>
landlord actually receives the Security Deposit. It is intended that the
covenants and obligations contained in this Lease on the part of Landlord shall,
subject to the foregoing, be binding on Landlord, its successors and assigns,
only during and in respect to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in a writing signed by Landlord.
The rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall
be delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises and the Building, and all preliminary
negotiations, oral agreements, understandings and/or practices, except those
contained in this Lease, are superseded and of no further effect. Tenant waives
its rights to rely on any representations or promises made by Landlord or others
which are not contained in this Lease. No verbal agreement or implied covenant
shall be held to modify the provisions of this Lease, any statute, law, or
custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
17.
<PAGE>
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement or
certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No actions, policies,
oral or informal arrangements, business dealings or other course of conduct by
or between the parties shall be deemed to modify this Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Landlord, either directly or indirectly,
without the prior written consent of Landlord, provided, however, that Tenant
may disclose the terms to prospective subtenants or assignees under this Lease.
SECTION 22.2. GUARANTY. As a condition to the execution of this Lease by
Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of
the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining
financing for the Building, the lender shall request reasonable modifications in
this Lease as a condition to the financing, Tenant will not unreasonably
withhold or delay its consent, provided that the modifications do not materially
increase the obligations of Tenant or materially and adversely affect the
leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of
Landlord which would otherwise entitle Tenant to be relieved of its obligations
hereunder or to terminate this Lease shall result in such a release or
termination unless (a) Tenant has given notice by registered or certified mail
to any beneficiary of a deed of trust or mortgage covering the Premises whose
address has been furnished to Tenant and (b) such beneficiary is afforded a
reasonable opportunity to cure the default by Landlord (which in no event shall
be less than sixty (60) days), including, if necessary to effect the cure, time
to obtain possession of the Premises by power of sale or judicial foreclosure
provided that such foreclosure remedy is diligently pursued. Tenant agrees that
each beneficiary of a deed of trust or mortgage covering the Premises is an
express third party beneficiary hereof, Tenant shall have no right or claim for
the collection of any deposit from such beneficiary or from any purchaser at a
foreclosure sale unless such beneficiary or purchaser shall have actually
received and not refunded the deposit, and Tenant shall comply with any written
directions by any beneficiary to pay rent due hereunder directly to such
beneficiary without determining whether an event of default exists under such
beneficiary's deed of trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this Lease
shall be construed to be conditions as well as covenants as though the words
specifically expressing or imparting covenants and conditions were used in each
separate provision.
18.
<PAGE>
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises. Tenant assumes all responsibility for
the protection of Tenant, its agents, invitees and property from acts of third
parties. Nothing herein contained shall prevent Landlord, at its sole option,
from providing security protection for the Premises or any part thereof, in
which event the cost thereof shall be included within the definition of Building
Costs.
LANDLORD: TENANT:
____________________ ENTER TENANT NAME
19.
<PAGE>
EXHIBIT A
Description of the Premises
---------------------------
[To Be Inserted]
EXHIBIT A
<PAGE>
EXHIBIT A-1
Description of the Site
-----------------------
[To Be Inserted]
EXHIBIT A-1
<PAGE>
EXHIBIT X
Work Letter
-----------
[To Be Inserted]
EXHIBIT X
<PAGE>
EXHIBIT 10.17
SUMMIT
LEASE
AEW \ PARKER II, LLC,
a California limited liability company
as Landlord,
and
BUY.COM,
a ________________________
as Tenant.
<PAGE>
INDEX
-----
ARTICLE SUBJECT MATTER PAGE
- ---------------------- ----
1. PROJECT, BUILDING AND PREMISES..................................... 1
2. INITIAL LEASE TERM; OPTION TERM.................................... 2
3. BASE RENT; ABATEMENT OF BASE RENT.................................. 3
4. ADDITIONAL RENT.................................................... 3
5. USE OF PREMISES.................................................... 5
6. SERVICES AND UTILITIES............................................. 6
7. REPAIRS............................................................ 6
8. ADDITIONS AND ALTERATIONS.......................................... 7
9. COVENANT AGAINST LIENS............................................. 7
10. INSURANCE.......................................................... 7
11. DAMAGE AND DESTRUCTION............................................. 8
12. NONWAIVER.......................................................... 9
13. CONDEMNATION....................................................... 9
14. ASSIGNMENT AND SUBLETTING.......................................... 9
15. OWNERSHIP AND REMOVAL OF TRADE FIXTURES............................ 11
16. HOLDING OVER....................................................... 11
17. ESTOPPEL CERTIFICATES.............................................. 11
18. SUBORDINATION...................................................... 11
19. DEFAULTS; REMEDIES................................................. 12
20. FORCE MAJEURE...................................................... 12
21. SECURITY DEPOSIT; LETTER OF CREDIT................................. 13
22. INTENTIONALLY OMITTED.............................................. 13
23. SIGNS.............................................................. 13
24. COMPLIANCE WITH LAW................................................ 14
25. LATE CHARGES....................................................... 14
26. LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT............... 14
27. ENTRY BY LANDLORD.................................................. 14
28. TENANT PARKING..................................................... 15
29. MISCELLANEOUS PROVISIONS........................................... 15
EXHIBITS
- --------
A OUTLINE OF PREMISES
B TENANT WORK LETTER
C NOTICE OF LEASE TERM DATES
D RULES AND REGULATIONS
E ESTOPPEL CERTIFICATE
F RECOGNITION OF COVENANTS, CONDITIONS AND RESTRICTIONS
G LETTER OF CREDIT
-i-
<PAGE>
INDEX OF MAJOR DEFINED TERMS
----------------------------
PAGE
----
Abatement Event............................................................ 6
Additional Rent............................................................ 3
After-Hours HVAC........................................................... 6
Alterations................................................................ 7
Base Rent.................................................................. 3
Base Year.................................................................. 3
Brokers.................................................................... 16
Building................................................................... 1
Child Care Facilities...................................................... 18
Child Care Provider........................................................ 18
Common Areas............................................................... 1
Cost Pools................................................................. 4
Direct Expenses............................................................ 3
Eligibility Period......................................................... 6
Estimate................................................................... 5
Estimate Statement......................................................... 5
Estimated Excess........................................................... 5
Excess..................................................................... 5
Existing Building First Offer Space........................................ 1
Expense Year............................................................... 3
Extension Option........................................................... 2
First Offer Commencement Date.............................................. 2
First Offer Notice......................................................... 1
First Offer Rent........................................................... 1
Force Majeure.............................................................. 12
Hazardous Material......................................................... 17
HVAC....................................................................... 6
Initial Premises........................................................... 1
Landlord Parties........................................................... 7
L-C........................................................................ 13
L-C Amount................................................................. 13
L-C Security Deposit....................................................... 13
Lease Commencement Date.................................................... 2
Lease Expiration Date...................................................... 2
Lease Term................................................................. 2
Monument................................................................... 13
Notices.................................................................... 16
Operating Expenses......................................................... 3
Option Rent................................................................ 2
Option Rent Notice......................................................... 2
Option Term................................................................ 2
Original Tenant............................................................ 1
Other Improvements......................................................... 17
Permitted Use.............................................................. 5
Prior Base Rent............................................................ 1
Project.................................................................... 1
Proposition 13............................................................. 4
Provider................................................................... 18
Renovation Abatement Event................................................. 17
Renovation Eligibility Period.............................................. 17
Renovations................................................................ 17
Rent....................................................................... 3
Statement.................................................................. 5
Subject Space.............................................................. 9
Superior Right Holders..................................................... 1
Tax Expenses............................................................... 4
Tenant Signage............................................................. 14
Tenant's Share............................................................. 5
Transfer Notice............................................................ 9
Transfer Premium........................................................... 10
Transferee................................................................. 9
Transfers.................................................................. 9
-ii-
<PAGE>
SUMMIT
------
SUMMARY OF BASIC LEASE INFORMATION
----------------------------------
The undersigned hereby agree to the following terms of this Summary of
Basic Lease Information (the "Summary"). This Summary is hereby incorporated
into and made a part of the attached Lease (this Summary and the Lease to be
known collectively as the "Lease") which pertains to the building which is
located at 85 Enterprise, Aliso Viejo, California (the "Building"). Each
reference in the Lease to any term of this Summary shall have the meaning as set
forth in this Summary for such term. In the event of a conflict between the
terms of this Summary and the Lease, the terms of the Lease shall prevail. Any
capitalized terms used herein and not otherwise defined herein shall have the
meaning as set forth in the Lease.
TERMS OF LEASE
(References are to the Lease) DESCRIPTION
- ----------------------------- -----------
1. Date: June ___, 1999.
2. Landlord: AEW \ Parker II, LLC, a California
limited liability company
3. Address of Landlord 95 Enterprise
(Section 29.14): Suite 200
------------- Aliso Viejo, California 92656
Attention: Todd Burnight, Esq.
and
Allen, Matkins, Leck, Gamble & Mallory
LLP
1999 Avenue of the Stars
Suite 1800
Los Angeles, California 90067
Attention: Anton N. Natsis, Esq.
4. Tenant: Buy.com, a __________________________
5. Address of Tenant
(Section 29.14): ____________________________________
------------- ____________________________________
____________________________________
____________________________________
Attention: _________________________
6. Premises (Article 1): Approximately 53,583 rentable (50,186
--------- usable) square feet of space located on
the first (1st) floor (which contains
approximately 25,053 rentable square
feet and approximately 23,364 usable
square feet) and second (2nd) floor
(which contains approximately 28,530
rentable square feet and approximately
26,822 usable square feet) of the
Building, as set forth on Exhibit A
attached hereto.
7. Term (Article 2).
---------
7.1 Lease Term: Five (5) years and six (6) months.
7.2 Lease Commencement Date The earlier of (i) the date Tenant
commences business in the Premises, and
(ii) the date the Premises are Ready for
Occupancy (as defined in the Tenant Work
Letter attached hereto as Exhibit B),
---------
which Lease Commencement Date is
anticipated to be November 15, 1999.
7.3 Lease Expiration Date The last day of the sixty-sixth (66th)
month of the Lease Term.
8. Base Rent (Article 3):
---------
Monthly Monthly Rental
Months of Installment Rate per Rentable
Lease Term of Base Rent Square Foot
---------- ------------ -----------
1-6 $ 92,397.30 $2.35 (subject to Section 3.2)
-----------
7-66 $125,920.05 $2.35
9. Additional Rent (Article 4).
---------
9.1 Base Year: Calendar year 2000.
9.2 Tenant's Share of Direct
Expenses: 48.40%
10. Use (Article 5): General office use only.
---------
SUMMIT
85 ENTERPRISE
[Buy.com]
<PAGE>
11. Security Deposit (Article 21): None
----------
Letter of Credit (Article 21): $2,622,210.20 (representing the
---------- following: (i) the sum of leasing
commissions equal to $486,575.21, (ii)
Tenant improvement costs equal to
$1,380,115 and (iii) six months of Base
Rent equal to $755,520).
12. Parking Pass Ratio (Article 28): 4 parking passes for every 1,000
---------- rentable square feet of the Premises, of
which ten (10) shall be for covered,
reserved spaces.
13. Brokers (Section 29.21): CB Richard Ellis, Inc.
------------- 24422 Avenida de la Carlota, Suite 120
Laguna Hills, California 92653
14. Tenant Improvement Allowance
(Section 2 of Exhibit B): $27.50 x usable square feet
----------------------
-2-
SUMMIT
85 ENTERPRISE
[Buy.com]
<PAGE>
LEASE
-----
This Lease, which includes the preceding Summary of Basic Lease Information
(the "Summary") attached hereto and incorporated herein by this reference (the
Lease and Summary to be known sometimes collectively hereafter as the "Lease"),
dated as of the date set forth in Section 1 of the Summary, is made by and
---------
between AEW \ PARKER II, LLC, a California limited liability company
("Landlord"), and BUY.COM, a ________________________ ("Tenant").
1. PROJECT, BUILDING AND PREMISES
------------------------------
1.1 Project, Building and Premises. Upon and subject to the terms,
------------------------------
covenants and conditions hereinafter set forth in this Lease, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the premises set forth
in Section 6 of the Summary (the "Initial Premises," and together with all space
---------
leased by Tenant from time to time pursuant to this Lease, the "Premises"),
which Initial Premises is located in the "Building," as that term is defined in
this Section 1. The Premises are a part of the building (the "Building")
---------
located at 85 Enterprise, Aliso Viejo, California and is a part of the mixed use
project known as the "Summit". The term "Project," as used in this Lease, shall
mean (i) the Building and the "Common Areas," as that term is defined below,
(ii) the land (which is improved with landscaping and other improvements) upon
which the Building and the Common Areas are located, (iii) the other office
buildings located adjacent to the Building and the land upon which such adjacent
office buildings are located, (iv) the parking facility servicing the Building
(the "Building Parking Facility"), and (v) at Landlord's reasonable discretion,
any additional real property, areas, land, buildings or other improvements added
thereto outside of but adjacent to or in close proximity with the Project.
Tenant shall have the non-exclusive right to use and enjoy in common with other
tenants in the Building those portions of the Project which are provided for use
in common by Tenant and any other tenants of the Project (the "Common Areas").
Subject to Landlord's reasonable rules and regulations and access control
procedures, Tenant shall have the right of access to the Premises twenty-four
(24) hours per day, seven (7) days per week during the "Lease Term," as that
term is defined in Article 2 of this Lease. Except as specifically set forth in
---------
this Lease and in the Tenant Work Letter attached hereto as Exhibit B, Landlord
shall not be obligated to provide or pay for any improvement work or services
related to the improvement of the Premises. Tenant also acknowledges that
Landlord has made no representation or warranty regarding the condition of the
Premises or the Building or the Project except as specifically set forth in this
Lease and the Tenant Work Letter.
1.2 Verification of Rentable Square Feet of Premises and Building. For
-------------------------------------------------------------
purposes of this Lease, "rentable square feet" and "usable square feet" shall be
calculated pursuant to Standard Method of Measuring Floor Area in Office
Building, ANSI Z65.1 - 1996 ("BOMA"). Promptly following the Substantial
Completion of the Premises, the Building and the Premises shall be measured by
Stevenson Systems, Landlord's space planner/architect, to determine the actual
rentable and usable square footage. The determination of Landlord's space
planner/architect shall be conclusive and binding upon the parties. In the event
that Landlord's space planner/architect determines that the amounts thereof
shall be different from those set forth in this Lease, all amounts, percentages
and figures appearing or referred to in this Lease based upon such incorrect
amount (including, without limitation, the amount of the "Rent" and any
"Security Deposit," as those terms are defined in Section 4.1 and Article 21
----------- ----------
of this Lease, respectively) shall be modified in accordance with such
determination effective as of the date of such determination. If such
determination is made, it will be confirmed in writing by Landlord to Tenant.
1.3 Existing Building Right of First Offer. Landlord hereby grants to the
--------------------------------------
Tenant named in the Summary (the "Original Tenant") a continuing right of first
offer with respect to any space on the third (3rd) or fourth (4th) floors of the
Building that becomes "Available for Lease," as that term is defined below,
after the date hereof (the "Existing Building First Offer Space"). The Existing
Building First Offer Space (or portions thereof) shall be deemed "Available for
Lease" only following the expiration or earlier termination of the initial
lease(s) of the Existing Building First Offer Space, including any renewal of
such lease(s), whether or not such renewal is pursuant to an express written
provision in such lease(s), and regardless of whether any such renewal is
consummated pursuant to a lease amendment or a new lease(s), and such first
offer right shall be subordinate to all rights of all other tenants of the
Building to lease the Existing Building First Offer Space in existence as of the
date hereof (whether pursuant to existing rights of first offer, expansion
options, must-take requirements, or otherwise) (collectively, the "Superior
Right Holders"). Tenant's right of first offer shall be on the terms, covenants
and conditions ("TCCs") set forth in this Section 1.3.
-----------
1.3.1 Procedure for Offer. Landlord shall notify Tenant (the "First
-------------------
Offer Notice") when and if the Existing Building First Offer Space (or portions
thereof) becomes Available for Lease during the first four (4) "Lease Years," as
that term is defined in Section 2.1 below, provided that no Superior Right
-----------
Holder wishes to lease such space. Pursuant to such First Offer Notice, Landlord
shall offer to lease to Tenant the Existing Building First Offer Space (or
applicable portion thereof). The First Offer Notice shall describe the space so
offered to Tenant and shall set forth the "First Offer Rent," as that term is
defined in Section 1.3.3 below, and the other economic terms upon which Landlord
-------------
is willing to lease such space to Tenant.
1.3.2 Procedure for Acceptance. If Tenant wishes to exercise Tenant's
------------------------
right of first offer with respect to the space described in the First Offer
Notice, then within five (5) business days of delivery of the First Offer Notice
to Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to
exercise its right of first offer with respect to the entire space described in
the First Offer Notice on the terms contained in such notice. If Tenant does not
so notify Landlord within the five (5) business day period, then Landlord shall
be free to lease the space described in the First Offer Notice to anyone to whom
Landlord desires on any terms Landlord desires. Notwithstanding anything to the
contrary contained herein, Tenant must elect to exercise its right of first
offer, if at all, with respect to all of the space offered by Landlord to
Tenant, and Tenant may not elect to lease only a portion thereof.
1.3.3 First Offer Rent. The rent payable by Tenant for the Existing
----------------
Building First Offer Space (the "First Offer Rent") shall be equal to the rent
(including additional rent and considering any "base year" or "expense stop"
applicable thereto), including all escalations, at which tenants, as of the
"First Offer Commencement Date," as that term is defined in Section 1.3.5,
-------------
below, are leasing non-sublease, non-encumbered, non-equity space comparable in
size, location and quality to the Existing Building First Offer Space for a
similar lease term, which comparable space is located in the Project, taking
into consideration only the following concessions (collectively, the "RFO
Concessions"): (a) rental abatement concessions, if any, being granted such
tenants in connection with such comparable space, and (b) tenant improvements or
allowances provided or to be provided for such comparable space, taking into
account, and deducting the value of, the existing improvements in the Existing
Building First Offer Space, such value to be based upon the age, quality and
layout of the improvements and the extent to which the same could be utilized by
a general office user. Notwithstanding anything to the contrary in the
foregoing, in no event shall the base rent component of the First Offer Rent be
less than the sum of (i) the Base Rent on an annual, per rentable square foot
basis under this Lease for the Initial Premises as of the "First Offer
Commencement Date," as that term is defined in Section 1.3.4 below, including
-------------
all applicable escalations to the Base Rent made or to be made during the Lease
Term, and (ii) the amount of Tenant's Share of Direct Expenses, as that term is
defined in Section 4.2.2 below, payable by Tenant on an annual, per rentable
-------------
square foot basis for the Premises immediately prior to such commencement date
(collectively, the "Prior Base Rent"). In the event that the base rent component
of the First Offer Rent is the Prior Base Rent, then (A) the new "Base Year," as
that term is defined in Section 4.2.1, below, with respect to the Existing
-------------
Building First Offer Space only shall be the calendar year in which the First
Offer Commencement Date occurs with respect to the Existing
SUMMIT
85 ENTERPRISE
[Buy.com]
<PAGE>
Building First Offer Space, and (B) the concessions granted to Tenant in
connection with the Existing Building First Offer Space shall be equal to the
RFO Concessions.
1.3.4 Construction In Existing Building First Offer Space; Automatic
--------------------------------------------------------------
Extension of Lease Term. Tenant shall take the Existing Building First Offer
- -----------------------
Space in its "as is" condition, and the construction of improvements in the
Existing Building First Offer Space shall comply with the terms of Article 8 of
---------
this Lease. Tenant shall commence payment of rent for the Existing Building
First Offer Space, and the term of the Lease with respect to the Existing
Building First Offer Space shall commence upon the date of delivery of the
Existing Building First Offer Space to Tenant (the "First Offer Commencement
Date"). The term of this Lease with respect to the Existing Building First Offer
Space shall be for the period set forth in the First Offer Notice.
1.3.5 Amendment to Lease. If Tenant timely exercises Tenant's right
------------------
to lease the Existing Building First Offer Space as set forth herein, Landlord
and Tenant shall within fifteen (15) days thereafter execute an amendment to
this Lease for such Existing Building First Offer Space upon the TCCs set forth
in the First Offer Notice and this Section 1.3.
-----------
1.3.6 Termination of Right of First Offer. The rights contained in
-----------------------------------
this Section 1.3 shall be personal to the Original Tenant, and may only be
-----------
exercised by the Original Tenant (and not any assignee, sublessee or other
transferee of Tenant's interest in this Lease) if Tenant occupies the entire
Premises as of the date of the attempted exercise of the right of first offer by
Tenant and as of the scheduled date of delivery of such Existing Building First
Offer Space to Tenant. The right of first offer granted herein shall terminate
upon the failure by Tenant to exercise its right of first offer with respect to
the Existing Building First Offer Space as offered by Landlord. Notwithstanding
the foregoing, Landlord shall have no obligation to offer the Existing Building
First Offer Space (or any portion thereof) to Tenant and Tenant shall not have
the right to lease the Existing Building First Offer Space (or any portion
thereof), as provided in this Section 1.3, (i) after the commencement of the
-----------
fifth (5th) "Lease Year," or (ii) if, as of the date of the attempted exercise
of the right of first offer by Tenant, or as of the scheduled date of delivery
of such Existing Building First Offer Space to Tenant, Tenant is in default
under this Lease or Tenant has previously been in default under this Lease more
than once.
2. INITIAL LEASE TERM; OPTION TERM.
-------------------------------
2.1 Initial Lease Term. The terms and provisions of this Lease shall be
effective as of the date of this Lease except for the provisions of this Lease
relating to the payment of "Rent," as that term is defined in Section 4.1,
-----------
below. The term of this Lease (the "Lease Term") shall be as set forth in
Section 7.1 of the Summary and shall commence on the date (the "Lease
- -----------
Commencement Date") set forth in Section 7.2 of the Summary (subject to the
-----------
terms of the Tenant Work Letter) and shall terminate on the date (the "Lease
Expiration Date") set forth in Section 7.3 of the Summary, unless sooner
-----------
terminated or extended as hereinafter provided. For purposes of this Lease, the
term "Lease Year" shall mean consecutive twelve (12) month period during the
Lease Term. At any time during the Lease Term, Landlord may deliver to Tenant a
factually correct notice of Lease Term dates in the form as set forth in Exhibit
C, attached hereto, which notice Tenant shall execute and return to Landlord
within five (5) business days of receipt thereof. Notwithstanding the foregoing,
Tenant shall be entitled to occupancy of the Premises when the same are "Ready
for Occupancy" (as defined in Section 5.01 of the Tenant Work Letter), and
------------
further Tenant shall be allowed to early entry to the Premises in accordance
with the terms of Section 6.1 of the Tenant Work Letter for the purposes
described therein.
2.2 Option Term.
-----------
2.2.1 Option Right. Landlord hereby grants the Original Tenant one
------------
(1) option to extend the Lease Term ("Extension Option") for a period of five
(5) years (the "Option Term"), which option shall be exercisable only by written
notice delivered by Tenant to Landlord as provided below, provided that, as of
the date of delivery of such notice, Tenant is not in default under this Lease
(after the expiration of any applicable cure periods) and Landlord has not
delivered three (3) or more factually correct notices of Tenant's default under
this Lease during the last twelve (12) months immediately preceding the
expiration of the initial Lease Term. Upon the proper exercise of such option to
extend, and provided that, as of the end of the initial Lease Term, Tenant is
not in default under this Lease (after the expiration of any applicable cure
periods) and Landlord has not delivered three (3) or more factually correct
notices of Tenant's default under this Lease during the last twelve (12) months
immediately preceding the expiration of the initial Lease Term, the Lease Term,
as it applies to the Initial Premises and the Existing Building First Offer
Space (if any), shall be extended for a period of five (5) years. The rights
contained in this Section 2.2 shall be personal to the Original Tenant and any
Permitted Transferee (as defined in Section 14.6 below) and may only be
------------
exercised by the Original Tenant (and any Permitted Transferee, but not any
other assignee, sublessee or other transferee of the Original Tenant's interest
in this Lease) if the Original Tenant occupies not less than ninety percent
(90%) of the Premises.
2.2.2 Option Rent. The rent payable by Tenant during the Option Term
-----------
with respect to the Initial Premises (the "Option Rent") shall be the Rent
(including Additional Rent and considering any "base year" applicable thereto),
including all escalations, at which tenants, as of the commencement of the
Option Term, are leasing non-sublease, non-encumbered space comparable in size,
location and quality to the Initial Premises for a term of five (5) years, which
comparable space is located in the Project, taking into consideration only the
following concessions (collectively, the "Option Rent Concessions"): (a) rental
abatement concessions, if any, being granted such tenants in connection with
such comparable space, (b) tenant improvements or allowances provided or to be
provided for such comparable space, taking into account, and deducting the value
of, the existing improvements in the Existing Building First Offer Space, such
value to be based upon the age, quality and layout of the improvements and the
extent to which the same could be utilized by a general office user; and (c)
leasing commissions that would be payable to licensed real estate brokers.
Notwithstanding anything to the contrary in the foregoing, in no event shall the
"Base Rent," as that term is defined in Section 3.1 below, payable by Tenant
-----------
during the Option Term with respect to the Premises be less than the "Prior Base
Rent," as that term is defined in Section 1.3.3 above, except the Prior Base
------------
Rent shall be determined as of the commencement of the Option Term. In the event
that the base rent component of the Option Rent is the Prior Base Rent, then (A)
the new "Base Year," as that term is defined in Section 4.2.1, below, with
-------------
respect to the Premises shall be the calendar year in which the Option Term
commences, and (B) the concessions granted to Tenant in connection with the
Existing Building First Offer Space shall be equal to the Option Rent
Concessions.
2.2.3 Exercise of Option. The Extension Option contained in this
------------------
Section 2.2 shall be exercised by Tenant, if at all, only in the following
manner: (i) Original Tenant shall deliver written notice to Landlord not more
than three hundred sixty-five (365) days nor less than two hundred forty (240)
days prior to the expiration of the initial Lease Term, stating that Tenant is
interested in exercising its option; (ii) Landlord, after receipt of Tenant's
notice, shall deliver notice (the "Option Rent Notice") to Tenant not less than
one hundred fifty (150) days prior to the expiration of the initial Lease Term,
setting forth the Option Rent; and (iii) if Tenant wishes to exercise such
option, Tenant shall, on or before the date occurring thirty (30) days after
Tenant's receipt of the Option Rent Notice, exercise the Extension Option by
delivering written notice thereof to Landlord.
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3. BASE RENT; ABATEMENT OF BASE RENT.
---------------------------------
3.1 Base Rent. Tenant shall pay, without notice or demand, except as
---------
otherwise set forth in this Lease, to Landlord at its office in the Building,
check for lawful money of the United States of America, base rent ("Base Rent")
as set forth in Section 8 of the Summary, payable in equal monthly installments
---------
as set forth in Section 8 of the Summary in advance on or before the first day
---------
of each month during the Lease Term, without any setoff or deduction whatsoever,
except as otherwise set forth in this Lease. The Base Rent for the first full
month of the Lease Term, which occurs after the expiration of any free rent
period, shall be paid at the time of Tenant's execution of this Lease. If any
rental payment date (including the Lease Commencement Date) falls on a day of
the month other than the first day of such month or if any rental payment is for
a period which is shorter than one month, then the rental for any such
fractional month shall be a proportionate amount of the full calendar month's
rental. All other payments or adjustments required to be made under the terms of
this Lease that require proration on a time basis shall be prorated on the same
basis.
3.2 Abatement of Rent. The parties acknowledge and agree that the Base
-----------------
Rent during the initial six (6) months of the Lease Term is based upon the same
rental rate as is applicable for the remainder of the initial Lease Term (i.e.,
$2.35 per rentable square foot), but that Landlord has agreed to abate the Base
Rent that would otherwise be due hereunder during such six (6) month period in
an amount equal to the product of the following (hereinafter, the "Abated Base
Rent Amount"): (a) the total rentable square footage of the portion of the
Premises located on the second (2nd) floor of the Building (as the same may be
adjusted pursuant to Section 1.2 of this Lease), divided by two (2); multiplied
-----------
by (b) Two and 35/100 Dollars ($2.35) For example, if the rentable square
footage of the second floor of the Building remains as is stated in Section 6 of
---------
the Summary (i.e., 28,530 rentable square feet) and is not adjusted pursuant to
Section 1.2, then during the initial six (6) months of the Lease Term, the Base
- ----------
Rent shall equal the amount set forth in Section 8 of the Summary.
---------
4. ADDITIONAL RENT.
---------------
4.1 Additional Rent. In addition to paying the Base Rent specified in
---------------
Article 3 of this Lease, commencing on January 1, 2001, Tenant shall pay as
- ---------
additional rent Tenant's Share of the annual Direct Expenses, which are in
excess of Direct Expenses incurred in the "Base Year," as that term is defined
in Section 4.2.1 of this Lease. Such additional rent, together with any and all
-------------
other amounts payable by Tenant to Landlord pursuant to the terms of this Lease
(other than Base Rent), shall be hereinafter collectively referred to as the
"Additional Rent." The Base Rent and Additional Rent are herein collectively
referred to as the "Rent." Without limitation on other obligations of Tenant
which shall survive the expiration of the Lease Term, the obligations of Tenant
to pay the Additional Rent provided for in this Article 4 shall survive the
---------
expiration of the Lease Term.
4.2 Definitions. As used in this Article 4, the following terms shall
----------- ---------
have the meanings hereinafter set forth:
4.2.1 "Base Year" shall be the period set forth in Section 9.1 of the
-----------
Summary.
4.2.2 "Direct Expenses" shall mean "Operating Expenses" and "Tax
Expenses."
4.2.3 "Expense Year" shall mean each calendar year in which any
portion of the Lease Term falls, through and including the calendar year in
which the Lease Term expires, provided that Landlord, upon notice to Tenant, may
change the Expense Year from time to time to any other twelve (12) consecutive
month period, and in the event of any such change, Tenant's Share of Direct
Expenses shall be equitably adjusted for any Expense Year involved in any such
change.
4.2.4 "Operating Expenses" shall mean all expenses, costs and amounts
of every kind and nature which Landlord shall pay during any Expense Year
because of or in connection with the prudent ownership, management, maintenance,
repair, replacement, restoration or operation of the Project, including, without
limitation, any amounts paid for (i) the cost of supplying all utilities, the
cost of operating, maintaining, repairing, renovating and managing the utility
systems, mechanical systems, sanitary and storm drainage systems, and any
escalator and/or elevator systems, and the cost of supplies and equipment and
maintenance and service contracts in connection therewith; (ii) the cost of
licenses, certificates, permits and inspections and the cost of contesting the
validity or applicability of any governmental enactments which may increase
Operating Expenses, and the reasonable costs incurred in connection with the
implementation and operation of a transportation system management program or
similar program; (iii) the cost of insurance carried by Landlord, in such
amounts as Landlord may reasonably determine or as may be required by any
mortgagees or the lessor of any underlying or ground lease affecting the Project
and/or the Building; (iv) the cost of landscaping, relamping, and all supplies,
tools, equipment and materials used in the operation, repair and maintenance of
the Project; (v) the cost of parking area repair, restoration, and maintenance,
including, but not limited to, resurfacing, repainting, restriping, and
cleaning; (vi) reasonable fees, charges and other costs, including consulting
fees, legal fees and accounting fees, of all contractors engaged by Landlord or
otherwise reasonably incurred by Landlord in connection with the management,
operation, maintenance and repair of the Building and Project; (vii) any
equipment rental agreements or management agreements (including the cost of any
management fee and the fair rental value of any office space provided
thereunder); (viii) wages, salaries and other compensation and benefits of all
persons engaged in the operation, management, maintenance or security of the
Project, and employer's Social Security taxes, unemployment taxes or insurance,
and any other taxes which may be levied on such wages, salaries, compensation
and benefits; provided, that if any employees of Landlord provide services for
more than one building of Landlord, then a prorated portion of such employees'
wages, benefits and taxes shall be included in Operating Expenses based on the
portion of their working time devoted to the Building; (ix) payments under any
easement, license, operating agreement, declaration, restrictive covenant,
underlying or ground lease (excluding rent), or instrument pertaining to the
sharing of costs by the Project; (x) operation, repair, maintenance and
replacement of all "Systems and Equipment," as that term is defined in Section
4.2.6 of this Lease, and components thereof; (xi) the cost of janitorial
service, alarm and security service, window cleaning, trash removal, replacement
of wall and floor coverings, ceiling tiles and fixtures in lobbies, corridors,
restrooms and other common or public areas or facilities, maintenance and
replacement of curbs and walkways, repair to roofs and re-roofing; (xii)
amortization (including interest on the unamortized cost) of the cost of
acquiring or the rental expense of personal property used in the maintenance,
operation and repair of the Building and Project; and (xiii) the cost of any
capital improvements or other costs (I) which are intended as a labor-saving
device or to effect other economies in the operation or maintenance of the
Building or Project, (II) made to the Building or Project that are required
under any governmental law or regulation, or (III) which are reasonably
determined by Landlord to be in the best interest of the Building and/or
Project; provided, however, that if any such cost described in (I), (II) or
(III), above, is a capital expenditure, such cost shall be amortized (including
interest on the unamortized cost) over its useful life (in accordance with
generally accepted accounting principles). If Landlord is not furnishing any
particular work or service (the cost of which, if performed by Landlord, would
be included in Operating Expenses) to a tenant who has undertaken to perform
such work or service in lieu of the performance thereof by Landlord, Operating
Expenses shall be deemed to be increased by an amount equal to the additional
Operating Expenses which would reasonably have been incurred during such period
by Landlord if it had at its own expense furnished such work or service to such
tenant. If the Project is not at least ninety-five percent (95%) occupied during
all or a portion of any Expense Year, Landlord shall make an appropriate
adjustment to the
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variable components of Operating Expenses for such year or applicable portion
thereof, in accordance with generally accepted accounting principles, to
determine the amount of Operating Expenses that would have been paid had the
Project been ninety-five percent (95%) occupied; and the amount so determined
shall be deemed to have been the amount of Operating Expenses for such year, or
applicable portion thereof. The electrical component of Operating Expenses
during all Expense Years shall be deemed to be at least as great as the
electrical component of Operating Expenses during the Base Year. In no event
shall expenses for the repair, restoration and maintenance of the parking area
be offset by any revenue generated from such parking area. Landlord shall have
the right, from time to time, to equitably allocate some or all of the Operating
Expenses among different tenants of the Building or Project (the "Cost Pools").
Such Cost Pools may include, but shall not be limited to, the office space
tenants of the Building or Project and the retail space tenants of the Building
or Project. Notwithstanding anything to the contrary set forth in this Article
4, when calculating Direct Expenses for the Base Year, Operating Expenses shall
exclude market-wide labor-rate increases due to extraordinary circumstances,
including, but not limited to, boycotts and strikes, and utility rate increases
due to extraordinary circumstances including, but not limited to, conservation
surcharges, boycotts, embargoes or other shortages.
Notwithstanding the foregoing, Operating Expenses shall not include
---
the following:
(a) legal fees, brokerage commissions, advertising costs, "tenant
allowances" or "tenant concessions" in connection with the leasing of any
portion of the Building or Project;
(b) capital repairs, alterations, additions, improvements or replacements
connected with or arising from the Renovations to the Project (except as
permitted in clause (xiii) above); or any repairs or replacements made to
rectify or correct any defect in the design, materials or workmanship of any
portion of the Project;
(c) costs incurred in connection with damage or repairs which are covered
under any insurance policy carried by Landlord in connection with the Project;
(d) expenses for repair or replacement paid by condemnation awards;
(e) the cost of offsite service personnel to the extent that such
personnel are not engaged in the management, operation, repair or maintenance of
the Project;
(f) charitable or political contributions;
(g) Landlord's general overhead expenses not related to the Project;
(h) all principal, interest, loan fees, and other carrying costs related
to any mortgage or deed of trust encumbering the Project and all rental and
other payable due under any ground or underlying lease, unless such costs are
directly attributable to Tenant's, its agents' or employees' activities in, on
or about the Project, or as a result of a Tenant's breach or default under this
Lease;
(i) costs (including permit, license and inspection fees) incurred in
renovating or otherwise improving, decorating, painting, expanding or altering
space for tenants or other occupants of vacant, leasable space in the Project;
(j) services or installations furnished to any tenant in the Project which
are not furnished to Tenant;
(k) the cost of any service provided to Tenant or other occupants of the
Project for which Landlord is reimbursed directly;
(l) the costs of repairs and/or replacements of any roof, foundation, and
structural support which is part of the Project (except as permitted in clause
(xiii) above);
(m) costs of acquisition of sculpture or other objects of art for the
Project; and
(n) costs related to the "Year 2000 problem" which could reasonably be
avoided by corrections or repairs to the affected equipment in advance of the
occurrence of any failure arising from such "Year 2000 problem."
4.2.5 "Tax Expenses" shall mean all federal, state, county, or local
governmental or municipal taxes, fees, charges or other impositions of every
kind and nature, whether general, special, ordinary or extraordinary (including,
without limitation, real estate taxes, general and special assessments, special
assessment district payments, transit taxes, leasehold taxes or taxes based upon
the receipt of rent, including gross receipts or sales taxes applicable to the
receipt of rent, unless required to be paid by Tenant, personal property taxes
imposed upon the fixtures, machinery, equipment, apparatus, systems and
equipment, appurtenances, furniture and other personal property used in
connection with the Project), which Landlord shall pay because of or in
connection with the ownership, leasing and operation of the Project or
Landlord's interest therein. If in any Expense Year subsequent to the Base Year,
the amount of Tax Expenses decreases below the amount of Tax Expenses in the
Base Year, then for purposes of such Expense Year and all subsequent Expense
Years, the Base Year Tax Expenses shall be deemed to be reduced by the amount of
such decrease. Tax Expenses shall include, without limitation: (i) any tax on
Landlord's rent, right to rent or other income from the Project or as against
Landlord's business of leasing any of the Project; (ii) any assessment, tax,
fee, levy or charge in addition to, or in substitution, partially or totally, of
any assessment, tax, fee, levy or charge previously included within the
definition of real property tax, it being acknowledged by Tenant and Landlord
that Proposition 13 was adopted by the voters of the State of California in the
June 1978 election ("Proposition 13") and that assessments, taxes, fees, levies
and charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies, and charges and all similar
assessments, taxes, fees, levies and charges be included within the definition
of Tax Expenses for purposes of this Lease; (iii) any assessment, tax, fee,
levy, or charge allocable to or measured by the area of the Premises or the rent
payable hereunder, including, without limitation, any gross income tax with
respect to the receipt of such rent, or upon or with respect to the possession,
leasing, operating, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises, or any portion thereof; and (iv) Any
assessment, tax, fee, levy or charge, upon this transaction or any document to
which Tenant is a party, creating or transferring an interest or an estate in
the Premises.
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4.2.6 "Tenant's Share" shall mean the percentage set forth in Section
-------
9.2 of the Summary. Tenant's Share was calculated by multiplying the number of
- ---
rentable square feet of the Premises, as set forth in Section 6 of the Summary,
by 100, and dividing the product by the total number of rentable square feet in
the Building.
4.3 Calculation and Payment of Additional Rent.
------------------------------------------
4.3.1 Calculation of Excess and Underage. If for any Expense Year
----------------------------------
ending or commencing within the Lease Term, Tenant's Share of Direct Expenses
for such Expense Year exceeds Tenant's Share of Direct Expenses for the Base
Year, then Tenant shall pay to Landlord, in the manner set forth in Section
-------
4.3.2, below, and as Additional Rent, an amount equal to the excess (the
- -----
"Excess").
4.3.2 Statement of Actual Direct Expenses and Payment by Tenant.
---------------------------------------------------------
Following the end of each Expense Year, Landlord shall give to Tenant a
statement (the "Statement") which Statement shall state the actual Direct
Expenses incurred or accrued for such preceding Expense Year, and which shall
indicate the amount, if any, of any Excess or underage. Upon receipt of the
Statement for each Expense Year ending during the Lease Term, if an Excess is
present, Tenant shall pay, with its next installment of Base Rent, the full
amount of the Excess for such Expense Year, less the amounts, if any, paid
during such Expense Year as "Estimated Excess," as that term is defined in
Section 4.3.3 below. Even though the Lease Term has expired and Tenant has
- -------------
vacated the Premises, when the final determination is made of Tenant's Share of
the Direct Expenses for the Expense Year in which this Lease terminates, if an
Excess is present, Tenant shall, within thirty (30) days of receipt of a
Statement setting forth the Excess, pay to Landlord an amount as calculated
pursuant to the provisions of Section 4.3.1 of this Lease. In the event that an
-------------
underage is present for any Expense Year, Landlord shall, at its election, pay
to Tenant the amount of such underage concurrent with Landlord's delivery of the
applicable statement or allow Tenant to offset the amount of such underage
against Tenant's installment(s) of Direct Expenses next becoming due. The
provisions of this Section 4.3.2 shall survive the expiration or earlier
-------------
termination of the Lease Term.
4.3.3 Statement of Estimated Direct Expenses. Landlord, at Landlord's
--------------------------------------
option, may elect to give Tenant a yearly expense estimate statement (the
"Estimate Statement") which Estimate Statement shall set forth Landlord's
reasonable estimate (the "Estimate") of what the total amount of Direct Expenses
for the then-current Expense Year shall be and the estimated Excess (the
"Estimated Excess") as calculated by comparing Tenant's Share of Direct
Expenses, which shall be based upon the Estimate, to Tenant's Share of Direct
Expenses for the Base Year. The failure of Landlord to timely furnish the
Estimate Statement for any Expense Year shall not preclude Landlord from
enforcing its rights to collect any Estimated Excess under this Article 4. If
---------
pursuant to the Estimate Statement an Estimated Excess is calculated for the
then-current Expense Year, Tenant shall pay, with its next installment of Base
Rent, a fraction of the Estimated Excess for the then-current Expense Year
(reduced by any amounts paid pursuant to the last sentence of this Section
-------
4.3.3). Such fraction shall have as its numerator the number of months which
- -----
have elapsed in such current Expense Year to the month of such payment, both
months inclusive, and shall have twelve (12) as its denominator. Until a new
Estimate Statement is furnished, Tenant shall pay monthly, with the monthly Base
Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated
Excess set forth in the previous Estimate Statement delivered by Landlord to
Tenant.
4.4 Taxes and Other Charges for Which Tenant Is Directly Responsible.
----------------------------------------------------------------
Tenant shall reimburse Landlord within five (5) days of demand (with supporting
documentation) for any and all taxes or assessments required to be paid by
Landlord (except to the extent included in Tax Expenses by Landlord), excluding
state, local and federal personal or corporate income taxes measured by the net
income of Landlord from all sources and estate and inheritance taxes, whether or
not now customary or within the contemplation of the parties hereto, when:
4.4.1 Said taxes are measured by or reasonably attributable to the
cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises (excluding, however, the cost or value of the
original leasehold improvements made in or to the Premises by or for Tenant
pursuant to the Tenant Work Letter set forth in Exhibit D attached hereto which
---------
shall be included in the Tax Expenses in the Base Year, but including the cost
or value of any other leasehold improvements), to the extent the cost or value
of such other leasehold improvements exceeds the cost or value of a building
standard build-out as determined by Landlord regardless of whether title to such
improvements shall be vested in Tenant or Landlord;
4.4.2 Said taxes are assessed upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises or any portion of the Project (including the
Building Parking Facility);
4.4.3 Said taxes are assessed upon this transaction or any document
to which Tenant is a party creating or transferring an interest or an estate in
the Premises; or
4.4.4 Said assessments are levied or assessed upon the Project or any
part thereof or upon Landlord and/or by any governmental authority or entity,
and relate to the construction, operation, management, use, alteration or repair
of mass transit improvements.
4.5 Landlord's Books and Records. Within ninety (90) days after receipt
----------------------------
of a Statement by Tenant, if Tenant disputes the amount of Additional Rent set
forth in the Statement, an independent certified public accountant (which
accountant is a member of a nationally recognized accounting firm and is working
on a noncontingent fee basis), designated and paid for by Tenant, may, after
reasonable notice to Landlord and at reasonable times, inspect Landlord's
records at Landlord's offices, provided that Tenant is not then in default under
this Lease (after applicable notice and cure periods) and Tenant has paid all
amounts required to be paid under the applicable Estimate Statement and
Statement, as the case may be. In connection with such inspection, Tenant and
Tenant's agents must agree in advance to follow Landlord's reasonable rules and
procedures regarding inspections of Landlord's records, and shall execute a
commercially reasonable confidentiality agreement regarding such inspection.
Tenant's failure to dispute the amount of Additional Rent set forth in any
Statement within ninety (90) days following Tenant's receipt of such Statement
shall be deemed to be Tenant's approval of such Statement and Tenant,
thereafter, waives the right or ability to dispute the amounts set forth in such
Statement. If after such inspection, Tenant still disputes such Additional Rent,
a determination as to the proper amount shall be made, at Tenant's expense, by
an independent certified public accountant (the "Accountant") selected by
Landlord and subject to Tenant's reasonable approval; provided that if such
determination by the Accountant proves that Direct Expenses were overstated by
more than five percent (5.0%), then the cost of the Accountant and the cost of
such determination shall be paid for by Landlord.
5. USE OF PREMISES Tenant shall use the premises only for the purpose as set
---------------
forth in Section 10 of the Summary (the "Permitted Use") and for no other use or
----------
purpose, unless first approved in writing by Landlord, which approval Landlord
may withhold
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in its sole discretion. Tenant agrees that it shall not use, or permit any
person to use, the Premises or any part thereof for any use or purpose contrary
to the provisions of the Rules and Regulations set forth in Exhibit D, attached
---------
hereto, or in violation of the laws of the United States of America, the State
of California, or the ordinances, regulations or requirements of any local,
municipal or county governing body or other lawful authorities having
jurisdiction over the Building or Project. Tenant shall comply with all recorded
covenants, conditions, and restrictions (the "Existing CC&Rs"), and the
provisions of all ground or underlying leases, now affecting the Project. In the
event Landlord desires to record additional covenants, conditions, and
restrictions (the "Additional CC&Rs") against the Project after the date of full
execution of this Lease, Landlord shall, at its option, either (a) obtain
Tenant's consent thereto, which consent shall not be unreasonably withheld,
conditioned or delayed or (b) elect not to obtain Tenant's consent thereto, in
which event the provisions of this Lease shall prevail over any conflicting
provisions of the Additional CC&Rs. Landlord shall have the right to require
Tenant to execute and acknowledge, within fifteen (15) business days of a
request by Landlord, a "Recognition of Covenants, Conditions, and Restriction,"
in a form substantially similar to that attached hereto as Exhibit F, agreeing
---------
to and acknowledging the Additional CC&Rs. Tenant shall not use or allow another
person or entity to use any part of the Premises for the storage, use,
treatment, manufacture or sale of hazardous materials or hazardous substances
(as defined under applicable laws).
6. SERVICES AND UTILITIES
----------------------
6.1 Standard Tenant Services. Landlord shall, as its cost but as part of
------------------------
Direct Expenses, provide the following services and utilities twenty-four (24)
hours per day on every day during the Lease Term, unless otherwise stated below.
6.1.1 Subject to all governmental rules, regulations and guidelines
applicable thereto, Landlord shall provide heating and air conditioning when
necessary for normal comfort for normal office use in the Premises ("HVAC") from
Monday through Friday from 7:00 a.m. to 7:00 p.m., and on Saturday from 8:00
a.m. to 2:00 p.m., except for the date of observation of nationally or locally
recognized holidays, in Landlord's sole discretion (collectively, the
"Holidays"). The daily time periods identified hereinabove are sometimes
referred to as the "Business Hours."
6.1.2 Landlord shall at all times provide electricity to the Premises
(including adequate electrical wiring and facilities for connection to Tenant's
lighting fixtures and other equipment) for lighting and power suitable for the
Permitted Use. Landlord shall also provide (i) city water for use in connection
with any plumbing fixtures now or hereafter installed in the Premises and the
Building in accordance with this Lease, (ii) janitorial services five (5) days
per week except the date of observation of the Holidays, in and about the
Premises, and (iii) nonexclusive automatic passenger elevator service at all
times. If Tenant uses electricity, water or heat or air conditioning in excess
of that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall
pay to Landlord, within thirty (30) days of billing, the cost of such excess
consumption, the cost of the installation, operation, and maintenance of
equipment which is installed in order to supply such excess consumption, and the
cost of the increased wear and tear on existing equipment caused by such excess
consumption; and Landlord may install devices to separately meter any increased
use and in such event Tenant shall pay the increased cost directly to Landlord,
within thirty (30) days of demand, including the cost of such additional
metering devices. Landlord may increase the hours or days during which air
conditioning, heating and ventilation are provided to the Premises and the
Building to accommodate the usage by tenants occupying two-thirds or more of the
rentable square feet of the Building or to conform to practices of other
buildings in the area comparable to the Building.
6.2 After-Hours Use. Upon request by Tenant, Landlord shall provide heat,
---------------
ventilation and cooling adequate for the comfortable use and occupancy of the
Premises outside Business Hours (the "After-Hours HVAC"). Tenant shall pay
Landlord within thirty (30) days of demand for any such After-Hours HVAC at the
hourly cost established by Landlord for such After-Hours HVAC, which hourly rate
shall be fixed at Thirty ($30.00) Dollars per hour during the Lease Term.
6.3 Interruption of Use. Except as provided below, Tenant agrees that
-------------------
Landlord shall not be liable for damages, by abatement of rent or otherwise, for
failure to furnish or delay in furnishing any service (including telephone and
telecommunication services), or for any diminution in the quality or quantity
thereof, when such failure or delay or diminution is occasioned, in whole or in
part, by repairs, replacements, or improvements, by any strike, lockout or other
labor trouble, by inability to secure electricity, gas, water, or other fuel at
the Building after reasonable effort to do so, by any accident or casualty
whatsoever, by act or default of Tenant or other parties, or by any other cause
beyond Landlord's reasonable control; and such failures or delays or diminution
shall never be deemed to constitute an eviction or disturbance of Tenant's use
and possession of the Premises or relieve Tenant from paying rent or performing
any of its obligations under this Lease. In the event that Tenant is prevented
from using, and does not use, the Premises or any portion thereof, as a result
of any failure to provide services, utilities or access to the Premises as
required by Section 6 of this Lease (such set of circumstances, as set forth
---------
above, to be known as an "Abatement Event"), then Tenant shall give Landlord
notice of such Abatement Event, and if such Abatement Event continues for five
(5) consecutive business days after Landlord's receipt of any such notice (the
"Eligibility Period"), then the Base Rent and Tenant's Share of Direct Expenses
shall be abated or reduced, as the case may be, after expiration of the
Eligibility Period for such time that Tenant continues to be so prevented from
using, and does not use, the Premises or a portion thereof, in the proportion
that the rentable area of the portion of the Premises that Tenant is prevented
from using, and does not use, bears to the total rentable area of the Premises;
provided, however, in the event that Tenant is prevented from using, and does
not use, a portion of the Premises for a period of time in excess of the
Eligibility Period and the remaining portion of the Premises is not sufficient
to allow Tenant to effectively conduct its business therein, and if Tenant does
not conduct its business from such remaining portion, then for such time after
expiration of the Eligibility Period during which Tenant is so prevented from
effectively conducting its business therein, the Base Rent and Tenant's Share of
Direct Expenses for the entire Premises shall be abated for such time as Tenant
continues to be so prevented from using, and does not use, the Premises. If,
however, Tenant reoccupies any portion of the Premises during such period, the
Rent allocable to such reoccupied portion, based on the proportion that the
rentable area of such reoccupied portion of the Premises bears to the total
rentable area of the Premises, shall be payable by Tenant from the date Tenant
reoccupies such portion of the Premises. Such right to abate Base Rent and
Tenant's Share of Direct Expenses shall be Tenant's sole and exclusive remedy at
law or in equity for an Abatement Event. Except as provided in this Section 6.3,
nothing contained herein shall be interpreted to mean that Tenant is excused
from paying Rent due hereunder. Furthermore, Landlord shall not be liable under
any circumstances for a loss of, or injury to, property or for injury to, or
interference with, Tenant's business, including, without limitation, loss of
profits, however occurring, through or in connection with or incidental to a
failure to furnish any services or utilities.
7. REPAIRS Tenant shall, at Tenant's own expense, keep the Premises, including
-------
all improvements, fixtures and furnishings therein, in first class order, repair
and condition, reasonable wear and tear and casualty excepted, at all times
during the Lease Term. In addition, Tenant shall, at Tenant's own expense but
under the supervision and subject to the prior approval of Landlord, and within
any reasonable period of time, promptly and adequately repair all damage to the
Premises and replace or repair all damaged or broken fixtures and appurtenances;
provided however, that, at Landlord's option, or if Tenant fails to make such
repairs, Landlord may, but need not, make such repairs and replacements, and
Tenant shall pay Landlord the cost thereof, including, if Tenant fails to make
such repairs and Landlord does so, a percentage of the cost thereof (to be
uniformly established for the Project, not to exceed, however, seven percent)
sufficient to reimburse Landlord for all overhead, general conditions, fees and
other costs or expenses arising
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from Landlord's involvement with such repairs and replacements forthwith upon
being billed for same. Landlord may, but shall not be required to, enter the
Premises at all reasonable times to make such repairs, alterations, improvements
and additions to the Premises or to the Building or to any equipment located in
the Building as Landlord shall deem necessary or as Landlord may be required to
do by governmental or quasi-governmental authority or court order or decree.
Tenant hereby waives and releases its right to make repairs at Landlord's
expense under Sections 1941 and 1942 of the California Civil Code, or under any
similar law, statute, or ordinance now or hereafter in effect.
8. ADDITIONS AND ALTERATIONS
-------------------------
8.1 Landlord's Consent to Alterations. Tenant may not make any
---------------------------------
improvements, alterations, additions or changes to the Premises (collectively,
the "Alterations") without first procuring the prior written consent of Landlord
to such Alterations, which consent shall be requested by Tenant not less than
thirty (30) days prior to the commencement thereof, and which consent shall not
be unreasonably withheld by Landlord. The construction of the initial
improvements to the Premises shall be governed by the terms of the Tenant Work
Letter attached hereto as Exhibit B, and not the terms of this Article 8.
--------- ---------
8.2 Manner of Construction. Landlord may impose, as a condition of its
----------------------
consent to all Alterations or repairs of the Premises or about the Premises,
such requirements as Landlord in its sole discretion may deem desirable,
including, but not limited to, the requirement that upon Landlord's request
(made at the time Landlord gives its consent to the proposed Alterations, if
Tenant requests in writing that Landlord identify whether or not such
Alterations must be removed upon the expiration or earlier termination of this
Lease), Tenant shall, at Tenant's expense, remove such Alterations upon the
expiration or any early termination of the Lease Term, and/or the requirement
that Tenant utilize for such purposes only contractors, materials, mechanics and
materialmen selected by Landlord. All work with respect to any Alterations must
be done in a good and workmanlike manner, by properly licensed and insured
contractors, in compliance with all applicable laws and with Landlord's
construction rules and regulations, and diligently prosecuted to completion to
the end that the Premises shall at all times be a complete unit except during
the period of work. In performing the work of any such Alterations, Tenant shall
have the work performed in such manner as not to unreasonably obstruct access to
the Building or Project or the common areas for any other tenant of the
Building, and as not to unreasonably obstruct the business of Landlord or other
tenants of the Project, or interfere with the labor force working in the
Project. In the event that Tenant makes any Alterations, Tenant agrees to carry
"Builder's All Risk" insurance in an amount approved by Landlord covering the
construction of such Alterations, and such other insurance as Landlord may
require, it being understood and agreed that all of such Alterations shall be
insured by Tenant pursuant to Article 10 of this Lease immediately upon
----------
completion thereof. In addition, Landlord may post notices of non-responsibility
at the Premises and/or on the Building. Upon completion of any Alterations,
Tenant agrees to cause a Notice of Completion to be recorded in the office of
the Recorder of the county in which the Building is located in accordance with
Section 3093 of the Civil Code of the State of California or any successor
statute, and Tenant shall deliver to the Building management office a
reproducible copy of the "as built" drawings of the Alterations.
8.3 Payment for Improvements. In the event Tenant orders any Alteration or
------------------------
repair work directly from Landlord, or from the contractor selected by Landlord,
the charges for such work shall be deemed Additional Rent under this Lease,
payable upon billing therefor, either periodically during construction or upon
the substantial completion of such work, at Landlord's option. Upon completion
of such work, Tenant shall deliver to Landlord, if payment is made directly to
contractors, evidence of payment, contractors' affidavits and full and final
waivers of all liens for labor, services or materials. Whether or not Tenant
orders any work directly from Landlord, Tenant shall pay to Landlord a
percentage of the cost of such work (such percentage, which shall vary depending
upon whether or not Tenant orders the work directly from Landlord, to be
established on a uniform basis for the Project, not to exceed, however, seven
percent) sufficient to compensate Landlord for all overhead, general conditions,
fees and other costs and expenses arising from Landlord's involvement with such
work.
8.4 Landlord's Property. All Alterations, improvements, fixtures and/or
-------------------
permanently affixed equipment which may be installed or placed in or about the
Premises, and all signs installed in, on or about the Premises, from time to
time, shall be at the sole cost of Tenant and shall be and become the property
of Landlord. Furthermore, Landlord may, by written notice to Tenant prior to the
end of the Lease Term, or given upon any earlier termination of this Lease,
require Tenant at Tenant's expense to remove such Alterations and to repair any
damage to the Premises, Building and Project caused by such removal, provided
that if Tenant requests in writing, at the time Tenant is seeking Landlord's
consent to the proposed Alterations, that Landlord identify whether or not such
Alterations must be removed upon the expiration or earlier termination of this
Lease, Tenant shall only be obligated to remove those Alterations so identified
by Landlord for removal. If Tenant fails to complete such removal and/or to
repair any damage caused by the removal of any Alterations, Landlord may do so
and may charge the cost thereof to Tenant. Tenant hereby indemnifies and holds
Landlord harmless from any liability, cost, obligation, expense or claim of lien
in any manner relating to the installation, placement, removal or financing of
any such Alterations, improvements, fixtures and/or equipment in, on or about
the Premises.
9. COVENANT AGAINST LIENS Tenant has no authority or power to cause or permit
----------------------
any lien or encumbrance of any kind whatsoever, whether created by act of
Tenant, operation of law or otherwise, to attach to or be placed upon the
Project, Building or Premises, and any and all liens and encumbrances created by
Tenant shall attach to Tenant's interest only. Landlord shall have the right at
all times to post and keep posted on the Premises any notice which it deems
necessary for protection from such liens. Tenant covenants and agrees not to
suffer or permit any lien of mechanics or materialmen or others to be placed
against the Project, the Building or the Premises with respect to work or
services claimed to have been performed for or materials claimed to have been
furnished to Tenant or the Premises, and, in case of any such lien attaching or
notice of any lien, Tenant covenants and agrees to cause it to be immediately
released and removed of record. Notwithstanding anything to the contrary set
forth in this Lease, in the event that such lien is not released and removed on
or before the date notice of such lien is delivered by Landlord to Tenant,
Landlord, at its sole option, may immediately take all action necessary to
release and remove such lien, without any duty to investigate the validity
thereof, and all sums, costs and expenses, including reasonable attorneys' fees
and costs, incurred by Landlord in connection with such lien shall be deemed
Additional Rent under this Lease and shall immediately be due and payable by
Tenant.
10. INSURANCE
---------
10.1 Indemnification and Waiver. To the extent not prohibited by law,
--------------------------
Landlord, its partners and their respective officers, agents, servants,
employees, and independent contractors (collectively, "Landlord Parties") shall
not be liable for any damage either to person or property or resulting from the
loss of use thereof, which damage is sustained by Tenant or by other persons
claiming through Tenant. Tenant shall indemnify, defend, protect, and hold
harmless Landlord Parties from any and all loss, cost, damage, expense and
liability (including without limitation court costs and reasonable attorneys'
fees) incurred in connection with or arising from any cause in, on or about the
Premises, any acts, omissions or negligence of Tenant or any person claiming by,
through or under Tenant, or of the contractors, agents, servants, employees,
invitees, guests or licensees of Tenant or any such person in, on, or about the
Project, or any breach of the terms of this Lease, either prior to, during, or
after the expiration of the Lease Term. Notwithstanding the foregoing, Tenant
shall not be required to protect, defend, save harmless or indemnify Landlord
Parties from any
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liability for injury, loss, accident or damage to any person to the extent
resulting from Landlord's negligent acts or omissions or willful misconduct or
that of its agents, contractors, servants, employees or licensees, in connection
with Landlord's activities on or about the Premises, and Landlord hereby
indemnifies and agrees to protect, defend and hold Tenant harmless from and
against such claims to the extent arising out of Landlord's negligent acts or
omissions or willful misconduct or those of its agents, contractors, servants,
employees or licensees in connection with Landlord's activities on or about the
Premises. Such exclusion from Tenant's indemnity and such agreement by Landlord
to so indemnify and hold Tenant harmless are not intended to and shall not
relieve any insurance carrier of its obligations under policies required to be
carried by Tenant pursuant to the provisions of this Lease to the extent that
such policies cover (or, if such policies would have been carried as required,
would have covered) the result of negligent acts or omissions or willful
misconduct of Landlord or those of its agents, contractors, servants, employees
or licensees; provided, however, the provisions of this sentence shall in no way
be construed to imply the availability of any double or duplicate coverage.
Landlord's and Tenant's indemnification obligations hereunder may or may not be
coverable by insurance, but the failure of either Landlord or Tenant to carry
insurance covering the indemnification obligation shall not limit their
indemnity obligations hereunder. The provisions of this Section 10.1 shall
------------
survive the expiration or sooner termination of this Lease with respect to any
claims or liability occurring prior to such expiration or termination.
10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance.
---------------------------------------------------------------
Tenant shall, at Tenant's expense, comply as to the Premises with all insurance
company requirements pertaining to the use of the Premises. If Tenant's conduct
or use of the Premises causes any increase in the premium for such insurance
policies, then Tenant shall reimburse Landlord for any such increase. Tenant, at
Tenant's expense, shall comply with all rules, orders, regulations or
requirements of the American Insurance Association (formerly the National Board
of Fire Underwriters) and with any similar body.
10.3 Tenant's Insurance. Tenant shall maintain Commercial General
------------------
Liability Insurance covering the insured against claims of bodily injury,
personal injury and property damage arising out of Tenant's operations, assumed
liabilities or use of the Premises, including a Broad Form Commercial General
Liability endorsement covering the insuring provisions of this Lease and the
performance by Tenant of the indemnity agreements set forth in Section 10.1 of
------------
this Lease, for limits of liability not less than $2,000,000.00 for each
occurrence and $3,000,000.00 annual aggregate, with not more than 5% Insured's
participation. In addition, Tenant shall carry Physical Damage Insurance
covering (i) all office furniture, trade fixtures, office equipment, merchandise
and all other items of Tenant's property on the Premises installed by, for, or
at the expense of Tenant, and (ii) all other improvements, alterations and
additions to the Premises made by or for Tenant, including any improvements,
alterations or additions installed at Tenant's request above the ceiling of the
Premises or below the floor of the Premises (but excluding the initial Tenant
Improvements described in the Tenant Work Letter). Such insurance shall be
written on an "all risks" of physical loss or damage basis, for the full
replacement cost value new without deduction for depreciation of the covered
items and in amounts that meet any co-insurance clauses of the policies of
insurance and shall include a vandalism and malicious mischief endorsement,
sprinkler leakage coverage and earthquake sprinkler leakage coverage.
10.4 Form of Policies. The minimum limits of policies of insurance
----------------
required of Tenant under this Lease shall in no event limit the liability of
Tenant under this Lease. Such insurance shall (i) name Landlord, and any other
party it so specifies, as an additional insured; (ii) specifically cover the
liability assumed by Tenant under this Lease, including, but not limited to,
Tenant's obligations under Section 10.1 of this Lease; (iii) be issued by an
------------
insurance company having a rating of not less than A-X in Best's Insurance Guide
or which is otherwise acceptable to Landlord and licensed to do business in the
state in which the Building is located; (iv) be primary insurance as to all
claims thereunder and provide that any insurance carried by Landlord is excess
and is non-contributing with any insurance requirement of Tenant; (v) provide
that said insurance shall not be canceled or coverage changed unless thirty (30)
days' prior written notice shall have been given to Landlord and any mortgagee
or ground or underlying lessor of Landlord. Tenant shall deliver said policy or
policies or certificates thereof to Landlord on or before the Lease Commencement
Date and at least thirty (30) days before the expiration dates thereof. In the
event Tenant shall fail to procure such insurance, or to deliver such policies
or certificate, Landlord may, at its option, procure such policies for the
account of Tenant, and the cost thereof shall be paid to Landlord as Additional
Rent within five (5) days after delivery to Tenant of bills therefor.
10.5 Subrogation. Landlord and Tenant agree to have their respective
-----------
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the case
may be, so long as the insurance carried by Landlord and Tenant, respectively,
is not invalidated thereby. As long as such waivers of subrogation are contained
in their respective insurance policies, Landlord and Tenant hereby waive any
right that either may have against the other on account of any loss or damage to
their respective property to the extent such loss or damage is insurable under
policies of insurance for fire and all risk coverage, theft, public liability,
or other similar insurance.
10.6 Additional Insurance Obligations. Tenant shall carry and maintain
--------------------------------
during the entire Lease Term, at Tenant's sole cost and expense, increased
amounts of the insurance required to be carried by Tenant pursuant to this
Article 10, and such other reasonable types of insurance coverage and in such
- ----------
reasonable amounts covering the Premises and Tenant's uses and operations
therein, as may be commercially reasonable for tenants leasing space in premises
similar to the Premises and with uses and operations similar to Tenant's uses
and operations.
10.7 Landlord's Insurance. Landlord shall provide all of the following
--------------------
types of insurance, with commercially reasonable deductibles in amounts as may
be determined by Landlord in its reasonable discretion: (i) "all risk" property
insurance, subject to standard exclusions, covering the Building, and such other
risks as Landlord or its mortgagees may from time to time deem appropriate,
including leasehold improvements made by Landlord that are a part of the real
property comprising the Building, and (ii) commercial general liability coverage
covering the common areas of the Project for limits of liability not less than
$2,000,000.00 for each occurrence and $3,000,000.00 annual aggregate. Landlord
shall not be required to carry insurance on Tenant's property including trade
fixtures, furnishings, equipment and all other items of personal property.
11. DAMAGE AND DESTRUCTION
----------------------
11.1 Repair of Damage to Premises by Landlord. If the Premises or any
----------------------------------------
common areas of the Building serving or providing access to the Premises shall
be damaged by fire or other casualty, Landlord shall promptly and diligently,
subject to reasonable delays for insurance adjustment or other matters beyond
Landlord's reasonable control, and subject to all other terms of this Article
-------
11, restore the damaged areas (excluding, however, Tenant's property including
- --
trade fixtures, furnishings, equipment and all other items of personal
property). Such restoration shall be to substantially the same condition
existing prior to the casualty, except for modifications required by zoning and
building codes and other laws or by the holder of a mortgage on the Building, or
the lessor of a ground or underlying lease with respect to the Project and/or
the Building, or any other modifications to the common areas deemed desirable by
Landlord, provided access to the Premises and any common restrooms serving the
Premises shall not be materially impaired and provided further that the overall
quality and appearance is not diminished. Notwithstanding any other provision of
this Lease, upon the occurrence of any damage to the Premises, Tenant shall
assign to Landlord (or to any party designated by Landlord)
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all insurance proceeds payable to Tenant under Tenant's insurance carried under
Section 10.3 of this Lease, and Landlord shall repair any injury or damage to
the Tenant Improvements installed in the Premises and shall return such Tenant
Improvements to their original condition; provided that if the cost of such
repair by Landlord exceeds the amount of insurance proceeds received by Landlord
from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs
shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. In
connection with such repairs and replacements, Tenant shall, prior to the
commencement of construction, submit to Landlord, for Landlord's review and
approval, all plans, specifications and working drawings relating thereto, and
Landlord shall select the contractors to perform such improvement work. Landlord
shall not be liable for any inconvenience or annoyance to Tenant or its
visitors, or injury to Tenant's business resulting in any way from such damage
or the repair thereof; provided however, that if such fire or other casualty
shall have damaged the Premises or common areas necessary to Tenant's occupancy,
and if such damage is not the result of the willful misconduct of Tenant or
Tenant's employees, contractors, licensees, or invitees, Landlord shall allow
Tenant a proportionate abatement of Rent, during the time and to the extent the
Premises are unfit for occupancy for the purposes permitted under this Lease,
and not occupied by Tenant as a result thereof.
11.2 Landlord's Option to Repair. Notwithstanding the terms of Section
--------------------------- -------
11.1 of this Lease, Landlord may elect not to rebuild and/or restore the
- ----
Premises and/or Building and instead terminate this Lease, effective as of the
later of the date of such destruction or the date Tenant vacates the Premises,
by notifying Tenant in writing of such termination within sixty (60) days after
the date of discovery of such damage, but Landlord may so elect only if the
Building or Project shall be damaged by fire or other casualty or cause, whether
or not the Premises are affected, and one or more of the following conditions is
present: (i) repairs cannot reasonably be completed within one hundred eighty
(180) days of the date of discovery of damage (when such repairs are made
without the payment of overtime or other premiums); (ii) the holder of any
mortgage on the Building or Project or ground or underlying lessor with respect
to the Project and/or the Building shall require that the insurance proceeds or
any portion thereof be used to retire the mortgage debt, or shall terminate the
ground or underlying lease, as the case may be; or (iii) the damage is not fully
covered, except for deductible amounts, by Landlord's insurance policies. In
addition, in the event that the Premises, the Building or the Project is
destroyed or damaged to any substantial extent during the last twelve (12)
months of the Lease Term (as the same may be extended) and the time period for
restoration is estimated by Landlord to exceed sixty (60) days, then
notwithstanding anything contained in this Article 11, Tenant and Landlord shall
----------
each have the option to terminate this Lease, effective as of the later of the
date of such destruction or the date Tenant vacates the Premises, by giving
written notice to the other of the exercise of such option within thirty (30)
days after the date of such damage or destruction, in which event this Lease
shall cease and terminate as of the date of such destruction or vacation, as
applicable. Upon any such termination of this Lease pursuant to this Section
-------
11.2, Tenant shall pay the Base Rent and Additional Rent, properly apportioned
- ----
up to such date of termination, and both parties hereto shall thereafter be
freed and discharged of all further obligations hereunder, except as provided
for in provisions of this Lease which by their terms survive the expiration or
earlier termination of the Lease Term.
11.3 Waiver of Statutory Provisions. The provisions of this Lease,
------------------------------
including this Article 11, constitute an express agreement between Landlord and
----------
Tenant with respect to any and all damage to, or destruction of, all or any part
of the Premises, the Building or any other portion of the Project, and any
statute or regulation of the state in which the Building is located, including,
without limitation, Sections 1932(2) and 1933(4) of the California Civil Code,
with respect to any rights or obligations concerning damage or destruction in
the absence of an express agreement between the parties, and any other statute
or regulation, now or hereafter in effect, shall have no application to this
Lease or any damage or destruction to all or any part of the Premises, the
Building or any other portion of the Project.
12. NONWAIVER No waiver of any provision of this Lease shall be implied by (i)
---------
any failure of either party to insist in any instance on the strict keeping,
observance or performance of any covenant or agreement contained in this Lease
or exercise any election contained in this Lease, or (ii) any failure of either
party to enforce any remedy on account of the violation of such provision, even
if such violation shall continue or be repeated subsequently. Any waiver by
either party of any provision of this Lease may only be in writing, and no
express waiver shall affect any provision other than the one specified in such
waiver and that one only for the time and in the manner specifically stated.
13. CONDEMNATION If the whole or any part of the Premises, Building or Project
------------
shall be taken by power of eminent domain or condemned by any competent
authority for any public or quasi-public use or purpose, or if any adjacent
property or street shall be so taken or condemned, or reconfigured or vacated by
such authority in such manner as to require the use, reconstruction or
remodeling of any part of the Premises, Building or Project, or if Landlord
shall grant a deed or other instrument in lieu of such taking by eminent domain
or condemnation, Landlord shall have the option to terminate this Lease upon
ninety (90) days' notice, provided such notice is given no later than one
hundred eighty (180) days after the date of such taking, condemnation,
reconfiguration, vacation, deed or other instrument. If more than fifteen
percent (15%) of the rentable square feet of the Premises is taken, or if access
to the Premises is substantially impaired, Tenant shall have the option to
terminate this Lease upon ninety (90) days' notice, provided such notice is
given no later than one hundred eighty (180) days after the date of such taking.
Landlord shall be entitled to receive the entire award or payment in connection
therewith, except that Tenant shall have the right to file any separate claim
available to Tenant for any taking of Tenant's goodwill, personal property and
fixtures belonging to Tenant and removable by Tenant upon expiration of the
Lease Term pursuant to the terms of this Lease, and for moving expenses, so long
as such claim does not diminish the award available to Landlord, its ground
lessor with respect to the Project or its mortgagee, and such claim is payable
separately to Tenant. All Rent shall be apportioned as of the date of such
termination, or the date of such taking, whichever shall first occur. If any
part of the Premises shall be taken, and this Lease shall not be so terminated,
the Rent shall be proportionately abated. Tenant hereby waives any and all
rights it might otherwise have pursuant to Section 1265.130 of the California
Code of Civil Procedure.
14. ASSIGNMENT AND SUBLETTING
-------------------------
14.1 Transfers. Tenant shall not, without the prior written consent of
---------
Landlord, assign, mortgage, pledge, encumber or otherwise transfer, this Lease
or any interest hereunder, permit any assignment or other such foregoing
transfer of this Lease or any interest hereunder by operation of law, or sublet
the Premises or any part thereof (all of the foregoing are hereinafter sometimes
referred to collectively as "Transfers" and any person to whom any Transfer is
made or sought to be made is hereinafter sometimes referred to as a
"Transferee"). To request Landlord's consent to any Transfer, Tenant shall
notify Landlord in writing, which notice (the "Transfer Notice") shall include
(i) the proposed effective date of the Transfer, which shall not be less than
thirty (30) days after the date of delivery of the Transfer Notice, (ii) a
description of the portion of the Premises to be transferred (the "Subject
Space"), (iii) all of the terms of the proposed Transfer and the consideration
therefor, including a calculation of the "Transfer Premium," as that term is
defined in Section 14.3 below, in connection with such Transfer, the name and
------------
address of the proposed Transferee, and a copy of all existing and/or proposed
documentation pertaining to the proposed Transfer, including all existing
operative documents to be executed to evidence such Transfer or the agreements
incidental or related to such Transfer, (iv) current financial statements of the
proposed Transferee certified by an officer, partner or owner thereof, and any
other information required by Landlord, which will enable Landlord to determine
the financial responsibility, character, and reputation of the proposed
Transferee, nature of such Transferee's business and proposed use of the Subject
Space, and such other information as Landlord may reasonably require, and (v) a
processing fee in
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<PAGE>
the amount of Three Hundred and No/100 Dollars ($300.00) (the "Pre-paid
Processing Fee"). Any Transfer made without Landlord's prior written consent
shall, at Landlord's option, be null, void and of no effect, and shall, at
Landlord's option, constitute a default by Tenant under this Lease. Whether or
not Landlord shall grant consent, Tenant shall pay Landlord's Pre-paid
Processing Fee, as well as any reasonable legal fees incurred by Landlord,
within thirty (30) days after written request by Landlord.
14.2 Landlord's Consent. Landlord shall not unreasonably withhold or
------------------
condition its consent to any proposed Transfer of the Subject Space to the
Transferee on the terms specified in the Transfer Notice. The parties hereby
agree that it shall be reasonable under this Lease and under any applicable law
for Landlord to withhold consent to any proposed Transfer where one or more of
the following apply, without limitation as to other reasonable grounds for
withholding consent:
14.2.1 The Transferee is of a character or reputation or engaged in a
business which is not consistent with the quality of the Project;
14.2.2 The Transferee intends to use the Subject Space for purposes
which are not permitted under this Lease;
14.2.3 The Transferee is either a governmental agency or
instrumentality thereof;
14.2.4 The Transferee is not a party of equal or greater financial
worth and/or financial stability as Tenant as of the date of this Lease;
14.2.5 The proposed Transfer would cause Landlord to be in violation
of another lease or agreement to which Landlord is a party, or would give an
occupant of the Building a right to cancel its lease;
14.2.6 The terms of the proposed Transfer will allow the Transferee
to exercise a right of renewal, right of expansion, right of first offer, or
other similar right held by Tenant (or will allow the Transferee to occupy space
leased by Tenant pursuant to any such right);
14.2.7 The Transfer occurs during the period from the Lease
Commencement Date until the earlier of (i) the end of the thirtieth (30th) full
month of the Lease Term or (ii) the date at least ninety-five percent (95%) of
the rentable square feet of the Project is leased, and the rent charged by
Tenant to such Transferee during the term of such Transfer (the "Transferee's
Rent"), calculated using a present value analysis, is less than ninety-five
percent (95%) of the rent being quoted by Landlord at the time of such Transfer
for comparable space in the Project for a comparable term (the "Quoted Rent"),
calculated using a present value analysis; or
14.2.8 Either the proposed Transferee, or any person or entity which
directly or indirectly, controls, is controlled by, or is under common control
with, the proposed Transferee, (i) occupies space in the Project at the time of
the request for consent, (ii) is negotiating with Landlord to lease space in the
Project at such time, or (iii) has negotiated with Landlord during the six (6)-
month period immediately preceding the Transfer Notice.
If Landlord consents to any Transfer pursuant to the terms of this Section
-------
14.2 (and does not exercise any recapture rights Landlord may have under Section
- ---- -------
14.4 of this Lease), Tenant may within six (6) months after Landlord's consent,
- ----
but not later than the expiration of said six-month period, enter into such
Transfer of the Premises or portion thereof, upon substantially the same terms
and conditions as are set forth in the Transfer Notice furnished by Tenant to
Landlord pursuant to Section 14.1 of this Lease. If Landlord fails to notify
------------
Tenant in writing of its approval or disapproval of any proposed Transfer within
the applicable thirty (30) day period, then, provided after the expiration of
such thirty (30) day period Tenant has delivered an additional written notice to
Landlord specifying in all capital letters and boldface type on page one of such
notice the following: "YOUR FAILURE TO APPROVE OR DISAPPROVE OF THE ASSIGNMENT
OR SUBLEASE SET FORTH IN THIS NOTICE WITHIN FIVE (5) BUSINESS DAYS SHALL ENTITLE
THE TENANT NAMED HEREIN TO ENTER INTO SUCH ASSIGNMENT OR SUBLEASE WITHOUT YOUR
CONSENT," and Landlord fails to respond within five (5) business days after
receipt of such written notice, Landlord shall be deemed to have approved such
assignment or subletting.
14.3 Transfer Premium. If Landlord consents to a Transfer, as a condition
----------------
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord any "Transfer Premium," as that term is defined in this Section 14.3,
------------
actually received by Tenant from such Transferee. "Transfer Premium" shall mean
all rent, additional rent or other consideration payable by such Transferee in
excess of the Rent and Additional Rent payable by Tenant under this Lease on a
per rentable square foot basis if less than all of the Premises is transferred.
"Transfer Premium" shall also include, but not be limited to, key money and
bonus money paid by Transferee to Tenant in connection with such Transfer, and
any payment in excess of fair market value for services rendered by Tenant to
Transferee or for assets, fixtures, inventory, equipment, or furniture
transferred by Tenant to Transferee in connection with such Transfer. In the
calculations of the Rent (as it relates to the Transfer Premium calculated under
this Section 14.3), and the Transferee's Rent and Quoted Rent under Section 14.2
------------ ------------
of this Lease, the Rent paid during each annual period for the Subject Space,
and the Transferee's Rent and the Quoted Rent, shall be computed after adjusting
such rent to the actual effective rent to be paid, taking into consideration any
and all reasonable leasehold concessions granted in connection therewith,
including, but not limited to, any reasonable rent credit commissions and tenant
improvement allowance, and Tenant's reasonable third-party fees and costs by
including reasonable attorneys' fees, incurred in negotiating, documenting and
consummating the Transfer. For purposes of calculating any such effective rent,
all such concessions shall be amortized on a straight-line basis over the
relevant term.
14.4 Landlord's Option as to Subject Space. Notwithstanding anything to
-------------------------------------
the contrary contained in this Article 14, Landlord shall have the option, by
----------
giving written notice to Tenant within ten (10) business days after receipt of
any Transfer Notice, to recapture the Subject Space. Such recapture notice shall
cancel and terminate this Lease with respect to the Subject Space as of the
effective date of the proposed Transfer until the last day of the term of the
Transfer as set forth in the Transfer Notice. In the event of a recapture by
Landlord, if this Lease shall be canceled with respect to less than the entire
Premises, the Rent reserved herein shall be prorated on the basis of the number
of rentable square feet retained by Tenant in proportion to the number of
rentable square feet contained in the Premises, and this Lease as so amended
shall continue thereafter in full force and effect, and upon request of either
party, the parties shall execute written confirmation of the same.
Notwithstanding the above, Tenant shall have the right to rescind Landlord's
recapture by providing written notice to Landlord within 10 days following
receipt of Landlord's notice of recapture that it will not effect the Transfer.
14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the
------------------
terms and conditions of this Lease shall in no way be deemed to have been waived
or modified, (ii) such consent shall not be deemed consent to any further
Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to
Landlord, promptly after execution, an original executed copy of all
documentation pertaining to
-10-
<PAGE>
the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall
furnish upon Landlord's request a complete statement, certified by an
independent certified public accountant, or Tenant's chief financial officer,
setting forth in detail the computation of any Transfer Premium Tenant has
derived and shall derive from such Transfer, and (v) no Transfer relating to
this Lease or agreement entered into with respect thereto, whether with or
without Landlord's consent, shall relieve Tenant or any guarantor of the Lease
from liability under this Lease. Landlord or its authorized representatives
shall have the right at all reasonable times to audit the books, records and
papers of Tenant relating to any Transfer, and shall have the right to make
copies thereof. If the Transfer Premium respecting any Transfer shall be found
understated, Tenant shall, within thirty (30) days after demand, pay the
deficiency, and if understated by more than ten percent (10%), Landlord shall
have the right to cancel this Lease upon thirty (30) days' notice to Tenant.
14.6 Permitted Transfers. Any provision in this Lease to the contrary
-------------------
notwithstanding, Landlord's consent shall not be required for any of the
following transfers (each of which shall be a "Permitted Transfer" and each such
transferee shall by a "Permitted Transferee"), provided that such Permitted
Transfer is not a subterfuge by Tenant to avoid its obligations under this
Lease, and that the applicable Permitted Transferee shall have a tangible net
worth (not including goodwill as an asset) computed in accordance with generally
accepted accounting principles (the "Net Worth") at least equal to the greater
of (A) the Net Worth of Tenant immediately prior to such assignment or sublease,
or (B) the Net Worth on the date of this Lease of the Original Tenant: (i) to
any person(s) or entity who controls, is controlled by or is under common
control with Tenant, (ii) to any entity resulting from the merger, consolidation
or other reorganization of Tenant, whether or not Tenant is the surviving entity
or (iii) to any person or legal entity which acquires all or substantially all
of the assets or stock of Tenant; provided, that before such assignment or
sublease shall be effective, (x) said Permitted Transferee shall assume, in
full, the obligations of Tenant under this Lease, (y) Landlord shall be given
written notice of such assignment and assumption and (z) the use of the Premises
by the Permitted Transferee shall be as set forth in Article 10 of the Summary
of Basic Lease Information. For purposes of this paragraph, a public or private
offering of Tenant's stock is a Permitted Transfer and the term "control" means
possession, directly or indirectly, of the power to direct or cause the
direction of the management, affairs and policies of anyone, whether through the
ownership of voting securities, by contract or otherwise. The provisions of
Section 14.3 of this Lease concerning Transfer Premiums shall not apply to an
assignment or sublease by Tenant to a Permitted Transferee. Notwithstanding
anything to the contrary contained in this Lease, a Permitted Transferee shall
have the rights and privileges provided to Original Tenant and shall be deemed
to be an Original Tenant.
15. OWNERSHIP AND REMOVAL OF TRADE FIXTURES
---------------------------------------
15.1 Surrender of Premises. No act or thing done by Landlord or any agent
---------------------
or employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in a writing signed by Landlord. The delivery of keys
to the Premises to Landlord or any agent or employee of Landlord shall not
constitute a surrender of the Premises or effect a termination of this Lease,
whether or not the keys are thereafter retained by Landlord, and notwithstanding
such delivery Tenant shall be entitled to the return of such keys at any
reasonable time upon request until this Lease shall have been properly
terminated.
15.2 Removal of Tenant Property by Tenant. Upon the expiration of the
------------------------------------
Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this Article 15, quit and surrender possession of the
----------
Premises to Landlord in as good order and condition as when Tenant took
possession and as thereafter improved by Landlord and/or Tenant, reasonable wear
and tear excepted. Upon such expiration or termination, Tenant shall, without
expense to Landlord, remove or cause to be removed from the Premises all debris
and rubbish, and such items of furniture, equipment, free-standing cabinet work,
and other articles of personal property owned by Tenant or installed or placed
by Tenant at its expense in the Premises, and such similar articles of any other
persons claiming under Tenant, as Landlord may, in its sole discretion, require
to be removed, and Tenant shall repair at its own expense all damage to the
Premises, Building and Project resulting from such removal.
16. HOLDING OVER If Tenant holds over after the expiration of the Lease Term
------------
hereof, with or without the express or implied consent of Landlord, such tenancy
shall be from month-to-month only, and shall not constitute a renewal hereof or
an extension for any further term, and in such case Base Rent shall be payable
at a monthly rate equal to one hundred fifty percent (150%) the Base Rent
applicable during the last rental period of the Lease Term under this Lease.
Such month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein. Nothing contained in this Article 16 shall be
----------
construed as consent by Landlord to any holding over by Tenant, and Landlord
expressly reserves the right to require Tenant to surrender possession of the
Premises to Landlord as provided in this Lease upon the expiration or other
termination of this Lease. The provisions of this Article 16 shall not be deemed
----------
to limit or constitute a waiver of any other rights or remedies of Landlord
provided herein or at law. If Tenant fails to surrender the Premises within
thirty (30) days after the termination or expiration of this Lease, in addition
to any other liabilities to Landlord accruing therefrom, Tenant shall protect,
defend, indemnify and hold Landlord harmless from all loss, costs (including
reasonable attorneys' fees) and liability resulting from such failure,
including, without limiting the generality of the foregoing, any claims made by
any succeeding tenant founded upon such failure to surrender, and any lost
profits to Landlord resulting therefrom.
17. ESTOPPEL CERTIFICATE Within ten (10) days following a party's receipt of a
--------------------
request in writing by the other party, Tenant or Tenant, as the case may be,
shall execute and deliver to the other party an estoppel certificate, which
shall be substantially in the form of Exhibit E, attached hereto, (or such other
---------
form as may be required by any prospective mortgagee, lender or purchaser of the
Project, or any portion thereof, or of Tenant or Tenant's business, as the case
may be), indicating therein any exceptions thereto that may exist at that time,
and shall also contain any other information reasonably requested by such party
or their mortgagee, lender or prospective mortgagee or lender. Tenant or
Landlord shall execute and deliver whatever other instruments may be reasonably
required for such purposes. Failure of Tenant to timely execute and deliver such
estoppel certificate or other instruments shall constitute an acceptance of the
Premises and an acknowledgment by Tenant that statements included in the
estoppel certificate are true and correct, without exception.
18. SUBORDINATION This Lease is subject and subordinate to all present and
-------------
future ground or underlying leases of the Project and to the lien of any
mortgages or trust deeds, now or hereafter in force against the Project and the
Building, if any, and to all renewals, extensions, modifications, consolidations
and replacements thereof, and to all advances made or hereafter to be made upon
the security of such mortgages or trust deeds, unless the holders of such
mortgages or trust deeds, or the lessors under such ground lease or underlying
leases, require in writing that this Lease be superior thereto. Landlord agrees
to use its commercially reasonable efforts to obtain a subordination,
nondisturbance and attornment agreement from all beneficiaries of all deeds of
trust encumbering the Premises as of the date hereof (if any), provided that the
delivery thereof is not a condition precedent to Tenant's obligations under this
Lease. Tenant covenants and agrees in the event any proceedings are brought for
the foreclosure of any such mortgage, or if any ground or underlying lease is
terminated, to attorn, without any deductions or set-offs whatsoever, to the
purchaser upon any such foreclosure sale, or to the lessor of such ground or
underlying lease, as the case may be, if so requested to do so by such purchaser
or lessor, and to recognize such purchaser or lessor as the lessor under this
Lease, provided that Tenant shall not be disturbed in its possession under this
Lease by any such successor so long Tenant is not in default hereunder beyond
any applicable notice and cure periods. Tenant shall, within five (5) days of
request by Landlord, execute such further instruments or assurances as Landlord
may
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<PAGE>
reasonably deem necessary to evidence or confirm the subordination or
superiority of this Lease to any such mortgages, trust deeds, ground leases or
underlying leases. Tenant hereby irrevocably authorizes Landlord to execute and
deliver in the name of Tenant any such instrument or instruments if Tenant fails
to do so, provided that such authorization shall in no way relieve Tenant from
the obligation of executing such instruments of subordination or superiority.
Tenant waives the provisions of any current or future statute, rule or law which
may give or purport to give Tenant any right or election to terminate or
otherwise adversely affect this Lease and the obligations of the Tenant
hereunder in the event of any foreclosure proceeding or sale.
19. DEFAULTS; REMEDIES
------------------
19.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute a default of this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease, or any part thereof, within five (5) days
after written notice from Landlord to Tenant of such failure; provided however,
that any such notice shall be in lieu of, and not in addition to, any notice
required under California Code of Civil Procedure Section 1161 or any similar or
successor law;
19.1.2 Any failure by Tenant to respond to Landlord's request under
Article 17 or 18 within the time permitted therein for such response; or
- ----------------
19.1.3 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed by
Tenant, including, but not limited to, the Rules and Regulations set forth in
Exhibit D, attached hereto, where such failure continues for thirty (30) days
- ---------
after written notice thereof from Landlord to Tenant; provided however, that any
such notice shall be in lieu of, and not in addition to, any notice required
under California Code of Civil Procedure Section 1161 or any similar or
successor law; and provided further that if the nature of such default is such
that the same cannot reasonably be cured within a thirty (30)-day period, Tenant
shall not be deemed to be in default if it diligently commences such cure within
such period and thereafter diligently proceeds to rectify and cure said default
as soon as possible; or
19.1.4 Abandonment of the Premises by Tenant unless Tenant properly
secures the Premises from vandals.
19.2 Remedies Upon Default. Upon the occurrence of any event of default
---------------------
by Tenant, Landlord shall have, in addition to any other remedies available to
Landlord at law or in equity, the option to pursue any one or more of the
following remedies, each and all of which shall be cumulative and nonexclusive,
without any notice or demand whatsoever.
19.2.1 Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, without being liable for prosecution or any claim or damages therefor;
and Landlord may recover from Tenant the following: (i) the worth at the time of
award of any unpaid rent which has been earned at the time of such termination;
plus (ii) the worth at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time of award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided; plus (iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided; plus (iv) any other amount reasonably necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, specifically including but not limited to, brokerage
commissions and advertising expenses incurred, expenses of remodeling the
Premises or any portion thereof for a new tenant, whether for the same or a
different use, and any special concessions made to obtain a new tenant; and (v)
at Landlord's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law.
The term "rent" as used in this Section 19.2 shall be deemed to be and to mean
------------
all sums of every nature required to be paid by Tenant pursuant to the terms of
this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i)
--------------------
and (ii), above, the "worth at the time of award" shall be computed by allowing
- --------
interest at the rate set forth in Article 25 of this Lease, but in no case
----------
greater than the maximum amount of such interest permitted by law. As used in
Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed
- ---------------------
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California Civil
Code Section 1951.4 (lessor may continue lease in effect after lessee's breach
and abandonment and recover rent as it becomes due, if lessee has the right to
sublet or assign, subject only to reasonable limitations). Accordingly, if
Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
19.3 Sublessees of Tenant. Whether or not Landlord elects to terminate
--------------------
this Lease on account of any default by Tenant, as set forth in this Article 19,
----------
Landlord shall have the right to terminate any and all subleases, licenses,
concessions or other consensual arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed
to Tenant's interest in such subleases, licenses, concessions or arrangements.
In the event of Landlord's election to succeed to Tenant's interest in any such
subleases, licenses, concessions or arrangements, Tenant shall, as of the date
of notice by Landlord of such election, have no further right to or interest in
the rent or other consideration receivable thereunder.
19.4 Waiver of Default. No waiver by Landlord or Tenant of any violation
-----------------
or breach of any of the terms, provisions and covenants herein contained shall
be deemed or construed to constitute a waiver of any other or later violation or
breach of the same or any other of the terms, provisions, and covenants herein
contained. Forbearance by Landlord in enforcement of one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of such default. The acceptance of any Rent hereunder by
Landlord following the occurrence of any default, whether or not known to
Landlord, shall not be deemed a waiver of any such default, except only a
default in the payment of the Rent so accepted.
20. FORCE MAJEURE. Any prevention, delay or stoppage due to strikes, lockouts,
-------------
labor disputes, acts of God, inability to obtain services, labor, or materials
or reasonable substitutes therefor, governmental actions, civil commotions, fire
or other casualty, and other causes beyond the reasonable control of the party
obligated to perform, except with respect to the obligations imposed with regard
to Rent and other charges to be paid by Tenant pursuant to this Lease
(collectively, the "Force Majeure"), notwithstanding anything to the contrary
contained in this Lease, shall excuse the performance of such party for a period
equal to any such prevention,
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<PAGE>
delay or stoppage and, therefore, if this Lease specifies a time period for
performance of an obligation of either party, that time period shall be extended
by the period of any delay in such party's performance caused by a Force
Majeure.
21. SECURITY DEPOSIT; LETTER OF CREDIT.
----------------------------------
21.1 Security Deposit Concurrent with Tenant's execution of this Lease,
----------------
Tenant shall deposit with Landlord a security deposit (the "Security Deposit")
in the amount set forth in Section 11 of the Summary. The Security Deposit shall
----------
be held by Landlord as security for the faithful performance by Tenant of all
the terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the Lease Term. If Tenant defaults with respect to any provisions
of this Lease, including, but not limited to, the provisions relating to the
payment of Rent, Landlord may, but shall not be required to, use, apply or
retain all or any part of the Security Deposit for the payment of any Rent or
any other sum in default, or for the payment of any amount that Landlord may
spend or become obligated to spend by reason of Tenant's default, or to
compensate Landlord for any other loss or damage that Landlord may suffer by
reason of Tenant's default. If any portion of the Security Deposit is so used or
applied, Tenant shall, within five (5) days after written demand therefor,
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to its original amount, and Tenant's failure to do so shall be a default
under this Lease. If Tenant shall fully and faithfully perform every provision
of this Lease to be performed by it, the Security Deposit, or any balance
thereof, shall be returned to Tenant, or, at Landlord's option, to the last
assignee of Tenant's interest hereunder, within thirty (30) days following the
expiration of the Lease Term. Tenant shall not be entitled to any interest on
the Security Deposit.
21.2 Letter of Credit. In addition to the Security Deposit (if any),
----------------
Tenant shall deliver to Landlord concurrently with Tenant's execution of this
Lease, an unconditional, clean, irrevocable letter of credit (the "L-C-"), with
an expiration date not earlier than twelve (12) months after the date of
issuance, in the initial amount of Two Million Six Hundred Twenty-Two Thousand
Two Hundred Ten and 20/100 Dollars ($2,622,210.20) (the "L-C Amount-"), which L-
C shall be issued by a money-center bank (a bank which accepts deposits,
maintains accounts, has an Orange County office which will negotiate a letter of
credit, and whose deposits are insured by the FDIC) reasonably acceptable to
Landlord, and which L-C shall be in a form and content as set forth in Exhibit
-------
G, attached hereto. Tenant shall pay all expenses, points and/or fees incurred
- -
by Tenant in obtaining the L-C.
21.3 Application of the L-C. The L-C shall be held by Landlord as
----------------------
security for the faithful performance by Tenant of all the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the initial
Lease Term. The L-C shall not be mortgaged, assigned or encumbered in any manner
whatsoever by Tenant without the prior written consent of Landlord. If Tenant
defaults with respect to any provisions of this Lease, including, but not
limited to, the provisions relating to the payment of Rent, or if Tenant fails
to renew the L-C at least thirty (30) days before its expiration, Landlord may,
but shall not be required to, draw upon all or any portion of the L-C for
payment of any Rent or any other sum in default, or for the payment of any
amount that Landlord may reasonably spend or may become obligated to spend by
reason of Tenant's default, or to compensate Landlord for any other loss or
damage that Landlord may suffer by reason of Tenant's default, or if Tenant
fails to renew the L-C at least thirty (30) days before its expiration. The use,
application or retention of the L-C, or any portion thereof, by Landlord shall
not (a) prevent Landlord from exercising any other right or remedy provided by
this Lease or by law, it being intended that Landlord shall not first be
required to proceed against the L-C, nor (b) operate as a limitation on any
recovery to which Landlord may otherwise be entitled. Any amount of the L-C
which is drawn upon by Landlord, but is not used or applied by Landlord, shall
be held by Landlord and deemed a security deposit (the "L-C Security Deposit-")
and shall be held and treated in accordance with Section 21.1. If any portion of
the L-C is drawn upon, Tenant shall, within five (5) days after written demand
therefor, either (i) deposit cash with Landlord (which cash shall be applied by
Landlord to the L-C Security Deposit) in an amount sufficient to cause the sum
of the L-C Security Deposit and the amount of the remaining L-C to be equivalent
to the amount of the L-C then required under this Lease or (ii) reinstate the L-
C to the amount then required under this Lease, and if any portion of the L-C
Security Deposit is used or applied, Tenant shall, within five (5) days after
written demand therefor, deposit cash with Landlord (which cash shall be applied
by Landlord to the L-C Security Deposit) in an amount sufficient to restore the
L-C Security Deposit to the amount then required under this Lease, and Tenant's
failure to do so shall be a default under this Lease. Tenant acknowledges that
Landlord has the right to transfer or mortgage its interest in the Project and
the Building and in this Lease and Tenant agrees that in the event of any such
transfer or mortgage, Landlord shall have the right to transfer or assign the L-
C Security Deposit and/or the L-C to the transferee or mortgagee, and in the
event of such transfer, Tenant shall look solely to such transferee or mortgagee
for the return of the L-C Security Deposit and/or the L-C. If Tenant has not
been in default under this Lease, the L-C shall be returned to Tenant following
the completion of an initial public offering of Tenant's stock to the general
public pursuant to an offering made as a registered offering approved by the
U.S. Securities Exchange Commission, provided that after any such offering the
Net Worth (as defined in Section 14.6) of Tenant shall be equal to or greater
than One Hundred Million Dollars ($100,000,000.00). If Tenant shall fully and
faithfully perform every provision of this Lease to be performed by it, the L-C
Security Deposit and/or the L-C, or any balance thereof, shall be returned to
Tenant within thirty (30) days following the expiration of the Lease Term (if it
has not previously been delivered to Tenant in accordance with this
Section 21.3).
- ------------
21.4 Replacement of L-C. If Landlord has not received written notice from
------------------
the issuing bank that the L-C has been renewed, then Landlord shall have the
right, at its sole option, to draw upon and present the then existing L-C for
the entire amount available thereunder. Should the L-C then in effect be revoked
or should the creditworthiness of the issuer of the L-C then in effect become
impaired (in Landlord's reasonable judgment), then Tenant shall deliver a
replacement L-C in the form and substance required hereunder.
22. INTENTIONALLY OMITTED
---------------------
23. SIGNS
-----
23.1 In General. Subject to the terms of this Section 23, Tenant shall be
----------
entitled, at its sole cost and expense, to install the following signage:
(i) Two (2) signs identifying Tenant located at the top of the Building.
Tenant acknowledges and agrees that Landlord is not conferring upon Tenant any
exclusive right for signage in, on or around the Building or the Project;
(ii) One monument to be constructed by Landlord (the "Monument") in the
Project along Enterprise Drive, the precise location of which shall be
determined by Landlord. The Monument Sign shall be for Tenant's exclusive use;
(iii) One (1) eyebrow sign located above the southerly entry of the
Building, the precise location of which shall be determined by Landlord;
(iv) One (1) strip identifying Tenant on the directory board in the main
lobby of the Building; and
-13-
<PAGE>
(v) Any signage that Tenant may desire on the interior of the Premises
that is not visible from the exterior of the Premises or the exterior of the
Building.
23..2 Specifications. The graphics, materials, color, design, lettering,
--------------
lighting, size, illumination, specifications and exact location of the signs to
which Tenant is entitled pursuant to Section 23.1 above ("Tenant Signage") shall
be subject to the prior written approval of Landlord, which approval shall not
be unreasonably withheld conditioned or delayed, and shall be consistent and
compatible with the quality and nature of the Building and Project. Furthermore,
(i) Tenant's Signage shall comply with all applicable governmental rules and
regulations; (ii) Tenant's rights to Tenant's Signage shall be personal to the
Original Tenant and may not be utilized by any assignee, sublessee or other
transferee of Tenant's interest in this Lease or the Premises; and (iii)
Tenant's continuing right to Tenant's Signage shall be contingent on Tenant's
actually occupying the entire Premises. Tenant shall be responsible for all
costs incurred in connection with the design, construction, installation, repair
and maintenance and compliance with laws of Tenant's Signage, except that in the
event that the Monument shall not be for Tenant's exclusive use, Landlord shall,
at Landlord's cost, install, maintain, repair and cause the Monument to comply
with laws and Tenant shall only be responsible for the installation,
maintenance, repair and compliance with laws of Tenant's sign on the Monument.
Upon the expiration or earlier termination of this Lease, Tenant shall, at its
sole cost and expense, remove Tenant's Signage and repair any and all damage to
the Building and the Project caused by such removal.
23.2 Prohibited Signage and Other Items. Any signs, notices, logos,
----------------------------------
pictures, names or advertisements which are installed and that have not been
individually approved by Landlord may be removed without notice by Landlord at
the sole expense of Tenant. Except as expressly provided herein, Tenant may not
install any signs on the exterior or roof of the Building, Project, or the
common areas of the Building or the Project. Any signs, window coverings, or
blinds (even if the same are located behind the Landlord approved window
coverings for the Building), or other items visible from the exterior of the
Premises, Building or Project are subject to the prior approval of Landlord, in
its sole discretion.
24. COMPLIANCE WITH LAW Tenant shall comply with any law, statute, ordinance or
-------------------
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated. At its sole cost and expense, Tenant shall
promptly comply with all such governmental measures, other than the making of
structural changes or changes to the Building's life safety system. Should any
standard or regulation now or hereafter be imposed on Landlord or Tenant by a
state, federal or local governmental body charged with the establishment,
regulation and enforcement of occupational, health or safety standards for
employers, employees, landlords or tenants, then Tenant agrees, at its sole cost
and expense, to comply promptly with such standards or regulations. The judgment
of any court of competent jurisdiction or the admission of Tenant in any
judicial action, regardless of whether Landlord is a party thereto, that Tenant
has violated any of said governmental measures, shall be conclusive of that fact
as between Landlord and Tenant.
25. LATE CHARGES If any installment of Rent or any other sum due from Tenant
------------
shall not be received by Landlord or Landlord's designee within five (5) days
after said amount is due, or if any check delivered to Landlord by Tenant shall
be returned for insufficient funds, then Tenant shall pay to Landlord a late
charge equal to five percent (5%) of the amount due. In addition to the late
charge, in the event any check is returned for insufficient funds, Tenant shall
pay to Landlord, as additional rent, the sum of $25.00. The late charge shall be
deemed Additional Rent and the right to require it shall be in addition to all
of Landlord's other rights and remedies hereunder or at law and shall not be
construed as liquidated damages or as limiting Landlord's remedies in any
manner. In addition to the late charge described above, any Rent or other
amounts owing hereunder which are not paid when due shall thereafter bear
interest until paid at a rate per annum equal to the prime rate (as quoted in
the Wall Street Journal upon the commencement of the default) plus three percent
(3%), but in no event above the highest rate permitted by applicable law. In the
event that more than one (1) check of Tenant is returned for insufficient funds
in any twelve (12) month period, Landlord shall have the right to require that
any or all subsequent payments by Tenant to Landlord be in the form of cash,
money order, cashier's or certified check drawn on an institution acceptable to
Landlord, notwithstanding any prior practice of accepting payments in any
different form.
26. DEFAULT; PAYMENTS BY TENANT
----------------------------
26.1 Landlord's Cure. All covenants and agreements to be kept or performed
---------------
by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost
and expense and without any reduction of Rent. If Tenant shall fail to perform
any of its obligations under this Lease, within a reasonable time after such
performance is required by the terms of this Lease, Landlord may, but shall not
be obligated to, after reasonable prior notice to Tenant, make any such payment
or perform any such act on Tenant's part without waiving its right based upon
any default of Tenant and without releasing Tenant from any obligations
hereunder.
26.2 Tenant's Reimbursement. Except as may be specifically provided to
----------------------
the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15)
days after delivery by Landlord to Tenant of statements therefor: (i) sums equal
to expenditures reasonably made and obligations incurred by Landlord in
connection with the remedying by Landlord of Tenant's defaults pursuant to the
provisions of Section 26.1; (ii) sums equal to all losses, costs, liabilities,
------------
damages and expenses referred to in Article 10 of this Lease; and (iii) sums
----------
equal to all reasonable expenditures made and obligations incurred by Landlord
in collecting or attempting to collect the Rent or in enforcing or attempting to
enforce any rights of Landlord under this Lease or pursuant to law, including,
without limitation, all reasonable legal fees and other amounts so expended.
Tenant's obligations under this Section 26.2 shall survive the expiration or
------------
sooner termination of the Lease Term.
27. ENTRY BY LANDLORD. Landlord reserves the right at all reasonable times and
-----------------
upon no less than 24 hours notice (except in the event of an emergency, in which
case reasonable notice shall be provided) to the Tenant to enter the Premises to
(i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees
or tenants (but only within the last eight (8) months of the Lease for
prospective tenants), or to the ground or underlying lessors; (iii) post notices
of nonresponsibility; or (iv) alter, improve or repair the Premises or the
Building if necessary to comply with current building codes or other applicable
laws, or for structural alterations, repairs or improvements to the Building,
provided Landlord's entry does not unreasonably interfere with Tenant's use of
the Premises. Notwithstanding anything to the contrary contained in this
Article 27, Landlord may enter the Premises at any time to (A) perform services
- ----------
required of Landlord; (B) take possession due to any breach of this Lease in the
manner provided herein; and (C) perform any covenants of Tenant which Tenant
fails to perform. Any such entries shall be without the abatement of Rent and
shall include the right to take such reasonable steps as required to accomplish
the stated purposes. Tenant hereby waives any claims for damages or for any
injuries or inconvenience to or interference with Tenant's business, lost
profits, any loss of occupancy or quiet enjoyment of the Premises, and any other
loss occasioned thereby. For each of the above purposes, Landlord shall at all
times have a key with which to unlock all the doors in the Premises. In an
emergency, Landlord shall have the right to use any means that Landlord may deem
proper to open the doors in and to the Premises. Any entry into the Premises in
the manner hereinbefore described shall not be deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an actual or
constructive eviction of Tenant from any portion of the Premises.
-14-
<PAGE>
28. TENANT PARKING Tenant shall be entitled to number of parking spaces set
--------------
forth in Section 12 of the Summary to park in the Building Parking Facility.
Tenant shall pay to Landlord for automobile parking passes on a monthly basis
the prevailing rate charged for parking passes at the location of such passes,
provided that, during the initial Lease Term, the parking passes for the
unreserved and reserved spaces shall be free of charge; during the Option Term
(if any), Landlord may also charge Tenant for the unreserved and reserved
parking passes. Tenant's continued right to use the parking passes is
conditioned upon Tenant abiding by all rules and regulations which are
prescribed from time to time for the orderly operation and use of the Building
Parking Facility and upon Tenant's cooperation in seeing that Tenant's employees
and visitors also comply with such rules and regulations. Without limiting the
generality of the foregoing, Tenant acknowledges and agrees that under no
circumstances will Tenant exceed the number of parking passes/spaces allotted to
it under Section 12 of the Summary at any time and that, notwithstanding
Landlord's review or approval of any space plan for the Premises that shows
spaces or work areas for employees that exceed the number of parking
passes/spaces allotted to Tenant, Tenant shall be solely responsible for
arranging carpooling or different shifts in work hours for its employees such
that at no time will Tenant (and its employees and invitees) exceed the
permitted number of parking passes/spaces. Landlord specifically reserves the
right to change the size, configuration, design, layout, location and all other
aspects of the Building Parking Facility and Tenant acknowledges and agrees that
Landlord may, without incurring any liability to Tenant and without any
abatement of Rent under this Lease, from time to time, close-off or restrict
access to the Building Parking Facility, or relocate Tenant's parking passes to
other parking structures and/or surface parking areas within a reasonable
distance of the Premises, for purposes of permitting or facilitating any such
construction, alteration or improvements with respect to the Building Parking
Facility or to accommodate or facilitate renovation, alteration, construction or
other modification of other improvements or structures located on the Project.
Landlord may delegate its responsibilities hereunder to a parking operator in
which case such parking operator shall have all the rights of control attributed
hereby to the Landlord and such owner. The parking rates charged by Landlord for
Tenant's parking passes shall be exclusive of any parking tax or other charges
imposed by governmental authorities in connection with the use of such parking,
which taxes and/or charges shall be paid directly by Tenant or the parking
users, or, if directly imposed against Landlord, Tenant shall reimburse Landlord
for all such taxes and/or charges concurrent with its payment of the parking
rates described herein.
29. MISCELLANEOUS PROVISIONS
------------------------
29.1 Binding Effect. Each of the provisions of this Lease shall extend to
--------------
and shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of their respective successors or assigns,
provided this clause shall not permit any assignment by Tenant contrary to the
provisions of Article 14 of this Lease.
----------
29.2 No Air Rights. No rights to any view or to light or air over any
-------------
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease. If at any time any windows of the Premises are temporarily
darkened or the light or view therefrom is obstructed by reason of any repairs,
improvements, maintenance or cleaning in or about the Project, the same shall be
without liability to Landlord and without any reduction or diminution of
Tenant's obligations under this Lease.
29.3 Modification of Lease. Should any current or prospective mortgagee or
---------------------
ground lessor for the Project require a modification or modifications of this
Lease, which modification or modifications will not cause an increased cost or
expense to Tenant or in any other way materially and adversely change the rights
and obligations of Tenant hereunder, then and in such event, Tenant agrees that
this Lease may be so modified and agrees to execute whatever documents are
required therefor and deliver the same to Landlord within ten (10) days
following the request therefor..
29.4 Transfer of Landlord's Interest. Tenant acknowledges that Landlord
-------------------------------
has the right to transfer all or any portion of its interest in the Project and
Building and in this Lease, and Tenant agrees that in the event of any such
transfer, Landlord shall automatically be released from all liability under this
Lease arising after the date of such transfer and Tenant agrees to look solely
to such transferee for the performance of Landlord's obligations hereunder after
the date of transfer. The liability of any transferee of Landlord shall be
limited to the interest of such transferee in the Project and Building and such
transferee shall be without personal liability under this Lease, and Tenant
hereby expressly waives and releases such personal liability on behalf of itself
and all persons claiming by, through or under Tenant. Tenant further
acknowledges that Landlord may assign its interest in this Lease to a mortgage
lender as additional security and agrees that such an assignment shall not
release Landlord from its obligations hereunder and that Tenant shall continue
to look to Landlord for the performance of its obligations hereunder.
Notwithstanding the above, Landlord's transfer shall in no way relieve Landlord
from any liability accruing prior to such transfer.
29.5 Prohibition Against Recording. Except as provided in Section 29.3 of
----------------------------- ------------
this Lease or this Section 29.5, neither this Lease, nor any memorandum,
------------
affidavit or other writing with respect thereto, shall be recorded by Tenant or
by anyone acting through, under or on behalf of Tenant, and the recording
thereof in violation of this provision shall make this Lease null and void at
Landlord's election. Notwithstanding the foregoing, on or before fifteen (15)
business days following a written request by either Landlord or Tenant, the
parties agree to execute and record a short form memorandum of this Lease, in a
recordable form reasonably acceptable to Landlord and Tenant. Within five (5)
business days following the expiration or earlier termination of this Lease,
Tenant shall execute (and have properly notarized) and deliver to Landlord a
Quitclaim Deed, in recordable form, quitclaiming, terminating and forever
surrendering any and all right, title or interests Tenant may have in or to the
Premises.
29.6 Relationship of Parties. Nothing contained in this Lease shall be
-----------------------
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of Rent nor any act of the parties
hereto shall be deemed to create any relationship between Landlord and Tenant
other than the relationship of landlord and tenant.
29.7 Application of Payments. Landlord shall have the right to apply
-----------------------
payments received from Tenant pursuant to this Lease, regardless of Tenant's
designation of such payments, to satisfy any obligations of Tenant hereunder, in
such order and amounts as Landlord, in its sole discretion, may elect.
29.8 Time of Essence. Time is of the essence of this Lease and each of
---------------
its provisions, provided, however, that if a party's performance (except for
monetary payments) would fall on a Saturday, Sunday or legal holiday, that
party's performance shall be extended to the next following business day.
29.9 Partial Invalidity. If any term, provision or condition contained in
------------------
this Lease shall, to any extent, be invalid or unenforceable, the remainder of
this Lease, or the application of such term, provision or condition to persons
or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
-15-
<PAGE>
29.10 No Warranty. In executing and delivering this Lease, Tenant has not
-----------
relied on any representation, including, but not limited to, any representation
whatsoever as to the amount of any item comprising Additional Rent or the amount
of the Additional Rent in the aggregate or that Landlord is furnishing the same
services to other tenants, at all, on the same level or on the same basis, or
any warranty or any statement of Landlord which is not set forth herein or in
one or more of the exhibits attached hereto.
29.11 Entire Agreement. It is understood and acknowledged that there are
----------------
no oral agreements between the parties hereto affecting this Lease and this
Lease supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties hereto or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease.
29.12 Right to Lease. Landlord reserves the absolute right to effect such
--------------
other tenancies in the Project as Landlord in the exercise of its sole business
judgment shall determine to best promote the interests of the Project. Tenant
does not rely on the fact, nor does Landlord represent, that any specific tenant
or type or number of tenants shall, during the Lease Term, occupy any space in
the Project.
29.13 Waiver of Redemption by Tenant. Tenant hereby waives for Tenant and
------------------------------
for all those claiming under Tenant all right now or hereafter existing to
redeem by order or judgment of any court or by any legal process or writ,
Tenant's right of occupancy of the Premises after any termination of this Lease.
29.14 Notices. All notices, demands, statements or communications
-------
(collectively, "Notices") given or required to be given by either party to the
other hereunder shall be in writing, shall be sent by United States certified or
registered mail, postage prepaid, return receipt requested, or delivered
personally (i) to Tenant at the appropriate address set forth in Section 5 of
---------
the Summary, or to such other place as Tenant may from time to time designate in
a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section
-------
3 of the Summary, or to such other firm or to such other place as Landlord may
- -
from time to time designate in a Notice to Tenant. Any Notice will be deemed
given forty-eight (48) hours after the date it is mailed as provided in this
Section 29.14 or upon the date personal delivery is made. If Tenant is notified
- -------------
of the identity and address of Landlord's mortgagee or ground or underlying
lessor, Tenant shall give to such mortgagee or ground or underlying lessor
written notice of any default by Landlord under the terms of this Lease by
registered or certified mail, and such mortgagee or ground or underlying lessor
shall be given a reasonable opportunity to cure such default prior to Tenant's
exercising any remedy available to Tenant.
29.15 Landlord Exculpation. It is expressly understood and agreed that
--------------------
notwithstanding anything in this Lease to the contrary, and notwithstanding any
applicable law to the contrary, the liability of Landlord and the Landlord
Parties hereunder (including any successor landlord) and any recourse by Tenant
against Landlord or the Landlord Parties shall be limited solely and exclusively
to an amount which is equal to the interest of Landlord in the Building, and
neither Landlord, nor any of the Landlord Parties shall have any personal
liability therefor, and Tenant hereby expressly waives and releases such
personal liability on behalf of itself and all persons claiming by, through or
under Tenant.
29.16 Intentionally Omitted.
29.17 Authority. If Tenant is a corporation or partnership, each
---------
individual executing this Lease on behalf of Tenant hereby represents and
warrants that Tenant is a duly formed and existing entity qualified to do
business in the state in which the Building is located and that Tenant has full
right and authority to execute and deliver this Lease and that each person
signing on behalf of Tenant is authorized to do so.
29.18 Attorneys' Fees. If either party commences litigation against the
---------------
other for the specific performance of this Lease, for damages for the breach
hereof or otherwise for enforcement of any remedy hereunder, the parties hereto
agree to and hereby do waive any right to a trial by jury and, in the event of
any such commencement of litigation, the prevailing party shall be entitled to
recover from the other party such costs and reasonable attorneys' fees as may
have been incurred, including any and all costs incurred in enforcing,
perfecting and executing such judgment.
29.19 Governing Law. This Lease shall be construed and enforced in
-------------
accordance with the laws of the State of California.
29.20 Submission of Lease. Submission of this instrument for examination
-------------------
or signature by Tenant does not constitute a reservation of or an option for
lease, and it is not effective as a lease or otherwise until execution and
delivery by both Landlord and Tenant.
29.21 Brokers. Landlord and Tenant hereby warrant to each other that they
-------
have had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease, and that they know of no other real estate broker or
agent who is entitled to a commission in connection with this Lease, excepting
only the real estate brokers or agents specified in Section 13 of the Summary
(the "Brokers"). Each party agrees to indemnify and defend the other party
against and hold the other party harmless from any and all claims, demands,
losses, liabilities, lawsuits, judgments, and costs and expenses (including
without limitation reasonable attorneys' fees) with respect to any leasing
commission or equivalent compensation alleged to be owing on account of the
indemnifying party's dealings with any real estate broker or agent, other than
the Brokers.
29.22 Independent Covenants. This Lease shall be construed as though the
---------------------
covenants herein between Landlord and Tenant are independent and not dependent
and Tenant hereby expressly waives the benefit of any statute to the contrary
and agrees that if Landlord fails to perform its obligations set forth herein,
Tenant shall not be entitled to make any repairs or perform any acts hereunder
at Landlord's expense or to any setoff of the Rent or other amounts owing
hereunder against Landlord.
29.23 Project Name and Signage. Landlord shall have the right at any time
------------------------
to change the name of the Project and to install, affix and maintain any and all
signs on the exterior and on the interior of the Project as Landlord may, in
Landlord's sole discretion, desire. Tenant shall not use the name of the Project
or use pictures or illustrations of the Project in advertising or other
publicity, without the prior written consent of Landlord.
29.24 Transportation Management. Tenant shall fully comply with all
-------------------------
present or future programs intended to manage parking, transportation or traffic
in and around the Building, and in connection therewith, Tenant shall take
responsible action for the transportation planning and management of all
employees located at the Premises by working directly with Landlord, any
governmental transportation management organization or any other transportation-
related committees or entities.
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<PAGE>
29.25 Hazardous Material. As used herein, the term "Hazardous Material"
------------------
means any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the state in which the Building
is located or the United States Government. Tenant acknowledges that Landlord
may incur costs (A) for complying with laws, codes, regulations or ordinances
relating to Hazardous Material, or (B) otherwise in connection with Hazardous
Material. Tenant agrees that the costs incurred by Landlord with respect to, or
in connection with, complying with laws, codes, regulations or ordinances
relating to Hazardous Material shall be an Operating Expense, unless the cost of
such compliance, as between Landlord and Tenant, is made the responsibility of
Tenant under this Lease. Landlord represents and warrants that, to its "actual
knowledge" (as defined below), it is unaware of any Hazardous Material in, on or
under the Premises or the Building except for (i) any Hazardous Material that is
incorporated into the Building as part of the base, shell or core and is in
compliance with all applicable laws and (ii) any Hazardous Material that is
disclosed in [Todd to provide list of environmental reports]. For purposes of
this Section 29.25, the words "actual knowledge" means the present, actual
-------------
knowledge of Todd Burnight and Russ Parker, as of the date of this Lease,
without any duty of investigation or inquiry other than the obtaining of the
environmental report(s) referenced above.
29.26 Confidentiality. Tenant acknowledges that the content of this Lease
---------------
and any related documents are confidential information. Tenant shall keep such
confidential information strictly confidential and shall not disclose such
confidential information to any person or entity other than Tenant's financial,
legal, and space planning consultants.
29.27 Landlord Renovations. It is specifically understood and agreed that
--------------------
Landlord has no obligation and has made no promises to alter, remodel, improve,
renovate, repair or decorate the Premises, Building, Project or any part thereof
and that no representations respecting the condition of the Premises, Building
or Project have been made by Landlord to Tenant except as specifically set forth
herein or in the Tenant Work Letter. However, Tenant acknowledges that Landlord
is currently renovating or may during the Lease Term renovate, improve, alter,
or modify (collectively, the "Renovations") the Building, Premises, and/or
Project, including without limitation the Building Parking Facility, common
areas, systems and equipment, roof, and structural portions of the same. In
connection with such Renovations, Landlord may, among other things, erect
scaffolding or other necessary structures in the Building or Project, limit or
eliminate access to portions of the Project, including portions of the common
areas, or perform work in the Building or Project, which work may create noise,
dust or leave debris in the Building or Project. Tenant hereby agrees that such
Renovations and Landlord's actions in connection with such Renovations shall in
no way constitute a constructive eviction of Tenant nor entitle Tenant to any
abatement of Rent. Landlord shall have no responsibility or for any reason be
liable to Tenant for any direct or indirect injury to or interference with
Tenant's business arising from the Renovations, nor shall Tenant be entitled to
any compensation or damages from Landlord for loss of the use of the whole or
any part of the Premises or of Tenant's personal property or improvements
resulting from the Renovations or Landlord's actions in connection with such
Renovations, or for any inconvenience or annoyance occasioned by such
Renovations or Landlord's actions in connection with such Renovations.
Notwithstanding the foregoing, in the event that Tenant is prevented from using,
and does not use, the Premises or any portion thereof, as a result of any
Renovations performed by Landlord (such set of circumstances, as set forth
above, to be known as an "Renovation Abatement Event"), then Tenant shall give
Landlord notice of such Renovation Abatement Event, and if such Renovation
Abatement Event continues for five (5) consecutive business days after
Landlord's receipt of any such notice (the "Renovation Eligibility Period"),
then the Base Rent and Tenant's Share of Direct Expenses shall be abated or
reduced, as the case may be, after expiration of the Renovation Eligibility
Period for such time that Tenant continues to be so prevented from using, and
does not use, the Premises or a portion thereof, in the proportion that the
rentable area of the portion of the Premises that Tenant is prevented from
using, and does not use, bears to the total rentable area of the Premises;
provided, however, in the event that Tenant is prevented from using, and does
not use, a portion of the Premises for a period of time in excess of the
Renovation Eligibility Period and the remaining portion of the Premises is not
sufficient to allow Tenant to effectively conduct its business therein, and if
Tenant does not conduct its business from such remaining portion, then for such
time after expiration of the Renovation Eligibility Period during which Tenant
is so prevented from effectively conducting its business therein, the Base Rent
and Tenant's Share of Direct Expenses for the entire Premises shall be abated
for such time as Tenant continues to be so prevented from using, and does not
use, the Premises. If, however, Tenant reoccupies any portion of the Premises
during such period, the Rent allocable to such reoccupied portion, based on the
proportion that the rentable area of such reoccupied portion of the Premises
bears to the total rentable area of the Premises, shall be payable by Tenant
from the date Tenant reoccupies such portion of the Premises. Such right to
abate Base Rent and Tenant's Share of Direct Expenses shall be Tenant's sole and
exclusive remedy at law or in equity for an Renovation Abatement Event. Except
as provided in this Section 29.27, nothing contained herein shall be interpreted
to mean that Tenant is excused from paying Rent due hereunder.
29.28 Development of the Project.
--------------------------
29.28.1 Subdivision. Landlord reserves the right to further
-----------
subdivide all or a portion of the Project. Tenant agrees to execute and deliver,
upon demand by Landlord and in the form requested by Landlord, any additional
documents reasonably needed to conform this Lease to the circumstances resulting
from such subdivision.
29.28.2 The Other Improvements. If portions of the Project or
----------------------
property adjacent to the Project (collectively, the "Other Improvements") are
owned by an entity other than Landlord, Landlord, at its option, may enter into
an agreement with the owner or owners of any or all of the Other Improvements to
provide (i) for reciprocal rights of access and/or use of the Project and the
Other Improvements, (ii) for the common management, operation, maintenance,
improvement and/or repair of all or any portion of the Project and the Other
Improvements, (iii) for the allocation of a portion of the Direct Expenses to
the Other Improvements and the operating expenses and taxes for the Other
Improvements to the Project, and (iv) for the use or improvement of the Other
Improvements and/or the Project in connection with the improvement,
construction, and/or excavation of the Other Improvements and/or the Project.
Nothing contained herein shall be deemed or construed to limit or otherwise
affect Landlord's right to convey all or any portion of the Project or any other
of Landlord's rights described in this Lease.
29.28.3 Construction of Project and Other Improvements. Tenant
----------------------------------------------
acknowledges that portions of the Project and/or the Other Improvements may be
under construction following Tenant's occupancy of the Premises, and that such
construction may result in levels of noise, dust, obstruction of access, etc.
which are in excess of that present in a fully constructed project. Tenant
hereby waives any and all rent offsets or claims of constructive eviction which
may arise in connection with such construction.
29.29 No Discrimination. Tenant covenants by and for itself, its heirs,
-----------------
executors, administrators and assigns, and all persons claiming under or through
Tenant, and this Lease is made and accepted upon and subject to the following
conditions: that there shall be no discrimination against or segregation of any
person or group of persons, on account of race, color, creed, sex, religion,
marital status, ancestry or national origin in the leasing, subleasing,
transferring, use, or enjoyment of the Premises, nor shall Tenant itself, or any
person claiming under or through Tenant, establish or permit such practice or
practices of discrimination or segregation with reference to the selection,
location, number, use or occupancy, of tenants, lessees, sublessees, subtenants
or vendees in the Premises.
-17-
<PAGE>
29.30 Office and Communications Services.
----------------------------------
29.30.1 The Provider. Landlord has advised Tenant that certain
------------
office and communications services may be offered to tenants of the Building by
a concessionaire under contract to Landlord ("Provider"). Tenant shall be
permitted to contract with Provider for the provision of any or all of such
services on such terms and conditions as Tenant and Provider may agree.
29.30.2 Other Terms. Tenant acknowledges and agrees that: (i)
-----------
Landlord has made no warranty or representation to Tenant with respect to the
availability of any such services, or the quality, reliability or suitability
thereof; (ii) the Provider is not acting as the agent or representative of
Landlord in the provision of such services, and Landlord shall have no liability
or responsibility for any failure or inadequacy of such services, or any
equipment or facilities used in the furnishing thereof, or any act or omission
of Provider, or its agents, employees, representatives, officers or contractors;
(iii) Landlord shall have no responsibility or liability for the installation,
alteration, repair, maintenance, furnishing, operation, adjustment or removal of
any such services, equipment or facilities; and (iv) any contract or other
agreement between Tenant and Provider shall be independent of this Lease, the
obligations of Tenant hereunder, and the rights of Landlord hereunder, and,
without limiting the foregoing, no default or failure of Provider with respect
to any such services, equipment or facilities, or under any contract or
agreement relating thereto, shall have any effect on this Lease or give to
Tenant any offset or defense to the full and timely performance of its
obligations hereunder, or entitle Tenant to any abatement of rent or additional
rent or any other payment required to be made by Tenant hereunder, or constitute
any accrual or constructive eviction of Tenant, or otherwise give rise to any
other claim of any nature against Landlord.
29.31 Child Care Facilities. Tenant acknowledges that any child care
---------------------
facilities located in the Project (the "Child Care Facilities") which are
available to Tenant and Tenant's employees are provided by a third party (the
"Child Care Provider") which is leasing space in the Project, and not by
Landlord. If Tenant or its employees choose to use the Child Care Facilities,
Tenant acknowledges that Tenant and Tenant's employees are not relying upon any
investigation which Landlord may have conducted concerning the Child Care
Provider or any warranties or representation with respect thereto, it being the
sole responsibility of Tenant and the individual user of the Child Care
Facilities to conduct any and all investigations of the Child Care Facilities
prior to making use thereof. Accordingly, Landlord shall have no responsibility
with respect to the quality or care provided by the Child Care Facilities, or
for any acts or omissions of the Child Care Provider. Furthermore, Tenant, for
Tenant and for Tenant's employees, hereby agrees that Landlord, its members and
their respective partners, subpartners, officers, agents, servants, employees,
and independent contractors shall not be liable for, and are hereby released
from any responsibility for any loss, cost, damage, expense or liability, either
to person or property, arising from the use of the Child Care Facilities by
Tenant or Tenant's employees. Tenant hereby covenants that Tenant shall inform
all of Tenant's employees of the provisions of this Section 29.31 prior to such
employees' use of the Child Care Facilities.
29.32 Intentionally Omitted
-18-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed the day and date first above written.
"Landlord":
AEW\PARKER II, LLC,
a California limited liability company
By: Eastrich Aliso, LLC,
a Delaware limited liability company,
Member - Manager
By:____________________________________
James Flynn
Authorized Signatory
"Tenant":
BUY.COM,
a _____________________________________
By:____________________________________
Its____________________________________
By:____________________________________
Its____________________________________
-19-
<PAGE>
EXHIBIT A
---------
OUTLINE OF PREMISES
-------------------
[TO BE PROVIDED]
EXHIBIT A - Page 1
<PAGE>
EXHIBIT B
---------
TENANT WORK LETTER
------------------
This Tenant Work Letter shall set forth the terms and conditions relating
to the construction of the tenant improvements in the Premises. This Tenant
Work Letter is essentially organized chronologically and addresses the issues of
the construction of the Premises, in sequence, as such issues will arise during
the actual construction of the Premises. All references in this Tenant Work
Letter to Articles or Sections of "this Lease" shall mean the relevant portion
of Articles 1 through 29 of the Office Lease to which this Tenant Work Letter is
---------------------
attached as Exhibit B and of which this Tenant Work Letter forms a part, and all
---------
references in this Tenant Work Letter to Sections of "this Tenant Work Letter"
shall mean the relevant portion of Sections 1 through 6 of this Tenant Work
--------------------
Letter.
SECTION 1
---------
LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES
-----------------------------------------------
1.1 Base, Shell and Core of the Premises as Constructed by Landlord.
---------------------------------------------------------------
Landlord has constructed, or shall construct, at its sole cost and expense, the
base, shell, and core as set forth on Schedule 1, attached hereto (the "Base,
----------
Shell, and Core") (i) of the Premises and (ii) of the floor of the Building on
which the Premises is located (collectively, the "Base, Shell, and Core"). The
Base, Shell and Core shall consist of those portions of the Premises which were
in existence prior to the construction of the tenant improvements in the
Premises for the prior tenant of the Premises.
1.2 Landlord Work. Landlord shall, at Tenant's sole cost and expense,
-------------
cause the construction or installation of the following items on the floor of
the Building containing the Premises (collectively, the "Landlord Work").
Tenant may not change or alter the Landlord Work.
1.2.1 Public Corridor (only as to that portion of the Premises,
if any, which occupies only a portion of a floor, rather than an entire floor,
of the Building). The actual public corridor wall, the standard tenant entries
and exits including doors, frames, hardware, and sidelight (if any), and
standard tenant entry signage and exit lights (collectively, the "Public
Corridor"), which Public Corridor is adjacent to the Premises.
1.2.2 Demising Walls Between Tenants (only as to that portion of
the Premises, if any, which occupies only a portion of a floor, rather than an
entire floor, of the Building). One-half of the cost of the demising partitions
between tenants which shall include studs, acoustical insulation and dry wall
ready for finish on tenant side only and any necessary penetrations, fire
dampers and sound traps (collectively, the "Demising Walls"), which Demising
Walls are adjacent to the Premises.
1.2.3 Elevator Lobby (only as to that portion of the Premises, if
any, which occupies only a portion of a floor, rather than an entire floor, of
the Building) (the "Lobby").
SECTION 2
---------
TENANT IMPROVEMENTS
-------------------
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time
----------------------------
tenant improvement allowance (the "Tenant Improvement Allowance") in the amount
of One Million Three Hundred Eighty Thousand One Hundred Fifteen Dollars
($1,380,115.00) (i.e., $27.50 per usable square foot of the Premises multiplied
by 50,186 useable square feet) for the costs relating to the initial design and
construction of Tenant's improvements which are permanently affixed to the
Premises (the "Tenant Improvements"). Except as set forth in this Section 2.1
----------
of this Tenant Work Letter, in no event shall Landlord be obligated to make
disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance. All Tenant Improvements for which the
Tenant Improvement Allowance has been made available shall be deemed Landlord's
property under the terms of the Lease.
2.2 Disbursement of the Tenant Improvement Allowance. Except as otherwise
------------------------------------------------
set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Landlord (each of which disbursements shall be made pursuant to
Landlord's disbursement process) for costs related to the construction of the
Tenant Improvements and for the following items and costs (collectively, the
"Tenant Improvement Allowance Items"): (i) payment of the fees of the
"Architect" and the "Engineers," as those terms are defined in Section 3.1 of
-----------
this Tenant Work Letter (provided that Tenant's right to reimbursement from the
Tenant Improvement Allowance for the Architect's fees for preparing the
"Preliminary Space Plan," as that term is defined in Section 3.1 of this Tenant
-----------
Work Letter, shall not exceed $0.12 per usable square foot of space within the
Premises), and payment of the fees incurred by, and the cost of documents and
materials supplied by, Landlord and Landlord's consultants in connection with
the preparation and review of the "Construction Drawings," as that term is
defined in Section 3.1 of this Tenant Work Letter; (ii) the cost of any changes
-----------
in the Base, Shell and Core when such changes are required by the Construction
Drawings; (iii) the cost of any changes to the Construction Drawings or Tenant
Improvements required by all applicable building codes (the "Code"); (iv) the
cost of the Landlord's Work; (v) the "Landlord Supervision Fee", as that term is
defined in Section 4.3.2 of this Tenant Work Letter; and (vi) a portion of the
-------------
costs, as designated by Landlord, of the tenant demising walls, and public
corridor and Lobby walls and materials, if any, as designated by Landlord.
2.3 Standard Tenant Improvement Package. Landlord has established
-----------------------------------
specifications (the "Specifications") for the Building standard components to be
used in the construction of the Tenant Improvements in the Premises
(collectively, the "Standard Improvement Package"), which Specifications are set
forth on Schedule 2, attached hereto shall be supplied to Tenant by Landlord.
----------
The quality of Tenant Improvements shall be equal to or of greater quality than
the quality of the Specifications, provided that Landlord may, at Landlord's
option, require the Tenant Improvements to comply with certain Specifications.
Landlord may make changes to the Specifications for the Standard Improvement
Package from time to time.
SECTION 3
---------
CONSTRUCTION DRAWINGS
---------------------
3.1 Selection of Architect/Construction Drawings. Tenant has retained H.
--------------------------------------------
Hendy & Associates Design (the "Architect") as the architect/space planner to
prepare the preliminary space plan for the Premises ("Preliminary Space Plan"),
which is attached hereto as Schedule 3. Landlord shall retain the Architect to
----------
prepare the "Construction Drawings," as that term is defined in this Section
-------
3.1. Landlord shall also retain the engineering consultants (the "Engineers")
to prepare all plans and engineering working
EXHIBIT B - Page 1
<PAGE>
drawings relating to the structural, mechanical, electrical, plumbing, HVAC,
life safety, and sprinkler work of the Tenant Improvements. The plans and
drawings to be prepared by Architect and the Engineers hereunder shall be known
collectively as the "Construction Drawings."
3.2 Final Space Plan. Landlord and the Architect, with Tenant's
----------------
assistance, shall prepare the final space plan for Tenant Improvements in the
Premises (collectively, the "Final Space Plan"), which Final Space Plan shall be
based upon the Preliminary Space Plan (subject to Section 3.1 above) and shall
----------
include a layout and designation of all offices, rooms and other partitioning,
their intended use, and equipment to be contained therein, and shall deliver the
Final Space Plan to Tenant for Tenant's approval. Tenant shall have ___________
(___) business days to review and approve the same. Tenant's failure to review
and approve the Final Space Plan within such ___________ (___) business day
period shall constitute Tenant's approval of the same.
3.3 Final Working Drawings. Landlord, the Architect and the Engineers,
----------------------
with Tenant's assistance, shall complete the architectural and engineering
drawings for the Premises, and the final architectural working drawings in a
form which is complete to allow subcontractors to bid on the work and to obtain
all applicable permits (collectively, the "Final Working Drawings") and shall
submit the same to Tenant for Tenant's approval. Tenant shall have ___________
(___) business days to review and approve the same. Tenant's failure to review
and approve the Final Working Drawings within such ___________ (___) business
day period shall constitute Tenant's approval of the same.
3.4 Permits. The Final Working Drawings shall be approved (or deemed
-------
approved) by Tenant (the "Approved Working Drawings") prior to the commencement
of the construction of the Tenant Improvements. Landlord shall immediately
submit the Approved Working Drawings to the appropriate municipal authorities
for all applicable building permits necessary to allow "Contractor," as that
term is defined in Section 4.1, below, to commence and fully complete the
-----------
construction of the Tenant Improvements (the "Permits"), and, in connection
therewith, Tenant shall, if requested by Landlord, coordinate with Landlord in
order to assist Landlord in obtaining the Permits on or before the date set
forth in Schedule 1. Landlord may make any and all changes, modifications or
----------
alterations in the Approved Working Drawings that may be required by any
governmental authority without the prior written consent of Tenant.
3.5 Time Deadlines. Tenant shall use its good faith, efforts and all due
--------------
diligence to cooperate with the Architect, the Engineers, and Landlord to
complete all phases of the Construction Drawings and the permitting process, and
with Contractor for approval of the "Cost Proposal," as that term is defined in
Section 4.2 of this Tenant Work Letter, as soon as possible after the execution
- -----------
of the Lease, and, in that regard, shall meet with Landlord on a scheduled basis
to be determined by Landlord, to discuss the same. The applicable dates for
approval of items, plans and drawings as described in this Section 3, Section 4,
--------- ---------
below, and in this Tenant Work Letter are set forth and further elaborated upon
in Schedule 4 (the "Time Deadlines"), attached hereto. Tenant agrees to comply
----------
with the Time Deadlines.
SECTION 4
---------
CONSTRUCTION OF THE TENANT IMPROVEMENTS
---------------------------------------
4.1 Contractor. Landlord shall competitively bid the Tenant Improvements
----------
Work to the following general contractors (the "Pre-Approved Contractors"):
[Insert applicable list.] Landlord shall select the contractor to construct the
Tenant Improvements. Tenant's consent to such selection shall not be required
if Landlord selects as its general contractor any one of the Pre-Approved
Contractors. If Landlord desires to select another general contractor, Landlord
shall obtain Tenant's consent thereto (not to be unreasonably withheld,
conditioned or delayed). The contractor selected by Landlord is referred to
herein as the "Contractor."
4.2 Cost Proposal. After the Approved Working Drawings are signed by
-------------
Landlord and Tenant, Landlord shall provide Tenant with a cost proposal in
accordance with the Approved Working Drawings, which cost proposal shall
include, as nearly as possible, the cost of all Tenant Improvement Allowance
Items to be incurred by Tenant in connection with the design and construction of
the Tenant Improvements (the "Cost Proposal"). Tenant shall approve and deliver
the Cost Proposal to Landlord within five (5) business days of the receipt of
the same, and upon receipt of the same by Landlord, Landlord shall be released
by Tenant to purchase the items set forth in the Cost Proposal and to commence
the construction relating to such items. The date by which Tenant must approve
and deliver the Cost Proposal to Landlord shall be known hereafter as the "Cost
Proposal Delivery Date".
4.3 Construction of Tenant Improvements by Contractor under the
-----------------------------------------------------------
Supervision of Landlord.
- -----------------------
4.3.1 Over-Allowance Amount. On the Cost Proposal Delivery Date,
---------------------
Tenant shall deliver to Landlord cash in an amount (the "Over-Allowance Amount")
equal to the difference between (i) the amount of the Cost Proposal and (ii) the
amount of the Tenant Improvement Allowance. The Over-Allowance Amount shall be
disbursed by Landlord prior to the disbursement of any then remaining portion of
the Tenant Improvement Allowance, and such disbursement shall be pursuant to the
same procedure as the Tenant Improvement Allowance. In the event that, after
the Cost Proposal Delivery Date, any revisions, changes, or substitutions shall
be made to the Construction Drawings or the Tenant Improvements, any additional
costs which arise in connection with such revisions, changes or substitutions or
any other additional costs shall be paid by Tenant to Landlord immediately upon
Landlord's request as an addition to the Over-Allowance Amount.
4.3.2 Landlord's Retention of Contractor. Landlord shall
----------------------------------
independently retain Contractor, on behalf of Tenant, to construct the Tenant
Improvements in accordance with the Approved Working Drawings and the Cost
Proposal and Landlord shall supervise the construction by Contractor, and Tenant
shall pay a construction supervision and management fee (the "Landlord
Supervision Fee") to Landlord in an amount equal to the product of (i) five
percent (5%) multiplied by (ii) the amount in the Cost Proposal.
4.3.3 Contractor's Warranties and Guaranties. Landlord hereby
--------------------------------------
assigns to Tenant all warranties and guaranties by Contractor relating to the
Tenant Improvements, and Tenant hereby waives all claims against Landlord
relating to, or arising out of the construction of, the Tenant Improvements.
4.3.4 Tenant's Covenants. Within ten (10) days after completion of
------------------
construction of the Tenant Improvements, Tenant shall cause Contractor and
Architect to cause a Notice of Completion to be recorded in the office of the
County Recorder of the county in which the Building is located in accordance
with Section 3093 of the Civil Code of the State of California or any successor
statute and furnish a copy thereof to Landlord upon recordation, failing which,
Landlord may itself execute and file the same on behalf of Tenant as Tenant's
agent for such purpose. In addition, immediately after the Substantial
Completion of the Premises, Tenant shall
EXHIBIT B - Page 2
<PAGE>
have prepared and delivered to the Building a copy of the "as built" plans and
specifications (including all working drawings) for the Tenant Improvements.
4.3.5 Unused Allowance Amount. If the Tenant Improvement Allowance
-----------------------
is not expended in full, any unused amounts ("Allowance Savings") shall be
credited against Tenant's Base Rent first becoming due under the Lease, provided
that under no circumstances shall the Allowance Savings exceed the amount of
Base Rent that is due in the first month of the Lease Term.
SECTION 5
---------
COMPLETION OF THE TENANT IMPROVEMENTS;
--------------------------------------
LEASE COMMENCEMENT DATE
-----------------------
5.1 Ready for Occupancy. The Premises shall be deemed "Ready for
-------------------
Occupancy" upon the Substantial Completion of the Premises. For purposes of
this Lease, "Substantial Completion" of the Premises shall occur upon (i) the
substantial completion of construction of the Tenant Improvements in the
Premises pursuant to the Approved Working Drawings, with the exception of any
punch list items and any tenant fixtures, work-stations, built-in furniture, or
equipment to be installed by Tenant or under the supervision of Contractor and
(ii) the issuance of a certificate of occupancy (temporary or permanent), or the
functional equivalent thereof that allows for the legal occupancy of the
Premises such as a sign off on the building inspection cards, by the applicable
governmental authorities.
5.2 Delay of the Substantial Completion of the Premises. Except as
---------------------------------------------------
provided in this Section 5.2, the Lease Commencement Date shall occur as set
-----------
forth in the Lease and Section 5.1, above. If there shall be a delay or there
-----------
are delays in the Substantial Completion of the Premises or in the occurrence of
any of the other conditions precedent to the Lease Commencement Date, as set
forth in the Lease, as a direct, partial, or total result of:
5.2.1 Tenant's unreasonable failure to comply with the Time
Deadlines;
5.2.2 Tenant's unreasonable failure to timely approve any matter
requiring Tenant's approval;
5.2.3 A material breach by Tenant of the terms of this Tenant Work
Letter or the Lease;
5.2.4 Changes in any of the Construction Drawings after disapproval
of the same by Landlord or because the same do not comply with Code or other
applicable laws;
5.2.5 Tenant's unreasonable request for changes in the Approved
Working Drawings;
5.2.6 Tenant's unreasonable requirement for materials, components,
finishes or improvements which are not available in a commercially reasonable
time given the anticipated date of Substantial Completion of the Premises, as
set forth in the Lease, or which are different from, or not included in, the
Standard Improvement Package;
5.2.7 Changes to the Base, Shell and Core required by the Approved
Working Drawings; or
5.2.8 Any other acts or omissions of Tenant, or its agents, or
employees;
then, notwithstanding anything to the contrary set forth in the Lease
or this Tenant Work Letter and regardless of the actual date of the Substantial
Completion of the Premises, the Lease Commencement Date shall be deemed to be
the date the Lease Commencement Date would have occurred if no Tenant delay or
delays, as set forth above, had occurred.
SECTION 6
---------
MISCELLANEOUS
-------------
6.1 Tenant's Entry Into the Premises Prior to Substantial Completion.
----------------------------------------------------------------
Provided that Tenant and its agents do not interfere with Contractor's work in
the Building and the Premises, Contractor shall allow Tenant access to the
Premises approximately thirty (30) days prior to the Substantial Completion of
the Premises for the purpose of Tenant installing overstandard equipment or
fixtures (including Tenant's data and telephone equipment) in the Premises.
Prior to Tenant's entry into the Premises as permitted by the terms of this
Section 6.1, Tenant shall submit a schedule to Landlord and Contractor, for
- -----------
their approval, which schedule shall detail the timing and purpose of Tenant's
entry. Tenant shall hold Landlord harmless from and indemnify, protect and
defend Landlord against any loss or damage to the Building or Premises and
against injury to any persons caused by Tenant's actions pursuant to this
Section 6.1. Notwithstanding the foregoing, Tenant shall not be deemed to be
- -----------
commencing business operations from the Premises, as contemplated in Section 6
---------
of the Summary, when entering the Premises solely for the purposes described in
this Section 6.1.
-----------
6.2 Freight Elevators. Landlord shall, consistent with its obligations to
-----------------
other tenants of the Building, make the freight elevator reasonably available to
Tenant in connection with initial decorating, furnishing and moving into the
Premises.
6.3 Tenant's Representative. Tenant has designated _______________ as its
-----------------------
sole representative with respect to the matters set forth in this Tenant Work
Letter, who, until further notice to Landlord, shall have full authority and
responsibility to act on behalf of the Tenant as required in this Tenant Work
Letter.
6.4 Landlord's Representative. Landlord has designated Don Christeson as
-------------------------
its sole representatives with respect to the matters set forth in this Tenant
Work Letter, who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this Tenant Work
Letter.
6.5 Time of the Essence in This Tenant Work Letter. Unless otherwise
----------------------------------------------
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. In all instances where Tenant is required to approve or deliver
an item, if no written notice of approval is given or the item is not delivered
within the stated time period, at Landlord's sole option, at the end of such
period the item shall automatically be deemed approved or delivered by Tenant
and the next succeeding time period shall commence.
EXHIBIT B - Page 3
<PAGE>
6.6 Tenant's Lease Default. Notwithstanding any provision to the contrary
----------------------
contained in this Lease, if an event of default as described in the Lease, or a
default by Tenant under this Tenant Work Letter, has occurred at any time on or
before the Substantial Completion of the Premises, then (i) in addition to all
other rights and remedies granted to Landlord pursuant to the Lease, Landlord
shall have the right to withhold payment of all or any portion of the Tenant
Improvement Allowance and/or Landlord may cause Contractor to cease the
construction of the Premises (in which case, Tenant shall be responsible for any
delay in the Substantial Completion of the Premises caused by such work stoppage
as set forth in Section 5 of this Tenant Work Letter), and (ii) all other
---------
obligations of Landlord under the terms of this Tenant Work Letter shall be
forgiven until such time as such default is cured pursuant to the terms of the
Lease.
EXHIBIT B - Page 4
<PAGE>
SCHEDULE 1 TO EXHIBIT B
-----------------------
BASE, SHELL AND CORE DESCRIPTION
--------------------------------
[To be provided]
SCHEDULE 1 TO EXHIBIT B - Page 1
<PAGE>
SCHEDULE 2 TO EXHIBIT B
------------------------
STANDARD IMPROVEMENT PACKAGE
----------------------------
[To be provided]
SCHEDULE 2 TO EXHIBIT B - Page 1
<PAGE>
SCHEDULE 3 TO EXHIBIT B
-----------------------
PRELIMINARY SPACE PLAN
----------------------
[To be Attached]
SCHEDULE 3 TO EXHIBIT B - Page 1
<PAGE>
SCHEDULE 4 TO EXHIBIT B
-----------------------
TIME DEADLINES
--------------
Dates Actions to be Performed
----- -----------------------
A. Five (5) business days after the Tenant to approve Cost Proposal and
receipt of the Cost Proposal by deliver Cost Proposal to Landlord.
Tenant
SCHEDULE 4 TO EXHIBIT B - Page 1
<PAGE>
EXHIBIT C
---------
NOTICE OF LEASE TERM DATES
--------------------------
To: __________________________
__________________________
__________________________
__________________________
Re: Office Lease dated ________________________, 19__, between [INSERT
LANDLORD NAME AND LEGAL ENTITY] ("Landlord"), and
_______________________ _____________, a _____________________
("Tenant") concerning Suite _______ on floor(s) _______ of the Office
Building located at [INSERT BUILDING ADDRESS].
Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you
and/or confirm as follows:
1. That the Premises are Ready for Occupancy, and that the Lease Term
shall commence as of ________________ for a term of _______________ ending on
_______________.
2. That in accordance with the Lease, Rent commenced to accrue on
_______________________.
3. If the Lease Commencement Date is other than the first day of the
month, the first billing will contain a pro rata adjustment. Each billing
thereafter, with the exception of the final billing, shall be for the full
amount of the monthly installment as provided for in the Lease.
4. Rent is due and payable in advance on the first day of each and every
month during the Lease Term. Your rent checks should be made payable to
____________________________________ at _______________________________________.
5. The exact number of rentable square feet within the Premises is
_______ square feet.
6. Tenant's Share as adjusted based upon the exact number of rentable
square feet within the Premises is _______%.
"Landlord":
[LANDLORD NAME AND LEGAL ENTITY]
By:______________________________________
Its:___________________________________
Agreed to and Accepted as
of _____________, 19__.
"Tenant":
[TENANT NAME AND LEGAL ENTITY],
By:____________________________
Its:__________________________
EXHIBIT C - Page 1
<PAGE>
EXHIBIT D
---------
RULES AND REGULATIONS
---------------------
Tenant shall faithfully observe and comply with the following Rules and
Regulations. Landlord shall not be responsible to Tenant for the nonperformance
of any of said Rules and Regulations by or otherwise with respect to the acts or
omissions of any other tenants or occupants of the Building.
1. Tenant shall not alter any lock or install any new or additional locks
or bolts on any doors or windows of the Premises without obtaining Landlord's
prior written consent. Tenant shall bear the cost of any lock changes or repairs
required by Tenant. Two keys will be furnished by Landlord for the Premises, and
any additional keys required by Tenant must be obtained from Landlord at a
reasonable cost to be established by Landlord.
2. All doors opening to public corridors shall be kept closed at all
times except for normal ingress and egress to the Premises, unless electrical
hold backs have been installed.
3. Landlord reserves the right to close and keep locked all entrance and
exit doors of the Building during such hours as are customary for comparable
buildings in the vicinity of the Building. Tenant, its employees and agents must
be sure that the doors to the Building are securely closed and locked when
leaving the Premises if it is after the normal hours of business for the
Building. Any tenant, its employees, agents or any other persons entering or
leaving the Building at any time when it is so locked, or any time when it is
considered to be after normal business hours for the Building, may be required
to sign the Building register when so doing. Access to the Building may be
refused unless the person seeking access has proper identification or has a
previously arranged pass for access to the Building. The Landlord and his agents
shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of same by any means it
deems appropriate for the safety and protection of life and property.
4. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy property brought into the Building. Safes
and other heavy objects shall, if considered necessary by Landlord, stand on
supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property in any case. All damage done to any part of the Building, its contents,
occupants or visitors by moving or maintaining any such safe or other property
shall be the sole responsibility of Tenant and any expense of said damage or
injury shall be borne by Tenant.
5. No furniture, freight, packages, supplies, equipment or merchandise
will be brought into or removed from the Building or carried up or down in the
elevators, except upon prior notice to Landlord, and in such manner, in such
specific elevator, and between such hours as shall be designated by Landlord.
Tenant shall provide Landlord with not less than 24 hours prior notice of the
need to utilize an elevator for any such purpose, so as to provide Landlord with
a reasonable period to schedule such use and to install such padding or take
such other actions or prescribe such procedures as are appropriate to protect
against damage to the elevators or other parts of the Building. In no event
shall Tenant's use of the elevators for any such purpose be permitted during the
hours of 7:00 a.m. - 9:00 a.m., 11:30 a.m. - 1:30 p.m. and 4:30 p.m. - 6:30 p.m.
6. Landlord shall have the right to control and operate the public
portions of the Building, the public facilities, the heating and air
conditioning, and any other facilities furnished for the common use of tenants,
in such manner as is customary for comparable buildings in the vicinity of the
Building.
7. The requirements of Tenant will be attended to only upon application
at the office location designated by Landlord. Employees of Landlord shall not
perform any work or do anything outside their regular duties unless under
special instructions from Landlord.
8. Tenant shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate with Landlord or Landlord's agents to prevent same.
9. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by the tenant who, or whose employees or agents, shall have caused it.
10. Tenant shall not overload the floor of the Premises, nor mark, drive
nails or screws, or drill into the partitions, woodwork or plaster or in any way
deface the Premises or any part thereof without Landlord's consent first had and
obtained.
11. Except for vending machines intended for the sole use of Tenant's
employees and invitees, no vending machine or machines of any description other
than fractional horsepower office machines shall be installed, maintained or
operated upon the Premises without the written consent of Landlord.
12. Tenant shall not use or keep in or on the Premises or the Building any
kerosene, gasoline or other inflammable or combustible fluid or material.
13. Tenant shall not use any method of heating or air conditioning other
than that which may be supplied by Landlord, without the prior written consent
of Landlord.
14. Tenant shall not use, keep or permit to be used or kept, any foul or
noxious gas or substance in or on the Premises, or permit or allow the Premises
to be occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the Building by reason of noise, odors, or vibrations, or
interfere in any way with other Tenants or those having business therein.
15. Tenant shall not bring into or keep within the Building or the
Premises any animals, birds, bicycles or other vehicles.
16. No cooking shall be done or permitted by any tenant on the Premises,
nor shall the Premises be used for the storage of merchandise, for lodging or
for any improper, objectionable or immoral purposes. Notwithstanding the
foregoing, Underwriters' laboratory-approved equipment and microwave ovens may
be used in the Premises for heating food and brewing coffee, tea, hot
EXHIBIT D - Page 1
<PAGE>
chocolate and similar beverages, provided that such use is in accordance with
all applicable federal, state and city laws, codes, ordinances, rules and
regulations, and does not cause odors which are objectionable to Landlord and
other Tenants.
17. Landlord will approve where and how telephone and telegraph wires are
to be introduced to the Premises. No boring or cutting for wires shall be
allowed without the consent of Landlord. The location of telephone, call boxes
and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
18. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
these Rules and Regulations.
19. Tenant, its employees and agents shall not loiter in the entrances or
corridors, nor in any way obstruct the sidewalks, lobby, halls, stairways or
elevators, and shall use the same only as a means of ingress and egress for the
Premises.
20. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to ensure the most effective operation
of the Building's heating and air conditioning system, and shall refrain from
attempting to adjust any controls. This includes the closing of exterior blinds,
disallowing the sun rays to shine directly into areas adjacent to exterior
windows.
21. Tenant shall store all its trash and garbage within the interior of
the Premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash and garbage in the city
in which the Building is located without violation of any law or ordinance
governing such disposal. All trash, garbage and refuse disposal shall be made
only through entry-ways and elevators provided for such purposes at such times
as Landlord shall designate.
22. Tenant shall cooperate with Landlord's trash recycling programs and
the orderly sorting of trash materials to facilitate such programs.
23. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
24. Tenant shall assume any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed, when the Premises are not
occupied.
25. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules or Regulations against any or all tenants of the Building.
26. No awnings or other projection shall be attached to the outside walls
of the Building without the prior written consent of Landlord. No curtains,
blinds, shades or screens shall be attached to or hung in, or used in connection
with, any window or door of the Premises without the prior written consent of
Landlord. All electrical ceiling fixtures hung in offices or spaces along the
perimeter of the Building must be fluorescent and/or of a quality, type, design
and bulb color approved by Landlord.
27. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels or other articles be placed on the windowsills.
28. The washing and/or detailing of or, the installation of windshields,
radios, telephones in or general work on, automobiles shall not be allowed on
the Project, except by concessionaires of Landlord.
29. Food vendors appropriately licensed by the appropriate authorities
shall be allowed in the Building upon twenty-four (24) hour advance receipt of a
written request from the Tenant. The food vendor shall service only the tenants
that have a written request on file in the Project management office. Under no
circumstance shall the food vendor display their products in a public or common
area including corridors and elevator lobbies. Any failure to comply with this
rule shall result in immediate permanent withdrawal of the vendor from the
Building.
30. Tenant must comply with requests by the Landlord concerning the
informing of their employees of items of importance to the Landlord.
31. Tenant shall comply with any non-smoking ordinance adopted by any
applicable governmental authority. There is no smoking permitted in any of the
buildings comprising the Project. In addition, Landlord reserves the right to
designate, in Landlord's sole discretion, the only outside areas in the Project
where smoking shall be permitted.
32. Landlord reserves the right at any time to change or rescind any one
or more of these Rules and Regulations, or to make such other and further
reasonable Rules and Regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises
and Building, and for the preservation of good order therein, as well as for the
convenience of other occupants and tenants therein. Landlord shall not be
responsible to Tenant or to any other person for the nonobservance of the Rules
and Regulations by another tenant or other person. Tenant shall be deemed to
have read these Rules and Regulations and to have agreed to abide by them as a
condition of its occupancy of the Premises.
EXHIBIT D- Page 2
<PAGE>
EXHIBIT E
---------
FORM OF TENANT'S ESTOPPEL CERTIFICATE
-------------------------------------
The undersigned as Tenant under that certain Office Lease (the "Lease")
made and entered into as of _________________, 19__ and between [INSERT LANDLORD
NAME AND LEGAL ENTITY] as Landlord, and the undersigned as Tenant, for Premises
on the ___________ floor(s) of the Office Building located at
[INSERT BUILDING ADDRESS] certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the Lease
and all amendments and modifications thereto. The documents contained in Exhibit
A represent the entire agreement between the parties as to the Premises.
2. The undersigned has commenced occupancy of the Premises described in
the Lease, currently occupies the Premises, and the Lease Term commenced on
_________.
3. The Lease is in full force and effect and has not been modified,
supplemented or amended in any way except as provided in Exhibit A.
4. Tenant has not transferred, assigned, or sublet any portion of the
Premises nor entered into any license or concession agreements with respect
thereto except as follows:
5. Tenant shall not modify the documents contained in Exhibit A or prepay
any amounts owing under the Lease to Landlord in excess of thirty (30) days
without the prior written consent of Landlord's mortgagee.
6. Base Rent became payable on _______________.
7. The Lease Term expires on _________________.
8. All conditions of the Lease to be performed by Landlord necessary to
the enforceability of the Lease have been satisfied and Landlord is not in
default thereunder.
9. No rental has been paid in advance and no security has been deposited
with Landlord except as provided in the Lease.
10. As of the date hereof, there are no existing defenses or offsets that
the undersigned has, which preclude enforcement of the Lease by Landlord.
11. All monthly installments of Base Rent, all Additional Rent and all
monthly installments of estimated Additional Rent have been paid when due
through _________________. The current monthly installment of Base Rent is
$__________.
12. The undersigned acknowledges that this Estoppel certificate may be
delivered to Landlord's prospective mortgagee, or a prospective purchaser, and
acknowledges that it recognizes that if same is done, said mortgagee,
prospective mortgagee, or prospective purchaser will be relying upon the
statements contained herein in making the loan or acquiring the property of
which the Premises are a part, and in accepting an assignment of the Lease as
collateral security, and that receipt by it of this certificate is a condition
of making of the loan or acquisition of such property.
13. If Tenant is a corporation or partnership, each individual executing
this Estoppel Certificate on behalf of Tenant hereby represents and warrants
that Tenant is a duly formed and existing entity qualified to do business in the
state in which the Building is located and that Tenant has full right and
authority to execute and deliver this Estoppel Certificate and that each person
signing on behalf of Tenant is authorized to do so.
Executed at __________________ on the _____ day of ______________, 19___.
"Tenant":
________________________________,
a_______________________________
By:_____________________________
Its:___________________________
By:_____________________________
Its:___________________________
EXHIBIT E - Page 1
<PAGE>
EXHIBIT F
---------
SUMMIT
------
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
ALLEN, MATKINS, LECK, GAMBLE
& MALLORY LLP
1999 Avenue of the Stars, 18th Floor
Los Angeles, California 90067
Attention: Anton N. Natsis, Esq.
================================================================================
RECOGNITION OF COVENANTS,
-------------------------
CONDITIONS, AND RESTRICTIONS
----------------------------
This Recognition of Covenants, Conditions, and Restrictions (this
"Agreement") is entered into as of the __ day of ________, 199__, by and between
AEW \ PARKER II, LLC, a California limited liability company ("Landlord"), and
________________ ("Tenant"), with reference to the following facts:
A. Landlord and Tenant entered into that certain Office Lease Agreement
dated _____, 199__ (the "Lease"). Pursuant to the Lease, Landlord leased to
Tenant and Tenant leased from Landlord space (the "Premises") located in an
office building on certain real property described in Exhibit "A" attached
-----------
hereto and incorporated herein by this reference (the "Property").
B. The Premises are located in an office building located on real
property which is part of an area owned by Landlord containing approximately
___(__) acres of real property located in the City of Aliso Viejo, California
(the "Project"), as more particularly described in Exhibit "B" attached hereto
-----------
and incorporated herein by this reference.
C. Landlord, as declarant, has previously recorded, or proposes to record
concurrently with the recordation of this Agreement, a Declaration of Covenants,
Conditions, and Restrictions (the "Declaration"), dated ________________, 19__,
in connection with the Project.
D. Tenant is agreeing to recognize and be bound by the terms of the
Declaration, and the parties hereto desire to set forth their agreements
concerning the same.
NOW, THEREFORE, in consideration of (a) the foregoing recitals and the
mutual agreements hereinafter set forth, and (b) for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows,
1. Tenant's Recognition of Declaration. Notwithstanding that the Lease
-----------------------------------
has been executed prior to the recordation of the Declaration, Tenant agrees to
recognize and by bound by all of the terms and conditions of the Declaration.
2. Miscellaneous.
-------------
2.1 This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, estates, personal
representatives, successors, and assigns.
2.2 This Agreement is made in, and shall be governed, enforced and
construed under the laws of, the State of California.
2.3 This Agreement constitutes the entire understanding and
agreements of the parties with respect to the subject matter hereof, and shall
supersede and replace all prior understandings and agreements, whether verbal or
in writing. The parties confirm and acknowledge that there are no other
promises, covenants, understandings, agreements, representations, or warranties
with respect to the subject matter of this Agreement except as expressly set
forth herein.
2.4 This Agreement is not to be modified, terminated, or amended in
any respect, except pursuant to any instrument in writing duly executed by both
of the parties hereto.
2.5 In the event that either party hereto shall bring any legal
action or other proceeding with respect to the breach, interpretation, or
enforcement of this Agreement, or with respect to any dispute relating to any
transaction covered by this Agreement, the losing party in such action or
proceeding shall reimburse the prevailing party therein for all reasonable costs
of litigation, including reasonable attorneys' fees, in such amount as may be
determined by the court or other tribunal having jurisdiction, including matters
on appeal.
2.6 All captions and heading herein are for convenience and ease of
reference only, and shall not be used or referred to in any way in connection
with the interpretation or enforcement of this Agreement.
2.7 If any provision of this Agreement, as applied to any party or to
any circumstance, shall be adjudged by a court of competent jurisdictions to be
void or unenforceable for any reason, the same shall not affect any other
provision of this Agreement, the application of such provision under
circumstances different form those adjudged by the court, or the validity or
enforceability of this Agreement as a whole.
2.8 Time is of the essence of this Agreement.
2.9 The Parties agree to execute any further documents, and take any
further actions, as may be reasonable and appropriate in order to carry out the
purpose and intent of this Agreement.
EXHIBIT F - Page 1
<PAGE>
2.10 As used herein, the masculine, feminine or neuter gender, and the
singular and plural numbers, shall each be deemed to include the others whenever
and whatever the context so indicates.
EXHIBIT F - Page 2
<PAGE>
SIGNATURE PAGE OF RECOGNITION OF
--------------------------------
COVENANTS, CONDITIONS AND RESTRICTIONS
--------------------------------------
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
"Landlord":
AEW \ PARKER II, LLC,
a California limited liability company
By: Eastrich Aliso, LLC,
a Delaware limited liability company,
Member - Manager
By: ________________________________
James Flynn
Authorized Signatory
"Tenant":
_________________________________________,
a _______________________________________
By:______________________________________
Its:____________________________________
By:______________________________________
Its:____________________________________
EXHIBIT F - Page 3
<PAGE>
Exhibit G
---------
FORM OF LETTER OF CREDIT
------------------------
(Letterhead of a money center bank
acceptable to the Landlord)
_________________, 199_
AEW \ PARKER II, LLC
75 Enterprise
Suite 300
Aliso Viejo, California 92656
Attention: Todd Burnight, Esq.
Ladies and Gentlemen:
We hereby establish our Irrevocable Letter of Credit and authorize you to
draw on us at sight for the account of Buy.com the aggregate amount of
________________________ and No/100 Dollars ($___________________).
Funds under this Letter of Credit are available to the beneficiary hereof
as follows:
Any or all of the sums hereunder may be drawn down at any time and from
time to time from and after the date hereof by AEW \ Parker II, LLC, a
California limited liability company, or its successors or assigns
(collectively, "Beneficiary") when accompanied by this Letter of Credit and a
written statement signed by a representative of Beneficiary, certifying that
such moneys are due and owing to Beneficiary, and a sight draft executed and
endorsed by a representative of Beneficiary.
This Letter of Credit is transferable in its entirety. Should a transfer be
desired, such transfer will be subject to the return to us of this advice,
together with written instructions.
The amount of each draft must be endorsed on the reverse hereof by the
negotiating bank. We hereby agree that this Letter of Credit shall be duly
honored upon presentation and delivery of the certification specified above.
This Letter of Credit shall expire on ______________.
Notwithstanding the above expiration date of this Letter of Credit, the
term of this Letter of Credit shall be automatically renewed for successive,
additional one (1) year periods unless, at least thirty (30) days prior to any
such date of expiration, the undersigned shall give written notice to
Beneficiary, by certified mail, return receipt requested and at the address set
forth above or at such other address as may be given to the undersigned by
Beneficiary, that this Letter of Credit will not be renewed.
This Letter of Credit is governed by the Uniform Customs and Practice for
Documentary Credits (1983 Revision), International Chamber of Commerce
Publication 400.
Very truly yours,
(Name of Issuing Bank)
By:__________________________________
EXHIBIT G - Page 1
<PAGE>
EXHIBIT 10.18
OPERATING AGREEMENT
of
BUYTRAVEL.COM LLC
a Delaware Limited
Liability Company
July 19, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
OPERATING AGREEMENT OF BUYTRAVEL.COM LLC................................ 1
SECTION 1 THE COMPANY................................................... 1
1.1 Defined Terms......................................... 1
1.2 Formation............................................. 1
1.3 Company Name.......................................... 1
1.4 Purposes.............................................. 1
1.5 Principal Place of Business........................... 1
1.6 Term.................................................. 1
1.7 Filings; Statutory Agent for Service of Process....... 1
1.8 Expenses.............................................. 1
SECTION 2 MEMBERS, UNITS AND PERCENTAGE INTERESTS....................... 1
2.1 Names, Addresses, Units and Percentage Interests of
Members............................................... 1
2.2 Certificates for Membership Units..................... 1
SECTION 3 CAPITAL CONTRIBUTIONS......................................... 1
3.1 Initial Capital Contributions......................... 1
3.2 Additional Capital Contributions...................... 1
3.3 Approval of Budget and Business Plan.................. 1
3.4 Other Matters......................................... 1
SECTION 4 CAPITAL ACCOUNTS AND ALLOCATIONS.............................. 1
4.1 Taxation as a Partnership............................. 1
4.2 Capital Accounts...................................... 1
4.3 Allocations........................................... 1
SECTION 5 DISTRIBUTIONS TO MEMBERS...................................... 1
5.1 Distributions......................................... 1
5.2 Mandatory Tax Distributions........................... 1
5.3 Discretionary Distributions........................... 1
5.4 No Other Withdrawals.................................. 1
5.5 Withholding Taxes..................................... 1
SECTION 6 MANAGEMENT AND CONTROL........................................ 1
6.1 Management............................................ 1
6.2 Board of Managers..................................... 1
6.3 Special Board Approval................................ 1
6.4 Officers.............................................. 1
6.5 Duties of Board....................................... 1
6.6 Rights of Members..................................... 1
6.7 Waiver of Conflicts of Interest; Exculpation.......... 1
6.8 Indemnification....................................... 1
</TABLE>
i
<PAGE>
TABLE OF CONTENTS (Continued)
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.9 Freedom of Action..................................... 1
6.10 Reliance on Acts of Board............................. 1
SECTION 7 BOOKS AND RECORDS; TAX MATTERS............................... 1
7.1 Books and Records..................................... 1
7.2 Fiscal Year........................................... 1
7.3 Tax Matters Partner................................... 1
7.4 Section 754 Election.................................. 1
SECTION 8 ADMISSION OF NEW MEMBERS; TRANSFERS OF UNITS................. 1
8.1 Admission of New Members.............................. 1
8.2 Restriction on Transfers.............................. 1
8.3 Permitted Transfers................................... 1
8.4 Conditions to Permitted Transfers..................... 1
8.5 Tag-Along Rights...................................... 1
8.6 Right of Last Refusal................................. 1
8.7 Prohibited Transfers.................................. 1
8.8 Distributions with Respect to Transferred Units....... 1
8.9 Termination of Transfer Restrictions.................. 1
SECTION 9 WITHDRAWAL OF A MEMBER....................................... 1
9.1 Withdrawal of a Member................................ 1
9.2 Improper Withdrawal................................... 1
9.3 Consequences of Withdrawal............................ 1
SECTION 10 DISSOLUTION OF THE COMPANY................................... 1
10.1 Dissolution Events.................................... 1
10.2 Winding Up............................................ 1
10.3 Compliance With Timing Requirements of the
Regulations........................................... 1
10.4 Rights of Members..................................... 1
SECTION 11 DEADLOCKS; PUT RIGHT; MANDATORY REPURCHASE OF UA INTEREST.... 1
11.1 Deadlocks............................................. 1
11.2 Put Right............................................. 1
11.3 Mandatory Repurchase of UA Interest................... 1
SECTION 12 MEETINGS OF MEMBERS.......................................... 1
12.1 Meetings.............................................. 1
12.2 Place of Meetings..................................... 1
12.3 Notice of Meetings.................................... 1
12.4 Meeting of all Members................................ 1
12.5 Record Date........................................... 1
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS (Continued)
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
12.6 Quorum................................................ 1
12.7 Manner of Acting...................................... 1
12.8 Proxies............................................... 1
12.9 Action by Members Without a Meeting................... 1
12.10 Waiver of Notice...................................... 1
SECTION 13 AMENDMENTS................................................... 1
13.1 Authority to Amend.................................... 1
13.2 Notice of Amendments.................................. 1
SECTION 14 REPRESENTATIONS AND WARRANTIES............................... 1
14.1 Securities Law Representations........................ 1
14.2 Legends............................................... 1
14.3 Representations and Warranties of UA.................. 1
14.4 Representations and Warranties of Buy.com............. 1
SECTION 15 MISCELLANEOUS................................................ 1
15.1 Notices............................................... 1
15.2 Binding Effect........................................ 1
15.3 Construction.......................................... 1
15.4 Entire Agreement...................................... 1
15.5 Headings.............................................. 1
15.6 Severability.......................................... 1
15.7 Incorporation by Reference............................ 1
15.8 Further Action........................................ 1
15.9 Variation of Pronouns................................. 1
15.10 Governing Law......................................... 1
15.11 Specific Performance.................................. 1
15.12 Counterpart Execution................................. 1
15.13 Confidentiality....................................... 1
LIST OF APPENDICES...................................................... 1
APPENDIX A MEMBERS' NAMES, ADDRESSES, CAPITAL CONTRIBUTIONS AND
- ----------
PERCENTAGE INTERESTS........................................ 1
APPENDIX B DEFINITIONS................................................. 1
- ----------
APPENDIX C TAX MATTERS................................................. 1
- ----------
APPENDIX D STRATEGIC THIRD PARTY LIST.................................. 1
- ----------
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS (Continued)
-----------------
Page
----
APPENDIX A MEMBERS' NAMES, ADDRESSES, CAPITAL CONTRIBUTIONS
AND PERCENTAGE INTERESTS
APPENDIX B DEFINITIONS
APPENDIX C TAX MATTERS
APPENDIX D STRATEGIC THIRD PARTY LIST
iv
<PAGE>
OPERATING AGREEMENT
OF BUYTRAVEL.COM LLC
THIS OPERATING AGREEMENT ("Agreement") is made and entered into as of the
19/th/ day of July, 1999 (the "Commencement Date"), by and between BUY.COM,
INC., a Delaware corporation ("Buy.com"), and United Air Lines, Inc., a Delaware
corporation ("UA") (Buy.com and UA are hereinafter sometimes referred to
collectively as the "Members" and individually as a "Member").
SECTION 1
THE COMPANY
-----------
1.1 Defined Terms.
-------------
Unless otherwise provided in this Agreement, capitalized terms used in this
Agreement shall have the meanings ascribed to them as set forth in Appendix B to
----------
this Agreement.
1.2 Formation.
---------
BuyTravel.com LLC (the "Company") is a limited liability company formed
pursuant to the provisions of the Act. Sean M. Pence, as an authorized person
within the meaning of the Act, shall execute, deliver and file the Certificate
of Formation on July 19, 1999 (the "Formation Date") with the Secretary of State
of the State of Delaware. Upon the filing of the Certificate of Formation with
the Secretary of the State of Delaware, his powers as an authorized person shall
cease and the Members shall thereafter be designated as an authorized person
within the meaning of the Act. The Members or an Officer shall execute, deliver
and file any other certificates (and any amendments and/or restatements thereof)
necessary for the Company to qualify to do business in a jurisdiction in which
the Company may wish to conduct business. The rights and liabilities of the
Members will be as provided in the Act except as otherwise provided in this
Agreement. To the extent that the rights or obligations of any Member are
different by reason of any provision of this Agreement than they would be in the
absence of such provision, this Agreement shall, to the extent permitted by the
Act, control.
1.3 Company Name.
-------------
The name of the Company is BuyTravel.com LLC. The name of the Company shall
be licensed by Buy.com to the Company pursuant to the Marketing and Services
Agreement.
1.4 Purposes.
---------
The purposes of the Company shall be:
(a) to engage in the business of marketing and selling travel
services and products on the Internet, and any activities necessary, appropriate
or incidental thereto; and
1
<PAGE>
(b) with the approval of the Board pursuant to Section 6.3, to
engage in any other operations, businesses or activities permitted under the Act
and any other applicable law or regulation.
Subject to the limitations and restrictions set forth in this Agreement,
the Company is empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for the furtherance
and accomplishment of the purposes and business described herein and for the
protection and benefit of the Company.
1.5 Principal Place of Business.
---------------------------
The principal place of business of the Company will be in Aliso Viejo,
California, or such other place as the Board may determine from time to time.
The Company will maintain, at its principal office, all records pertaining to
the Company as required by the Act.
1.6 Term.
----
The term of the Company will commence on the Formation Date and will
continue until dissolved in accordance with the provisions of this Agreement.
1.7 Filings; Statutory Agent for Service of Process.
-----------------------------------------------
(a) The Certificate of the Company has been filed in the office of
the Secretary of State of Delaware in accordance with the provisions of the Act.
The Members and/or the Board will take any and all other actions reasonably
necessary to perfect and maintain the status of the Company as a limited
liability company under the laws of Delaware.
(b) The Members and/or the Board will take any and all other actions
as may be reasonably necessary to perfect and maintain the status of the Company
as a limited liability company or similar type of entity under the laws of any
states or jurisdictions other than Delaware in which the Company engages in
business.
(c) The Company's agent for service of process on the Company in
Delaware shall be National Registered Agent, Inc. The Board may change, at any
time and from time to time, such statutory agent.
Upon the dissolution of the Company, the Members and/or the Board will
promptly execute and cause to be filed a certificate of cancellation in
accordance with the Act and the law of any other states or jurisdictions in
which the Company has qualified to conduct business.
1.8 Expenses.
--------
Each party and each of the substitute Members hereinafter becoming a
signatory hereto shall pay all expenses incurred by it in connection with the
formation of the Company and admission of the members.
2
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SECTION 2
MEMBERS, UNITS AND PERCENTAGE INTERESTS
---------------------------------------
2.1 Names, Addresses, Units and Percentage Interests of Members.
-----------------------------------------------------------
The names, addresses, number of Units and Percentage Interests of the
Members are set forth on Appendix A hereto. The Board shall promptly amend
----------
Appendix A from time to time to reflect the admission or withdrawal of Members;
- ----------
a change in a Member's address; the sale, grant, issuance or redemption of
Units; or the receipt of Capital Contributions; and any such amendment shall be
effective as of the date of the event necessitating such amendment.
2.2 Certificates for Membership Units.
---------------------------------
A Member's Units may, but need not, be represented by a Certificate of
Membership. The exact contents of a Certificate of Membership, if any, will be
determined by the Board.
SECTION 3
CAPITAL CONTRIBUTIONS
---------------------
3.1 Initial Capital Contributions.
-----------------------------
The initial Capital Contributions made or required to be made by Members
(the "Initial Capital Contributions") are set forth on Appendix A to this
----------
Agreement. Except as set forth in Section 3.2 hereof, no Member will be required
to make any Capital Contributions other than the Initial Capital Contributions
required to be made by such Member pursuant to this Section 3.1.
3.2 Additional Capital Contributions.
--------------------------------
(a) Each Member shall only be required to make additional Capital
Contributions to the Company based upon an annual Budget presented to the Board
in accordance with Section 3.3 and approved by the Board pursuant to Section
6.3. Each Member shall make a quarterly contribution of funds as established in
the annual Budget for the Company, with each Member's contribution being in
proportion to their respective Percentage Interests in the Company.
(b) Any Member who makes an additional contribution to the Company
pursuant to this Section 3.2 shall have the contribution treated as an
additional Capital Contribution to the Company.
(c) Without the prior written consent of UA and Buy.com, no Member
shall make a Capital Contribution to the Company that exceeds such Member's pro
rata portion of the aggregate Capital Contribution being made by all of the
Members in accordance with the Budget.
3.3 Approval of Budget and Business Plan.
------------------------------------
Within ninety (90) days of the date hereof, UA and Buy.com will agree on a
preliminary budget for the Company, covering the period from the date of this
Agreement until December 31, 1999 and a preliminary Business Plan for the same
period (the "Preliminary Budget and Business
3
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Plan"). On or prior to the date which is sixty (60) days before the end of each
Fiscal Year, commencing with the Fiscal Year ending December 31, 1999, the Chief
Executive Officer of the Company shall cause to be presented to the Board a
revised Business Plan for each of the three (3) succeeding Fiscal Years and a
Budget for the following Fiscal Year. Each Business Plan and each Budget shall
specify the types of matters and the level of detail, as requested by the Board.
The Budget for the next succeeding Fiscal Year and the Business Plan shall, upon
approval of the Board pursuant to Section 6.3, become the current Budget for
such Fiscal Year and the Business Plan for the purposes of this Agreement. The
Budget approved by the Board pursuant to Section 6.3, as in effect at any time,
is referred to herein as the "Budget," and the Business Plan hereafter approved
by the Board pursuant to Section 6.3, as in effect at any time, is referred to
herein as the "Business Plan."
3.4 Other Matters.
--------------
(a) Except as otherwise provided in this Agreement, no Member may
demand or receive a return of its Capital Contribution or withdraw from the
Company. Under circumstances requiring a return of its Capital Contribution, no
Member will have the right to receive property other than cash except as may be
specifically provided in this Agreement.
(b) No Member will receive any interest, salary or draw with respect
to its Capital Contribution or its Capital Account or otherwise solely in its
capacity as a Member.
The debts, liabilities, contracts or any other obligations of the Company
shall be solely the debts, liabilities, contracts and obligations of the
Company. No Member will be liable for the debts, liabilities, contracts or any
other obligations of the Company.
SECTION 4
CAPITAL ACCOUNTS AND ALLOCATIONS
--------------------------------
4.1 Taxation as a Partnership.
-------------------------
The Members hereby agree that the Company will make an election, or take
such other action as may be required under applicable law, to cause the Company
to be treated as a partnership for all U.S. federal and state income tax
purposes and no Member or Manager will take any action inconsistent with such
treatment.
4.2 Capital Accounts.
----------------
A Capital Account shall be maintained for each Member in the manner set
forth in Appendix C to this Agreement.
----------
4.3 Allocations.
-----------
Except as otherwise provided in Appendix C hereto, all items of income,
----------
gain, loss and deduction of the Company for any Fiscal Year shall be allocated
among the Members in proportion to their respective Percentage Interests in the
Company; provided, however, that in
-------- -------
4
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the event a Member contributes (or is deemed to contribute) cash to the Company
that is earmarked for the purpose of covering a specific expense or payment
obligation of the Company, any deduction of the Company attributable to such
expense or payment obligation shall be specifically allocated solely to such
Member.
SECTION 5
DISTRIBUTIONS TO MEMBERS
------------------------
5.1 Distributions.
-------------
Except as otherwise provided in Section 10, all distributions to Members
shall be made in proportion to their respective Percentage Interests. Unless
otherwise agreed by the Members, any property distributed in-kind shall be
distributed to the Members in proportion to their respective Percentage
Interests and no Member shall have the right to receive a distribution of
particular property or to receive cash in lieu of the asset being distributed
in-kind.
5.2 Mandatory Tax Distributions.
----------------------------
Within 30 days after the end of each fiscal quarter of the Company, or as
soon thereafter as possible, the Company shall calculate and distribute to the
Members the Tax Distribution Amount. The Tax Distribution Amount in each fiscal
quarter of each Fiscal Year means an amount equal to (x) the excess of (i) the
product of (A) the net taxable income of the Company from the beginning of the
Fiscal Year through the end of such fiscal quarter and (B) the highest maximum
combined state and federal corporate income tax rate to which any Member is
subject (taking into account the deduction of state income taxes on the federal
return), less (ii) the aggregate Tax Distribution Amount distributed to Members
for all prior fiscal quarters in such Fiscal Year. For purposes of this Section
5.2, if the Company incurs a net loss for federal income tax purposes for any
Fiscal Year or period of the Company beginning after the date of this Agreement,
such net loss shall be offset against, and shall reduce the net taxable income
of the Company in subsequent years until such time as the net loss has offset
net taxable income in an amount equal to such net loss.
5.3 Discretionary Distributions.
---------------------------
(a) Within thirty (30) days after the end of each Fiscal Year, the
Board will, unless otherwise agreed by the Manager elected by UA and the Manager
elected by Buy.com, distribute amounts in excess of the Tax Distribution Amount
to the extent the cash assets of the Company exceed its capital needs as set
forth in the then-current Budget of the Company, provided that the Company shall
not make any distribution to the Members unless, immediately after giving effect
to the distribution, all liabilities of the Company, other than liabilities to
Members on account of their Units in the Company and liabilities as to which
recourse of creditors is limited to specified property of the Company, do not
exceed the fair market value of the Company's property. For this purpose, the
fair market value of any property that is subject to a liability as to which
recourse of creditors is so limited shall be included in the Company's assets
only to the extent that the fair market value of the property exceeds such
liability.
5
<PAGE>
(b) No Member shall be liable to the Company for the amount of any
distribution received provided that, at the time of the distribution, such
Member did not know that the distribution was in violation of the Act or this
Section 5.3. If a Member receives a distribution in violation of Section 5.3(a)
and such Member knew at the time of the distribution that the distribution
violated such Section, such Member shall be liable to the Company for the amount
of the distribution.
5.4 No Other Withdrawals.
--------------------
Except as provided in this Section 5, or as otherwise approved by the
Board, no withdrawals or distributions shall be required or permitted.
5.5 Withholding Taxes.
-----------------
Notwithstanding any other provisions of this Agreement, the Company is
authorized to take any action that it determines to be necessary or appropriate
in order to comply with any Federal, state, local and foreign withholding
requirement with respect to any payment or distribution by the Company to any
Member or other person. All amounts withheld or paid by the Company pursuant to
the preceding sentence, or any such amount that is paid by the Company solely by
reason of the holding of an Interest by any Member, shall be treated as amounts
distributed to such Member pursuant to this Section 5 and shall be credited to
its Capital Account accordingly. If any such withholding or payment requirement
with respect to any Member exceeds the amount distributable to such Member under
this Section 5 or Section 10, or if any such withholding requirement was not
satisfied with respect to any amount previously distributed to such Member under
this Section 5 or Section 10, such Member and any successor or assignee with
respect to such Member's Interest will contribute to the Company the amount
necessary for such excess amount or such withholding requirement, as the case
may be.
SECTION 6
MANAGEMENT AND CONTROL
----------------------
6.1 Management.
----------
Subject to the limitations imposed by the Act and this Agreement, the
Board, in its full and exclusive discretion, will manage and control, have
authority to obligate and bind, and make all decisions affecting the business
and assets of the Company, including, without limitation, taking any and all
actions otherwise requiring the consent of the Members pursuant to the Act.
6.2 Board of Managers.
-----------------
(a) The Company shall have a Board of three (3) natural persons. The
members of the Board shall be elected as follows: (i) Buy.com shall be entitled
to elect one (1) member of the Board; (ii) UA shall be entitled to elect one (1)
member of the Board; and (iii) an independent individual approved in writing by
Buy.com and UA shall serve as the third member of the Board, with each member of
the Board being referred to as a "Manager." Upon execution of this Agreement,
the members of the Board shall be Alan Barbieri, as the initial designee of
Buy.com,
6
<PAGE>
and Michael Cavanaugh, as the initial designee of UA, with a vacancy for the
third member of the Board. The Manager elected by Buy.com and the Manager
elected by UA shall serve as Co-Chairmen of the Board. Each Manager may be
removed by the Member or Members who elected such Manager at any time with or
without cause. Any vacancy on the Board resulting from a Manager's resignation,
removal or death shall be filled by the Member or Members who elected the
removed or departing Manager.
(b) Except as otherwise provided in Section 6.3 hereof with respect
to matters regarding "Special Board Approval," any action under this Agreement
requiring the consent of or determination or approval of the Board, will require
(i) in the case of a meeting, at which a quorum is present in accordance with
6.2(h) or 6.2(i) as applicable, the approval by a majority of the Board members
present at such meeting or (ii) in the case of a written consent, the unanimous
written consent of the Board in accordance with Section 6.2.
(c) Members of the Board shall be natural persons of full age and
need not be Members. Except in the case of vacancies, each Manager shall be
elected to serve until his successor is elected and qualified.
(d) A resignation from the Board shall be deemed to take effect upon
its receipt by either Co-Chairmen of the Board, unless some other time is
specified therein.
(e) Regular meetings of the Board shall be held at such times and
places as they be agreed up by the Managers. Special meetings of the Board may
be held upon the request of any of the Managers.
(f) Written notice of each regular meeting, stating the time and
place shall be given to each Manager at least seven (7) Business Days before
such meeting.
(g) The notice shall include the time and place of the meeting and
instructions for participation by telephone and a detailed agenda of the
business to be transacted at the meeting. No business may be brought before the
Board at such meeting that is not specifically identified on the agenda for such
meeting. Written notice of each special meeting, stating the time and place
thereof, the instructions for participation by telephone and a detailed agenda
of the business to be transacted at the meeting, shall be given to each Manager
at least two (2) Business Days before such meeting. Notices delivered under this
section shall be deemed delivered in accordance with the provisions of Section
15.1 hereof.
(h) At all meetings of the Board, the presence of a majority of the
Managers in office shall be necessary to constitute a quorum for the transaction
of business and, except as otherwise provided in Section 6.2(i), the presence of
each of the Manager designated by Buy.com and the Manager designated by UA shall
be required to constitute a quorum. Managers who have a direct or indirect
personal or financial interest in a contract or transaction which is before the
Board, or who are common managers, directors or executive officers of the
Company and another corporation or entity with respect to which a contract or
transaction is before the Board, may be counted in determining the presence of a
quorum at a meeting of the Managers, or a committee thereof. If a quorum shall
not be present at any meeting of the Board, the Managers
7
<PAGE>
present thereat may adjourn the meeting from time to time, without notice other
than announcement of the meeting, until a quorum shall be present.
(i) In the event the Manager designated by Buy.com or the Manager
designated by UA fails to attend two or more consecutive meetings of the Board
which have been duly called under this Section 6.2, and as a consequence, a
quorum was not present and business could not be transacted at such Board
meetings, then, notwithstanding anything to the contrary in this Section 6.2,
the following special notice and quorum procedure shall apply for the purpose of
calling a special meeting of the Board to transact business: One of the Managers
who was present at the two prior meetings at which a quorum was not present, may
call a special meeting of the Board on fourteen (14) Business Days notice to
each Manager, delivered in accordance with the provisions of Section 15.1
hereof. The notice shall include the time and place of the meeting, instructions
for participation by telephone and a detailed agenda of the business to be
transacted at the meeting. No business may be brought before the Board at such
meeting that is not specifically identified on the agenda for such meeting. At
all meetings of the Board duly called pursuant to this Section 6.2(i), a
majority of the Managers in office shall be necessary to constitute a quorum for
the transaction of business, and except as otherwise provided in Section 6.3
hereof with respect to matters requiring "Special Board Approval," the acts of a
majority of the Managers present at a meeting at which a quorum is present under
this Section 6.2(i) shall be the acts of the Board.
(j) To the extent permitted by law, Managers or Members of any
committee of the Board may participate in a meeting of such body through the use
of telephone conference or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting pursuant to this Section shall constitute presence in person at
such meeting.
(k) Any action required or permitted to be taken at a meeting of the
Board may be taken without a meeting if such action is approved by the unanimous
written consent of the then serving Managers, and such approval is evidenced by
one or more written consents describing the action taken, signed by all of the
Managers and delivered to the Company for inclusion in the minutes of the
Company or for filing with the Company records.
(l) Subject to Section 6.3, the Board may delegate any of its duties
or responsibilities to one or more committees of the Board.
6.3 Special Board Approval.
----------------------
Notwithstanding any other provisions of this Agreement, any of the
following actions (the "Reserved Matters") taken by or on behalf of the Company
shall require the consent or approval of the Manager designated by Buy.com and
the Manager designated by UA:
(a) any fundamental change in the purpose or scope of the Business
of the Company or the abandonment of the Company;
8
<PAGE>
(b) approval of the Business Plan and Budget of the Company and any
material revisions or amendments thereto;
(c) changes to the transaction fee to be charged to vendors;
(d) any expenditure which, when added to all other expenditures
covered by the then-current Business Plan and Budget for the Company, would make
the total expenditures exceed the expenditures set forth in such Business Plan
and Budget by an amount equal to or greater than the lesser of (x) $1,000,000 or
(y) 10%;
(e) except as expressly authorized in the then-current Business Plan
and Budget, any merger, sale, lease, license, assignment or other disposition
for value of any of the Company's assets with a fair market value in excess of
$100,000 at any one time or the aggregate value of which exceeds $250,000 within
any six (6)-month period;
(f) except as expressly authorized in the then-current Business Plan
and Budget, any incurrence or guarantee of indebtedness or grant of any security
interest in any of the Company's assets, involving in each case an amount in
excess of $50,000, or any guarantee of indebtedness; or
(g) any action or inaction that might cause the breach or
termination of any agreement to which the Company is a party involving an amount
to be paid by the Company over the term of the agreement in excess of $25,000;
(h) except as expressly authorized in the then-current Business Plan
and Budget, any investment in, contribution to the capital of, or acquisition
for value for the Company's account of any stock or similar security issued by
or any other ownership interest in, any other person;
(i) any amendment, modification or extension of or suspension of
performance under, or waiver or termination by the Company of the Marketing &
Services Agreement or the Hosting Services Agreement;
(j) except as expressly authorized in the then current Business Plan
and Budget, any agreement, contract, commitment, undertaking involving an amount
in excess of $100,000, or any amendment, modification or extension of or
suspension of performance under any such agreement, contract, commitment or
undertaking;
(k) surrendering or abandoning any property, tangible or intangible,
or any rights thereunder by the Company;
(l) except as set forth in Section 5, withdrawals by or
distributions to Members;
(m) leasing of any real property;
9
<PAGE>
(n) entering into any agreements or material transactions between
the Company and either (1) a director or executive officer of the Company, or
(2) any Member of the Company, or any Affiliate of any such Member
(o) any determination to initiate or forego any claim or litigation
and any settlement, compromise or confession of judgment as to any claim,
controversy or litigation regarding in each case an amount in excess of $250,000
and involving the Company as claimant or defendant;
(p) the admission of a new Member to the Company;
(q) any amendment of the Certificate of the Company;
(r) any dissolution or liquidation of the Company;
(s) approval of the final annual audited financial statements and
statements and the disposition of profits of the Company;
(t) any merger or consolidation of the Company with any other person
or entity, or any recapitalization or reorganization of the Company, or any
transfer of all or any material part of the business of the Company, or any
contract for the lease of the entire business of the Company or any other
similar contract;
(u) investing or otherwise acquiring any assets (other than in the
ordinary course of business), capital stock or other interests in another
business or entity;
(v) selling, leasing, mortgaging, pledging, encumbering,
hypothecating or otherwise transferring or disposing of substantially all of the
Company's assets, other than in the ordinary course of business;
(w) issuing, or entering into any agreement to issue, any equity
interests in the Company, or issuing any options, warrants, convertible
interests or other rights to acquire any such equity interests;
(x) declaring or paying any dividends or distributions on any equity
interests in the Company, or redeeming or repurchasing any equity interests in
the Company;
(y) selecting or modifying the methods, principles, practices,
procedures and policies of accounting, or the Fiscal Year of the Company, or the
retention or dismissal of the Company's independent auditors;
(z) electing or removing the Company's CEO or any officers listed in
Section 6.4;
(aa) changing the number of members comprising the Company's Board;
and
(bb) delegating any duties of the Board.
10
<PAGE>
6.4 Officers.
--------
The Board may appoint themselves or other individuals as officers of the
Company which may include (a) a chairman or co-chairmen; (b) a president and
chief executive officer; (c) one or more vice presidents; (d) a secretary and/or
one or more assistant secretaries; and (e) a treasurer and/or one or more
assistant treasurers. The Board may delegate a portion of its day-to-day
management responsibilities to any such officers, as determined by the Board
from time to time, and such officers will have the authority to contract for,
negotiate on behalf of and otherwise represent the interests of the Company as
so authorized by the Board, provided that in no event will any officer have any
rights, duties, powers or authority greater than that so delegated or that of
the Board.
(a) The Chairman of the Board shall preside over all meetings of the
Board. In the event the Company designates Co-chairmen, they shall co-chair
meetings of the Board.
(b) The President and Chief Executive Officer shall have general and
active management of the business of the Company, subject to authority of the
Board.
(c) The Vice-President or, if there are more than one, the Vice-
President who has been designated by the Board, shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President. In addition, each Vice-President shall perform such other duties as
shall from time to time be imposed upon him by the Board, Chairman or Co-
chairmen of the Board or President.
(d) The Secretary shall give, or cause to be given, notice of all
meetings of the Members and of special meetings of the Board, and shall perform
such other duties as may be from time to time imposed upon him by the Board,
Chairman or Co-Chairmen of the Board, or President, under whose supervision he
shall act.
(e) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Company, and shall deposit all moneys
and other valuable effects in the name and to the credit of the Company in such
depositories as shall be designated by the Board. The Treasurer shall disburse
the funds of the Company as may be ordered by the Board, taking proper vouchers
for such disbursements, and shall render to the President and Board an account
of all his transactions as Treasurer and of the financial condition of the
Company. The Treasurer shall perform such other duties as shall from time to
time be imposed upon him by the Board, Chairman of the Board, or President.
(f) In the absence or disability of the Secretary, the Assistant
Secretaries, in the order designated by the Board, shall perform the duties of
the Secretary, and shall have the full powers thereof.
11
<PAGE>
6.5 Duties of Board.
---------------
(a) The Board will manage the affairs of the Company in a prudent
and businesslike manner and will devote such part of their time to the Company
affairs as is reasonably necessary for the conduct of such affairs.
(b) In carrying out their obligations, the Board will or will cause
the duly-elected and acting officers to:
(i) Cause to be obtained and maintained such public liability
and other insurance as may be available and as the Board deems necessary or
appropriate;
(ii) Cause to be deposited all funds of the Company in one or
more separate bank accounts with such banks or trust companies as the Board may
designate (withdrawals from such bank accounts to be made upon such signature or
signatures as the Board may designate);
(iii) Cause to be maintained complete and accurate records of
all assets owned or leased by the Company and complete and accurate books of
account and all other records required by the Act (and containing such
information as shall be necessary to record allocations and distributions), and
make such records and books of account available for inspection and audit by any
Member or his duly authorized representative (at the expense of such Member)
during regular business hours and at the office specified in Section 1.4 hereof;
(iv) Cause to be prepared and distributed to each Member all
tax reporting information reasonably required for the preparation of such
Member's federal, state, local or foreign tax returns within ninety (90) days
after the end of each Fiscal Year or as soon thereafter as is reasonably
practicable;
(v) Cause to be filed such instruments or certificates and
amendments thereto and do such other acts as may be required by law to qualify
and maintain the Company as a limited liability company in all states in which
the Company transacts any business; and
(vi) Cause to be prepared and distributed to each Member
audited annual financial statements within ninety (90) days after the end of the
Fiscal Year or as soon thereafter as is reasonably practicable.
(c) The Managers shall not be personally liable for the return of
all or any part of the Capital Contributions of the Members to the Company. Any
such return shall be made solely from the assets of the Company.
6.6 Rights of Members.
-----------------
Except as otherwise expressly provided in this Agreement, no Member shall
be entitled to participate in the control and management of the Company, nor
shall any Member have the right to sign for or bind the Company except when
acting as a duly designated Manager or when
12
<PAGE>
acting within the scope of powers properly delegated by the Board to a Member,
officer, employee or agent of the Company.
6.7 Waiver of Conflicts of Interest; Exculpation.
--------------------------------------------
(a) Subject to the terms of subsection (b), immediately below, each
Member (for itself and on behalf of the Company) hereby, to the fullest extent
permitted by applicable law,
(i) waives any claim or cause of action against any other
Member and its Affiliates or any of the Managers, officers or employees of the
Company or any of the employees, officers, directors, agents or authorized
representatives of any of the foregoing (collectively, the "Indemnified
-----------
Parties") that may from time to time arise in respect of a breach of any duty to
- -------
the Company by any such person including as a result of a conflict of interest
between the Company and such other Member or any of its Affiliates other than
the breach of a duty expressly imposed pursuant to an agreement to which the
Company and any other Member or any of its Affiliates are parties (a "Related
Agreement");
(ii) acknowledges and agrees that, except as expressly required
by this Agreement, (A) in the event of any conflict of interest between the
Company and any other Member or any of its Affiliates that may from time to time
arise, each of such other Member, such other Member's Affiliates, any Manager
and any employee of such other Member (or its Affiliates) may act in the best
interest of such other Member or any of its Affiliates and (B) each such Member
shall not be obligated (1) to reveal to the Company confidential information to
reveal to the Company confidential information belonging to or relating to the
business of such other Member or any of its Affiliates or (2) to recommend or
take any action in its capacity as such Member, Manager or employee (including
as a seconded employee), as the case may be, that prefers the interest of the
Company over the interest of such other Member or any of its Affiliates;
provided, however, that all business dealings of the Company with a Member and
its Affiliates shall be on standard commercial terms and conditions, except as
otherwise expressly provided in a Related Agreement; and
(iii) acknowledges and agrees that no Indemnified Party shall
have any liability, responsibility or accountability, now or in the future,
(whether direct or indirect, in contract or tort or otherwise) to any other
Indemnified Party or to the Company for any losses, claims, damages, liabilities
or expenses (including fees and expenses of counsel) (collectively, "Damages")
asserted against or incurred by the Company or any Indemnified Party arising out
of or in connection with the management or conduct of the business and affairs
of the Company or any Indemnified Party, any activities of any Indemnified Party
involving the offering and selling of interests in the Company, the management
or conduct of the business and affairs of any Indemnified Party insofar as it
relates to the Company or any Member, or any other acts reasonably believed by
such Indemnified Party to be within the scope of authority conferred on such
person by this Agreement, including, without limitation, activities of an
Indemnified Party (A) which are for the account of such Indemnified Party, (B)
in respect of which such Indemnified Party profits in any manner, or (C) in
which such Indemnified Party failed or refused to perform any act except those
acts expressly required by the terms of this Agreement,
13
<PAGE>
or (D) any act or failure to act pursuant to advice of the independent public
accountant or legal counsel for the Company, or required or prohibited by any
government rule; provided, however, that the foregoing shall not relieve any
Indemnified Party for Damages asserted against or incurred by the Company or
another Indemnified Party which result from a judgment or other final
adjudication adverse to such Indemnified Party that establishes that such acts
were in bad faith or involved intentional misconduct or a knowing violation of
law or any breach by such Indemnified Party of the representations, warranties,
covenants or agreements contained in this Agreement or (ii) breach of a Related
Agreement; provided, further, that Damages shall not be deemed to arise out of
or be based upon any violation of law, willful misconduct, bad faith or active
or deliberate dishonesty of an Indemnified Party solely because they arise out
of or are based upon a violation of law, willful misconduct, bad faith or active
and deliberate dishonesty of a Manager, officer or employee of such Indemnified
Party if at the time of such violation of law, willful misconduct, bad faith or
active and deliberate dishonesty, such Manager, officer or employee was also a
seconded employee of the Company or Manager acting in his or her capacity as
such (collectively, "Excluded Activities").
6.8 Indemnification.
---------------
(a) The Company shall indemnify and hold harmless each Indemnified
Party from and against any and all Damages asserted against or incurred by such
Indemnified Party arising out of or in connection with the management or conduct
of the business and affairs of the Company or any Affiliate thereof; provided,
however, that the foregoing shall not apply with respect to Excluded Activities
committed by any such Indemnified Party.
(b) In the event that an Indemnified Party desires to assert its
right to indemnification from an Indemnifying Party required to indemnify such
Indemnified Party under this Section 3.7 the Indemnified Party will give the
Indemnifying Party prompt notice of the claim giving rise thereto (a "Claim"),
and the Indemnifying Party will undertake the defense thereof (unless the Claim
is asserted against or related to results from any action or failure to take
action by such Indemnifying Party). The failure to promptly notify the
Indemnifying Party hereunder shall not relieve the Indemnifying Party of its
obligations hereunder, except to the extent that the Indemnifying Party is
actually prejudiced by the failure to so notify promptly.
(c) The Indemnified Party shall not settle or compromise any Claim
without the written consent of the Indemnifying Party unless the Indemnified
Party agrees in writing to forego any and all claims for indemnification from
the Indemnifying Party with respect to such Claim. However, if the Indemnifying
Party, within a reasonable time after notice of any such Claim, fails to defend
such Claim, the Indemnified Party will have the right to undertake the defense,
compromise or settlement of such Claim on behalf of and for the account and risk
of the Indemnifying Party, subject to the right of the Indemnifying Party to
assume the defense of such Claim at any time prior to settlement, compromise or
final determination thereof.
(d) If the Indemnifying Party has undertaken the defense of a Claim
and (i) if there is a reasonable expectation that (A) a claim may materially and
adversely affect the Indemnified Party other than as a result of money damages
or other money payments or (B) the
14
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Indemnified Party or Parties may have legal defenses available to it or them
that are different from or additional to the defenses available to the
Indemnifying Party, or (ii) if the Indemnifying Party shall not have employed
counsel reasonably satisfactory to the Indemnified Party, the Indemnified Party
shall nevertheless have the right at the Indemnified Party's cost and expense,
to defend such Claim.
(e) The indemnification authorized by this Section 6.8 is not
exclusive of and will be in addition to any other rights granted to those
seeking indemnification under this Agreement, any other agreement, a vote of
Members or disinterested Managers of the Company, or otherwise, both as to
action in their official capacities and as to action in another capacity while
holding their offices or positions. The indemnification will continue as to a
person who has ceased to be a Member, Manager, officer, employee or agent of the
Company and will inure to the benefit of such person's heirs, executors,
administrators, successors and assigns.
(f) The Company shall purchase and maintain insurance or furnish
similar protection, including, but not limited to, trust funds, letters of
credit or self-insurance, for or on behalf of any person who is or was a Member,
Manager or officer of the Company. The insurance or similar protection purchased
or maintained for those persons may be for any liability asserted against them
and incurred by them in any capacity described in this Section 6 or for any
liability arising out of their status as described in this Section 6, whether or
not the Company would have the power to indemnify them against that liability
under this Section 6.9. Insurance may be so purchased from or so maintained with
a person in which the Company has a financial interest.
(g) The authority of the Company to indemnify persons pursuant to
paragraph (a) of this Section 6.9 does not limit the payment of expenses as they
are incurred, in advance of the final disposition of an action, suit or
proceeding, or the payment of indemnification, insurance or other protection
that may be provided pursuant to paragraphs (e) or (f) of this Section 6.9 does
not create any obligation to repay or return payments made by the Company
pursuant to paragraphs (e) or (f) of this Section.
6.9 Freedom of Action.
-----------------
(a) Each Member and its respective Affiliates and Related Parties
(collectively, the "Permitted Persons") may have other business interests and
may engage in any other business or trade, profession or employment whatsoever,
on its own account, or in partnership with, or as an employee, officer, director
or stockholder of any other Person, and no Permitted Person shall be required to
devote its or his entire time to the business of the Company. Without limiting
the generality of the foregoing, (i) may engage in the same or similar
activities or lines of business as the Company or develop or market any products
or services that compete, directly or indirectly, with those of the Company,
(ii) may invest or own any interest publicly or privately in, or develop a
business relationship with, any Person engaged in the same or similar activities
or lines of business as, or otherwise in competition with, the Company and (iii)
do business with any client or customer of the Company. Neither the Company nor
any other Member nor any Affiliate thereof by virtue of this Agreement shall
have any rights in and to any such independent
15
<PAGE>
venture or the income or profits derived therefrom, regardless of whether or not
such venture was presented to a Permitted Person as a direct or indirect result
of its or his connection with the Company. No Permitted Person shall have any
obligation to present any business opportunity to the Company, even if the
opportunity is one that the Company might reasonably be deemed to have pursued
or had the ability or desire to pursue, in each case, if granted the opportunity
to do so and no Permitted Person shall be liable to the Company or any Member
(or any Affiliate thereof) for breach of any fiduciary or other duty, as a
member or otherwise, by reason of the fact that a Permitted Person pursues or
acquires such business opportunity, directs such business opportunity to another
Person or fails to present such business opportunity, or information regarding
such business opportunity, to the Company.
(b) Notwithstanding the foregoing, during the initial term of the
Marketing & Services Agreement, Buy.com agrees not to take any action prohibited
by Section 7(a) of the Marketing and Services Agreement.
6.10 Reliance on Acts of Board.
-------------------------
No financial institution or any other person, firm or corporation dealing
with the Board shall be required to ascertain whether the Board is acting in
accordance with this Agreement, but such financial institution or such other
person, firm or corporation shall be protected in relying solely upon the deed,
transfer or assurance of, and the execution of such instrument or instruments by
the Board.
SECTION 7
BOOKS AND RECORDS; TAX MATTERS
------------------------------
7.1 Books and Records.
-----------------
The Company will keep adequate books and records at its principal place of
business, setting forth a true and accurate account of all transactions and
other matters arising out of and in connection with the conduct of the Company's
business, which books and records will be otherwise kept in accordance with the
provisions of the Act. Any Member or its designated representative will have the
right, at any reasonable time, to have access to and to inspect and copy the
contents of such books or records.
7.2 Fiscal Year.
-----------
The accounting period and fiscal year of the Company (the "Fiscal Year")
will be the calendar year.
7.3 Tax Matters Partner.
-------------------
UA is hereby designated as "Tax Matters Partner" of the Company under
Section 6231 of the Code and Regulations thereunder and any comparable
provisions under state or local law. Each Member hereby consents to such
designation and agrees that upon the request of UA it will execute, certify,
acknowledge, deliver, swear to, file and record at the appropriate public
offices
16
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such documents as may be necessary or appropriate to evidence such consent. The
Tax Matters Partner, acting for the Company, shall control the preparation of
all income tax and information returns as are required to be filed by the
Company in the jurisdictions in which the Company does business or derives
income. In the event the Company or any Members thereof in their capacity as
Members shall be the subject of an income tax audit by any federal, state or
local taxing authority, including administrative settlement and judicial review
(a "Tax Contest"), the Tax Matters Partner shall be authorized to act for, and
its decision shall be final and binding upon, the Company and each Member
thereof. The Tax Matters Partner shall provide the Members with copies of (i)
all income tax and information returns of the Company at least 20 days prior to
the due date of such returns and (ii) all material written correspondence or
filings to be submitted to a federal, state or local taxing authority in
connection with a Tax Contest reasonably in advance of their submission (subject
to applicable time constraints imposed by any such authority). The Tax Matters
Partner shall consider, in its sole discretion, all reasonable suggestions
regarding such materials made by the Members to the Tax Matters Partner on or
before the tenth day following the date on which such materials are delivered to
the Members (or on or before such earlier date as is specified in a cover letter
accompanying such materials if a shorter comment period is made necessary by
applicable time constraints imposed by a taxing authority). All expenses
incurred by the Tax Matters Partner in participating in any Company tax audit or
contesting any adjustment proposed by the Internal Revenue Service shall be
borne by the Company.
7.4 Section 754 Election.
--------------------
The Tax Matters Partner may, in its sole discretion, make or revoke, on
behalf of the Company, an election under Section 754 of the Code. Each Member
shall, upon request of the Tax Matters Partner, supply the information necessary
to give effect to such an election.
SECTION 8
ADMISSION OF NEW MEMBERS; TRANSFERS OF UNITS
--------------------------------------------
8.1 Admission of New Members.
------------------------
Subject to Section 6.3 hereof, additional Members may be admitted to the
Company from time to time on such terms and conditions as shall be determined by
the Board, including, without limitation, upon execution and delivery of an
appropriate subscription agreement. The cash proceeds received by the Company
from the admission of any additional Member to the Company pursuant to this
Section 8.1 shall be used for such purposes as the Board may determine. Appendix
--------
A to this Agreement shall be amended from time to time as appropriate to reflect
- -
the Units and Percentage Interest of any additional Member admitted to the
Company in accordance with this Agreement.
8.2 Restriction on Transfers.
------------------------
Except as otherwise permitted by this Agreement, no Member may transfer all
or any portion of its Units.
17
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8.3 Permitted Transfers.
-------------------
Subject to the conditions and restrictions set forth in Section 8.4 below,
the Units of any Member may be Transferred (a "Permitted Transfer") solely in
accordance with any of the following:
(a) A Member may Transfer all or any portion of its Interest to a
Permitted Affiliate of such Member.
(b) Either Buy.com or UA may Transfer up to 50% of their respective
Units to any of the parties listed on Appendix D or any direct or indirect
----------
wholly-owned subsidiary of any such Party (each a "Strategic Third Party"),
provided such Transfer is in connection with a strategic transaction being
entered into between the Company and such Strategic Third Party; and provided
further that any Transfer under this Section 8.3(b) shall be subject to
compliance with Section 8.5.
(c) If neither 8.3(a) or 8.3(b) is applicable, either Buy.com or UA
may Transfer all or any portion of its Units to any person with the prior
written consent of the other Member which consent may be withheld in the sole
and absolute discretion provided, however, that from and after the date that is
three years from the Commencement Date, either Member may transfer all or any
portion of its Interest without consent of the other Member, provided further,
that any Transfer under this Section 8.3(c) shall be subject to compliance with
Section 8.5 and Section 8.6.
8.4 Conditions to Permitted Transfers.
---------------------------------
A Transfer will not be treated as a Permitted Transfer unless and until the
following conditions are satisfied.
(a) The transferor and transferee shall execute and deliver to the
Company such documents and instruments of conveyance as may be necessary or
appropriate in the opinion of counsel to the Company to effect such Transfer and
to confirm the agreement of the transferee to be bound by the provisions of this
Agreement. In all cases, the Company will be reimbursed by the transferor and/or
transferee for all costs and expenses that it reasonably incurs in connection
with such Transfer.
(b) The transferor and transferee will furnish the Company with the
transferee's taxpayer identification number, and any other information
reasonably required to permit the Company to file all required federal and state
tax returns and other legally required information statements or returns.
Without limiting the generality of the foregoing, the Company will not be
required to make any distribution otherwise provided for in this Agreement with
respect to any transferred Units until it has received such information.
(c) Either (i) such Units will be registered under the Securities
Act of 1933, as amended, and any applicable state securities laws, or (ii) the
transferor will provide, upon the Company's reasonable request, an opinion of
counsel, which opinion will be reasonably
18
<PAGE>
satisfactory to the Company, to the effect that such Transfer will be exempt
from all applicable registration requirements and that such Transfer will not
violate any applicable laws regulating the transfer of securities.
(d) The transferor may grant to any transferee of Units pursuant to
a Permitted Transfer, the right to become a substitute Member, with respect to
the Units transferred.
(e) All transferees hereunder shall be bound by the terms of this
Agreement in the same manner as the transferors.
(f) The transferor shall provide an opinion of counsel, which
opinion and counsel are satisfactory to the Board, to the effect that: (i) the
Transfer will not result in a termination of the Company under this Section 708
of the Code; (ii) the Transfer will not cause the Company to be classified as an
entity other than a partnership for purposes of the Code; and (iii) the Transfer
will not result in or create a "prohibited transaction" as defined in Section
4975(c) of the Code or result in or cause the Company or any Member to be liable
for excise tax under Chapter 42 of the Code or result in or cause the Company or
the Company's assets to become the assets of an employee benefit plan (as
defined in Section 3(3) of ERISA).
8.5 Tag-Along Rights.
----------------
(a) If a Member ("Selling Member") desires to transfer, pursuant to
Section 8.3(b) or Section 8.3(c) of this Agreement, any portion of the Units in
the Company to one or more persons pursuant to a private sale or exchange or a
series of related private sales or exchanges, the Selling Member must first
notify the other Member (the "Tag-Along Member") in writing (for purposes of
this Section 8.5, the "Tag-Along Notice") of such intended transfer at least
twenty (20) Business Days prior to the proposed date for the consummation of
such transfer, which notice will contain all of the proposed terms of the
transfer, including, without limitation, the name and address of the prospective
purchaser(s), the purchase price (which is to be determined on the basis of all
consideration paid or to be paid in connection with such transfer, excluding
compensation paid or to be paid for actual services rendered or to be rendered
or for non-competition agreements) and other terms and conditions of payment (or
the basis for determining the purchase price and other terms and conditions),
the date on or about which such sale is to be consummated and the Units to be
transferred; provided, however, that in the case of a transfer pursuant to
-------- -------
Section 8.3(c) of this Agreement, the requirement of this Section 8.5 to deliver
the Tag-Along Notice shall be fully satisfied by delivery of a Last Refusal
Notice (as such term is defined in Section 8.6(a)). Within fifteen (15) Business
Days after receipt of the Tag-Along Notice, in the case of transfers pursuant to
Section 8.3(b), and within twenty (20) Business Days after receipt of the Last
Refusal Notice, in the case of transfers pursuant to Section 8.3(c), the Tag-
Along Member may notify (for purposes of this Section 8.5, the "Participation
Notice") the Selling Member that it will sell Units held by it (the number of
which shall be determined as set forth in the following sentence) on the same
terms as set forth in the Tag-Along Notice. The Units which the Tag-Along Member
will be entitled to sell under this Section 8.5 will be determined as of the
date of consummation of such transfer and will equal (x)
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<PAGE>
the total number of Units that the Selling Member proposes to sell as set forth
in the Tag-Along Notice, multiplied by (y) the Percentage Interest of the Tag-
Along Member .
(b) The Selling Member may sell its Units for which the Tag-Along
Member has not delivered Participation Notices pursuant to Section 8.5(a)
hereof, and which are the subject matter of the Tag-Along Notice, but only to
the prospective purchaser identified in such Tag-Along Notice, at or about the
time (not later than thirty (30) Business Days after the date of the Tag-Along
Notice) and at the price and on the same terms and conditions as those contained
in the Tag-Along Notice.
(c) Any Participation Notice given pursuant to this Section 8.5
hereof, when taken together with the Tag-Along Notice, will constitute a binding
legal agreement on the terms and conditions therein set forth, subject to the
consummation of the transactions described in the Tag-Along Notice, it being
understood that any material modification, amendment, variance or other change
by the Selling Member of the terms and conditions set forth in the Tag-Along
Notice, other than as provided in this Agreement, will be of no force and effect
unless consented to in writing by the Tag-Along Member.
(d) The costs and expenses of any transfer pursuant to this Section
8.5 will be borne by the Selling Member and the participating Tag-Along Member
on a pro rata basis according to their Units being sold (or in such other
proportion as such Members may agree).
8.6 Right of Last Refusal.
---------------------
Prior to effecting any Permitted Transfer pursuant to Section 8.3(c), the
transferring Member ("Offeror Member") shall first offer to the other Member the
right to purchase all of the Interest proposed to be Transferred in accordance
with the following provisions:
(a) If the Offeror Member receives (i) a bona fide written offer to
purchase all or part of its Interest (a "Bona Fide Offer") from a Person which
is not a Permitted Affiliate of such Member ("Prospective Purchaser") that the
Offeror Member desires to accept, or (ii) a bona fide written acceptance from a
Prospective Purchaser of the Offeror Member's offer to sell all or part of its
Interest (a "Bona Fide Acceptance"), then the Offeror Member shall, not later
than five (5) Business Days after receipt of such Bona Fide Offer or Bona Fide
Acceptance, deliver written notice thereof (a "Last Refusal Notice") to the
other Member ("Offeree Member"). A Last Refusal Notice in respect of any
Interest shall: (i) identify the Prospective Purchaser; (ii) state the aggregate
purchase price for such Membership Interest to be paid by the Prospective
Purchaser (if such purchase price is to be paid by delivery of property other
than cash, such price shall be the fair market value of such property and such
notice shall state the Offeror Member's estimate of the fair market value of
such property); (iii) summarize all material terms and conditions of the Bona
Fide Offer or Bona Fide Acceptance and all other transactions and agreements
directly or indirectly conditioned upon or otherwise related to the purchase of
the Interest by the Prospective Purchaser; and (iv) be accompanied by a
certificate of the Offeror Member or a duly authorized officer of the Offeror
Member certifying that the information set forth in the Last Refusal Notice is
true, correct and complete in all respects to the best of his or her knowledge.
20
<PAGE>
(b) For a period of twenty (20) Business Days following receipt by
the Offeree Member of a Last Refusal Notice (the "Last Refusal Period"), the
Offeree Member may elect, by the delivery of written notice of such election to
the Offeror Member (the "Last Refusal Election Notice") within such Last Refusal
Period, either to purchase such Interest at a price equal to the price set forth
in the Last Refusal Notice (payable as set forth in Section 8.6(c)) and
otherwise on the terms and conditions described in the Last Refusal Notice and
in the accompanying materials or to exercise tag along rights with respect to
such sale pursuant to the terms and conditions of Section 8.5 hereof; . The
rights afforded to the Offeree Member pursuant to this Section 8.6 may be
exercised by the Offeree Member or may be assigned by it to any other Person
designated by it (a "Last Refusal Assignee"), in which case reference to Offeree
Member in this Section 8.6 shall be deemed to include such Last Refusal
Assignee.
(c) If an Offeree Member elects to purchase the Interest specified
in the Last Refusal Notice, the Offeree Member may elect to pay the Purchase
Price by delivery of cash delivered by check or wire transfer of immediately
available funds or such other consideration as the Offeree Member and the
Offeror Member may mutually agree.
(d) If any Offeree Member duly and timely delivers a Last Refusal
Election Notice to the Offeror Member in respect of any Interest during the Last
Refusal Period, then the Offeror Member shall be obligated to sell such Interest
to such Offeree Member, and such Offeree Member shall be obligated to purchase
such Interest from the Offeror Member, free and clear of all liens, claims,
charges or security interests. The purchase of any Interest by the Offeree
Member shall be consummated on or before the later of (i) the one hundred
twentieth (120th) day after the Last Refusal Election Notice is received by the
Offeror Member or (ii) the date that is ten (10) Business Days following the
last to occur of (x) the expiration (or earlier termination) of any applicable
waiting period (and, if extended, the extended waiting period) imposed under any
applicable law or regulation and (y) the receipt of all material governmental
and regulatory consents, governmental and regulatory approvals or governmental
and regulatory waivers that may be required in connection with the purchase and
sale of the Interest, or on such other date as the Offeror Member and Offeree
Member may mutually agree.
(e) If the Offeree Member does not duly and timely deliver a Last
Refusal Election Notice to the Offeror Member in respect of any Interest, or if
the Offeree Member elects to purchase such Interest and fails to close such
purchase as required by Section 8.6(d) hereof, then the Offeror Member shall
have the right to enter into an agreement to sell such Interest to the
Prospective Purchaser by a date not later than ninety (90) days after (i) the
date of delivery of the Last Refusal Notice in respect of such Interest or (ii)
the date of the failure to close such purchase (the "Transfer Closing Date") at
a price and on terms which are neither individually nor in the aggregate more
favorable to the Prospective Purchaser than those originally contained in the
Bona Fide Offer or Bona Fide Acceptance.
8.7 Prohibited Transfers.
--------------------
(a) Any purported Transfer of a Unit that is not a Permitted
Transfer, or that is not otherwise made in accordance with this Section 8, will
be null and void and of no effect
21
<PAGE>
whatsoever; provided that, if the Company is required to recognize a Transfer
that is not a Permitted Transfer, the Interest transferred will be strictly
limited to the transferor's rights to allocations and distributions as provided
by this Agreement with respect to the transferred Interest, which allocations
and distributions may be applied (without limiting any other legal or equitable
rights of the Company) to satisfy any debts, obligations or liabilities for
damages that the transferor or transferee of such Units may have to the Company
and neither the transferee nor the transferor will have any rights as to the
management of the Company with respect to such transferred Units; provided,
further, that the Company shall have the option to purchase such transferred or
purportedly transferred Units from the transferee by delivering written notice
of its intention to purchase such Units to the transferee at any time within
ninety (90) Business Days after the Company has knowledge of a Transfer that is
not a Permitted Transfer, to the extent permitted by law. The Company may assign
all or part of its right to purchase such transferee's Units as provided in the
foregoing sentence to the non-transferring Members on a pro rata basis or such
other basis as such Members agree, provided that the entire Interest of such
transferee is purchased by the Company or its Member assignees. The purchase
price and terms of sale for such Units shall be determined in accordance with
Section 11 hereof.
(b) In the case of a Transfer or attempted Transfer of a Unit that
is not a Permitted Transfer, the parties engaging or attempting to engage in
such Transfer will be liable to indemnify and hold harmless the Company and the
other Members from all costs, liability, and damage that any of such indemnified
Persons may incur (including, without limitation, incremental tax liability and
attorneys' fees and expenses) as a result of such Transfer or attempted Transfer
and efforts to enforce the indemnity granted hereby.
8.8 Distributions with Respect to Transferred Units.
-----------------------------------------------
All distributions on or before the date of such Transfer will be made to
the transferor, and all distributions thereafter will be made to the transferee.
Solely for purposes of making such distributions, the Company will recognize
such Transfer not later than the end of the calendar month during which it is
given notice of such Transfer, provided that if the Company does not receive a
notice stating the date such Unit was Transferred and such other information as
the Company may reasonably require within thirty (30) days after the end of the
accounting period during which the Transfer occurs, then all of such
distributions will be made to the Member who, according to the books and records
of the Company, on the last day of the accounting period during which the
transfer occurs, was the owner of the Unit. Neither the Company nor any Member
will incur any liability for making distributions in accordance with the
provisions of this Section 8.8, whether or not the Company has knowledge of any
Transfer of ownership of any Unit.
8.9 Termination of Transfer Restrictions.
------------------------------------
The transfer restrictions contained in this Section 8 shall terminate upon
the closing of an initial public offering of equity securities of the Company.
22
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SECTION 9
WITHDRAWAL OF A MEMBER
----------------------
9.1 Withdrawal of a Member.
----------------------
No Member may withdraw or resign from the Company, or take any action to
dissolve, liquidate or terminate the Company except in accordance with the terms
of this Agreement.
9.2 Improper Withdrawal.
-------------------
If a Member withdraws from the Company in contravention of this Agreement,
in addition to any other remedies available to the Company under applicable law,
the Company may recover from the withdrawing Member damages for breach of this
Agreement and may offset the damages against the amount otherwise distributable
to such Member on account of its Interest.
9.3 Consequences of Withdrawal.
--------------------------
(a) In the event of a withdrawal by a Member the Company shall not
dissolve but, shall continue until dissolved in accordance with Section 10
hereof.
SECTION 10
DISSOLUTION OF THE COMPANY
--------------------------
10.1 Dissolution Events.
------------------
The Company will dissolve and commence winding up and liquidation upon the
first to occur of any of the following (each, a "Dissolution Event"):
(a) The sale or other transfer of all or substantially all of the
Company's assets;
(b) A merger or consolidation of the Company with one or more other
entities in which the Company is not the surviving entity;
(c) The decision of the Board pursuant to Section 6.3 of this
Agreement to dissolve, wind up, and liquidate the Company;
(d) Upon entry of a decree of judicial dissolution under the Act.
(e) The withdrawal of all members.
10.2 Winding Up.
----------
Upon the occurrence of a Dissolution Event, the Company will continue
solely for the purposes of winding up its affairs in an orderly manner,
liquidating its assets, and satisfying the claims of its creditors and Members.
No Member will take any action that is inconsistent with, or not necessary to or
appropriate for, the winding up of the Company's business and affairs.
23
<PAGE>
The Company's assets will be liquidated as promptly as is consistent with
obtaining the fair value thereof, and the proceeds therefrom, to the extent
sufficient therefor, will be applied and distributed in the following order:
(a) First, to the payment and discharge of all of the Company's
debts and liabilities to creditors other than Members and of the expenses of
liquidation;
(b) Second, to the establishment of any reserve which the Members,
their successors or other representatives may deem reasonably necessary for any
contingent or unforeseen liabilities or obligations of the Company. Such reserve
may be paid over to any attorney at law, or other acceptable party, as escrow
agent to be held for disbursement in payment of any of the aforementioned
liabilities and, at the expiration of such period as shall be deemed advisable
by the Members, their successors or other representatives for distribution of
the balance, in the manner provided in this Section 10.2;
(c) Third, to the payment and discharge of all of the Company's
debts and liabilities to Members; and
(d) Finally, to the Members in accordance with their positive
Capital Account balances, after giving effect to all contributions,
distributions, and allocations for all taxable periods, including the period
during which the Dissolution Event occurs, until such Capital Account balances
are reduced to zero.
Any distribution to a Member pursuant to paragraphs 10.2(b) or (c) above
will be net of any amounts owed to the Company by such Member.
No Member will receive any additional compensation for any services
performed pursuant to this Section 10.
10.3 Compliance With Timing Requirements of the Regulations.
------------------------------------------------------
In the event the Company is "liquidated" within the meaning of Section
1.704-1(b)(2)(ii)(g) of the Regulations, distributions will be made pursuant to
this Section 10.3 to the Members who have positive Capital Accounts in
compliance with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations. If any
Member has a deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
the year during which such liquidation occurs), such Member will have no
obligation to make any contribution to the capital of the Company with respect
to such deficit, and such deficit will not be considered a debt owed to the
Company or to any other Person for any purpose whatsoever. In the discretion of
the Board, a pro rata portion of the distributions that would otherwise be made
to the Members pursuant to this Section 10.3 may be:
(a) distributed to a trust established for the benefit of the
Members for the purposes of liquidating Company assets, collecting amounts owed
to the Company, and paying any contingent or unforeseen liabilities or
obligations of the Company or of the Members arising out of or in connection
with the Company. The assets of any such trust shall be distributed to the
24
<PAGE>
Members from time to time, in the discretion of the Board, in the same
proportion as the amount distributed to such trust by the Company would
otherwise have been distributed to the Members pursuant to this Agreement; or
(b) withheld to provide a reserve for Company liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Company, provided that such withheld amounts
shall be distributed to the Members as soon as reasonably practicable.
10.4 Rights of Members.
-----------------
Except as otherwise provided in this Agreement, (a) each Member will look
solely to the assets of the Company for the return of his Capital Contribution
and will have no right or power to demand or receive property other than cash
from the Company, and (b) no Member will have priority over any other Member as
to the return of his Capital Contribution, distributions or allocations.
Prohibition on Withdrawal. Except as otherwise provided in Sections 8 or 9
of this Agreement or another written agreement between the Company and one or
more Members, no Member is entitled to withdraw from the Company prior to the
Company's dissolution pursuant to this Section 10. Under no circumstances, other
than pursuant to the express terms of this Agreement, will the Company be
required to make any distribution pursuant to the Act prior to the Company's
dissolution pursuant to this Section 10.
SECTION 11
DEADLOCKS; PUT RIGHT; MANDATORY
-------------------------------
REPURCHASE OF UA INTEREST
-------------------------
11.1 Deadlocks.
---------
In the event the Manager appointed by UA and the Manager appointed by
Buy.com are unable to agree on any of the Reserved Matters set forth in Section
6.3 hereof (a "Deadlock"), within sixty (60) days of the occurrence of the
Deadlock (the "Deadlock Period"), UA and Buy.com shall undertake the following
resolution procedures in an effort to resolve the Deadlock. The Managers
appointed by UA and Buy.com shall conduct at least two face to face meetings to
discuss the Deadlock in a good faith effort to resolve the Deadlock. If the
Deadlock persists following these meetings between the Managers, each Manager
shall prepare a summary of the Deadlock issues and their respective positions
and shall provide a copy of such summary to the other Member. The Chief
Executive Officer of Buy.com and the Senior Vice President, Finance or Chief
Information Officer of UA shall then conduct at least one face to face meeting
to discuss the Deadlock in a good faith effort to resolve the Deadlock.
25
<PAGE>
11.2 Put Right.
---------
(a) Within sixty days after the end of the Deadlock Period without
resolution of a Deadlock, after complying with the resolution procedures set
forth in Section 11.1 hereof, provided such Deadlock occurs after the third
anniversary of the Formation Date, UA may deliver notice to the Company and
Buy.com (the "Put Notice") stating that UA is exercising its option to put all,
but not less than all, of its Interest in the Company to Buy.com (the "Put
Option"). Upon the receipt of the Put Notice, Buy.com and UA shall jointly
determine the fair market value of UA's Interest, taking into account the fair
market value of the Business of the Company as a going concern (the "Fair Market
Value") and the sale of the Interest pursuant to the Put Option shall be
consummated within twenty (20) Business Days of such determination of Fair
Market Value according to the procedures set forth herein, subject to any and
all necessary regulatory or other approvals. If Buy.com and UA fail to agree as
to the Fair Market Value within fifteen (15) Business Days starting from the
date of the Put Notice, UA will engage an appraisal firm (the "First Appraiser")
to appraise the Fair Market Value as of the most recent practicable date (the
"Appraisal Date") and to prepare and deliver a report to UA and Buy.com
describing the results of such appraisal (the "First Appraisal") no later than
twenty (20) Business Days after being engaged. For a period of ten (10) Business
Days following receipt of the First Appraisal, Buy.com will have the right to
object to the First Appraisal by written notice to UA (the "FMV Objection
Notice") and engage an appraisal firm (the "Second Appraiser"). Buy.com will
cause the Second Appraiser to appraise the Fair Market Value as of the Appraisal
Date and to prepare and deliver a report to Buy.com and UA describing the
results of such appraisal (the "Second Appraisal") within twenty (20) Business
Days following the date of the FMV Objection Notice. In the event the Fair
Market Values determined by the First Appraiser and the Second Appraiser differ
and UA and Buy.com fail to agree upon the Fair Market Value within ten (10)
Business Days after delivery of the Second Appraisal, the First Appraiser and
the Second Appraiser will select an appraisal firm (the "Third Appraiser"), and
---------------
UA and Buy.com will cause the Third Appraiser to appraise the Fair Market Value
as of the Appraisal Date and to prepare and deliver a report to UA and Buy.com
describing the results of such appraisal (the "Third Appraisal") within twenty
---------------
(20) Business Days following the date of the Third Appraiser's engagement. After
delivery of the Third Appraisal, the Fair Market Value will be the average of
the two values determined by the appraisers whose determination of value is
closest to each other from among the three appraisals. Determination of the Fair
Market Value in the above manner will be final and binding on UA and Buy.com.
The cost of the First Appraiser will be borne by UA. The cost of the Second
Appraiser, if any, will be borne by Buy.com. The cost of the Third Appraiser, if
any, will be shared equally by UA and Buy.com. Buy.com shall have the right to
assign its obligation to purchase the Interest of UA.
(b) At the closing of the sale of UA's Interest to Buy.com pursuant to
the Put Option, Buy.com shall issue and deliver to UA a Promissory Note in the
principal amount equal to the Fair Market Value as determined pursuant to this
Section 11. The Promissory Note shall provide for the principal to be paid in
five (5) equal quarterly installments, together with accrued but unpaid interest
thereon, with the initial payment being six (6) months after the final Fair
Market Value has been established pursuant to Section 11.2(a). The Promissory
Note shall bear interest at the rate of prime plus 1%.
26
<PAGE>
11.3 Mandatory Repurchase of UA Interest.
-----------------------------------
In the event that UA elects to terminate the Marketing and Services
Agreement pursuant to the provisions of Section 17(b) thereof, Buy.com shall be
required to purchase all of UA's Units for a purchase price of [$1.00] per Unit.
Such purchase shall be consummated within five (5) Business Days of the date on
which Buy.com receives written notice of UA's election to terminate the
Marketing and Services Agreement.
SECTION 12
MEETINGS OF MEMBERS
-------------------
12.1 Meetings.
--------
Meetings of the Members, for any purpose or purposes, unless otherwise
prescribed by statute, may be called by the Board, and shall be called by the
Board at the request in writing of any Member or group of Members holding at
least twenty percent (20%) of the Units. The Chairman of the Board shall preside
at all meetings of the Members.
12.2 Place of Meetings.
-----------------
The Board may designate any place, either within or outside the State of
Delaware, as the place of meeting for any meeting of the Members. If no
designation is made, or if a special meeting is otherwise called, the place of
meeting shall be at the Company's principal place of business in Aliso Viejo,
California.
12.3 Notice of Meetings.
------------------
Except as provided in Section 12.4 hereof, the Board shall deliver or cause
to be delivered a notice of such meeting to each Member entitled to vote at such
meeting. Said notice shall be delivered not less than five (5) days nor more
than sixty (60) days before the date of such meeting and shall state the place,
day and hour of the meeting and the purpose or purposes for which the meeting is
called.
12.4 Meeting of all Members.
----------------------
If all of the Members shall meet at any time and place, either within or
outside of the State of Delaware, and consent to the holding of a meeting at
such time and place, such meeting shall be valid without call or notice, and at
such meeting lawful action may be taken.
12.5 Record Date.
-----------
For the purpose of determining Members entitled to notice of, or to vote
at, any meeting of Members or any adjournment thereof, or Members entitled to
receive payment of any distribution, or in order to make a determination of
Members for any other purpose, the date on which notice of the meeting is mailed
or the date on which the resolution declaring such
27
<PAGE>
distribution is adopted, as the case may be, shall be the record date for such
determination of Members. When a determination of Members entitled to vote at
any meeting of Members has been made as provided in this Section, such
determination shall apply to any adjournment thereof.
12.6 Quorum.
------
Members holding a majority of all Units entitled to vote on the matters to
be presented at a meeting of the Members, whether represented in person or by
proxy, shall constitute a quorum at such meeting. In the absence of a quorum at
any such meeting, the Members holding at least sixty-six percent (66%) of the
Units so represented may adjourn the meeting from time to time for a period not
to exceed sixty (60) days without further notice. However, if the adjournment is
for more than sixty (60) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, then a notice of the adjourned meeting shall be
given to each Member of record entitled to vote at the meeting. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The Members present at a duly organized meeting may continue
to transact business until adjournment, notwithstanding the withdrawal during
such meeting of that number of Units whose absence would cause less than a
quorum.
12.7 Manner of Acting.
----------------
If a quorum is present, the affirmative vote of Members holding at least a
majority of all Units entitled to vote on the subject matter shall be the act of
the Members, unless the vote of a greater or lesser proportion or number or
separate class vote is otherwise required by the Act, the Certificate or this
Agreement.
12.8 Proxies.
-------
At all meetings of the Members, a Member may vote in person or by written
proxy executed by the Member or by such Member's duly authorized attorney-in-
fact. Such proxy shall be filed with the Company before or at the time of the
meeting. No proxy shall be valid after eight (8) months from the date of its
execution, unless otherwise provided in the proxy.
12.9 Action by Members Without a Meeting.
-----------------------------------
Action required or permitted to be taken at a meeting of the Members may be
taken without a meeting if such action is approved by the Members holding at
least a majority of all Units entitled to vote on the action, unless the
approval of a greater or lesser proportion or number or separate class approval
is required, and such approval is evidenced by one or more written consents
describing the action taken, signed by the requisite number of qualified Members
and delivered to the Company for inclusion in the minutes of the Company or for
filing with the Company records. Action taken under this Section 12.9 is
effective when the requisite number of qualified Members have signed the
consent, unless the consent specifies a different effective date. The record
date for determining Members entitled to take action without a meeting shall be
the date the first Member signs a written consent. Notice of any action taken
28
<PAGE>
under this Section 12.9 shall be given to each Member who did not sign a written
consent with respect to such action.
12.10 Waiver of Notice.
----------------
When any notice is required to be given to any Member, a waiver thereof in
writing signed by the person entitled to such notice, whether before, at or
after the time stated therein, shall be equivalent to the giving of such notice.
SECTION 13
AMENDMENTS
----------
13.1 Authority to Amend.
------------------
Amendments to this Agreement shall require the approval of Buy.com and UA.
13.2 Notice of Amendments.
--------------------
Every Member shall have the right to propose amendments to this Agreement.
A copy of any amendment to be approved by the Members pursuant to Section 13.1
hereof shall be mailed in advance to each Member.
SECTION 14
REPRESENTATIONS AND WARRANTIES
------------------------------
14.1 Securities Law Representations.
------------------------------
Each Member hereby represents and covenants that such Member is acquiring
such Member's Units for its own account solely for investment purposes and not
with a view to the distribution or resale thereof. Notwithstanding statements
contained in other Sections of this Agreement, no Unit may be offered or sold
and no transfer of a Interest will be made either by the Company or the Members
unless: (i) such Unit is registered under the Securities Act of 1933, as amended
from time to time, and any applicable state securities laws, or (ii) an opinion
of counsel, reasonably satisfactory to the Board as to form and substance, is
delivered to the Company by the Member desiring to offer, sell or transfer a
Unit, to the effect that no such registration is necessary; provided that such
requirement may be waived by the Board.
14.2 Legends.
-------
(a) Each Member further hereby agrees that the following legend may
be placed upon any counterpart of this Agreement, the certificate, or any other
document or instrument evidencing ownership of a Unit:
The Units represented by this document have not been registered
under any securities laws and the transferability of such Units
is restricted. A Unit may not be sold, assigned or transferred,
nor will any assignee, vendee, transferee or endorsee thereof be
recognized as having acquired any such Unit by the issuer for
29
<PAGE>
any purposes, unless (1) a registration statement under the
Securities Act of 1933, as amended, with respect to such Unit
will then be in effect and such transfer has been qualified under
all applicable state securities laws, or (2) the availability of
an exemption from such registration and qualification will be
established to the reasonable satisfaction of counsel to the
Company.
14.3 Representations and Warranties of UA.
------------------------------------
(a) UA is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all necessary power and
authority to enter into this Agreement, to carry out its obligations hereunder
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by UA, the performance by UA of its obligations
hereunder and the consummation by UA of the transactions contemplated hereby
have been duly authorized by all requisite action on the part of UA. This
Agreement has been duly executed and delivered by UA and constitutes a legal,
valid and binding obligation of UA enforceable against UA in accordance with its
terms, subject as to enforceability to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium, fraudulent conveyance or similar laws
affecting creditors rights generally and to the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law).
(b) The execution, delivery and performance of this Agreement by UA
does not and will not (i) violate or conflict with the Certificate of
Incorporation or Bylaws of UA, (ii) conflict with or violate any law or
governmental order applicable to UA, or (iii) result in any breach of, or
constitute a default (or event which with the giving of notice or lapse of time
or both would become a default) under, or give to any person any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of any lien on any of the assets or properties of UA pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument to which UA is a party or by which any of
its assets or properties are bound or affected, except as would not,
individually or in the aggregate, prohibit UA from consummating the transactions
contemplated hereby.
(c) The execution and delivery of this Agreement by UA does not, and
the performance of this Agreement by UA will not, require any consent, approval,
authorization or other action by, or filing with or notification to, any
governmental authority or any other person except as would not individually or
in the aggregate, prohibit UA from consummating the transactions contemplated
hereby.
14.4 Representations and Warranties of Buy.com.
-----------------------------------------
(a) Buy.com is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all necessary
power and authority to enter into this Agreement, to carry out its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Buy.com, the performance by Buy.com of its
obligations hereunder and the consummation by Buy.com of the transactions
contemplated hereby have been duly authorized by all requisite action on the
part of Buy.com. This Agreement has been duly executed and delivered by Buy.com
and constitutes
30
<PAGE>
a legal, valid and binding obligation of Buy.com and enforceable against Buy.com
in accordance with its terms, subject as to the enforceability, to the effect of
any applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent
conveyance or similar laws affecting creditors rights generally and to the
effect of general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
(b) The execution, delivery and performance of this Agreement by
Buy.com does not and will not (i) violate or conflict with the Certificate of
Incorporation or Bylaws of Buy.com, (ii) conflict with or violate any law or
governmental order applicable to Buy.com, or (iii) result in any breach of, or
constitute a default, (or event which with the giving of notice or lapse of time
or both would become a default) under, or give to any person any rights of
termination, amendment, acceleration or cancellation of, result in the creation
of any lien on any of the assets or properties of Buy.com pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument relating to such assets or properties to
which Buy.com is a party or by which any of such assets or properties are bound
or affected, except as would not, individually or in the aggregate, prohibit
Buy.com from consummating the transactions contemplated hereby.
(c) The execution and delivery of this Agreement by Buy.com does not,
and the performance of this Agreement by Buy.com, will not, require any consent,
approval, authorization or other action by, or filing with or notification to,
any governmental authority or any other person except as would not individually
or in the aggregate, prohibit Buy.com from consummating the transactions
contemplated hereby.
SECTION 15
MISCELLANEOUS
-------------
15.1 Notices.
-------
All notices, requests, demands and other communications under this
Agreement must be in writing and will be deemed duly given, unless otherwise
expressly indicated to the contrary in this Agreement, (a) when personally
delivered, (b) three (3) Business Days after having been deposited in the United
States mail, certified or registered, return receipt requested, postage prepaid,
(c) one (1) Business Day after having been dispatched by a nationally recognized
overnight courier service, addressed to the parties or their permitted assigns
with an acknowledgment of receipt requested at the following addresses, or (d)
upon receipt of confirmation of a telephonic facsimile transmission:
(a) If to the Company, to the Company at the address set forth in
Section 1.4 hereof; and
(b) If to a Member, to the address set forth on Appendix A to this
----------
Agreement.
Any Person may from time to time specify a different address by written
notice to the Company.
31
<PAGE>
15.2 Binding Effect.
--------------
Except as otherwise provided in this Agreement, every covenant, term, and
provision of this Agreement will be binding upon and inure to the benefit of the
Members and their respective heirs, legatees, legal representatives, successors,
transferees and assigns.
15.3 Construction.
------------
Every covenant, term and provision of this Agreement will be construed
simply according to its fair meaning and not strictly for or against any Member.
15.4 Entire Agreement.
----------------
This Agreement, together with the Certificate, the Marketing and Services
Agreement, and, together with all exhibits, appendices and schedules to each
such document, as each of the foregoing may be amended in writing from time to
time (the "Organizational Documents"), contain the entire understanding among
the parties and supersedes any prior understandings and agreements among them
respecting the subject matter of this Agreement. Except as otherwise provided in
a written agreement between the Company and a person who has been granted an
option to acquire Units in consideration for services rendered to the Company or
an Affiliate of the Company, there are no representations, agreements,
arrangements or undertakings, oral or written, between or among the parties
hereto relating to the subject matter of this Agreement which are not fully
expressed in the Organizational Documents.
15.5 Headings.
--------
Section and other headings contained in this Agreement are for reference
purposes only and are not intended to describe, interpret, define or limit the
scope or extent of this Agreement or any provision hereof.
15.6 Severability.
------------
Every provision of this Agreement is intended to be severable. If any term
or provision hereof is invalid for any reason whatsoever, such illegality or
invalidity will not affect the validity or legality of the remainder of this
Agreement.
15.7 Incorporation by Reference.
--------------------------
Every appendix, exhibit, schedule, and other document attached to this
Agreement and referred to herein is hereby incorporated into this Agreement by
reference.
15.8 Further Action.
--------------
Each Member agrees to perform all further acts and execute, acknowledge,
and deliver any documents which may be reasonably necessary, appropriate, or
desirable to carry out the provisions of this Agreement.
32
<PAGE>
15.9 Variation of Pronouns.
---------------------
All pronouns and any variations will be deemed to refer to masculine,
feminine, or neuter, singular or plural, as the identity of the Person or
Persons may require.
15.10 Governing Law.
-------------
The laws of the State of Delaware will govern the validity of this
Agreement, the construction of its terms, and the interpretation of the rights
and duties of the Members.
15.11 Specific Performance.
--------------------
The parties acknowledge that it is impossible to measure, in money, the
damages that shall accrue to a party or to the personal representative of a
decedent from a failure of a party to perform any of the obligations under this
Agreement. Therefore, if any party or the personal representative or executor of
any party enters into any action or proceeding to enforce the provisions of this
Agreement, any Person (including the Company) against whom the action or
proceeding is brought waives the claim or defense that the moving party or
representative has or shall have an adequate remedy at law, and the Person shall
not urge in the action or proceeding the claim or defense that an adequate
remedy at law exists.
15.12 Counterpart Execution.
---------------------
This Agreement may be executed in any number of counterparts with the same
effect as if all of the Members had signed the same document. All counterparts
will be construed together and will constitute one agreement.
15.13 Confidentiality.
---------------
The Members and the Company will enter into a Confidentiality Agreement.
Use and disclosure of Confidential Information (as defined in such
Confidentiality Agreement) by the Members and the Company shall be governed by
the terms of such Confidentiality Agreement.
33
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Operating Agreement
of BuyTravel.com LLC as of the date first above written.
BUY.COM, INC. UNITED AIR LINES, INC.
By:________________________________ By:_________________________________
(Signature) (Signature)
___________________________________ ____________________________________
(Print Name) (Print Name)
Title:_____________________________ Title:______________________________
[SIGNATURE PAGE TO OPERATING AGREEMENT]
34
<PAGE>
LIST OF APPENDICES
APPENDIX A - Members' Names, Addresses, Capital Contributions And Percentage
Interests
APPENDIX B - Definitions
APPENDIX C - Tax Matters
APPENDIX D - Strategic Third Party List
35
<PAGE>
APPENDIX A
----------
MEMBERS' NAMES, ADDRESSES,
CAPITAL CONTRIBUTIONS AND PERCENTAGE INTERESTS
<TABLE>
<CAPTION>
Capital Contributions
Names and Addresses Made
of Members or to be Made* Number of Units Percentage Interest
- ------------------------ ---------------------- ---------------- -------------------
<S> <C> <C> <C>
BUY.COM, INC. $2,000,000 100 50%
21 Brookline
Aliso Viejo, CA 92656
Attn: Chief Financial
Officer and Senior General
Counsel
UNITED AIR LINES, INC. $2,000,000 100 50%
1200 E. Algonquin Road
Elk Grove, Illinois 60007
Attn: Senior Vice President,
Finance
-------------------- ----------------
$4,000,000 200 100%
==================== ================
</TABLE>
*Each of Buy.com and UA will make $1,000,000 of such contribution within thirty
days of the completion of the Preliminary Budget and Business Plan and make the
remaining $1,000,000 of such contribution on or before the date that is four
months from the date of this Agreement.
Appendix A-1
<PAGE>
APPENDIX B
----------
DEFINITIONS
"Act" means the Delaware Limited Liability Act, as it may be amended from
time to time.
"Additional Member" means any Person admitted as a Member pursuant to
Section 8 hereof.
"Affiliate" means, with respect to any Person: (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person;
(ii) any Person owning or controlling outstanding securities representing 15% or
more of the voting power with respect to matters generally voted upon by
shareholders of such Person; (iii) any officer, director, manager, trustee or
general partner of such Person; or (iv) any Person who is an officer, director,
manager, trustee or general partner or holder of 5% or more of the voting
securities of any Person described in clauses (i) through (ii).
"Agreement" means this Agreement, as originally executed and as amended
from time to time. Terms such as "hereof," "hereto," "hereby," "hereunder" and
"herein" refer to this Agreement as a whole, unless the context otherwise
requires.
"Appraisal Date" shall have the meaning ascribed to such term in Section
11.2.
"Board" means the Board of Managers of the Company.
"Bona Fide Acceptance" shall have the meaning ascribed to such term in
Section 8.6.
"Bona Fide Offer" shall have the meaning ascribed to such term in Section
8.6.
"Budget" means the annual budget approved by the Board pursuant to Section
6.3 as contemplated by Section 3.3.
"Business" means the marketing and selling of travel services and products
on the Internet, and any activities necessary, appropriate or incidental
thereto.
"Business Day" means any day that is not a Sunday, Saturday or any day on
which banks are required or authorized by law to be closed in the State of
California or Illinois.
"Business Plan" means the business plan for the Company as approved by the
Board pursuant to Section 6.3 as contemplated by Section 3.3.
"Buy.com" means Buy.com, Inc., a Delaware corporation.
"Capital Account" means, with respect to any Member, the account maintained
for such Member in accordance with the provisions of Appendix C.
----------
Appendix B-1
<PAGE>
"Capital Contributions" means, with respect to any Member, the amount of
money and the initial fair market value of any assets (other than money)
contributed to the Company with respect to the Interest held by such Person.
"Certificate" means the Certificate of Formation for the Company originally
filed with the Delaware Secretary of State and as amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time (or any corresponding provisions of succeeding law).
"Commencement Date" shall have the meaning ascribed to such term in the
first paragraph of this Agreement.
"Company" means BuyTravel.com LLC, a Delaware limited liability company, as
defined in Section 1.1 of this Agreement.
"Confidentiality Agreement" means that certain Confidentiality Agreement
dated of even date herewith by and among the Company, Buy.com and UA as
contemplated in Section 15.13.
"Deadlock Period" shall have the meaning ascribed to such term in Section
11.1.
"Dissolution Event" shall have the meaning ascribed to such term in Section
10.1.
"Fair Market Value" shall have the meaning ascribed to such term in Section
11.2.
"First Appraisal" shall have the meaning ascribed to such term in Section
11.2.
"First Appraiser" shall have the meaning ascribed to such term in Section
11.2.
"Fiscal Year" shall have the meaning ascribed to such term in Section 7.2.
"FMV Objection Notice" shall have the meaning ascribed to such term in
Section 11.2.
"Hosting Services Agreement" shall mean the agreement providing for the
provision of web-site hosting services anticipated to be entered into by and
between the Company and a third-party provider pursuant to Section 2.a of the
Marketing and Services Agreement.
"Initial Capital Contribution" shall have the meaning ascribed to such term
in Section 3.1.
"Interest" means a Member's entire ownership interest in the Company
represented by one or more Units, including any and all benefits to which the
holder of such an Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement.
Appendix B-2
<PAGE>
"Last Refusal Election Notice" shall have the meaning ascribed to such term
in Section 8.6.
"Last Refusal Notice" shall have the meaning ascribed to such term in
Section 8.6.
"Last Refusal Period" shall have the meaning ascribed to such term in
Section 8.6.
"Manager" means a member of the Board.
"Marketing & Services Agreement" means that certain Marketing & Services
Agreement of even date herewith entered into by and among, the Company, UA and
Buy.com.
"Member" means any Person who (i) is referred to as such in the first
paragraph of this Agreement or has become a Member pursuant to the terms of this
Agreement, and (ii) has not ceased to be a Member pursuant to the terms of this
Agreement. Solely for purposes of the allocation, distribution and transfer
provisions of Appendix C and Sections 4, 5, 8 and 10 of the Agreement (and any
----------
definitions relating thereto), a Member shall also include an assignee or
transferee of a Unit who has not been admitted to the Company as a Member.
"Members" means all such Persons.
"Offeree Member" shall have the meaning given in Section 8.6.
"Offeror Member" shall have the meaning given in Section 8.6.
"Participation Notice" shall have the meaning ascribed to such term in
Section 8.5.
"Percentage Interest" means, with respect to any Member, the amount,
expressed as a percentage, that the number of Units owned by such Member at any
given time as set forth in Appendix A hereto bears to the total number of Units
----------
owned by all Members as of such date.
"Permitted Affiliate" means with respect to any Member, any Person with
respect to which such Member owns or controls outstanding securities of such
Person representing 51% or more of the voting power with respect to matters
generally voted upon by shareholders of such Person.
"Permitted Transfer" shall have the meaning ascribed to such term in
Section 8.3.
"Person" means any individual, partnership, corporation, trust, limited
liability company, or other entity.
"Preliminary Budget and Business Plan" shall have the meaning ascribed to
such term in Section 3.3.
"Prospective Purchaser" shall have the meaning ascribed to such term in
Section 8.6.
"Put Notice" shall have the meaning ascribed to such term in Section 11.2.
Appendix B-3
<PAGE>
"Put Option" shall have the meaning ascribed to such term in Section 11.2.
"Regulations" shall mean the regulations of the U.S. Treasury Department
issued pursuant to the Code.
"Reserved Matters" shall have the meaning given in Section 6.3.
"Second Appraisal" shall have the meaning ascribed to such term in Section
11.2.
"Second Appraiser" shall have the meaning ascribed to such term in Section
11.2.
"Selling Member" shall have the meaning ascribed to such term in Section
8.5.
"Strategic Third Party" shall have the meaning ascribed to such term in
Section 8.3.
"Tag-Along Member" shall have the meaning ascribed to such term in Section
8.5.
"Tag-Along Notice" shall have the meaning ascribed to such term in Section
8.5.
"Target Capital Account" shall have the meaning ascribed to such term in
Appendix C.
- ----------
"Tax Contest" shall have the meaning ascribed to such term in Section 7.3.
"Tax Distribution Amount" shall have the meaning ascribed to such term in
Section 5.2.
"Tax Matters Partner" shall have the meaning ascribed to such term in
Section 7.3 and the Code and any comparable provision of state or local law.
"Third Appraisal" shall have the meaning ascribed to such term in Section
11.2.
"Third Appraiser" shall have the meaning ascribed to such term in Section
11.2.
"Transfer" (whether or not such term is capitalized) means, as a noun, any
voluntary or involuntary transfer, sale, pledge, hypothecation, assignment or
other disposition by a Member and, as a verb, voluntarily or involuntarily to
transfer, sell, pledge, hypothecate, assign or otherwise dispose of a Member's
Interest or Units.
"Transfer Closing Date" shall have the meaning given in Section 8.6.
"Unit" means a unit of ownership interest in the Company and shall
represent an undivided interest in the holder's Capital Account balance.
"UA" means United Air Lines, Inc., a Delaware corporation.
Appendix B-4
<PAGE>
APPENDIX C
----------
TAX MATTERS
1.1 Definitions. Capitalized terms not otherwise defined herein shall
-----------
have the meanings ascribed to them in Appendix B of the Agreement.
----------
1.2 Capital Accounts. There shall established on the books and records of
----------------
the Company a Capital Account for each Member. The initial balance of the
Capital Account for each Member shall be such Member's Initial Capital
Contribution. The Capital Account for each Member shall be increased by (i) the
amount of such Member's additional Capital Contributions (net of any liabilities
to which such additional Capital Contributions are subject), if any, and (ii)
allocations to such Member of income and gain (including income exempt from
tax). The Capital Account of each Member shall be decreased by (i) the dollar
amount of any cash distributions made to such Member, (ii) the fair market value
of any property distributed to such Member (net of any liabilities to which such
property is subject), and (iii) allocations to such Member of loss and deduction
(including expenditures not deductible in computing the Company's income or loss
for U.S. federal income tax purposes). The provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b) and, to the extent such provisions are
inconsistent with such Regulation, the Regulation shall control. In the event
that the Tax Matters Partner determines that it is prudent to modify the manner
in which Capital Accounts or any allocations under this Agreement are computed
in order to comply with Code Section 704(b) and the Regulations thereunder, the
Tax Matters Partner, in its sole discretion, shall make such modification,
provided that it is not likely to have a material effect on the amounts
distributable to any Person pursuant to Section 10 of the Agreement upon the
dissolution of the Company.
1.3 Tax Allocations. (a) Except as otherwise provided in this
---------------
Appendix C, items of income, gain, loss and deduction realized by the Company
- ----------
shall be allocated among the Members for U.S. federal, state, local and other
tax purposes in the same manner as set forth in Section 4.3 of the Agreement.
In the event that the allocations set forth in this Appendix C are disallowed by
----------
the Internal Revenue Service, such allocations shall be deemed to be amended to
the minimum extent necessary to conform with Section 704 of the Code, while
preserving the intent of the foregoing allocations to the maximum possible
extent.
(b) For purposes of this Appendix C, to the extent that a Member
----------
contributes to the Company property with a fair market value greater to or less
than the adjusted tax basis of such property, any items of income, gain, loss
and deduction with respect to such property shall be allocated among the Members
so as to take into account the variation between the adjusted tax basis and fair
market value of such property, consistent with Section 704(c) of the Code and
the Regulations thereunder. The Members agree to use the remedial method
described in Regulations Section 1.704-3(d) with respect to any Section 704(c)
allocations relating to the property contributed by any Member to the Company.
Appendix C-1
<PAGE>
(c) The Members are aware of the income and other tax consequences of
the allocations referred to in this Appendix C and hereby agree to be bound by
----------
the provisions of this Appendix C in reporting their shares of items of Company
----------
income, gain, loss and deduction for tax purposes.
1.4 Special Allocations. Notwithstanding any other provisions of this
-------------------
Appendix C, the following special allocations will be made in the following
- ----------
order:
(a) Minimum Gain Chargeback. Subject to the exceptions set forth in
-----------------------
Sections 1.704-2(f)(2),(3),(4) and (5) of the Regulations, if there is a net
decrease in Company Minimum Gain (which shall have the meaning ascribed to
"partnership minimum gain" in Section 1.704-2(b)(2) of the Regulations) during
any taxable year, each Member shall be specially allocated items of Company
income and gain for such year (and, if necessary, subsequent years) an amount
equal to such Member's share of the net decrease in Company Minimum Gain,
determined in accordance with Section 1.704-2(g) of the Regulations.
Allocations pursuant to the previous sentence will be made in proportion to the
respective amounts required to be allocated to each Member pursuant thereto.
The items to be so allocated will be determined in accordance with Section
1.704-2(f) of the Regulations. This Section 1.3(a) is intended to comply with
the minimum gain chargeback requirement in such Section of the Regulations and
shall be interpreted consistently therewith.
(b) Member Minimum Gain Chargeback. Subject to the exception in
------------------------------
Section 1.704-2(i)(4) of the Regulations, if there is a net decrease in Member
Minimum Gain (which shall have the meaning ascribed to "partner nonrecourse debt
minimum gain" in Section 1.704-2(i)(2) of the Regulations) attributable to
Member Nonrecourse Debt (which shall have the meaning ascribed to "partner
recourse debt" in Section 1.704-2(b)(4) of the Regulations) during any Company
taxable year, each Member who has a share of the Member Minimum Gain
attributable to such Member Nonrecourse Debt shall be specially allocated items
of Company income and gain for such year (and, if necessary, subsequent years)
in an amount equal to such Member's share of the net decrease in Partner Minimum
Gain attributable to such Partner Nonrecourse Debt, determined in accordance
with Sections 1.704-2(i)(4) of the Regulations. Allocations pursuant to the
previous sentence will be made in proportion to the respective amounts required
to be allocated to each Member pursuant thereto. The items to be so allocated
will be determined in accordance with Section 1.704-2(i)(4) of the Regulations.
This Section 1.3(b) is intended to comply with the partnership minimum gain
chargeback requirement in such Section of the Regulations and shall be
interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Member unexpectedly
-----------------------
receives any adjustments, allocations or distributions described in Section
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of
the Regulations, items of Company income and gain will be specially allocated to
each such Member in an amount and manner sufficient to eliminate, to the extent
required by the Regulations promulgated under Section 704(b) of the Code, the
deficit balance, if any, in such Member's Adjusted Capital Account (as defined
below) as quickly as possible; provided, that an allocation pursuant to this
Section 1.4(c) shall be made only if and to the extent that such Member would
have a deficit balance in its Adjusted Capital
Appendix C-2
<PAGE>
Account after all other allocations provided for in this Appendix C have been
----------
tentatively made as if this Section 1.4(c) were not in this Appendix C. For
----------
purposes of this Section 1.4 (c) Adjusted Capital Account means, with respect to
any Member, the balance in such Member's Capital Account as of the end of the
relevant taxable year, after giving effect to the following adjustments: (i)
crediting to such Capital Account any amounts which such Member is deemed to be
obligated to restore pursuant to the penultimate sentences of Sections 1.704-
2(g)(1) and 1.704-2(i)(5) of the Regulations; and (ii) debiting to such Capital
Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. The foregoing
definition of Adjusted Capital Account is intended to comply with the provisions
of Section 1.704-1(b)(2)(ii)(d) of the Regulations and will be interpreted
consistently therewith.
(d) Nonrecourse Deductions. Nonrecourse Deductions (as defined in
----------------------
Section 1.704-2(b)(1) of the Regulations) for any taxable year or other period
shall be allocated between the Members in accordance with their Percentage
Interests. If the Tax Matters Partner determines in its good faith discretion
that the Nonrecourse Deductions must be allocated in a different ratio to
satisfy the safe harbor requirements of the Regulations promulgated under
Section 704(b) of the code, the Tax Matters Partner is authorized to revise the
prescribed ratio to the numerically closest ratio that satisfies such
requirements.
(e) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions
-----------------------------
(which shall have the meaning ascribed to "partner nonrecourse deductions" in
Section 1.704-2(i)(1) of the Regulations) for any taxable year or other period
shall be specially allocated to the Member who bears the Economic Risk of Loss
(as defined in Section 1.752-2 of the Regulations) with respect to the Member
Nonrecourse Debt (which shall have the meaning ascribed to "partner non-recourse
debt" in Section 1.704-2(b)(4) of the Regulations) to which such Member
Nonrecourse Deductions are attributable in accordance with Section 1.704-2(i) of
the Regulations. If more than one Member bears the Economic Risk of Loss with
respect to a Member Nonrecourse Debt, such Member Nonrecourse Deductions
attributable thereto shall be allocated between or among such Members in
accordance with the ratios in which they share such Economic Risk of Loss.
(f) Section 754 Adjustments. To the extent an adjustment to the
-----------------------
adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Section 1.704-1(b)(2)(iv)(m) of the
Regulations, to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts will be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis) and such gain or loss will be specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
(g) Loss Limitation. To the extent that any loss or deduction
---------------
otherwise allocable to a Member hereunder would cause such Member (a "Restricted
Member") to have a deficit balance in its Adjusted Capital Account as of the end
of the taxable year to which such loss or deduction relates, such loss or
deduction shall not be allocated to such Restricted Member
Appendix C-3
<PAGE>
and instead shall be allocated to the other Member(s) pro rata in accordance
with their relative Percentage Interests.
1.5 Manner of Making Special Allocations. The allocations set forth in
------------------------------------
Section 1.4 (the "Regulatory Allocations") are intended to comply with certain
requirements of the Regulations. It is the intent of the Members that, to the
extent possible, all Regulatory Allocations shall be offset either with other
Regulatory Allocations or with special allocations of other items of Company
income, gain, loss or deduction pursuant to this Section 1.5. Therefore,
notwithstanding any other provision of Appendix C (other than the Regulatory
----------
Allocations), the Tax Matters Partner shall make such offsetting special
allocations of Company income, gain, loss or deduction in whatever manner it
determines appropriate so that, after such offsetting allocations are made, each
Member's Capital Account balance is, to the extent possible, equal to the
Capital Account balance such Member would have had if the Regulatory Allocations
were not part of this Agreement and all Company items were allocated pursuant to
Section 4.3 of the Agreement. In exercising its discretion under this Section
1.5, the Tax Matters Partner shall take into account future Regulatory
Allocations under Sections 1.4(a) and (b) that, although not yet made, are
likely to offset other Regulatory Allocations previously made under Sections
1.4(d) and (e).
1.6 Special Allocations in the Event of Section 482 Adjustments. The
-----------------------------------------------------------
following special allocations shall be made in the following order:
(a) If for any taxable period of the Company, Company is deemed to
have income for tax purposes as a result of a redetermination by a tax authority
of an item of income resulting from the Company's provision of services, or its
grant of a license or sublicense to its intangible property to any Member (or
any Affiliate of any Member), such income shall be allocated to the Member that
received such service, license or sublicense (or the Member whose Affiliate
received such service, license or sublicense) and any related deemed cash
distribution shall be treated as having been made to the same Member.
(b) If for any taxable period of the Company, Company is deemed to
have a reduction in income for tax purposes as a result of a redetermination by
a tax authority of an item of income resulting from the Company's provision of
services, or its grant of a license or sublicense to its intangible property to
any Member (or any Affiliate of any Member), such reduction in income shall be
allocated to the Member that received such service, license or sublicense (or
the Member whose Affiliate received such service, license or sublicense) and any
related deemed cash contribution shall be treated as having been made by the
same Member.
(c) If for any taxable period of a Member, such Member is deemed to
have income for tax purposes as a result of a redetermination by a tax authority
of an item of income resulting from the Member's provision of services, or its
grant of a license or sublicense to its intangible property to the Company, any
Company deduction associated with such redetermination of income shall be
allocated to the Member that provided such service, license or sublicense (or
the Member whose Affiliate received such service, license or sublicense) and any
related deemed cash contribution shall be treated as having been made by the
same Member.
Appendix C-4
<PAGE>
(d) If for any taxable period of a Member, such Member is deemed to
have a reduction in income for tax purposes as a result of a redetermination by
a tax authority of an item of income resulting from the Member's provision of
services, or its grant of a license or sublicense to its intangible property to
the Company, any reduction of a Company deduction shall be allocated to the
Member that performed such service, license or sublicense and any related deemed
cash distribution shall be treated as having been made to the same Member.
1.7 Book-Ups.
--------
(a) The Tax Matters Partner may adjust the adjusted basis as computed
for book purposes (the "book value"), of all of the Company's assets to equal
their respective gross fair market values in accordance with Section 1.704-
1(b)(2)(iv)(f) of the Regulations; provided, however, that if any such
-------- -------
adjustments to the book value of the Company assets are made (i) the Capital
Accounts of the Members shall be adjusted in accordance with Section 1.704-
1(b)(2)(iv)(g) of the Regulations and (ii) the Members' distributive shares of
depreciation, depletion, amortization and gain or loss, as computed for tax
purposes, with respect to such property shall be determined in accordance with
Section 1.704-1(b)(2)(iv)(f) of the Regulations.
(b) The book value of the Company assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis for federal income
tax purposes of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Section l.704-l(b)(2)(iv)(m) of the
Regulations;provided, however, that book value of the Company assets shall not
------------------
be adjusted pursuant to this Section 1.7(b) to the extent the Tax Matters
Partner determines that an adjustment pursuant to Section 1.7(a) above is
necessary or appropriate in connection with a transaction that would otherwise
result in an adjustment pursuant to this Section 1.7(b).
1.8 Allocations Upon Transfer. If during any period a Member transfers
-------------------------
all or any portion of its interest in the Company to another Person, items of
income, gain, loss and deduction attributable to such transferred interest for
such Fiscal Year, shall be allocated between the transferor and the transferee
in accordance with their respective Percentage Interests during the period using
any method permitted by Section 706 of the Code and selected by the Tax Matters
Partner, except that any gain or loss arising out of the sale or other
------
disposition of property occurring outside the ordinary course of the Company's
trade or business or any other item of material income or expense that arises
outside of the normal course of the Company's trade or business shall (unless
otherwise required by the Code and the underlying Regulations) be allocated to
the transferor only if occurring prior to the date of the transfer, and to the
transferee only if occurring after the date of the transfer.
Appendix C-5
<PAGE>
APPENDIX D
----------
STRATEGIC THIRD PARTY LIST
Lufthansa
Varig
Air Canada
SAS
Air New Zealand
Ansett Australia
Thai Airways
All Nippon Airways
Singapore Airlines
Mexicana
Delta Air Lines
Continental Airlines
Northwest Airlines
US Airways
America OnLine
Yahoo!
@home
General Electric
USA Networks
Appendix F-1
<PAGE>
Exhibit 10.19
MARKETING & SERVICES AGREEMENT
------------------------------
THIS MARKETING & SERVICES AGREEMENT ("Agreement") is made and entered
into as of July 19, 1999 ("Effective Date") by and among United Air Lines, Inc.
("UA"), a Delaware corporation with offices located at 1200 E. Algonquin Road,
Elk Grove, Illinois 60007, Buy.com, Inc. ("Buy.com"), a Delaware corporation
with offices located at 21 Brookline, Aliso Viejo, California 92656, and
BuyTravel.com LLC ("BuyTravel.com"), a Delaware limited liability company with
offices located at Aliso Viejo, California 92656 (UA, Buy.com and Buy Travel.com
collectively, the "Parties").
WHEREAS, UA and Buy.com are creating BuyTravel.com for the purpose of
marketing and selling airline tickets and other travel and travel-related
products and services over the World Wide Web;
WHEREAS, UA and Buy.com agree that each of them shall undertake
certain advertising and other marketing activities on behalf of BuyTravel.com,
as well as provide or make available to BuyTravel.com certain services and
functionality;
NOW THEREFORE, in consideration of the mutual and dependent promises
hereinafter set forth, the Parties, intending to be legally bound, hereby agree
as follows:
1. DEFINITIONS AND RULES OF INTERPRETATION.
---------------------------------------
1. "Affiliate" means with respect to any Party: (i) any individual,
partnership, corporation trust, limited liability company or other
entity (a "Person") directly or indirectly controlling, controlled by
------
or under common control with such Party; (ii) any Person owning or
controlling outstanding securities representing 15% or more of the
voting power with respect to matters generally voted upon by
shareholders of such Party; (iii) any officer, director, manager,
trustee or general partner of such Party; or (iv) any Person who is
an officer, director, manager, trustee or general partner or holder of
5% or more of the voting securities of any Person described in clauses
(i) through (ii).
2. "Buy.com Related Entities" means Related Entities of Buy.com.
<PAGE>
3. "Buy.com Service" means an electronic commerce retail shopping service
provided by Buy.com through its Web site. As of the Effective Date,
such services include the following "stores": "BUYCOMP.COM,"
"BUYSOFT.COM,""BUYGAMES.COM," "BUYMUSIC.COM," "BUYSURPLUS.COM" and
"BUYBOOKS.COM."
4. "BuyTravel.com Data" means any and all data, information and content
(but not the look, feel or presentation) of such content, in whatever
media type or form, provided to, or generated or obtained by,
BuyTravel.com, or on its behalf by either Party or any other entity.
BuyTravel.com Data does not include Travel Vendor Data, but does
include Site Customer Data.
5. "Closing" means the closing of the formation of BuyTravel.com and the
execution and delivery of this Agreement, and the Operating Agreement
for BuyTravel.com.
6. "Customer Service Support" means customer service support related
directly to travel reservations, including such support for product or
service inquiries, bookings and ticketing of travel services. Such
Customer Service Support may be provided by toll-free telephone
support, e-mail or other commercially reasonable means.
7. "Damages" means all losses, awards, causes of action, claims,
obligations, demands, assessments, fines and penalties (civil or
criminal), liabilities, expenses and costs (including litigation costs
and reasonable attorneys' fees), bodily or other personal injuries,
damage to tangible property, and any other damages, of any kind or
nature actually suffered by an entity.
8. "Intellectual Property" means all patents and patent applications;
trademarks, service marks, and trademark or service mark registrations
and applications, trade names, Internet domain names, logos, designs,
slogans, and general intangibles of like nature, together with all
goodwill related to the foregoing; copyrights, copyright
registrations, renewals and applications for copyrights; software,
technology, trade secrets and other confidential information, know-
how, proprietary processes, formulae, algorithms, models and
methodologies, rights of privacy and publicity, and license agreements
relating to any of the foregoing.
<PAGE>
9. "Related Entities" means, with respect to any entity, that entity's
Affiliates, and that entity and its Affiliates' respective directors,
officers, employees and agents.
10. "Site Customer Data" means any and all data, information and content
(but not the look, feel or presentation of such content) concerning
any customers, potential customers or Web site visitors of
BuyTravel.com, including any and all information relating to
customers, potential customers or visitors to any Web sites operated
by or on behalf of BuyTravel.com, or users of BuyTravel.com services
through any other channels, such as wireless or other services. Site
Customer Data does not include Travel Vendor Data.
11. "Site URL" means the uniform resource locator(s) for BuyTravel.com,
including "www.buytravel.com."
12. "Travel Vendor" means a provider of travel services, such as an
airline, automobile rental company or hotel chain.
13. "Travel Vendor Business" means a Travel Vendor's products and
services, and its customers' and potential customers' use of that
Travel Vendor's products and services.
14. "Travel Vendor Data" means, with respect to a Travel Vendor, any and
all data, information and content, in whatever media form or type,
relating to its Travel Vendor Business, including all data,
information and content provided to, generated or obtained by, or on
behalf of, BuyTravel.com relating to that Travel Vendor or in
connection with fulfilling BuyTravel.com's obligations that relate to
that Travel Vendor. Such Travel Vendor Data includes information
included in, or relating to, PNRs, SIRs, TCNs, bookings, ticketing,
rates, fares, fare rules, classes of service, seat availability,
inventory, scheduling, travel-related documents (such as boarding
passes, baggage tags, itineraries, receipts and manifests), in-flight
and in-flight status information, seat maps and assignments, and
information relating to or generated under that Travel Vendor's
frequent flier and other programs and services. Travel Vendor Data
also includes any and all data, information and content derived from
or based on any of the foregoing.
15. "UA-Related Entities" means Related Entities of UA.
<PAGE>
16. Rules of Interpretation. This Agreement is the result of the Parties'
-----------------------
negotiations, and no provision of this Agreement shall be construed
for or against either Party because of the authorship of that
provision. As used in this Agreement:
1. Neutral pronouns and any variations thereof shall be deemed
to include the feminine and masculine and all terms used in
the singular shall be deemed to include the plural, and vice
versa, as the context may require;
2. The word "or" has the inclusive meaning "and/or";
3. The words "hereto," "this Agreement" and words of similar
import refer to this Agreement as a whole, including any
attachments to this Agreement, as the same may from time to
time be amended or supplemented and not any subdivision
contained in this Agreement;
4. The words "including" and "such as" when used herein are not
intended to be exclusive and in all cases mean "including
without limitation and such as, by way of example but
without limitation," respectively; and
5. Captions or headings are only for reference and are not to
be considered in interpreting this Agreement.
2. UA-PROVIDED RESOURCES.
---------------------
1. Hosting of BuyTravel.com Web Site. UA will be responsible for
---------------------------------
actively working with BuyTravel.com to negotiate a web-site hosting
services agreement between BuyTravel.com and a web-site hosting
services company, which agreement is anticipated to provide for
services and service levels as set forth in Schedule A hereto. In the
event the Board of Managers of BuyTravel.com (the "Board") determines
to discontinue using the services of the chosen hosting services
provider, UA and BuyTravel.com will actively work together in
selecting and negotiating an arrangement with another hosting services
provider.
2. Selection of CRS Service Provider. Notwithstanding any other
---------------------------------
provision of this Agreement, UA shall have sole discretion in the
selection of a CRS service provider, or service providers, to support
BuyTravel.com. UA will select a CSR
<PAGE>
provider from the full service CRS list attached as Schedule B hereto
(the "CRS List") and can make any changes to the selection as long as
the successor provider is on the CRS List. If any new CRS providers
emerge, UA may select one of these providers as long as it meets
mutually accepted criteria (i.e., full service, unbiased, display
provider).
3. Customer Service. UA will be responsible for actively working with
----------------
BuyTravel.com to negotiate a customer service agreement between
BuyTravel.com and a customer service provider. In the event the Board
determines to discontinue using the services of the chosen customer
service provider, UA and BuyTravel.com will work together in selecting
and negotiating an agreement with another customer service provider.
4. Fares. UA will throughout the term make available to BuyTravel.com
-----
all travel fares on UA operated flight segments, including without
limitation standard published fares and E-Fares_, that are generally
available to the public through a CRS or through public Internet
sites.
5. Responsibility for Third Parties. Under no circumstances will UA be
--------------------------------
liable or otherwise responsible for any actions of any third party
service providers to BuyTravel.com, including any Web site hosting
service provider(s), and customer service support providers.
3. BUY.COM PROVIDED RESOURCES.
--------------------------
1. Marketing, Advertising Sales, & E-Commerce Expertise. Buy.com shall
----------------------------------------------------
provide BuyTravel.com with the following:
1. Marketing support, including access to Buy.com's marketing
professionals, as well as consulting services and access to
any technology or expertise used by or available to Buy.com
for creating, implementing, managing or otherwise supporting
marketing and related activities.
2. Advertising sales support, including for the BuyTravel.com
Web site and any other sites or services operated by or on
behalf of BuyTravel.com, other than advertising sales
support directed at Travel Vendors, which shall be the
responsibility of BuyTravel.com employees. Such support
<PAGE>
shall include consulting services and access to any
technology or expertise used by or available to Buy.com for
creating, implementing, managing or otherwise supporting
advertising and related activities.
3. Electronic commerce support, including consulting services
and access to any technology or expertise used by or
available to Buy.com for creating, implementing, managing or
otherwise supporting electronic commerce business processes
and functionality.
2. Credit Card Processing. Buy.com shall provide, or cause to be
----------------------
provided, credit card processing functionality to BuyTravel.com, and
all such ancillary functionality and services that are typically
associated with such credit card processing functionality, through
Buy.com's arrangements and relationships with credit card service
providers.
3. BuyTravel.com Storefront Placement & Support.
--------------------------------------------
1. Buy.com shall provide BuyTravel.com with prominent
storefront space on the Buy.com home page ("BuyTravel.com
Storefront"). The BuyTravel.com Storefront space shall be
(i) no smaller in actual size than the storefront space
afforded any other Buy.com Service, and (ii) no less
prominent than any other Buy.com Service's storefront;
provided, that this determination shall be made over a
rolling six (6) month period as described in the following
sentence. BuyTravel.com and UA acknowledge and agree that
Buy.com shall have the right to maintain the flexibility to
rotate the size, placement and prominence of the various
storefronts in connection with marketing and promotional
activities for the various storefronts so long as
BuyTravel.com receives comparable treatment with respect to
clauses (i) and (ii) above over any rolling six (6) month
period.
2. Buy.com shall make available to BuyTravel.com all
functionality, features, connectivity and services it makes
available to or through any other Buy.com Services, which
are appropriate for BuyTravel.com and for which it is not
prohibited from providing to BuyTravel.com. Buy.com and UA
agree and acknowledge that BuyTravel.com is intended to
present to the BuyTravel.com end user an interface and user
environment with the
<PAGE>
same general look, feel, functionality and performance
comparable to the other Buy.com Services.
3. Buy.com agrees that BuyTravel.com shall have control over
the content and organization of the BuyTravel.com
Storefront, except that BuyTravel.com will, subject to
reasonable notice and time to comply, comply with reasonable
requests of Buy.com with respect to the BuyTravel.com
Storefront to the extent such requests relate to maintaining
a consistent "look and feel" to the various storefronts on
the Buy.com home page or to the extent such requests relate
to removing or altering content that violates or allegedly
violates any third party rights or applicable law.
BuyTravel.com shall be responsible for obtaining any
licenses, releases, waivers or other documentation
perfecting the right to use any content placed on or within
the BuyTravel.com Web site, and BuyTravel.com shall be
responsible for confirming the factual accuracy and
compliance with all applicable law with respect to any
content placed on or within the BuyTravel.com Web site.
Buy.com shall obtain, at Buy.com's cost, all right, title
and interest in and to the URL name "BuyTravel.com" and
shall grant a license to BuyTravel.com use such name, and
associated trademarks, pursuant to the terms of Section 11b
below.
4. Consistent with the requirements of sections 3.d(i),
3.d(ii), and 3.d (iii) hereof, and with the consent of
Buy.com, which shall not be unreasonably withheld, Buy.com
shall provide and maintain all links necessary, as
determined by BuyTravel.com, from the Buy.com Web site to
BuyTravel.com, its support infrastructure providers, and
business partner Web sites.
4. EMPLOYEES. Upon mutual agreement of Buy.com and UA, all individuals working
---------
for BuyTravel.com shall be employees of either Buy.com or UA who are
seconded to BuyTravel.com pursuant to an Employee Secondment Agreement
between the seconding entity and BuyTravel.com in a form and at a
compensation level approved by the Board of Managers of BuyTravel.com.
Neither of Buy.com nor UA will have any liability for any actions or
omissions of employees seconded to BuyTravel.com, and BuyTravel.com shall
indemnify and hold harmless Buy.com and the Buy.com Related Entities, or UA
and the UA Related Entities, as applicable, from and against any and all
Damages arising
<PAGE>
from such actions or omissions. BuyTravel.com will only be charged the
costs approved by the Board of Managers of BuyTravel.com.
5. PARTIES' CONTROL OF PROVIDED RESOURCES. Each Party shall have sole control
--------------------------------------
over the manner in which it provides the resources and other support it is
obligated to provide to BuyTravel.com under this Agreement, except as
expressly set forth otherwise or as otherwise agreed by the Parties, or a
Party and BuyTravel.com, in writing.
6. BUYTRAVEL.COM ADVERTISING & MARKETING SUPPORT.
---------------------------------------------
1. UA Advertising Support. UA agrees to incur on behalf of BuyTravel,
----------------------
without reimbursement, costs and expenses relating to advertising,
including co-branded advertising, and other marketing support to
BuyTravel.com with a gross value totaling US$18,000,000 over the first
three (3) years after the Effective Date ("UA Advertising
Commitment"). During this three-year period, and in satisfaction of
part of the UA Advertising Commitment, UA will spend at least
$100,000 per month, averaged over six (6) month rolling periods, on
advertising and other marketing expenditures on the Buy.com Web site.
The UA Advertising Commitment may be, but is not required to be, in
incremental, new expenditures on advertising and other marketing
efforts. Such UA Advertising Commitment expenditures may also be in
the form of expenditures on advertising and other marketing efforts
through UA channels (such as advertising in Hemispheres or on UA
ticket envelopes) or through bartering and other arrangements with
third parties, in which case the fair market value of such advertising
or other marketing effort will be credited toward the UA Advertising
Commitment. In all instances, however, such activity must clearly
emphasize BuyTravel.com as a substantial element of such activity to
qualify as part of the UA Advertising Commitment.
2. Buy.com Advertising Support. Buy.com agrees to incur on behalf of
---------------------------
BuyTravel.com, without reimbursement, costs and expenses related to
co-branded advertising and other marketing support to BuyTravel.com
with a gross value totaling US$18,000,000 over the first three (3)
years after the Effective Date ("Buy.com Advertising Commitment"). The
Buy.com Advertising Commitment may be, but is not required to be, in
the form of incremental, new expenditures on advertising and other
marketing efforts. Such UA Advertising Commitment expenditures may
also be in the form of expenditures on advertising and other marketing
efforts through bartering and other arrangements with third parties,
in
<PAGE>
which case the fair market value of such advertising or other
marketing effort will be credited toward the UA Advertising
Commitment. In all instances, however, such activity must clearly
emphasize BuyTravel.com as a substantial element of such activity to
qualify as part of the Buy.com Advertising Commitment.
3. Supplier and BuyTravel.com Relations. UA will use commercially
------------------------------------
reasonable efforts to assist BuyTravel.com in marketing to other
airlines to obtain their participation in providing E-Fares products
through BuyTravel.com and to obtain their advertising and promotional
support of BuyTravel.com. UA will appoint an individual who will have
as a responsibility the pursuit of beneficial business relationships
between BuyTravel.com and Travel Vendors. For a period of not less
than the time from the date of this Agreement until the general market
launch of the BuyTravel.com web site, each of Buy.com and UA will
appoint an individual who will each have as their primary
responsibility the role of primary contact between them and between
each of them and BuyTravel.com to address and support issues related
to BuyTravel.com and to foster support of BuyTravel.com within their
respective organizations.
4. Advertising & Publicity. Neither Party, nor anyone on such Party's
-----------------------
behalf, shall publish, distribute or otherwise disseminate any press
release, advertising or publicity matter having any reference to the
other Party or to BuyTravel.com, unless and until such matter shall
have first been submitted to and approved in writing by the other
Party.
5. Co-Branded Advertising Criteria. The value to BuyTravel.com of any co-
-------------------------------
branded advertising efforts will be based upon the percentage of the
advertising space or time dedicated to BuyTravel.com multiplied by the
total cost of the advertisement, as determined in accordance with
standard advertising criteria used in co-branded advertising. Both
Parties agree to develop marketing and advertising plans with a
reasonably diverse mix of media consistent with the object of the
marketing or advertising message.
<PAGE>
7. RESTRICTIONS & LIMITATION ON THE OTHER ACTIVITIES.
-------------------------------------------------
1. Restriction on Buy.com Activities. Buy.com agrees and acknowledges
---------------------------------
that it shall not, directly or indirectly, provide, or have any
ownership interest in or otherwise support any entity which provides,
any travel services other than BuyTravel.com during the term of this
Agreement; provided, however, that notwithtstanding the foregoing,
-------- -------
BuyTravel.com may continue existing business relationships with, or
enter into new business relationships with, an entity which, as part
of its business, provides travel services, as long as Buy.com does not
support or participate in any travel services provided by such
entities.
2. Freedom of Action. Notwithstanding any other provision of this
-----------------
Agreement, other than as set forth in Sections 6.d or 7.a above, no
provision of this Agreement shall be construed as limiting or
restricting in any way either Party from undertaking or supporting any
other business activity, whether internal Party activity or third
party activity, in pursuit of its business interests and objectives.
By way of example, but without limitation:
1. Neither Party is in any way restricted from advertising,
marketing or otherwise marketing and promoting its products and
services, or those of any other party, even if in competition
with BuyTravel.com, including by entering into linking, framing,
co-branding, co-marketing or other partnering, alliance or joint
venture agreements with any third parties, except as set forth in
Sections 6.d and 7.a of this Agreement;
2. UA shall not be limited or restricted in any way with respect to
the setting of any prices for UA products and services.
8. CHARGES.
-------
1. Charges to BuyTravel.com. Unless expressly provided otherwise by the
------------------------
Parties, all services and materials provided to BuyTravel.com by UA or
Buy.com shall be provided on a fully allocated cost basis. Any
Intellectual Property licensed by either Party to BuyTravel.com shall
be licensed on a no fee, no royalty basis, except for such third party
license fees and other costs payable to third parties in connection
with the use of such Intellectual Property by or for the benefit of
BuyTravel.com.
<PAGE>
2. Transaction Fee. BuyTravel.com will charge the Travel Provider or
---------------
travel consumer a transaction fee plus credit card processing fees.
This transaction fee may be scaled based on the amount of the ticket
or the type of fare, such as, by way of example but without
limitation, standard published fares versus Internet-only fares.
9. TRANSPORTATION RELATIONSHIP.
---------------------------
1. UA as Preferred Airline. Buy.com and BuyTravel.com will enter into a
-----------------------
transportation agreement within sixty (60) business days of the
Effective Date with UA whereby UA will be the number one preferred
airline of Buy.com and BuyTravel.com for all business travel by their
employees.
2. Buy.com Corporate Incentive Program. UA will review a corporate
-----------------------------------
incentive program for use by Buy.com employees for business travel
that is comparable, in terms of the incentive and terms and
conditions, to competitive incentive plans offered by UA to entities
of similar size, market position, and travel expenditures as Buy.com.
3. "Mileage Plus Premier Executive Status". UA will provide "Mileage Plus
---------------------------------------
Premier Executive Status" for two Buy.com executives designated by
Buy.com.
10. COMPUTER EQUIPMENT RELATIONSHIP. UA will introduce Buy.com to its
-------------------------------
purchasing department(s) representatives in an effort to include Buy.com as
a potential supplier of computer equipment or other selected products to UA
and its Affiliates in UA's competitive procurement efforts.
11. INTELLECTUAL PROPERTY.
---------------------
1. Licensed Intellectual Property. Unless otherwise expressly provided
------------------------------
herein or otherwise agreed by the Parties, each Party and its
licensors shall retain all right, title and interest, throughout the
world, in and to all Intellectual Property licensed to BuyTravel.com
or used on behalf of BuyTravel.com, and the other Party is granted no
right, title or interest in or to such other Party's Intellectual
Property under this Agreement.
<PAGE>
2. License of BuyTravel.com Domain Name and Mark. Buy.com hereby grants
---------------------------------------------
to BuyTravel.com the exclusive, worldwide, royalty-free
nontransferable right and license, during the term of this Agreement,
to use the "BUYTRAVEL.COM" ("Mark") and the domain name
"buytravel.com" (the "Domain Name"), with rights to sublicense, and
all rights that may arise under (x) all trademark registrations
applications for the Mark throughout the world, including, without
limitation, any U.S. trademark applications for "BUYTRAVEL.COM," and
(y) the domain name registration for the Domain Name. BuyTravel.com
hereby agrees to use reasonable efforts to ensure that the content,
appearance and functionality of the BuyTravel.com Web site will be of
a quality that is substantially consistent with or better than the Web
sites of Buy.com that include "BUY" in the second level domain name,
such as the Web sites BuyMusic.com and BuyBooks.com. Such license
shall terminate at such time as BuyTravel.com is no longer engaged in
the provision of travel services as a going concern.
3. BuyTravel.com Intellectual Property. Unless otherwise expressly
-----------------------------------
provided herein or otherwise agreed by the Parties, BuyTravel.com
shall retain all right, title and interest, throughout the world, in
and to all Intellectual Property developed by BuyTravel.com, and
neither UA nor Buy.com will have any right, title or interest in or to
such Intellectual Property developed by BuyTravel.com. Notwithstanding
the foregoing, at such time is BuyTravel.com is dissolved pursuant to
the Operating Agreement or is otherwise no longer engaged in the
provision of travel services as a going concern (the "Dissolution
Date"), each of Buy.com and UA will have joint ownership of any
Intellectual Property developed by BuyTravel.com prior to the
Dissolution Date ("BuyTravel.com Developed IP), and shall have (I) all
rights to exploit such BuyTravel.com Developed IP without rights of
accounting or reporting to the other owning Party, provided that
neither UA nor Buy.com may grant any right, title or interest in or to
any BuyTravel.com Developed IP to a direct competitor of the other
party of that BuyTravel.com Developed IP for a period of twelve (12)
months from the Dissolution Date, and (II) all rights to bring suit
for any infringement, misappropriation or other violation of the
BuyTravel.com Developed IP without the consent or joinder of the other
owning Party, except as may be required by law (in which case the
other owning Party shall provide reasonable cooperation with such
suit).
4. Jointly-Developed Intellectual Property.
---------------------------------------
<PAGE>
1. Buy.com, BuyTravel.com and UA agree that any Intellectual
Property developed jointly by any or all of the Parties ("Jointly
Developed IP") shall be owned jointly by the Parties that develop
such Jointly Developed IP. In the absence of an express agreement
to the contrary, each Party making a substantial contribution to
the Jointly Developed IP shall have an equal, undivided interest
in and to such Jointly Developed IP. Any Party that does not make
such a contribution to the development of Jointly Developed IP
shall have no right, title or interest whatsoever in or to such
Jointly Developed IP, except as may be expressly agreed to in
writing by the Parties owning the Jointly Developed IP.
2. Except as otherwise provided, each Party owning any Jointly
Developed IP shall have (I) all rights to exploit such Jointly
Developed IP without rights of accounting or reporting to the
other owning Parties, provided that no Party may grant any right,
title or interest in or to any Jointly Developed IP to a direct
competitor of another owning Party of that Jointly Developed IP
for a period of twelve (12) months from the first commercial use
of that Jointly Developed IP, and (II) all rights to bring suit
for any infringement, misappropriation or other violation of the
Jointly Owned IP without the consent or joinder of the other
owning Parties, except as may be required by law (in which case
the other owning Party or Parties shall provide reasonable
cooperation with such suit).
12. DATA RIGHTS.
-----------
1. Travel Vendor Data.
------------------
1. Buy.com and UA agree and acknowledge that, as among Buy.com, UA,
BuyTravel.com and the Travel Vendors of BuyTravel.com, each such
Travel Vendor (including UA, in its capacity as a Travel Vendor)
shall have exclusive ownership, throughout the world, of all
right, title and interest in and to all Travel Vendor Data
related to flight segments flown by, or products and services
provided by, or otherwise directly related to, that Travel
Vendor. Information that is within the scope of the Travel Vendor
Data definition, but which relates to flight segments or products
and services of multiple Travel Vendors, or otherwise relates to
multiple Travel Vendors, shall be jointly owned by such Travel
Vendors.
<PAGE>
2. BuyTravel.com shall take all reasonable measures to protect Travel Vendor
Data from access by, or beneficial use for:
(1) any Travel Vendor (including UA, in its capacity as a Travel Vendor)
or its Related Entities, other than by or for each Travel Vendor with
respect to Travel Vendor Data owned by that Travel Vendor, as set
forth in Section 12.a above; and
(2) Buy.com or its Related Entities, such restriction including UA's
Travel Vendor Data.
3. BuyTravel.com shall use Travel Vendor Data solely to provide the travel
services provided through BuyTravel.com, as well as to analyze and enhance
BuyTravel.com's business processes and products and services.
4. To the extent that the provision of any resources or services under this
Agreement requires that Buy.com have access to or make use of any Travel
Vendor Data, Buy.com shall treat such Travel Vendor Data as Confidential
Information and shall use such Travel Vendor Data solely for the purposes
of providing such resources or services Buy.com is required to provide
under this Agreement, shall disclose such Travel Vendor Data only to such
Buy.com employees as have a need to know, and shall not disclose such
Travel Vendor Data to any third party.
5. Except as expressly provided in this Section 12.a or otherwise in this
Agreement, BuyTravel.com shall not disclose any Travel Vendor Data to any
person, including either Party, nor use any Travel Vendor Data for any
purpose.
<PAGE>
2. BuyTravel.com Data.
------------------
1. All BuyTravel.com Data (which excludes Travel Vendor Data) will be
jointly owned by Buy.com and UA. To the extent any right, title or
interest in or to any BuyTravel.com Data vests, by operation of law or
otherwise, in (1) either Party such Party shall, and hereby does,
irrevocably assign to the other Party a one-half, undivided interest
in and to any and all such right, title and interest in such
BuyTravel.com Data, or (2) BuyTravel.com, the Parties shall cause
BuyTravel.com to irrevocably assign to each of the Parties a one-half,
undivided interest in and to any and all such right, title and
interest in such BuyTravel.com Data .
2. Each Party and BuyTravel.com may use any such BuyTravel.com Data for
its own business purposes without restriction, except that
(1) In no event shall Buy.com, BuyTravel.com or, with respect solely
to Travel Vendors other than itself, UA, disclose BuyTravel.com
Data to any Travel Vendor or its Related Entities, nor use any
BuyTravel.com Data for the benefit of any Travel Vendor or its
Related Entities;
(2) No party will have a right to provide or otherwise sell
BuyTravel.com Data without mutual consent of UA and Buy.com; and
(3) To the extent either Buy.com or UA uses BuyTravel.com Data to
contact customers of BuyTravel.com, neither Buy.com nor UA, as
applicable, will disclose BuyTravel.com as the source of
BuyTravel.com Data unless required to do so by applicable law.
3. Access to Data.
--------------
1. BuyTravel.com and Buy.com shall provide UA with copies of any Travel
Related Data owned by UA, and copies of any BuyTravel.com Data, that
is in the possession or control of BuyTravel.com or Buy.com, as
applicable, promptly upon reasonable request by UA.
<PAGE>
2. BuyTravel.com and UA shall provide Buy.com with copies of
any BuyTravel.com Data, that is in the possession or control
of BuyTravel.com or UA, as applicable, promptly upon
reasonable request by Buy.com.
3. UA shall be entitled to its own Travel Vendor Data
regardless of any breach of this Agreement or any other
agreement between the Parties.
13. TAXES.
-----
The Parties hereto shall each bear their respective taxes, if any, incurred
in connection with this Agreement.
14. CONFIDENTIALITY.
---------------
1. Definition. "Confidential Information" means: (i) the existence of
----------
this Agreement, and any information regarding the terms and conditions
of this Agreement, (ii) any information relating to BuyTravel.com or
its business, (iii) any information, in whatever form, designated by
the party disclosing the information ("Disclosing Party") in writing
as confidential, proprietary or marked with words of like import when
provided to the party receiving the information ("Receiving Party");
and (iv) any information orally conveyed if the Disclosing Party
states at the time of the oral conveyance or within ten (10) days
thereafter that such information is to be treated as Confidential
Information.
2. Exclusions. Confidential Information shall not include information
----------
which:
1. at or prior to the time of disclosure by the Disclosing
Party was known to the Receiving Party through lawful means;
2. at or after the time of disclosure by the Disclosing Party
becomes generally available to the public through no act or
omission on the Receiving Party's part;
3. the Receiving Party receives from a third Person who is free
to make such disclosure without breach of any legal
obligation; or
<PAGE>
4. is independently developed by the Receiving Party without reference to
the Confidential Information.
3. Confidentiality Obligations. The Receiving Party acknowledges the
---------------------------
confidential and proprietary nature of the Disclosing Party's Confidential
Information and agrees that it shall not discuss, reveal, or disclose the
Disclosing Party's Confidential Information to any person other than the
parties to this Agreement, or use any Confidential Information for any
purpose other than as contemplated hereby, in each case, without the prior
written consent of the Disclosing Party. The Receiving Party agrees to take
reasonable precautions (no less rigorous than the Receiving Party takes
with respect to its own comparable Confidential Information) to prevent
unauthorized or inadvertent disclosure of the Confidential Information of
the Disclosing Party. In the event that a Receiving Party wishes to
disclose Confidential Information to one of its professional advisors, it
may do so only if (a) that professional advisor agrees in writing to abide
by confidentiality obligations substantially as those set forth in this
Section 14, and (b) a copy of such confidentiality agreement is provided to
the other Party before any Confidential Information is disclosed to such
professional advisor. Additionally, a Receiving Party may disclose the
terms of this Agreement to a potential or actual business partner or
acquirer of the Receiving Party's business to which the Agreement relates,
but only if that entity and its professional advisor(s) agree in writing to
abide by confidentiality obligations substantially as those set forth in
this Section 14.
4. Legal Obligations. The Receiving Party may disclose Confidential
-----------------
Information pursuant to any statute, regulation, order, subpoena or
document discovery request, provided that prior written notice of such
disclosure is furnished to the Disclosing Party as soon as practicable in
order to afford the Disclosing Party an opportunity to seek a protective
order or to utilize other available procedures to protect such Confidential
Information (it being agreed that if the Disclosing Party is unable to
obtain or does not seek a protective order or other protection of such
Confidential Information and the Receiving Party is legally compelled to
disclose such information, disclosure of such information may be made
without liability).
5. Return of Information. The Receiving Party shall, upon the written
---------------------
request of the Disclosing Party, during the Term or thereafter, (a)
promptly return all Confidential Information held or used by the Receiving
Party in whatever form, or (b) at
<PAGE>
the discretion of the Disclosing Party, promptly destroy all such
Confidential Information, including all copies thereof, and those
portions of all documents that incorporate such Confidential
Information, and certify in writing to the Disclosing Party that such
destruction has taken place.
6. Injunctions. In view of the difficulties of placing a monetary value
-----------
on such Confidential Information, the Disclosing Party may be entitled
to a preliminary and final injunction without the necessity of posting
any bond or undertaking in connection therewith to prevent any further
breach of this Section 14 or further unauthorized use of its
Confidential Information. This remedy is separate and apart from, and
without prejudice to, any other remedy the Disclosing Party may have.
15. NONSOLICITATION. Neither Party shall, during the term of this Agreement
---------------
and for one (1) year thereafter, and whether on behalf of itself or on
behalf of any third party, solicit any employees of the other Party
involved with the negotiation of this Agreement or that Party's performance
hereunder, without the express written consent of the Party that employs
such employee, such consent to be at the employing Party's sole and
absolute discretion. If any such employee should cease to be an employee
of a Party, the other Party may solicit such employee beginning one (1)
year after cessation of such employment. Notwithstanding anything to the
contrary herein, neither Party shall be deemed to have breached or violated
this Section 15 (a) solely as a result of generic employment advertising by
that Party (including any "open position" or similar listings in that
Party's Web site or other general advertising), or (b) if any employee of
the other Party approaches and obtains employment with the other Party
after the date hereof solely as a result of any advertising or recruitment
effort contemplated in clause (a) above.
<PAGE>
16. INDEMNIFICATION.
---------------
1. Indemnification by Buy.com. Buy.com shall indemnify, defend and hold
--------------------------
harmless UA and the UA-Related Entities from and against all Damages
arising from or in connection with (a) any misrepresentation or breach
of any representation or warranty of Buy.com under this Agreement; (b)
any breach of any covenant or agreement by Buy.com under this
Agreement; (c) any representation, misrepresentation, warranty,
covenant or agreement Buy.com may make with respect to UA or any of
its products or services to Buy.com Customers or any other entity,
without the express written consent of UA; and (d) all third-party
claims brought against UA arising from or in connection with Buy.com's
performance or non-performance of its obligations under this
Agreement.
2. Indemnification by UA. UA shall indemnify, defend and hold harmless
---------------------
Buy.com and the Buy.com-Related Entities from and against all Damages
arising from or in connection with (a) any misrepresentation or breach
of any representation or warranty of UA under this Agreement; (b) any
breach of any covenant or agreement by UA under this Agreement; (c)
any representation, misrepresentation, warranty, covenant or agreement
UA may make with respect to Buy.com or any of its products or
services, to any other entity, without the express written consent of
Buy.com; and (d) all third-party claims brought against Buy.com
arising from or in connection with UA's performance or non-performance
of its obligations under this Agreement.
3. Limitation on Indemnification. Notwithstanding Sections 16.a and 16.b
-----------------------------
above, no Indemnified Party shall be entitled to indemnification
pursuant to Section 16.a or 16.b to the extent attributable to the
negligence or willful misconduct of such Indemnified Party or its
Related Entities.
4. Indemnification Procedure.
-------------------------
1. A party seeking indemnification (the "Indemnified Party")
shall promptly notify the other party (the "Indemnifying
Party") in writing of any claim for indemnification,
provided, that failure to give such notice shall not relieve the
--------
Indemnifying Party of any liability hereunder (except to the
extent the Indemnifying Party has suffered actual material
prejudice by such failure).
<PAGE>
2. The Indemnified Party shall tender sole defense and control of
such claim to the Indemnifying Party. The Indemnified Party
shall, if requested by the Indemnifying Party, give reasonable
assistance to the Indemnifying Party in defense of any claim. The
Indemnifying Party shall reimburse the Indemnified Party for any
reasonable legal expenses directly incurred from providing such
assistance, as such expenses are incurred.
3. The Indemnifying Party shall have the right to consent to the
entry of judgment with respect to, or otherwise settle, an
indemnified claim with the prior written consent of the
Indemnified Party, which consent shall not be unreasonably
withheld; provided, however, that the Indemnified Party may
-------- -------
withold its consent if any such judgment or settlement imposes
and unreimbursed monetary or continuing non-monetary obligation
on such Party or does not include an unconditional release of
that Party and its Affiliates from all liability in respect of
claims that are the subject matter of the indemnified claim.
17. TERM & TERMINATION.
------------------
1. Mutual Termination Rights. In addition to any other right or remedy
-------------------------
it may have, either UA or Buy.com may terminate this Agreement without
any notice of default or judicial intervention being required, in the
event:
1. proceedings in bankruptcy are instituted by or against the other
party, or the other party terminates its business activities for
any other reason.
2. there is any material breach of, or material failure to comply
with, any of the terms or conditions of this Agreement by the
other party which breach or failure is not remedied within thirty
(30) days after notice of such breach or failure.
3. at any time after the date that is three years from the date
hereof, UA or Buy.com gives the other party ninety (90) days
notice, for any reason or no reason at all.
<PAGE>
2. United Termination Right. UA may terminate this Agreement upon twenty
------------------------
(20) days notice at any time within ten (10) days after March 31, 2000
if, prior to such time (A) Buy.com has not consummated (x) an initial
---
public offering of its equity securities underwritten by a nationally
recognized investment bank or (y) a merger or other similar
transaction in which the outstanding shares of Common Stock of Buy.com
are converted into the right to receive either cash or equity
securities of which are traded on a national securities exchange or on
the National Association of Securities Dealers Automated Quotation
System and (B) UA has not exercised, either in whole or in part, that
certain Warrant of even date herewith issued to UA by Buy.com.
3. No Prejudice to Other Rights. Exercise of the right of termination
----------------------------
afforded to either party shall not prejudice any other legal rights or
remedies either party may have against the other in respect of any
breach of the terms of this Agreement.
4. Survival of Terms. The provisions of Sections 1, 11, 12, 14, 15 (for
-----------------
one (1) year post-termination), 16, 17.c, 17.d, 18 (for the Transition
Period), 19, 20 and 21, and any and all disclaimers, limitations on
remedies and indemnities contained herein or in any schedules to this
Agreement will survive the termination of this Agreement.
18. POST-TERMINATION TRANSITION SUPPORT.
-----------------------------------
1. Transition Support. In the event of termination of this Agreement for
------------------
any reason, including breach by the other Party, each Party shall use
commercially reasonable efforts to make available to BuyTravel.com,
for a period of time not to exceed ninety (90) days after the
effective date of such termination ("Transition Period") all resources
and services as were being provided, or required to be provided,
immediately prior to notice of termination ("Transition Support").
Each Party shall use commercially reasonable efforts to provide
consulting services and technical assistance as is reasonably
requested by BuyTravel.com during the Transition Period (also,
"Transition Support").
2. Transition Support Payment Terms. All resources and services provided
--------------------------------
pursuant to Section 18.a above shall be provided on the same pricing
terms as governed immediately prior to notice of termination, except
that estimates of amounts due for any given month shall be due on the
first day of that month, and a Party shall
<PAGE>
have no obligation to provide such resources or services if any
amounts due to such Party under this Agreement remain more than thirty
(30) days past due.
19. LIMITATION OF WARRANTIES & REMEDIES.
-----------------------------------
1. Representations & Warranties. Each Party represents that it has full
----------------------------
power to enter into and complete the transactions required hereunder,
and that this Agreement is enforceable against it in accordance with
its terms, and that the activities contemplated hereunder do not
conflict with or constitute a breach of or default under any contracts
or commitments to which it is a party.
2. Warranty Disclaimer. EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL
-------------------
RESOURCES AND SERVICES PROVIDED UNDER THIS AGREEMENT BY THE OTHER
PARTY ARE PROVIDED "AS IS," WITH ALL FAULTS AND WITHOUT ANY WARRANTY,
CONDITION, GUARANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS
OR IMPLIED, IN LAW OR IN FACT, ORAL OR IN WRITING, INCLUDING WITHOUT
LIMITATION ANY WARRANTY, CONDITION, GUARANTY OR REPRESENTATION OF YEAR
2000 COMPLIANCE, ACCURACY, NON-INTERRUPTION, COMPLETENESS,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-
INFRINGEMENT, OR THE LIKE.
3. Liability Disclaimer. EXCEPT IN CONNECTION WITH AN INDEMNIFICATION
--------------------
CLAIM PURSUANT TO SECTION 19 ABOVE, IN NO EVENT SHALL EITHER PARTY NOR
ANY RELATED ENTITY OF SUCH PARTY BE LIABLE TO THE OTHER PARTY, A
RELATED ENTITY OF SUCH PARTY OR ANY THIRD PERSON FOR ANY SPECIAL,
INCIDENTAL, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES OF ANY KIND
(INCLUDING WITHOUT LIMITATION LOST PROFITS, LOST SAVINGS, LOSS OF
DATA, LOSS OF BUSINESS OPPORTUNITIES) ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT, THE SERVICES OR THE LICENSED PRODUCTS, WHETHER
BASED IN CONTRACT, TORT (INCLUDING WITHOUT LIMITATION NEGLIGENCE) OR
OTHERWISE, EVEN IF THE PARTY PROVIDING THE RESOURCE OR SERVICE, OR A
RELATED ENTITY OF SUCH PARTY, HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES OR SHOULD HAVE FORESEEN SUCH DAMAGES.
<PAGE>
20. AUDIT RIGHTS. Each Party may, upon ten (10) business days' notice,
------------
inspect, or have a mutually agreeable independent auditor, the operations,
books and records of the other Party to verify compliance with the terms
and conditions of this Agreement. Any such audit shall be conducted at the
audited Party's relevant facilities during normal business hours. Each
Party may invoke its audit rights under this Section 20 once every six (6)
months during the term of this Agreement and for one (1) year thereafter.
The auditing Party shall conduct, or cause to be conducted, such audit at
its own expense, except that the auditing Party shall be entitled to
reimbursement of its auditing expenses by the auditing Party in the event
that such audit reveals that the audited Party has overcharged the other
Party or BuyTravel.com for an amount, or failed to provide resources and
services as required by this Agreement fairly valued at an amount, greater
than 5% of the proper amount, or properly valued amount, for the audited
time period. Neither Party shall be required to provide access to third
party data, facilities or other assets if that Party does not have the
contractual right to provide access to such assets to the other Party.
21. MISCELLANEOUS.
-------------
1. Force Majeure. Neither Party will be liable for any failure to
-------------
perform any obligation (other than payment or reimbursement
obligations) hereunder, or from any delay in the performance thereof,
due to causes beyond its control, including without limitation
industrial disputes of whatever nature, acts of God, public enemy,
acts of government, failure of telecommunications, or other calamity.
2. Assignment. No Party may assign this Agreement without the prior
----------
written consent of the other Parties under any conditions, except in
connection with a corporate reorganization, merger or the sale of
substantially all of its business or assets or substantially similar
transaction; provided, however, that, notwithstanding the foregoing,
-------- -------
in the case of an assignment by Buy.com to a competitor of UA, or by
UA to a competitor of Buy.com, including in connection with a
corporate reorganization, merger, sale of substantially all of the
business or assets of UA or Buy.com, as applicable, or substantially
similar transaction, the prior written consent of UA or Buy.com, as
applicable, shall in all instances be required. Any purported
assignment or transfer in violation of this provision shall be void
and without effect.
<PAGE>
3. Notices. All notices and other correspondence under this Agreement
-------
shall be in writing and shall be sufficiently given if delivered
personally, if sent by facsimile transmission with proof of receipt by
the recipient, or sent overnight courier with proof of receipt, to the
addresses first stated herein, or to such other address as either
Party may specify by such notice.
4. Modification and Waiver. No modification, amendment, supplement to or
-----------------------
waiver of this Agreement or any attachment hereto shall be binding
upon the parties hereto unless made in writing and duly signed by both
parties. No invoice or other similar form may vary the terms hereof,
and any term thereof that is inconsistent with or additional to the
terms hereof shall not be binding. A failure or delay by either Party
to enforce at any time any of the provisions hereof, or to exercise
any option which is herein provided, or to require at any time
performance of any of the provisions hereto shall in no way be
construed to be a waiver of such provisions of the Agreement.
5. Severability. The provisions of this Agreement are severable, and in
------------
the event that any provisions of this Agreement are determined to be
invalid or unenforceable under any controlling law, such invalidity or
unenforceability shall not in any way affect the validity or
enforceability of the remaining provisions thereof. If any provision
of this Agreement is found to be invalid or unenforceable, the invalid
provision shall be modified to the minimum extent required to comply
with applicable law, and the modified provision shall be construed as
having been in effect since the Effective Date.
6. Entire Agreement. This Agreement and the Operating Agreement,
----------------
including the schedules and exhibits referred to herein and therein
and attached or to be attached hereto and thereto, constitutes the
entire agreement between the parties and supercedes all prior
agreements, promises, proposals, representations, understandings and
negotiations, whether or not reduced to writing, between the parties
respecting the subject matter hereof.
7. Governing Law; Choice of Forum. The validity of this Agreement, the
------------------------------
construction and enforcement of its terms, and the interpretation of
the rights and duties of the parties shall be governed by the laws of
the State of Delaware, excluding the choice of law and conflicts of
law principles of that state.
<PAGE>
8. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of
which shall be considered one and the same instrument.
<PAGE>
UNITED AIR LINES, INC.: BUY.COM, INC.:
By:_______________________________ By:_____________________________
Title:____________________________ Title:__________________________
Date:_____________________________ Date:___________________________
BUYTRAVEL.COM, LLC
By: UNITED AIR LINES, INC.
Its: Member
By:___________________________
Title: _______________________
Date:_________________________
By: BUY.COM, INC.
Its: Member
By:___________________________
Title: _______________________
Date:_________________________
[SIGNATURE PAGE TO MARKETING AND SERVICES AGREEMENT]
<PAGE>
SCHEDULE A
----------
BUYTRAVEL.COM WEB SITE
HOSTING SERVICES AND SERVICE LEVELS
22. SERVICES.
--------
1. Hosting of BuyTravel.com Web site, including Web pages, and Web site
services. Such hosting services shall include:
1. Provision of a suitable hosting facility, with adequate
electrical, air conditioning and fire safety utilities (including
back-up resources)
2. Installation and configuration of all hardware and software for
the Web site, including all support software directly related to
the Web site, and interface software to other BuyTravel.com
information systems. Such installation and configuration services
shall apply to all upgrades and modifications of the above
referenced hardware and software.
3. Monitoring and operational control of the BuyTravel.com Web site.
4. Web site visitor data capture and generation and reporting of Web
site statistics.
5. Implementation and management of problem handling procedures.
2. Interfacing to, and cooperation with, providers of third party Web
site services utilized on the BuyTravel.com Web site.
3. Internet connectivity through high speed (competitive with other
travel services Web sites), highly available network access.
4. Back-up and restoration services.
<PAGE>
23. SERVICE LEVELS.
--------------
1. Web site uptime availability: 99.5% (with the exception of scheduled
downtime for maintenance and support).
2. Network uptime availability: 99.5% (with the exception of scheduled
downtime for maintenance and support)
<PAGE>
SCHEDULE B
CRS LIST
Amadeus (including SystemOne Amadeus)
Galileo International (including both Apollo and Galileo)
Sabre
Worldspan
<PAGE>
EXHIBIT 10.20
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR
QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND QUALIFICATION UNDER
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY IN FORM
AND SUBSTANCE TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED UNLESS SOLD PURSUANT TO RULE 144 UNDER THE ACT.
Date of Issuance: July 19, 1999
BUY.COM, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, United Air Lines, Inc. (the "Holder")
or permitted assigns is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time or from time to time, prior to 5:00 p.m.
Pacific Time on July 19, 2004, to subscribe for and purchase from BUY.COM, INC.,
a Delaware corporation (the "Company"), 2,000,000 fully paid and non-assessable
shares of the Company's Common Stock. Hereinafter, the Common Stock of the
Company, together with any other equity securities which may be issued by the
Company in substitution or exchange therefor, is referred to as the "Common
Stock," (i) the shares of the Common Stock purchasable hereunder are referred to
as the "Warrant Shares," (ii) the aggregate exercise price payable for all of
the Warrant Shares is referred to as the "Aggregate Exercise Price," and (iii)
the price payable hereunder for each of the Warrant Shares is referred to as the
"Per Share Exercise Price," as set forth in Section 1.1 hereof. The Per Share
Exercise Price and the number of Warrant Shares are subject to adjustment as
provided herein.
1. Exercisability.
--------------
1.1 Exercise of Warrant. Subject to the terms of Section 14 hereof,
-------------------
this Warrant may be exercised at a Per Share Exercise Price of $10.00 per share
in whole at any time or in part from time to time immediately after the issuance
hereof and prior to 5:00 p.m. Pacific Time on July 19, 2004 (subject to earlier
termination as hereinafter provided), by the Holder by the surrender of this
Warrant (with the subscription form at the end hereof duly executed) at the
principal office of the Company, which is currently located at 21 Brookline,
Aliso Viejo, California 92656 or at such other office of the Company as it may
designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company, together with proper payment of the Per
Share Exercise Price for each of the Warrant Shares as to which the Warrant is
being exercised. Payment for Warrant Shares shall be made by certified or bank
cashier's check, payable to the order of the Company.
If this Warrant is exercised in part, this Warrant must be exercised
for a number of whole shares of the Common Stock and the Holder shall be
entitled to receive a new Warrant covering the number of Warrant Shares with
respect to which this Warrant has not been
<PAGE>
exercised. This Warrant shall be deemed to have been exercised immediately prior
to the close of business on the date of its surrender for exercise as provided
above, together with payment of the Per Share Exercise Price for the number of
Warrant Shares being purchased, and the Holder shall be treated for all purposes
as the holder of record of such shares as of the close of business on such date.
Upon the surrender of this Warrant, together with the subscription form at the
end hereof duly executed and proper payment of the Per Share Exercise Price for
each of the Warrant Shares as to which the Warrant is being exercised, the
Company will, as promptly as practicable on or after such date and in any event
within ten (10) business days thereafter, at its expense, (i) issue, or cause
the Company's transfer agent to issue, a certificate or certificates in the name
of the Holder for the largest number of whole shares of the Common Stock to
which the Holder shall be entitled and, if this Warrant is exercised in whole,
in lieu of any fractional share of the Common Stock to which the Holder shall be
entitled, cash equal to the fair market value of such fractional share (as
calculated in accordance with Section 1.2 below), and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, if any,
or the proportionate part thereof if this Warrant is exercised in part, pursuant
to the provisions of this Warrant.
1.2 Net Issue Election. The Holder may elect to receive, without the
------------------
payment by the Holder of any additional consideration, shares equal to the value
(as determined below) of this Warrant or any portion hereof by the surrender of
this Warrant or such portion to the Company, with the net issue election notice
annexed hereto duly executed, at the office of the Company. Thereupon, the
Company shall issue to the Holder such number of fully paid and nonassessable
shares of Common Stock as is computed using the following formula:
X = Y (A-B)
------
A
__________
where:
X = the number of shares of Common Stock to be issued to the Holder
pursuant to this Section 1.2.
Y = the number of shares of Common Stock purchasable by this Warrant
in respect of which the net issue election is made pursuant to this Section 1.2.
A = the fair market value of one share of Common Stock, as determined
in accordance with the provisions of this Section 1.2.
B = the Per Share Exercise Price in effect under this Warrant at the
time the net issue election is made pursuant to this Section 1.2.
For purposes of this Section 1.2, the "fair market value" per share of the
Company's Common Stock shall be valued as follows:
(a) If traded on a national securities exchange or through the NASDAQ
National Market, the value shall be deemed to be the average of the last
reported sale or closing prices of the securities on such exchange or market
over the five trading days immediately prior to the effective date of exercise
of the net issuance election;
2
<PAGE>
(b) If there is no active public market, the value shall be the fair
market value thereof, as determined in good faith by the Company's Board of
Directors.
2. Reservation of Warrant Shares. The Company agrees that, during the
-----------------------------
term this Warrant is exercisable, the Company will at all times have authorized
in reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the shares of the Common Stock and other securities
and properties as from time to time shall be receivable upon the exercise of
this Warrant. The Company further covenants that all shares that may be issued
upon the exercise of rights represented by this Warrant and payment of the
Aggregate Exercise Price, all as set forth herein, will be free from all liens
and preemptive rights in respect of the issue thereof.
3. Adjustments.
-----------
3.1 Distribution With Respect to Common Stock. If, at any time or
-----------------------------------------
from time to time after the date of this Warrant, the Company shall distribute
to the holders of the Common Stock, without payment therefor, (i) securities,
other than shares of the Common Stock, or (ii) property, other than cash, with
respect to the Common Stock, then, and in each such case, subject to Section 3.4
below, the Holder, upon the exercise of this Warrant, shall be entitled to
receive the securities and properties which the Holder would hold on the date of
such exercise if, on the date of such distribution, the Holder had been the
holder of record of the number of shares of the Common Stock subscribed for upon
such exercise and, during the period from the date of such distribution to and
including the date of such exercise, had retained such shares and the securities
and properties receivable by the Holder during such period.
3.2 Stock Splits, Etc. If, at any time or from time to time after
-----------------
the date of this Warrant, the Company shall issue to the holders of the Common
Stock shares of the Common Stock by way of a stock dividend or stock split,
then, and in each such case, the Per Share Exercise Price shall be adjusted, or
further adjusted, to a price (to the nearest whole cent) determined by dividing
(i) an amount equal to the number of shares of the Common Stock outstanding
immediately prior to such issuance multiplied by the Per Share Exercise Price as
it existed immediately prior to such issuance by (ii) the total number of shares
of the Common Stock outstanding immediately after such issuance. Upon each such
adjustment in the Per Share Exercise Price, the number of Warrant Shares shall
be adjusted by dividing the Aggregate Exercise Price by the Per Share Exercise
Price in effect immediately after such adjustment.
3.3 Reverse Splits, Etc. If, at any time or from time to time after
-------------------
the date of this Warrant, the number of shares of Common Stock outstanding is
decreased by way of combination of shares or reserve split, then, and in each
such case, the Per Share Exercise Price shall be adjusted, or further adjusted,
to a price (to the nearest whole cent) determined by dividing (i) an amount
equal to the number of shares of the Common Stock outstanding immediately prior
to such event multiplied by the Per Share Exercise Price as it existed
immediately prior to such event by (ii) the total number of shares of the Common
Stock outstanding immediately after such event. Upon each such adjustment in the
Per Share Exercise Price, the number of Warrant Shares shall be adjusted by
dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect
immediately after such adjustment.
3
<PAGE>
3.4 Adjustment for Reorganization, Consolidation, Merger, etc.
---------------------------------------------------------
a. Reorganization, Consolidation, Merger, etc. In case at any
------------------------------------------
time or from time to time, the Company shall (i) effect a reorganization (other
than a combination, reclassification, exchange or subdivision of shares, as
otherwise provided for herein), (ii) consolidate with or merge into any other
entity or person, or (iii) transfer all or substantially all of its properties
or assets to any other entity or person including under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, then, as
a part of such reorganization, merger, consolidation, sale or transfer, lawful
provision shall be made so that the 4W Holder, on the exercise hereof as
provided in Section 1 at any time after the consummation of such reorganization,
consolidation, merger, sale or transfer or the effective date of such
reorganization, consolidation, merger, sale or transfer, as the case may be,
shall be entitled to receive, in lieu of the Common Stock (or other securities)
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which the Holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if the Holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment thereafter as
provided in this Section 3.
b. Continuation of Terms. Upon any reorganization,
---------------------
consolidation, merger, sale or transfer (and any dissolution following any sale
or transfer) referred to in this Section 3.4 (collectively, a "Corporate
Transaction"), this Warrant shall, immediately after such Corporate Transaction,
be appropriately adjusted to apply and pertain to the number and class of
securities which would have been issued to the Holder in the consummation of
such Corporate Transaction had the option been exercised immediately prior to
such Corporate Transaction. Appropriate adjustments shall also be made to the
Exercise Price payable per share, provided the Aggregate Exercise Price payable
hereunder shall remain the same.
c. Notice. The Company shall provide advance notice to the
------
Holder of any Corporate Transaction as soon as practicable, but in no event less
than 20 days prior to the consummation of any such transaction.
3.5 Reclassifications. If the Company, at any time while this
-----------------
Warrant or any portion hereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change the Common Stock into
the same or a different number of securities of any other class or classes, this
Warrant shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with respect
to the Common Stock that was subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Per Share
Exercise Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 3.
3.6 Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment pursuant to this Section 3, the Company at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to the Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written
request, at any time, of any such Holder, furnish or cause to be furnished to
such Holder a like certificate
4
<PAGE>
setting forth: (i) such adjustments and readjustments; (ii) the Per Share
Exercise Price at the time in effect, and (iii) the number of shares and the
amount, if any, of other property that at the time would be received upon the
exercise of the Warrant.
3.7 No Impairment. The Company will not, by any voluntary action,
-------------
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 3 and in
the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder of this Warrant against impairment.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of the
-----------------------
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable. The Company
further covenants and agrees that it will pay, when due and payable, any and all
federal and state stamp, original issue or similar taxes which may be payable in
respect of the issue of any Warrant Share or certificate therefor; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance of any certificate
for Warrant Shares in a name other than that of the Holder upon any exercise of
this Warrant.
5. Restrictions on Transferability of Securities; Compliance with
--------------------------------------------------------------
Securities Act.
- --------------
5.1 Restrictions on Transferability. The transferability of this
-------------------------------
Warrant and the Warrant Shares (as well as any other securities issued in
respect of the Warrant Shares upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event) shall be subject to
the conditions specified in this Section 5. The Holder, and any transferee of
this Warrant or the Warrant Shares, by its acceptance hereof or thereof, agrees
that this Warrant and the Warrant Shares will be taken and held subject to the
provisions and upon the conditions specified in this Section 5.
5.2 Restrictive Legend. This Warrant and each certificate
------------------
representing (i) the Warrant Shares or (ii) any other securities issued in
respect of the Warrant Shares upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall (unless
otherwise permitted or unless the securities evidenced by such certificate shall
have been registered under the Securities Act of 1933 (the "Act")) be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required under applicable state securities laws), and
shall be subject to the provisions thereof.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, (THE "ACT"), OR QUALIFIED UNDER THE
SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED UNLESS SOLD
PURSUANT TO RULE 144 UNDER THE ACT.
5
<PAGE>
5.3 "Market Stand-Off" Agreement. Each Holder hereby agrees that,
---------------------------
during the period of duration specified by the Company and an underwriter of
Common Stock or other securities of the Company, it shall not, to the extent
requested by the Company and such underwriter, directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of (other than to
donees who agree to be similarly bound) any securities of the Company held by it
at any time during such period except Common Stock included in such
registration; provided, however, that:
a. such market stand-off time period shall not exceed [180]
days;
b. all officers and directors of the Company and all other
persons with registration rights enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop transfer instructions with respect to any securities of the Company held by
the Holder until the end of such period. If requested to do so by the Company,
each Holder shall execute an underwriter's letter in the customary form prior to
the registration of the Company's initial public offering.
Notwithstanding the foregoing, the obligations described in this
Section 5.3 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms which may be promulgated in the future.
5.4 Assignability. This Warrant may not be transferred or assigned,
-------------
in whole or in part, by Holder except (i) where Holder has provided the Company
with written notice of its intent to assign or transfer the Warrant and the
Company has consented to such assignment or transfer in writing, or (ii) to any
Affiliate of the Holder. For purposes hereof, "Affiliate" shall mean with
respect to the Holder: (i) any individual, partnership, corporation, trust,
limited liability company or other entity (any of the foregoing, a "Person")
directly or indirectly controlling, controlled by or under common control with
the Holder; (ii) any Person owning or controlling outstanding securities
representing 15% or more of the voting power with respect to matters generally
voted upon by shareholders of the Holder; (iii) any officer, director, manager,
trustee or general partner of the Holder; or (iv) any Person who is an officer,
director, manager, trustee or general partner or holder of 5% or more of the
voting securities of any Person described in clauses (i) through (iii).
6. Warrant Register. This Warrant is transferable only upon the books of
----------------
the Company which it shall cause to be maintained for such purpose. The Company
may treat the registered holder of this Warrant as he, she or it appears on the
Company's books at any time as the Holder for all purposes; provided, however,
that upon receipt of notice of an assignment pursuant to Section 5.4, the
Company shall revise its books to reflect such new holder(s).
7. Loss, Etc., of Warrant. Upon receipt of evidence satisfactory to the
----------------------
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant
6
<PAGE>
if mutilated, the Company shall execute and deliver to the Holder a new Warrant
of like date, tenor and denomination.
8. Warrant Holder Has No Stockholder Rights. This Warrant does not
----------------------------------------
confer upon the Holder any right to vote or to consent or to receive notice as a
stockholder of the Company, as such, with respect to any matters whatsoever, or
any other rights or liabilities as a stockholder, prior to the exercise thereof.
9. Registration Rights. Upon exercise of this Warrant, the Holder shall
-------------------
have and be entitled to exercise, together with all other holders of Registrable
Securities possessing registration rights under that certain Second Amended and
Restated Investors' Rights Agreement, in the form previously provided to Holder,
to be entered into after the date hereof by and among the Company and the
parties who are signatories thereto or are otherwise bound thereby, as may be
amended from time to time, (the "Investors' Rights Agreement"), the rights of
registration granted under the Investors' Rights Agreement to Registrable
Securities with respect to the Warrant Shares. By its receipt of this Warrant,
the Holder agrees to be bound by the Investors' Rights Agreement.
10. Representations and Warranties of the Holder. Holder hereby
--------------------------------------------
represents and warrants that:
10.1 Authorization. Holder has full power and authority to accept and
-------------
purchase this Warrant to purchase and any Warrant Shares for which it may be
exercised.
10.2 Purchase Entirely for Own Account. This Warrant is sold in
---------------------------------
reliance upon Holder's representation to the Company which, by Holder's
execution of this Warrant, Holder hereby confirms, that the Warrant to be
received by Holder and the Warrant Shares issuable upon the exercise thereof
(collectively, the "Securities") will be acquired for investment for Holder's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Holder has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Warrant, Holder further represents that Holder does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to person or to any third person, with respect
to any of the Securities.
10.3 Disclosure of Information. Holder believes that it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Warrant and any Warrant Shares for which the Warrant may be
exercised. Holder further represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Warrant and the business, properties,
prospects and financial condition of the Company.
10.4 Investment Experience. Holder is an investor in securities of
---------------------
companies in the development stage and acknowledges that Holder is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrant and any Warrant Shares for
which the Warrant may be exercised.
7
<PAGE>
10.5 Accredited Investor. Holder is an "accredited investor" within
-------------------
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation
D, as presently in effect.
10.6 Restricted Securities. Holder understands that the Securities
---------------------
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such Securities may be resold without registration under the Act, only in
certain limited circumstances. In this connection, Holder represents that it is
familiar, with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
10.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, Holder further agrees not to make any
disposition of all or any portion of the Securities unless and until:
a. There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
b. Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a reasonably detailed
statement of the circumstances surrounding the proposed disposition, and if
reasonably requested by the Company, Holder shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company that such
disposition will not require registration of such shares under the Act. It is
agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances, or if required by a
sale pursuant to Rule 144(g).
11. Communication.
-------------
All notices, requests, demands and other communications under this
Warrant must be in writing and will be deemed duly given, unless otherwise
expressly indicated to the contrary in this Agreement, (a) when personally
delivered, (b) three (3) business days after having been deposited in the United
States mail, certified or registered, return receipt requested, postage prepaid,
(c) one (1) business day after having been dispatched by a nationally recognized
overnight courier service, addressed to the parties or their permitted assigns
with an acknowledgment of receipt requested at the following addresses, or (d)
upon receipt of confirmation of a telephonic facsimile transmission:
To the Company: BUY.COM, INC.
21 Brookline
Aliso Viejo, CA 92656
Attn: Chief Financial Officer and
Senior General Counsel
Fax: (949) 425-5283
8
<PAGE>
To Holder: United Air Lines, Inc.
P.O. Box 66100
Chicago, Illinois 60666
Attn: Senior Vice President, Finance
Fax: (847) 700-6340
The Company and the Holder may change the address to which such
notices are to be addressed to them by giving the other party notice in the
manner set forth herein.
12. Headings. The headings of this Warrant have been inserted as a matter
--------
of convenience and shall not affect the construction hereof.
13. Applicable Law. This Warrant shall be governed by and construed in
--------------
accordance with the internal laws of the State of California.
14. Cancellation. In the event that the Holder elects to terminate that
------------
certain Marketing and Services Agreement of even date herewith entered into by
and among the Company, Holder and BuyTravel.com LLC, a Delaware limited
liability company, pursuant to the provisions of Section 17(b) thereof, this
Warrant shall automatically be cancelled and shall no longer be exercisable
without any further action of the Company or Holder.
IN WITNESS WHEREOF, BUY.COM, INC. has caused this Warrant to be
executed by its officers thereunto authorized.
Dated: July ___, 1999 BUY.COM, INC.
By:___________________________________
Alan Barbieri
President & Chief Financial Officer
ACCEPTED AND AGREED:
United Air Lines, Inc.
By:_____________________________
Name:___________________________
Title:__________________________
9
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
For value received, the undersigned hereby sells, assigns and
transfers unto _____________________ the right to purchase _______ shares of
Common Stock evidenced by the within Warrant, and hereby appoints
________________________ to transfer the same on the books of BUY.COM, INC. with
full power of substitution in the premises.
Dated: _______________, _____
(Signature)
Note: Signature must confirm in all respect to the name of the Warrant
Holder as specified on the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
EXERCISE FORM
(To Be Executed By The Warrant Holder If The Holder Desires To
Exercise The Warrant In Whole Or In Part)
TO: BUY.COM, INC.
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and for purchase thereunder,
_________________ shares of Common Stock provided for therein and tenders
payment herewith to the order of BUY.COM, INC. in the amount of
$____________.____. The undersigned requested that certificates for such shares
of Common Stock be issued as follows:
Name:
Address:
Deliver to:
Address:
Date: ___________, _____
(Signature)
Note: Signature must conform in all respect to the name of the Warrant
Holder as specified on the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
NET ISSUE ELECTION NOTICE
To: BUY.COM, INC.
The undersigned hereby elects, pursuant to Section 1.2 of the attached
Warrant, to surrender the right to purchase ____ shares of Common Stock. The
Certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
Date:_________________________ ___________________________________
Signature
___________________________________
Name for Registration
___________________________________
Mailing Address
<PAGE>
EXHIBIT 10.21
$15,000,000
CREDIT AGREEMENT,
dated as of July 20, 1999,
between
BUY.COM INC.,
as the Borrower,
CERTAIN COMMERCIAL LENDING INSTITUTIONS,
as the Lenders,
and
THE BANK OF NOVA SCOTIA,
as the Agent for the Lenders.
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of July 20, 1999, between BUY.COM INC., a
Delaware corporation (the "Borrower"), the various financial institutions as are
--------
or may become parties hereto (collectively, the "Lenders") and THE BANK OF NOVA
-------
SCOTIA (the "Scotiabank"), as agent for the Lenders (the "Agent")
---------- -----
W I T N E S S E T H:
WHEREAS, the Borrower desires to obtain Commitments from the Lenders
pursuant to which Loans will be made to the Borrower and Letters of Credit will
be issued for the account of the Borrower, in a maximum aggregate principal
amount at any one time outstanding not to exceed $15,000,000, from time to time
prior to the Commitment Termination Date; and
WHEREAS, the Lenders are willing, on the terms and subject to the
conditions hereinafter set forth (including Article V), to extend such
---------
Commitments and make such Loans to, and issue Letters of Credit for the account
of, the Borrower; and
WHEREAS, the Loans and the Letters of Credit will be used
(a) to make payment in full, concurrently with the initial Borrowing
hereunder, of all Indebtedness identified in Item 7.2.2(b) ("Indebtedness
-------------
to be Paid") of the Disclosure Schedule; and
(b) for general corporate purposes of the Borrower and its
Subsidiaries;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION I.1 Defined Terms. The following terms (whether or not
-------------
underscored) when used in this Agreement, including its
<PAGE>
preamble and recitals, shall, except where the context otherwise requires, have
the following meanings (such meanings to be equally applicable to the singular
and plural forms thereof):
"Account Control Agreement" means the Account Control Agreement executed
-------------------------
and delivered pursuant to Section 5.1.5, substantially in the form of Exhibit F
------------- ---------
hereto, as amended, supplemented, restated or otherwise modified from time to
time.
"Affiliate" of any Person means any other Person which, directly or
---------
indirectly, controls, is controlled by or is under common control with such
Person (excluding any trustee under, or any committee with responsibility for
administering, any Plan). A Person shall be deemed to be "controlled by" any
other Person if such other Person possesses, directly or indirectly, power
(a) to vote 10% or more of the securities (on a fully diluted basis)
having ordinary voting power for the election of directors or managing
general partners; or
(b) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"Agent" is defined in the preamble and includes each other Person as shall
-----
have subsequently been appointed as the successor Agent pursuant to Section 9.4.
-----------
"Agreement" means, on any date, this Credit Agreement as originally in
---------
effect on the Effective Date and as thereafter from time to time amended,
supplemented, amended and restated, or otherwise modified and in effect on such
date.
"Alternate Base Rate" means, on any date and with respect to all Base Rate
-------------------
Loans, a fluctuating rate of interest per annum equal to the higher of
(a) the rate of interest most recently announced by Scotiabank at its
Domestic Office as its base rate; and
<PAGE>
(b) the Federal Funds Rate most recently determined by Scotiabank
plus 0.5%.
The Alternate Base Rate is not necessarily intended to be the lowest rate of
interest determined by Scotiabank in connection with extensions of credit.
Changes in the rate of interest on that portion of any Loans maintained as Base
Rate Loans will take effect simultaneously with each change in the Alternate
Base Rate. The Agent will give notice promptly to the Borrower and the Lenders
of changes in the Alternate Base Rate.
"Assignee Lender" is defined in Section 10.11.1.
--------------- ---------------
"Authorized Officer" means, relative to the Borrower, those of its officers
------------------
whose signatures and incumbency shall have been certified to the Agent and the
Lenders pursuant to Section 5.1.1.
-------------
"Base Rate Loan" means a Loan bearing interest at a fluctuating rate
--------------
determined by reference to the Alternate Base Rate.
"Borrower" is defined in the preamble.
-------- --------
"Borrowing" means the Loans of the same type and, in the case of LIBO Rate
---------
Loans, having the same Interest Period made by the Lenders on the same Business
Day and pursuant to the same Borrowing Request in accordance with Section 2.1.
-----------
"Borrowing Request" means a loan request and certificate duly executed by
-----------------
an Authorized Officer of the Borrower, substantially in the form of Exhibit B
---------
hereto.
"Business Day" means
------------
(a) any day which is neither a Saturday or Sunday nor a legal holiday
on which banks are authorized or required to be closed in San Francisco or
New York; and
(b) relative to the making, continuing, prepaying or repaying of any
LIBO Rate Loans, any day on which dealings in Dollars are carried on in the
London interbank market.
"Capital Expenditures" means, for any period, the sum of
--------------------
3
<PAGE>
(a) the aggregate amount of all expenditures of the Borrower and its
Subsidiaries for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital expenditures; and
(b) the aggregate amount of all Capitalized Lease Liabilities
incurred during such period.
"Capitalized Lease Liabilities" means all monetary obligations of the
-----------------------------
Borrower or any of its Subsidiaries under any leasing or similar arrangement
which, in accordance with GAAP, would be classified as capitalized leases, and,
for purposes of this Agreement and each other Loan Document, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP, and the stated maturity thereof shall be the date of the last payment
of rent or any other amount due under such lease prior to the first date upon
which such lease may be terminated by the lessee without payment of a penalty.
"Cash Equivalent Investment" means, at any time:
--------------------------
(a) any evidence of Indebtedness, maturing not more than one year
after such time, issued or guaranteed by the United States Government;
(b) commercial paper, maturing not more than nine months from the
date of issue, which is issued by
(i) a corporation (other than an Affiliate of the Borrower)
organized under the laws of any state of the United States or of the
District of Columbia and rated A-l by Standard & Poor's Corporation or
P-l by Moody's Investors Service, Inc., or
(ii) any Lender (or its holding company);
(c) any certificate of deposit or bankers acceptance, maturing not
more than one year after such time, which is issued by either
(i) a commercial banking institution that is a member of the
Federal Reserve System and has a combined
4
<PAGE>
capital and surplus and undivided profits of not less than
$500,000,000, or
(ii) any Lender; or
(d) any repurchase agreement entered into with any Lender (or other
commercial banking institution of the stature referred to in clause (c)(i))
-------------
which
(i) is secured by a fully perfected security interest in any
obligation of the type described in any of clauses (a) through (c);
----------- ---
and
(ii) has a market value at the time such repurchase agreement is
entered into of not less than 100% of the repurchase obligation of any
Lender (or other commercial banking institution) thereunder.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
"CERCLIS" means the Comprehensive Environmental Response Compensation
-------
Liability Information System List.
"Change in Control" means the acquisition by any Person (exclusive of the
-----------------
Trust or Affiliates of the Trust), or two or more Persons acting in concert
(exclusive of the Trust or Affiliates of the Trust), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities and Exchange Commission
under the Securities Exchange Act of 1934) of 30% or more of the outstanding
shares of voting stock of the Borrower.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
----
otherwise modified from time to time.
"Commitment" means relative to any Lender, such Lender's obligation to make
----------
Loans pursuant to Section 2.1.1 and to issue Letters of Credit pursuant to
-------------
Section 2.7.
- -----------
"Commitment Amount" means, on any date, $15,000,000, as such amount may be
-----------------
reduced from time to time pursuant to Section 2.2,
-----------
5
<PAGE>
minus the aggregate undrawn face amount of outstanding Letters of Credit.
- -----
"Commitment Termination Date" means the earliest of
---------------------------
(a) the Stated Maturity Date;
(b) the date on which the Commitment Amount is terminated in full or
reduced to zero pursuant to Section 2.2; and
-----------
(c) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described in clause (b) or (c), the Commitments
---------- ---
shall terminate automatically and without any further action.
"Commitment Termination Event" means
----------------------------
(a) the occurrence of any Default described in clauses (a) through
-----------
(d) of Section 8.1.9; or
--- -------------
(b) the occurrence and continuance of any other Event of Default and
either
(i) the declaration of the Loans to be due and payable pursuant
to Section 8.3, or
-----------
(ii) in the absence of such declaration, the giving of notice by
the Agent, acting at the direction of the Required Lenders, to the
Borrower that the Commitments have been terminated.
"Contingent Liability" means any agreement, undertaking or arrangement by
--------------------
which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to invest in, a
debtor, or otherwise to assure a creditor against loss) the indebtedness,
obligation or any other liability of any other Person (other than by
endorsements of instruments in the course of collection), or
6
<PAGE>
guarantees the payment of dividends or other distributions upon the shares of
any other Person. The amount of any Person's obligation under any Contingent
Liability shall (subject to any limitation set forth therein) be deemed to be
the outstanding principal amount (or maximum principal amount, if larger) of the
debt, obligation or other liability guaranteed thereby.
"Continuation/Conversion Notice" means a notice of continuation or
------------------------------
conversion and certificate duly executed by an Authorized Officer of the
Borrower, substantially in the form of Exhibit C hereto.
---------
"Controlled Group" means all members of a controlled group of corporations
----------------
and all members of a controlled group of trades or businesses (whether or not
incorporated) under common control which, together with the Borrower, are
treated as a single employer under Section 414(b) or 414(c) of the Code or
Section 4001 of ERISA.
"Current Ratio" means the ratio of (a) consolidated current assets of the
-------------
Borrower and its Subsidiaries to (b) consolidated current liabilities of the
--
Borrower and its Subsidiaries.
"Default" means any Event of Default or any condition, occurrence or event
-------
which, after notice or lapse of time or both, would constitute an Event of
Default.
"Disclosure Schedule" means the Disclosure Schedule attached hereto as
-------------------
Schedule I, as it may be amended, supplemented or otherwise modified from time
- ----------
to time by the Borrower with the written consent of the Agent and the Required
Lenders.
"Dollar" and the sign "$" mean lawful money of the United States.
------ -
"Domestic Office" means, relative to any Lender, the office of such Lender
---------------
designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a Lender (or any successor or
assign of such Lender) within the United States as may be designated from time
to time by notice from such Lender to each other Person party hereto.
7
<PAGE>
"Effective Date" means the date this Agreement becomes effective pursuant
--------------
to Section 10.8.
------------
"Environmental Laws" means all applicable federal, state or local statutes,
------------------
laws, ordinances, codes, rules, regulations and guidelines (including consent
decrees and administrative orders) relating to public health and safety and
protection of the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA also refer to any successor sections.
"Event of Default" is defined in Section 8.1.
---------------- -----------
"Federal Funds Rate" means, for any period, a fluctuating interest rate per
------------------
annum equal for each day during such period to
(a) the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank of
New York; or
(b) if such rate is not so published for any day which is a Business
Day, the average of the quotations for such day on such transactions
received by Scotiabank from three federal funds brokers of recognized
standing selected by it.
"Fiscal Quarter" means any quarter of a Fiscal Year.
--------------
"Fiscal Year" means any period of twelve consecutive calendar months ending
-----------
on December 31; references to a Fiscal Year with a number corresponding to any
calendar year (e.g. the "1999 Fiscal Year") refer to the Fiscal Year ending on
----
December 31, 1999.
"Fronting Fee" is defined in Section 3.3.2.
------------ -------------
8
<PAGE>
"F.R.S. Board" means the Board of Governors of the Federal Reserve System
------------
or any successor thereto.
"GAAP" is defined in Section 1.4.
---- -----------
"Guaranty" means the Guaranty executed and delivered pursuant to Section
-------- -------
5.1.4, substantially in the form of Exhibit E hereto, as amended, supplemented,
- ----- ---------
restated or otherwise modified from time to time.
"Hazardous Material" means
------------------
(a) any "hazardous substance", as defined by CERCLA;
(b) any "hazardous waste", as defined by the Resource Conservation
and Recovery Act, as amended;
(c) any petroleum product; or
(d) any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material or substance within the meaning of any other applicable
federal, state or local law, regulation, ordinance or requirement
(including consent decrees and administrative orders) relating to or
imposing liability or standards of conduct concerning any hazardous, toxic
or dangerous waste, substance or material, all as amended or hereafter
amended.
"Hedging Obligations" means, with respect to any Person, all liabilities of
-------------------
such Person under interest rate swap agreements, interest rate cap agreements
and interest rate collar agreements, and all other agreements or arrangements
designed to protect such Person against fluctuations in interest rates or
currency exchange rates.
"herein", "hereof", "hereto", "hereunder" and similar terms contained in
------ ------ ------ ---------
this Agreement or any other Loan Document refer to this Agreement or such other
Loan Document, as the case may be, as a whole and not to any particular Section,
paragraph or provision of this Agreement or such other Loan Document.
9
<PAGE>
"Impermissible Qualification" means, relative to the opinion or
---------------------------
certification of any independent public accountant as to any financial statement
of any Obligor, any qualification or exception to such opinion or certification
(a) which is of a "going concern" or similar nature;
(b) which relates to the limited scope of examination of matters
relevant to such financial statement; or
(c) which relates to the treatment or classification of any item in
such financial statement and which, as a condition to its removal, would
require an adjustment to such item the effect of which would be to cause
Borrower to be in default of any of its obligations under Section 7.2.4 or
-------------
the Trust to be in default of any of its obligations under the Guaranty.
"Indebtedness" of any Person means, without duplication:
------------
(a) all obligations of such Person for borrowed money and all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments;
(b) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's
acceptances issued for the account of such Person;
(c) all obligations of such Person as lessee under leases which have
been or should be, in accordance with GAAP, recorded as Capitalized Lease
Liabilities;
(d) all other items which, in accordance with GAAP, would be included
as liabilities on the liability side of
10
<PAGE>
the balance sheet of such Person as of the date at which Indebtedness is to
be determined;
(e) net liabilities of such Person under all Hedging Obligations;
(f) whether or not so included as liabilities in accordance with
GAAP, all obligations of such Person to pay the deferred purchase price of
property or services, and indebtedness (excluding prepaid interest thereon)
secured by a Lien on property owned or being purchased by such Person
(including indebtedness arising under conditional sales or other title
retention agreements), whether or not such indebtedness shall have been
assumed by such Person or is limited in recourse; and
(g) all Contingent Liabilities of such Person in respect of any of
the foregoing.
For all purposes of this Agreement, the Indebtedness of any Person shall include
the Indebtedness of any partnership or joint venture in which such Person is a
general partner or a joint venturer.
"Indemnified Liabilities" is defined in Section 10.4.
----------------------- ------------
"Indemnified Parties" is defined in Section 10.4.
------------------- ------------
"Ingram Micro" means Ingram Micro, Inc.
------------
"Interest Period" means, relative to any LIBO Rate Loans, the period
---------------
beginning on (and including) the date
11
<PAGE>
on which such LIBO Rate Loan is made or continued as, or converted into, a LIBO
Rate Loan pursuant to Section 2.3 or 2.4 and shall end on (but exclude) the
----------- ---
day which numerically corresponds
12
<PAGE>
to such date one, two or three months thereafter (or, if such month has no
numerically corresponding day, on the last Business Day of such month), as the
Borrower may select in its
13
<PAGE>
relevant notice pursuant to Section 2.3 or 2.4; provided, however, that
----------- --- -------- -------
(a) the Borrower shall not be permitted to select Interest Periods to
be in effect at any one time which have expiration dates occurring on more
than five different dates;
(b) Interest Periods commencing on the same date for Loans comprising
part of the same Borrowing shall be of the same duration;
(c) if such Interest Period would otherwise end on a day which is not
a Business Day, such Interest Period shall end on the next following
Business Day (unless such next following Business Day is the first Business
Day of a calendar month, in which case such Interest Period shall end on
the Business Day next preceding such numerically corresponding day); and
(d) no Interest Period may end later than the date set forth in
clause (a) of the definition of "Commitment Termination Date".
--------- ---------------------------
"Investment" means, relative to any Person,
----------
14
<PAGE>
(a) any loan or advance made by such Person to any other Person
(excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business);
(b) any Contingent Liability of such Person; and
(c) any ownership or similar interest held by such Person in any
other Person.
The amount of any Investment shall be the original principal or capital amount
thereof less all returns of principal or equity thereon (and without adjustment
by reason of the financial condition of such other Person) and shall, if made by
the transfer or exchange of property other than cash, be deemed to have been
made in an original principal or capital amount equal to the fair market value
of such property.
"IPO" means a primary underwritten public offering of the common stock of
---
the Borrower, other than a public offering of sale pursuant to a registration
statement on Form S-8 or a comparable form.
"L/C Fees" is defined in Section 3.3.2.
-------- -------------
"L/C Issuer" means Scotiabank and its successors and assigns.
----------
"Lenders" is defined in the preamble.
------- --------
"Lender Assignment Agreement" means a Lender Assignment Agreement
---------------------------
substantially in the form of Exhibit D hereto.
---------
"Letter of Credit" means a standby or commercial letter of credit issued at
----------------
the request and for the account of the Borrower or for the account of the
Borrower and one or more of its Subsidiaries pursuant to Section 2.7.
-----------
"LIBO Rate" means, relative to any Interest Period for LIBO Rate Loans, the
---------
rate of interest equal to the average (rounded upwards, if necessary, to the
nearest 1/16 of 1%) of the rates per annum at which Dollar deposits in
immediately available funds
15
<PAGE>
are offered to Scotiabank's LIBOR Office in the London interbank market as at or
about 11:00 a.m. London time two Business Days prior to the beginning of such
Interest Period for delivery on the first day of such Interest Period, and in an
amount approximately equal to the amount of Scotiabank's LIBO Rate Loan and for
a period approximately equal to such Interest Period.
"LIBO Rate Loan" means a Loan bearing interest, at all times during an
--------------
Interest Period applicable to such Loan, at a fixed rate of interest determined
by reference to the LIBO Rate (Reserve Adjusted).
"LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made,
----------------------------
continued or maintained as, or converted into, a LIBO Rate Loan for any Interest
Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of
1%) determined pursuant to the following formula:
LIBO Rate = LIBO Rate
-------------------------------
(Reserve Adjusted) 1.00 - LIBOR Reserve Percentage
The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate
Loans will be determined by the Agent on the basis of the LIBOR Reserve
Percentage in effect two Business Days before the first day of such Interest
Period.
"LIBOR Office" means, relative to any Lender, the office of such Lender
------------
designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a Lender as designated from time to
time by notice from such Lender to the Borrower and the Agent, whether or not
outside the United States, which shall be making or maintaining LIBO Rate Loans
of such Lender hereunder.
"LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO
------------------------
Rate Loans, the reserve percentage (expressed as a decimal) equal to the maximum
aggregate reserve requirements (including all basic, emergency, supplemental,
marginal and other reserves and taking into account any transitional adjustments
or other scheduled changes in reserve requirements) specified under regulations
issued from time to time by the F.R.S. Board and then applicable to assets or
liabilities consisting of and including
16
<PAGE>
"Eurocurrency Liabilities", as currently defined in Regulation D of the F.R.S.
Board, having a term approximately equal or comparable to such Interest Period.
"Lien" means any security interest, mortgage, pledge, hypothecation,
----
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property to secure payment of a debt or
performance of an obligation or other priority or preferential arrangement of
any kind or nature whatsoever.
"Loan" is defined in Section 2.1.1.
---- -------------
"Loan Document" means this Agreement, the Notes, the Guaranty, the Account
-------------
Control Agreement and each other relevant agreement, document or instrument
delivered in connection with this Agreement.
"Monthly Payment Date" means the last day of each calendar month or, if any
--------------------
such day is not a Business Day, the next succeeding Business Day.
"Note" means a promissory note of the Borrower payable to any Lender, in
----
the form of Exhibit A hereto (as such promissory note may be amended, endorsed
---------
or otherwise modified from time to time), evidencing the aggregate Indebtedness
of the Borrower to such Lender resulting from outstanding Loans, and also means
all other promissory notes accepted from time to time in substitution therefor
or renewal thereof.
"Obligations" means all obligations (monetary or otherwise) of the Borrower
-----------
arising under or in connection with this Agreement, the Notes, each Letter of
Credit and each other Loan Document.
"Obligor" means the Borrower, the Trust or any other Person (other than the
-------
Agent or any Lender) obligated under any Loan Document.
"Organic Document" means, relative to any Obligor, its certificate of
----------------
incorporation, its by-laws and all shareholder
17
<PAGE>
agreements, voting trusts and similar arrangements applicable to any of its
authorized shares of capital stock.
"Participant" is defined in Section 10.11.
----------- -------------
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
----
succeeding to any or all of its functions under ERISA.
"Pension Plan" means a "pension plan", as such term is defined in section
------------
3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer
plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or
any corporation, trade or business that is, along with the Borrower, a member of
a Controlled Group, may have liability, including any liability by reason of
having been a substantial employer within the meaning of section 4063 of ERISA
at any time during the preceding five years, or by reason of being deemed to be
a contributing sponsor under section 4069 of ERISA.
"Percentage" means, relative to any Lender, the percentage set forth
----------
opposite its signature hereto or set forth in the Lender Assignment Agreement,
as such percentage may be adjusted from time to time pursuant to Lender
Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and
delivered pursuant to Section 10.11.
-------------
"Person" means any natural person, corporation, firm, association,
------
government, governmental agency or any other entity, whether acting in an
individual, fiduciary or other capacity.
"Plan" means any Pension Plan or Welfare Plan.
----
"Quarterly Payment Date" means the last day of each March, June, September,
----------------------
and December or, if any such day is not a Business Day, the next succeeding
Business Day.
"Release" means a "release", as such term is defined in CERCLA.
-------
"Required Lenders" means, at any time, Lenders holding at least 51% of the
----------------
then aggregate outstanding principal amount of the Notes then held by the
Lenders, or, if no such principal
18
<PAGE>
amount is then outstanding, Lenders having at least 51% of the Commitments.
"Resource Conservation and Recovery Act" means the Resource Conservation
--------------------------------------
and Recovery Act, 42 U.S.C. Section 690, et seq., as in effect from time to
-- ---
time.
"Stated Maturity Date" means July 19, 2000.
--------------------
"Subordinated Debt" means all unsecured Indebtedness of the Borrower for
-----------------
money borrowed which is subordinated, upon terms satisfactory to the Agent and
the Required Lenders, in right of payment to the payment in full in cash of all
Obligations.
"Subsidiary" means, with respect to any Person, any corporation of which
----------
more than 50% of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by such Person, by such
Person and one or more other Subsidiaries of such Person, or by one or more
other Subsidiaries of such Person.
"Tangible Net Worth" means the consolidated net worth of the Borrower and
------------------
its Subsidiaries after subtracting therefrom the aggregate amount of any
intangible assets of the Borrower and its Subsidiaries, including goodwill,
franchises, licenses, patents, trademarks, trade names, copyrights, service
marks and brand names.
"Taxes" is defined in Section 4.6.
----- -----------
"Trust" means the Scott A. Blum Separate Property Trust dated August 2,
-----
1995.
"type" means, relative to any Loan, the portion thereof, if any, being
----
maintained as a Base Rate Loan or a LIBO Rate Loan.
"United States" or "U.S." means the United States of America, its fifty
------------- ----
States and the District of Columbia.
19
<PAGE>
"Warrant" means that certain warrant executed and delivered by the Borrower
-------
pursuant to Section 5.1.6, substantially in the form of Exhibit G hereto, as
------------- ---------
amended, supplemented, restated or otherwise modified from time to time.
"Welfare Plan" means a "welfare plan", as such term is defined in section
------------
3(1) of ERISA.
SECTION I.2 Use of Defined Terms. Unless otherwise defined or the
--------------------
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in the Disclosure Schedule and in
each Note, Borrowing Request, Continuation/Conversion Notice, Loan Document,
notice and other communication delivered from time to time in connection with
this Agreement or any other Loan Document.
SECTION I.3 Cross-References. Unless otherwise specified, references in
----------------
this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section of this Agreement or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause of
such Article, Section or definition.
SECTION I.4 Accounting and Financial Determinations. Unless otherwise
---------------------------------------
specified, all accounting terms used herein or in any other Loan Document shall
be interpreted, all accounting determinations and computations hereunder or
thereunder (including under Section 7.2.4) shall be made, and all financial
-------------
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with, those generally accepted accounting principles ("GAAP") applied
----
in the preparation of the financial statements referred to in Section 6.5.
-----------
ARTICLE II
COMMITMENTS, BORROWING PROCEDURES AND NOTES
SECTION II.1 Commitments. On the terms and subject to the conditions of
-----------
this Agreement (including Article V), each Lender
---------
20
<PAGE>
severally agrees to make Loans pursuant to the Commitments described in this
Section 2.1.
- -----------
SECTION II.1.1 Commitment of Each Lender. From time to time on any
-------------------------
Business Day occurring prior to the Commitment Termination Date, each Lender
will make loans relative to such Lender, and of any type (its "Loans") to the
-----
Borrower equal to such Lender's Percentage of the aggregate amount of the
Borrowing requested by the Borrower to be made on such day. The commitment of
each Lender described in this Section 2.1.1 is herein referred to as its
-------------
"Commitment". On the terms and subject to the conditions hereof, the Borrower
- -----------
may from time to time borrow, prepay and reborrow Loans.
SECTION II.1.2 Lenders Not Permitted or Required To Make Loans. No Lender
-----------------------------------------------
shall be permitted or required to make any Loan if, after giving effect thereto,
the aggregate outstanding principal amount of all Loans
(a) of all Lenders would exceed the Commitment Amount, or
(b) of such Lender would exceed such Lender's Percentage of the
Commitment Amount.
SECTION II.2 Reduction of Commitment Amount. The Commitment Amount is
------------------------------
subject to reduction from time to time pursuant to this Section 2.2.
-----------
SECTION II.2.1 Optional. The Borrower may, from time to time on any
--------
Business Day, voluntarily reduce the Commitment Amount; provided, however, that
-------- -------
all such reductions shall require at least three Business Days' prior notice to
the Agent and be permanent, and any partial reduction of the Commitment Amount
shall be in a minimum amount of $1,000,000 and in an integral multiple of
$250,000.
SECTION II.2.2 Mandatory. There shall be a mandatory reduction of the
---------
Commitments by the following amounts:
21
<PAGE>
(a) One hundred percent (100%) of the net cash proceeds received by
the Borrower from the issuance of any equity securities after the date of
the IPO; and
(b) One hundred percent (100%) of the net cash proceeds received by
the Borrower from the issuance of any Subordinated Debt.
Any such reduction of the Commitments shall be effective on the first Business
Day following the Borrower's receipt of net cash proceeds.
SECTION II.2.3 Special Letter of Credit Provisions. Notwithstanding
-----------------------------------
anything to the contrary herein, the Borrower may not reduce the Commitments to
an amount less than the aggregate undrawn face amount of outstanding Letters of
Credit then in effect unless the Borrower shall have deposited with the Lender
all amounts required pursuant to the second paragraph of Section 2.7 hereof.
-----------
SECTION II.3 Borrowing Procedure. The Borrower may from time to time
-------------------
irrevocably request that a Borrowing be made by delivering a Borrowing Request
to the Agent (i) for a LIBO Rate Loan, on or before 11:00 a.m., San Francisco
time, on a Business Day, at least three Business Days prior to the date of such
proposed Borrowing, in a minimum amount of $1,000,000 or an integral multiple of
$250,000 in excess thereof, or in the unused amount of the Commitments and (ii)
for a Base Rate Loan, on or before 11:00 a.m., San Francisco time, on a Business
Day, at least one Business Day prior to the date of such proposed Borrowing, in
a minimum amount of $500,000 or an integral multiple of $250,000 in excess
thereof, or in the unused amount of the Commitments. On the terms and subject
to the conditions of this Agreement, each Borrowing shall be comprised of the
type of Loans, and shall be made on the Business Day, specified in such
Borrowing Request. On or before 11:00 a.m. (San Francisco time) on such
Business Day, each Lender shall deposit with the Agent same day funds in an
amount equal to such Lender's Percentage of the requested Borrowing. Such
deposit will be made to an account which the Agent shall specify from time to
time by notice to the Lenders. To the extent funds are received from the
Lenders, the Agent shall make such funds available to the
22
<PAGE>
Borrower by wire transfer to the accounts the Borrower shall have specified in
its Borrowing Request. No Lender's obligation to make any Loan shall be affected
by any other Lender's failure to make any Loan.
SECTION II.4 Continuation and Conversion Elections. By delivering a
-------------------------------------
Continuation/Conversion Notice to the Agent on or before 11:00 a.m., San
Francisco time, on a Business Day, the Borrower may from time to time
irrevocably elect, on not less than three Business Days' notice that all, or any
portion in an aggregate minimum amount of $1,000,000 and an integral multiple of
$500,000, of any Loans be, in the case of Base Rate Loans, converted into LIBO
Rate Loans or, in the case of LIBO Rate Loans, be continued as a LIBO Rate Loan
(in the absence of delivery of a Continuation/ Conversion Notice with respect to
any LIBO Rate Loan at least three Business Days before the last day of the then
current Interest Period with respect thereto, such LIBO Rate Loan shall, on such
last day, automatically convert to a Base Rate Loan); provided, however, that
-------- -------
(i) each such conversion or continuation shall be pro rated among the applicable
outstanding Loans of all Lenders, and (ii) no portion of the outstanding
principal amount of any Loans may be continued as, or be converted into, LIBO
Rate Loans when any Default has occurred and is continuing.
SECTION II.5 Funding. Each Lender may, if it so elects, fulfill its
-------
obligation to make, continue or convert LIBO Rate Loans hereunder by causing one
of its foreign branches or Affiliates to make or maintain such LIBO Rate Loan;
provided, however, that such LIBO Rate Loan shall nonetheless be deemed to have
- -------- -------
been made and to be held by such Lender, and the obligation of the Borrower to
repay such LIBO Rate Loan shall nevertheless be to such Lender for the account
of such foreign branch, Affiliate or international banking facility. In
addition, the Borrower hereby consents and agrees that, for purposes of any
determination to be made for purposes of Sections 4.1, 4.2, 4.3 or 4.4, it shall
------------ --- --- ---
be conclusively assumed that each Lender elected to fund all LIBO Rate Loans by
purchasing Dollar deposits in its LIBOR Office's interbank eurodollar market.
SECTION II.6 Notes. Each Lender's Loans under its Commitment shall be
-----
evidenced by a Note payable to the order of
23
<PAGE>
such Lender in a maximum principal amount equal to such Lender's Percentage of
the original Commitment Amount. The Borrower hereby irrevocably authorizes each
Lender to make (or cause to be made) appropriate notations on the grid attached
to such Lender's Note (or on any continuation of such grid), which notations, if
made, shall evidence, inter alia, the date of, the outstanding principal of, and
----------
the interest rate and Interest Period applicable to the Loans evidenced thereby.
Such notations shall be conclusive and binding on the Borrower absent manifest
error; provided, however, that the failure of any Lender to make any such
-------- -------
notations shall not limit or otherwise affect any Obligations of the Borrower or
any other Obligor.
SECTION II.7 Letter of Credit Procedure. The Borrower may from time to
--------------------------
time request that a Letter of Credit be issued by delivering to the Agent on a
Business Day, at least three Business Days prior to the date of such proposed
issuance, a Letter of Credit application in Scotiabank's then standard form,
completed to the reasonable satisfaction of Scotiabank, and such other
certificates as Scotiabank may reasonably request; provided, however, that no
-------- -------
Letter of Credit shall be issued in any currency other than U.S. dollars and no
Letter of Credit shall be issued if after giving effect to the issuance thereof,
the aggregate undrawn face amount of outstanding Letters of Credit would exceed
the lesser of (a) $2,623,000 or (b) the Commitment Amount minus the aggregate
-----
unpaid principal amount of Loans then outstanding. On the terms and subject to
the conditions of this Agreement, each Letter of Credit shall be issued by
Scotiabank on the Business Day specified in the Borrower's application therefor.
Each request for a Letter of Credit and each Letter of Credit shall be subject
to the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication Number 500. Each Letter of Credit
will be issued for a term of not more than one year, and in no event shall any
Letter of Credit have an expiration date later than the Stated Maturity Date.
Upon any termination of the Commitments prior to the Stated Maturity Date,
the Borrower shall deposit with Scotiabank an amount equal to 105% of the
aggregate amount available to be drawn under outstanding Letters of Credit, such
amount to be placed in a segregated, interest-bearing cash collateral account
24
<PAGE>
pledged to Scotiabank as collateral hereunder over which the Borrower shall have
no control but which shall be applied solely to repay the Borrower's obligations
in connection with such Letters of Credit unless an Event of Default has
occurred and is continuing. In the event the expiration date (or earlier
termination) of any Letter of Credit should occur with no draw having been made
thereunder for which the Borrower has not made reimbursement and so long as no
Event of Default has occurred and is continuing, the amount of the cash
collateral account shall be reduced by 105% of the undrawn amount of such
expired Letter of Credit, and the amount of such reduction shall be paid to the
Borrower (and, in the case of the final Letter of Credit to expire or otherwise
be terminated, the remaining balance of the cash collateral account shall be
paid to the Borrower).
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
SECTION III.1 Repayments and Prepayments. The Borrower shall repay in
--------------------------
full the unpaid principal amount of each Loan upon the Stated Maturity Date
therefor. Prior thereto, the Borrower
(a) may, from time to time on any Business Day, make a voluntary
prepayment, in whole or in part, of the outstanding principal amount of any
Loans; provided, however, that
-------- -------
(i) any such prepayment shall be made pro rata among Loans of
the same type and, if applicable, having the same Interest Period of
all Lenders;
(ii) no such prepayment of any LIBO Rate Loan may be made on any
day other than the last day of the Interest Period for such Loan;
(iii) all such voluntary prepayments shall require at least three
but no more than five Business Days' prior written notice to the
Agent; and
25
<PAGE>
(iv) all such voluntary partial prepayments shall be in an
aggregate minimum amount of $1,000,000 and an integral multiple of
$250,000;
(b) shall, on each date when any reduction in the Commitment Amount
shall become effective, make a mandatory prepayment of all Loans equal to
the excess, if any, of the aggregate, outstanding principal amount of all
Loans over the Commitment Amount as so reduced;
(c) shall, on or before the first Business Day following its receipt
of net cash proceeds from the IPO, make a mandatory prepayment of the Loans
in an amount equal to the lesser of the amount of such IPO proceeds or the
outstanding Obligations; and
(d) shall, immediately upon any acceleration of the Stated Maturity
Date of any Loans pursuant to Section 8.2 or Section 8.3, repay all Loans,
----------- -----------
unless, pursuant to Section 8.3, only a portion of all Loans is so
-----------
accelerated.
Each prepayment of any Loans made pursuant to this Section shall be without
premium or penalty, except as may be required by Section 4.4. No voluntary
-----------
prepayment of principal of any Loans shall cause a reduction in the Commitment
Amount.
SECTION III.2 Interest Provisions. Interest on the outstanding principal
-------------------
amount of Loans shall accrue and be payable in accordance with this Section 3.2.
-----------
SECTION III.2.1 Rates. Pursuant to an appropriately delivered Borrowing
-----
Request or Continuation/Conversion Notice, the Borrower may elect that Loans
comprising a Borrowing accrue interest at a rate per annum:
(a) on that portion maintained from time to time as a Base Rate Loan,
equal to the sum of the Alternate Base Rate from time to time in effect
plus a margin of 2.0%; and
(b) on that portion maintained as a LIBO Rate Loan, during each
Interest Period applicable thereto, equal to the
26
<PAGE>
sum of the LIBO Rate (Reserve Adjusted) for such Interest Period plus a
margin of 3.0%.
In the event that the IPO shall not have occurred within six months after the
Effective Date, the margins set forth in clauses (a) and (b) above shall
increase by an additional 0.5%.
All LIBO Rate Loans shall bear interest from and including the first day of
the applicable Interest Period to (but not including) the last day of such
Interest Period at the interest rate determined as applicable to such LIBO Rate
Loan.
SECTION III.2.2 Post-Maturity Rates. After the date any principal amount
-------------------
of any Loan is due and payable (whether on the Stated Maturity Date, upon
acceleration or otherwise), or after any other monetary Obligation of the
Borrower shall have become due and payable, the Borrower shall pay, but only to
the extent permitted by law, interest (after as well as before judgment) on such
amounts at a rate per annum equal to the Alternate Base Rate plus the applicable
margin for Base Rate Loans under Section 3.2.1 plus an additional margin of
-------------
2.0%.
SECTION III.2.3 Payment Dates. Interest accrued on each Loan shall be
-------------
payable, without duplication:
(a) on the Stated Maturity Date therefor;
(b) on the date of any payment or prepayment, in whole or in part, of
principal outstanding on such Loan;
(c) with respect to Base Rate Loans, on each Monthly Payment Date
occurring after the Effective Date;
(d) with respect to LIBO Rate Loans, the last day of each applicable
Interest Period; and
(e) on that portion of any Loans the Stated Maturity Date of which is
accelerated pursuant to Section 8.2 or Section 8.3, immediately upon such
----------- -----------
acceleration.
Interest accrued on Loans or other monetary Obligations arising under this
Agreement or any other Loan Document after the date
27
<PAGE>
such amount is due and payable (whether on the Stated Maturity Date, upon
acceleration or otherwise) shall be payable upon demand.
SECTION III.3 Fees. The Borrower agrees to pay the fees set forth in this
----
Section 3.3. All such fees shall be non-refundable.
- -----------
SECTION III.3.1 Commitment Fee. The Borrower agrees to pay to the Agent,
--------------
for the account of each Lender, for the period (including any portion thereof
when its Commitment is suspended by reason of the Borrower's inability to
satisfy any condition of Article V) commencing on the Effective Date and
---------
continuing through the final Commitment Termination Date, a commitment fee at
the rate of 0.5 of 1% per annum on such Lender's Percentage of the sum of the
average daily unused portion of the Commitment Amount. Such commitment fees
shall be payable by the Borrower in arrears on each Quarterly Payment Date,
commencing with the first such day following the Effective Date and on the
Commitment Termination Date.
SECTION III.3.2 Letter of Credit Fees. The Borrower agrees to pay to the
---------------------
Agent, for the account of each Lender, letter of credit fees (the "L/C Fees")
--------
on the average daily face amount of outstanding Letters of Credit during each
Fiscal Quarter, calculated at a per annum rate equal to the applicable margin
for LIBO Rate Loans in effect from time to time. The Borrower further agrees to
pay to Scotiabank a fronting fee (the "Fronting Fee") equal to 0.125% per annum
------------
of the average daily face amount of outstanding Letters of Credit. The L/C Fees
and the Fronting Fee shall be computed on the basis of a year comprised of 360
days and shall be payable quarterly in arrears, on each Quarterly Payment Date.
SECTION III.3.3 Agreement to Repay Letter of Credit Drawings with Loans.
-------------------------------------------------------
The Borrower agrees to reimburse the L/C Issuer for each draft that is paid
under any Letter of Credit for the amount of (a) such draft and (b) any
reasonable taxes, fees, charges or other costs and expenses incurred by the L/C
Issuer in connection with such payment, whether such draft is paid before, on or
after termination of the Commitments. Upon notice by the L/C Issuer to the
Borrower on any day that payment has been made
28
<PAGE>
under any Letter of Credit, the Borrower shall reimburse the L/C Issuer with its
own funds or with the proceeds of a Loan not later than the following Business
Day. Interest shall be payable on any and all unreimbursed amounts advanced by
the L/C Issuer under this Section from the date such amounts have been advanced
by the L/C Issuer until reimbursed at the rate of interest payable on Base Rate
Loans.
The payment obligations of the Borrower under this Section shall be
unconditional and irrevocable and shall be paid strictly in accordance with the
terms of this Agreement under all circumstances, including without limitation,
the following circumstances:
(a) the existence of any claim, set-off, defense or other right which
the Borrower may have at any time against any beneficiary, or any
transferee, of any Letter of Credit (or any Persons for whom any such
beneficiary or any such transferee may be acting), the L/C Issuer or any
other Person, whether in connection with this Agreement, the transactions
contemplated herein, or any unrelated transaction;
(b) any statement or any other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or unenforceable in any
respect or any statement therein being untrue or inaccurate in any respect;
or
(c) payment by the L/C Issuer under any Letter of Credit against
presentation of drafts, certificates, claims, documents or required
statements that do not strictly comply with the terms of the Letter of
Credit;
provided, however, that the Borrower shall not be liable for any reimbursement
- -------- -------
obligation to the extent of any losses by the Borrower which are determined by a
court of competent jurisdiction in a final proceeding to have resulted from the
L/C Issuer's gross negligence or wilful misconduct.
SECTION III.4 Letter of Credit Participations. The L/C Issuer irrevocably
-------------------------------
agrees to grant and hereby grants to each Lender, and, to induce the L/C Issuer
to issue Letters of Credit
29
<PAGE>
hereunder, each Lender irrevocably agrees to accept and purchase and hereby
accepts and purchases from the L/C Issuer for such Lender's own account and risk
an undivided interest equal to such Lender's Percentage in the L/C Issuer's
obligations and rights under each Letter of Credit issued hereunder and each
draft paid by the L/C Issuer hereunder.
Upon presentation of a draft drawn under any Letter of Credit, the L/C
Issuer shall promptly notify the Agent and the Agent shall promptly notify each
Lender of the amount under such draft and of such Lender's Percentage of such
amount. Unless (i) the Borrower shall have previously reimbursed the L/C Issuer
for the amount of such draft or (ii) there is a sufficient amount in any cash
collateral account established to cover payments to be made under such Letter of
Credit, each of the Lenders shall thereafter make a Loan in an amount equal to
such Lender's Percentage of the amount of such payment made by the L/C Issuer,
together with any accrued and unpaid interest thereon. Each Lender shall pay
the proceeds of its Loan, in immediately available funds, directly to the Agent
for the account of the L/C Issuer, not later than 1:00 p.m. New York time, on
the following Business Day. Loans made by the Lenders to repay amounts under
Letters of Credit pursuant to this subsection shall constitute Loans hereunder,
initially shall be Base Rate Loans and shall be subject to all of the provisions
of this Agreement concerning Loans, except that such Loans shall be made upon
demand by the Agent as set forth above rather than upon notice by the Borrower,
and shall be made, notwithstanding anything in this Agreement to the contrary,
without regard to satisfaction of conditions precedent to the making of Loans
set forth in Article V of this Agreement.
---------
Each Lender's obligation to make Loans in the amount of its Percentage of
any unreimbursed amounts outstanding under a Letter of Credit pursuant hereto is
several, and not joint or joint and several. The failure of any Lender to
perform its obligation to make a Loan in the amount of such Lender's Percentage
of any unreimbursed amounts outstanding under a Letter of Credit will not
relieve any other Lender of its obligation hereunder to make a Loan in the
amount of such other Lender's Percentage of such amounts. Any Lender may, but
shall have no obligation to any Person to, assume all or any portion of any non-
performing
30
<PAGE>
Lender's obligation to make a Loan in the amount of such Lender's Percentage of
such amount outstanding under a Letter of Credit. The Borrower agrees to accept
the Loans hereinabove provided, whether or not such loans could have been made
pursuant to the terms of Section 5.2 hereof, or any other Section of this
-----------
Agreement.
ARTICLE IV
CERTAIN LIBO RATE AND OTHER PROVISIONS
SECTION IV.1 LIBO Rate Lending Unlawful. If any Lender shall determine
--------------------------
(which determination shall, upon notice thereof to the Borrower and the Lenders,
be conclusive and binding on the Borrower) that the introduction of or any
change in or in the interpretation of any law makes it unlawful, or any central
bank or other governmental authority asserts that it is unlawful, for such
Lender to make, continue or maintain any Loan as, or to convert any Loan into, a
LIBO Rate Loan, the obligations of all Lenders to make, continue, maintain or
convert any such Loans shall, upon such determination, forthwith be suspended
until such Lender shall notify the Agent that the circumstances causing such
suspension no longer exist, and all LIBO Rate Loans shall automatically convert
into Base Rate Loans at the end of the then current Interest Periods with
respect thereto or sooner, if required by such law or assertion.
SECTION IV.2 Deposits Unavailable. If the Agent shall have determined
--------------------
that
(a) Dollar deposits in the relevant amount and for the relevant
Interest Period are not available to Scotiabank in its relevant market; or
(b) by reason of circumstances affecting Scotiabank's relevant
market, adequate means do not exist for ascertaining the interest rate
applicable hereunder to LIBO Rate Loans,
then, upon notice from the Agent to the Borrower and the Lenders, the
obligations of all Lenders under Section 2.3 and Section 2.4
----------- -----------
31
<PAGE>
to make or continue any Loans as, or to convert any Loans into, LIBO Rate Loans
shall forthwith be suspended until the Agent shall notify the Borrower and the
Lenders that the circumstances causing such suspension no longer exist.
SECTION IV.3 Increased Costs, etc. The Borrower agrees to reimburse each
--------------------
Lender for any increase in the cost to such Lender of, or any reduction in the
amount of any sum receivable by such Lender in respect of, (i) making,
continuing or maintaining (or of its obligation to make, continue or maintain)
any Loans as, or of converting (or of its obligation to convert) any Loans into,
LIBO Rate Loans or (ii) any Letter of Credit issued hereunder. Such Lender
shall promptly notify the Agent and the Borrower in writing of the occurrence of
any such event, such notice to state, in reasonable detail, the reasons therefor
and the additional amount required fully to compensate such Lender for such
increased cost or reduced amount. Such additional amounts shall be payable by
the Borrower directly to such Lender within five days of its receipt of such
notice, and such notice shall, in the absence of manifest error, be conclusive
and binding on the Borrower.
SECTION IV.4 Funding Losses. In the event any Lender shall incur any
--------------
loss or expense (including any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such Lender
to make, continue or maintain any portion of the principal amount of any Loan
as, or to convert any portion of the principal amount of any Loan into, a LIBO
Rate Loan) as a result of
(a) any conversion or repayment or prepayment of the principal amount
of any LIBO Rate Loans on a date other than the scheduled last day of the
Interest Period applicable thereto, whether pursuant to Section 3.1 or
-----------
otherwise;
(b) any Loans not being made as LIBO Rate Loans in accordance with
the Borrowing Request therefor; or
(c) any Loans not being continued as, or converted into, LIBO Rate
Loans in accordance with the Continuation/ Conversion Notice therefor,
32
<PAGE>
then, upon the written notice of such Lender to the Borrower (with a copy to the
Agent), the Borrower shall, within five days of its receipt thereof, pay
directly to such Lender such amount as will (in the reasonable determination of
such Lender) reimburse such Lender for such loss or expense. Such written
notice (which shall include calculations in reasonable detail) shall, in the
absence of manifest error, be conclusive and binding on the Borrower.
SECTION IV.5 Increased Capital Costs. If any change in, or the
-----------------------
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any law or regulation, directive, guideline, decision or request
(whether or not having the force of law) of any court, central bank, regulator
or other governmental authority affects or would affect the amount of capital
required or expected to be maintained by any Lender or any Person controlling
such Lender, and such Lender determines (in its sole and absolute discretion)
that the rate of return on its or such controlling Person's capital as a
consequence of its Commitment or the Loans made by such Lender or any Letter of
Credit issued by such Lender is reduced to a level below that which such Lender
or such controlling Person could have achieved but for the occurrence of any
such circumstance, then, in any such case upon notice from time to time by such
Lender to the Borrower, the Borrower shall immediately pay directly to such
Lender additional amounts sufficient to compensate such Lender or such
controlling Person for such reduction in rate of return. A statement of such
Lender as to any such additional amount or amounts (including calculations
thereof in reasonable detail) shall, in the absence of manifest error, be
conclusive and binding on the Borrower. In determining such amount, such Lender
may use any method of averaging and attribution that it (in its sole and
absolute discretion) shall deem applicable.
SECTION IV.6 Taxes. All payments by the Borrower of principal of, and
-----
interest on, the Loans, all reimbursements by the Borrower of any amounts drawn
under a Letter of Credit and all other amounts payable hereunder shall be made
free and clear of and without deduction for any present or future income,
excise, stamp or other taxes, fees, duties, withholdings or other charges of any
nature whatsoever imposed by any taxing authority, other than franchise taxes
and taxes imposed on or measured by
33
<PAGE>
any Lender's net income or receipts (such non-excluded items being called
"Taxes"). In the event that any withholding or deduction from any payment to be
-----
made by the Borrower hereunder is required in respect of any Taxes pursuant to
any applicable law, rule or regulation, then the Borrower will
(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to the Agent an official receipt or other
documentation satisfactory to the Agent evidencing such payment to such
authority; and
(c) pay to the Agent for the account of the Lenders such additional
amount or amounts as is necessary to ensure that the net amount actually
received by each Lender will equal the full amount such Lender would have
received had no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the Agent or any Lender
with respect to any payment received by the Agent or such Lender hereunder, the
Agent or such Lender may pay such Taxes and the Borrower will promptly pay such
additional amounts (including any penalties, interest or expenses) as is
necessary in order that the net amount received by such person after the payment
of such Taxes (including any Taxes on such additional amount) shall equal the
amount such person would have received had not such Taxes been asserted.
If the Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to the Agent, for the account of the respective
Lenders, the required receipts or other required documentary evidence, the
Borrower shall indemnify the Lenders for any incremental Taxes, interest or
penalties that may become payable by any Lender as a result of any such failure.
For purposes of this Section 4.6, a distribution hereunder by the Agent or any
-----------
Lender to or for the account of any Lender shall be deemed a payment by the
Borrower.
Each non-United States Lender represents and warrants to the Agent and the
Borrower as of the date hereof that under applicable law and treaties such
Lender is entitled to claim the
34
<PAGE>
benefit of complete exemption from imposition of United States withholding tax
or that the income receivable pursuant to this Agreement is effectively
connected with the conduct of a trade or business in the United States. The
Agent and each Lender represents and warrants to the Borrower that as of the
date of this Agreement, there are no Taxes being asserted against Agent or any
Lender.
SECTION IV.7 Payments, Computations, etc. All payments by the Borrower
---------------------------
pursuant to this Agreement, the Notes or any other Loan Document shall be made
by the Borrower to the Agent for the pro rata account of the Lenders entitled to
receive such payment. All such payments required to be made to the Agent shall
be made, without setoff, deduction or counterclaim, not later than 11:00 a.m.,
San Francisco time, on the date due, in same day or immediately available funds,
to such account as the Agent shall specify from time to time by notice to the
Borrower. Funds received after that time shall be deemed to have been received
by the Agent on the next succeeding Business Day. The Agent shall promptly
remit in same day funds to each Lender its share, if any, of such payments
received by the Agent for the account of such Lender. All interest and fees
shall be computed on the basis of the actual number of days (including the first
day but excluding the last day) occurring during the period for which such
interest or fee is payable over a year comprised of 360 days (or, in the case of
interest on a Base Rate Loan, 365 days or, if appropriate, 366 days). Whenever
any payment to be made shall otherwise be due on a day which is not a Business
Day, such payment shall (except as otherwise required by clause (c) of the
----------
definition of the term "Interest Period" with respect to LIBO Rate Loans) be
---------------
made on the next succeeding Business Day and such extension of time shall be
included in computing interest and fees, if any, in connection with such
payment.
SECTION IV.8 Sharing of Payments. If any Lender shall obtain any payment
-------------------
or other recovery (whether voluntary, involuntary, by application of setoff or
otherwise) on account of any Loan (other than pursuant to the terms of Sections
--------
4.3, 4.4 and 4.5) in excess of its pro rata share of payments then or therewith
- --- --- --- --- ----
obtained by all Lenders, such Lender shall purchase from the other Lenders such
participations in Loans made by them as shall be necessary to cause such
purchasing Lender to share
35
<PAGE>
the excess payment or other recovery ratably with each of them; provided,
--------
however, that if all or any portion of the excess payment or other recovery is
- -------
thereafter recovered from such purchasing Lender, the purchase shall be
rescinded and each Lender which has sold a participation to the purchasing
Lender shall repay to the purchasing Lender the purchase price to the ratable
extent of such recovery together with an amount equal to such selling Lender's
ratable share (according to the proportion of
(a) the amount of such selling Lender's required repayment to the
purchasing Lender
to
- --
(b) the total amount so recovered from the purchasing Lender)
of any interest or other amount paid or payable by the purchasing Lender in
respect of the total amount so recovered. The Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to this Section may,
to the fullest extent permitted by law, exercise all its rights of payment
(including pursuant to Section 4.9) with respect to such participation as fully
-----------
as if such Lender were the direct creditor of the Borrower in the amount of such
participation. If under any applicable bankruptcy, insolvency or other similar
law, any Lender receives a secured claim in lieu of a setoff to which this
Section applies, such Lender shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the rights
of the Lenders entitled under this Section to share in the benefits of any
recovery on such secured claim.
SECTION IV.9 Setoff. Each Lender shall, upon the occurrence of any
------
Default described in clauses (a) through (d) of Section 8.1.9 or, with the
----------- --- -------------
consent of the Required Lenders, upon the occurrence of any other Event of
Default, have the right to appropriate and apply to the payment of the
Obligations owing to it (whether or not then due), and (as security for such
Obligations) the Borrower hereby grants to each Lender a continuing security
interest in, any and all balances, credits, deposits, accounts or moneys of the
Borrower then or thereafter
36
<PAGE>
maintained with such Lender; provided, however, that any such appropriation and
-------- -------
application shall be subject to the provisions of Section 4.8. Each Lender
-----------
agrees promptly to notify the Borrower and the Agent after any such setoff and
application made by such Lender; provided, however, that the failure to give
-------- -------
such notice shall not affect the validity of such setoff and application. The
rights of each Lender under this Section are in addition to other rights and
remedies (including other rights of setoff under applicable law or otherwise)
which such Lender may have.
SECTION IV.10 Use of Proceeds. The Borrower shall apply the proceeds of
---------------
each Borrowing in accordance with the third recital; without limiting the
----- -------
foregoing, no proceeds of any Loan will be used to acquire any equity security
of a class which is registered pursuant to Section 12 of the Securities Exchange
Act of 1934 or any "margin stock", as defined in F.R.S. Board Regulation U.
SECTION IV.11 Actions of Affected Lenders. Each Lender agrees to use
---------------------------
reasonable efforts (including reasonable efforts to change the booking office
for its Loans) to avoid or minimize any illegality pursuant to Section 4.1 or
-----------
any amounts which might otherwise be payable pursuant to Sections 4.3, 4.5 or
------------ ---
4.6; provided, however, that such efforts shall not cause the imposition on such
- --- -------- -------
Lender of any additional costs or legal or regulatory burdens deemed by such
Lender to be material. In the event that such reasonable efforts are
insufficient to avoid all such illegality pursuant to Section 4.1 or all amounts
-----------
that might be payable pursuant to Sections 4.3, 4.5 or 4.6, then the Borrower
------------ --- ---
shall have the right, but not the obligation, at its own expense, to request
such Lender (the "Affected Lender") to transfer its Commitments hereunder to any
---------------
other Lender (which itself is not then an Affected Lender) or financial
institution designated by the Borrower and approved by the Agent (which approval
shall not be unreasonably withheld), and such Lender hereby agrees to transfer
and assign without recourse (in accordance with and subject to the restrictions
contained in this Agreement) all its interests, rights and obligations under
this Agreement to such assignee; provided, however, that no Lender shall be
-------- -------
obligated to make any such assignment unless (i) such assignment shall not
conflict with any law or any rule,
37
<PAGE>
regulation or order of any governmental authority, (ii) such assignee shall pay
to the Affected Lender in immediately available funds on the date of such
assignment the principal of the Loans made by such Lender hereunder, and (iii)
the Borrower shall pay to the Affected Lender in immediately available funds on
the date of such assignment the interest accrued to the date of such assignment
hereunder and all other amounts accrued for such Lender's account or owed to it
hereunder.
ARTICLE V
CONDITIONS TO BORROWING
SECTION V.1 Initial Borrowing. The obligations of the Lenders to fund
-----------------
the initial Borrowing or issue the initial Letter of Credit shall be subject to
the prior or concurrent satisfaction of each of the conditions precedent set
forth in this Section 5.1.
-----------
SECTION V.1.1 Resolutions, etc.
----------------
(a) The Agent shall have received from the Borrower a certificate,
dated the date of the initial Borrowing, of its Secretary or Assistant
Secretary as to
(i) resolutions of its Board of Directors then in full force and
effect authorizing the execution, delivery and performance of this
Agreement, the Notes and each other Loan Document to be executed by
it; and
(ii) the incumbency and signatures of those of its officers
authorized to act with respect to this Agreement, the Notes and each
other Loan Document executed by it,
upon which certificate each Lender may conclusively rely until it shall
have received a further certificate of the Secretary of the Borrower
canceling or amending such prior certificate.
38
<PAGE>
(b) The Agent shall have received from the Trust a certificate, dated
the date of the initial Borrowing, of the trustee thereof as to
(i) the Declaration of Trust for the Trust, together with all
amendments thereto, as in effect on such date; and
(ii) the incumbency and signature of each Person authorized to
act with respect to the Guaranty, the Account Control Agreement and
each other Loan Document to be executed on behalf of the Trust,
upon which certificate each Lender may conclusively rely until it shall
have received a further certificate of the trustee canceling or amending
such prior certificate.
SECTION V.1.2 Delivery of Notes. The Agent shall have received, for the
-----------------
account of each Lender, its Notes duly executed and delivered by the Borrower.
SECTION V.1.3 Payment of Outstanding Indebtedness, etc. All Indebtedness
----------------------------------------
identified in Item 7.2.2(b) ("Indebtedness to be Paid") of the Disclosure
-------------
Schedule, together with all interest, all prepayment premiums and other amounts
due and payable with respect thereto, shall have been paid in full (including,
to the extent necessary, from proceeds of the initial Borrowing); and all Liens
securing payment of any such Indebtedness have been released and the Agent shall
have received all Uniform Commercial Code Form UCC-3 termination statements or
other instruments as may be suitable or appropriate in connection therewith.
SECTION V.1.4 Guaranty. The Agent shall have received the Guaranty, dated
--------
the date hereof, duly executed by the Trust.
SECTION V.1.5 Account Control Agreement. The Agent shall have received
-------------------------
executed counterparts of the Account Control Agreement, dated as of the date
hereof, duly executed by the Borrower, the Trust and Merrill, Lynch, Pierce,
Fenner & Smith Incorporated.
39
<PAGE>
SECTION V.1.6 Warrant. The Agent shall have received the Warrant, dated
-------
the date hereof, duly executed by the Borrower, together with a duly executed
investors rights agreement in a form satisfactory to the Agent.
SECTION V.1.7 Financial Projections. The Agent shall have received
---------------------
financial projections, in form and substance satisfactory to the Agent, covering
the 1999 and 2000 Fiscal Years of the Borrower, which projections shall include,
without limitation, income statements, balance sheets and cash flow statements.
SECTION V.1.8 Year 2000 Reprogramming. The Agent shall have received
-----------------------
confirmations to its reasonable satisfaction that the Borrower has completed all
reprogramming required to permit the proper functioning in and following the
year 2000 of computer systems owned or operated by the Borrower or used or
relied upon by the Borrower.
SECTION V.1.9 Opinion of Counsel. The Agent shall have received an
------------------
opinion, dated the date of the initial Borrowing and addressed to the Agent and
all Lenders, from Brobeck, Phleger & Harrison LLP, counsel to the Borrower and
the Trust, substantially in the form of Exhibit D hereto.
---------
SECTION V.1.10 Closing Fees, Expenses, etc. The Agent shall have received
---------------------------
for its own account, or for the account of each Lender, as the case may be, all
fees, costs and expenses due and payable pursuant to that certain fee letter
dated June 3, 1999 between the Borrower and Scotiabank and pursuant to Section
-------
10.3, if then invoiced.
- ----
SECTION V.2 All Borrowings. The obligation of each Lender to issue any
--------------
Letter of Credit or to fund any Loan on the occasion of any Borrowing (including
the initial Borrowing) shall be subject to the satisfaction of each of the
conditions precedent set forth in this Section 5.2.
-----------
SECTION V.2.1 Compliance with Warranties, No Default, etc. Both before
-------------------------------------------
and after giving effect to the issuance of a Letter of Credit or any Borrowing
(but, if any Default of the nature referred to in Section 8.1.5 shall have
-------------
occurred with respect to
40
<PAGE>
any other Indebtedness, without giving effect to the application, directly or
indirectly, of the proceeds thereof) the following statements shall be true and
correct
(a) the representations and warranties set forth in Article VI
-----------
(excluding, however, those contained in Section 6.7) shall be true and
-----------
correct with the same effect as if then made (unless stated to relate
solely to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date);
(b) the representations and warranties set forth in Section 6 of the
Guaranty shall be true and correct with the same effect as if then made
(unless stated to relate solely to an earlier date, in which case such
representations and warranties shall be true and correct as of such earlier
date);
(c) except as disclosed by the Borrower to the Agent and the Lenders
pursuant to Section 6.7
-----------
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or, to the
knowledge of the Borrower, threatened against the Borrower or any of
its Subsidiaries which might materially adversely affect the
Borrower's consolidated business, operations, assets, revenues,
properties or prospects or which purports to affect the legality,
validity or enforceability of this Agreement, the Notes or any other
Loan Document; and
(ii) no development shall have occurred in any labor controversy,
litigation, arbitration or governmental investigation or proceeding
disclosed pursuant to Section 6.7 which might materially adversely
-----------
affect the consolidated businesses, operations, assets, revenues,
properties or prospects of the Borrower and its Subsidiaries; and
(d) no Default shall have then occurred and be continuing, and
neither the Borrower, the Trust nor any of the
41
<PAGE>
Borrower's Subsidiaries are in material violation of any law or
governmental regulation or court order or decree.
SECTION V.2.2 Borrowing Request. The Agent shall have received a Borrowing
-----------------
Request for such Borrowing. Each of the delivery of a Borrowing Request and the
acceptance by the Borrower of the proceeds of such Borrowing shall constitute a
representation and warranty by the Borrower that on the date of such Borrowing
(both immediately before and after giving effect to such Borrowing and the
application of the proceeds thereof) the statements made in Section 5.2.1 are
-------------
true and correct. Each request by the Borrower for the issuance of a Letter of
Credit shall be made pursuant to a Letter of Credit application in Scotiabank's
then current form. Delivery of such application and the delivery by Scotiabank
of the Letter of Credit shall constitute a representation and warranty by the
Borrower that on the date of issuance of such Letter of Credit (both immediately
before and after giving effect thereto) the statements made in Subsection 5.2.1
----------------
are true and correct.
SECTION V.2.3 Satisfactory Legal Form. All documents executed or submitted
-----------------------
pursuant hereto by or on behalf of the Borrower or any of its Subsidiaries or
the Trust shall be reasonably satisfactory in form and substance to the Agent
and its counsel; the Agent and its counsel shall have received all information,
approvals, opinions, documents or instruments as the Agent or its counsel may
reasonably request.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders and the Agent to enter into this Agreement
and to make Loans hereunder, the Borrower represents and warrants unto the
Agent and each Lender as set forth in this Article VI.
----------
SECTION VI.1 Organization, etc. The Borrower and each of its Subsidiaries
-----------------
is a corporation validly organized and existing and in good
42
<PAGE>
standing under the laws of the state of its incorporation, is duly qualified to
do business and is in good standing as a foreign corporation in each
jurisdiction where the nature of its business requires such qualification and
failure to qualify would not have a material adverse effect on any of the
Borrower's or any of its Subsidiaries businesses, and has full power and
authority and holds all requisite governmental licenses, permits and other
approvals to enter into and perform its Obligations under this Agreement, the
Notes and each other Loan Document to which it is a party and to own and hold
under lease its property and to conduct its business substantially as currently
conducted by it.
SECTION VI.2 Due Authorization, Non-Contravention, etc. The execution,
-----------------------------------------
delivery and performance by the Borrower of this Agreement, the Notes and each
other Loan Document executed or to be executed by it, are within the Borrower's
corporate powers have been duly authorized by all necessary corporate action,
and do not
(a) contravene the Borrower's Organic Documents;
(b) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting the Borrower or
the Trust; or
(c) result in, or require the creation or imposition of, any Lien on
any of the Borrower's properties.
SECTION VI.3 Government Approval, Regulation, etc. No authorization or
------------------------------------
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body or other Person is required for the due execution,
delivery or performance by the Borrower of this Agreement, the Note or any other
Loan Document to which it is a party except those that have been obtained or
made. Neither the Borrower nor any of its Subsidiaries is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
or a "holding company", or a "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
SECTION VI.4 Validity, etc. This Agreement constitutes, and the Notes
-------------
and each other Loan Document executed by the
43
<PAGE>
Borrower will, on the due execution and delivery thereof, constitute, the legal,
valid and binding obligations of the Borrower enforceable in accordance with
their respective terms, except as enforceability may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and general
principles of equity.
SECTION VI.5 Financial Information. The unaudited balance sheets of the
---------------------
Borrower and each of its Subsidiaries as at December 31, 1998, and the related
statements of earnings and cash flow of the Borrower and each of its
Subsidiaries, copies of which were delivered by facsimile on July 19, 1999 to
the Agent and each Lender, have been prepared in accordance with GAAP
consistently applied, and present fairly the consolidated financial condition of
the corporations covered thereby as at the dates thereof and the results of
their operations for the periods then ended.
SECTION VI.6 No Material Adverse Change. Since March 31, 1999, there has
--------------------------
been no material adverse change in the financial condition, operations, assets,
business, properties or prospects of the Borrower and since April 30, 1999,
there has been no material adverse change in the financial condition,
operations, assets, business, properties or prospects of the Trust.
SECTION VI.7 Litigation, Labor Controversies, etc. There is no pending
------------------------------------
or, to the knowledge of the Borrower, threatened litigation, action, proceeding
or labor controversy affecting the Borrower, any of its Subsidiaries, or any of
their respective properties, assets or revenues, which may materially adversely
affect the financial condition, operations, assets, business, properties or
prospects of the Borrower or any such Subsidiary or which purports to affect the
legality, validity or enforceability of this Agreement, the Notes or any other
Loan Document, except as disclosed in Item 6.7 ("Litigation") of the Disclosure
--------
Schedule.
SECTION VI.8 Subsidiaries. The Borrower has no Subsidiaries, except
------------
those Subsidiaries
(a) which are identified in Item 6.8 ("Existing Subsidiaries") of the
--------
Disclosure Schedule; or
44
<PAGE>
(b) which are permitted to have been acquired in accordance with
Section 7.2.5 or 7.2.10.
------------- ------
SECTION VI.9 Ownership of Properties. The Borrower and each of its
-----------------------
Subsidiaries owns good and marketable title to all of its properties and assets,
real and personal, tangible and intangible, material to its business (including
all material patents, trademarks, trade names, service marks and copyrights),
free and clear of all Liens, material charges or claims (including infringement
claims with respect to material patents, trademarks, copyrights and the like)
except as permitted pursuant to Section 7.2.3.
-------------
SECTION VI.10 Taxes. The Borrower and each of its Subsidiaries has filed
-----
all tax returns and reports required by law to have been filed by it and has
paid all taxes and governmental charges thereby shown to be owing, except any
such taxes or charges which are being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books.
SECTION VI.11 Pension and Welfare Plans. During the twelve-consecutive-
-------------------------
month period prior to the date of the execution and delivery of this Agreement
and prior to the date of any Borrowing hereunder, no steps have been taken to
terminate any Pension Plan, and no contribution failure has occurred with
respect to any Pension Plan sufficient to give rise to a Lien under section
302(f) of ERISA. No condition exists or event or transaction has occurred with
respect to any Pension Plan which might result in the incurrence by the Borrower
or any member of the Controlled Group of any material liability, fine or
penalty. Except as disclosed in Item 6.11 ("Employee Benefit Plans") of the
---------
Disclosure Schedule, neither the Borrower nor any member of the Controlled Group
has any contingent liability with respect to any post-retirement benefit under a
Welfare Plan, other than liability for continuation coverage described in Part 6
of Title I of ERISA.
SECTION VI.12 Environmental Warranties. Except as set forth in Item 6.12
------------------------ ---------
("Environmental Matters") of the Disclosure Schedule:
45
<PAGE>
(a) all facilities and property (including underlying groundwater)
owned or leased by the Borrower or any of its Subsidiaries have been, and
continue to be, owned or leased by the Borrower and its Subsidiaries in
material compliance with all Environmental Laws;
(b) there have been no past, and there are no pending or threatened
(i) claims, complaints, notices or requests for information
received by the Borrower or any of its Subsidiaries with respect to
any alleged violation of any Environmental Law, or
(ii) complaints, notices or inquiries to the Borrower or any of
its Subsidiaries regarding material potential liability under any
Environmental Law;
(c) there have been no Releases of Hazardous Materials at, on or
under any property now or previously owned or leased by the Borrower or any
of its Subsidiaries that, singly or in the aggregate, have, or may
reasonably be expected to have, a material adverse effect on the financial
condition, operations, assets, business, properties or prospects of the
Borrower and its Subsidiaries;
(d) the Borrower and its Subsidiaries have been issued and are in
material compliance with all material permits, certificates, approvals,
licenses and other authorizations relating to environmental matters and
necessary or desirable for their businesses;
(e) no property now or previously owned or leased by the Borrower or
any of its Subsidiaries is listed or proposed for listing (with respect to
owned property only) on the National Priorities List pursuant to CERCLA, on
the CERCLIS or on any similar state list of sites requiring investigation
or clean-up;
(f) there are no underground storage tanks, active or abandoned,
including petroleum storage tanks, on or under
46
<PAGE>
any property now or previously owned or leased by the Borrower or any of
its Subsidiaries that, singly or in the aggregate, have, or may reasonably
be expected to have, a material adverse effect on the financial condition,
operations, assets, business, properties or prospects of the Borrower and
its Subsidiaries;
(g) neither Borrower nor any Subsidiary of the Borrower has directly
transported or directly arranged for the transportation of any Hazardous
Material to any location which is listed or proposed for listing on the
National Priorities List pursuant to CERCLA, on the CERCLIS or on any
similar state list or which is the subject of federal, state or local
enforcement actions or other investigations which may lead to material
claims against the Borrower or such Subsidiary thereof for any remedial
work, damage to natural resources or personal injury, including claims
under CERCLA;
(h) there are no polychlorinated biphenyls or friable asbestos
present at any property now or previously owned or leased by the Borrower
or any Subsidiary of the Borrower that, singly or in the aggregate, have,
or may reasonably be expected to have, a material adverse effect on the
financial condition, operations, assets, business, properties or prospects
of the Borrower and its Subsidiaries; and
(i) no conditions exist at, on or under any property now or
previously owned or leased by the Borrower which, with the passage of time,
or the giving of notice or both, would give rise to any material liability
under any Environmental Law.
SECTION VI.13 Regulations U and X. The Borrower is not engaged in the
-------------------
business of extending credit for the purpose of purchasing or carrying margin
stock, and no proceeds of any Loans will be used for a purpose which violates,
or would be inconsistent with, F.R.S. Board Regulation U or X. Terms for which
meanings are provided in F.R.S. Board Regulation U or X or any regulations
substituted therefor, as from time to time in effect, are used in this Section
with such meanings.
47
<PAGE>
SECTION VI.14 Accuracy of Information. All factual information heretofore
-----------------------
or contemporaneously furnished by or on behalf of the Borrower in writing to the
Agent or any Lender for purposes of or in connection with this Agreement or any
transaction contemplated hereby is, and all other such factual information
hereafter furnished by or on behalf of the Borrower to the Agent or any Lender
will be, true and accurate in every material respect on the date as of which
such information is dated or certified and as of the date of execution and
delivery of this Agreement by the Agent and such Lender, and such information is
not, or shall not be, as the case may be, incomplete by omitting to state any
material fact necessary to make such information not misleading provided that to
--------
the extent any such information, report, financial statement, exhibit or
schedule was based upon or constitutes a forecast or projection, the Borrower
represents only that it acted in good faith and utilized reasonable assumptions
and due care in the preparation of such information, report, financial
statement, exhibit or schedule (it being understood that forecasts and
projections by their nature involve approximations and uncertainties).
SECTION VI.15 Year 2000 Representations. On the basis of a comprehensive
-------------------------
review and assessment of Borrower's systems and equipment and inquiry made of
Borrower's material suppliers, vendors and customers, the Borrower reasonably
believes that the "Year 2000 problem" (that is, the inability of computers, as
well as embedded microchips in non-computing devices, to perform properly date-
sensitive functions with respect to certain dates prior to and after December
31, 1999), including costs of remediation, will not have a material adverse
change in the financial condition, operations, assets, properties or prospects
of the Borrower. The Borrower has developed reasonably feasible contingency
plans adequate to ensure uninterrupted and unimpaired business operation in the
event of failure of its own or, to the extent within the Borrower's control, a
third party's systems or equipment due to the Year 2000 problem, including those
of material vendors, customers, and suppliers, as well as a general failure of
or interruption in its communications and delivery infrastructure.
ARTICLE VII
48
<PAGE>
COVENANTS
SECTION VII.1 Affirmative Covenants. The Borrower agrees with the Agent
---------------------
and each Lender that, until all Commitments have terminated and all Obligations
have been paid and performed in full, the Borrower will perform the obligations
set forth in this Section 7.1.
-----------
SECTION VII.1.1 Financial Information, Reports, Notices, etc. The
--------------------------------------------
Borrower will furnish, or will cause to be furnished, to each Lender and the
Agent copies of the following financial statements, reports, notices and
information:
(a as soon as available and in any event within 45 days after the
end of each of the first three Fiscal Quarters of each Fiscal Year of the
Borrower, consolidated balance sheets of the Borrower and its Subsidiaries
as of the end of such Fiscal Quarter and consolidated statements of
earnings and cash flow of the Borrower and its Subsidiaries for such Fiscal
Quarter and for the period commencing at the end of the previous Fiscal
Year and ending with the end of such Fiscal Quarter, certified by the chief
financial Authorized Officer of the Borrower;
(b as soon as available and in any event within 90 days after the
end of each Fiscal Year of the Borrower, a copy of the annual audit report
for such Fiscal Year for the Borrower and its Subsidiaries, including
therein consolidated balance sheets of the Borrower and its Subsidiaries as
of the end of such Fiscal Year and consolidated statements of earnings and
cash flow of the Borrower and its Subsidiaries for such Fiscal Year, in
each case certified (without any Impermissible Qualification) in a manner
acceptable to the Agent and the Required Lenders by Arthur Andersen & Co.
or other independent public accountants acceptable to the Agent and the
Required Lenders, together with a certificate from such accountants
containing a computation of, and showing compliance with, each of the
financial ratios and restrictions contained in Section 7.2.4 and to the
-------------
effect that, in making the examination necessary for the signing of such
annual report by such accountants, they have not become aware of any
49
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Default or Event of Default that has occurred and is continuing, or, if
they have become aware of such Default or Event of Default, describing such
Default or Event of Default and the steps, if any, being taken to cure it;
(c as soon as available and in any event within 45 days after the
end of each Fiscal Quarter and 90 days after the end of each Fiscal Year, a
certificate, executed by the chief financial Authorized Officer of the
Borrower, showing (in reasonable detail and with appropriate calculations
and computations in all respects satisfactory to the Agent) compliance with
the financial covenants set forth in Section 7.2.4.;
--------------
(d as soon as possible and in any event within three days after the
occurrence of each Default, a statement of the chief financial Authorized
Officer of the Borrower setting forth details of such Default and the
action which the Borrower has taken and proposes to take with respect
thereto;
(e as soon as possible and in any event within three days after (x)
the occurrence of any materially adverse development with respect to any
litigation, action, proceeding or labor controversy described in Section
-------
6.7 or (y) the commencement of any material labor controversy, litigation,
---
action or proceeding of the type described in Section 6.7, notice thereof
-----------
and copies of all documentation relating thereto;
(f promptly after the sending or filing thereof, copies of all
reports which the Borrower sends to any of its securityholders, and all
reports and registration statements which the Borrower or any of its
Subsidiaries files with the Securities and Exchange Commission or any
national securities exchange;
(g immediately upon becoming aware of the institution of any steps
by the Borrower or any other Person to terminate any Pension Plan, or the
failure to make a required contribution to any Pension Plan if such failure
is sufficient to give rise to a Lien under section 302(f) of
50
<PAGE>
ERISA, or the taking of any action with respect to a Pension Plan which
could result in the requirement that the Borrower furnish a bond or other
security to the PBGC or such Pension Plan, or the occurrence of any event
with respect to any Pension Plan which could result in the incurrence by
the Borrower of any material liability, fine or penalty, or any material
increase in the contingent liability of the Borrower with respect to any
post-retirement Welfare Plan benefit, notice thereof and copies of all
documentation relating thereto; and
(h such other information respecting the condition or operations,
financial or otherwise, of the Borrower or any of its Subsidiaries as any
Lender through the Agent may from time to time reasonably request.
SECTION VII.1.2 Compliance with Laws, etc. The Borrower will, and will
--------------------------
cause each of its Subsidiaries to, comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance to include
(without limitation):
(a the maintenance and preservation of its corporate existence and
qualification as a foreign corporation; and
(b the payment, before the same become delinquent, of all taxes,
assessments and governmental charges imposed upon it or upon its property
except to the extent being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with
GAAP shall have been set aside on its books.
SECTION VII.1.3 Maintenance of Properties. The Borrower will, and will
-------------------------
cause each of its Subsidiaries to, maintain, preserve, protect and keep its
properties in good repair, working order and condition, and make necessary and
proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times unless the Borrower
determines in good faith that the continued maintenance of any of its properties
is no longer economically desirable.
51
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SECTION VII.1.4 Insurance. The Borrower will, and will cause each of its
---------
Subsidiaries to, maintain or cause to be maintained with responsible insurance
companies insurance with respect to its properties and business (including
business interruption insurance) against such casualties and contingencies and
of such types and in such amounts as is customary in the case of similar
businesses and will, upon request of the Agent, furnish to the Agent for
delivery to each Lender at reasonable intervals a certificate of an Authorized
Officer of the Borrower setting forth the nature and extent of all insurance
maintained by the Borrower and its Subsidiaries in accordance with this Section.
SECTION VII.1.5 Books and Records. The Borrower will, and will cause each
-----------------
of its Subsidiaries to, keep books and records which accurately reflect all
of its business affairs and transactions and permit the Agent and each Lender or
any of their respective representatives, at reasonable times and intervals, to
visit all of its offices, to discuss its financial matters with its officers and
independent public accountant (and the Borrower hereby authorizes such
independent public accountant to discuss the Borrower's financial matters with
each Lender or its representatives whether or not any representative of the
Borrower is present) and to examine (and, at the expense of the Borrower,
photocopy extracts from) any of its books or other corporate records. Prior to
the occurrence and continuance of a Default, the Borrower shall pay up to
$25,000 of such independent public accountant's fees incurred in any fiscal year
in connection with the exercise by the Agent or any Lender of its rights
pursuant to this Section, and the Agent or such Lender shall be responsible for
any amounts in excess thereof. After the occurrence and during the continuance
of any Default, the Borrower shall pay any fees of such independent public
accountant incurred in connection with the Agent's or any Lender's exercise of
its rights pursuant to this Section.
SECTION VII.1.6 Environmental Covenant. The Borrower will, and will cause
----------------------
each of its Subsidiaries to,
(a use and operate all of its facilities and properties in material
compliance with all Environmental Laws, keep all necessary permits,
approvals, certificates,
52
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licenses and other authorizations relating to environmental matters in
effect and remain in material compliance therewith, and handle all
Hazardous Materials in material compliance with all applicable
Environmental Laws;
(b immediately notify the Agent and provide copies upon receipt of
all material written claims, complaints, notices or inquiries relating to
the condition of its facilities and properties or compliance with
Environmental Laws, and shall promptly cure and have dismissed with
prejudice to the satisfaction of the Agent any actions and proceedings
relating to compliance with Environmental Laws; and
(c provide such information and certifications which the Agent may
reasonably request from time to time to evidence compliance with this
Section 7.1.6.
-------------
SECTION VII.1.7 Financial Statements. On or before August 31, 1999, the
--------------------
Borrower will deliver to the Agent a copy of the annual audit report for the
Fiscal Year ending December 31, 1998 for the Borrower and its Subsidiaries,
including therein consolidated balance sheets of the Borrower and its
Subsidiaries as of the end of such Fiscal Year and consolidated statements of
earnings and cash flows of the Borrower and its Subsidiaries for such Fiscal
Year, in each case certified (without any Impermissible Qualification) any
manner acceptable to the Agent and the Required Lenders by Arthur Andersen &
Co., which audited financial statements shall reflect no material changes from
the unaudited financial statements previously delivered to Scotiabank and
described in Section 6.5 hereof.
-----------
SECTION VII.2 Negative Covenants. The Borrower agrees with the Agent and
------------------
each Lender that, until all Commitments have terminated and all Obligations have
been paid and performed in full, the Borrower will perform the obligations set
forth in this Section 7.2.
-----------
SECTION VII.2.1 Business Activities. The Borrower will not, and will not
-------------------
permit any of its Subsidiaries to, engage in any business activity, except for
any line of business related to
53
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e-commerce and such activities as may be incidental or related thereto.
SECTION VII.2.2 Indebtedness. The Borrower will not, and will not permit
------------
any of its Subsidiaries to, create, incur, assume or suffer to exist or
otherwise become or be liable in respect of any Indebtedness, other than,
without duplication, the following:
(a Indebtedness in respect of the Loans and other Obligations;
(b until the date of the initial Borrowing, Indebtedness identified
in Item 7.2.2(b) ("Indebtedness to be Paid") of the Disclosure Schedule;
-------------
(c Indebtedness existing as of the Effective Date which is
identified in Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure
-------------
Schedule;
(d Indebtedness of the Borrower or its Subsidiaries in an aggregate
principal amount not to exceed: (i) in the case of Ingram Micro, an amount
equal to the previous month's aggregate sales, (ii) in the case of Ingram
Entertainment, Inc., $14,000,000, (iii) in the case of Ingram Books, Inc.,
$10,000,000, (iv) in the case of Valley Media, Inc., $10,000,000 and (v) in
the case of any other vendor of goods for new lines of business for the
Company and its Subsidiaries, an amount not to exceed $10,000,000 per
vendor, in each case to finance the acquisition of assets from such Person;
(e unsecured Indebtedness incurred in the ordinary course of
business (including open accounts extended by suppliers on normal trade
terms in connection with purchases of goods and services, but excluding
Indebtedness incurred through the borrowing of money or Contingent
Liabilities);
(f Indebtedness in respect of Capitalized Lease Liabilities to the
extent permitted by Section 7.2.7;
-------------
54
<PAGE>
(g other Indebtedness of the Borrower and its Subsidiaries in an
aggregate amount not to exceed $3,000,000;
provided, however, that no Indebtedness otherwise permitted by clauses (d), (e),
- -------- ------- ----------- ---
(f), or (g) shall be permitted if, after giving effect to the incurrence
- --- ---
thereof, any Default shall have occurred and be continuing.
SECTION VII.2.3 Liens. The Borrower will not, and will not permit any of
-----
its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any
of its property, revenues or assets, whether now owned or hereafter acquired,
except:
(a Liens securing payment of Indebtedness of the type permitted and
described in clause (b) of Section 7.2.2;
---------- -------------
(b Liens granted prior to the Effective Date to secure payment of
Indebtedness of the type permitted and described in clause (c) of Section
---------- -------
7.2.2;
-----
(c Liens granted to secure payment of Indebtedness of the type
permitted and described in clauses (d) and (f) of Section 7.2.2 and
----------- --- -------------
covering only those assets acquired with the proceeds of such Indebtedness;
(d Liens for taxes, assessments or other governmental charges or
levies not at the time delinquent or thereafter payable without penalty or
being diligently contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with GAAP shall have been set aside
on its books;
(e Liens of carriers, warehousemen, mechanics, materialmen and
landlords incurred in the ordinary course of business for sums not overdue
or being diligently contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books;
(f Liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment
55
<PAGE>
insurance or other forms of governmental insurance or benefits, or to
secure performance of tenders, statutory obligations, leases and contracts
(other than for borrowed money) entered into in the ordinary course of
business or to secure obligations on surety or appeal bonds;
(g judgment Liens in existence less than 15 days after the entry
thereof or with respect to which execution has been stayed or the payment
of which is covered in full (subject to a customary deductible) by
insurance maintained with responsible insurance companies; and
(h zoning restrictions, easements, encroachments, licenses,
restrictions or covenants on the use of the Borrower's or any of its
Subsidiaries' real property.
SECTION VII.2.4 Financial Condition. The Borrower will not permit:
-------------------
(a Its Tangible Net Worth to be less than a negative $50,000,000.
(b Its net operating losses for any fiscal quarter set forth below
to exceed the amount set forth below opposite such fiscal quarter:
Fiscal Quarter Maximum Net Operation Loss
-------------- --------------------------
2nd quarter - 1999 - $19,000,000
3rd quarter - 1999 - $13,000,000
4th quarter - 1999 - $ 6,000,000
1st quarter - 2000 - $ 2,500,000
2nd quarter - 2000
and thereafter zero
(c Its Current Ratio to be less than 0.8 to 1.0 as of September 30,
1999 or less than 2.0 to 1.0 as of December 31, 1999 or the end of any
Fiscal Quarter thereafter.
56
<PAGE>
SECTION VII.2.5 Investments. The Borrower will not, and will not permit
-----------
any of its Subsidiaries to, make, incur, assume or suffer to exist any
Investment in any other Person, except:
(a Investments existing on the Effective Date and identified in Item
----
7.2.5(a) ("Ongoing Investments") of the Disclosure Schedule;
--------
(b Cash Equivalent Investments;
(c without duplication, Investments permitted as Indebtedness
pursuant to Section 7.2.2;
-------------
(d without duplication, Investments permitted as Capital
Expenditures pursuant to Section 7.2.7;
-------------
(e in the ordinary course of business, Investments by the Borrower
in any of its Subsidiaries, or by any such Subsidiary in any of its
Subsidiaries, by way of contributions to capital or loans or advances; and
(f Investments in which the sole consideration contributed by the
Borrower is the capital stock of the Borrower;
(g Investments (including, but not limited to, joint ventures) in
the airline and insurance industries, each in an aggregate amount at any
one time not to exceed $2,000,000;
(h other cash Investments in an aggregate amount at any one time not
to exceed $2,000,000;
provided, however, that no Investment otherwise permitted by clause (e), (f),
- -------- ------- ---------- ---
(g), or (h) shall be permitted to be made if, immediately before or after giving
- --- ---
effect thereto, any Default shall have occurred and be continuing.
SECTION VII.2.6 Restricted Payments, etc. On and at all times after the
------------------------
Effective Date:
57
<PAGE>
(a the Borrower will not declare, pay or make any dividend or
distribution (in cash, property or obligations) on any shares of any class
of capital stock (now or hereafter outstanding) of the Borrower or on any
warrants, options or other rights with respect to any shares of any class
of capital stock (now or hereafter outstanding) of the Borrower (other than
dividends or distributions payable in its common stock or warrants to
purchase its common stock or splitups or reclassifications of its stock
into additional or other shares of its common stock) or apply, or permit
any of its Subsidiaries to apply, any of its funds, property or assets to
the purchase, redemption, sinking fund or other retirement of, or agree or
permit any of its Subsidiaries to purchase or redeem, any shares of any
class of capital stock (now or hereafter outstanding) of the Borrower, or
warrants, options or other rights with respect to any shares of any class
of capital stock (now or hereafter outstanding) of the Borrower; provided,
--------
however that the Borrower and its Subsidiaries may make redemptions of
stock of employees in an aggregate amount not to exceed $2,000,000 in any
fiscal year;
(b the Borrower will not, and will not permit any of its
Subsidiaries to
(i) make any payment or prepayment of principal of, or make any
payment of interest on, any Subordinated Debt on any day other than
the stated, scheduled date for such payment or prepayment set forth in
the documents and instruments memorializing such Subordinated Debt, or
which would violate the subordination provisions of such Subordinated
Debt; or
(ii) redeem, purchase or defease, any Subordinated Debt; and
(c the Borrower will not, and will not permit any Subsidiary to,
make any deposit for any of the foregoing purposes.
SECTION VII.2.7 Capital Expenditures, etc. The Borrower will not, and
-------------------------
will not permit any of its Subsidiaries to, make or
58
<PAGE>
commit to make Capital Expenditures in any period set forth below, except
Capital Expenditures which do not aggregate in excess of the amount set forth
below opposite such period:
1999 Fiscal Year $7,000,000
First 6 months of 2000 $7,000,000.
SECTION VII.2.8 Rental Obligations. The Borrower will not, and will not
------------------
permit any of its Subsidiaries to, enter into at any time any arrangement which
does not create a Capitalized Lease Liability and which involves the leasing by
the Borrower or any of its Subsidiaries from any lessor of any real or personal
property (or any interest therein), except arrangements which, together with all
other such arrangements which shall then be in effect, will not require the
payment of an aggregate amount of rentals by the Borrower and its Subsidiaries
in excess of (excluding escalations resulting from a rise in the consumer price
or similar index) $3,000,000 for any Fiscal Year; provided, however, that any
-------- -------
calculation made for purposes of this Section shall exclude any amounts required
to be expended for maintenance and repairs, insurance, taxes, assessments, and
other similar charges.
SECTION VII.2.9 Consolidation, Merger, etc. The Borrower will not, and
--------------------------
will not permit any of its Subsidiaries to, liquidate or dissolve, consolidate
with, or merge into or with, any other corporation, or purchase or otherwise
acquire all or substantially all of the assets of any Person (or of any division
thereof) except
(a any such Subsidiary may liquidate or dissolve voluntarily into,
and may merge with and into, the Borrower or any other Subsidiary, and the
assets or stock of any Subsidiary may be purchased or otherwise acquired by
the Borrower or any other Subsidiary; and
(b so long as no Default has occurred and is continuing or would
occur after giving effect thereto, the Borrower or any of its Subsidiaries
may purchase all or substantially all of the assets of any Person, or
acquire such Person by merger, if permitted (without duplication) by
Section 7.2.7 to be made as a Capital Expenditure.
-------------
59
<PAGE>
SECTION VII.2.10 Asset Dispositions, etc. The Borrower will not, and will
-----------------------
not permit any of its Subsidiaries to, sell, transfer, lease, contribute or
otherwise convey, or grant options, warrants or other rights with respect to,
all or any substantial part of its assets (including accounts receivable,
capital stock of Subsidiaries and intangible assets and excluding any capital
stock of the Borrower issued pursuant to an Investment permitted by Section
-------
7.2.5.) to any Person, unless
- -----
(a such sale, transfer, lease, contribution or conveyance is in the
ordinary course of its business or is permitted by Section 7.2.10; or
--------------
(b the net book value of such assets, together with the net book
value of all other assets sold, transferred, leased, contributed or
conveyed otherwise than in the ordinary course of business by the Borrower
or any of its Subsidiaries pursuant to this clause since the Effective
Date, does not exceed $500,000.
SECTION VII.2.11 Transactions with Affiliates. The Borrower will not, and
----------------------------
will not permit any of its Subsidiaries to, enter into, or cause, suffer or
permit to exist any arrangement or contract with any of its other Affiliates
unless such arrangement or contract is fair and equitable to the Borrower or
such Subsidiary and is an arrangement or contract of the kind which would be
entered into by a prudent Person in the position of the Borrower or such
Subsidiary with a Person which is not one of its Affiliates.
SECTION VII.2.12 Negative Pledges, etc. The Borrower will not, and will
---------------------
not permit any of its Subsidiaries to, enter into any agreement (excluding this
Agreement, any other Loan Document and any agreement governing any Indebtedness
60
<PAGE>
permitted either by clause (b) of Section 7.2.2 as in effect on the Effective
---------- -------------
Date or by clause (d) of Section 7.2.2 as to the assets financed with the
---------- -------------
proceeds of such Indebtedness) prohibiting
(a the creation or assumption of any Lien upon its properties,
revenues or assets, whether now owned or hereafter acquired (other than
properties and assets that are subject to Liens permitted by Section
-------
7.2.3), or the ability of the Borrower or any other Obligor to amend or
otherwise modify this Agreement or any other Loan Document; or
(b the ability of any Subsidiary to make any payments, directly or
indirectly, to the Borrower by way of dividends, advances, repayments of
loans or advances, reimbursements of management and other intercompany
charges, expenses and accruals or other returns on investments, or any
other agreement or arrangement which restricts the ability of any such
Subsidiary to make any payment, directly or indirectly, to the Borrower.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION VIII.1 Listing of Events of Default. Each of the following events
----------------------------
or occurrences described in this Section 8.1 shall constitute an "Event of
----------- --------
Default".
- -------
SECTION VIII.1.1 Non-Payment of Obligations. The Borrower shall default
--------------------------
in the payment or prepayment when due of any principal of or interest on any
Loan (and, in the case of a payment or prepayment of interest, such default
shall continue
61
<PAGE>
unremedied for a period of three Business Days), or the Borrower shall default
(and such default shall continue unremedied for a period of five days) in the
payment when due of any commitment fee or of any other Obligation.
SECTION VIII.1.2 Breach of Warranty. Any representation or warranty of
------------------
the Borrower or any other Obligor made or deemed to be made hereunder or in any
other Loan Document executed by it or any other writing or certificate furnished
by or on behalf of the Borrower or any other Obligor to the Agent or any Lender
for the purposes of or in connection with this Agreement or any such other Loan
Document (including any certificates delivered pursuant to Article V) is or
---------
shall be incorrect when made in any material respect.
SECTION VIII.1.3 Non-Performance of Certain Covenants and Obligations.
----------------------------------------------------
The Borrower shall default in the due performance and observance of any of its
obligations under clause (d) of Section 7.1.1 or Section 7.2 or the Trust shall
---------- ------------- -----------
default in the due performance and observance of any of its obligations under
Section 7(f) of the Guaranty.
- ------------
SECTION VIII.1.4 Non-Performance of Other Covenants and Obligations. Any
--------------------------------------------------
Obligor shall default in the due performance and observance of any other
agreement contained herein or in any other Loan Document executed by it, and
such default shall continue unremedied for a period of 30 days after notice
thereof shall have been given to the Borrower by the Agent or any Lender.
SECTION VIII.1.5 Default on Other Indebtedness. A default shall occur in
-----------------------------
the payment when due (subject to any applicable grace period), whether by
acceleration or otherwise, of any Indebtedness of the Borrower or any of its
Subsidiaries (including, without limitation, any accounts payable or other
Indebtedness owing to Ingram Micro) or any other Obligor having a principal
amount, individually or in the aggregate, in excess of $500,000, or a default
shall occur in the performance or observance of any obligation or condition with
respect to such Indebtedness if the effect of such default is to accelerate the
maturity of any such Indebtedness or such default shall continue unremedied for
any applicable period of time sufficient to permit the holder or holders of such
Indebtedness, or any trustee or
62
<PAGE>
agent for such holders, to cause such Indebtedness to become due and payable
prior to its expressed maturity.
SECTION VIII.1.6 Judgments. Except as disclosed in Item 6.7 to the
---------
Disclosure Schedule, any judgment or order for the payment of money in excess of
$1,000,000 shall be rendered against the Borrower or any of its Subsidiaries or
any other Obligor and either
(a enforcement proceedings shall have been commenced by any creditor
upon such judgment or order; or
(b there shall be any period of 30 consecutive days during which a
stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect.
SECTION VIII.1.7 Pension Plans. Any of the following events shall occur
-------------
with respect to any Pension Plan
(a the institution of any steps by the Borrower, any member of its
Controlled Group or any other Person to terminate a Pension Plan if, as a
result of such termination, the Borrower or any such member could be
required to make a contribution to such Pension Plan, or could reasonably
expect to incur a liability or obligation to such Pension Plan, in excess
of $500,000; or
(b a contribution failure occurs with respect to any Pension Plan
sufficient to give rise to a Lien under Section 302(f) of ERISA.
SECTION VIII.1.8 Control of the Borrower. Any Change in Control shall
-----------------------
occur.
SECTION VIII.1.9 Bankruptcy, Insolvency, etc. The Borrower or any of its
---------------------------
Subsidiaries or any other Obligor shall
(a become insolvent or generally fail to pay, or admit in writing
its inability or unwillingness to pay, debts as they become due;
63
<PAGE>
(b apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Borrower or any
of its Subsidiaries or any other Obligor or any property of any thereof, or
make a general assignment for the benefit of creditors;
(c in the absence of such application, consent or acquiescence,
permit or suffer to exist the appointment of a trustee, receiver,
sequestrator or other custodian for the Borrower or any of its Subsidiaries
or any other Obligor or for a substantial part of the property of any
thereof, and such trustee, receiver, sequestrator or other custodian shall
not be discharged within 60 days, provided that the Borrower, each
Subsidiary and each other Obligor hereby expressly authorizes the Agent and
each Lender to appear in any court conducting any relevant proceeding
during such 60-day period to preserve, protect and defend their rights
under the Loan Documents;
(d permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Borrower or any of its Subsidiaries or any
other Obligor, and, if any such case or proceeding is not commenced by the
Borrower or such Subsidiary or such other Obligor, such case or proceeding
shall be consented to or acquiesced in by the Borrower or such Subsidiary
or such other Obligor or shall result in the entry of an order for relief
or shall remain for 60 days undismissed, provided that the Borrower, each
Subsidiary and each other Obligor hereby expressly authorizes the Agent and
each Lender to appear in any court conducting any such case or proceeding
during such 60-day period to preserve, protect and defend its rights under
the Loan Documents; or
(e take any action authorizing, or in furtherance of, any of the
foregoing.
SECTION VIII.1.10 Impairment. Any Loan Document shall (except in
----------
accordance with its terms), in whole or in part, terminate, cease to be
effective or cease to be the legally
64
<PAGE>
valid, binding and enforceable obligation of any Obligor party thereto; the
Trust shall be amended without the prior written consent of the Agent; or the
Borrower, any other Obligor or any other party shall, directly or indirectly,
contest in any manner the effectiveness, validity, binding nature or
enforceability of such Loan Document or the Trust.
SECTION VIII.1.11 Termination of Material Contracts. Any material
---------------------------------
contract in excess of $1,000,000 of the Borrower (including, without limitation,
the supply agreement with Ingram Micro) shall (except in accordance with its
terms) terminate, cease to be effective or cease to be the legally valid,
binding and enforceable obligation of any party thereto unless such termination
or cessation is consistent with the Borrower's business objectives as evidenced
by a vote of the Borrower's board of directors.
SECTION VIII.2 Action if Bankruptcy. If any Event of Default described in
--------------------
clauses (a) through (d) of Section 8.1.9 shall occur, the Commitment (if not
- ----------- --- -------------
theretofore terminated) shall automatically terminate and the outstanding
principal amount of all outstanding Loans and all other Obligations shall
automatically be and become immediately due and payable, without notice or
demand.
SECTION VIII.3 Action if Other Event of Default. If any Event of Default
--------------------------------
(other than any Event of Default described in clauses (a) through (d) of Section
----------- --- -------
8.1.9) shall occur for any reason, whether voluntary or involuntary, and be
- -----
continuing, the Agent, upon the direction of the Required Lenders, shall by
notice to the Borrower declare all or any portion of the outstanding principal
amount of the Loans and other Obligations to be due and payable and/or the
Commitments (if not theretofore terminated) to be terminated, whereupon the full
unpaid amount of such Loans and other Obligations which shall be so declared due
and payable shall be and become immediately due and payable, without further
notice, demand or presentment, and/or, as the case may be, the Commitments shall
terminate.
ARTICLE IX
THE AGENT
65
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SECTION IX.1 Actions. Each Lender hereby appoints Scotiabank as its
-------
Agent under and for purposes of this Agreement, the Notes and each other Loan
Document. Each Lender authorizes the Agent to act on behalf of such Lender
under this Agreement, the Notes and each other Loan Document and, in the absence
of other written instructions from the Required Lenders received from time to
time by the Agent (with respect to which the Agent agrees that it will comply,
except as otherwise provided in this Section or as otherwise advised by
counsel), to exercise such powers hereunder and thereunder as are specifically
delegated to or required of the Agent by the terms hereof and thereof, together
with such powers as may be reasonably incidental thereto. Each Lender hereby
indemnifies (which indemnity shall survive any termination of this Agreement)
the Agent, pro rata according to such Lender's Percentage, from and against any
--- ----
and all liabilities, obligations, losses, damages, claims, costs or expenses of
any kind or nature whatsoever which may at any time be imposed on, incurred by,
or asserted against, the Agent in any way relating to or arising out of this
Agreement, the Notes and any other Loan Document, including reasonable
attorneys' fees, and as to which the Agent is not reimbursed by the Borrower;
provided, however, that no Lender shall be liable for the payment of any portion
- -------- -------
of such liabilities, obligations, losses, damages, claims, costs or expenses
which are determined by a court of competent jurisdiction in a final proceeding
to have resulted solely from the Agent's gross negligence or wilful misconduct.
The Agent shall not be required to take any action hereunder, under the Notes or
under any other Loan Document, or to prosecute or defend any suit in respect of
this Agreement, the Notes or any other Loan Document, unless it is indemnified
hereunder to its satisfaction. If any indemnity in favor of the Agent shall be
or become, in the Agent's determination, inadequate, the Agent may call for
additional indemnification from the Lenders and cease to do the acts indemnified
against hereunder until such additional indemnity is given.
SECTION IX.2 Funding Reliance, etc. Unless the Agent shall have been
---------------------
notified by telephone, confirmed in writing, by any Lender by 3:00 p.m., San
Francisco time, on the day prior to a Borrowing that such Lender will not make
available the amount which would constitute its Percentage of such Borrowing on
the
66
<PAGE>
date specified therefor, the Agent may assume that such Lender has made such
amount available to the Agent and, in reliance upon such assumption, make
available to the Borrower a corresponding amount. If and to the extent that such
Lender shall not have made such amount available to the Agent, such Lender and
the Borrower severally agree to repay the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
the Agent made such amount available to the Borrower to the date such amount is
repaid to the Agent, at the interest rate applicable at the time to Loans
comprising such Borrowing.
SECTION IX.3 Exculpation. Neither the Agent nor any of its directors,
-----------
officers, employees or agents shall be liable to any Lender for any action taken
or omitted to be taken by it under this Agreement or any other Loan Document, or
in connection herewith or therewith, except for its own wilful misconduct or
gross negligence, nor responsible for any recitals or warranties herein or
therein, nor for the effectiveness, enforceability, validity or due execution of
this Agreement or any other Loan Document, nor for the creation, perfection or
priority of any Liens purported to be created by any of the Loan Documents, or
the validity, genuineness, enforceability, existence, value or sufficiency of
any collateral security, nor to make any inquiry respecting the performance by
the Borrower of its obligations hereunder or under any other Loan Document. Any
such inquiry which may be made by the Agent shall not obligate it to make any
further inquiry or to take any action. The Agent shall be entitled to rely upon
advice of counsel concerning legal matters and upon any notice, consent,
certificate, statement or writing which the Agent believes to be genuine and to
have been presented by a proper Person.
SECTION IX.4 Successor. The Agent may resign as such at any time upon at
---------
least 30 days' prior notice to the Borrower and all Lenders. If the Agent at
any time shall resign, the Required Lenders may appoint another Lender as a
successor Agent which shall thereupon become the Agent hereunder. If no
successor Agent shall have been so appointed by the Required Lenders, and shall
have accepted such appointment, within 30 days after the retiring Agent's giving
notice of resignation, then the retiring Agent may, on behalf of the Lenders,
appoint a successor Agent,
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<PAGE>
which shall be one of the Lenders or a commercial banking institution organized
under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of
a commercial banking institution, and having a combined capital and surplus of
at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder
by a successor Agent, such successor Agent shall be entitled to receive from the
retiring Agent such documents of transfer and assignment as such successor Agent
may reasonably request, and shall thereupon succeed to and become vested with
all rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations under this
Agreement. After any retiring Agent's resignation hereunder as the Agent, the
provisions of
(a this Article IX shall inure to its benefit as to any actions
----------
taken or omitted to be taken by it while it was the Agent under this
Agreement; and
(b Section 10.3 and Section 10.4 shall continue to inure to its
------------ ------------
benefit.
SECTION IX.5 Loans by Scotiabank. Scotiabank shall have the same rights
-------------------
and powers with respect to (x) the Loans made by it or any of its Affiliates,
and (y) the Notes held by it or any of its Affiliates as any other Lender and
may exercise the same as if it were not the Agent. Scotiabank and its Affiliates
may accept deposits from, lend money to, and generally engage in any kind of
business with the Borrower or any Subsidiary or Affiliate of the Borrower as if
Scotiabank were not the Agent hereunder.
SECTION IX.6 Credit Decisions. Each Lender acknowledges that it has,
----------------
independently of the Agent and each other Lender, and based on such Lender's
review of the financial information of the Borrower, this Agreement, the other
Loan Documents (the terms and provisions of which being satisfactory to such
Lender) and such other documents, information and investigations as such Lender
has deemed appropriate, made its own credit decision to extend its Commitment.
Each Lender also acknowledges that it will, independently of the Agent and each
other Lender, and based on such other documents, information and investigations
as it shall deem appropriate at any time, continue to make its own credit
decisions as to exercising or not exercising from time to
68
<PAGE>
time any rights and privileges available to it under this Agreement or any other
Loan Document.
SECTION IX.7 Copies, etc. The Agent shall give prompt notice to each
-----------
Lender of each notice or request required or permitted to be given to the Agent
by the Borrower pursuant to the terms of this Agreement (unless concurrently
delivered to the Lenders by the Borrower). The Agent will distribute to each
Lender each document or instrument received for its account and copies of all
other communications received by the Agent from the Borrower for distribution to
the Lenders by the Agent in accordance with the terms of this Agreement.
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION X.1 Waivers, Amendments, etc. The provisions of this Agreement
------------------------
and of each other Loan Document may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the Borrower and the Required Lenders; provided, however, that no such
-------- -------
amendment, modification or waiver which would:
(a modify any requirement hereunder that any particular action be
taken by all the Lenders or by the Required Lenders shall be effective
unless consented to by each Lender;
(b modify this Section 10.1, change the definition of "Required
------------ --------
Lenders", increase the Commitment Amount or the Percentage of any Lender,
-------
reduce any fees described in Article III, change the schedule of reductions
-----------
to the Commitments provided for in Section 2.2.2, release any collateral
-------------
security, except as otherwise specifically provided in any Loan Document,
or extend the Commitment Termination Date shall be made without the consent
of each Lender and each holder of a Note;
(c extend the due date for, or reduce the amount of, any scheduled
repayment or prepayment of principal of or
69
<PAGE>
interest on any Loan (or reduce the principal amount of or rate of interest
on any Loan) shall be made without the consent of the holder of that Note
evidencing such Loan; or
(d affect adversely the interests, rights or obligations of the
Agent qua the Agent shall be made without consent of the Agent.
---
No failure or delay on the part of the Agent, any Lender or the holder of any
Note in exercising any power or right under this Agreement or any other Loan
Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power or right preclude any other or further exercise
thereof or the exercise of any other power or right. No notice to or demand on
the Borrower in any case shall entitle it to any notice or demand in similar or
other circumstances. No waiver or approval by the Agent, any Lender or the
holder of any Note under this Agreement or any other Loan Document shall, except
as may be otherwise stated in such waiver or approval, be applicable to
subsequent transactions. No waiver or approval hereunder shall require any
similar or dissimilar waiver or approval thereafter to be granted hereunder.
SECTION X.2 Notices. All notices and other communications provided to
-------
any party hereto under this Agreement or any other Loan Document shall be in
writing or by facsimile and addressed, delivered or transmitted to such party at
its address or facsimile number set forth below its signature hereto or set
forth in the Lender Assignment Agreement or at such other address or facsimile
number as may be designated by such party in a notice to the other parties. Any
notice, if mailed and properly addressed with postage prepaid or if properly
addressed and sent by pre-paid courier service, shall be deemed given when
received; any notice, if transmitted by facsimile, shall be deemed given when
transmitted.
SECTION X.3 Payment of Costs and Expenses. The Borrower agrees to pay
-----------------------------
on demand all expenses of the Agent (including the fees and out-of-pocket
expenses of counsel to the Agent and of local counsel, if any, who may be
retained by counsel to the Agent) in connection with
70
<PAGE>
(a) the negotiation, preparation, execution and delivery of this
Agreement and of each other Loan Document, including schedules and
exhibits, and any amendments, waivers, consents, supplements or other
modifications to this Agreement or any other Loan Document as may from time
to time hereafter be required, whether or not the transactions contemplated
hereby are consummated, and
(b) the preparation and review of the form of any document or
instrument relevant to this Agreement or any other Loan Document.
The Borrower further agrees to pay, and to save the Agent and the Lenders
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Agreement, the borrowings
hereunder, or the issuance of the Notes or any other Loan Documents. The
Borrower also agrees to reimburse the Agent and each Lender upon demand for all
reasonable out-of-pocket expenses (including attorneys' fees and legal expenses)
incurred by the Agent or such Lender in connection with (x) the negotiation of
any restructuring or "work-out", whether or not consummated, of any Obligations
and (y) the enforcement of any Obligations.
SECTION X.4 Indemnification. In consideration of the execution and
---------------
delivery of this Agreement by each Lender and the extension of the Commitments,
the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender
and each of their respective officers, directors, employees and agents
(collectively, the "Indemnified Parties") free and harmless from and against any
-------------------
and all actions, causes of action, suits, losses, costs, liabilities and
damages, and expenses incurred in connection therewith (irrespective of whether
any such Indemnified Party is a party to the action for which indemnification
hereunder is sought), including reasonable attorneys' fees and disbursements
(collectively, the "Indemnified Liabilities"), incurred by the Indemnified
-----------------------
Parties or any of them as a result of, or arising out of, or relating to
(a) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loan or Letter of Credit;
71
<PAGE>
(b) the entering into and performance of this Agreement and any other
Loan Document by any of the Indemnified Parties (including any action
brought by or on behalf of the Borrower as the result of any determination
by the Required Lenders pursuant to Article V not to fund any Borrowing);
---------
(c) any investigation, litigation or proceeding related to an IPO;
(d) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to the
protection of the environment or the Release by the Borrower or any of its
Subsidiaries of any Hazardous Material; or
(e) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any real
property owned or operated by the Borrower or any Subsidiary thereof of any
Hazardous Material (including any losses, liabilities, damages, injuries,
costs, expenses or claims asserted or arising under any Environmental Law),
regardless of whether caused by, or within the control of, the Borrower or
such Subsidiary,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or wilful misconduct, and if and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law.
SECTION X.5 Survival. The obligations of the Borrower under Sections
-------- --------
4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under
- --- --- --- --- ---- ----
Section 9.1, shall in each case survive any termination of this Agreement, the
- -----------
payment in full of all Obligations and the termination of all Commitments. The
representations and warranties made by each Obligor in this Agreement and in
each other Loan Document shall survive the
72
<PAGE>
execution and delivery of this Agreement and each such other Loan Document.
SECTION X.6 Severability. Any provision of this Agreement or any other
------------
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.
SECTION X.7 Headings. The various headings of this Agreement and of
--------
each other Loan Document are inserted for convenience only and shall not affect
the meaning or interpretation of this Agreement or such other Loan Document or
any provisions hereof or thereof.
SECTION X.8 Execution in Counterparts, Effectiveness, etc. This
---------------------------------------------
Agreement may be executed by the parties hereto in several counterparts, each of
which shall be executed by the Borrower and the Agent and be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Agreement shall become effective when counterparts hereof
executed on behalf of the Borrower and each Lender (or notice thereof
satisfactory to the Agent) shall have been received by the Agent and notice
thereof shall have been given by the Agent to the Borrower and each Lender.
SECTION X.9 Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES
-------------------------------
AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER
AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. This Agreement, the
Notes and the other Loan Documents constitute the entire understanding among the
parties hereto with respect to the subject matter hereof and supercede any prior
agreements, written or oral, with respect thereto.
SECTION X.10 Successors and Assigns. This Agreement shall be binding
----------------------
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that:
-------- -------
73
<PAGE>
(a) the Borrower may not assign or transfer its rights or obligations
hereunder without the prior written consent of the Agent and all Lenders;
and
(b) the rights of sale, assignment and transfer of the Lenders are
subject to Section 10.11.
-------------
SECTION X.11 Sale and Transfer of Loans and Note; Participations in Loans
------------------------------------------------------------
and Note. Each Lender may assign, or sell participations in, its Loans and
- --------
Commitment to one or more other Persons in accordance with this Section 10.11.
-------------
SECTION X.11.1 Assignments. Any Lender,
-----------
(a) with the written consents of the Borrower and the Agent (which
consents shall not be unreasonably delayed or withheld and which consent,
in the case of the Borrower, shall be deemed to have been given in the
absence of a written notice delivered by the Borrower to the Agent, on or
before the fifth Business Day after receipt by the Borrower of such
Lender's request for consent, stating, in reasonable detail, the reasons
why the Borrower proposes to withhold such consent) may at any time assign
and delegate to one or more commercial banks or other financial
institutions, and
(b) with notice to the Borrower and the Agent, but without the
consent of the Borrower or the Agent, may assign and delegate to any of its
Affiliates or to any other Lender
(each Person described in either of the foregoing clauses as being the Person to
whom such assignment and delegation is to be made, being hereinafter referred to
as an "Assignee Lender"), all or any fraction of such Lender's total Loans and
---------------
Commitment (which assignment and delegation shall be of a constant, and not a
varying, percentage of all the assigning Lender's Loans and Commitment) in a
minimum aggregate amount of $5,000,000; provided, however, that any such
-------- -------
Assignee Lender will comply, if applicable, with the provisions contained in the
penultimate sentence of Section 4.6 and further, provided, however, that, the
----------- ------- -------- -------
Borrower each other Obligor and the Agent shall be entitled to continue to deal
solely and directly with such Lender in
74
<PAGE>
connection with the interests so assigned and delegated to an Assignee Lender
until
(c) written notice of such assignment and delegation, together with
payment instructions, addresses and related information with respect to
such Assignee Lender, shall have been given to the Borrower and the Agent
by such Lender and such Assignee Lender,
(d) such Assignee Lender shall have executed and delivered to the
Borrower and the Agent a Lender Assignment Agreement, accepted by the
Agent, and
(e) the processing fees described below shall have been paid.
From and after the date that the Agent accepts such Lender Assignment Agreement,
(x) the Assignee Lender thereunder shall be deemed automatically to have become
a party hereto and to the extent that rights and obligations hereunder have been
assigned and delegated to such Assignee Lender in connection with such Lender
Assignment Agreement, shall have the rights and obligations of a Lender
hereunder and under the other Loan Documents, and (y) the assignor Lender, to
the extent that rights and obligations hereunder have been assigned and
delegated by it in connection with such Lender Assignment Agreement, shall be
released from its obligations hereunder and under the other Loan Documents.
Within five Business Days after its receipt of notice that the Agent has
received an executed Lender Assignment Agreement, the Borrower shall execute and
deliver to the Agent (for delivery to the relevant Assignee Lender) a new Note
evidencing such Assignee Lender's assigned Loans and Commitment and, if the
assignor Lender has retained Loans and a Commitment hereunder, a replacement
Note in the principal amount of the Loans and Commitment retained by the
assignor Lender hereunder (such Note to be in exchange for, but not in payment
of, that Note then held by such assignor Lender). Each such Note shall be dated
the date of the predecessor Note. The assignor Lender shall mark the
predecessor Note "exchanged" and deliver it to the Borrower. Accrued interest
on that part of the predecessor Note evidenced by the new Note, and accrued
fees, shall be paid as provided in the Lender Assignment Agreement. Accrued
interest on
75
<PAGE>
that part of the predecessor Note evidenced by the replacement Note shall be
paid to the assignor Lender. Accrued interest and accrued fees shall be paid at
the same time or times provided in the predecessor Note and in this Agreement.
Such assignor Lender or such Assignee Lender must also pay a processing fee to
the Agent upon delivery of any Lender Assignment Agreement in the amount of
$3,500. Any attempted assignment and delegation not made in accordance with this
Section 10.11.1 shall be null and void.
- ---------------
SECTION X.11.2 Participations. Any Lender may at any time sell to one or
--------------
more commercial banks or other Persons (each of such commercial banks and other
Persons being herein called a "Participant") participating interests in any of
-----------
the Loans, its Commitment, or other interests of such Lender hereunder;
provided, however, that
- -------- -------
(a) no participation contemplated in this Section 10.11 shall relieve
-------------
such Lender from its Commitment or its other obligations hereunder or under
any other Loan Document,
(b) such Lender shall remain solely responsible for the performance
of its Commitment and such other obligations,
(c) the Borrower and each other Obligor and the Agent shall continue
to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement and each of the other
Loan Documents,
(d) no Participant, unless such Participant is an Affiliate of such
Lender, or is itself a Lender, shall be entitled to require such Lender to
take or refrain from taking any action hereunder or under any other Loan
Document, except that such Lender may agree with any Participant that such
Lender will not, without such Participant's consent, take any of the
following actions: (i) increase the Commitment Amount, reduce any fees
described in Article III, or extend the Commitment Termination Date, or
-----------
(ii) extend the due date for, or reduce the amount of, any scheduled
repayment or prepayment of
76
<PAGE>
principal of or interest on any Loan (or reduce the principal amount of or
rate of interest on any Loan), and
(e) the Borrower shall not be required to pay any amount under
Section 4.6 that is greater than the amount which it would have been
-----------
required to pay had no participating interest been sold.
The Borrower acknowledges and agrees that each Participant, for purposes of
Sections 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, 10.3 and 10.4, shall be considered a
------------ --- --- --- --- --- ---- ----
Lender.
SECTION X.12 Other Transactions. Nothing contained herein shall preclude
------------------
the Agent or any other Lender from engaging in any transaction, in addition to
those contemplated by this Agreement or any other Loan Document, with the
Borrower or any of its Affiliates in which the Borrower or such Affiliate is not
restricted hereby from engaging with any other Person.
SECTION X.13 Forum Selection and Consent to Jurisdiction. ANY LITIGATION
-------------------------------------------
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER
SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
-------- -------
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE
COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET
FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY
IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS
TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL
SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY
AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION BROUGHT IN ANY SUCH COURT
77
<PAGE>
REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE
ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER
THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF
EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER
HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS.
SECTION X.14 Waiver of Jury Trial. THE AGENT, THE LENDERS AND THE
--------------------
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE
BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT
CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN
DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH
SUCH OTHER LOAN DOCUMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
BUY.COM INC.
By_____________________________________
Title:
Address: 21 Brookline
Aliso Viejo, CA 92656
Facsimile No.: 949-425-5300
Attention: Mr. Murray Williams
78
<PAGE>
Percentage: 100% THE BANK OF NOVA SCOTIA, as Agent
and Lender
By_________________________________
Title:
Address: 580 California Street
Suite 2100
San Francisco, CA 94119
Facsimile No.: 415-397-0791
Attention: Mr. Chris Osborn
Domestic
Office: 600 Peachtree St. N.E.
Suite 2700
Atlanta, GA 30308
Facsimile No.: 404-888-8998
Attention: Ms. Kathy Clark
LIBOR
Office: 600 Peachtree St. N.E.
Suite 2700
Atlanta, GA 30308
Facsimile No.: 404-888-8998
Attention: Ms. Kathy Clark
79
<PAGE>
SCHEDULE I
DISCLOSURE SCHEDULE
-------------------
ITEM 6.7 Litigation.
----------
Description of Proceeding Action or Claim Sought
------------------------- ----------------------
ITEM 6.8 Existing Subsidiaries.
---------------------
State of Ownership Business
Name Incorporation % Description
- ---- ------------- --------- -----------
ITEM 6.11 Employee Benefit Plans.
----------------------
ITEM 6.12 Environmental Matters.
---------------------
ITEM 7.2.2(b) Indebtedness to be Paid.
-----------------------
Creditor Outstanding Principal Amount
-------- ----------------------------
ITEM 7.2.2(c) Ongoing Indebtedness.
--------------------
Creditor Outstanding Principal Amount
-------- ----------------------------
ITEM 7.2.5(a) Ongoing Investments.
-------------------
<PAGE>
SCHEDULE I
<PAGE>
EXHIBIT A
NOTE
$15,000,000 July 20, 1999
FOR VALUE RECEIVED, the undersigned, BUY.COM INC., Delaware corporation
(the "Borrower"), promises to pay to the order of THE BANK OF NOVA SCOTIA (the
--------
"Lender") on July 19, 2000 the principal sum of FIFTEEN MILLION DOLLARS
- -------
($15,000,000) or, if less, the aggregate unpaid principal amount of all Loans
shown on the schedule attached hereto (and any continuation thereof) made by the
Lender pursuant to that certain Credit Agreement, dated as of even date herewith
(together with all amendments and other modifications, if any, from time to time
thereafter made thereto, the "Credit Agreement"), among the Borrower, THE BANK
----------------
OF NOVA SCOTIA, as Agent, and the various financial institutions (including the
Lender) as are, or may from time to time become, parties thereto.
The Borrower also promises to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Credit Agreement.
Payments of both principal and interest are to be made in lawful money of
the United States of America in same day or immediately available funds to the
account designated by the Agent pursuant to the Credit Agreement.
This Note is a Note referred to in, and evidences Indebtedness incurred
under, the Credit Agreement, to which reference is made for a description of the
security for this Note and for a statement of the terms and conditions on which
the Borrower is permitted and required to make prepayments and repayments of
principal of the Indebtedness evidenced by this Note and on which such
Indebtedness may be declared to be immediately due and payable. Unless otherwise
defined, terms used herein have the meanings provided in the Credit Agreement.
<PAGE>
EXHIBIT A
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK.
BUY.COM INC.
By_______________________________
Title:
<PAGE>
LOANS AND PRINCIPAL PAYMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount of Unpaid
Amount of Principal Principal
Loan Made Repaid Balance
Interest
------------ ------------- ------------
Base LIBO Period (if Base LIBO Base LIBO Notation
Date Rate Rate applicable) Rate Rate Rate Rate Total Made By
- ---- ---- ---- ----------- ---- ---- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
BORROWING REQUEST
The Bank of Nova Scotia
600 Peachtree Street N.E.
Suite 2700
Atlanta, Georgia 30308
Attention: Ms. Kathy Clark
BUY.COM INC.
------------
Gentlemen and Ladies:
This Borrowing Request is delivered to you pursuant to Section 2.3 of the
Credit Agreement, dated as of July 20, 1999 (together with all amendments, if
any, from time to time made thereto, the "Credit Agreement"), among BUY.COM
----------------
INC., a Delaware corporation (the "Borrower"), certain financial institutions
--------
and THE BANK OF NOVA SCOTIA (the "Agent"). Unless otherwise defined herein or
-----
the context otherwise requires, terms used herein have the meanings provided in
the Credit Agreement.
The Borrower hereby requests that a Loan be made in the aggregate principal
amount of $_____________ on ________________, 19___ as a [LIBO Rate Loan having
an Interest Period of ___________ months] [Base Rate Loan].
The Borrower hereby acknowledges that, pursuant to Section 5.2.2 of the
-------------
Credit Agreement, each of the delivery of this Borrowing Request and the
acceptance by the Borrower of the proceeds of the Loans requested hereby
constitute a representation and warranty by the Borrower that, on the date of
such Loans, and before and after giving effect thereto and to the
<PAGE>
application of the proceeds therefrom, all statements set forth in Section 5.2.1
-------------
are true and correct in all material respects.
The Borrower agrees that if prior to the time of the Borrowing requested
hereby any matter certified to herein by it will not be true and correct at such
time as if then made, it will immediately so notify the Agent. Except to the
extent, if any, that prior to the time of the Borrowing requested hereby the
Agent shall receive written notice to the contrary from the Borrower, each
matter certified to herein shall be deemed once again to be certified as true
and correct at the date of such Borrowing as if then made.
Please wire transfer the proceeds of the Borrowing to the accounts of the
following persons at the financial institutions indicated respectively:
Amount to be Person to be Paid Name, Address, etc.
--------------------------
Transferred Name Account No. of Transferee Lender
- ----------- ---- ----------- --------------------
$___________ ____________ __________ ____________________
____________________
Attention: _________
$___________ ____________ ___________ ____________________
____________________
Attention: _________
Balance of The Borrower ___________ ____________________
such proceeds ____________________
Attention: _________
The Borrower has caused this Borrowing Request to be executed and
delivered, and the certification and warranties contained herein to be made, by
its duly Authorized Officer this _____ day of ________________, 19____.
BUY.COM INC.
<PAGE>
By ___________________________
Title:
3
<PAGE>
EXHIBIT C
CONTINUATION/CONVERSION NOTICE
The Bank of Nova Scotia
600 Peachtree Street N.E.
Suite 2700
Atlanta, Georgia 30308
Attention: Ms. Kathy Clark
BUY.COM INC.
------------
Gentlemen and Ladies:
This Continuation/Conversion Notice is delivered to you pursuant to Section
2.4 of the Credit Agreement, dated as of July 20, 1999 (together with all
amendments, if any, from time to time made thereto, the "Credit Agreement"),
----------------
among BUY.COM INC., a Delaware corporation (the "Borrower"), certain financial
--------
institutions and THE BANK OF NOVA SCOTIA (the "Agent"). Unless otherwise
-----
defined herein or the context otherwise requires, terms used herein have the
meanings provided in the Credit Agreement.
The Borrower hereby requests that on __________________, 19____,
(1) $___________ of the presently outstanding principal amount of the
Loans originally made on ________________, 19__ [and $_________ of the
presently outstanding principal amount of the Loans originally made on
_________________, 19_____],
(2) and all presently being maintained as [Base Rate Loans] [LIBO
Rate Loans],
<PAGE>
EXHIBIT C
(3) be [converted into] [continued as],
(4) [LIBO Rate Loans having an Interest Period of _________ months]
[Base Rate Loans].
The Borrower hereby:
(a) certifies and warrants that no Default has occurred and is
continuing; and
(b) agrees that if prior to the time of such continuation or
conversion any matter certified to herein by it will not be true and
correct at such time as if then made, it will immediately so notify the
Agent.
Except to the extent, if any, that prior to the time of the continuation or
conversion requested hereby the Agent shall receive written notice to the
contrary from the Borrower, each matter certified to herein shall be deemed to
be certified at the date of such continuation or conversion as if then made.
The Borrower has caused this Continuation/Conversion Notice to be executed
and delivered, and the certification and warranties contained herein to be made,
by its Authorized Officer this ________ day of ________________, 19____.
BUY.COM INC.
By ___________________________
Title:
<PAGE>
EXHIBIT D
[Opinion of Counsel to the Borrower]
<PAGE>
EXHIBIT D
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1
I.1 Defined Terms 1
-------------
I.2 Use of Defined Terms 20
--------------------
I.3 Cross-References 20
----------------
I.4 Accounting and Financial Determinations 20
---------------------------------------
ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES 20
II.1 Commitments 20
-----------
II.1.1 Commitment of Each Lender 21
-------------------------
II.1.2 Lenders Not Permitted or Required To Make Loans 21
-----------------------------------------------
II.2 Reduction of Commitment Amount 21
------------------------------
II.2.1 Optional 21
--------
II.2.2 Mandatory 21
---------
II.2.3 Special Letter of Credit Provisions. 22
-----------------------------------
II.3 Borrowing Procedure 22
-------------------
II.4 Continuation and Conversion Elections 23
-------------------------------------
II.5 Funding 23
-------
II.6 Notes 23
-----
II.7 Letter of Credit Procedure 24
--------------------------
ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES 25
III.1 Repayments and Prepayments 25
--------------------------
III.2 Interest Provisions 26
-------------------
III.2.1 Rates 26
-----
III.2.2 Post-Maturity Rates 27
-------------------
III.2.3 Payment Dates 27
-------------
III.3 Fees 28
----
III.3.1 Commitment Fee 28
--------------
III.3.2 Letter of Credit Fees 28
---------------------
III.3.3 Agreement to Repay Letter of Credit Drawings with Loans 28
-------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
<S> <C>
III.4 Letter of Credit Participations 29
-------------------------------
ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS 31
IV.1 LIBO Rate Lending Unlawful 31
--------------------------
IV.2 Deposits Unavailable 31
--------------------
IV.3 Increased Costs, etc 32
--------------------
IV.4 Funding Losses 32
--------------
IV.5 Increased Capital Costs 33
-----------------------
IV.6 Taxes 33
-----
IV.7 Payments, Computations, etc. 35
---------------------------
IV.8 Sharing of Payments 35
-------------------
IV.9 Setoff 36
------
IV.10 Use of Proceeds 37
---------------
IV.11 Actions of Affected Lenders 37
---------------------------
ARTICLE V CONDITIONS TO BORROWING 38
V.1 Initial Borrowing 38
-----------------
V.1.1 Resolutions, etc. 38
----------------
V.1.2 Delivery of Notes 39
-----------------
V.1.3 Payment of Outstanding Indebtedness, etc. 39
----------------------------------------
V.1.4 Guaranty 39
--------
V.1.5 Account Control Agreement 39
-------------------------
V.1.6 Warrant 40
-------
V.1.7 Financial Projections 40
---------------------
V.1.8 Year 2000 Reprogramming 40
-----------------------
V.1.9 Opinion of Counsel 40
------------------
V.1.10 Closing Fees, Expenses, etc 40
---------------------------
V.2 All Borrowings 40
--------------
V.2.1 Compliance with Warranties, No Default, etc 40
-------------------------------------------
V.2.2 Borrowing Request 42
-----------------
V.2.3 Satisfactory Legal Form 42
-----------------------
ARTICLE VI REPRESENTATIONS AND WARRANTIES 42
VI.1 Organization, etc 42
-----------------
VI.2 Due Authorization, Non-Contravention, etc. 43
-----------------------------------------
VI.3 Government Approval, Regulation, etc. 43
------------------------------------
VI.4 Validity, etc 43
-------------
VI.5 Financial Information 44
---------------------
VI.6 No Material Adverse Change 44
--------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
VI.7 Litigation, Labor Controversies, etc. 44
------------------------------------
VI.8 Subsidiaries 44
------------
VI.9 Ownership of Properties 45
-----------------------
VI.10 Taxes 45
-----
VI.11 Pension and Welfare Plans 45
-------------------------
VI.12 Environmental Warranties 45
------------------------
VI.13 Regulations U and X 47
-------------------
VI.14 Accuracy of Information 48
-----------------------
VI.15 Year 2000 Representations 48
-------------------------
ARTICLE VII COVENANTS 49
VII.1 Affirmative Covenants 49
---------------------
VII.1.1 Financial Information, Reports, Notices, etc. 49
--------------------------------------------
VII.1.2 Compliance with Laws, etc 51
-------------------------
VII.1.3 Maintenance of Properties 51
-------------------------
VII.1.4 Insurance 52
---------
VII.1.5 Books and Records 52
-----------------
VII.1.6 Environmental Covenant 52
----------------------
VII.1.7 Financial Statements 53
--------------------
VII.2 Negative Covenants 53
------------------
VII.2.1 Business Activities 53
-------------------
VII.2.2 Indebtedness 54
------------
VII.2.3 Liens 55
-----
VII.2.4 Financial Condition 56
-------------------
VII.2.5 Investments 57
-----------
VII.2.6 Restricted Payments, etc. 57
------------------------
VII.2.7 Capital Expenditures, etc 58
-------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
<S> <C>
VII.2.8 Rental Obligations 59
------------------
VII.2.9 Consolidation, Merger, etc. 59
--------------------------
VII.2.10 Asset Dispositions, etc. 60
-----------------------
VII.2.11 Transactions with Affiliates 60
----------------------------
VII.2.12 Negative Pledges, etc 60
---------------------
ARTICLE VIII EVENTS OF DEFAULT 61
VIII.1 Listing of Events of Default 61
----------------------------
VIII.1.1 Non-Payment of Obligations 61
--------------------------
VIII.1.2 Breach of Warranty 62
------------------
VIII.1.3 Non-Performance of Certain Covenants and Obligations 62
----------------------------------------------------
VIII.1.4 Non-Performance of Other Covenants and Obligations 62
--------------------------------------------------
VIII.1.5 Default on Other Indebtedness 62
-----------------------------
VIII.1.6 Judgments 63
---------
VIII.1.7 Pension Plans 63
-------------
VIII.1.8 Control of the Borrower 63
-----------------------
VIII.1.9 Bankruptcy, Insolvency, etc 63
---------------------------
VIII.1.10 Impairment 64
----------
VIII.1.11 Termination of Material Contracts 65
---------------------------------
VIII.2 Action if Bankruptcy 65
--------------------
VIII.3 Action if Other Event of Default 65
--------------------------------
ARTICLE IX THE AGENT 65
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
<S> <C>
IX.1 Actions 66
-------
IX.2 Funding Reliance, etc. 66
---------------------
IX.3 Exculpation 67
-----------
IX.4 Successor 67
---------
IX.5 Loans by Scotiabank 68
-------------------
IX.6 Credit Decisions 68
----------------
IX.7 Copies, etc. 69
-----------
ARTICLE X MISCELLANEOUS PROVISIONS 69
X.1 Waivers, Amendments, etc. 69
------------------------
X.2 Notices 70
-------
X.3 Payment of Costs and Expenses 70
-----------------------------
X.4 Indemnification 70
---------------
X.5 Survival 72
--------
X.6 Severability 73
------------
X.7 Headings 73
--------
X.8 Execution in Counterparts, Effectiveness, etc 73
---------------------------------------------
X.9 Governing Law; Entire Agreement 73
-------------------------------
X.10 Successors and Assigns 73
----------------------
X.11 Sale and Transfer of Loans and Note; Participations
---------------------------------------------------
in Loans and Note 74
-----------------
X.11.1 Assignments 74
-----------
X.11.2 Participations 76
--------------
X.12 Other Transactions 77
------------------
X.13 Forum Selection and Consent to Jurisdiction 77
-------------------------------------------
X.14 Waiver of Jury Trial 78
--------------------
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
vi
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
vii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SCHEDULE I - Disclosure Schedule
EXHIBIT A - Form of Note
EXHIBIT B - Form of Borrowing Request
EXHIBIT C - Form of Continuation/Conversion Notice
EXHIBIT D - Form of Opinion of Counsel to the Borrower
and Guarantor
EXHIBIT E - Form of Guaranty
EXHIBIT F - Form of Account Control Agreement
EXHIBIT G - Form of Warrant
</TABLE>
viii
<PAGE>
EXHIBIT 10.22
NOTE
$15,000,000 July 20, 1999
FOR VALUE RECEIVED, the undersigned, BUY.COM INC., Delaware corporation
(the "Borrower"), promises to pay to the order of THE BANK OF NOVA SCOTIA (the
--------
"Lender") on July 19, 2000 the principal sum of FIFTEEN MILLION DOLLARS
- -------
($15,000,000) or, if less, the aggregate unpaid principal amount of all Loans
shown on the schedule attached hereto (and any continuation thereof) made by the
Lender pursuant to that certain Credit Agreement, dated as of even date herewith
(together with all amendments and other modifications, if any, from time to time
thereafter made thereto, the ("Credit Agreement"), among the Borrower, THE BANK
----------------
OF NOVA SCOTIA, as Agent, and the various financial institutions (including the
Lender) as are, or may from time to time become, parties thereto.
The Borrower also promises to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Credit Agreement.
Payments of both principal and interest are to be made in lawful money of
the United States of America in same day or immediately available funds to the
account designated by the Agent pursuant to the Credit Agreement.
This Note is a Note referred to in, and evidences Indebtedness incurred
under, the Credit Agreement, to which reference is made for a description of the
security for this Note and for a statement of the terms and conditions on which
the Borrower is permitted and required to make prepayments and repayments of
principal of the Indebtedness evidenced by this Note and on which such
Indebtedness may be declared to be immediately due and payable. Unless
otherwise defined, terms used herein have the meaning provided in the Credit
Agreement.
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK.
BUY.COM INC.
By:_____________________________________
Title:
<PAGE>
LOANS AND PRINCIPAL PAYMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount of Unpaid
Amount of Principal Principal
Loan Made Repaid Balance
---------------- --------------- ----------------
Interest
Base LIBO Period (if Base LIBO Base LIBO Notation
Date Rate Rate applicable) Rate Rate Rate Rate Total Made By
- ------ ------ ------ ------------- ------ ------ ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
EXHIBIT 10.23
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), NOR QUALIFIED
UNDER THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND QUALIFICATION
UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY IN
FORM AND SUBSTANCE TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED.
Date of Issuance: July 20, 1999
BUY.COM, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, The Bank of Nova Scotia (the
"Holder"), or any assignee permitted under the terms hereof, is entitled, upon
the terms and subject to the conditions and termination provisions hereinafter
set forth, to subscribe for and purchase from BUY.COM INC., a Delaware
corporation (the "Company"), at the Per Share Exercise Price provided in Section
2 hereof, the number of fully paid and non-assessable shares of the Company's
Common Stock, par value $.0001 (the "Common Stock") per share, equal to (a) the
quotient of $675,000 divided by the IPO Price Per Share (as defined in Section 2
hereof) of the Company's Common Stock, or (b) if the Company has not completed
its IPO (as defined in Section 2 hereof) prior to July 20, 2000, the number of
shares covered by this Warrant shall be 43,550 shares of Common Stock. The
shares of the Common Stock purchasable hereunder are referred to as the "Warrant
Shares," and the term "Warrant" includes this Warrant and any Warrant issued in
substitution or exchange herefor. The Per Share Exercise Price and the number of
Warrant Shares are subject to adjustment as provided herein.
1. Term of Warrant.
---------------
This Warrant may be exercised by the Holder, in whole or in part from time
to time beginning on the earlier to occur of (i) the consummation of the
Company's IPO or (ii) July 20, 2000. In any event, the Holder cannot exercise
this Warrant after 5:00 p.m. Pacific Time on July 20, 2001 (subject to earlier
termination as hereinafter provided).
2. Exercise Price.
--------------
The price payable hereunder for each of the Warrant Shares (referred to
herein as the "Per Share Exercise Price") shall be the price determined in
accordance with the following: (i) if the Company has consummated its initial
public offering of its Common Stock pursuant to a Registration Statement under
the Securities Act (the "IPO"), the Per Share Exercise Price shall
<PAGE>
be equal to the price per share at which the Common Stock is first sold to the
public pursuant to such Registration Statement (the "IPO Price Per Share"); or
(ii) if at the time of exercise of this Warrant the Company has not completed
its IPO, the Per Share Exercise Price shall be equal to $15.50 per share.
3. Exercise of Warrant.
-------------------
3.1 Subscription and Payment of Exercise Price. To exercise this
------------------------------------------
Warrant, the Holder must surrender this Warrant (with the subscription form at
the end hereof duly executed) at the principal office of the Company, which is
currently located at 21 Brookline, Aliso Viejo, California 92656, together with
proper payment of the Per Share Exercise Price for each of the Warrant Shares as
to which the Warrant is being exercised. Payment for Warrant Shares shall be
made by certified or bank cashier's check, payable to the order of the Company.
Upon such surrender of this Warrant, together with the subscription form at
the end hereof duly executed and proper payment of the Per Share Exercise Price
for each of the Warrant Shares as to which the Warrant is being exercised, the
Company shall (i) issue, or cause the Company's transfer agent to issue, a
certificate or certificates in the name of the Holder for the largest number of
whole shares of the Common Stock to which the Holder shall be entitled and, if
this Warrant is exercised in whole, in lieu of any fractional share of the
Common Stock to which the Holder shall be entitled, cash equal to the fair
market value of such fractional share (based on the fair market value of a whole
share of Common Stock, determined as provided in Section 3.2 below), and (ii)
deliver any other securities and property receivable upon the exercise of this
Warrant, if any, or the proportionate part thereof if this Warrant is exercised
in part, pursuant to the provisions of this Warrant. If this Warrant is
exercised in part, this Warrant must be exercised for a number of whole shares
of the Common Stock and the Holder shall be entitled to receive a new Warrant
covering the number of Warrant Shares with respect to which this Warrant has not
been exercised.
3.2 Net Issue Election. The Holder may elect to receive, without the
------------------
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
-------
A
where:
X = the number of shares to be issued to the Holder pursuant to this
Section 3.2.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 3.2.
A = the fair market value of one share of Common Stock, as determined in
accordance with the provisions of this Section 3.2.
2
<PAGE>
B = the Per Share Exercise Price in effect under this Warrant at the time
the net issue election is made pursuant to this Section 3.2.
For purposes of this Section 3.2, the "fair market value" per share of the
Company's Common Stock shall be valued as follows:
(1) If traded on a national securities exchange or the Nasdaq
National Market System (the "NMS"), the value shall be deemed to be
the average of the last reported sale prices of the Company's Common
Stock on such exchange or the NMS over the thirty (30) day period
ending three (3) days prior to the closing;
(2) If traded over-the-counter (but not on the NMS), the value
shall be deemed to be the average of the mean of the closing bid and
ask prices of the Company's Common Stock over the thirty (30) day
period ending three (3) days prior to the closing or
(3) If there is no active public market, the value shall be the
fair market value of the Company's Common Stock, as determined in good
faith by the Board of Directors.
4. Reservation of Warrant Shares. The Company agrees that it will at all
-----------------------------
times prior to the expiration of this Warrant have authorized in reserve, and
will keep available, solely for issuance or delivery upon the exercise of this
Warrant, such number and amount of shares of the Common Stock and other
securities and properties as from time to time shall be receivable upon the
exercise of this Warrant.
5. Adjustments.
-----------
5.1 Distribution With Respect to Common Stock. If, at any time or
-----------------------------------------
from time to time after the date of this Warrant, the Company shall distribute
to the holders of the Common Stock, without payment therefor, (i) securities,
other than shares of the Common Stock, or (ii) property or cash (other than
dividends paid in the ordinary course), with respect to the Common Stock, then,
and in each such case, subject to Section 5.4 below, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities and
properties which the Holder would hold on the date of such exercise if, on the
date of such distribution, the Holder had been the holder of record of the
number of shares of the Common Stock subscribed for upon such exercise and,
during the period from the date of such distribution to and including the date
of such exercise, had retained such shares and the securities and properties
receivable by the Holder during such period.
5.2 Stock Splits, Etc. If, at any time or from time to time after
-----------------
the date of this Warrant, the Company shall issue to the holders of the Common
Stock shares of the Common Stock by way of a stock dividend or stock split,
then, and in each such case, the Per Share Exercise Price shall be adjusted, or
further adjusted, to a price (to the nearest whole cent) determined by dividing
(i) an amount equal to the number of shares of the Common Stock outstanding
immediately prior to such issuance multiplied by the Per Share Exercise Price as
it existed immediately prior to such issuance by (ii) the total number of shares
of the Common Stock outstanding immediately after such issuance. Upon each such
adjustment in the Per Share
3
<PAGE>
Exercise Price, the number of Warrant Shares shall be adjusted by dividing the
aggregate Per Share Exercise Price for all Warrant Shares that are subject to
this Warrant by the Per Share Exercise Price in effect immediately after such
adjustment.
5.3 Reverse Splits, Etc. If, at any time or from time to time after
-------------------
the date of this Warrant, the number of shares of Common Stock outstanding is
decreased by way of combination of shares or reserve split, then, and in each
such case, the Per Share Exercise Price shall be adjusted, or further adjusted,
to a price (to the nearest whole cent) determined by dividing (i) an amount
equal to the number of shares of the Common Stock outstanding immediately prior
to such event multiplied by the Per Share Exercise Price as it existed
immediately prior to such event by (ii) the total number of shares of the Common
Stock outstanding immediately after such event. Upon each such adjustment in the
Per Share Exercise Price, the number of Warrant Shares shall be adjusted by
dividing the aggregate Per Share Exercise Price for all Warrant Shares that are
subject to this Warrant by the Per Share Exercise Price in effect immediately
after such adjustment.
5.4 Adjustment for Reorganization, Consolidation, Merger, etc.
---------------------------------------------------------
a. Reorganization, Consolidation, Merger, etc. In case at any
------------------------------------------
time or from time to time, the Company shall (i) effect a reorganization or any
reclassification, (ii) consolidate with or merge into any other entity or
person, or (iii) transfer all or substantially all of its properties or assets
to any other entity or person, then, in each such case, lawful provisions shall
be made so that the Holder, on the exercise hereof as provided in Section 3 at
any time after the consummation of such reorganization, consolidation or merger
or the effective date of such reorganization, consolidation or merger, as the
case may be, shall receive, in lieu of the Common Stock (or other securities)
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which the Holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if the Holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment thereafter as
provided in this Section 5.
b. Continuation of Terms. Upon any reorganization,
---------------------
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 5.4 (collectively, a "Corporate Transaction"), this
option shall, immediately after such Corporate Transaction, be appropriately
adjusted to apply and pertain to the number and class of securities which would
have been issued to Holder in the consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the Exercise Price payable per
share, provided that the Aggregate Exercise Price payable hereunder shall remain
--------
the same.
c. Notice. The Company shall provide advance notice to the
------
Holder of any reorganization, consolidation, merger, dissolution or other such
transaction as soon as practicable, but in no event less than 20 days prior to
the consummation of any such transaction.
5.5 Certificate As To Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment provided for in this Section 5, the Company shall, at
its expense, promptly compute such adjustment or readjustment in accordance with
the terms hereof and furnish to
4
<PAGE>
each Holder of a Warrant a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any such Holder, furnish to such Holder a like certificate setting forth: (i)
such adjustments and readjustments; (ii) the Per Share Exercise Price in effect
at the time such certificate is requested; and (iii) the number of shares and
the amount, if any, of other securities, property or cash that at the time would
be received upon exercise of the Warrant.
5.6 No Impairment. The Company shall not, by any voluntary action,
-------------
avoid or seek to avoid the observance or performance of any of the provisions of
this Warrant, and shall at all times act in good faith to assist in the carrying
out of all of the provisions hereof including each of the provisions of this
Section 5, and in the taking of all such other action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
impairment.
6. Fully Paid Stock; Taxes. The Company agrees that the shares of the
-----------------------
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable. The Company
further covenants and agrees that it will pay, when due and payable, any and all
federal and state stamp, original issue or similar taxes which may be payable in
respect of the issue of any Warrant Share or certificate therefor; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance of any certificate
for Warrant Shares in a name other than that of the Holder upon any exercise of
this Warrant.
7. Restrictions on Transferability of Securities; Compliance with
--------------------------------------------------------------
Securities Act.
- --------------
7.1 Restrictive Legend. This Warrant and each certificate
------------------
representing (i) the Warrant Shares or (ii) any other securities issued in
respect of the Warrant Shares upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall (unless
otherwise permitted or unless the securities evidenced by such certificate shall
have been registered under the Securities Act be stamped or otherwise imprinted
with a legend substantially in the following form (in addition to any legend
required under applicable state securities laws), and shall be subject to the
provisions thereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISUNDER THE
SECURITIES ACT OF 1933, (THE "ACT"), OR QUALIFIED UNDER THE SECURITIES LAWS OF
ANY STATE, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
7.2 "Market Stand-Off" Agreement. The Holder of this Warrant is
---------------------------
subject to the terms and conditions of the "Market Standoff" provisions in
Section 2.2 of the Second Amended and Restated Investors' Rights Agreement to be
entered into on or about July 21, 1999 (the "Investors' Rights Agreement").
5
<PAGE>
7.3 Assignability.
-------------
a. Transfer/Assignment. This Warrant may not be transferred or
-------------------
assigned, in whole or in part, by the Holder unless the Holder has provided the
Company with written notice of its intent to so assign or transfer the Warrant
and the Company has consented to such assignment or transfer in writing, with
such consent not to be unreasonably withheld. In addition, the Holder must
comply with each of the terms and conditions relating to transfer set forth in
the Investors' Rights Agreement. Notwithstanding the foregoing, the Holder may
transfer or assign this Warrant to an affiliate of the Holder, provided that the
Holder has given written notice of its intent to transfer or assign the Warrant
to the Company and such affiliate transferee agrees to comply with and be bound
by the terms of the Investors' Rights Agreement.
b. Warrant Register. This Warrant is transferable only upon the
----------------
books of the Company which it shall cause to be maintained for such purpose. The
Company may treat the registered holder of this Warrant as he, she or it appears
on the Company's books at any time as the Holder for all purposes; provided,
however, that upon receipt of notice of an assignment pursuant to Section 7, the
Company shall revise its books to reflect such new holder(s).
c. Exchange of Warrants Upon Transfer. Upon surrender of this
----------------------------------
Warrant for exchange, properly endorsed and subject to the provisions of this
Warrant and the Investors' Rights Agreement referred to herein with respect to
compliance with the Securities Act, the Company shall at its expense issue to or
on the order of the Holder a new warrant or warrants of like tenor, in the name
of the Holder or as the Holder may direct, for an aggregate number of shares
equal to the number of Warrant Shares issuable upon exercise hereof.
8. Loss, Etc., of Warrant. Upon receipt of evidence satisfactory to
----------------------
the Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnity reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant if mutilated, and
upon reimbursement of the Company's reasonable incidental expenses, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
9. Warrant Holder Has No Stockholder Rights. This Warrant does not
----------------------------------------
confer upon the Holder any right to vote or to consent or to receive notice as a
stockholder of the Company, as such, with respect to any matters whatsoever, or
any other rights or liabilities as a stockholder, prior to the exercise thereof.
10. Representations and Warranties of the Holder. Holder hereby represents
--------------------------------------------
and warrants that:
10.1 Authorization. Holder has full power and authority to enter
-------------
into and purchase this Warrant and any Warrant Shares for which it may be
exercised, and the Warrant constitutes Holder's valid and legally binding
obligation, enforceable in accordance with its terms.
10.2 Purchase Entirely for Own Account. This Warrant is sold in
---------------------------------
reliance upon Holder's representation to the Company, which by Holder's
execution of this Warrant Holder
6
<PAGE>
hereby confirms, that the Warrant to be received by Holder and the Warrant
Shares issuable upon the exercise thereof (collectively, the "Securities") will
be acquired for investment for Holder's own account, not as a nominee or agent,
and not with a view to the resale or distribution of any part thereof, and that
Holder has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Warrant, Holder further
represents that Holder does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to person
or to any third person, with respect to any of the Securities.
10.3 Disclosure of Information. Holder believes that it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Warrant and any Warrant Shares for which the Warrant may be
exercised. Holder further represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Warrant and the business, properties,
prospects and financial condition of the Company.
10.4 Investment Experience. Holder is an investor in securities of
---------------------
companies in the development stage and acknowledges that Holder is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrant and any Warrant Shares for
which the Warrant may be exercised.
10.5 Accredited Investor. Holder is an "accredited investor" within
-------------------
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation
D, as presently in effect.
10.6 Restricted Securities. Holder understands that the Securities
---------------------
Holder is purchasing are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Holder
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
11. Termination of Warrant. This Warrant and Holder's ability to subscribe
----------------------
for and purchase the Warrant Shares shall terminate upon either of the following
events:
a. any action taken by the Holder to perfect a security
interest in the Restricted Investment Account or the Trust (as defined in the
Credit Agreement) pursuant to Section 8.1.12 of that certain Credit Agreement
between the Company and the Holder dated July 20, 1999 (the "Credit Agreement");
or
b. the occurrence of any Event of Default under the Credit
Agreement or any of the ancillary documents in connection with the Credit
Agreement and the Holder's subsequent enforcement of any of its rights under the
Credit Agreement or any of the ancillary documents in connection with such
Credit Agreement.
7
<PAGE>
12. Communication. Any notice required or permitted to be given
-------------
hereunder shall be in writing and shall be deemed to have been given if
personally delivered, sent by overnight courier or by facsimile, or if mailed,
certified or registered mail, postage prepaid, registered or certified, return
receipt requested, addressed to each party in the following manner:
To the Company: BUY.COM INC.
21 Brookline
Aliso Viejo, CA 92656
Attn: Gregory J. Hawkins
Fax: (949) 425-5257
To Holder: The Bank of Nova Scotia
580 California Street, Suite 2100
San Francisco, CA 94119
Attention: Mr. Christopher Osborn
Facsimile: (415) 397-0791
The Company and the Holder may change the address to which such notices are
to be addressed to them by giving the other party notice in the manner set forth
herein. Any notice given in the foregoing manner shall be effective (i) if
delivered personally or by telecopy, when received, (ii) if sent by overnight
courier, when receipted for, and (iii) if mailed, five days after being mailed
as described above.
13. Registration and Other Rights of Holders. The Holder of this Warrant
----------------------------------------
and of Warrant Shares issued upon exercise hereof shall have such rights with
respect to the registration thereof under the Securities Act and such other
rights as are set forth in the Investors' Rights Agreement.
14. Headings. The headings of this Warrant have been inserted as a matter
--------
of convenience and shall not affect the construction hereof.
15. Applicable Law. This Warrant shall be governed by and construed in
--------------
accordance with the internal laws of the State of Delaware.
IN WITNESS WHEREOF, BUY.COM INC. has caused this Warrant to be executed by
its officers thereunto authorized.
Dated: July 20, 1999 BUY.COM INC.
By: _________________________________
Gregory J. Hawkins
Chief Executive Officer
8
<PAGE>
ACCEPTED AND AGREED:
The Bank of Nova Scotia
______________________________
Name:
Title:
9
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
For value received, the undersigned hereby sells, assigns and transfers
unto __________________ the right to purchase __________ shares of Common Stock
evidenced by the within Warrant, and hereby appoints
____________________________ to transfer the same on the books of BUY.COM INC.
with full power of substitution in the premises.
Date: ________________ ____, _________
________________________________
(Signature)
Note: Signature must conform in all respects to the name of the Warrant
Holder as specified on the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
10
<PAGE>
EXERCISE FORM
(To Be Executed By The Warrant Holder If The Holder Desires
To Exercise The Warrant In Whole Or In Part)
TO: BUY.COM INC.
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for, and for purchase thereunder,
___________________ shares of Common Stock provided for therein and tenders
payment herewith to the order of BUY.COM INC. in the amount of
$_____________.____. The undersigned requested that certificates for such shares
of Common Stock be issued as follows:
Name:
Address:
Deliver to:
Address:
Date: _____________, _______
___________________________________
(Signature)
Note: Signature must conform in all respects to the name of the Warrant
Holder as specified on the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
11
<PAGE>
NET ISSUE ELECTION NOTICE
To: BUY.COM INC.
The undersigned hereby elects, pursuant to Section 1.2 of the attached
Warrant, to surrender the right to purchase ___________ shares of Common Stock.
The Certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
Date: ______________________________ ___________________________
Signature
___________________________
Name for Registration
___________________________
Mailing Address
12
<PAGE>
EXHIBIT 10.25
PROMISSORY NOTE
---------------
May 26, 1999
$10,000,000 Aliso Viejo, California
BUY.COM INC., a Delaware corporation (the "Company"), for value
received, hereby promises to pay to The Scott A. Blum Separate Property Trust
u/d/t 8/2/95 or its registered assigns ("Investor"), in lawful money of the
United States at such place as the Investor may designate from time to time in a
written notice to the Company, the principal sum of Ten Million
Dollars($10,000,000), together with all accrued but unpaid interest thereon.
Unpaid principal of this Note shall bear interest (computed on the
basis of a year of 360 days of actual days elapsed), from the date hereof until
such principal is paid, at a rate per annum which shall be equal to ten percent
(10%). All outstanding principal and accrued but unpaid interest on this Note
shall be due and payable on the closing and funding of a loan transaction in
which the Company receives at least $15,000,000 from The Bank of Nova Scotia or
another institutional lender (the "Bank Financing"). However, if the Bank
Financing is not consummated on or before June 25, 1999, all outstanding
principal and accrued but unpaid interest on this Note shall be due and payable
within ten (10) days after a demand, anytime after June 30, 1999. All payments
with respect to this Note shall be credited first to the payment of accrued but
unpaid interest and then to the repayment of principal. The rate of interest
payable hereunder shall in no event exceed the maximum rate permitted by law.
The Company may prepay this Note without premium or penalty.
If any payment of principal or interest on this Note shall become due
on a Saturday, Sunday, or a public holiday under the laws of the State of
California, such payment shall be made on the next succeeding business day and
such extension of time shall be included in computing interest in connection
with such payment.
This Note may be transferred only upon surrender of the original Note
for registration of transfer, duly endorsed, or accompanied by a duly executed
written instrument of transfer in form reasonably satisfactory to the Company.
Thereupon, a new Note for like principal amount and interest will be issued to,
and registered in the name of, the transferee. Interest and principal are
payable only to the registered holder of the Note.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to the Company for cancellation.
The Company waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Investor in exercising any right hereunder shall operate as a waiver
of such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
In the event that the Company fails to make payment on any date for
payment specified by Investor, the Company shall be deemed to be in default
hereunder.
<PAGE>
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, the Company agrees to pay, in addition to the principal and
interest payable hereon, reasonable attorneys' fees and costs incurred by
Investor.
IN WITNESS WHEREOF, the Company has caused this Promissory Note to be
duly executed and delivered on and as of the day and year first written above.
BUY.COM INC., a Delaware corporation
By: _____________________________________
Print Name:______________________________
Title:___________________________________
2
<PAGE>
EXHIBIT 10.26
AGREEMENT
---------
This Agreement (the "Agreement") is dated as of May 26, 1999 between The
Scott A. Blum Separate Property Trust u/d/t 8/2/95 (the "Trust") and BUY.COM
INC. (the "Company").
WHEREAS, the Trust has made a $10,000,000 loan to the Company evidenced by
a promissory note bearing 10% annual interest (the "Note"), attached hereto as
Exhibit A, with all of the outstanding principal and accrued but unpaid interest
- ---------
due and payable on the closing and funding of a loan transaction in which the
Company receives at least $15,000,000 from the Bank of Nova Scotia or another
institutional lender (the "Bank Financing");
WHEREAS, the Trust desires the Company to issue a warrant to the Trust in
the event that the Bank Financing is not completed on or before June 25, 1999;
NOW, THEREFORE, in consideration for the Trusts' loan the Company pursuant
to the terms of the Note, the Trust and the Company agree to the following:
1. In the event the Bank Financing is not consummated on or before
June 25, 1999, the Company will issue to the Trust a warrant (in substantially
the form attached hereto as Exhibit B) to purchase 10,000 shares of the
---------
Company's Common Stock at an exercise price per share equal to the following:
(a) If the Company has filed a Registration Statement on Form
S-1 for an initial public offering of its Common Stock, the exercise price per
share shall be equal to the mid point of the offering's price per share range
listed in such Registration Statement; or
(b) If the Company has not filed a Registration Statement on
Form S-1 for an initial public offering of its Common Stock, the exercise price
per share shall be equal to the fair market value of such shares on the date of
the warrant's issuance. The fair market value shall be determined in good faith
by the Company's Board of Directors.
2. In the event the Bank Financing is completed on or before June
25, 1999 and all of the outstanding principal and accrued but unpaid interest
under the Note has been repaid to the Trust, the Company shall not have any
obligations to issue any equity securities to the Trust pursuant to this
Agreement.
IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date
first written above.
The Scott A. Blum Separate Property BUY.COM INC.
Trust u/d/t 8/2/95
___________________________________ ___________________________________
Scott A. Blum, Trustee Gregory J. Hawkins
Chief Executive Officer
<PAGE>
Exhibit A
---------
<PAGE>
Exhibit B
---------
<PAGE>
WAIVER OF CERTAIN RIGHTS
PURSUANT TO THE AGREEMENT DATED MAY 26, 1999
August 5, 1999
WHEREAS, The Scott A. Blum Separate Property Trust dated 8/2/95 (the
"Trust") and BUY.COM INC., a Delaware corporation (the "Company") are the
parties to that certain Agreement, dated May 26, 1999 (the "Agreement");
WHEREAS, The Trust has made a $10,000,000 loan to the Company evidenced by
a promissory note bearing 10% annual interest (the "Note") with all of the
outstanding principal and accrued but unpaid interest due and payable on the
closing of the loan transaction with The Bank of Nova Scotia;
WHEREAS, in the event the loan transaction was not completed on or before
June 30, 1999, the Company is obligated to issue the Trust a warrant to purchase
10,000 shares of the Company's common stock (pre 15 to 1 split) (the "Warrant");
WHEREAS, the loan transaction with The Bank of Scotia was not completed on
or before June 30, 1999, and the Company is obligated to issue the Warrant to
the Trust;
WHEREAS, the Trust desires to waive the Company's obligation to issue the
Warrant and agrees to waive any and all rights under the Agreement;
NOW THEREFORE, the Trust makes the following waiver:
1. The Trust hereby waives the Company's obligation to issue the Warrant
and waives any and all rights under the Agreement and the Company's obligation
to issue the Warrant is hereby terminated.
IN WITNESS WHEREOF, the foregoing Waiver is hereby executed as of the date
first above written.
THE SCOTT A. BLUM SEPARATE
PROPERTY TRUST U/D/T 8/2/95
BY: _______________________
Name: Scott Blum
Title: Trustee
<PAGE>
EXHIBIT 10.27
BUY CORP.
STOCK OPTION AGREEMENT
----------------------
This Stock Option Agreement (the "Agreement") is made as of
_________________, 199__ by and among BUY CORP., a Delaware corporation (the
"Corporation") and ______________________ (the "Optionee").
RECITALS
--------
A. The Board of Directors of the Corporation has adopted that
certain 1998 Stock Option/Stock Issuance Plan (the "Plan") for the purpose of
attracting and retaining the services of persons who contribute to the growth
and financial success of the Corporation.
B. Optionee is a person who the Plan Administrator believes has and
will contribute to the growth and financial success of the Corporation, and this
Agreement is executed pursuant to and is intended to carry out the purposes of
the Plan.
AGREEMENT
---------
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. Subject to and upon the terms and conditions set
---------------
forth in this Agreement, the Corporation hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant of
Stock Option (the "Notice of Grant"), a stock option (the "Option") to purchase
up to that number of shares of the Corporation's Common Stock (the "Option
Shares") as is specified in the Notice of Grant. The Option Shares shall be
purchasable from time to time during the option term at the option price per
share (the "Option Price") specified in the Notice of Grant. Capitalized terms
used herein which are not otherwise defined shall have the meaning ascribed to
such terms in the Plan.
2. Option Term. This Option shall have a maximum term of ten (10)
-----------
years measured from the Grant Date and shall expire at the close of business on
the expiration date (the "Expiration Date") specified in the Notice of Grant,
unless sooner terminated in accordance with Paragraphs 5, 6 or 18.
3. Limited Transferability. This Option shall be neither
-----------------------
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee.
4. Dates of Exercise. This Option may not be exercised in whole or
-----------------
in part at any time prior to the time the Plan is approved by the Corporation's
shareholders in accordance with Paragraph 18. Provided such shareholder
approval is obtained, this Option shall thereupon become exercisable for the
Option Shares in one or more installments as is specified
<PAGE>
in the Notice of Grant. As the Option becomes exercisable in one or more
installments, the installments shall accumulate and the Option shall remain
exercisable for such installments until the Expiration Date (as set forth in the
Notice of Grant) or the sooner termination of the Option Term under Paragraph 5
or Paragraph 6 of this Agreement.
5. Special Termination of Option Term. The option term (the "Option
----------------------------------
Term") specified in Paragraph 2 shall terminate (and this Option shall cease to
be exercisable) prior to the Expiration Date should any of the following
provisions become applicable:
A. Except as otherwise provided in subparagraph (ii) or (iii) below,
should Optionee cease to remain in Service (as defined below) while this Option
is outstanding, then the period for exercising this Option shall be reduced to a
three (3)-month period commencing with the date of such cessation of Service,
but in no event shall this Option be exercisable at any time after the
Expiration Date. Upon the expiration of such three (3)-month period or (if
earlier) upon the Expiration Date, this Option shall terminate and cease to be
outstanding.
B. Should Optionee die while this Option is outstanding, then the
personal representative of the Optionee's estate or the person or persons to
whom the Option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution shall have the right to exercise this
Option. Such right shall lapse and this Option shall cease to be exercisable
upon the earlier of (A) the expiration of the twelve (12) month period measured
-------
from the date of Optionee's death or (B) the Expiration Date. Upon the
expiration of such twelve (12) month period or (if earlier) upon the Expiration
Date, this Option shall terminate and cease to be outstanding.
C. Should Optionee become permanently disabled and cease by reason
thereof to remain in Service while this Option is outstanding, then the Optionee
shall have a period of twelve (12) months (commencing with the date of such
cessation of Service) during which to exercise this Option, but in no event
shall this Option be exercisable at any time after the Expiration Date.
Optionee shall be deemed to be permanently disabled if Optionee is unable to
engage in any substantial gainful activity for the Corporation or the parent or
subsidiary corporation retaining his/her services by reason of any medically
determinable physical or mental impairment, which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than twelve (12) months. Upon the expiration of such limited period of
exercisability or (if earlier) upon the Expiration Date, this Option shall
terminate and cease to be outstanding.
D. During the limited period of exercisability applicable under
subparagraphs (i), (ii) or (iii) above, this Option may be exercised for any or
all of the Option Shares for which this Option is, at the time of the Optionee's
cessation of Service, exercisable in accordance with the exercise schedule
specified in the Notice of Grant and the provisions of Paragraph 6 of this
Agreement.
E. For purposes of this Paragraph 5 and for all other purposes under
this Agreement:
<PAGE>
(i) The Optionee shall be deemed to remain in "Service" for so long as
the Optionee continues to render periodic services to the Corporation or any
parent or subsidiary corporation, whether as an Employee, a non-employee member
of the board of directors, or an independent contractor or consultant.
(ii) The Optionee shall be deemed to be an "Employee" of the Corporation
and to continue in the Corporation's employ for so long as the Optionee remains
in the employ of the Corporation or one or more of its parent or subsidiary
corporations, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance.
(iii) A corporation shall be considered to be a "subsidiary" corporation
of the Corporation if it is a member of an unbroken chain of corporations
beginning with the Corporation, provided each such corporation in the chain
(other than the last corporation) owns, at the time of determination, stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
(iv) A corporation shall be considered to be a "parent" corporation of the
Corporation if it is a member of an unbroken chain ending with the Corporation,
provided each such corporation in the chain (other than the Corporation) owns,
at the time of determination, stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
6. Effect of Corporate Transaction.
-------------------------------
A. Optionee shall automatically vest in full with respect to all of
the Option Shares in the event of a Corporate Transaction so the Option shall,
immediately prior to the effective date of the Corporate Transaction, may be
exercised for any or all of the Option Shares as fully-vested shares of Common
Stock, provided that the Option Shares shall not automatically vest in full if
and to the extent: (i) this Option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable Option to purchase shares of the
capital stock of the successor corporation (or parent thereof), or (ii) such
Option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested Option Shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to those Option Shares.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator (as defined in the Plan), and its determination shall
be final, binding and conclusive.
B. To the extent not previously exercised, this Option shall
terminate and cease to be exercisable upon the consummation of a Corporate
Transaction unless it is expressly assumed by the successor corporation or
parent thereof.
C. Option Shares available under an Option that is assumed or
replaced in the Corporate Transaction and that do not otherwise accelerate at
that time, shall automatically vest in full in the event the Optionee's Service
should subsequently terminated by reason of an Involuntary Termination within
eighteen (18) months following the effective date of such
<PAGE>
Corporate Transaction. Any Option so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the Option Term
-------
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
D. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise make changes in its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. Effect of Change in Control
---------------------------
In the event of any Change in Control, Optionee shall automatically
vest in full with respect to all Option Shares so that the Option shall,
immediately prior to the effective date of the Change in Control, be fully
exercisable for any or all of Option Shares as fully-vested shares of Common
Stock.
8. Adjustment in Option Shares.
---------------------------
A. In the event any change is made to the Corporation's outstanding
Common Stock by reason of any stock split, stock dividend, combination of
shares, exchange of shares, or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then appropriate adjustments
shall be made to (i) the total number of Option Shares subject to this Option,
(ii) the number of Option Shares for which this Option is to be exercisable from
and after each installment date specified in the Notice of Grant and (iii) the
Option Price payable per share in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.
B. If this Option is to be assumed in connection with a Corporate
Transaction described in Paragraph 6 or is otherwise to remain outstanding, then
this Option shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issuable to the Optionee in the consummation of such Corporate
Transaction had the Option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Option Price
payable per share, provided the aggregate Option Price payable hereunder shall
--------
remain the same.
9. Privilege of Stock Ownership. The holder of this Option shall not
----------------------------
have any of the rights of a shareholder with respect to the Option Shares until
such individual shall have exercised the Option and paid the Option Price.
10. Manner of Exercising Option.
---------------------------
A. In order to exercise this Option with respect to all or any part
of the Option Shares for which this Option is at the time exercisable, Optionee
(or in the case of exercise after Optionee's death, the Optionee's executor,
administrator, heir or legatee, as the case may be) must take the following
actions:
<PAGE>
(i) Execute and deliver to the Secretary of the Corporation a
stock purchase agreement (the "Stock Purchase Agreement") in substantially the
form of Exhibit B to the Notice of Grant.
---------
(ii) Pay the aggregate Option Price for the purchased shares in
one or more forms approved under the Plan.
(iii) Furnish to the Corporation appropriate documentation that
the person or persons exercising the Option, if other than Optionee, have the
right to exercise this Option.
B. For purposes of this Agreement, the Exercise Date shall be the
date on which the executed Purchase Agreement shall have been delivered to the
Corporation, and the fair market value of a share of Common Stock on any
relevant date shall be determined in accordance with subparagraphs (i) through
(iii) below:
(i) If the Common Stock is not at the time listed or admitted
to trading on any stock exchange but is traded on the NASDAQ National Market
System, the fair market value shall be the closing selling price of one share of
Common Stock on the date in question, as such price is reported by the National
Association of Securities Dealers through its NASDAQ system or any successor
system. If there is no closing selling price for the Common Stock on the date in
question, then the closing selling price on the last preceding date for which
such quotation exists shall be determinative of fair market value.
(ii) If the Common Stock is at the time listed or admitted to
trading on any stock exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question on the stock
exchange determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Common Stock on
such exchange on the date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding date for which such
quotation exists.
(iii) If the Common Stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-counter
market, or if the Plan Administrator determines that the value determined
pursuant to subparagraphs (i) and (ii) above does not accurately reflect the
fair market value of the Common Stock, then such fair market value shall be
determined by the Plan Administrator after taking into account such factors as
the Plan Administrator shall deem appropriate.
C. As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to Optionee or to the other person or persons exercising
this Option a certificate or certificates representing the shares so purchased
and paid for, with the appropriate legends affixed thereto.
D. In no event may this Option be exercised for any fractional
shares.
11. Compliance with Laws and Regulations.
------------------------------------
<PAGE>
A. The exercise of this Option and the issuance of Option Shares
upon such exercise shall be subject to compliance by the Corporation and the
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange on which shares of the
Corporation's Common Stock may be listed at the time of such exercise and
issuance.
B. In connection with the exercise of this Option, Optionee shall
execute and deliver to the Corporation such representations in writing as may be
requested by the Corporation in order for it to comply with the applicable
requirements of Federal and State securities laws.
12. Successors and Assigns. Except to the extent otherwise provided
----------------------
in Paragraphs 3 or 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the successors, administrators, heirs, legal
representatives and assigns of Optionee and the successors and assigns of the
Corporation.
13. Liability of Corporation.
------------------------
A. If the Option Shares covered by this Agreement exceed, as of the
Grant Date, the number of shares of Common Stock which may without shareholder
approval be issued under the Plan, then this Option shall be void with respect
to such excess shares, unless shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of Article IV, Section 3, of the
Plan.
B. The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this Option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
14. Notices. Any notice required to be given or delivered to the
-------
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation in care of the Secretary of the Corporation at the
Corporation's principal corporate offices. Any notice required to be given or
delivered to Optionee shall be in writing and addressed to Optionee at the
address indicated below Optionee's signature line on the Notice of Grant. All
notices shall be deemed to have been given or delivered upon personal delivery
or upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
15. Loans. The Plan Administrator may, in its absolute discretion
-----
and without any obligation to do so, assist the Optionee in the exercise of this
Option by (i) authorizing the extension of a loan to the Optionee from the
Corporation or (ii) permitting the Optionee to pay the Option Price for the
purchased Common Stock in installments over a period of years. The terms of any
such loan or installment method of payment (including the interest rate, the
requirements for collateral and the terms of repayment) shall be established by
the Plan Administrator in its sole discretion.
<PAGE>
16. Construction. This Agreement and the Option evidenced hereby are
------------
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. All decisions of the
Plan Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this Option.
17. Governing Law. The interpretation, performance, and enforcement
-------------
of this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-law rules.
18. Shareholder Approval. The grant of this Option is subject to
--------------------
approval of the Plan by the Corporation's shareholders within twelve (12) months
after the adoption of the Plan by the Board of Directors. Notwithstanding any
-------------------
provision of this Agreement to the contrary, this Option may not be exercised in
- --------------------------------------------------------------------------------
whole or in part until such shareholder approval is obtained. In the event that
- ------------------------------------------------------------
such shareholder approval is not obtained, then this Option shall thereupon
terminate in its entirety and the Optionee shall have no further rights to
acquire any Option Shares hereunder.
19. Additional Terms Applicable to an Incentive Stock Option. In the
--------------------------------------------------------
event this Option is designated an Incentive Stock Option in the Notice of
Grant, the following terms and conditions shall also apply to the grant:
A. This Option shall cease to qualify for favorable tax treatment as
an Incentive Stock Option under the Federal tax laws if (and to the extent) this
Option is exercised for one or more Option Shares: (i) more than three (3)
months after the date the Optionee ceases to be an Employee for any reason other
than death or permanent disability (as defined in Paragraph 5) or (ii) more than
one (1) year after the date the Optionee ceases to be an Employee by reason of
permanent disability.
B. Should this Option be designated as immediately exercisable in
the Notice of Grant, then this Option shall not become exercisable in the
calendar year in which granted if (and to the extent) the aggregate fair market
value (determined at the Grant Date) of the Corporation's Common Stock for which
this Option would otherwise first become exercisable in such calendar year
would, when added to the aggregate fair market value (determined as of the
respective date or dates of grant) of the Corporation's Common Stock for which
this Option or one or more other Incentive Stock Options granted to the Optionee
prior to the Grant Date (whether under the Plan or any other Option plan of the
Corporation or its parent or subsidiary corporations) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in
the aggregate. To the extent the exercisability of this Option is deferred by
reason of the foregoing limitation, the deferred portion will first become
exercisable in the first calendar year or years thereafter in which the One
Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not
be contravened.
C. Should this Option be designated as exercisable in installments
in the Notice of Grant, then no installment under this Option (whether annual or
monthly) shall qualify for favorable tax treatment as an Incentive Stock Option
under the Federal tax laws if (and to the extent) the aggregate fair market
value (determined at the Grant Date) of the Corporation's
<PAGE>
Common Stock for which such installment first becomes exercisable hereunder
will, when added to the aggregate fair market value (determined as of the
respective date or dates of grant) of the Corporation's Common Stock for which
one or more other Incentive Stock Options granted to the Optionee prior to the
Grant Date (whether under the Plan or any other Option plan of the Corporation
or any parent or subsidiary corporation) first become exercisable during the
same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate.
20. Withholding. Optionee hereby agrees to make appropriate
-----------
arrangements with the Corporation or parent or subsidiary corporation employing
Optionee for the satisfaction of all Federal, State or local income tax
withholding requirements and all Federal social security employee tax
requirements applicable to the exercise of this Option.
<PAGE>
EXHIBIT 10.28
NON-COMPETITION AGREEMENT
This Non-Competition Agreement (this "Agreement") is entered into as
of this 3rd day of December, 1998 by and among SPEEDSERVE.COM INC., a Delaware
corporation (the "Company"); BUY CORP., a Delaware corporation ("BUY.COM");
Ingram Entertainment Inc. ("Ingram Entertainment"); and David B. Ingram ("David
Ingram") (Ingram Entertainment and David Ingram are referred to collectively as
the "Sellers").
WHEREAS, the Company is a wholly owned subsidiary of BUY.COM;
WHEREAS, BUY.COM intends to merge SpeedServe Inc. ("SpeedServe") into
the Company (the "Merger");
WHEREAS, Ingram Entertainment is a principal shareholder of SpeedServe
and David Ingram is a principal shareholder of Ingram Entertainment;
WHEREAS, one or both of the Sellers is engaged, or may during the Term
(defined below) be engaged, in those businesses listed on Exhibit A hereto (the
---------
"Exempt Businesses") and has investments in, or may have investments in, those
companies listed on Exhibit B hereto (the "Exempt Investments");
---------
WHEREAS, neither SpeedServe nor BUY.COM is presently engaged in the
sale of music products over the world-wide web/Internet; and
WHEREAS, it is a condition to the Merger that each of the Sellers
enter into a non-competition agreement with the Company;
NOW, THEREFORE, the parties agree as follows:
1. The term (the "Term") of this Agreement shall be for a period
commencing on the date hereof and ending on the second anniversary of the date
hereof.
2. During the Term, neither Seller will, without the Company's prior
written consent, directly or indirectly, own a controlling interest (defined
below) in any company or business engaged in the ownership or hosting of any
world-wide web/Internet site targeted at the direct sale to the individual
consumer of books; videos; music; games; or computer hardware or software (the
"Internet Retail Business"). Notwithstanding the foregoing, (a) the ownership
by any Seller of any of the Exempt Investments shall not violate the
prohibitions of this paragraph; and (b) neither (i) the conduct by any Seller of
any of the Exempt Businesses nor (ii) the conduct by any entity in which any
Seller has one of the Exempt Investments of any business (including one directly
or indirectly in competition with the Company or offering any of the products or
services being developed, marketed, distributed, planned, sold or otherwise
provided by the Company or any successor to the Company at any time) shall
violate the prohibitions of this paragraph. For purposes of this Agreement, a
"controlling interest" in a company or business
<PAGE>
shall mean direct or indirect ownership or control of more than 50% of the
shares or other equity securities entitled to vote for the election of directors
or, if there are no such directors, to direct the business affairs and
operations of, such company or business.
3. During the Term hereof, neither Seller will, directly or
indirectly, knowingly employ, or knowingly permit any other company or business
organization which is directly or indirectly controlled by any Seller to employ,
any person while that person is employed by the Company, or in any manner seek
to induce any such person to leave his or her employment with the Company;
provided, however, that former employees of SpeedServe separated from SpeedServe
- -------- -------
prior to the date hereof in connection with the Merger shall be exempt from this
restriction; provided, further, that hiring any employee of the Company as a
-------- -------
result of a general advertising solicitation to which such individual responds
without specific inducement shall not constitute a violation hereunder. The
parties acknowledge that the Company will sublease premises from Ingram
Entertainment in connection with the Merger and that general job postings by
Ingram Entertainment on its premises shall be deemed a general advertising
solicitation for these purposes.
4. During the Term hereof, the Company will not, directly or
indirectly, knowingly employ, or knowingly permit any other company or business
organization which is directly or indirectly controlled by it to employ, any
person while that person is employed by either Seller, or in any manner seek to
induce any such person to leave his or her employment with either of the
Sellers; provided, however, that employees of any Seller separated from such
-------- -------
Seller prior to the date hereof in connection with the Merger shall be exempt
from this restriction; provided, further, that hiring any employee of either
-------- -------
Seller as a result of a general advertising solicitation to which such
individual responds without specific inducement shall not constitute a violation
hereunder.
5. Each Seller, the Company, and BUY.COM agree that any material
breach of this Agreement by the other will cause irreparable damage to the non-
breaching party and that in the event of such breach the non-breaching party
shall have, in addition to any and all remedies of law, the right to an
injunction, specific performance or other equitable relief to prevent the
violation of the breaching party's obligations hereunder.
6. Any amendment to or modification of this Agreement, and any waiver
of any provision hereof, shall be in writing. Any waiver of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach hereof.
7. Each party hereby agrees that each provision herein shall be
treated as a separate and independent clause, and the unenforceability of any
one clause shall in no way impair the enforceability of any of the other clauses
herein. Moreover, if one or more of the provisions contained in this Agreement
shall for any reason be held to be excessively broad as to scope, activity or
subject so as to be unenforceable at law, such provision or provisions shall be
construed by the appropriate judicial body by limiting and reducing it or them,
so as to be enforceable to the maximum extent compatible with the applicable law
as it shall then appear.
<PAGE>
8. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
9. The term "Company" shall include Speedserve.Com Inc.. and any of
its subsidiaries, subdivisions or affiliates, including BUY.COM. The Company
shall have the right to assign this Agreement to its successors and assigns, and
all covenants and agreements hereunder shall inure to the benefit of and be
enforceable by said successors or assigns; provided that such assignment does
not expand the scope or coverage of this Agreement.
10. This Agreement and its contents, including Exhibits A and B, are
----------------
confidential and shall remain confidential following its execution. No party
hereto shall knowingly make any disclosure of the existence or the terms of this
Agreement or provide an original or copy of all or any portion thereof to
anyone, except in compliance with a lawful order or process of a court or
arbitrator of competent jurisdiction or governmental agency, or as may otherwise
be required by law or regulation, or with the written consent of all other
parties hereto.
[CONTINUED ON NEXT PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Non-
Competition Agreement as of the date first written above.
Very truly yours,
SPEEDSERVE.COM INC.
By:_________________________________________
Name:
Title:
BUY CORP.
By:_________________________________________
Name:
Title:
INGRAM ENTERTAINMENT INC.
By: _______________________________________
David B. Ingram
President
DAVID B. INGRAM
____________________________________________
David B. Ingram
<PAGE>
EXHIBIT A
to
Non-Competition Agreement
EXEMPT BUSINESSES
-----------------
Either Seller can engage in one or more of the following activities or provide
one or more of the following services (the "Exempt Businesses"):
1. Wholesale distribution of consumer products, including videos, DVD's,
audio books, games, multimedia, electronics and related products, to customers,
including, but not limited to, traditional retailers and world-wide
web/Internet customers, and the providing of related services. For purposes of
the preceding sentence, wholesale distribution specifically excludes sales
directly to the consumer, but includes electronic ordering by non-consumer
customers on a business-to-business basis. This business also includes the
solicitation of advertising dollars from studios and other suppliers.
2. Wholesale distribution or retail sale to the consumer of computer
products in connection with the computer liquidation business, including the
providing of related services, whether directly or through a company in which
one or both of the Sellers or an affiliate holds an investment, and including
distribution or sale through the world-wide web/Internet and the ownership or
hosting of one or more world-wide web/Internet sites related to this business.
3. Product fulfillment, "fee-based" distribution, cashiering (i.e.
----
processing payments in connection with commercial transactions), electronic
ordering, or other value-added services for world-wide web/Internet sites owned
or hosted by others, including sites in competition with those of the Company
and its affiliates. These services may include world-wide web/Internet-based
ordering from in-store PC/kiosks located on the premises of retailers which sell
directly to the consumer, which sites are or may be hosted by either of the
Sellers. (The parties acknowledge that wholesale competitors of Ingram
Entertainment presently offer product fulfillment, "fee-based" distribution,
cashiering, electronic ordering, and other value-added services as contemplated
by the first sentence of this item 3).
4. In connection with the acquisition of a controlling interest in an
entertainment product distributor business that does not primarily engage in the
retail sale of entertainment products through the world-wide web/Internet, but
which hosts one or more world-wide web/Internet sites of others targeted at the
direct sale to the individual consumer of entertainment products (collectively
the "Internet Entertainment Business"), the Seller acquiring such ownership
shall be entitled to take one of the following courses of action:
(a) Continue to operate that Internet Entertainment Business during
the term of this Agreement without dedicating materially greater resources
(including expanding advertising and capital expenditure budgets) to that
Internet Entertainment Business than was dedicated by the predecessor
company immediately prior to the acquisition;
(b) Divest itself of the Internet Entertainment Business; or
<PAGE>
(c) Commence the winding down of the Internet Entertainment Business
and proceed with such winding down in an orderly manner (which winding down
may extend beyond the term of this Agreement.)
Nothing herein shall limit either Seller's right during the term of the
Agreement to maintain or expand hosting relationships with customers engaged in
retail sales, or the scope of services provided to such customers of the
acquired business immediately prior to the acquisition.
<PAGE>
EXHIBIT B
to
Non-Competition Agreement
EXEMPT INVESTMENTS
------------------
Investments or ownership by either Seller in the following entities (including
their successors by way of merger, consolidation, acquisition of assets or
stock, or otherwise), or of the following types, shall constitute Exempt
Investments:
1. Ingram Micro Inc.
2. Attitude Network, Ltd.
3. HSX Holdings, Inc.
4. Magnitude Network, L.L.C.
5. Video City, Inc.
6. Movie Gallery, Inc.
7. West Coast Entertainment Corp.
8. Video Update, Inc.
9. Nashville Computer Liquidators, Inc., or any entity in which that
corporation and Ingram Entertainment, or subsidiaries or affiliates of
either of them, are equity owners.
10. McGee, Best, Frank & Ingram LLC.
11. Ingram / LeBrun Music Inc.
12. LeBrun / Ingram Songs Inc.
13. Video Financial Services Inc.
14. Ingram Design Group L.P.
15. Big Time Toys, Inc.
16. Equity interests in customers of Ingram Entertainment received in
settlement of account balances arising from the furnishing of product
to those customers in one of the Exempt Businesses.
<PAGE>
EXHIBIT 10.29
PROMISSORY NOTE
---------------
August 16, 1999
$5,000,000 Aliso Viejo, California
BUY.COM INC., a Delaware corporation (the "Company"), for value
received, hereby promises to pay to The Scott A. Blum Separate Property Trust
u/d/t 8/2/95 or its registered assigns ("Investor"), in lawful money of the
United States at such place as the Investor may designate from time to time in a
written notice to the Company, the principal sum of Five Million Dollars
($5,000,000), together with all accrued but unpaid interest thereon.
Unpaid principal of this Note shall bear interest (computed on the
basis of a year of 360 days of actual days elapsed), from the date hereof until
such principal is paid, at a rate per annum which shall be equal to ten percent
(10%). All outstanding principal and accrued but unpaid interest on this Note
shall be due and payable on the closing and funding of a preferred stock
financing with certain SOFTBANK Venture Funds (the "Financing"). However, if the
Financing is not consummated on or before September 30, 1999, all outstanding
principal and accrued but unpaid interest on this Note shall be due and payable
within ten (10) days after a demand. All payments with respect to this Note
shall be credited first to the payment of accrued but unpaid interest and then
to the repayment of principal. The rate of interest payable hereunder shall in
no event exceed the maximum rate permitted by law. The Company may prepay this
Note at any time without premium or penalty.
If any payment of principal or interest on this Note shall become due
on a Saturday, Sunday, or a public holiday under the laws of the State of
California, such payment shall be made on the next succeeding business day and
such extension of time shall be included in computing interest in connection
with such payment.
This Note may be transferred only upon surrender of the original Note
for registration of transfer, duly endorsed, or accompanied by a duly executed
written instrument of transfer in form reasonably satisfactory to the Company.
Thereupon, a new Note for like principal amount and interest will be issued to,
and registered in the name of, the transferee. Interest and principal are
payable only to the registered holder of the Note.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to the Company for cancellation.
The Company waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Investor in exercising any right hereunder shall operate as a waiver
of such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
In the event that the Company fails to make payment under this Note in
accordance with the payment terms contained herein, the Company shall be deemed
to be in default hereunder.
<PAGE>
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, the Company agrees to pay, in addition to the principal and
interest payable hereon, reasonable attorneys' fees and costs incurred by
Investor.
IN WITNESS WHEREOF, the Company has caused this Promissory Note to be
duly executed and delivered on and as of the day and year first written above.
BUY.COM INC., a Delaware corporation
By:_______________________________
Print Name:_______________________
Title:____________________________
2
<PAGE>
Exhibit 10.30
BUY.COM INC.
SERIES B CONVERTIBLE PARTICIPATING
PREFERRED STOCK PURCHASE AGREEMENT
SEPTEMBER 2, 1999
<PAGE>
Index of Exhibits
-----------------
Schedule of Purchasers Exhibit A
Amended and Restated Certificate
of Incorporation Exhibit B
Third Amended and Restated Investors'
Rights Agreement Exhibit C
Second Amended and Restated
Stockholders' Agreement Exhibit D
Employee NonDisclosure and Exhibit E
Developments Agreement
Form of Legal Opinion Exhibit F
Joint Venture Letter of Intent Exhibit G
<PAGE>
BUY.COM INC.
SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK PURCHASE AGREEMENT
(the "Agreement") is entered into as of this 2nd day of September, 1999, by and
among BUY.COM INC., a Delaware corporation (the "Company"), and each of those
entities, severally and not jointly, whose names are set forth on the Schedule
of Purchasers attached hereto as Exhibit A (which entities are hereinafter
---------
collectively referred to as "Purchasers" and each individually as a
"Purchaser").
Recitals
WHEREAS, the Company has authorized the sale and issuance of an aggregate
of Fifteen Million Eight Hundred Seventy Seven Thousand Two Hundred Forty Nine
(15,877,249) shares of its Series B Convertible Participating Preferred Stock
(the "Shares");
WHEREAS, Purchasers desire to purchase the Shares on the terms and
conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Shares to Purchasers on
the terms and conditions set forth herein.
Now, Therefore, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
Section 1. Agreement to Sell and Purchase
1.1 Authorization of Shares. On or prior to the Closing Date (as defined
in Section 2 below), the Company shall have (i) duly authorized the sale and
issuance to Purchasers of the Shares and (ii) duly authorized and reserved a
sufficient number of shares of common stock of the Company, $.0001 par value
(the "Common Stock"), for issuance upon full conversion of the Shares (the
"Conversion Shares"). The Shares and the Conversion Shares shall have the
rights, preferences, privileges and restrictions set forth in the Amended and
Restated Certificate of Incorporation of the Company, in the form attached
hereto as Exhibit B (the "Certificate"). The Company has, or before the Closing
---------
Date will have, adopted and filed with the Secretary of State of the State of
Delaware the Certificate and will have taken all necessary corporate action for
the purpose of authorizing the sale or issuance of the Shares pursuant hereto.
1.2 Sale and Purchase. Subject to the terms and conditions hereof, at
the Closing (as hereinafter defined), the Company hereby agrees to issue and
sell to each Purchaser, severally and not jointly, and each Purchaser agrees to
purchase from the Company, severally and not jointly, the number of Shares set
forth opposite such Purchaser's name in Exhibit A, at a purchase price per Share
---------
equal to $5.6685, for the aggregate purchase price set forth in Exhibit A.
---------
-1-
<PAGE>
Section 2. Closing, Delivery and Payment
2.1 Closing. The closing of the sale and purchase of the Shares under
this Agreement (the "Closing") shall take place at the offices of Brobeck,
Phleger & Harrison LLP, 38 Technology Drive, Irvine, California 92618 on the
later to occur of (i) September 15, 1999, (ii) the first business day following
the date on which the last to be fulfilled or waived of the conditions to the
Closing set forth in Sections 6.1 and 6.2 hereof have been fulfilled or waived
in accordance with this Agreement or (iii) at such other time or place as the
Company and Purchasers may mutually agree (such date is hereinafter referred to
as a "Closing Date").
2.2 Delivery. At the Closing, subject to the terms and conditions
hereof, the Company will deliver to the Purchasers stock certificates
representing the number of Shares to be purchased at the Closing by each
Purchaser (which shall be issued in such Purchaser's name), against payment of
the purchase price therefor by check payable to the order of the Company or by
wire transfer of immediately available funds to the bank account of the Company
designated by the Company.
Section 3. Representations and Warranties of the Company
Except as set forth on the Schedule of Exceptions delivered to the
Purchasers, the Company hereby represents and warrants to each Purchaser as
follows:
3.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement, the Third Amended and Restated Investors' Rights Agreement, in
the form attached hereto as Exhibit C (the "Investors' Rights Agreement"), and
---------
the Second Amended and Restated Stockholders' Agreement, in the form attached
hereto as Exhibit D (the "Stockholders' Agreement"), to issue and sell the
---------
Shares and the Conversion Shares and to carry out the provisions of this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement and the
Certificate and to carry on its business as presently conducted and as presently
proposed to be conducted. The Company is duly qualified and is authorized to do
business and is in good standing as a foreign corporation in all jurisdictions
in which the nature of its activities and of its properties (both owned and
leased) make such qualifications necessary, except for those jurisdictions in
which failure to do so would not have a material adverse effect on the Company
or its business. The Company owns no equity securities of any other corporation,
limited partnership or similar entity. The Company is not a participant in any
joint venture, partnership or similar arrangement. The Company has made
available to the Purchasers true, correct and complete copies of the Company's
Certificate of Incorporation and Bylaws, each as amended to date and presently
in effect.
3.2 Capitalization; Voting Rights. The authorized capital stock of the
Company, immediately prior to the Closing, will consist of (a) eight hundred
fifty million (850,000,000) shares of Common Stock, one hundred forty-two
million, nine hundred twenty-two thousand, eight hundred ten (142,922,810)
shares of which are issued and outstanding, thirty million, five hundred
seventy-seven thousand, five hundred (30,577,500) shares of which are currently
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reserved for issuance pursuant to outstanding option agreements, and seven
hundred ninety-four thousand, four hundred sixty (794,460) shares of which will
be reserved in the future for issuance to key employees, consultants and others
affiliated with the Company pursuant to stock grant, stock purchase and/or
option plans or any other stock incentive program, arrangement or agreement
approved by the Company's Board of Directors and (b) one hundred fifty million
(150,000,000) shares of Preferred Stock (the "Preferred Stock"), 19,481,130 of
which are designated Series A Convertible Participating Preferred Stock, all of
which are issued and outstanding, and 15,877,249 of which are designated Series
B Convertible Participating Preferred Stock, none of which are issued and
outstanding. All issued and outstanding shares of the Company's Common Stock and
Preferred Stock (i) have been duly authorized and validly issued, (ii) are fully
paid and nonassessable, (iii) are free of liens and encumbrances created by the
Company and (iv) were issued in compliance with all applicable state and federal
laws concerning the issuance of securities. The rights, preferences, privileges
and restrictions of the Shares are as stated in the Certificate. The Conversion
Shares have been duly and validly reserved for issuance in sufficient number for
issuance upon full conversion of the Shares. Except as may be granted pursuant
to this Agreement and except as set forth above, there are no outstanding
options, warrants, puts, calls, rights (including conversion or preemptive
rights and rights of first refusal), proxy or stockholder agreements, or
agreements of any kind for the purchase or acquisition from the Company of any
of its securities or other restrictions on the incidents of ownership or
transfer created by statute, the charter documents of the Company or any
agreement to which the Company is a party or by which it is bound. The Shares
and the Conversion Shares have been duly authorized and, when issued in
compliance with the provisions of this Agreement and the Certificate, will be
validly issued (including, without limitation, issued in compliance with
applicable state and federal securities laws), fully paid and nonassessable and
will be free of any liens or encumbrances; provided, however, that the Shares
and the Conversion Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time transfer is proposed.
3.3 Authorization; Binding Obligations. All corporate action on the part
of the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement, the performance of all obligations of
the Company hereunder and thereunder at the Closing and the authorization, sale,
issuance and delivery of the Shares pursuant hereto and the Conversion Shares
pursuant to the Certificate has been taken or will be taken prior to the
Closing. The Agreement, the Investors' Rights Agreement and the Stockholders'
Agreement, when executed and delivered, will be valid and binding obligations of
the Company enforceable against the Company, in accordance with their terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; (ii) as limited by general principles of equity that restrict
the availability of specific performance, injunctive relief or other equitable
remedies; and (iii) to the extent that the enforceability of the indemnification
provisions of the Investors' Rights Agreement may be limited by applicable
federal and state securities laws. The sale of the Shares and the subsequent
conversion of the Shares into Conversion Shares are not and will not be subject
to any preemptive rights or rights of first refusal that have not been properly
waived or complied with.
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3.4 Financial Statements; Subsidiaries. The Company's unaudited balance
sheet as of December 31, 1998 and unaudited statements of operations and cash
flows of the Company for the 12-month period ended December 31, 1998 and the
Company's unaudited balance sheet as of June 30, 1999 (the "Latest Balance
Sheet") and unaudited statements of operations and cash flows of the Company for
the six-month period ending June 30, 1999 (the "Financial Statements") delivered
to the Purchasers in connection with the investment contemplated hereby have
been prepared in accordance with generally accepted accounting principles
consistently applied (in the case of the Financial Statements, subject to normal
year-end adjustments and the absence of footnote disclosures) and fairly present
in all material respects the financial position and the results of operations of
the Company for the periods covered thereby, and the Company has no material
liabilities or obligations of any nature (absolute, accrued, contingent or
otherwise) that are not either reflected or fully reserved against on the Latest
Balance Sheet or incurred in the ordinary course of the business of the Company
subsequent to the date thereof. Since the date of the Latest Balance Sheet,
there has not been any material adverse change in the business, operations,
financial condition or business of the Company. The Company has no subsidiaries.
3.5 Agreements; Action.
(a) Except for agreements explicitly contemplated hereby, there are
no agreements, understandings or proposed transactions between the Company and
any of its officers, directors, affiliates or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or to its knowledge by which it is bound which may
involve (i) obligations (contingent or otherwise) of, or payments to, the
Company (other than obligations of, or payments to, the Company arising in the
ordinary course of business), or (ii) the license of any patent, copyright,
trade secret or other proprietary right to or from the Company (other than
licenses arising from the purchase of "off the shelf" or other standard
products), or (iii) provisions restricting or affecting the development,
manufacture or distribution of the Company's products or services, or (iv)
indemnification by the Company with respect to infringements of proprietary
rights.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities (other than with respect to dividend obligations,
distributions, indebtedness and other obligations incurred in the ordinary
course of business or as disclosed in the Financial Statements), (iii) made any
loans or advances to any person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
3.6 Obligations to Related Parties. There are no obligations of the
Company to officers, directors, stockholders, or employees of the Company other
than (a) for payment of salary for services rendered, (b) reimbursement for
reasonable expenses incurred on behalf of the Company and (c) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the
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Board of Directors of the Company). No officer, director or, to the best of the
Company's knowledge, stockholder, or any member of their immediate families, are
indebted to the Company or have any direct or indirect ownership interest in any
firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation which competes
with the Company, except that officers, directors and/or stockholders of the
Company may own stock in publicly traded companies which may compete with the
Company. No such officer, director or stockholder, or any member of their
immediate families is, directly or indirectly, interested in any material
contract with the Company (other than such contracts as relate to any such
person's ownership of capital stock or other securities of the Company). The
Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
3.7 Title to Properties and Assets; Liens, Etc. The Company has good and
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than (i) those resulting from taxes which have not yet become
delinquent, (ii) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of the Company and (iii) those that have otherwise arisen in the
ordinary course of business. All facilities, machinery, equipment, fixtures,
vehicles and other properties owned, leased or used by the Company are in good
operating condition and repair and are reasonably fit and usable for the
purposes for which they are being used. The Company is in compliance with all
material terms of each lease to which it is a party or is otherwise bound.
3.8 Patents and Trademarks. The Company owns or possesses sufficient
legal rights to all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information and other proprietary rights and processes necessary
for its business as now conducted and as proposed to be conducted, without any
known infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing, nor is the Company
bound by or a party to any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes
of any other person or entity other than such licenses or agreements arising
from the purchase of "off the shelf" or standard products. The Company has not
received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments or any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with their duties to the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company
does not believe it is or will be necessary to utilize any inventions, trade
secrets or proprietary information of any of its employees made prior to their
employment by the Company, except for inventions, trade secrets or proprietary
information that have been assigned to the Company.
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3.9 Compliance with Other Instruments. The Company is not in violation
or default of any term of its Certificate of Incorporation or Bylaws, or of any
provision of any mortgage, indenture, contract, agreement, instrument or
contract to which it is party or by which it is bound or of any judgment,
decree, order, writ or, to its knowledge, any statute, rule or regulation
applicable to the Company which, individually or in the aggregate, would
materially and adversely affect the business, assets, liabilities, financial
condition, operations or prospects of the Company. The execution, delivery, and
performance of and compliance with this Agreement and the related agreements,
and the issuance and sale of the Shares pursuant hereto and of the Conversion
Shares pursuant to the Certificate, will not, with or without the passage of
time or giving of notice, result in any such material violation, or be in
conflict with or constitute a default under any such term, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company or the suspension, revocation, impairment,
forfeiture or nonrenewal of any permit, license, authorization or approval
applicable to the Company, its business or operations or any of its assets or
properties.
3.10 Litigation. There is no action, suit, proceeding or investigation
pending or to the Company's knowledge currently threatened against the Company
that questions the validity of this Agreement, the Investors' Rights Agreement
or the Stockholders' Agreement or the right of the Company to enter into any of
such agreements, or to consummate the transactions contemplated hereby or
thereby, or which might result, either individually or in the aggregate, in any
material adverse change in the assets, condition, affairs or prospects of the
Company, financially or otherwise, or any change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for the
foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers. The Company is not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company intends to initiate.
3.11 Tax Returns and Payments. The Company has timely filed all tax
returns (federal, state and local) required to be filed by it. All taxes shown
to be due and payable on such returns, any assessments imposed, and to the
Company's knowledge all other taxes due and payable by the Company on or before
the Closing have been paid or will be paid prior to the time they become
delinquent. The Company has not been advised (i) that any of its returns,
federal, state or other, have been or are being audited as of the date hereof,
or (ii) of any deficiency in assessment or proposed judgment to its federal,
state or other taxes. The Company has no knowledge of any liability of any tax
to be imposed upon its properties or assets as of the date of this Agreement
that is not adequately provided for.
3.12 Employees. The Company has no collective bargaining agreements with
any of its employees. There is no labor union organizing activity pending or, to
the Company's knowledge, threatened with respect to the Company. No employee has
any agreement or contract, written or verbal, regarding his employment. To the
Company's knowledge, no employee of the Company, nor any consultant with whom
the Company has contracted, is in
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violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed by, or to contract with, the Company because of the nature of the
business to be conducted by the Company; and to the Company's knowledge the
continued employment by the Company of its present employees, and the
performance of the Company's contracts with its independent contractors, will
not result in any such violation. The Company has not received any notice
alleging that any such violation has occurred. No employee of the Company has
been granted the right to continued employment by the Company or to any material
compensation following termination of employment with the Company. The Company
is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any officer, key
employee or group of key employees.
3.13 NonDisclosure and Developments Agreements. Each current employee and
officer of the Company has executed, or will execute prior to or at Closing, an
Employee NonDisclosure and Developments Agreement in the forms attached hereto
as Exhibit E. To the Company's knowledge, no current employee, officer or
---------
consultant of the Company has excluded works or inventions made prior to his or
her employment with the Company from his or her assignment of inventions
pursuant to such employee, officer or consultant's agreement. The Company, after
reasonable investigation, is not aware that any of its employees, officers or
consultants is in violation thereof and the Company will use its best efforts to
prevent any such violation.
3.14 Obligations of Management. Each officer of the Company is currently
devoting one hundred percent (100%) of his business time to the conduct of the
business of the Company. The Company is not aware of any officer or key employee
of the Company planning to work less than full time at the Company in the
future.
3.15 Registration Rights. Except as required pursuant to the Investors'
Rights Agreement, the Company is presently not under any obligation, and has not
granted any rights, to register (as defined in Section 1 of the Investors'
Rights Agreement) any of the Company's presently outstanding securities or any
of its securities that may hereafter be issued.
3.16 Compliance with Laws; Permits. The Company is not in violation of
any applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which violation would
materially and adversely affect the business, assets, liabilities, financial
condition, operations or prospects of the Company. No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection with
the execution and delivery of this Agreement and the offer, issuance, sale and
delivery of the Shares or the Conversion Shares, or the other transactions to be
consummated at the Closing, as contemplated in this Agreement, except pursuant
to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules promulgated thereunder (the "HSR Act"), and, except such as has been duly
and validly obtained or filed, or with respect to any filings that must be made
after the Closing, as will be filed in a timely manner. The Company has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it,
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the lack of which, individually or in the aggregate, could materially and
adversely affect the business, properties, prospects or financial condition of
the Company and believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be conducted.
3.17 Environmental and Safety Laws. The Company is not in violation of
any applicable statute, law or regulation relating to the environment or
occupational health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation.
3.18 Offering Valid. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4.2 hereof, the offer, sale
and issuance of the Shares and the Conversion Shares will be exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and will have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit or
qualification requirements of all applicable state securities laws. Neither the
Company nor any agent on its behalf has solicited or will solicit any offers to
sell or has offered to sell or will offer to sell all or any part of the Shares
to any person or persons so as to bring the sale of such Shares by the Company
within the registration provisions of the Securities Act or any state securities
laws.
3.19 Minute Books. The minute books of the Company provided to counsel
for the Purchasers contain a complete summary of all meetings of, and any
actions taken by, the directors and stockholders of the Company since the date
of the Company's incorporation.
3.20 Disclosure. The Company has fully provided the Purchasers with all
the information the Purchasers have requested for deciding whether to acquire
the Shares and the Conversion Shares and all the information that the Company
believes is reasonably necessary to enable the Purchasers to make such a
decision. The Certificate of Incorporation and Bylaws of the Company are in the
form provided to counsel for the Purchasers.
3.21 Year 2000 Compliance. The Company has reviewed the areas within its
business and operations which could be adversely affected by Year 2000 issues
and evaluated the costs associated with modifying and testing its systems for
the Year 2000. The Company does not believe that the cost of Year 2000
compliance for its internal information systems will be material to the Company
or that it will have a material adverse effect on the Company's business,
financial condition or results of operations.
3.22 Qualified Small Business. The Company qualifies as a "Qualified
Small Business" as defined in Section 1202(d) of the Code and covenants that so
long as its shares are held by the Purchasers (or a transferee in whose hands
the shares are eligible to qualify as Qualified Small Business Stock as defined
in Section 1202(c) of the Code), it will use its best efforts to cause the
shares to qualify as Qualified Small Business Stock.
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Section 4. Representations and Warranties of the Purchasers
Each Purchaser hereby represents and warrants to the Company as follows
(such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):
4.1 Requisite Power and Authority. Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement, the Investors' Rights Agreement and the Stockholders' Agreement and
to carry out their provisions. All actions on the part of the Purchaser required
for the lawful execution and delivery of this Agreement, the Investors' Rights
Agreement and the Stockholders' Agreement have been or will be effectively taken
prior to the Closing. Upon their execution and delivery, this Agreement, the
Investors' Rights Agreement and the Stockholders' Agreement will be valid and
binding obligations of Purchaser, enforceable in accordance with their terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, (ii) as limited by general principles of equity that restrict
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) to the extent that the enforceability of the indemnification
provisions of the Investors' Rights Agreement may be limited by applicable
federal and state securities laws.
4.2 Purchase Entirely For Own Account. The Shares will be acquired
solely for investment purposes, for the Purchaser's own account, not as a
nominee or agent, and not with a view to the resale or distribution of any part
thereof.
4.3 Investment Experience. Purchaser is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. Purchaser believes it has
acquired sufficient information about the Company to reach an informed decision
to purchase the Shares. Purchaser has such business and financial experience as
are required to give it the capacity to protect its own interests in connection
with the purchase of the Shares.
4.4 Restricted Securities. The Purchaser understands that the Shares are
being offered in a transaction not involving any public offering in the United
States within the meaning of the Securities Act, that such Shares have not been
registered under the Securities Act and that it may not resell, pledge or
otherwise transfer any such Shares except (A) pursuant to an effective
registration statement under the Securities Act, (B) in an offshore transaction
complying with Rule 904 of Regulation S under the Securities Act, or (C)
pursuant to another applicable exemption from registration.
4.5 Legends. The Purchaser understands that the Shares and any
securities issued in respect thereof or exchange therefor, may bear the
following legend until such time, if any, as the Shares or such securities may
be resold pursuant to Rule 144(k) under the Securities Act (or a comparable
successor provision).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISTRIBUTION MAY BE
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EFFECTED EXCEPT IN AN OFFSHORE TRANSACTION COMPLYING WITH THE PROVISIONS OF RULE
904 OF REGULATION S UNDER THE SECURITIES ACT OR PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN APPLICABLE EXEMPTION THEREFROM."
A Share certificate bearing the foregoing legend may be exchanged for a
certificate not bearing such legend upon certification by the transferor in form
reasonably satisfactory to the Company that the transfer of any such restricted
certificate has been made in accordance with Rule 904 under the Securities Act.
Section 5. Covenants
5.1 HSR Act Filings.
(a) The Purchasers shall make all filings required under the HSR
Act relating to the transactions contemplated by this Agreement and shall use
commercially reasonable efforts to cause any such required filings to be made
promptly after the date hereof.
(b) The Company shall make all filings required under the HSR Act
relating to the transactions contemplated by this Agreement and shall use
commercially reasonable efforts to cause any such required filings to be made
promptly after the date hereof.
(c) The parties will each use commercially reasonable efforts to
promptly furnish, or cause to be furnished, any information that may be required
by the Federal Trade Commission (the "FTC") or the Department of Justice (the
"DOJ") under the HSR Act in order for the requisite approvals for the purchase
and sale of the Shares and the consummation of the related transactions
contemplated by this Agreement to be obtained or any applicable waiting periods
to be terminated or expire; provided, however, that in the event the FTC or the
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DOJ issues a "second request" in connection with any such filing, the parties
hereto will consult with each other in good faith regarding appropriate further
action, which shall be taken only to the extent agreed upon by all of the
parties.
5.2 Proceeds. The proceeds from the sale by the Company of the Shares
shall be used for the working capital needs of the Company and to repay
outstanding debt borrowed from the Bank of Nova Scotia.
5.3 Reservation of Common Stock. The Company will at all times reserve
and keep available, solely for issuance and delivery upon conversion of the
Shares, a sufficient number of shares of Common Stock to be issuable from time
to time upon such conversion.
5.4 International Joint Ventures. The Company hereby covenants and
agrees, and the Purchasers hereby covenant and agree to cause their applicable
affiliates to execute and deliver the binding Letter of Intent in the form
attached hereto as Exhibit G and the Term Sheets attached thereto, and to
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negotiate in good faith the definitive joint venture agreements (i) between the
Company and SOFTBANK Corporation with respect to a joint venture operation in
Japan, (ii) between the Company and eVentures with respect to a joint venture
operation in the United Kingdom and (iii) between the Company and @VISO with
respect to a joint venture operation in Continental Europe based upon the
principal terms set forth in the Letter of Intent,
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attached hereto as Exhibit G, for the respective joint venture.
---------
5.5 Standstill Provisions. Commencing as of the Closing and for the
period until the fifth anniversary of the consummation of the Company's initial
public offering ("IPO") of shares of Common Stock, registered under the
Securities Act pursuant to a Registration Statement on Form S-1, Purchasers
(including all Softbank Entities) shall not acquire beneficial ownership of any
shares of Common Stock of the Company, any securities convertible into or
exchangeable for Common Stock, or any other right to acquire Common Stock,
except by way of stock dividends or other distributions or offerings made
available to holders of Series B Preferred Stock (or Common Stock issued upon
conversion thereof) generally, from the Company or any other person or entity,
without the prior written consent of the Company, which consent may be withheld
in its sole discretion, if such acquisition should cause the Purchasers
(including all Softbank Entities) to beneficially own more than thirty-two
percent (32%) of the Company's outstanding voting stock (assuming the full
conversion and exercise of all convertible and exercisable securities of the
Company held by the Purchasers and any other Softbank entities). Notwithstanding
anything to the contrary contained in the Investors' Rights Agreement, the
Purchasers' right of first offer under the Investors' Rights Agreement shall not
be applicable to the extent that exercising such right would cause the
Purchasers to violate this Section 5.5. "Softbank Entities" shall mean (i) any
direct or indirect, wholly owned subsidiary of SOFTBANK Corp. or of Purchaser,
or (ii) any affiliate (as such term is defined under Rule 144 under the
Securities Act) of such Purchaser (and any person or entity referred to in
clause (i) or (ii).
5.6 Staggered Board Designation. Immediately prior to the Company's
initial public offering, the Company shall adopt a staggered Board of Directors
comprised of three classes and shall appoint the Board designee of the
Purchasers to the class of directors standing for reelection in the third term.
5.7 Further Assurances. The Company and the Purchasers shall use their
respective reasonable efforts at any time and from time to time prior to, at and
after the Closing to execute and deliver to the applicable parties such further
documents and instruments and to take all such further actions as such other
parties to this Agreement reasonably may request to consummate the transactions
contemplated by this Agreement, the Certificate, the Stockholders' Agreement,
the Investors' Rights Agreement and the joint venture Letter of Intent.
Section 6. Conditions to Closing
6.1 Conditions to Purchasers' Obligations at the Closing. Purchasers'
obligations to purchase the Shares at the Closing are subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
(a) Representations and Warranties True; Performance of
Obligations. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing
Date.
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(b) Performance of Obligations. The Company shall have performed
and complied with all agreements and conditions herein required to be performed
or complied with by the Company on or before the Closing Date.
(c) Reservation of Conversion Shares. The Conversion Shares
issuable upon full conversion of the Shares shall have been duly authorized and
reserved for issuance upon such conversion.
(d) Legal Investment. On the Closing Date, the sale and issuance of
the Shares and the proposed issuance of the Conversion Shares shall be legally
permitted by all laws and regulations to which Purchasers and the Company are
subject.
(e) Consents, Permits, and Waivers. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement, the Investors'
Rights Agreement and the Stockholders' Agreement (except for such as may be
properly obtained subsequent to the Closing).
(f) Filing of Certificate. The Certificate shall have been filed
with the Secretary of State of the State of Delaware.
(g) Investors' Rights Agreement. An Investors' Rights Agreement,
substantially in the form attached hereto as Exhibit C, shall have been executed
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and delivered by the parties thereto.
(h) Stockholders' Agreement. A Stockholders' Agreement,
substantially in the form attached hereto as Exhibit D, shall have been executed
---------
and delivered by the parties thereto.
(i) Employee NonDisclosure and Developments Agreement. An Employee
NonDisclosure and Developments Agreement, substantially in the form attached
hereto as Exhibit E, shall have been executed and delivered by each officer or
---------
employee of the Company.
(j) Compliance Certificate. The Chief Executive Officer of the
Company shall deliver to the Purchasers at the Closing a certificate, dated the
Closing Date, certifying that the conditions specified in Sections 6.1(a) and
6.1(b) have been fulfilled.
(k) Legal Opinion. The Purchasers shall have received from legal
counsel to the Company an opinion addressed to them, dated as of the Closing
Date, in substantially the form attached hereto as Exhibit F.
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(l) Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the Closing hereby, all
documents and instruments incident to such transactions and all documents,
instruments and proceedings related to the Purchasers' business, technical and
legal due diligence shall be reasonably satisfactory in substance and form to
the Purchasers and their counsel, and the Purchasers and their counsel
-12-
<PAGE>
shall have received all such counterpart originals or certified or other copies
of such documents as they may reasonably request.
(m) Board Composition. At the Closing, the Company's Board of
Directors shall consist of Gregory Hawkins, Donald Kendall, John Scully, Wayne
Thorson, James Roszak, Charles Richion, David Ingram, Scott Russell and William
Burnham.
(n) Waiting Period. Any waiting period applicable to the sale of
the Shares under the HSR Act shall have expired or been terminated.
(o) Joint Venture. The Company shall have executed and delivered
the Letter of Intent and accompanying Term Sheets for the international joint
ventures in substantially the form attached hereto as Exhibit G.
---------
(p) Related Transaction. The transactions contemplated in the Stock
Purchase Agreement, dated of even date, by and among, The Scott A. Blum Separate
Property Trust U/D/T 8/2/95, Scott A. Blum, David Mason, Michael Mason and the
purchasers listed on Exhibit A thereto, shall be consummated before or
concurrently with the consummation of the transactions contemplated in this
Agreement.
(q) Audited Financial Statements. The Purchasers shall have
received from the Company audited financial statements (for the periods filed in
the registration statement on Form S-1) prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved and that fairly present the financial position of the Company
at the respective dates and the results of operations and cash flow for the
periods indicated.
6.2 Conditions to Obligations of the Company. The Company's
obligation to issue and sell the Shares at the Closing is subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
(a) Representations and Warranties True. The representations and
warranties made by the Purchasers in Section 4 hereof shall be true and correct
in all material respects as of the Closing Date.
(b) Performance of Obligations. Purchasers shall have performed and
complied with all agreements and conditions herein required to be performed or
complied with by Purchasers on or before the Closing Date.
(c) Filing of Certificate. The Certificate shall have been filed
with the Secretary of State of the State of Delaware.
(d) Investors' Rights Agreement. An Investors' Rights Agreement,
substantially in the form attached hereto as Exhibit C, shall have been executed
---------
and delivered by the Purchasers.
-13-
<PAGE>
(e) Stockholders' Agreement. A Stockholders' Agreement,
substantially in the form attached hereto as Exhibit D, shall have been executed
---------
and delivered by the parties thereto.
(f) Consents, Permits, and Waivers. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement, the Investors'
Rights Agreement and the Stockholders' Agreement (except for such as may be
properly obtained subsequent to the Closing).
(g) Waiting Period. Any waiting period applicable to the sale of
the Shares under the HSR Act shall have expired or been terminated.
(h) Joint Venture. The Purchasers, or their affiliates, as
applicable, shall have executed and delivered the Letter of Intent and the
accompanying Term Sheets for the international joint ventures in substantially
the form attached hereto as Exhibit G.
---------
(i) Related Transaction. The transactions contemplated in the Stock
Purchase Agreement, dated of even date, by and among, The Scott A. Blum Separate
Property Trust U/D/T 8/2/95, Scott A. Blum, David Mason, Michael Mason and the
purchasers listed on Exhibit A thereto, shall be consummated before or
concurrently with the consummation of the transactions contemplated in this
Agreement.
Section 7. Miscellaneous
7.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Delaware without regard to principles of conflict of
laws.
7.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive for a period of four (4) years any investigation made
by any Purchaser and the closing of the transactions contemplated hereby. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.
7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares from time to time.
7.4 Entire Agreement. This Agreement, the Exhibits and Schedules hereto,
including the Investors' Rights Agreement and the Stockholders' Agreement, and
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and no party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically set
forth herein and therein.
-14-
<PAGE>
7.5 Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
7.6 Amendment and Waiver.
(a) This Agreement may be amended or modified only upon the written
consent of the Company and holders of at least a majority of the Shares (treated
as if converted and including any Conversion Shares into which the Shares have
been converted that have not been sold to the public).
(b) The obligations of the Company and the rights of the holders of
the Shares and the Conversion Shares under the Agreement may be waived only with
the written consent of the holders of at least a majority of the Shares (treated
as if converted and including any Conversion Shares into which the Shares have
been converted that have not been sold to the public).
7.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement, the Investors'
Rights Agreement, the Stockholders' Agreement or the Certificate, shall impair
any such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance thereafter occurring. It is further agreed
that any waiver, permit, consent or approval of any kind of character on any
Purchaser's part of any breach, default or noncompliance under this Agreement,
the Investors' Rights Agreement, the Stockholders' Agreement or under the
Certificate or any waiver on such party's part of any provisions or conditions
of the Agreement, the Investors' Rights Agreement, the Stockholders' Agreement,
or the Certificate must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, the Investors' Rights Agreement, the Stockholders' Agreement, the
Certificate, by law, or otherwise afforded to any party, shall be cumulative and
not alternative.
7.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified; (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; (iii) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (iv) one (1) day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
Company at the address as set forth on the signature page hereof and to
Purchaser at the address set forth on Exhibit A attached hereto or at such other
---------
address as the Company or Purchaser may designate by ten (10) days advance
written notice to the other parties hereto.
7.9 Titles and Subtitles. The titles of the sections and subsections of
the Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-15-
<PAGE>
7.11 Broker's Fees. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 7.11 being untrue.
7.12 Expenses. The Company shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement and all of the transactions contemplated herein. The Company
shall reimburse the reasonable fees and expenses of counsel to the Purchasers,
not to exceed $50,000 in the aggregate, incurred in connection with the
negotiation, execution, delivery and performance of this Agreement and all of
the transactions contemplated herein, provided that the Company shall not be
obligated to pay any of the expenses incurred by the Purchasers or their
affiliates in the negotiation, execution, delivery and performance of the
International Joint Venture transactions.
7.13 Exculpation Among Purchasers. Each Purchaser acknowledges that it is
not relying upon any person, firm, or corporation, other than the Company and
its officers and directors, in making its investment or decision to invest in
the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the Shares and Conversion
Shares.
7.14 Specific Enforcement. Any Purchaser shall be entitled to specific
enforcement of its rights under this Agreement. Then Company acknowledges that
money damages would be an inadequate remedy for its breach of this Agreement and
consents to an action for specific performance or other injunctive relief in the
event of any such breach.
7.15 Attorney's Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
7.16 Waiver of Conflicts. Each party to this Agreement acknowledges that
Brobeck, Phleger & Harrison LLP, counsel for the Company, has in the past and
may continue to perform legal services for certain of the Purchasers in matters
unrelated to the transactions described in this Agreement, including the
representation of such Purchasers in venture capital financings. Accordingly,
each party to this Agreement hereby (i) acknowledges that they have had an
opportunity to ask for information relevant to this disclosure, (ii)
acknowledges that Brobeck, Phleger & Harrison LLP represented the Company in the
transaction contemplated by this Agreement and has not represented any
individual Purchaser or any individual shareholder or employee of the Company in
connection with such transaction, and (iii) gives its informed consent to the
representation by Brobeck, Phleger & Harrison LLP of certain of the Purchasers
in such unrelated matters and the representation by Brobeck, Phleger & Harrison
LLP of the Company in connection with this Agreement and the transactions
contemplated hereby.
-16-
<PAGE>
7.17 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-17-
<PAGE>
In Witness Whereof, the parties hereto have executed the Series B
Convertible Participating Preferred Stock Purchase Agreement as of the date set
forth in the first paragraph hereof.
COMPANY:
BUY.COM INC.
Address: 21 Brookline
Aliso Viejo, CA 92656
By: ___________________________
Name: Gregory J. Hawkins
Title: Chief Executive Officer
PURCHASERS:
SOFTBANK Capital Advisors Fund LP SOFTBANK Capital Partners LP
By: SOFTBANK Capital Partners LLC By: SOFTBANK Capital Partners LLC
Its General Partner Its General Partner
By:____________________________ By:___________________________
Name:__________________________ Name:_________________________
Title:_________________________ Title:________________________
SOFTBANK Technology Advisors Fund LP SOFTBANK Technology Ventures IV LP
By: STV IV LLC By: STV IV LLC
Its General Partner Its General Partner
By:_____________________________ By:___________________________
Name:___________________________ Name:_________________________
Title:__________________________ Title:________________________
Seris B Convertible Participating Preferred Stock Purchase Agreement
<PAGE>
SOFTBANK Technology Ventures V LP SOFTBANK Technology Advisors Fund V LP
By: SBTV V LLC By: SBTV V LLC
Its General Partner Its General Partner
By:_____________________________ By:_____________________________
Name: Edward Scott Russell Name: Edward Scott Russell
Title: Managing Director Title: Managing Director
SOFTBANK Technology Entrepreneurs Fund V LP
By: SBTV V LLC
Its General Partner
By:_____________________________
Name: Edward Scott Russell
Title: Managing Director
Series B Convertible Participating Preferred Stock Purchase Agreement
<PAGE>
ePARTNERS
By: ___________________________
Name: ___________________________
Title: ___________________________
VIVENDI
By: ___________________________
Name: ___________________________
Title: ___________________________
Series B Convertible Participating Preferred Stock Purchase Agreement
<PAGE>
Exhibit A
Series B Convertible Participating Preferred Stock Purchase Agreement
<TABLE>
<CAPTION>
Aggregate
Purchase
Name and Address Shares Price
- --------------------------------------------- ---------------- -----------------
<S> <C> <C>
SOFTBANK Capital Partners LP 10,207,063 $57,850,735.44
10 Langley Road
Suite 403
Newton Center, MA 02159
SOFTBANK Capital Advisors Fund LP 148,079 $ 839,270.99
10 Langley Road
Suite 403
Newton Center, MA 02159
SOFTBANK Technology Ventures IV LP 1,015,735 $ 5,757,693.85
333 W. San Carlos Street
Suite 1225
San Jose, CA 95110
SOFTBANK Technology Advisors Fund LP 19,462 $ 110,320.35
333 W. San Carlos Street
Suite 1225
San Jose, CA 95110
SOFTBANK Technology Ventures V LP 1,035,196 $ 5,868,008.53
333 W. San Carlos Street
Suite 1225
San Jose, CA 95110
ePartners 2,070,393 $11,739,997.71
Ground Floor
Four Millbank
London, SW1P3JA
UK
Vivendi 1,381,321 $ 7,829,998.21
42 Avenue de Friedland ---------------- -----------------
75380 Paris Cedex
08 France
Total: 15,877,249 $89,996,025.08
================ ==================
</TABLE>
Series B Convertible Participating Preferred Stock Purchase Agreement
<PAGE>
Exhibit B
Amended And Restated Certificate Of Incorporation
<PAGE>
Exhibit C
Investors' Rights Agreement
<PAGE>
Exhibit D
Stockholders' Agreement
<PAGE>
Exhibit E
Employee Nondisclosure and Developments Agreement and
Non-Competition Agreement
<PAGE>
Exhibit F
Legal Opinion
<PAGE>
EXHIBIT G
LETTER OF INTENT
<PAGE>
Exhibit 10.31
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR QUALIFIED UNDER THE
SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO
THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT
REQUIRED.
Date of Issuance: October 8, 1999
BUY.COM INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, Harpeth Holdings Inc. (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time or from time to time, prior to 5:00 p.m. Pacific Time on
December 15, 2001, to subscribe for and purchase from BUY.COM INC., a Delaware
corporation (the "Company"), 1,000,000 fully paid and non-assessable shares of
the Company's Common Stock. Hereinafter, the Common Stock of the Company,
together with any other equity securities which may be issued by the Company in
substitution therefor, is referred to as the "Common Stock," (i) the shares of
the Common Stock purchasable hereunder are referred to as the "Warrant Shares,"
(ii) the aggregate exercise price payable for all of the Warrant Shares is
referred to as the "Aggregate Exercise Price," and (iii) the price payable
hereunder for each of the Warrant Shares is referred to as the "Per Share
Exercise Price," which shall be $5.67 per share. The Per Share Exercise Price
and the number of Warrant Shares are subject to adjustment as provided herein.
1. Exercisability.
--------------
1.1 Exercise of Warrant. This Warrant may be exercised, in whole at
-------------------
any time or in part from time to time, prior to 5:00 p.m. Pacific Time on
December 15, 2001 (subject to earlier termination as hereinafter provided), by
the Holder by the surrender of this Warrant (with the subscription form at the
end hereof duly executed) at the principal office of the Company, which is
currently located at 21 Brookline, Aliso Viejo, California 92656, together with
proper payment of the Per Share Exercise Price for each of the Warrant Shares as
to which the Warrant is being exercised. Payment for Warrant Shares shall be
made by certified or bank cashier's check, payable to the order of the Company
or by wire transfer to the Company's designated bank account.
<PAGE>
If this Warrant is exercised in part, this Warrant must be exercised
for a number of whole shares of the Common Stock and the Holder shall be
entitled to receive a new Warrant covering the number of Warrant Shares with
respect to which this Warrant has not been exercised. Upon such surrender of
this Warrant, together with the subscription form at the end hereof duly
executed and proper payment of the Per Share Exercise Price for each of the
Warrant Shares as to which the Warrant is being exercised, the Company will (i)
issue, or cause the Company's transfer agent to issue, a certificate or
certificates in the name of the Holder for the largest number of whole shares of
the Common Stock to which the Holder shall be entitled and, if this Warrant is
exercised in whole, in lieu of any fractional share of the Common Stock to which
the Holder shall be entitled, cash equal to the fair value of such fractional
share (as determined by the last reported selling price of the Common Stock on
the last business day before the date the Warrant is exercised), and (ii)
deliver the other securities and properties receivable upon the exercise of this
Warrant, if any, or the proportionate part thereof if this Warrant is exercised
in part, pursuant to the provisions of this Warrant.
1.2 Net Issue Election. The Holder may elect to receive, without the
------------------
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
-------
A
where:
X = the number of shares to be issued to the Holder pursuant to this
Section 1.2.
Y = the number of shares covered by this Warrant in respect of which the
net issue election is made pursuant to this Section 1.2.
A = the fair market value of one share of Common Stock, as determined in
accordance with the provisions of this Section 1.2.
B = the Per Share Exercise Price in effect under this Warrant at the time
the net issue election is made pursuant to this Section 1.2.
For purposes of this Section 1.2, the "fair market value" per share of the
Company's Common Stock shall be valued as follows:
(a) If traded on a securities exchange or through the NASDAQ National
Market, the value shall be deemed to be the average of the closing prices of the
securities on such exchange or market over the five day period ending on the
last business day before the effective date of exercise of the net issuance
election;
2
<PAGE>
(b) If there is no active public market, the value shall be the fair
market value thereof, as determined by the Company's Board of Directors.
2. Reservation of Warrant Shares. The Company agrees that, prior to the
-----------------------------
expiration of this Warrant, the Company will at all times have authorized in
reserve, and will keep available, solely for issuance or delivery upon the
exercise of this Warrant, the shares of the Common Stock and other securities
and properties as from time to time shall be receivable upon the exercise of
this Warrant.
3. Adjustments.
-----------
3.1 Distribution With Respect to Common Stock. If, at any time or
-----------------------------------------
from time to time after the date of this Warrant, the Company shall distribute
to the holders of the Common Stock, without payment therefor, (i) securities,
other than shares of the Common Stock, or (ii) property, other than cash, with
respect to the Common Stock, then, and in each such case, subject to Section 3.4
below, the Holder shall only be entitled to receive such securities and
properties if, on the date of such distribution, the Holder has exercised this
Warrant, in part or in whole, and is the holder of record of the number of
shares of the Common Stock subscribed for upon such exercise. Notwithstanding
the foregoing, in no event shall the Holder, upon exercise of this Warrant or
otherwise, be entitled to participate in any distribution or dividend of the
capital stock of the Company's BuyNow Inc. subsidiary.
3.2 Stock Splits, Etc. If, at any time or from time to time after
-----------------
the date of this Warrant, the Company shall issue to the holders of the Common
Stock shares of the Common Stock by way of a stock dividend or stock split,
then, and in each such case, the Per Share Exercise Price shall be adjusted, or
further adjusted, to a price (to the nearest whole cent) determined by dividing
(i) an amount equal to the number of shares of the Common Stock outstanding
immediately prior to such issuance multiplied by the Per Share Exercise Price as
it existed immediately prior to such issuance by (ii) the total number of shares
of the Common Stock outstanding immediately after such issuance. Upon each such
adjustment in the Per Share Exercise Price, the number of Warrant Shares shall
be adjusted by dividing the Aggregate Exercise Price by the Per Share Exercise
Price in effect immediately after such adjustment.
3.3 Reverse Splits, Etc. If, at any time or from time to time after
-------------------
the date of this Warrant, the number of shares of Common Stock outstanding is
decreased by way of combination of shares or reserve split, then, and in each
such case, the Per Share Exercise Price shall be adjusted, or further adjusted,
to a price (to the nearest whole cent) determined by dividing (i) an amount
equal to the number of shares of the Common Stock outstanding immediately prior
to such event multiplied by the Per Share Exercise Price as it existed
immediately prior to such event by (ii) the total number of shares of the Common
Stock outstanding immediately after such event. Upon each such adjustment in
the Per Share Exercise Price, the number of Warrant Shares shall be adjusted by
dividing the Aggregate Exercise Price by the Per Share Exercise Price in effect
immediately after such adjustment.
3
<PAGE>
3.4. Adjustment for Reorganization, Consolidation, Merger, etc.
---------------------------------------------------------
a. Reorganization, Consolidation, Merger, etc. In case at any
------------------------------------------
time or from time to time, the Company shall (i) effect a reorganization, (ii)
consolidate with or merge into any other entity or person, or (iii) transfer all
or substantially all of its properties or assets to any other entity or person
under any plan or arrangement contemplating the dissolution of the Company,
then, in each such case, the Holder, on the exercise hereof as provided in
Section 1 at any time after the consummation of such reorganization,
consolidation or merger or the effective date of such reorganization,
consolidation or merger, as the case may be, shall receive, in lieu of the
Common Stock (or other securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which the Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if the
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in this Section 3.
b. Continuation of Terms. Upon any reorganization,
---------------------
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3.4 (collectively, a "Corporate Transaction"), this
option shall, immediately after such Corporate Transaction, be appropriately
adjusted to apply and pertain to the number and class of securities which would
have been issued to Holder in the consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the Per Share Exercise Price
payable per share, provided the Aggregate Exercise Price payable hereunder shall
--------
remain the same.
c. Notice. The Company shall provide advance notice to the
------
Holder of any reorganization, consolidation, merger, dissolution or other such
transaction as soon as practicable, but in no event less than 20 days prior to
the consummation of any such transaction.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of the
-----------------------
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable. The Company
further covenants and agrees that it will pay, when due and payable, any and all
federal and state stamp, original issue or similar taxes which may be payable in
respect of the issue of any Warrant Share or certificate therefor; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance of any certificate
for Warrant Shares in a name other than that of the Holder upon any exercise of
this Warrant.
5. Restrictions on Transferability of Securities; Compliance with
--------------------------------------------------------------
Securities Act.
- --------------
5.1 Restrictions on Transferability. The transferability of this
-------------------------------
Warrant and the Warrant Shares (as well as any other securities issued in
respect of the Warrant Shares upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event) shall be subject to
the conditions specified in this Section 5. The Holder, and any transferee of
this Warrant or the Warrant Shares, by its acceptance hereof or thereof, agrees
that this Warrant and
4
<PAGE>
the Warrant Shares will be taken and held subject to the provisions and upon the
conditions specified in this Section 5.
5.2 Restrictive Legend. This Warrant and each certificate representing
------------------
(i) the Warrant Shares or (ii) any other securities issued in respect of the
Warrant Shares upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted or unless the
securities evidenced by such certificate shall have been registered under the
Securities Act of 1933 (the "Act") be stamped or otherwise imprinted with a
legend substantially in the following form (in addition to any legend required
under applicable state securities laws), and shall be subject to the provisions
thereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, (THE "ACT"), OR QUALIFIED UNDER THE SECURITIES
LAWS OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
5.3 "Market Stand-Off" Agreement. Each Holder hereby agrees that, during
----------------------------
the period of duration specified by the Company and an underwriter of Common
Stock or other securities of the Company, it shall not, to the extent requested
by the Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
a. such market stand-off time period shall not exceed 180 days;
b. all officers and directors of the Company and all other persons with
registration rights enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to any securities of the Company held by the
Holder until the end of such period. If requested to do so by the Company, each
Holder shall execute an underwriter's letter in the customary form prior to the
registration of the Company's initial public offering.
Notwithstanding the foregoing, the obligations described in this Section
5.3 shall not apply to a registration relating solely to employee benefit plans
on Form S-l or Form S-8 or similar forms which may be promulgated in the future,
or a registration relating solely to a Commission Rule 145 transaction on Form
S-4 or similar forms which may be promulgated in the future.
5
<PAGE>
5.4 Assignability. This Warrant may not be transferred or assigned,
-------------
in whole or in part, by Holder except where Holder has provided the Company with
written notice of its intent to assign or transfer the Warrant and the Company
has consented to such assignment or transfer in writing.
6. Warrant Register. This Warrant is transferable only upon the books of
----------------
the Company which it shall cause to be maintained for such purpose. The Company
may treat the registered holder of this Warrant as he, she or it appears on the
Company's books at any time as the Holder for all purposes; provided, however,
that upon receipt of notice of an assignment pursuant to Section 5.4, the
Company shall revise its books to reflect such new holder(s).
7. Loss, Etc., of Warrant. Upon receipt of evidence satisfactory to the
----------------------
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company shall
execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
8. Warrant Holder Has No Stockholder Rights. This Warrant does not
----------------------------------------
confer upon the Holder any right to vote or to consent or to receive notice as a
stockholder of the Company, as such, with respect to any matters whatsoever, or
any other rights or liabilities as a stockholder, prior to the exercise thereof.
9. Representations and Warranties of the Holder. Holder hereby
--------------------------------------------
represents and warrants that:
9.1 Authorization. Holder has full power and authority to enter
-------------
into and purchase this Warrant and any Warrant Shares for which it may be
exercised, and the Warrant constitutes Holder's valid and legally binding
obligation, enforceable in accordance with its terms.
9.2 Purchase Entirely for Own Account. This Warrant is sold in
---------------------------------
reliance upon Holder's representation to the Company, which by Holder's
execution of this Warrant Holder hereby confirms, that the Warrant to be
received by Holder and the Warrant Shares issuable upon the exercise thereof
(collectively, the "Securities") will be acquired for investment for Holder's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Holder has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Warrant, Holder further represents that Holder does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to person or to any third person, with respect
to any of the Securities.
9.3 Disclosure of Information. Holder believes that it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Warrant and any Warrant Shares for which the Warrant may be
exercised. Holder further represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the
6
<PAGE>
terms and conditions of the offering of the Warrant and the business,
properties, prospects and financial condition of the Company.
9.4 Investment Experience. Holder is an investor in securities of
---------------------
companies in the development stage and acknowledges that Holder is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrant and any Warrant Shares for
which the Warrant may be exercised.
9.5 Accredited Investor. Holder is an "accredited investor" within
-------------------
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation
D, as presently in effect.
9.6 Restricted Securities. Holder understands that the Securities
---------------------
Holder is purchasing are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Holder
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
9.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, Holder further agrees not to make any
disposition of all or any portion of the Securities unless and until:
a. There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
b. Holder shall have notified the Company of the proposed disposition
and shall have furnished the Company with a reasonably detailed statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances, or if required by a sale pursuant
to Rule 144(g) .
10. Communication. Any notice required or permitted to be given hereunder
-------------
shall be in writing and shall be deemed to have been given 48 hours after having
been deposited in the
7
<PAGE>
United States mail, postage prepaid, registered or certified, return receipt
requested, addressed to each party in the following manner:
To the Company: BUY.COM INC.
21 Brookline
Aliso Viejo, CA 92656
Attn: Murray Williams
Copy: General Counsel
To Holder: Harpeth Holdings Inc.
One Ingram Boulevard
P.O. Box 2006
LaVergne, TN 37086-1986
Attn: Frank Kerrigan
Copy: General Counsel
The Company and the Holder may change the address to which such
notices are to be addressed to them by giving the other party notice in the
manner set forth herein.
11. Headings. The headings of this Warrant have been inserted as a matter
--------
of convenience and shall not affect the construction hereof.
12. Applicable Law. This Warrant shall be governed by and construed in
--------------
accordance with the internal laws of the State of California.
13. Registration Rights. The Company hereby covenants and agrees to use
-------------------
its diligent efforts to amend the current Investors' Rights Agreement by and
among the Company and certain stockholders of the Company, in order to add
Holder as a party to such agreement for the purpose of granting "piggyback
registration rights" to Holder for the Warrant Shares. In the absence of such
agreement, the Company agrees to grant "piggyback" registration rights
consistent with those included in the Third Amended and Restated Investors'
Rights Agreement.
IN WITNESS WHEREOF, BUY.COM INC. has caused this Warrant to be
executed by its officers thereunto authorized.
Dated: October 8, 1999 BUY.COM INC.
By:
_____________________
Name:
Title:
8
<PAGE>
ACCEPTED AND AGREED:
HARPETH HOLDINGS INC.
_________________________
Name:
Title:
9
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
For value received, the undersigned hereby sells, assigns and transfers
unto __________________ the right to purchase __________ shares of Common Stock
evidenced by the within Warrant, and hereby appoints
____________________________ to transfer the same on the books of BUY.COM INC.
with full power of substitution in the premises.
Date: ________________ ____, _________
_____________________________________
(Signature)
Note: Signature must conform in all respects to the name of the Warrant
Holder as specified on the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
10
<PAGE>
EXERCISE FORM
(To Be Executed By The Warrant Holder If The Holder Desires
To Exercise The Warrant In Whole Or In Part)
TO: BUY.COM INC.
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and for purchase thereunder,
___________________ shares of Common Stock provided for therein and tenders
payment herewith to the order of BUY.COM INC. in the amount of
$_____________.____. The undersigned requested that certificates for such
shares of Common Stock be issued as follows:
Name:
Address:
Deliver to:
Address:
Date: _____________, _______
________________________________
(Signature)
Note: Signature must conform in all respects to the name of the Warrant
Holder as specified on the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
11
<PAGE>
NET ISSUE ELECTION NOTICE
To: BUY.COM INC.
The undersigned hereby elects, pursuant to Section 1.2 of the attached
Warrant, to surrender the right to purchase ___________ shares of Common Stock.
The Certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
Date: ______________________________ ___________________________
Signature
___________________________
Name for Registration
___________________________
Mailing Address
12
<PAGE>
EXHIBIT 10.32
NONCOMPETITION AGREEMENT
This Noncompetition Agreement (this "Agreement") is made effective as of
October 25, 1999 by and among BUY.COM INC., a Delaware corporation ("Parent"),
and BuyGolf.com, Inc., a Delaware corporation ("Company"), on one hand, and
Bradford W. Allen (the "Stockholder") on the other hand.
RECITALS
A. As an employee, executive and stockholder of Company, the Stockholder
has obtained extensive and valuable knowledge and information concerning the
business of Company (including, but not limited to, confidential information
relating to Company and its operations, assets, contracts, customers, personnel,
plans and prospects).
B. Concurrently with the execution and delivery of this Agreement, Parent
is acquiring the Company through a merger of Parent's wholly owned subsidiary
with and into the Company (the "Acquisition") pursuant to that certain Agreement
and Plan of Merger and Reorganization dated as of the date hereof (the "Merger
Agreement"). The Merger Agreement requires that a noncompetition agreement be
executed and delivered by the Stockholder as a condition to the completion of
the Acquisition, and the Stockholder is entering into this Agreement in order to
induce Parent to complete the Acquisition.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. Definitions. Capitalized terms used but not expressly defined in this
-----------
Agreement shall have the meanings ascribed to them in the Merger Agreement.
2. Acknowledgments by the Stockholder. The Stockholder acknowledges that
----------------------------------
(a) the Stockholder has occupied a position of trust and confidence with Company
prior to the date hereof and has become familiar with the following, any and all
of which may constitute confidential information of Company (any such
information constituting confidential information of Company, the "Confidential
Information"): (i) any and all trade secrets concerning the business and affairs
of Company, data, know-how, compositions, processes, customer lists, current and
anticipated customer requirements, price lists, market studies, business plans,
internally developed programming code/software, database architecture; (ii) any
and all information concerning the business and affairs of Company (which
includes historical financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and plans, the names
and backgrounds of key personnel, personnel training and techniques and
materials), however documented; and (iii) any and all notes, analysis,
compilations, studies, summaries, and other material prepared by or for Company
containing or based, in whole or in part, on any information included in the
foregoing, (b) Parent has required that the Stockholder make the covenants set
forth in this Agreement as a condition to Parent's acquisition of the Company,
(c) the provisions of this Agreement are reasonable and necessary to protect and
preserve Company's business, and (d) Parent and Company would be
<PAGE>
irreparably damaged if the Stockholder were to breach the covenants set forth in
Sections 3, 4, 5, 6 and 7 of this Agreement.
3. Confidential Information. The Stockholder acknowledges and agrees that
------------------------
all Confidential Information known or obtained by the Stockholder, whether
before or after the date hereof, is the property of Parent. Therefore, the
Stockholder agrees that the Stockholder will not, at any time, disclose to any
unauthorized third party or use for his own account or for the benefit of any
third party any Confidential Information, whether the Stockholder has such
information in the Stockholder's memory or embodied in writing or other physical
form, without Parent's written consent, unless and to the extent that the
Confidential Information (i) is or becomes generally known to and available for
use by the public other than as a result of the Stockholder's fault or the fault
of any other party bound by a duty of confidentiality to Parent or Company or
(ii) becomes available to Stockholder on a nonconfidential basis from a person
other than Company or Parent who is not otherwise bound by a confidentiality
agreement with Company or Parent, or is otherwise not under an obligation to
Company or Parent not to transmit the information to Stockholder. The
Stockholder agrees to deliver to Parent, at any time Parent may request, all
documents, memoranda, notes, plans, records, reports, and other documentation,
models, components, or computer software, whether embodied in a disk or in other
form (and all copies of all of the foregoing), relating to the businesses,
operations, or affairs of Company and any other Confidential Information that
the Stockholder may then possess or have under the Stockholder's control.
4. Noncompetition. As an inducement for Parent to enter into the Merger
--------------
Agreement and as additional consideration for the consideration to be paid
hereunder, the adequacy and sufficiency of which is hereby acknowledged by the
parties hereto, the Stockholder agrees that during the Noncompetition Period (as
hereinafter defined), the Stockholder will not, for any reason, directly or
indirectly, engage or invest in, own, manage, operate, finance, control, or
participate in the ownership, management, operation, financing, or control of,
be employed by, associated with, or in any manner connected with, lend the
Stockholder's name or any similar name to, lend the Stockholder's credit to, or
render services or advice to, any business whose products, product development,
sales, services or other activities compete in any respect with the products,
product development, sales, services or other activities of or offered by
Company or the Parent, as such existed at or could be reasonably anticipated at,
or before the Closing Date (the "Restricted Business"), in any county of any
state of the United States of America, and any other states or international
jurisdictions throughout the world at any time within the Noncompetition Period
(as hereinafter defined); provided, however, that the Stockholder may purchase
or otherwise acquire up to (but not more than) one percent (1%) of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended. The Stockholder agrees that this
covenant is reasonable with respect to its duration, geographical area, and
scope. In the event that any court determines that the duration or the
geographic areas provided for in this Section 4, or both of them, are illegal or
unenforceable, the parties intend that such court shall limit such duration or
geographic scope to the minimum extent necessary so that such covenant shall
remain in full force and effect for the greatest duration of time and in the
greatest geographical area that would not render it unenforceable. The parties
further intend that this covenant shall be deemed to be a series of separate
covenants, one for
2
<PAGE>
each and every state or other political subdivision of the United States and for
any other country in the world where this covenant is intended to be effective.
As used herein, the "Noncompetition Period" shall commence upon the Closing Date
and end two and one-half years after the Closing Date.
5. Nonsolicitation. The Stockholder further agrees that during the
---------------
Noncompetition Period, he will not (i) directly or indirectly, personally or
through others, encourage, induce, attempt to induce, solicit or attempt to
solicit (on the Stockholder's own behalf or on behalf of any other person or
entity) any employee of, or representative, agent, consultant, or advisor to,
Parent or Company to leave his or her employment with such Parent or Company;
(ii) divert, or attempt to divert, any person or entity which has furnished
services to the Parent or the Company or furnishes services for or to the Parent
or Company (including any person or entity known by Stockholder to be a
prospective customer, supplier or material service provider of the Parent or
Company) or (iii) induce or attempt to induce any customer, supplier or material
service provider of the Parent or the Company to cease being (or to not become)
a customer, supplier or material service provider of the Parent or Company
(including any person or entity known by Stockholder to be a prospective
customer, supplier or material service provider of the Parent or Company).
6. Independence of Obligations. The covenants of the Stockholder set
---------------------------
forth in this Agreement shall be construed as independent of any other agreement
or arrangement between the Stockholder, on the one hand, and Parent or Company,
on the other. The existence of any claim or cause of action by the Stockholder
against Parent or Company shall not constitute a defense to the enforcement of
such covenants against the Stockholder.
7. Remedies. If the Stockholder breaches the covenants set forth in this
--------
Agreement, each of Parent and Company will be entitled to the following
remedies:
a. damages from the Stockholder; and
b. in addition to its right to damages and any other rights it may
have, to obtain injunctive or other equitable relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this
Agreement, it being agreed that money damages alone would be inadequate to
compensate the Parent or Company and would be an inadequate remedy for such
breach.
8. Non-Exclusivity. The rights and remedies of Parent and Company
---------------
hereunder are not exclusive of or limited by any other rights or remedies which
Parent or Company may have, whether at law, in equity, by contract or otherwise,
all of which shall be cumulative (and not alternative). Without limiting the
generality of the foregoing, the rights and remedies of Parent and Company
hereunder, and the obligations and liabilities of the Stockholder hereunder, are
in addition to their respective rights, remedies, obligations and liabilities
under the law of unfair competition, misappropriation of trade secrets and the
like.
9. Waiver. The rights and remedies of the parties to this Agreement are
------
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or
3
<PAGE>
privilege under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement can be discharged by one party, in whole or in part, by a waiver
or renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (c) no notice to or demand on
one party will be deemed to be a waiver of any obligation of such party or of
the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement.
10. Governing Law. This Agreement will be governed by the laws of the
-------------
State of California without regard to conflicts of laws principles.
11. Severability. If any provision of this Agreement or any part of any
------------
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) such invalidity or
enforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Agreement. Each provision of this
Agreement is separable from every other provision of this Agreement, and each
part of each provision of this Agreement is separable from every other part of
such provision.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement. Execution and delivery of this Agreement by exchange
of facsimile copies bearing the facsimile signature of a party hereto shall
constitute a valid and binding execution and delivery of this Agreement by such
party.
13. Section Headings; Construction. The section headings in this Agreement
------------------------------
are provided for convenience only and will not affect its construction or
interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
14. Notices. All notices, consents, waivers, and other communications
-------
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand, (b) sent by facsimile, provided that a copy is
mailed by registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service or
registered mail (receipt requested), in each case to the appropriate addresses
4
<PAGE>
and facsimile numbers set forth below (or to such other addresses and facsimile
numbers as a party may designate by notice to the other parties):
Stockholder: At Stockholder's address set forth on the signature page
hereof.
Parent: BUY.COM INC.
21 Brookline
Aliso Viejo, CA 92656
Attn: Gregory Hawkins
Facsimile number: (949) 425-5231
With a copy to: Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, CA 92618
Attn: Bruce R. Hallett, Esq.
Facsimile number: (949) 790-6301
15. Further Assurances. The Stockholder shall execute and/or cause to be
------------------
delivered to Parent or Company such instruments and other documents and shall
take such other actions as Parent or Company may reasonably request to
effectuate the intent and purposes of this Agreement.
16. Assignment. This Agreement and all obligations hereunder are personal
----------
to the Stockholder and may not be transferred or assigned by the Stockholder at
any time. Each of Parent and Company may assign its respective rights under this
Agreement to any entity in connection with any sale or transfer of all or a
substantial portion of its respective assets to such entity.
17. Binding Nature. Subject to Section 11 hereof, this Agreement will be
--------------
binding upon the Stockholder and the Stockholder's representatives, executors,
administrators, estate, heirs, successors and assigns, and will inure to the
benefit of Parent and Company and their respective successors and assigns.
18. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter of this Agreement and
supersedes all prior written and oral agreements and understandings among
Parent, Company and the Stockholder with respect to the subject matter of this
Agreement. This Agreement may not be amended except by a written agreement
executed by all parties hereto.
19. Survival. All of the provisions set forth in this Agreement are
--------
continuing and shall survive both the execution of this Agreement and the Merger
Agreement.
20. Not an Employment Contract. This agreement is not a contract of
--------------------------
employment and does not give Stockholder any right to employment for any
specific period of time. If there is at any time a contract of employment
between the Stockholder and Parent or the Company, whether effective before or
after this Agreement, this Agreement shall be deemed to be an amendment to such
contract of employment unless such contract of employment expressly cancels this
Agreement.
5
<PAGE>
21. Attorneys' Fees. In the event that any legal proceeding is brought to
---------------
enforce or interpret any of the provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees whether or not the
action or proceeding proceeds to final judgment.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
BUY.COM INC. STOCKHOLDER:
By:_______________________________ By:_______________________________
Name:________________________
Title:_______________________
BUYGOLF.COM INC.
By:_______________________________
Name:________________________
Title:_______________________
6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
Orange County, California
October 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> OTHER YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1999
<PERIOD-START> JUN-07-1997 JAN-01-1998 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1998 SEP-30-1999
<CASH> 34 9,221 0 3,231
<SECURITIES> 0 0 0 0
<RECEIVABLES> 178 5,036 0 16,828
<ALLOWANCES> 0 50 0 766
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 216 15,465 0 20,715
<PP&E> 57 3,044 0 6,070
<DEPRECIATION> 7 149 0 784
<TOTAL-ASSETS> 267 26,837 0 33,889
<CURRENT-LIABILITIES> 607 19,027 0 90,669
<BONDS> 0 1,175 0 1,818
0 0 0 0
0 14,943 0 14,943
<COMMON> 0 14 0 14
<OTHER-SE> (340) (8,322) 0 (73,555)
<TOTAL-LIABILITY-AND-EQUITY> 267 26,837 0 33,889
<SALES> 878 125,290 63,761 397,601
<TOTAL-REVENUES> 878 125,290 63,761 397,601
<CGS> 832 123,527 61,165 401,214
<TOTAL-COSTS> 832 123,527 61,165 401,214
<OTHER-EXPENSES> 427 19,806 7,339 76,338
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 7 (202) (78) 721
<INCOME-PRETAX> (388) (17,841) (4,665) (80,524)
<INCOME-TAX> 2 3 3 3
<INCOME-CONTINUING> (390) (17,844) (4,668) (80,527)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (390) (17,844) (4,668) (80,527)
<EPS-BASIC> (0.00) (0.14) (0.04) (0.57)
<EPS-DILUTED> (0.00) (0.14) (0.04) (0.57)
</TABLE>
