<PAGE>
As filed with the Securities and Exchange Commission on December 16, 1999
Registration No. 333-89737
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BUY.COM INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
<TABLE>
<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.
Scott Santagata, Esq. Michael S. Russell, Esq.
Joo Ryung Kang, 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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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Offering Aggregate
Securities to be Amount to be Price Per Offering Amount of
Required Registered(1) Share(2) Price(1)(2) Registration Fee(3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.0001
par value.............. 16,100,000 shares $12.00 $193,200,000.00 $53,105
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes 2,100,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
(3) Consists of a registration fee of (i) $41,700, which was previously paid
relating to the maximum aggregate offering price at that time of
$150,000,000 calculated at the then applicable rate of .000278 and (ii)
$11,405 relating to the additional equity of $43,200,000 included in this
filing calculated at the current rate of .000264.
----------------
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.
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- --------------------------------------------------------------------------------
<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 December 16, 1999
PROSPECTUS
14,000,000 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 $10.00 and $12.00 per share. After the
pricing of the offering, we expect that the common stock will trade on the
Nasdaq National Market under the symbol "BUYX."
Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 6 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 2,100,000 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.
At our request, the underwriters have reserved up to 10% of the shares of
our common stock offered by this prospectus for sale, at the initial public
offering price, to some of our employees, officers, directors, distributors,
dealers, business associates and related persons. The number of shares of
common stock for sale to the general public in this offering will be reduced to
the extent those persons purchase the reserved shares.
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 , 2000.
-----------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Hambrecht & Quist
U.S. Bancorp Piper Jaffray
-----------
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover of Prospectus
1. Flap (outside)
B. Annotations:
a. 2,500,000 unique visitors (Media Metrix - 8/99)
b. 1,300,000 customers (as of 9/99)
c. 850,000 stock keeping units
d. 29,000 computer items
e. 8,000 daily orders (avg. 7/99 - 9/99)
f. 24 hours a day
g. 9 online specialty stores
h. 0 warehouses
i. BUY.COM -- Why Buy Anywhere Else
<PAGE>
2. Flap (inside gatefold)
A. Graphics: A screen shot of BUY.COM's home page and a screen shot
of the home page of the BUYCOMP store.
B. Annotations for graphics:
a. "BUY.COM Why Buy Anywhere Else"
b. "Nine online specialty stores" Just one click away. Shoppers
can also search by keyword.
c. "Daily product specials" BUY.COM offers daily product
"give aways" to attract customers and capture user interest,
while featuring significant corporate sponsorships from
companies such as VISA.
d. "Superior customer service" Returning customers are greeted
by name and exposed to BUY.COM's value proposition: low
prices, secure online shopping and superior customer service.
e. "Attractive advertising vehicle" As these "Trigger Buttons"
illustrate, BUY.COM provides an easy and attractive vehicle
for advertisers seeking to reach shoppers who spend
relatively large amounts online.
f. "Over 29,000 computer items" With easy to navigate category
keys, customers can move easily throughout the BUYCOMP store
to select from among a broad selection of computer hardware
products. All items from each of the nine specialty stores
can be bundled in one online shopping basket for easy
purchase and delivery.
g. "Featured product spotlights" Shoppers get a quick snapshot
of the product and a fast link to further information and
the checkout page.
h. "Store within a store" One example of a premium
merchandising and advertising opportunity: clicking on this
IBM product will take the customer directly to an IBM
"store within a store" featuring an extensive selection of
branded merchandise and product information.
C. Annotation in the footer:
This prospectus contains product names, trade names, service marks
and trademarks of BUY.COM and other organizations, all of which are
the property of their respective owners. In addition, the prices
and product information contained in the screen shots of our web
pages are provided for illustrative purposes only and are not
necessarily effective or representative of the products or prices
at which these products are currently offered for sale."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
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............................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 34
Management............................................................... 50
Related Party Transactions............................................... 64
Principal Stockholders................................................... 68
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 74
Underwriting............................................................. 76
Legal Matters............................................................ 78
Experts.................................................................. 79
Where You Can Find More Information...................................... 79
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.
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, clearance equipment, golf
related products and consumer electronics at everyday low prices. Through our
eight online specialty stores, we offer more than 850,000 products identified
as separate stock keeping units or SKUs, using a convenient, easy-to-use
shopping interface that features extensive product information and multi-media
presentations. Our e-commerce portal, www.buy.com, links our eight 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. Our business model
includes outsourcing the majority of our operating infrastructure, such as
distribution and fulfillment functions, customer service and support, credit
card processing, and the hosting of our system infrastructure and database
servers. We believe these outsourcing arrangements provide us with a variety of
benefits including cost efficiencies, operating flexibility and enhanced
scalability. By taking advantage of these benefits, we believe 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
customers, of which 396,000 were added during the third quarter of 1999.
According to a BUY.COM sponsored survey conducted by Message Media, 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.
"Unique Visitor" is an industry term used to describe an individual who has
visited a particular Internet site once or more during a specific period of
time. Our net revenues have increased to $396.2 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. We also incurred net losses of $4.7 million
for the nine months ended September 30, 1998, $17.8 million for the year ended
December 31, 1998 and $80.5 million for the nine months ended September 30,
1999.
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.
1
<PAGE>
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. Our top
priorities include offering superior customer service and improving our
communications with customers. We also plan to continue to work with our
distribution and fulfillment providers to obtain more timely and accurate
product information, shipping and fulfillment. We intend to use our recognized
name, BUY.COM, and strong market position in online 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 companies,
similar to our recently announced joint venture with United Air Lines, Inc.
Through this joint venture, of which we own 50%, we are creating 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.
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
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 products. Since the second quarter of
1999, we have increased our product margins without experiencing a decline in
the growth of overall sales volumes or customer levels. We intend to further
refine this pricing structure over time.
We are expanding our business into international markets through wholly-
owned Internet superstores and through joint ventures with third parties that
provide expertise in local markets and financial resources to the joint
venture. We recently launched BUY.COM Canada in December 1999 as our wholly-
owned Internet superstore. In addition, 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. Each of the joint ventures will
hire its own management and other personnel and will establish relationships
with local distribution providers for product categories suited for the
particular territory.
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, L.P. 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 and two other
stockholders.
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.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by BUY.COM.................. 14,000,000 shares
Common stock to be outstanding after this
offering........................................ 129,140,179 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........... BUYX
</TABLE>
The number of shares of common stock outstanding after this offering is
based on 115,140,179 shares outstanding as of December 1, 1999, and does not
include 22,068,790 shares of common stock issuable upon the exercise of options
outstanding as of December 1, 1999 at a weighted average exercise price of
$2.96 per share, or warrants to purchase approximately 1,936,364 shares of
common stock, based upon an estimated initial public offering price of $11.00
per share, at a weighted average exercise price of $13.60 per share.
Risk Factors
Our business and operations and an investment in our common stock are
subject to a variety of risks. You should carefully consider the factors
discussed in detail elsewhere in this prospectus under the caption "Risk
Factors."
3
<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 and the pro forma effect of the
PGA Tour agreement as if it was entered into effective January 1, 1999. The pro
forma basic and diluted weighted average shares outstanding gives effect to the
issuance of common stock for the acquisition of BuyGolf.com and the PGA Tour
sponsorship agreement as though they had occurred on January 1, 1999, and gives
effect to the conversion of all of our Series A and B convertible participating
preferred stock, including those shares issued in October 1999, into shares of
common stock as if all shares were outstanding and converted on January 1,
1999.
<TABLE>
<CAPTION>
Pro Forma
June 7, 1997 Nine Months Ended Combined Nine
(Inception) to Year Ended September 30, Months 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 $ 396,172 $ 397,157
Gross profit............ 46 1,763 2,596 (5,254) (5,152)
Operating loss.......... (381) (18,039) (4,685) (79,877) (95,544)
Net loss................ (390) (17,844) (4,668) (80,527) (96,188)
Net loss per share:
Basic and diluted..... $ (0.00) $ (0.22) $ (0.06) $ (0.91) $ (0.84)
Weighted average shares
used in computing net
loss per share:
Basic and diluted..... 81,331,078 81,815,869 81,331,078 88,634,048 114,447,359
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
June Sept.
30, 30, Dec. 31, Mar. 31, June 30, Sept.
1998 1998 1998 1999 1999 30, 1999
------- ------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Quarterly Statements of
Operations Data:
Net revenues........... $19,233 $34,985 $ 61,529 $107,932 $129,280 $158,960
Gross profit........... 1,051 837 (832) (183) (4,937) (134)
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 ...................................... $ 3,231 $ 93,456 $235,361
Working capital (deficit).................. (69,954) 29,662 171,282
Total assets............................... 33,889 158,992 300,612
Long-term debt, net of current portion..... 1,818 1,818 1,818
Total stockholders' equity (deficit)....... (58,598) 65,665 207,285
</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
Capital Partners, L.P. and its affiliates in October 1999.
4
<PAGE>
Our pro forma as adjusted balance sheet data gives effect to the application
of the estimated net proceeds from the sale of the 14,000,000 shares offered by
this prospectus.
- --------
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 $11.00 per share;
. we will effect a 5 for 8 reverse stock split prior to the consummation of
this offering;
. all outstanding shares of Series A convertible participating preferred
stock and Series B convertible participating preferred stock will be
converted into an aggregate of 22,098,982 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.
5
<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.
Ingram Micro's failure to supply and fulfill our computer hardware and software
products could reduce our revenues and harm our business
We depend on Ingram Micro, Inc. to provide all of our computer hardware and
software products and 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.
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 dependent on several third party providers to fulfill a number of our
retail functions. If these parties are unwilling or unable to continue
providing services to us, our business could be seriously harmed
We are currently dependent on our distribution and fulfillment providers 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, games and the purchase and
fulfillment of our consumer electronics products, 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 providers on acceptable commercial terms,
6
<PAGE>
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 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
providers 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 providers 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 for customer service and support, credit card processing, and hosting
our system infrastructure and database servers. In addition, our distributors
and fulfillment providers 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 business model and our pricing strategies;
. 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.
Because we sell a substantial portion of our products at very competitive
prices, 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 operating 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
7
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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 business 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.
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.
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
business 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,
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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.
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,
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our Chief Executive Officer, who was hired in March 1999, and Mitch C. Hill,
our Chief Financial Officer, who was hired 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 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.
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
seven new online stores and acquiring BuyGolf.com. Continued expansion of our
operations requires substantial expenses and development,
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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 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;
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. 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 $42.5 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.
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.
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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 providers to supply 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.
We may be unable to protect our Internet domain names, which are essential to
our business
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 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;
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. content;
. copyrights;
. 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.
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 that 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 legal actions, see "Business--Legal Proceedings."
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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, consumer electronics and golf related 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.
We would also realize significant competitive pressure if any of our
distribution providers 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.
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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, and withdrew from participation in our management,
business and operations. As of October 15, 1999, these shares represented
approximately 56% of our outstanding capital stock. To date, Mr. Blum has been
primarily responsible for conceiving, developing and implementing our 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.
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, providers 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 applied for the registration of some of our
trademarks and service marks in the United States and some other countries.
Even if we are able to register these names, registration 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, 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 and its affiliates control a majority of our outstanding common stock
which will enable them 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, SOFTBANK and its affiliates will own
approximately 29.7% of our outstanding stock. In addition, as a result of a
voting trust agreement with our largest shareholder, approximately 48.1% of our
outstanding stock must be voted to mirror the voting of all shares that are not
subject to the terms of the voting trust agreement on significant stockholder
actions, as defined in the voting trust agreement. On
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routine stockholder actions, the trustees have the discretion to vote the trust
shares in any manner determined by a majority of the trustees. Because SOFTBANK
and its affiliates will control a majority of the shares not subject to the
voting trust, they will effectively control the votes of approximately 77.8% of
our common stock on significant corporate actions and 29.7% on routine
corporate governance matters immediately after this offering. This control by
SOFTBANK and its affiliates 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 $141.6
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.
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
Sales of substantial amounts of our common stock in the public market after
this offering could reduce the market price of our common stock. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. For a
description of the shares of our common stock that are available for future
sale, 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 strategic 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.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 14,000,000 shares of common stock sold
by us in this offering are estimated to be approximately $141.6 million based
on an assumed initial public offering price of $11.00 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 as follows:
. An estimated $20.0 million to $30.0 million may be used for capital
expenditures associated with technology and systems upgrades and
expansion.
. An estimated $70.0 million to $90.0 million may be used for sales and
marketing activities, particularly advertising campaigns and promotions,
to increase our brand recognition, including $8.5 million during 2000 as
part of our sponsorship of the BUY.COM Tour.
. Approximately $12.5 million will be used to repay our debt under our
credit facility. Under the terms of the credit agreement, the loan bears
interest at the London Interbank Offer Rate plus 3.00% and has a maturity
date of July 19, 2000. The proceeds of the loan were used for our short
term working capital needs.
. The remainder of the net proceeds will be used to fund operating losses,
for additional working capital and for general corporate purposes
including the introduction of new product categories, the expansion of
existing product categories and expansion into international markets.
As of the date of this prospectus, we have not allocated any specific amount
of the proceeds for the purposes listed above. The amounts actually expended
for the purposes listed above will depend upon a number of factors, including
the growth of our sales and customer base, the type of efforts we make to build
our brand and competitive developments in e-commerce. Therefore, we cannot
specify with certainty the particular uses of the net proceeds of this
offering, and the amounts we actually spend could exceed the ranges set forth
above. Our management will have significant flexibility and discretion in
applying the net proceeds of this offering.
Pending any use, the net proceeds of this offering will be invested
generally in short-term, interest-bearing securities.
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.
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 issuance of our Series B
convertible participating preferred stock, the acquisition of
BuyGolf.com, Inc., the issuance of 1,125,000 in connection with our
sponsorship agreement with the PGA TOUR, and the conversion of all of our
Series A convertible participating preferred stock and Series B
convertible participating preferred stock into an aggregate of 22,098,982
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 14,000,000 shares of common stock at an assumed initial
public offering price of $11.00 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 $ 1,818
Stockholders' equity (deficit):
Convertible participating preferred stock,
$.0001 par value (Series A and B);
150,000,000 authorized; 12,175,705 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; 89,326,756
shares issued and outstanding, actual;
115,140,054 shares issued and
outstanding, pro forma; 129,140,054
shares issued and outstanding, pro forma
as adjusted ............................. 9 12 13
Additional paid-in capital, common........ 30,607 173,239 314,858
Deferred compensation..................... (8,088) (8,088) (8,088)
Accumulated deficit....................... (96,069) (99,498) (99,498)
-------- -------- --------
Total stockholders' equity (deficit).... (58,598) 65,665 207,285
-------- -------- --------
Total capitalization................... $(56,780) $ 67,483 $209,103
======== ======== ========
</TABLE>
- --------
These share amounts exclude 19,124,281 shares of common stock issuable upon
the exercise of options outstanding as of September 30, 1999 at a weighted
average exercise price of $2.96 per share and warrants to purchase
approximately 1,311,364 shares of common stock, based upon an estimated initial
public offering price of $11.00 per share, at a weighted average exercise price
of $15.76 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
9,923,277 shares of Series B convertible participating preferred stock, was
approximately $33.7 million, or $0.29 per share of common stock. 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 22,098,982 shares
of common stock, the issuance of 2,589,329 shares of common stock in connection
with our acquisition of BuyGolf.com, and the issuance of 1,125,000 shares of
common stock in connection with our sponsorship agreement with PGA TOUR.
Without taking into account any other changes in pro forma net tangible book
value other than to give effect to our sale of the 14,000,000 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 $175.6 million, or $1.36 per share of common stock. This represents
an immediate increase in pro forma net tangible book value of $1.07 per share
to existing stockholders and an immediate dilution in pro forma net tangible
book value of $9.64 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.......... $11.00
Pro forma net tangible book value per share as of
September 30, 1999..................................... $ 0.29
Increase per share attributable to new investors........ 1.07
---------
Pro forma net tangible book value per share after this
offering................................................ 1.36
------
Dilution per share to new investors...................... $ 9.64
======
</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 issuance of shares of common stock in connection with our
acquisition of BuyGolf.com, and the issuance of shares of common stock in
connection with our sponsorship agreement with the PGA TOUR. 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
$11.00 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.... 115,140,054 89.2% $116,930,000 43.2% $ 1.02
New investors............ 14,000,000 10.8% 154,000,000 56.8% $11.00
----------- ----- ------------ -----
Total................ 129,140,054 100.0% $270,930,000 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of September 30, 1999. As of September 30, 1999,
options to purchase 19,124,281 shares of common stock were outstanding at a
weighted average exercise price of $2.96 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 1,311,364 shares of
common stock were outstanding, based upon an estimated initial public offering
price of $11.00 per share, at a weighted average exercise price of $15.76 per
share. Assuming all options and warrants discussed above are exercised, new
investors will own approximately 9.4% of our outstanding shares while
contributing approximately 56.8% of the total amount paid to fund our company.
All of the information above also assumes no exercise of the underwriters'
overallotment option. 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 $ 396,172
Cost of goods sold...... 832 123,527 61,165 401,426
----------- ----------- ---------- -----------
Gross profit............ 46 1,763 2,596 (5,254)
----------- ----------- ---------- -----------
Operating expenses:
Sales and marketing.... 130 13,430 2,770 42,453
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 74,623
----------- ----------- ---------- -----------
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) $ (0.22) $ (0.06) $ (0.91)
Weighted average shares
outstanding:
Basic and diluted...... 81,331,078 81,815,869 81,331,078 88,634,048
Pro forma net loss per
share:
Basic and diluted...... $ (0.84)
Pro forma weight average
shares outstanding:
Basic and diluted...... 114,447,359
<CAPTION>
December 31,
--------------------------- September 30,
1997 1998 1999
-------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash ................... $ 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
and notes to selected unaudited pro forma condensed combined financial
information for information regarding the method used to compute our actual
basic and diluted net loss per share and our pro forma 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 Capital
Partners, L.P. and its affiliates in October 1999.
22
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
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. The final allocation of purchase price is not expected to
differ materially from the tentative allocation or to have a material impact on
our results of operations or financial position. Purchase accounting is based
upon preliminary asset valuations, which are subject to change. Furthermore,
post-closing adjustments, if any, are not expected to have material impact on
our results of operations or financial position.
The selected unaudited pro forma condensed combined statement of operations
data for the nine months ended September 30, 1999 is presented as if BUY.COM
had completed the acquisition of BuyGolf.com and entered into the PGA TOUR
sponsorship agreement 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.
The selected unaudited pro forma condensed combined balance sheet
information is prepared as if BUY.COM had completed the acquisition of
BuyGolf.com and entered into the PGA TOUR sponsorship agreement on September
30, 1999.
23
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS INFORMATION
(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............ $ 396,172 $ 1,025 $ (40)(b) $ 397,157
Cost of goods sold...... 401,426 883 -- 402,309
----------- ----------- ------------ ------------
Gross profit............ (5,254) 142 (40) (5,152)
Total operating
expense................ 74,623 3,576 12,193 (b)(c) 90,392
----------- ----------- ------------ ------------
Operating loss.......... (79,877) (3,434) (12,233) (95,544)
Total other income
(expense).............. (647) 7 -- (640)
----------- ----------- ------------ ------------
Loss before provision
for income taxes....... (80,524) (3,427) (12,233) (96,184)
Provision for income
taxes.................. 3 1 -- 4
----------- ----------- ------------ ------------
Net loss................ $ (80,527) $ (3,428) $ (12,233) $ (96,188)
=========== =========== ============ ============
Net loss per share:
Basic and diluted...... $ (0.84)
Weighted average number
of commons shares
outstanding:
Basic and diluted(d)... 114,447,359
</TABLE>
- --------
(a) BuyGolf.com was acquired by BUY.COM on October 25, 1999, in a purchase-
type transaction. BUY.COM issued a total of 2,589,329 shares of common
stock to acquire the remaining 95% of the outstanding common stock of
BuyGolf.com that it did not previously own. 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 of $5.8 million that would have
been recorded for the nine months ended September 30, 1999, if the
acquisition of BuyGolf.com occurred on January 1, 1999. Goodwill is
amortized on a straight-line basis over a period of three years. No other
significant fair value purchase price adjustments were recorded in
conjunction with the acquisition of BuyGolf.com. Also includes expense of
$6.4 million for the PGA TOUR sponsorship agreement as though the
agreement was effective January 1, 1999.
(d) Reflects the conversion of all preferred stock outstanding at December 1,
1999, the issuance of common stock for the acquisition of BuyGolf.com and
the issuance of common stock in connection with the PGA TOUR sponsorship
agreement.
24
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET INFORMATION
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------
BUY.COM BuyGolf.com, Pro Forma Pro Forma
Inc. Inc. (b) Adjustments Combined
------- ------------ ----------- ---------
Assets
<S> <C> <C> <C> <C>
Current Assets:
Cash......................... $ 3,231 $ 225 $ 90,000 (a) $ 93,456
Accounts receivable.......... 16,062 31 (157)(c) 15,936
Prepaid expenses and other
assets...................... 1,422 151 10,206 (d) 11,779
------- ------- -------- --------
Total current assets....... 20,715 407 100,049 121,171
Property and equipment, net... 5,286 178 -- 5,464
Intangibles, net.............. 7,187 469 24,000 (e) 31,656
Other noncurrent assets....... 701 -- -- 701
------- ------- -------- --------
$33,889 $ 1,054 $124,049 $158,992
======= ======= ======== ========
<CAPTION>
Liabilities and Stockholders'
Equity
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable............. $68,455 $ 778 (157)(c) $ 69,076
Line of credit............... 12,377 -- -- 12,377
Accrued expenses............. 3,695 219 -- 3,914
Deferred Revenue............. 826 -- -- 826
Income taxes payable......... 3 -- -- 3
Note payable to
stockholder................. 5,000 -- -- 5,000
Current portion of long-term
debt........................ 313 -- -- 313
------- ------- -------- --------
Total current liabilities.. 90,669 997 (157) 91,509
------- ------- -------- --------
Long Term Debt, net of current
portion...................... 1,818 -- -- 1,818
------- ------- -------- --------
Commitments and
Contingencies................
Stockholders' Equity:
Convertible participating
preferred stock, $0.0001
par value, including
additional paid-in
capital..................... 14,943 -- 100,206 (a)(d) 115,149
Common stock, $0.0001 par
value....................... 9 1 -- 10
Additional paid-in capital... 30,607 3,485 24,000 (e) 58,092
Deferred compensation........ (8,088) -- -- (8,088)
Accumulated deficit.......... (96,069) (3,429) -- (99,498)
------- ------- -------- --------
Total stockholders' equity... (58,598) 57 124,206 65,665
------- ------- -------- --------
$33,889 $ 1,054 $124,049 $158,992
======= ======= ======== ========
</TABLE>
- --------
(a) Reflects the receipt of approximately $90.0 million in connection with the
sale of Series B convertible participating preferred stock to SOFTBANK
Capital Partners, L.P. and its affiliates in October 1999.
(b) BuyGolf.com was acquired by BUY.COM on October 25, 1999, in a purchase-type
transaction. BUY.COM issued a total of 2,589,329 shares of common stock to
acquire the remaining 95% of the outstanding shares of common stock of
BuyGolf.com that it did not previously own. 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 September 30,
1999.
(c) Represents intercompany receivables/payables, at September 30, 1999, that
should be eliminated upon the acquisition of BuyGolf.com by BUY.COM.
(d) Reflects the issuance of 1,125,000 common shares to the PGA TOUR, at an
estimated fair value of $9.07 per share, totalling $10.2 million. Fair
value is based upon unrelated party sales of convertible preferred stock.
(e) Represents goodwill resulting from the acquisition of BuyGolf.com on
October 25, 1999, in a purchase-type transaction.
25
<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, music, consumer electronics and
golf related products at everyday low prices. 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. 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 and continuing 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. 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 BUYCLEARANCE.COM, which offers high quality,
brand name, closeout products at significant discounts and in November 1999, we
launched our newest online retail store, BUYELECTRONICS.COM, which offers brand
name consumer electronics products. In addition, in October 1999 we acquired
BuyGolf.com, Inc., an online store selling golf equipment and other golf
related merchandise.
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 our stockholders. BUYNOW provides contract e-commerce service,
including order fulfillment and credit card processing, to its customers. We
are entering into a license and services agreement with BUYNOW under which we
will license technology, trademarks and domain names as well as provide certain
administrative and customer support services.
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 business model that includes outsourcing the majority of
our infrastructure to leading national distribution and fulfillment providers
with established expertise. Through this model, we capitalize on the cost
efficiencies achieved by our distribution providers 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.
Consistent with our merchandising strategy, we have started to raise prices
on many of our products. 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.
26
<PAGE>
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 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 advertising 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 advertising 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.
Results of Operations
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. 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 95.9 101.3
----- ----- -------- --------
Gross profit................ 5.2 1.4 4.1 (1.3)
----- ----- -------- --------
Operating expenses:
Sales and marketing........ 14.8 10.7 4.3 10.7
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 18.8
----- ----- -------- --------
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>
27
<PAGE>
We were formed in June 1997 and did not launch our Web site until November
1997, and, as a result, our results of operation for the year ended December
31, 1997 do not bear any significant relationship to our operating results for
the year ended December 31, 1998. The significant changes in operating results
for the year ended December 31, 1998 as compared to the year ended December 31,
1997 were primarily attributable to the duration and extent of our operations
in those periods.
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
$396.2 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, including shipping. Cost of goods
sold increased to $401.4 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 (1.3)%
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 and 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 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 $42.5 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 10.7% 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
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<PAGE>
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
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.
29
<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 $129,280 $158,960
Cost of goods sold..... 18,182 34,148 62,361 108,115 134,217 159,094
------- ------- -------- -------- -------- --------
Gross profit........... 1,051 837 (832) (183) (4,937) (134)
------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 1,370 2,151 9,264 12,322 14,459 15,672
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 23,123 32,300
------- ------- -------- -------- -------- --------
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 97.6 101.4 100.2 103.8 100.1
------- ------- -------- -------- -------- --------
Gross profit........... 5.5 2.4 (1.4) (0.2) (3.8) (0.1)
------- ------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 7.1 6.1 15.1 11.4 11.2 9.9
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 0.8 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 17.9 20.3
------- ------- -------- -------- -------- --------
Operating loss......... (6.3) (8.7) (21.7) (18.0) (21.7) (20.4)
------- ------- -------- -------- -------- --------
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) (21.7) (20.9)
Provision for income
taxes................. -- -- 0.0 -- -- 0.0
------- ------- -------- -------- -------- --------
Net loss............... (6.3)% (8.6)% (21.4)% (17.8)% (21.7)% (20.9)%
======= ======= ======== ======== ======== ========
</TABLE>
30
<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 business 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 providers 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
2,589,329 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 1,125,000 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 provide a
$17.0 million letter of credit as security for payment of the sponsorship fee.
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, phone 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, including
our non-information technology systems, is Year 2000 compliant.
Third Party Providers. 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.
32
<PAGE>
We are also entirely dependent on our distribution and fulfillment
providers to provide and distribute the merchandise we sell in our online
stores. We have initiated formal communications with all of our
distributors and fulfillment providers 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
providers to confirm that their systems are Year 2000 compliant. Although
we believe that our distributors and fulfillment providers 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 also
evaluated the Year 2000 compliance of ClientLogic, our customer service
and support providers, and Exodus Communications, our database server
host. We have obtained Year 2000 readiness disclosure statements from
ClientLogic, CyberSource and Exodus Communications verifying that their
systems are Year 2000 compliant. 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 approximately $50,000. 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. Although we have developed a worst case scenario plan concerning our
Year 2000 issues, we cannot be certain that this plan will be successful. Our
worst case scenario plan provides for the following:
. in the event we lose power, our facility has a standby generator that
will supply power to the building; and
. in the event we lose communication with our suppliers, we will deliver
our customers' orders to our suppliers through other means, including
overnight delivery, traditional mail, courier or facsimile.
33
<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, clearance products,
consumer electronics and golf related products at everyday low prices. Through
our eight online specialty stores, we offer more than 850,000 SKUs in a
convenient, easy-to-use shopping interface that features extensive product
information and multi-media presentations. Our e-commerce portal, www.buy.com,
links all of our eight specialty stores and is designed to enhance the
customer's online shopping experience 24 hours a day, seven days a week. We use
a business model that includes outsourcing the majority of our operating
infrastructure including distribution and fulfillment, customer service and
support, credit card processing and the hosting of our system infrastructure
and database servers. This business 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 companies
similar to our BUYTRAVEL.COM 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, 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
34
<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 online sale of computer hardware is
one of the largest domestic Internet retail opportunities for the consumer and
small office/home office market. 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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<PAGE>
. 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 Rapidly Increase 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 eight 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. The
rapid growth of our business has enabled us to become one of the top
five e-commerce providers, according to a number of industry studies.
. Highly Flexible Business Model. We use a business model that includes
outsourcing the majority of our operating infrastructure to leading
national distribution and fulfillment firms and other service providers
with established expertise. This business model allows us to make
adjustments 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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. Low Operating Costs. We minimize our infrastructure and operating
expenses by taking advantage of the cost efficiencies achieved by our
distribution and fulfillment providers. By keeping our costs low, we are
able to focus our efforts and resources on developing our brand name 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.
. 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 business 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 pricing 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 online 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 strategic
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
providers enable us to operate with significantly lower operating
expenses than many of our competitors. As our brand strengthens and we
add additional products and services, we believe we will be able to
capture even greater efficiencies while improving gross margins
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on existing products. We will continue to modify our pricing strategy to
maintain a group of aggressively 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 expect to 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
Providers to be a Low Cost Supplier. We plan to continue to work with
our distribution and fulfillment providers 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 providers. 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
business model will enable us to pursue this large market without
significant investment by aligning ourselves 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 recently launched BUY.COM Canada and 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 eight
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 structure also allows
customers to click on the designated category or subcategory to go to
the desired location immediately.
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. 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. We also provide updated
product information for each of our online stores to indicate product
availability and the approximate amount of time until a particular
product will be shipped. When 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 24
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, and 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 regarding the status of their orders and to follow up
after the order has been received by the customer.
. Obtaining Assistance. Customers can access online assistance 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 eight 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 establish a relationship 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.
. 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.
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. 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 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 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 vendors to ensure that this store's product selection
serves to complement our other online stores.
. BUYELECTRONICS.COM. This store was launched in November 1999 and offers
brand name consumer electronic products, including cameras, DVD players,
telephones and televisions. This store offers detailed product
descriptions and customer reviews. In addition, customers may browse by
product category, reviewing other top selling products or by reviewing
new products offered for sale.
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. Currently, the BuyGolf.com online store is linked to our online
specialty stores through several links. We intend to launch a new BUYGOLF.COM
specialty store in the first quarter of 2000 that will have a similar look and
feel to our other online specialty stores.
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, marketing and
advertising sales support by our personnel, systems and technology support by
our development personnel, and credit card processing services through our
third party vendors. Under the agreement, United will provide availability to
all of its fares, including all excess inventory or E-fares. 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 1,250,000 shares of our common stock at an exercise
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price of $16.00 per share. The BUYTRAVEL.COM operating agreement requires both
parties to approve various matters related to corporate governance including
approval of the annual budget and business plan, material expenditures, the
sale or purchase of material assets, the admission of new members, the
dissolution of the company, electing or removing the Chief Executive Officer of
the company and changing the number of directors of the company. 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. We intend to launch the BUYTRAVEL.COM
service during the first quarter of 2000.
Recent Acquisition of BuyGolf.com
On October 25, 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, including golf clubs, bags, balls, shoes, clothes and
memorabilia. 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 and subject to the PGA
TOUR's existing contractual relationships, we also have a non-exclusive right
to open a branded PGA TOUR shop on our Web site. In addition, the PGA TOUR has
agreed that we will be the only online store authorized to operate the BUY.COM
Tour online store. In consideration for this sponsorship agreement, we issued
the PGA TOUR 1,125,000 shares of our common stock and agreed to pay $8.5
million upon the completion of this offering and to provide a $17.0 million
letter of credit as security for payment of the sponsorship fee. The letter of
credit will be secured by a cash account and will terminate in December 2001.
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 distributors
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. These letters of intent may be terminated by
either party if definitive agreements have not been executed by March 2000 for
the joint ventures in the United Kingdom and continental Europe and by June
2000 for the joint venture in Japan.
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Distribution Network
We believe that the ability to maintain a primarily outsourced operating
infrastructure is key to an efficient and profitable e-commerce model. As part
of this strategy, we have entered into relationships with leading distributors
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, Nashville Computer Liquidators for our
clearance products and Las Vegas Golf & Tennis for our golf-related products.
These distributors carry a vast inventory of products located in warehouses
throughout the country from which products are picked, packed and shipped
directly to our customers or our national fulfillment provider. Through this
system, we have been highly effective at leveraging the inventory management
and fulfillment capabilities of each of our providers 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 $22.0 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 that a particular product is available
at the time an order is placed. In addition, we believe we receive
favorable pricing for the products we purchase based on our commitment
to meet annual sales targets. 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. We believe we receive favorable pricing from
Ingram Entertainment based on the quantity of products that we purchase.
Ingram Entertainment is a leading distributor of videos, video games,
DVD hardware and software and audio books, with net sales of over $1.0
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 some
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.
In October 1999, we entered into a binding term sheet with Ingram
Entertainment to purchase from a third party supplier, on our behalf, and
ship the consumer electronic products that we sell in our electronics
store. In connection with this purchase and fulfillment relationship, we
intend to provide a $3.4 million letter of credit. Ingram Entertainment
may terminate this agreement for any reason upon 90 days prior written
notice.
. 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 $780.0 million for
1998. Valley Media is solely responsible for the order fulfillment and
distribution of these pre-recorded music products. Valley Media has
agreed to ship priority orders that have been received by 10:00 a.m.
Pacific Time on the same day, and orders received after 10:00 a.m. will
be shipped the following business day; standard priority orders received
by 1:00 p.m. Pacific Time are shipped on the next business day and those
orders received after 1:00 p.m. will not be shipped until the second
business day after the order is received. In addition, Valley Media has
agreed to sell their products
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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 and there are no provisions providing for the automatic
renewal of these agreements. We issued a warrant to Harpeth Holdings
Inc., an affiliate of the Ingram Book Company, to purchase 625,000
shares of our common stock at $9.07 per share in consideration for these
agreements.
. 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.
They have also agreed that all orders received by 12:00 p.m. Central
Time will be shipped on the same business day. Orders received after
12:00 p.m. Central Time will be shipped on the following business day.
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.
. Las Vegas Golf & Tennis, Inc. In May 1999, we entered into an agreement
with Las Vegas Golf & Tennis through which they have agreed to be our
primary source of the golf equipment, accessories and the other golf-
related merchandise that we sell. This agreement expires in May 2000,
however, either party may terminate the agreement for any reason upon 60
days prior written notice. In September 1999, we amended this agreement,
to be effective in April 2000, to modify our payment structure. The
amended agreement expires in March 2003, but is subject to automatic two
year renewal periods. BuyGolf.com issued 540,000 shares of its common
stock to Las Vegas Golf & Tennis in May 1999 in consideration for these
agreements. These shares were exchanged for 175,500 shares of our common
stock upon the completion of our acquisition of BuyGolf.com.
By using a secure electronic connection with each of our providers, 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 providers
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
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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 distributors. 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 our 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 providers. 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 name brand and the breadth and depth of our
product selection in our online stores enable us to pursue unique merchandising
and pricing strategies. Because 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.
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 eight 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; and
. raising prices on selected products. Since June 1999, we have raised
prices on selected products to refine our pricing strategy and increase
our gross margins. For some of these products the increase in price did
not result in any decline in sales volumes. However, for other products
sales volumes declined. By
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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, we organize our products into particular
categories. For example, our online bookstore is divided into multiple subject
areas, including fiction, non-fiction and romance, and our online computer
store includes 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, several of our online stores contain a top 25 list of products for
sale, identify selected "great buys" and highlight a combination of other
featured offers, including new releases and coming attractions. Products can
also be located 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, 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.
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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 business model strategy and enhance our ability to scale our
operations quickly, we have outsourced our first level customer support to
ClientLogic, a provider of customer service support to such technology
organizations as Dell, E*Trade, Microsoft and others. 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 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. We have
entered into a four year contract with ClientLogic. This contract may be
terminated by either party for any reason upon 30 days written notice. However,
if we terminate the contract without cause, we are obligated to pay a
termination fee.
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 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 and other servers. 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 and other 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 operating strategy, in June 1998 we entered into an
agreement to outsource the hosting of our Web servers to an Internet data
center specialist, Exodus Communications, which maintains an extensive
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national network. 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. Our
one year agreement with Exodus provides for automatic one year renewal periods,
but allows either party to terminate the agreement for any reason upon 30 days'
prior written notice.
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, consumer electronics, golf
related products and other entertainment products. Moreover, all of the
products we sell in our online stores are available through traditional and
catalog retailers. Consequently, we must compete with companies in the e-
commerce market as well as the traditional retail industry.
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 and Egghead.com; 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.
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Our current or potential competitors with respect to consumer electronics
include, but are not limited to:
. traditional consumer electronic retailers such as Best Buy and Circuit
City; and
. online retailers of consumer electronics such as Amazon.com and 800.com.
Our current or potential competitors with respect to golf related products
include, but are not limited to:
. traditional golf retailers such as Edwin Watts and Roger Dunn Golf Shops;
and
. online retailers of golf products such as chipshot.com and igogolf.com.
We also expect to experience significant competitive pressure if any of our
distributors 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.
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. Although we believe that we compete favorably with
respect to these factors, several of our competitors may have an advantage
over us with respect to specific factors. In addition, 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.
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,
BUYELECTRONICS.COM, BUYGAMES.COM, BUYGOLF.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.
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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 February 1999, a computer monitor was mistakenly priced on our
Web site. After we learned of the error, we contacted our customers and
cancelled all orders placed at the incorrect price except for those that had
already been shipped. Each affected customer received a full refund. Three
weeks after the error occurred, 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. Eleven days later, a
similar class action case was filed in Camden County, New Jersey. Both actions
claim that we intentionally mispriced the monitors as a scheme to cause more
people to visit our site. Plaintiffs also claim that we attempted the same
scheme with other products. The plaintiffs are seeking compensatory and
punitive damages in addition to injunctive relief. Neither action sets forth
the amount of damages sought by the plaintiffs. 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.
Our insurer has agreed to defend both cases with a reservation of rights,
and coverage may be available for some or all of the claims made by plaintiffs.
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.
We have been contacted by the Federal Trade Commission regarding our
advertisement concerning a particular computer system promotional campaign. We
are cooperating with the FTC in its inquiry, and we do not expect the results
of the inquiry to have a material impact on our business.
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.
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MANAGEMENT
Executive Officers and Directors
The following table provides information with respect to our directors,
executive officers and certain of our significant employees as of December 1,
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............. 40 Chief Financial Officer
Keven F. Baxter........... 40 Vice President, Corporate Affairs and General
Counsel
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, New Business Development
William L. Burnham........ 28 Director
David B. Ingram........... 36 Director
Donald M. Kendall(1)...... 78 Director
Charles W. Richion........ 63 Director
James B. Roszak(2)........ 58 Director
Edward S. Russell(2)...... 39 Director
John Sculley(2)........... 60 Director
Wayne T. Thorson(1)....... 73 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) 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 has been our Chief Financial Officer since November 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. From 1987 to 1991, Mr. Hill worked as an
associate in the investment banking group at Goldman, Sachs & Co. 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.
Keven F. Baxter has been our Vice President, Corporate Affairs and General
Counsel since November 1999. From January 1999 to November 1999 Mr. Baxter
practiced corporate and securities law in the Business and Technology Group of
Brobeck, Phleger & Harrison LLP. From June 1995 to December 1998 Mr. Baxter
served in several management roles at Interplay Entertainment Corp., a software
publisher, including Vice President, Corporate Affairs and General Counsel.
From 1988 to 1994, Mr. Baxter practiced corporate and securities law at
Brobeck, Phleger & Harrison LLP. Mr Baxter received his B.A. in Economics from
the University of California, Santa Barbara and his M.B.A. and J.D. from the
University of California, Berkeley.
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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 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, New Business Development
since December 1999. Prior to that, Mr. Williams served as our Vice President,
Finance from November 1998 to December 1999 and 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.
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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.
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 2001 annual meeting
of stockholders. Messrs. , and will serve as Class II
Directors whose terms expire at the 2002 annual meeting of stockholders.
Messrs. , and will serve as Class III Directors whose terms
expire at the 2003 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.
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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 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 4,542,281 shares of our common stock at an exercise price
of $3.83 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 1,022,015 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 commenced his employment as our Chief Financial Officer on
November 1, 1999. Mr. Hill's base salary is $220,000 per year, and he was
granted an option to purchase 1,223,871 shares of our common stock at an
exercise price of $9.14 per share, the fair market value on the grant date. 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 any options that
would otherwise vest in the subsequent twelve month period.
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.
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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.
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 -- 468,750
Vice President, Sales and
Operations
Murray H. Williams.............. 67,500 60,203 3,000(4) 703,125
Vice President, New Business
Development
</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 4,542,281 shares at an
exercise price of $3.83 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 became our Chief Financial Officer in November 1999. Mr. Hill's
annual salary for 1999 is $220,000 and we granted Mr. Hill an option to
purchase 1,223,871 shares of common stock at an exercise price of $9.14
per share.
(4) Consists of automobile lease payments.
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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............ 468,750 4.2% $0.01 $1.64 06/01/08 $764,063 $1,247,527 $1,989,252
Murray H. Williams...... 468,750 4.2% $0.01 $0.01 02/09/08 -- $ 2,948 $ 7,471
234,375 2.1% $0.01 $1.64 06/01/08 $382,031 $ 623,766 $ 994,626
</TABLE>
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 right of repurchase for Mr. Rusick's shares lapses over a
three year period. Our right of repurchase for Mr. Williams' shares lapses
equally over a three year period as to 468,750 shares. As for his remaining
234,375 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. Hill's employment with us in November 1999, he was
granted an option to purchase an aggregate of 1,223,871 shares of common stock
at an exercise price of $9.14 per share. All of these shares are immediately
exercisable and 911,371 shares are subject to our right of repurchase. This
repurchase right lapses with respect to 117,049 of such shares upon the
completion of Mr. Hill's first year of service and with respect to the
remaining shares in equal monthly installments over the subsequent three year
period.
Upon commencement of Mr. Hawkins' employment with us in March 1999, he was
granted an option to purchase an aggregate of 4,542,281 shares of common stock
at an exercise price of $3.83 per share. All of these options are immediately
exercisable, and 4,088,053 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; 454,228 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
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$11.00 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................ 468,750 -- $5,151,563 --
Murray Williams............. 703,125 -- $7,727,344 --
</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 21,587,475 shares of common stock have been authorized and reserved
for issuance under the 1998 plan. As of October 15, 1999, options to purchase
an aggregate of 18,809,540 shares were outstanding and 797,934 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
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<PAGE>
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.
All outstanding options under the 1998 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.
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 325,000 shares of our common stock has been set aside
for issuance under the assumed BuyGolf plan. As of December 1, 1999, options
for 162,175 shares of common stock were outstanding under the assumed BuyGolf
plan, and 162,825 shares remained available for future issuance. We do not
intend to grant any new options under the BuyGolf plan.
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 3,125,000
shares of our common stock has been set aside for issuance under the executive
plan. As of October 15, 1999, options for 1,695,746 shares of common stock were
outstanding under the executive plan, and 1,429,253 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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
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<PAGE>
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 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
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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.
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.
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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, some amendments may require stockholder approval.
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.
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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;
. for payment of dividends or approvals of stock repurchases or
redemptions that are unlawful under 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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RELATED PARTY 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. These related party transactions were each
negotiated at an arms length basis and were on no less favorable terms to us
than would have been given to a third party. Furthermore, for each sale or
other issuance of securities to a related party, the shares were sold at the
then current fair market value determined in good faith by the Board of
Directors.
Sales of Securities
In June 1997, BuyComp, LLC, a California limited liability company and our
predecessor, issued 9,000,000 ownership units to Scott and Audrey Blum in
exchange for $50,000. In August 1998, we issued 81,331,078 shares of common
stock to the Scott A. Blum Separate Property Trust u/d/t 8/2/95 ("The Blum
Trust") in exchange for approximately 96% 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) 3,043,921 shares of Series A convertible
participating preferred stock to The Blum Trust in exchange for approximately
4% of Scott and Audrey Blum's interest in BuyComp, LLC.; and (ii) 9,131,784
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 $1.64 per share. The Blum Trust sold a total of 3,043,921
shares of Series A convertible participating preferred stock to SOFTBANK
Technology Ventures IV L.P. and SOFTBANK Technology Advisors Fund L.P. at $1.64
per share, and in September 1998, a total of 10,456,771 shares of common stock
to SOFTBANK Holdings, Inc., SOFTBANK Ventures, Inc. and SOFTBANK Contents Fund
at $3.83 per share. In connection with the SOFTBANK affiliates' investment,
they entered into an investors' rights agreement that provides for, among other
things, registration rights and rights of first offer to purchase common stock
upon our issuance of additional securities.
In December 1998, we issued a total of 5,529,571 shares of common stock, for
an aggregate purchase price valued at approximately $9.1 million, to Ingram
Entertainment, Inc. and the other two stockholders of SpeedServe, Inc. in
consideration for our acquisition of all of the outstanding capital stock of
SpeedServe. In connection with this acquisition, our wholly-owned subsidiary,
BUY.COM ENTERTAINMENT Inc., entered into various agreements with Ingram
Entertainment Inc. and a non-competition agreement with David Ingram. David
Ingram, who is one of our directors, is a majority stockholder, Chairman and
President of Ingram Entertainment Inc. Mr. Ingram is also a minority
stockholder of Ingram Micro, our largest distributor.
The material ancillary agreements between Ingram Entertainment and BUY.COM
ENTERTAINMENT as a part of our acquisition of SpeedServe included a non-
competition agreement, a voting agreement, a system use agreement, an
intercompany services agreement, a supply agreement, a sublease, a database
license agreement and a rebranding agreement. These agreements primarily
facilitated the transition of SpeedServe's existing business relationships with
Ingram Entertainment to BUY.COM ENTERTAINMENT. Ingram Entertainment also
entered into an investors' rights agreement that provides for, among other
things, registration rights and rights of first offer to purchase common stock
upon our issuance of additional securities, and a stockholders agreement, which
will terminate upon the completion of this offering.
Between March 1999 and July 1999, we issued a total of 90,590 shares of
common stock to Ingram Entertainment Inc., for an aggregate purchase price of
approximately $563,000, 222,440 shares of common stock to SOFTBANK Technology
Ventures IV, L.P. for an aggregate purchase price of approximately
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$1.4 million and 4,265 shares to SOFTBANK Technology Advisors Fund, L.P. for an
aggregate purchase price of approximately $26,000 in connection with their
exercise of a contractual right of first offer to purchase shares of our common
stock, based upon their percentage ownership, upon our issuance of additional
securities to third parties. These rights of first offer do not apply to, and
will terminate upon the completion of this offering. Edward S. Russell, who is
one of our directors, is a General Partner of these SOFTBANK Technology
Ventures funds.
In October 1999, we issued 9,923,277 shares of our Series B convertible
participating preferred stock at a purchase price of $9.07 per share to a group
of investors led by SOFTBANK Capital Partners L.P. and its affiliates. In this
financing, The Blum Trust also sold an aggregate of 8,242,937 shares of our
common stock to SOFTBANK Capital Partners L.P. and its affiliates at a purchase
price of $9.07 per share.
Transactions with Ingram Micro and Ingram Entertainment
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 connection with our acquisition of SpeedServe in December 1998, we
entered into a supply 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 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 2,589,329 of common stock, for an
aggregate purchase price of approximately $23.5 million in connection with our
acquisition of BuyGolf.com, Inc. Both Scott Blum and David Ingram were
directors of BuyGolf.com. Ingram Entertainment 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 272,658 shares of our common stock in the
merger.
In October 1999, we entered into a binding term sheet with Ingram
Entertainment to purchase, from a third party supplier on our behalf, and ship
the consumer electronic products that we sell in our electronics store. In
connection with this purchase and fulfillment relationship, we intend to
provide a $3.4 million letter of credit.
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. This loan was repaid in full in September 1998. 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. This loan was repaid in
October 1998. 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.
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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 62,107,790 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 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 ours
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 28,125 shares of
common stock from one of our employees at a purchase price of $3.83 per share.
Under the terms of the voting trust agreement, these shares are excluded from
the voting trust.
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.,
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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 on a
pro rata basis. In the pro rata dividend among all of our stockholders, Murray
Williams, our Vice President, New Business Development, received 467,764
shares, Robb Brock, our Vice President, Technology, received 207,750 shares,
each of Messrs. Kendall, Richion, Roszak, Sculley and Thorson, directors of
BUY.COM received 434,800 shares, an Ingram Capital, Inc. and Ingram
Entertainment, of which Mr. Ingram is affiliated, received an aggregate of
3,297,450 shares. 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.
The Certificate of Incorporation of BUYNOW INC. provides that the number of
directors be set at five and that the holders of the Series A Preferred Stock
are entitled to elect three directors, provided that one director must be a
representative of SOFTBANK, and the holders of common stock are entitled to
elect two directors.
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. In addition, we have agreed to provide limited
customer support and system support to BUYNOW INC.
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. For a more complete discussion of our international joint ventures
please refer to "Business-- International Joint Ventures."
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PRINCIPAL STOCKHOLDERS
The following table indicates information as of December 1, 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 115,140,179 shares of common stock outstanding
as of December 1, 1999, assuming the conversion of all outstanding shares of
preferred stock into common stock, which will occur automatically upon the
consummation of this offering, and 129,140,179 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 December 1, 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)...................... 62,107,790 55.6% 48.1%
SOFTBANK Affiliates
William L. Burnham(3)................... 24,239,435 21.8 18.8
Edward S. Russell(4).................... 14,055,844 12.6 10.9
Total SOFTBANK Affiliates(5)............ 38,295,279 34.4 29.7
David B. Ingram(6)........................ 5,115,974 4.6 4.0
Gregory J. Hawkins(7)..................... 4,542,281 3.9 3.4
Mitch C. Hill(8).......................... 1,223,871 1.1 1.0
Brent Rusick(9)........................... 937,500 * *
Murray H. Williams(10).................... 703,125 * *
Donald M. Kendall(11)..................... 308,840 * *
Charles W. Richion(11).................... 308,840 * *
James B. Roszak(11)....................... 308,840 * *
John Sculley(11).......................... 308,840 * *
Wayne T. Thorson(11)...................... 308,840 * *
All directors and officers as a group
(16 persons)(12)(13)..................... 117,055,957 93.6% 84.2%
</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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(3) Includes 10,741,323 shares, 2,091,356 shares, 3,137,025 shares, 8,151,474
shares and 118,257 shares held by SOFTBANK America, Inc., SOFTBANK
Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Capital Partners L.P. 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.
(4) Includes 12,980,425 shares, 248,706 shares and 792,158 shares, 21,576
shares and 12,979 shares held by SOFTBANK Technology Ventures IV, L.P.,
SOFTBANK Technology Advisors Fund, L.P., SOFTBANK Technology Ventures V,
L.P., SOFTBANK Technology Advisors Fund V, L.P. and SOFTBANK Technology
Entrepreneurs Fund V, L.P. 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.
(5) Includes 10,741,323 shares, 2,091,356 shares, 3,137,025 shares, 12,980,425
shares, 248,706 shares, 8,151,474 shares, 118,257 shares, 792,158 shares,
21,576 shares and 12,979 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 Advisors Fund V and
SOFTBANK Technology Entrepreneurs Fund V, respectively.
(6) Includes 4,866,009 shares held by Ingram Capital, Inc. and 90,590 shares
held by Ingram Entertainment Inc. Mr. Ingram is the majority stockholder
of Ingram Entertainment Holdings, Inc., which is the parent corporation of
Ingram Capital, Inc. and Ingram Entertainment, Inc. Mr. Ingram disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest. Also includes 159,375 shares issuable upon exercise of
an option that is exercisable within 60 days of December 1, 1999.
(7) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of December 1, 1999. This amount also includes
a total of 277,115 shares of common stock, subject to an option, that has
been transferred to irrevocable trusts on behalf of Mr. Hawkins' children
and his family.
(8) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of December 1, 1999. This amount also includes
a total of 250,000 shares of common stock subject to an option that has
been transferred to five irrevocable trusts for the benefit of each of Mr.
Hill's children.
(9) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of December 1, 1999.
(10) This amount includes 660,938 shares of common stock that have been
transferred to the Murray Williams Separate Property Trust and a total of
42,187 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 178,125 shares issuable upon exercise of an option that is
exercisable within 60 days of December 1, 1999. Does not include
62,107,790 shares of common stock that are held in a voting trust for
which such person is a trustee. However, no single trustee has the power
to vote such shares. The voting trust agreement requires the approval of
at least two trustees to vote the shares.
(12) Includes 9,992,714 shares issuable upon exercise of options that are
exercisable within 60 days of December 1, 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 "Related Party Transactions--
Transactions with Scott Blum and His Immediate Family."
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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 990,000,000 shares of common stock, par value $0.0001, and 10,000,000 shares
of preferred stock, par value $0.0001.
Common Stock
Currently, we are authorized to issue 850,000,000 shares of common stock. At
December 1, 1999, 115,140,179 shares of common stock were deemed outstanding
and held of record by approximately 55 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 12,175,705 shares of our Series A
convertible participating preferred stock and 9,923,277 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 10,000,000 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 shares based on its
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<PAGE>
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 Chairman of the Board; or
. a majority of the entire Board.
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
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<PAGE>
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 77.8% of our common stock on significant stockholder actions,
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 "Related
Party Transactions--Transactions with Scott Blum and His Immediate Family."
Options
As of December 1, 1999, options to purchase a total of 22,068,790 shares of
common stock were outstanding, and up to 825,735 additional shares of common
stock may be subject to options granted in the future under the 1999 Stock
Incentive Plan. For a more complete discussion of our stock option plans,
please see "Employee Benefit Plans."
Warrants
In July 1999, we issued a warrant to United Air Lines to purchase 1,250,000
shares of common stock at an exercise price of $16.00 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 61,364 shares of common stock at an exercise price of $11.00. 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 625,000 shares of common stock at an
exercise price of $9.07 per share. This warrant may be exercised at any time
and expires in December 2001.
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<PAGE>
Registration Rights
After this offering, holders of approximately 97,529,482 shares of common
stock will be entitled to registration rights with respect to their shares.
Beginning 180 days after this offering, these holders may 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 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
1,250,000 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 129,140,179 shares of common
stock outstanding assuming no exercise of options after December 1, 1999. Of
this amount, the 14,000,000 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, 92,771,658 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 14,000,000 Freely tradable shares sold in this
effectiveness..... offering
90 days............ 15,684 Shares saleable under Rule 144 that
are not subject to 180-day lock-up
180 days........... 92,771,658 Lock-up released; shares saleable
under Rule 144, 144(k) or 701
</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 the limitations imposed by 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
December 1, 1999, the holders of options to purchase approximately 20,505,286
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
24,712,475 shares of common stock subject to outstanding stock
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<PAGE>
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 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 approximately 97,529,482 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 1,936,364 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., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc. 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 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.............................................
U.S. Bancorp Piper Jaffray Inc....................................
----------
Total........................................................ 14,000,000
==========
</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 some 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 specified liabilities,
including some 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 legal matters by counsel for the underwriters and other
conditions set forth in the purchase agreement. 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 selected
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 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 $1,600,000 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 2,100,000
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 specified
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 our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered hereby to be sold to
some of our directors, officers, employees, distributors, dealers, business
associates and related persons. 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 a few 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
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<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, 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 "BUYX."
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 some selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
selected 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 some underwriters and
selling group members under limited circumstances. 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 adverse effect on the price of our common stock to the
extent that it discourages resales of our common stock by selling group
members.
Neither we nor any of the underwriters can predict 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.
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<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.
79
<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
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30,
1999.................................................................... PF-3
</TABLE>
F-1
<PAGE>
After the reverse stock split discussed in Note 13 to BUY.COM INC.'s
consolidated financial statements is effected, we expect to be in a position to
render the following audit report.
/s/ Arthur Andersen LLP
Orange County, California
December 14, 1999
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.
Orange County, California
October 26, 1999 (except with respect to the matters discussed in NOTE 13, as
to which the date is , 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)
(note 8)
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash......................................... $ 34 $ 9,221 $ 3,231 $ 93,231
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--12,175,705 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--86,860,650 at
December 31, 1998, 89,326,743 at
September 30, 1999, and 111,425,725
pro forma (unaudited)....................... -- 9 9 11
Additional paid-in capital................... -- 9,664 30,607 135,548
Deferred compensation........................ -- (2,439) (8,088) (8,088)
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) (15,542) (96,069) (96,069)
--------------- ---------------- --------------- ---------------
Total stockholders' equity (deficit)....... (340) 6,635 (58,598) $ 31,402
--------------- ---------------- --------------- ---------------
$ 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 $ 396,172
Cost of goods sold....... 832 123,527 61,165 401,426
---------- ---------- ---------- ------------
Gross profit (loss)...... 46 1,763 2,596 (5,254)
Operating expenses:
Sales and marketing..... 130 13,430 2,770 42,453
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 74,623
---------- ---------- ---------- ------------
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) $ (0.22) $ (0.06) $ (0.91)
Weighted average number
of common shares
outstanding:
Basic and diluted...... 81,331,078 81,815,869 81,331,078 88,634,048
Pro forma (note 8):
Net loss per share:
Basic and diluted...... $ (0.73)
Weighted average number
of common shares
outstanding:
Basic and diluted...... 110,733,030
</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)
Allocation of
accumulated loss
to paid-in
capital......... -- -- -- -- -- -- (2,692) -- 2,692 --
Issued Series A
preferred
stock........... -- -- 3,043,921 2 -- -- -- -- -- 2
Issued common
stock........... -- -- -- -- 81,331,078 8 40 -- -- 48
Issuance of
Series A
preferred stock
for cash......... -- -- 9,131,784 14,941 -- -- -- -- -- 14,941
Issuance of
common stock for
acquisition of
Speedserve....... -- -- -- -- 5,529,571 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......... -- -- 12,175,705 14,943 86,860,649 9 9,664 (2,439) (15,542) 6,635
Exercise of stock
options for
cash............. -- -- -- -- 1,979,989 -- 21 -- -- 21
Issuance of
common stock for
cash............. -- -- -- -- 317,296 -- 1,974 -- -- 1,974
Common stock
issued for
purchases of
domain names for
cash and common
stock............ -- -- -- -- 168,809 -- 861 -- -- 861
Issuance of
warrants for
supply and debt
agreements....... -- -- -- -- -- -- 7,021 -- -- 7,021
Deferred
compensation
related to stock
options granted.. -- -- -- -- -- -- 11,066 (11,066) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 5,417 -- 5,417
Net loss......... -- -- -- -- -- -- -- -- (80,527) (80,527)
---------- ---- ---------- ------- ---------- ---- ------- -------- -------- --------
Balance,
September 30,
1999
(unaudited)...... -- $ -- 12,175,705 $14,943 89,326,743 $ 9 $30,607 $ (8,088) $(96,069) $(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, music, clearance equipment, golf related products and consumer
electronics. Through eight 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 eight 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
business model that includes outsourcing the majority of its operating
infrastructure, such as distribution and fulfillment functions, customer
service and support, credit card processing, and the hosting of the Company's
system infrastructure and database servers.
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. The Company has arranged with its
vendors that goods sold to customers are shipped directly from vendor warehouse
facilities. BUY.COM typically does not bill customers' credit cards until the
Company has received confirmation from the applicable vendors that the goods
have been shipped.
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 using the effective interest method 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, coupon
redemption 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. In certain cases, credit card companies require the
Company to charge customers' credit cards to obtain authorization. In such
cases, the Company defers revenue recognition until it has confirmed shipment
of the applicable goods to the customer.
The Company recognizes revenue from advertising sales ratably over the term
of the advertising campaigns, which usually range from one to twelve months. To
the extent that advertising customers have paid the Company for advertisements
that have yet to be published on the Company's web site, the Company defers
revenue recognition until such advertisements are delivered.
F-9
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
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
F-10
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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
F-11
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 acquisition was approximately
$9.1 million. The consideration for the acquisition consisted of 5,529,571
shares of the Company's common stock, with an estimated value of $1.64 per
share based upon the fair value of the Company's common stock as determined by
concurrent equity transactions with unrelated parties. 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 2,589,329 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. The common stock
issued had an estimated fair market value of $9.07 per share determined by
concurrent equity transactions with unrelated parties. 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 Nine months ended
to December 31, 1997 December 31, 1998 September 30, 1999
------------------------ ----------------- ------------------
<S> <C> <C> <C>
Net revenues............ $ 992 $ 126,568 $397,157
Net loss................ $ 2,319 $ 22,519 $ 96,188
Basic and diluted
weighted average net
loss per share......... $ (0.03) $ (0.28) $ (1.09)
</TABLE>
The pro forma net losses include amortization of goodwill and purchased
intangibles of approximately $1.6 million, $2.8 million and $8.1 million for
the period ended December 31, 1997, the year ended December 31, 1998, and the
nine month period ended September 30, 1999, 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
F-12
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, as an incentive to
execute this agreement, the Company granted UA a warrant to purchase 1,250,000
shares of the Company's common stock at an exercise price of $16.00 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 fair market value
of these warrants was estimated using the Black-Scholes pricing method using
the following assumptions: fair value of the Company's common stock, of $5.71;
risk-free interest rate of 6.00%; expected life of 5.00 years; volatility of
85.00%; and dividend yield of 0.00%. The fair value of the Company's common
stock was based upon equity transactions with unrelated parties. The BuyTravel
operating agreement requires both parties to approve various matters related to
corporate governance. In the event the Company and UA are unable to agree on
these matters, 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. It is the
intention of the parties that the Company will maintain sufficient voting
control such that it will consolidate these joint ventures.
Domain Name Transactions
During 1999, the Company entered into several agreements to purchase
internet domain names. Domain names were purchased in various transactions for
168,809 shares of the Company's common stock the fair value of which was
estimated based upon concurrent equity transactions with non-related parties,
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.
F-13
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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>
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. This fee was
allocated to deferred financing costs and amortized using the effective
interest rate method as interest expense over the expected term of the related
debt. Additionally, the Company issued warrants to the bank 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 expected term 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.
F-14
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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>
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. This agreement expires
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 notice.
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.
F-15
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. This
agreement expires in February 2001, but is subject to automatic one-year
renewal periods. This agreement may be terminated by the vendor if they
discontinue sales to on-line vendors.
On March 11, 1999, the Company entered into agreements to outsource certain
services and functions related to the fulfillment of customer orders made on
the Company's BuyBooks.com web site. These agreements expire in September 2003.
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.
In April 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. This agreement expires in April 2001, but is
subject to automatic one-year renewals. This agreement may be terminated if the
Company does not meet certain minimum credit terms.
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 625,000 shares of the Company's common stock at an exercise price of
$9.07 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. The Company computed the fair value of the
warrants using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 0.0%; expected volatility of
85.00%; risk-free rate of 6.00%; and expected lives of 2.00 years.
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. As partial consideration for this agreement, the
Company issued 1,125,000 shares of common stock valued at $9.07 per share,
aggregating $10.2 million. 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. In accordance with the terms of the
agreement, the 1,125,000 shares of common stock are subject to a repurchase
option at a nominal amount.
In October 1999, the Company declared a common stock dividend of 75% of the
capital stock, on an as converted basis, of one of its wholly-owned
subsidiaries, BUYNOW INC., to its stockholders. BUYNOW provides contract e-
commerce service, including order fulfilment and credit card processing, to its
customers. 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.
F-16
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. Neither action
sets forth the amount of damages plaintiffs seeks and such loss is not
reasonably estimated by the Company.
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 stock ("Series A Preferred
Stock"). The 9,000,000 issued membership units of the LLC converted into
81,331,078 shares of $0.0001 par value common stock and 3,043,921 shares of
$0.0001 par value Series A Preferred Stock.
Each share of preferred stock is convertible into one share of the Company's
common stock (subject to antidilution protections) and is convertible at the
option of the holder or automatically upon the consummation of a corporate
transaction that meets certain minimum conditions. Subsequent stock has
liquidation preferences over common stock and accrued dividends only if
declared.
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
this stock split and the reverse stock split that is expected to occur prior to
initial public offering of the Company's common stock (See note 13).
F-17
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 9,131,784 shares of Series A Preferred Stock for cash of $14.9 million
paid to the Company. Additionally, SOFTBANK received 3,043,921 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 and certain of its affiliates received 9,923,277 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) and Loss Per Share
Concurrent with the consummation of an initial public offering of the
Company's common stock as defined by the Preferred Stock Purchase Agreement,
the Company will cause the conversion of all existing Series A and Series B
Preferred Stock into common stock. Based on preferred stock outstanding as of
October 26, 1999, 22,098,982 shares of the Company's common stock will be
issued upon conversion of all preferred stock then outstanding. The unaudited
pro forma stockholders' equity (deficit) at September 30, 1999 gives effect to
this conversion. Unaudited pro forma loss per share gives effect to the
conversion of 12,175,705 Series A preferred shares outstanding as of September
30, 1999, and 9,923,277 Series B preferred shares issued in October 1999, as if
such shares were outstanding on January 1, 1999.
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 21,587,475 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 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 ratably over three to four years from the date of grant.
Subject to Internal Revenue Service limitations, options granted under the
1998 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-18
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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... -- $ -- 2,109,375 $0.02 14,539,652 $1.65
Granted.............. 2,109,375 0.02 12,430,277 1.94 7,504,472 4.64
Exercised............ -- -- -- -- (1,979,999) 0.02
Forfeited/expired.... -- -- -- -- (939,844) 2.53
--------- ----- ---------- ----- ---------- -----
Options outstanding,
End of period........... 2,109,375 $0.02 14,539,652 $1.66 19,124,281 $2.96
========= ===== ========== ===== ========== =====
</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>
$ 0.02 5,088,735 9.48 $0.02 1,939,619 $0.02
$ 1.64 1,148,437 9.69 $1.64 285,112 $1.64
$ 3.81 to $3.83 11,828,034 7.83 $3.83 -- --
$ 6.78 to $9.14 1,059,075 9.50 $8.82 -- --
---------- ---------
19,124,297 2,224,731
========== =========
</TABLE>
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) $ (0.22) $ (0.06) $ (0.91)
Basic and diluted net loss
per share, pro forma....... $(0.00) $ (0.22) $ (0.06) $ (0.84)
</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
$0.002, $0.53 and $0.86, 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.
F-19
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On March 1, 1999, 6,014,147 common stock options were approved by the Board
of Directors for grants to employees from the Company's 1998 ISO Plan. Of the
additional 6,014,147 stock options approved, 4,542,281 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 3,125,000 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.
The 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
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.
F-20
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
10. Loss Per Share
The following is the calculation for net loss per share (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>
Basic:
Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527)
Weighted average common
shares................. 81,331,078 81,815,869 81,331,078 88,634,048
----------- ----------- ----------- -----------
Net loss per common
share.................. $ (0.00) $ (0.22) $ (0.06) $ (0.91)
=========== =========== =========== ===========
Diluted:
Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527)
Weighted average common
shares................. 81,331,078 81,815,869 81,331,078 88,634,048
Stock options
adjustment............. -- -- -- --
Convertible preferred
stock adjustment....... -- -- -- --
----------- ----------- ----------- -----------
Average common shares
outstanding............ 81,331,078 81,815,869 81,331,078 88,634,048
----------- ----------- ----------- -----------
Net loss per common
share.................. $ (0.00) $ (0.22) $ (0.06) $ (0.91)
=========== =========== =========== ===========
</TABLE>
F-21
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
At December 31, 1997, December 31, 1998, and September 30, 1999,
respectively, options to purchase 2,109,375, 14,539,652, and 19,124,281 shares
of common stock, as well as preferred shares convertible into 0, 12,175,705,
and 12,175,705 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.
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.
F-22
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 130,715 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.
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 28,125 shares of
common stock from an employee of the Company at a purchase price of $3.83 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
2,589,329 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 272,658 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.
F-23
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 10,456,772 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 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 8,269,400 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, or $9.07 per
share. This sale was made at the estimated fair value of the Company's common
stock. This transaction was completed in October 1999. The Company received no
proceeds from the sale of common shares from this sale.
13. Subsequent Events (Unaudited)
During the fourth quarter of 1999, the Company granted 3,605,115 stock
options at the estimated fair value, based upon recent sales of preferred
stock, at a weighted average exercise price of $10.02 per share. Included in
the above stock options are 162,175 stock options, with a weighted average
exercise price of $9.14 per share, granted in connection with the Company's
assumption of BuyGolf.com's stock option plan.
The Company expects to effect a 5 for 8 reverse common stock split and
reverse preferred stock split for all issued and outstanding shares prior to
the initial public offering of the Company's common stock. All share and per
share data included in the consolidated financial statements and the
accompanying notes have been adjusted to reflect this reverse stock split and
the stock split that occurred on June 29, 1999 (see Note 8).
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, September 30,
1998 1999 1999
------------ ---------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................... $ 125 $ 635 $ 225
Accounts receivable, net of allowance
of $0, $2 and $8 at December 31, 1998,
June 30, 1999, and September 30, 1999,
respectively.......................... -- 83 31
Prepaid expenses and other current
assets................................ -- 72 151
---------- ---------- ----------
Total current assets................ 125 790 407
Property and equipment, net............. -- 149 178
Intangibles, net........................ -- 648 469
---------- ---------- ----------
$ 125 $ 1,587 $ 1,054
========== ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable....................... $ -- $ 299 $ 778
Accrued expenses....................... -- 16 219
---------- ---------- ----------
Total current liabilities........... -- 315 997
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.0001 par value;
Authorized shares--10,000,000 at
December 31, 1998, June 30, 1999 and
September 30, 1999; Issued and
outstanding--6,500,000 at December 31,
1998, 8,340,000 at June 30, 1999, and
8,559,473 at September 30, 1999 ...... 1 1 1
Additional paid-in capital............. 125 2,985 3,485
Accumulated deficit.................... (1) (1,714) (3,429)
---------- ---------- ----------
Total stockholders' equity.......... 125 1,272 57
---------- ---------- ----------
$ 125 $ 1,587 $ 1,054
========== ========== ==========
</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 Three Months Ended
December 31, 1998 June 30, 1999 September 30, 1999
----------------- ------------- ------------------
(unaudited)
<S> <C> <C> <C>
Net revenues............... $ -- $ 220 $ 805
Cost of goods sold......... -- 192 691
---------- ---------- ----------
Gross profit............... -- 28 114
Operating expenses:
Sales and marketing....... -- 680 1,161
General and
administrative........... 1 928 474
Depreciation and
amortization............. -- 134 199
---------- ---------- ----------
Total operating
expenses................ 1 1,742 1,834
---------- ---------- ----------
Operating loss........... (1) (1,714) (1,720)
Other income:
Interest income, net...... -- 2 5
---------- ---------- ----------
Total other income....... -- 2 5
---------- ---------- ----------
Loss before provision for
income taxes.............. (1) (1,712) (1,715)
Provision for income
taxes..................... -- 1 --
---------- ---------- ----------
Net loss................. $ (1) $ (1,713) $ (1,715)
========== ========== ==========
Net loss per share:
Basic and diluted......... $ -- $ (0.24) $ (0.23)
========== ========== ==========
Weighted average number of
common shares outstanding:
Basic and diluted......... 6,456,667 7,086,298 7,553,811
========== ========== ==========
</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
Issuance of common stock
for cash............... 219,473 -- 500 -- 500
Net loss................ -- -- -- (1,715) (1,715)
--------- -------- --------- -------- --------
Balance, September 30,
1999 (unaudited)....... 8,559,473 $ 1 $ 3,485 $ (3,429) $ 57
========= ======== ========= ======== ========
</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 Three Months Ended
December 31, 1998 June 30, 1999 September 30, 1999
----------------- ------------- -------------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $ (1) $(1,713) $(1,715)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization............. -- 134 199
Noncash expenditure for
services................. -- 500 --
Changes in assets and
liabilities:
Accounts receivable...... -- (83) 52
Prepaid expenses and
other current assets.... -- (72) (79)
Accounts payable......... -- 299 479
Accrued expenses......... -- 16 203
Income taxes payable..... -- -- --
------- ------- -------
Net cash used in
operating activities... (1) (919) (861)
------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment................ -- (165) (49)
Acquisition of domain
names.................... -- (31) --
------- ------- -------
Net cash used in
investing activities... -- (196) (49)
------- ------- -------
Cash flows from financing
activities:
Formation of Company...... 126 -- --
Proceeds from issuance of
common stock............. -- 1,625 500
------- ------- -------
Net cash provided by
financing activities... 126 1,625 500
------- ------- -------
Net increase in cash and
cash equivalents.......... 125 510 (410)
Cash, beginning of period.. -- 125 635
------- ------- -------
Cash, end of period........ $ 125 $ 635 $ 225
======= ======= =======
Supplemental cash flow
information:
Cash paid during the
period 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 business model that includes outsourcing the majority of its
operating infrastructure to a national supply and fulfillment providers.
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. The Company has arranged with its
vendor that goods sold to customers are shipped directly from vendor warehouse
facilities. It typically does not bill customers' credit cards until it has
received confirmation from the vendor that the goods have been shipped.
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.
F-30
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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.
The Company recognizes revenue from advertising sales ratably over the term
of the advertising campaigns, which usually range from one to twelve months.
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.
F-31
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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>
F-32
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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>
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.
F-33
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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, except share and per share data):
<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 and the estimated fair
value of $500,000 was charged to operations in the period.
F-36
<PAGE>
BUYGOLF.COM INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
During 1999 the Founder/Shareholder loaned the Company $9,000. The loan was
paid in full prior to June 30, 1999.
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
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 (collectively, the "Company"), 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. The final allocations of purchase
price is not expected to differ materially from the tentative allocation or to
have material impact on results of operations of financial position. Purchase
accounting is based upon preliminary asset valuations, which are subject to
change. Furthermore, post-closing adjustments, if any, are not expected to have
material impact on results of operations or financial position.
The Unaudited Pro Forma Condensed Combined Statements of Operations for the
nine months ended September 30, 1999 is presented as if BUY.COM had completed
the acquisition of BuyGolf.com and entered into the PGA Tour sponsorship
agreement 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................... $396,172 $ 1,025 $ (40)(b) $397,157
Cost of goods sold............. 401,426 883 -- 402,309
-------- ------- -------- --------
Gross profit................... (5,254) 142 (40) (5,152)
-------- ------- -------- --------
Operating expenses:
Sales and marketing.......... 42,453 1,841 (40)(b) 44,254
Product development.......... 3,851 -- -- 3,851
General and administrative... 12,872 1,402 -- 14,274
Depreciation and
amortization................ 3,009 333 12,233 (c) 15,575
Amortization of deferred
compensation................ 5,417 -- -- 5,417
Charge for warrants.......... 7,021 -- -- 7,021
-------- ------- -------- --------
Total operating expenses... 74,623 3,576 12,193 90,392
-------- ------- -------- --------
Operating loss............. (79,877) (3,434) (12,233) (95,544)
-------- ------- -------- --------
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) (3,427) (12,233) (96,184)
Provision for income taxes..... 3 1 -- 4
-------- ------- -------- --------
Net loss....................... $(80,527) $(3,428) $(12,233) $(96,188)
======== ======= ======== ========
</TABLE>
<TABLE>
<S> <C>
Net loss per share:
Basic and diluted.................................. $ (0.84)
Weighted average number of common shares outstanding:
Basic and diluted(d)............................... 114,447,359
</TABLE>
- --------
(a) BuyGolf.com was acquired by BUY.COM on October 22, 1999, in a purchase-type
transaction. BUY.COM issued a total of 2,589,329 shares of common stock to
acquire the remaining 95% of the outstanding common stock of BuyGolf.com
that it did not previously own. 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 $5.8 million 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. Goodwill is amortized on a
straight-line basis over a period of three years. No other significant fair
value purchase price adjustments were recorded in conjunction with the
acquisition of BuyGolf.com. Also includes expense of $6.4 million for the
PGA TOUR sponsorship agreement as though the agreement was executed January
1, 1999.
(d) Reflects the conversion of all preferred stock outstanding at November 30,
1999, the issuance of common stock for the acquisition of BuyGolf.com and
the issuance of common stock in connection with the PGA TOUR sponsorship
agreements.
PF-2
<PAGE>
BUY.COM INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------
BUY.COM BuyGolf.com, Pro Forma Pro Forma
Inc. Inc. (b) Adjustments Combined
-------- ------------ ----------- ---------
Assets
<S> <C> <C> <C> <C>
Current Assets:
Cash........................ $ 3,231 $ 225 $ 90,000 (a) $ 93,456
Accounts receivable......... 16,062 31 (157)(c) 15,936
Prepaid expenses and other
assets..................... 1,422 151 10,206 (d) 11,779
-------- ------- -------- --------
Total current assets........ 20,715 407 100,049 121,171
Property and equipment, net.. 5,286 178 -- 5,464
Intangibles, net............. 7,187 469 24,000 (e) 31,656
Other noncurrent assets...... 701 -- -- 701
-------- ------- -------- --------
$ 33,889 $ 1,054 $124,049 $158,992
======== ======= ======== ========
<CAPTION>
Liabilities and Stockholders'
Equity
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable............ $ 68,455 $ 778 $ (157)(c) $ 69,076
Line of credit.............. 12,377 -- -- 12,377
Accrued expenses............ 3,695 219 -- 3,914
Deferred revenue............ 826 -- -- 826
Income taxes payable........ 3 -- -- 3
Note payable to
stockholder................ 5,000 -- -- 5,000
Current portion of long-
term debt.................. 313 -- -- 313
-------- ------- -------- --------
Total current
liabilities.............. 90,669 997 (157) 91,509
-------- ------- -------- --------
Long Term Debt, net of
current portion............. 1,818 -- -- 1,818
-------- ------- -------- --------
Commitments and
Contingencies...............
Stockholders' Equity:
Convertible preferred stock
- Series A and B, $0.0001
par value.................. 14,943 -- 100,206 (a)(d) 115,149
Common stock, $0.0001 par
value...................... 9 1 -- 10
Additional paid-in
capital.................... 30,607 3,485 24,000 (e) 58,092
Deferred compensation....... (8,088) -- -- (8,088)
Accumulated deficit......... (96,069) (3,429) -- (99,498)
-------- ------- -------- --------
Total stockholders'
equity..................... (58,598) 57 124,206 65,665
-------- ------- -------- --------
$ 33,889 $ 1,054 $124,049 $158,992
======== ======= ======== ========
</TABLE>
- --------
(a) Reflects the receipt of approximately $90.0 million in connection with the
sale of Series B convertible participating preferred stock to SOFTBANK and
its related entities in October 1999.
(b) BuyGolf.com was acquired by BUY.COM on October 22, 1999, in a purchase-type
transaction. BUY.COM issued a total of 2,589,329 shares of common stock to
acquire the remaining 95% of the outstanding shares of common stock of
Buy.Golf.com that it did not previously own. 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 September 30, 1999.
(c) Represents intercompany receivables/payables, at September 30, 1999, that
should be eliminated upon the acquisition of BuyGolf.com by BUY.COM.
(d) Reflects the issuance of 1,125,000 common shares to the PGA TOUR. Estimated
fair value of $9.07 per share aggregating $10,206,000. Fair value is based
upon unrelated party sales of preferred stock.
(e) Represents goodwill resulting from the acquisition of BuyGolf.com on
October 25, 1999, in a purchase-type transaction.
PF-3
<PAGE>
[Inside Back Cover]
Inside Back Cover of Prospectus
1. BUY.COM LOGO (center)
2. Annotation for logo:
a. "BUY.COM"
b. "Why Buy Anywhere Else"
<PAGE>
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Through and including , 2000 (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.
14,000,000 Shares
[LOGO OF BUY.COM APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Hambrecht & Quist
U.S. Bancorp Piper Jaffray
, 2000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<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............................... 95,000
Blue sky fees and expenses....................................... 5,000
Printing and engraving expenses.................................. 275,000
Legal fees and expenses.......................................... 665,000
Accounting fees and expenses..................................... 450,000
Transfer Agent and Registrar fees................................ 2,000
Miscellaneous.................................................... 50,800
----------
Total........................................................ $1,600,000
==========
</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 in connection with this offering.
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) On June 9, 1997, BuyComp, LLC issued 9,000,000 units to Scott and Audrey
Blum for $50,000.
(2) On August 18, 1998, we sold 81,331,078 shares of common stock and
3,043,921 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) On August 18, 1998, we sold an aggregate of 9,131,784 shares of Series A
convertible participating preferred stock for an aggregate purchase price of
approximately $15,000,000 to SOFTBANK Technology Ventures IV, L.P. and SOFTBANK
Technology Advisors Fund L.P.
(4) On December 3, 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 5,529,571 shares of our common stock to the shareholders of
SpeedServe, Inc.
(5) On March 1, 1999, we issued 112,500 shares of our common stock to the
Benson York Group, Inc. in exchange for certain domain names.
(6) On March 10, 1999, we issued an aggregate of 163,058 shares of common
stock for an aggregate purchase price of approximately $623,000 to Ingram
Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and SOFTBANK
Technology Ventures IV, L.P.
(7) On April 5, 1999, we issued an aggregate of 25,068 shares of common
stock for an aggregate purchase price of approximately $85,000 to Ingram
Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and SOFTBANK
Technology Ventures IV, L.P.
(8) On April 8, 1999, we issued 15,684 shares of common stock to Harrison
Uhl in exchange for a domain name.
II-2
<PAGE>
(9) On June 29, 1999, we issued an aggregate of 129,168 shares of common
stock for an aggregate purchase price of approximately $1,180,000 to Ingram
Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and SOFTBANK
Technology Ventures IV, L.P.
(10) On July 19, 1999, we issued a warrant to purchase 1,250,000 shares of
common stock to United Airlines, Inc. for $16.00 per share. We also issued
another warrant for 61,364 shares of common stock at an exercise price of
$11.00.
(11) On July 17, 1999, we issued 40,625 shares of common stock to Raj Patel
in exchange for a domain name.
(12) In October 1999, we sold an aggregate of 9,923,277 shares of our Series
B convertible participating preferred stock for an aggregate purchase price of
approximately $90,000,000 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.
(13) On October 8, 1999, we issued a warrant to Harpeth Holdings Inc. to
purchase 625,000 shares of common stock for $9.07 per share in consideration
for our supply and fulfillment agreements with Ingram Book Company and Ingram
Fulfillment Services Inc.
(14) On October 25, 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 2,589,329 shares of our common stock to the stockholders
of BuyGolf.com.
(15) On October 25, 1999, we issued 1,125,000 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 812,500 options to employees, non-employee directors and
consultants to purchase units of BuyComp LLC at an exercise price of $0.10 per
unit. All options were assumed under our 1998 Stock Option/Stock Issuance Plan.
(17) Between September 1, 1998 and September 14, 1998, we granted options to
purchase 1,148,437 shares of our common stock at an exercise price of $1.64 per
share to certain employees and consultants. Between October 6, 1998 and March
10, 1999, we granted options to purchase 12,031,940 shares of common stock at
an exercise price of $3.83 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 23,437 shares of common stock at an exercise price of
$4.00 per share to a consultant. From April 1, 1999 to April 29, 1999, we
granted options to purchase 148,125 shares of common stock at an exercise price
of $6.79 per share to certain employees and a consultant. On June 29, 1999, we
granted options to purchase 688,125 shares of common stock at an exercise price
of $9.14 per share to employees and consultants. On August 1, 1999, we granted
options to purchase 386,887 shares of common stock at an exercise price of
$9.14 per share to employees and consultants. Between September 2, 1999 and
October 11, 1999, we granted options to purchase 3,156,996 shares of common
stock at an exercise price per share of $9.14 to employees and consultants.
(18) Between January 1, 1999 and July 31, 1999, we issued and sold
28,617,187 shares of common stock upon the exercise of stock options for
aggregate consideration of $20,350.
All sales and issuances of securities for amounts less than $5 million
involved all accredited investors or less than 35 other purchasers, did not
involve any general solicitation on advertising and were deemed to be exempt
from registration under Rule 505 promulgated under the Securities Act. All
sales and issuances for amounts in excess of $5 million involved all accredited
investors, did not involve any general solicitation or advertising and were
deemed exempt from registration under Section 4(2) of the Securities Act or
Rule 506 promulgated thereunder. All options were granted under Rule 701
promulgated under the Securities Act or Section 4(2) of the Securities Act.
Appropriate legends are affixed to the stock certificates issued in such
II-3
<PAGE>
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.
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**+ Master Service Agreement dated October 1, 1998 by and between
BUY.COM and SOFTBANK Services Group.
10.7**+ Resale Agreement dated March 10, 1999 by and between BUY.COM
and Ingram Micro, Inc.; Amendment dated August 11, 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
10.8* Employment Agreement dated March 1, 1999 by and between BUY.COM
and Gregory Hawkins; Amendment No. 1 to the Employment
Agreement dated July , 1999.
10.9** 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.
10.36* Agreement dated May 3, 1999 by and between BuyGolf.com, Inc.
and Las Vegas Golf & Tennis; First Amendment dated September
10, 1999.
10.37* Memorandum of Understanding dated October 8, 1999 by and
between BUY.COM INC. and the Ingram Book Group.
10.38* Ingram Fulfillment Services, Inc. Agreement dated October 8,
1999 by and between BUY.COM INC. and Ingram Fulfillment
Services, 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.
23.3 Consent of Message Media.
24.1** Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is requested for certain confidential portions of
this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, these confidential portions have been omitted from this
exhibit and filed separately with the Commission.
(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.
II-6
<PAGE>
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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, BUY.COM has duly
caused this Amendment to the 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 15th day of December, 1999.
BUY.COM INC.
/s/ Mitch C. Hill
By: _______________________________
Mitch C. Hill,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the 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>
* Chief Executive Officer and December 15, 1999
_________________________________ Director (principal executive
Gregory J. Hawkins officer)
/s/ Mitch C. Hill Chief Financial Officer December 15, 1999
_________________________________ (principal financial and
Mitch C. Hill accounting officer)
* Director December 15, 1999
_________________________________
William L. Burnham
* Director December 15, 1999
_________________________________
David B. Ingram
* Director December 15, 1999
_________________________________
Donald M. Kendall
* Director December 15, 1999
_________________________________
Charles W. Richion
* Director December 15, 1999
_________________________________
James B. Roszak
* Director December 15, 1999
_________________________________
Edward S. Russell
* Director December 15, 1999
_________________________________
John Sculley
* Director December 15, 1999
_________________________________
Wayne T. Thorson
/s/ Mitch C. Hill
*By: ___________________________
Mitch C. Hill,
Attorney-in-Fact
</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**+ Master Service Agreement dated October 1, 1998 by and between
BUY.COM and SOFTBANK Services Group.
10.7**+ 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>
10.8* Employment Agreement dated March 1, 1999 by and between BUY.COM
and Gregory Hawkins; Amendment No. 1 to the Employment
Agreement dated July , 1999.
10.9** 1998 Stock Option/Stock Issuance Plan.
10.12* 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.
10.13* Loan Agreement and related documents dated December 23, 1998 by
and between BUY.COM and the Bank of Yorba Linda.
10.14** 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.
10.15** Summit Lease dated June 1999 by and between BUY.COM and
AEW/Parker II, LLC.
10.16** Operating Agreement of BUYTRAVEL.COM LLC dated July 19, 1999.
10.17** Marketing and Services Agreement dated July 19, 1999 by and
between BUY.COM and United Air Lines, Inc.
10.18** Common Stock Purchase Warrant dated July 19, 1999 by and
between BUY.COM and United Air Lines, Inc.
10.19** Credit Agreement dated July 20, 1999 by and between BUY.COM and
certain commercial lending institutions and The Bank of Nova
Scotia.
10.20** Promissory Note dated July 20, 1999 by and between BUY.COM and
The Bank of Nova Scotia.
10.21** Common Stock Purchase Warrant dated July 20, 1999 by and
between BUY.COM and The Bank of Nova Scotia.
10.22** Series A Convertible Participating Preferred Stock Agreement
dated August 14, 1998 by and between BUY.COM and certain
investors.
10.23** 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.
10.24** 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.
10.25** Form of Option Agreement pursuant to 1998 Stock Option/Stock
Issuance Plan.
10.26** Non-Competition Agreement dated December 3, 1998 by and between
BUY.COM, BUY.COM's wholly-owned subsidiary, Ingram
Entertainment, Inc. and David Ingram.
10.27** Promissory Note dated August 16, 1999 by and between the Scott
A. Blum Separate Property Trust u/d/t 8/2/95.
10.28** Series B Convertible Participating Preferred Stock Purchase
Agreement dated September 2, 1999 by and between BUY.COM and
certain investors.
10.29** Common Stock Purchase Warrant dated October 8, 1999 by and
between BUY.COM and Harpeth Holdings Inc.
10.30** 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>
10.31** 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.
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.
10.36* Agreement dated May 3, 1999 by and between BuyGolf.com, Inc.
and Las Vegas Golf & Tennis; First Amendment dated September
10, 1999.
10.37* Memorandum of Understanding dated October 8, 1999 by and
between BUY.COM INC. and the Ingram Book Group.
10.38* Ingram Fulfillment Services, Inc. Agreement dated October 8,
1999 by and between BUY.COM INC. and Ingram Fulfillment
Services, 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.
23.3 Consent of Message Media.
24.1** Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed by the Registrant with the Commission.
+ Confidential treatment is requested for certain confidential portions of
this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, these confidential portions have been ommitted from this
exhibit and filed separately with the Commission.
<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
second amendment to the registration statement.
/s/ Arthur Andersen LLP
Orange County, California
December 14, 1999
<PAGE>
EXHIBIT 23.3
Message Media
6060 Spine Road
Boulder, CO 80301
December 8, 1999
Mr. Peter Sterling
Director, Direct Marketing
BUY.COM
21 Brookline
Aliso Viejo, CA 92656
Dear Mr. Sterling:
We conducted a survey for Buy.com in October 1999, prepared a report and
presented it to you on October 22, 1999.
Message Media gives permission to Buy.com to use the results of this survey for
reporting purposes in Buy.com's SEC registration statement.
Sincerely,
/s/ LARRY JONES
_______________________________
Signature
President and CEO
_______________________________
Title
<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 9 0 9
<OTHER-SE> (340) (8,322) 0 (73,550)
<TOTAL-LIABILITY-AND-EQUITY> 267 26,837 0 33,889
<SALES> 878 125,290 63,761 396,172
<TOTAL-REVENUES> 878 125,290 63,761 396,172
<CGS> 832 123,527 61,165 401,426
<TOTAL-COSTS> 832 123,527 61,165 401,426
<OTHER-EXPENSES> 427 19,806 7,339 74,549
<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) (0.22) (0.06) (0.91)
<EPS-DILUTED> (0.00) (0.22) (0.06) (0.91)
</TABLE>
