<PAGE>
As filed with the Securities and Exchange Commission on January 14, 2000
Registration No. 333-89737
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 5
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>
85 Enterprise
Aliso Viejo, California 92656
(949) 389-2000
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
----------------
Gregory J. Hawkins
Chief Executive Officer, President
BUY.COM INC.
85 Enterprise
Aliso Viejo, California 92656
(949) 389-2000
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
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
----------------
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. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated January 14, 2000
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 and $12 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 7 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 on or about ,
2000.
------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Chase H&Q
U.S. Bancorp Piper Jaffray
------------
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover of Prospectus
1. Flap (outside)
B. Annotations:
a. "buy.com"
b. 4,700,000 unique visitors (Media Metrix - 11/99)
c. 1,900,000 customers (as of 12/99)
d. 850,000 stock keeping units
e. 29,000 computer items
f. 14,000 daily orders (avg. 10/99 - 12/99)
g. 24 hours a day
h. 9 online specialty stores
i. 0 warehouses
j. buy better buy.com
<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 computer store.
B. Annotations for graphics:
a. "buy.com"
b. "Nine online specialty stores" Just one click away. Shoppers
can search by keyword within each store.
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 buy.com 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.
i. "buy better buy.com"
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 current products or
prices."
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Selected Unaudited Pro Forma Condensed Combined Financial Information.... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 38
Management............................................................... 54
Related Party Transactions............................................... 68
Principal Stockholders................................................... 72
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 78
Underwriting............................................................. 80
Legal Matters............................................................ 82
Experts.................................................................. 83
Where You Can Find More Information...................................... 83
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 based on our net
revenues and the amount of traffic to our Web site. We offer 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 nine 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 nine specialty stores and is designed
to enhance the customer's online shopping experience 24 hours a day, seven days
a week. 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 1.9 million
customers, of which 616,000 were added during the fourth 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. During September 1999, approximately 48% of our orders
and over 55% of our total booked revenues came from repeat customers. Media
Metrix estimates that approximately 4.7 million unique visitors came to our
site in November 1999, representing a 129% increase over the estimated 2.1
million unique visitors to our site in October 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 enabled us to become one of the top five e-commerce providers according to
a number of industry studies. 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. However, a number of
factors may affect our ability to increase our advertising revenues, including
uncertainty as to market acceptance of Internet advertising and increasing
competition for available advertising revenue.
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
brand 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 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. A
number of factors may affect our ability to implement these strategies,
including the rapidly evolving nature of the e-commerce market, the acceptance
of the Internet as a commerce medium, the significant competition we face in
the e-commerce market and our ability to manage our recent growth.
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. However, we cannot assure you that
increases in our product margins will not cause a decrease in traffic to our
Web site, reduce product revenues and make our Web site less attractive to
advertisers.
We are expanding our business into international markets both independently
and through joint ventures with third parties that will provide expertise in
local markets and financial resources to the joint ventures. We began selling
computer hardware and software products in Canada in December 1999. We expect
to begin operations in the United Kingdom in the first quarter of 2000 through
a joint venture with SOFTBANK America, Inc. and a News Corporation affiliate.
In addition, we entered into a binding letter of intent with SOFTBANK America,
Inc. and several of its affiliates and a News Corporation affiliate to form
international joint ventures in Australia, New Zealand and India. We also 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. However, we cannot assure you that we will be
successful in our efforts to expand internationally and a number of factors may
affect our ability to do so, including our ability to staff and manage foreign
operations, tariffs and other trade barriers, and our ability to adapt to
foreign regulatory requirements affecting e-commerce.
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 from 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 85 Enterprise, Aliso Viejo, California 92656,
and our telephone number is (949) 389-2000. 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>
Recent Developments
Our net revenues increased from $61.5 million for the three months ended
December 31, 1998 to an estimated $200.6 million for the three months ended
December 31, 1999. During the three months ended December 31, 1999, we
recognized net revenues primarily from product sales, advertising revenues and
customer shipping and handling charges, net of estimated sales returns,
discounts and coupon redemptions. Coupon redemptions increased from $0 for the
three months ended December 31, 1998 to an estimated $4.7 million for the three
months ended December 31, 1999. Coupon redemptions result in a reduction of
gross revenues in the period the coupons are redeemed by an amount equal to the
value of the coupons redeemed.
Our cost of goods sold increased from $62.4 million for the three months
ended December 31, 1998 to an estimated $202.4 million for the three months
ended December 31, 1999 as a result of the significant increase in our net
revenues.
Gross margin increased from (1.4%) for the three months ended December 31,
1998 to (0.9)% for the three months ended December 31, 1999. This increase in
gross margin reflects the implementation of selective price increases on
certain product categories and merchandising strategies, partially offset by
significant coupon redemptions.
Net revenues from shipping and handling charges increased from $3.4 million
for the three months ended December 31, 1998 to an estimated $9.1 million for
the three months ended December 31, 1999. Gross profit on our shipping and
handling decreased from $2.1 million for the three months ended December 31,
1998 to an estimated $1.0 million for the three months ended December 31, 1999.
Shipping and handling results are a direct function of our product sales and
are integral to our merchandising and pricing strategy. Accordingly, we believe
shipping and handling net revenues and the corresponding gross profit on these
net revenues cannot be viewed independent of product sales and gross profit.
Our financial statements for the three months ended December 31, 1999 have
not yet been completed and accordingly information regarding this period is
preliminary and subject to change. The audited financial statements are not
expected to differ materially from the information presented herein.
Additionally, the operating results for the December 1999 quarter or any other
quarter are not necessarily indicative of the operating results for any future
period.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by BUY.COM.................. 14,000,000 shares
Common stock to be outstanding after this
offering........................................ 129,140,175 shares
Use of proceeds.................................. For repaying indebtedness and for
working capital and other general
corporate purposes, including
developing our infrastructure to
support growth, sales and marketing
activities, and for acquiring and
developing 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 115,140,175 shares outstanding as of December 31, 1999, and does not
include 22,324,104 shares of common stock issuable upon the exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price of
$4.50 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.
4
<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 shows 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
Combined
June 7, 1997 Nine Months Ended Nine Months
(Inception) to Year Ended September 30, 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 88,801,360 114,614,671
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Quarterly Statement 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) (13,354) (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)
<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.
5
<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 a 5-for-8 reverse stock
split that will occur prior to the consummation of this offering and assumes
that:
. the initial public offering price will be $11.00 per share;
. all outstanding shares of Series A convertible participating preferred
stock will be converted into an aggregate of 12,175,706 shares of our
common stock upon consummation of this offering;
. each share of Series B convertible participating preferred stock will be
converted into one share of our common stock, or an aggregate of
9,923,276 shares of common stock, upon the consummation of this offering.
In the event the initial public offering price is below $11.33 per share,
additional shares of common stock will be issued upon the conversion of
the Series B convertible participating preferred stock. For example, if
the initial public offering price is between $10.00 and $11.00 per share
the range of additional shares of common stock issued upon conversion of
the Series B shares will be between 1,326,702 and 303,977, respectively;
and
. the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding options or warrants.
6
<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 has been 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 at least $350.0
million of products from Ingram Micro, our current pricing schedules could be
revised. Ingram Micro's termination of 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,
7
<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
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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 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 230 employees at December 31, 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 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
four 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 foreseeable future. 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 these systems have not been properly
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. In addition, despite the
fact that many computer systems are currently processing 21st century dates
correctly, these companies, including us, could experience latent Year 2000
problems.
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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
In the fall of 1999, Scott A. Blum, our founder, majority stockholder and
former Chief Executive Officer and Chairman, resigned from our Board of
Directors, deposited all of his shares of our common stock into a voting trust,
and withdrew from participation in our management, business and operations. Mr.
Blum had previously resigned as our Chief Executive Officer and terminated his
employment with us in March 1999. As of December 31, 1999, Mr. Blum's shares
represented approximately 54% of our outstanding capital stock. Prior to
leaving the company, Mr. Blum was 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 was 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 services are made available online. If we are not able
to protect our trademarks and 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 stockholder, approximately 48.1% of our
outstanding stock after this offering must be voted by the trustees 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
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voting trust agreement. On routine stockholder actions, the trustees have the
discretion to vote the trust shares in any manner determined by a majority of
the trustees. 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 with which 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.
18
<PAGE>
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. After
the offering, shares of our common stock will become available for resale in
the public market as shown on the chart below.
<TABLE>
<CAPTION>
Approximate Number
Days after the Date of Shares Eligible
of this Prospectus for Future Sale Comment
-------------------- ------------------ -----------------------------------
<C> <C> <S>
Upon effectiveness.. 14,000,000 Freely tradable shares sold in this
offering
90 days............. 15,684 Shares saleable under Rule 144 that
are not subject to 180-day lock-up
180 days............ 93,233,047 Lock-up released; shares saleable
under Rule 144, 144(k) or 701
</TABLE>
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."
19
<PAGE>
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.
20
<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,
including the payment of up to approximately $7.7 million in connection
with the initial funding of three international joint ventures that we
agreed to form with SOFTBANK America, Inc. and its affiliates.
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 amounts that may be allocated to the particular uses
of the net proceeds of this offering, and the amounts we actually spend could
be outside of 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.
21
<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 shares of our common stock
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)
(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; 150,000,000 authorized;
12,175,706 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; 89,326,751 shares issued
and outstanding, actual; 115,140,062 shares
issued and outstanding, pro forma;
129,140,062 shares issued and outstanding,
pro forma as adjusted ..................... 9 12 13
Additional paid-in capital, common.......... 30,607 169,810 311,429
Deferred compensation....................... (8,088) (8,088) (8,088)
Accumulated deficit......................... (96,069) (96,069) (96,069)
-------- -------- --------
Total stockholders' equity (deficit)...... (58,598) 65,665 207,285
-------- -------- --------
Total capitalization..................... $(56,780) $ 67,483 $209,103
======== ======== ========
</TABLE>
These share amounts exclude 20,138,940 shares of common stock issuable upon
the exercise of options outstanding as of September 30, 1999 at a weighted
average exercise price of $3.27 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.
22
<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
9,923,276 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 the 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:
<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.... 115,140,062 89.2% $116,930,000 43.2% $ 1.02
New investors............ 14,000,000 10.8% 154,000,000 56.8% $11.00
----------- ----- ------------ -----
Total................ 129,140,062 100.0% $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. To the extent that these
options are exercised, new investors will experience further dilution. As of
September 30, 1999, options to purchase 20,138,940 shares of common stock were
outstanding at a weighted average exercise price of $3.27 per share and
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
these options and warrants are exercised, new investors will own approximately
9.3% of our outstanding shares while contributing approximately 45.6% 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.
23
<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, as of September 30, 1999, for the period from June 7, 1997
(Inception) to December 31, 1997, for the year ended December 31, 1998 and for
the nine months ended September 30, 1999 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 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 88,801,360
Pro forma net loss per
share:
Basic and diluted
(unaudited)........... $ (0.70)
Pro forma weight average
shares outstanding:
Basic and diluted
(unaudited)........... 114,614,671
<CAPTION>
December 31,
--------------------------- September 30,
1997 1998 1999
-------------- ------------ -------------
<S> <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 notes 8 and 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.
24
<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, Speedserve 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 acquisition of BuyGolf.com 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
a material impact on our results of operations or financial position.
The selected unaudited pro forma condensed combined statement of operations
data for the year ended December 31, 1998 is presented as if BUY.COM had
completed the acquisition of Speedserve as of January 1, 1998.
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 issuance of the Series B convertible participating preferred
stock, 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.
25
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS INFORMATION
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------------
BUY.COM Speedserve, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues............ $ 125,290 $ 1,278 $ -- $ 126,568
Cost of goods sold...... 123,527 1,070 124,597
----------- ----------- ----------- -----------
Gross profit............ 1,763 208 -- 1,971
Total operating
expense................ 19,802 3,531 2,820 (b) 26,153
----------- ----------- ----------- -----------
Operating loss.......... (18,039) (3,323) (2,820) (24,182)
Total other income
(expense).............. 198 (5) -- 193
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (17,841) (3,328) (2,820) (23,989)
Provision for income
taxes.................. 3 (1,011) 1,011 (c) 3
----------- ----------- ----------- -----------
Net loss................ $ (17,844) $ (2,317) $ (3,831) $ (23,992)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted..... $ (0.24)
Weighted average number
of common shares
outstanding:
Basic and diluted(d).. 99,060,348
</TABLE>
- --------
(a) Speedserve was acquired by BUY.COM on December 3, 1998, in a purchase-type
transaction. BUY.COM issued 5,529,571 shares of common stock pursuant to
the acquisition. This presentation shows the pro forma effects of the
operations of Speedserve as if the acquisition occurred on January 1,
1998.
(b) Represents the amortization of $2.8 million of goodwill that would have
been recorded for the year ended December 31, 1998, if the acquisition of
Speedserve occurred January 1, 1998. 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 Speedserve.
(c) Represents tax benefits eliminated upon the acquisition of Speedserve by
BUY.COM.
(d) Reflects conversion of all preferred stock outstanding at December 31,
1998 and the issuance of common stock for the acquisition of Speedserve.
26
<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 common shares
outstanding:
Basic and diluted(d).. 114,614,671
</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.
The results of operations for BuyGolf.com from October 1, 1999 to October
25, 1999 are immaterial to our consolidated operating results. 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 31,
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.
27
<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 20,571 (e)(f) 54,663
Deferred compensation........ (8,088) -- -- (8,088)
Accumulated deficit.......... (96,069) (3,429) 3,429 (f) (96,069)
------- ------- -------- --------
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. The results of operations for BuyGolf.com from October 1,
1999 to October 25, 1999 are immaterial to our consolidated operating
results. 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 shares of common stock 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.
(f) Represents elimination of accumulated deficit resulting from the
acquisition of BuyGolf.com.
28
<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 based on our net
revenues and the amount of traffic to our Web site. We offer 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 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
January 2000, we integrated BUYGOLF.COM into our Web site as our ninth online
store.
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
intend to enter 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
revenues. We cannot be certain that our sales growth will continue or that we
will ever become profitable.
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To date, our sales of computer hardware and software products have accounted
for the vast majority of our net revenues. Our sales of products in other
categories constituted less than 15% of our net revenues for the years ended
December 31, 1997 and December 31, 1998 and the nine months ended September 30,
1999. None of these other categories individually constituted more than 10% of
our net revenues during these periods. 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. Product sales, including shipping and handling, accounted for 100% of
net revenues for the year ended December 31, 1997, 98.1% of net revenues for
the year ended December 31, 1998 and 97.9% of net revenues for the nine months
ended September 30, 1999.
We also derive revenues from shipping and handling charges. Shipping and
handling net revenues were $49,000 for the year ended December 31, 1997, $6.7
million for the year ended December 31, 1998 and $21.0 million for the nine
months ended September 30, 1999. The gross profit on our shipping and handling
net revenues during these periods was $36,000, $4.2 million and $10.5 million,
respectively. Shipping and handling results are a direct function of our
product sales and are an integral part of our merchandising and pricing
strategy. Accordingly, we believe shipping and handling net revenues and the
corresponding gross profit on these net revenues cannot be viewed independent
of product sales and gross profit.
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. Advertising
sales accounted for 0% of net revenues for the year ended December 31, 1997,
1.9% of net revenues for the year ended December 31, 1998 and 2.1% of net
revenues for the nine months ended September 30, 1999.
Our net revenues are also net of coupon redemptions. Coupon redemptions
result in a reduction of gross revenues in the period the coupons are redeemed
by an amount equal to the value of the coupons redeemed. Coupon redemptions
were $1.4 million for the nine months ended September 30, 1999, and we had no
coupon redemptions in 1997 or 1998.
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.
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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>
Year Ended December 31, 1997
Net revenues were $878,000 for the year ended December 31, 1997. Cost of
goods sold were $832,000 and gross margin was 5.2% for the year December 31,
1997. 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.
Year Ended December 31, 1998, and the Nine Month Periods Ended September 30,
1998 and September 30, 1999
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 and $125.3 million for the year
ended December 31, 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
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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 and $123.5
million for the year ended December 31, 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 and 1.4% for the year ended December 31, 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 and for the year ended December 31,
1998 was offset in part by gross profit derived from higher margin advertising
revenue and shipping and handling revenue. Charges for shipping and handling
are an integral part of our product pricing strategy and have a significant
positive impact on our overall gross margins. 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 and $13.4 million for the year ended December 31, 1998. Sales and
marketing expenses as a percentage of net revenues increased to 10.7% for the
nine months ended September 30, 1999 and for the year ended December 31, 1998
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 and $950,000 for the year
ended December 31, 1998. Product development expenses as a percentage of net
revenues increased to 1.0% for the nine months ended September 30, 1999 from
0.6% for the nine months ended September 30, 1998 and 0.8% for the year ended
December 31, 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 Expenses
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
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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 and $4.3 million for the year ended December 31, 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 and 3.4% for the year ended December 31, 1998.
This 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 Expenses
Depreciation and amortization expenses consist 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 and $377,000 for the year ended December 31, 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 and 0.3% for the year ended December 31, 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 and $795,000 for the year
ended December 31, 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 and 0.6% for the year ended December 31, 1998. This
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 $8.1 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 and $198,000 for the year ended December 31, 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 and
$17.8 million for the year ended December 31, 1998. This increase in net loss
was due to increased operating expenses and an increase in amortization of
goodwill, amortization of deferred compensation and charge for warrants.
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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 2,025 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 12,522 19,200 23,123 32,300
------- ------- -------- -------- -------- --------
Operating loss......... (1,219) (3,031) (13,354) (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) (13,178) (19,252) (28,091) (33,181)
Provision for income
taxes................. -- -- 3 -- -- 3
------- ------- -------- -------- -------- --------
Net loss............... $(1,217) $(3,008) $(13,181) $(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>
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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. 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. Under the letter of intent, we have agreed
to commit approximately $7.7 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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In January 2000, SOFTBANK issued a commitment letter to us confirming its
intention to provide the necessary investments in us to permit us to operate in
the ordinary course of business through the closing of this offering. This
commitment is limited to $60.0 million.
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 ended 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 ended 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 these systems have not been properly 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. To date, we have not experienced any Year 2000
problems in our computer systems or operations. However, other companies,
including us, could experience latent Year 2000 problems.
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
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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.
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 maintain 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 provider, 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
due to latent Year 2000 problems.
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 could incur
additional costs in addressing any unforeseen Year 2000 issues, which could
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.
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BUSINESS
General
BUY.COM is a leading multi-category Internet superstore based on our net
revenues and the amount of traffic to our site. We offer 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 nine 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 nine
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
involves 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 196 million at the end of 1999 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 48 million in 1999 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 $111.4 billion in 1999 to
approximately $1.3 trillion in 2003.
Limitations of Traditional and Catalog Retailers
The emergence of the Internet as an alternative shopping channel has
highlighted the limitations associated with shopping at traditional and catalog
retailers. Traditional retailers face inherent structural limitations that may
inhibit their ability to capitalize on the growing worldwide market for their
goods and services. The space available in a traditional retail store limits
merchandising flexibility and constrains the number of SKUs that a traditional
retailer can offer at any given time. Traditional retailers must make
significant investments in inventory that may quickly become obsolete. These
retailers also face challenges in hiring, training and maintaining
knowledgeable sales staff and preventing losses due to theft by customers and
employees. Personnel costs typically limit operating hours, reducing customer
convenience. Furthermore, traditional retailers generally have difficulties
gathering customer demographics and preferences, and their potential customer
base is typically limited to those who live within a reasonable geographic
distance from the retail locations.
While catalog retailers provide customers with the convenience of shopping
from anywhere at anytime, the number of SKUs they can feature and the product
information they can provide is limited due to catalog
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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 $2.4 billion in
1999 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 $3.0 billion in 1999 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 $3.3 billion in
1999 to more than $24.1 billion by 2003.
Challenges Faced by Online Retailers
The Internet addresses many of the limitations faced by traditional and
catalog retailers by providing unlimited shelf space, worldwide geographic
reach for potential customers, customer convenience, significant flexibility
with regard to vendor promotion and cross-merchandising opportunities, and on a
comparable basis, extremely low costs. However, online retailing is new and
evolving and presents a number of challenges, including:
. Limited Brand Awareness and Customer Loyalty. Online retailers must
build their brand recognition to attract potential new customers, to
develop customer trust and loyalty in the absence of face-to-face
interaction and to maintain high levels of customer traffic to their Web
sites. Creating a strong brand, however, can be difficult and expensive,
and many online retailers have had limited success developing their
brand name.
. Significant Price Competition. Online pricing engines enable customers
to easily determine the lowest price for a particular product. Because
online shoppers can quickly access pricing information with little
effort, online retailers must be able to offer competitive prices to
continue to draw traffic to their Web sites.
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. Limited Product Offerings and Customer Convenience. Many online
retailers focus on a single product category, which may frustrate
customers who must visit a variety of online stores and pay multiple
shipping fees to accommodate all of their online shopping needs. Among
those online retailers who provide multiple product offerings, many have
sites that are difficult to navigate, do not use sophisticated search
capabilities and do not allow customers to purchase products using a
single check-out process.
. Inability to 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 nine 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
November 1999 was approximately 4.7 million, which represents an
increase of 129% over the 2.1 million estimated unique visitors in
October 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 retailers.
. 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 December 1999, our average order size was more
than $134 and our average daily product sales were over $2.7 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. Offering superior
customer service and continually improving our communications with
customers are among our top priorities. 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 international joint
ventures in the United Kingdom, Australia, New Zealand and India. We
expect to begin operations in the United Kingdom in the first quarter of
2000. 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 nine
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 nine 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 450,000 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 on 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.
. BUYGOLF.COM. This store was integrated into our Web site in January 2000
and offers brand name golf equipment and other golf-related products and
accessories, including golf clubs, bags, balls, shoes, clothes and
memorabilia. Customers may browse by product vendor and product category
and may view various tournament statistics.
We plan to expand our product offerings within existing product categories
and to add new product categories from time to time to increase the overall
shopping convenience for our customers.
Strategic Relationship with United Air Lines, Inc.
In July 1999, we formed a joint venture with United Air Lines, Inc. to
create an online travel service that will offer a full range of airline
tickets, automobile rentals and hotel reservations as well as other travel
related services through the "BUYTRAVEL.COM" Web site. BUYTRAVEL.COM will be
operated through a newly-formed limited liability company, in which we have a
50% ownership interest. In connection with the formation of BUYTRAVEL.COM, we
entered into a Marketing and Services Agreement with United. Under this
agreement, we will provide a storefront on our Web site, 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
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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 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.
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. Our acquisition of BuyGolf.com enables us to
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 will also be authorized
to merchandise and sell products in our online store that are branded with the
"Official World Golf Championships" logos and designs. In connection with this
sponsorship and subject to the PGA TOUR's existing contractual relationships,
we also have a non-exclusive right to sell branded PGA TOUR merchandise on our
Web site. In addition, the PGA TOUR has agreed that we will be the only online
store authorized to sell branded BUY.COM Tour merchandise. 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 June 2001, but will be subject to renewal
periods. 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 Operations
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
international joint ventures 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, under the terms of the letter of intent, have committed
approximately $2.7 million in connection with the formation of the joint
venture in continental Europe, approximately $2.0 million for the formation of
the joint venture in the United Kingdom and approximately $3.0 million for the
formation of the joint venture in Japan. 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
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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.
We began selling some of our products in Canada in December 1999. BUY.COM
Canada currently includes computer and software specialty stores and is managed
and supported through our existing United States operations.
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, the
consumer electronic products that we sell in our electronics store.
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
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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 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,
although 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
back-ordered 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.
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Advertising Revenue
Advertising revenue is a key component of our business model. The large
volume of product sales on our site, together with our ability to attract
proven online buyers, provides a high quality audience for our advertisers.
According to a BUY.COM sponsored survey, our customers are primarily between 18
and 35 years old, and 80% of our customers visit our stores at least once a
week. Additionally, according to this survey, 76% of our customers are college
educated and 33% have annual household incomes in excess of $75,000.
Furthermore, the structure of our Web site encourages impulse purchasing of
products in various categories by shoppers who have come to the site to
purchase a specific item. We believe our ability to deliver a high quality
audience of proven online consumers creates a variety of opportunities for
advertisers.
We provide a range of advertising opportunities to reach Internet buyers. We
presently derive advertising revenue from vendor co-op advertising and media
advertising. Vendor co-op advertising is an industry standard practice that
involves vendors who advertise their products for sale in our online stores in
direct proportion to the amount of products sold in our stores. The primary
objective of vendor co-op advertising is to drive product sales on our Web
site. Vendors measure results in terms of the size, growth, breadth and depth
of their product sales. We sell co-op advertising to the sales and/or channel
groups within our vendors' organizations, often with the cooperation and
support of our 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 site, 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 brand name 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 nine 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 manufacturers; and
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. 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 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/Shopper.com, Computer Shopper, MP3.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 networks such as ABC, CBS and NBC;
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,"
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prominent display of the BUY.COM Tour logo on the PGA TOUR's Web site and other
sponsorship and media opportunities. We believe this sponsorship provides an
attractive marketing vehicle that enables us to target a customer demographic
that is consistent with the customer demographics of our other online stores.
Customer Service and Support
We are committed to providing superior customer service and plan to continue
to make technological and systems advancements to enhance the overall shopping
experience. We believe customer support throughout the shopping experience is a
key element in providing a convenient shopping forum for our customers and
establishing customer loyalty. As a result, we have made customer service a
focal point of our operations. Customer service representatives are available
for support 24 hours a day, seven days a week. In addition to offering customer
support on existing orders, service representatives are available to assist
shoppers in placing orders online. We believe this educational process builds
customer loyalty and creates comfort and familiarity with the shopping
experience.
To maintain our 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.
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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 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-throughs 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
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. non-entertainment retailers that sell a limited selection of
entertainment products at low prices, such as Wal-Mart.
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
applied for registration 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 for $164.50 rather than the intended price of $564.50. Before we
learned of the error, approximately 8,508 orders were placed for the monitors.
After we discovered 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 New Jersey action alleges that the class of
plaintiffs consists of all persons who ordered the computer monitor at the
mistaken price. The California action also focuses on the monitor error and
alleges that the class of plaintiffs consists of all individuals who have
attempted to purchase computer hardware or software and have been unable to do
so because we refused to provide the product at the agreed upon price. The
judge in the New Jersey action has granted a temporary stay of the New Jersey
action to monitor the progress of the California action. Discovery is in its
early stages in the California action and a class has not yet been certified in
either action.
We have been contacted by the Federal Trade Commission and the New York
State Attorney General's office regarding print and Web advertisements we ran
in August and September 1999 for a particular promotion of the Compaq Presario
5304 system. The inquiries concern the location and sufficiency of the
information we provided about the terms of the manufacturer rebate for the
system and the advertised price. We are cooperating with the inquiries, and we
do not expect the results of the inquiries to have a material impact on our
business.
Employees
As of December 31, 1999, we had 230 full-time employees, including 86
employees engaged in engineering and Web development, 37 engaged in sales and
marketing, and 107 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 facility is located in
approximately 50,000 square feet of office space in Aliso Viejo, California
under a lease that expires in January 2006. Our lease agreement for this
facility requires monthly base rental payments of approximately $92,000 for the
first six months of the lease and approximately $126,000 per month thereafter.
We believe our existing 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 31,
1999:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- ----------
<S> <C> <C>
Gregory J. Hawkins....... 45 Chief Executive Officer, President and Chairman of
the Board
Mitch C. Hill............ 40 Chief Financial Officer
Keven F. Baxter.......... 40 Vice President, Corporate Affairs, General Counsel
and Secretary
Robb Brock............... 36 Vice President, Technology
John C. Herr............. 33 Vice President, Advertising and Marketing
Anthony A. McAlister..... 40 Vice President, Information Services
Brent Rusick............. 37 Vice President, Sales Operations
Michael D. Walkey........ 35 General Manager, Small Business and Vice
President, Product Management
Murray H. Williams....... 29 Vice President, Global Business Development
William L. Burnham....... 28 Director
David B. Ingram.......... 37 Director
Donald M. Kendall(1)..... 78 Director
Charles W. Richion(1).... 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 and was elected President in December 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. Mr. Baxter was elected Secretary in December 1999.
From January 1999 to November 1999, Mr. Baxter
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<PAGE>
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.
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, Advertising 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 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.
Michael D. Walkey has been our General Manager, Small Business and Vice
President, Product Management since November 1999. Mr. Walkey served as the
President and Chief Executive Officer of BLT Electronics, Inc. from April 1999
to November 1999. From August 1990 to April 1999, Mr. Walkey served as the Vice
President, Purchasing for Ingram Micro, Inc. Mr. Walkey received his B.S. in
Business Management from Pepperdine University.
Murray H. Williams has been our Vice President, Global 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.
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<PAGE>
Mr. Ingram currently serves on the board of directors of the Video Software
Dealers Association, First American National Bank, Nashville Community Advisory
Board, and is a board member of several privately held companies. Mr. Ingram
was elected to our Board of Directors as a representative of Ingram
Entertainment Inc. under a voting agreement that will terminate upon the
closing of this offering. Mr. Ingram received his B.A. in History from
Duke University and his M.B.A. from the Owen Graduate School of Management,
Vanderbilt University.
Donald M. Kendall has been a Director since August 1998. Since 1991, Mr.
Kendall has served as a Consultant and Ambassador at Large for PepsiCo, Inc.,
and from 1986 to 1991, he served as the Chairman of the Executive Committee for
PepsiCo. From 1965 to 1986, Mr. Kendall served as PepsiCo's Chairman of the
Board and Chief Executive Officer. Mr. Kendall attended Western Kentucky
University before becoming a Navy pilot in World War II.
Charles W. Richion has been a Director since August 1998. From June 1997
to July 1998, Mr. Richion served as the Vice President of Corporate Development
for Identix, Inc. From 1965 to 1996, Mr. Richion served as the Vice President
of U.S. Sales and Vice President of Global Partners at Hewlett Packard, Co.
Mr. Richion currently serves on the board of directors of Identix, Inc. He
received his B.S.E.E. from the University of Pennsylvania.
James B. Roszak has been a Director since August 1998. From June 1991 to
June 1997, Mr. Roszak served as the President of the Life Insurance Division of
Transamerica Life Companies. Mr. Roszak received his B.S. in Business from the
University of Southern California.
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. Richion, Sculley and
Thorson will serve as Class I Directors, whose terms expire at the 2001 annual
meeting of stockholders. Messrs. Ingram, Kendall and Russell
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<PAGE>
will serve as Class II Directors, whose terms expire at the 2002 annual meeting
of stockholders. Messrs. Burnham, Hawkins and Roszak 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.
The compensation committee consists of Messrs. Kendall, Richion 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 1,211,099 shares of our
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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.
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 most highly compensated executive
officers who received compensation in excess of $100,000 for the year ended
December 31, 1998 and December 31, 1999. 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 or 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------- ------------
Shares of Common
Other Annual Stock Underlying
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ---- -------- ------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Gregory J. Hawkins(1)....... 1999 $217,755 $ -- $ 7,200(4) 4,542,281(5)
Chief Executive Officer
Scott A. Blum(2)............ 1998 24 218 25,440(4) --
Founder 1999 22 -- 21,980(4) --
Mitch C. Hill(3)............ 1999 33,846 -- -- 1,211,099(6)
Chief Financial Officer
John C. Herr................ 1999 184,462 10,000 1,500(4) --
Vice President, Advertising
and Marketing
Brent Rusick................ 1998 179,755 -- -- 468,750
Vice President, Sales 1999 184,731 -- 2,402(4) --
Operations
Murray H. Williams.......... 1998 79,702 45,000 3,000(4) 703,124
Vice President, Global 1999 127,062 -- 6,000(4) --
Business Development
</TABLE>
- --------
(1) Mr. Hawkins became our Chief Executive Officer in March 1999.
(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.
(4) Consists of automobile lease payments.
(5) Includes options to purchase 277,115 shares that were transferred to
irrevocable trusts on behalf of Mr. Hawkins' children and his family.
(6) Includes options to purchase 250,000 shares that were transferred to
irrevocable trusts for the benefit of Mr. Hill's children and options to
purchase 13,125 shares that were transferred to members of his family.
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<PAGE>
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 and the Special Executive
Stock Option Plan. All options granted under these plans are immediately
exercisable. The following table indicates information regarding options
granted to the named executive officers during 1999. We have not granted any
stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options Market of Stock Price Appreciation
Underlying Granted to Exercise Price on for Option Term
Options Employees Price Per Grant Expiration ----------------------------
Name Granted in 1999 Share Date Date 5% 10%
- ---- ---------- ---------- --------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory J. Hawkins...... 4,542,281 35.3% $3.83 $3.83 03/01/09 $10,940,840 $27,726,236
Scott A. Blum........... -- -- -- -- -- -- --
Mitch C. Hill........... 1,211,099 9.4% 9.14 9.14 10/11/09 6,961,514 17,641,844
John C. Herr............ -- -- -- -- -- -- --
Brent Rusick............ -- -- -- -- -- -- --
Murray H. Williams...... -- -- -- -- -- -- --
</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 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.
Upon commencement of Mr. Hill's employment with us in November 1999, he was
granted an option to purchase an aggregate of 1,211,099 shares of common stock
at an exercise price of $9.14 per share. All of these shares are immediately
exercisable and 898,599 shares are subject to our right of repurchase. This
repurchase right lapses over a four 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 over a four year
period.
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<PAGE>
Year-End Option Holdings
The following table indicates aggregated option information for the named
executive officers for the year ended December 31, 1999.
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(4)
Shares Acquired Value Received ------------------------- -------------------------
Name on Exercise on Exercise(3) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory J. Hawkins(1)... -- -- 4,542,281 -- $32,568,155 --
Scott A. Blum........... -- -- -- -- -- --
Mitch C. Hill(2)........ -- -- 1,211,099 -- 2,252,644 --
John Herr............... -- -- 539,061 -- 3,865,067 --
Brent Rusick............ -- -- 937,500 -- 10,303,125 --
Murray Williams......... 703,124 $2,685,934 -- -- -- --
</TABLE>
- --------
(1) Includes options to purchase 277,115 shares that were transferred to
irrevocable trusts on behalf of Mr. Hawkins' children and his family.
(2) Includes options to purchase 250,000 shares that were transferred to
irrevocable trusts for the benefit of Mr. Hill's children and options to
purchase 13,125 shares that were transferred to members of his family.
(3) Based on the estimated fair value of our common stock of $3.83 at the time
of exercise less the exercise price, multiplied by the number of shares
purchased.
(4) Based on the assumed initial public offering price of $11.00 per share
less the exercise price, multiplied by the number of shares underlying the
options.
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 December 31, 1999, options to purchase
an aggregate of 19,053,955 shares were outstanding and 553,398 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.
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<PAGE>
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, some of the outstanding options under the discretionary option grant
program not assumed by the successor corporation or otherwise continued in
effect will automatically accelerate and become immediately vested and
exercisable. Also, some 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 some
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, some 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 1998 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 service providers of
BuyGolf. As of December 31, 1999, options for 162,175 shares of common stock
were outstanding under the assumed BuyGolf plan. 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 January 2000.
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 December 31, 1999, options for 3,107,974 shares of common stock
were outstanding under the executive plan, and 17,026 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.
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All outstanding options under the executive plan will be transferred to the
successor 1999 Stock Incentive Plan at the time the underwriting agreement for
this offering is signed, and no further option grants or share issuances will
be made under the executive plan.
Our executive plan is administered by our Board of Directors. The Board of
Directors has complete discretion under the executive plan to determine which
eligible individuals are to receive option grants, the time or times when such
grants are to be made, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a non-
statutory option under the federal tax laws, the vesting schedule (if any) to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding.
Incentive stock options permit the deferral of taxable income related to the
exercise of those options. Non-statutory options are not entitled to this
deferral. Incentive stock options may only be granted to employees, and the
term of an incentive stock option cannot exceed ten years. The exercise price
of an incentive stock option will in no event be less than 100% of the fair
market value of the common stock on the date of grant. Each non-statutory
option will have an exercise price per share not less than 85% of the fair
market value per share of common stock on the option grant date, and will not
have a term in excess of ten years.
The options granted under the executive plan generally have been structured
so that those options are immediately exercisable for all the option shares.
However, any shares purchased under those options will be subject to repurchase
by us, at the exercise price paid per share, if the optionee ceases service
with us prior to vesting in those shares. Vesting of the option shares
generally occurs over a four year period of service.
The exercise price may be paid in cash, check or in shares of our common
stock. The Board of Directors may allow one or more optionees to pay the
exercise price by delivering a full-recourse note payable to us and secured by
the purchased shares. Following the initial public offering of the common
stock, outstanding options may also be exercised through a same-day sale
program pursuant to which a designated brokerage firm will effect an immediate
sale of the shares purchased under the option and pay over to us, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
exercise price for the purchased shares plus all applicable withholding taxes.
In the event that we are acquired by merger or asset sale, the shares
subject to each outstanding option under the executive plan will vest, unless
our repurchase rights with respect to those option shares are assigned to the
acquiring entity, and the option will terminate except to the extent assumed by
that entity. In addition, all unvested shares under the executive plan will
immediately vest prior to such merger or asset sale, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
acquiring entity.
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 Plans
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, our Special
Executive Stock Option Plan and the BuyGolf.com, Inc. 1998 Stock Option Plan.
The 1999 plan was adopted by the Board in December 1999 and approved by the
stockholders in January 2000. The 1999 plan will become effective when the
underwriting agreement for this
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<PAGE>
offering is signed. At that time, all outstanding options under our existing
1998 Stock Option/Stock Issuance Plan, our Special Executive Stock Option Plan
and the BuyGolf.com, Inc. 1998 Stock Option Plan will be transferred to the
1999 plan, and no further option grants will be made under either the 1998
plan, the executive plan or the BuyGolf 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 24,679,525 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, the executive plan
and the BuyGolf.com plan plus an additional increase of approximately 1,875,000
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 2001, 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 4,000,000
shares. In addition, no participant in the 1999 plan may be granted stock
options or direct stock issuances for more than 1,500,000 shares of common
stock in total in any calendar year.
Programs. Our 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified period of
service or as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
Board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our Board members and any consultants
we hire.
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.
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. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our predecessor plans, in return for the grant
of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock.
Change in Control. The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 plan
may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our Board through one or more contested elections. This
accelerated vesting may occur either at the time of the transaction or
upon the subsequent termination of the individual's service.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
this election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date. As a result, the option will be structured so
that the fair market value of the option shares on the 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 24,000 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 8,000 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;
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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 24,000 share
automatic option grant will vest 25% after one year of Board service and the
remainder in equal monthly installments over the next thirty-six months.
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 8,000 share automatic grant will vest based on
the same schedule.
Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee Board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee Board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the number
of shares subject to the option will be determined by dividing the amount of
the retainer fee applied to the program by two-thirds of the fair market value
per share of our common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
portion of the retainer fee applied to that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while serving as a Board member.
Additional Program Features. Our 1999 plan will also have the following
features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our Board
through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.
. The Board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than December 2009.
1999 Employee Stock Purchase Plan.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
Board in December 1999 and approved by the stockholders in January 2000. 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 1,250,000 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 2001, 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 1,300,000
shares.
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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 January 2002. The
next offering period will start on the first business day in February 2002, and
subsequent offering periods will set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to the lesser of (i)
10% of his or her base salary or (ii) $10,000 per calendar year 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 January and July each year. However, a participant may not
purchase more than 550 shares on any purchase date, and not more than 312,500
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 January
2010.
. 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;
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. acts or omissions which are found by a court of competent jurisdiction
to be not in good faith or which involve intentional misconduct, or
knowing violations of law;
. actions leading to improper personal benefit to the director; and
. payment of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law.
This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws. We have obtained liability insurance for our officers and
directors.
Section 145 of the Delaware law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided
that this provision shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. 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) 9,131,785
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 9,923,276 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 co-op advertising dollars and to include
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. For a more detailed description of the terms of this acquisition see
"Business--Acquisition of BuyGolf.com."
In October 1999, we entered into agreements with the Ingram Book Company and
Ingram Fulfillment Services, Inc. to supply and distribute the books that we
sell in our online store. In connection with this transaction, we issued
Harpeth Holdings, Inc. a warrant to purchase 625,000 shares of our common
stock. Although David Ingram does not have an ownership interest in any of
these entities, Ingram Book Company, Ingram Fulfillment Services Inc. and
Harpeth Holdings, Inc. are each affiliated with Ingram Industries, Inc., which
is controlled by several members of David Ingram's immediate family.
In October 1999, we entered into a binding term sheet with Ingram
Entertainment to purchase, from a third party supplier on our behalf, the
consumer electronic products that we sell in our electronics store.
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
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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.
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 54% 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.
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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,
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, Global 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 86,960 shares, and Ingram Capital, Inc., with 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 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 intend to enter 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 intend to 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.
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 Operations."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table indicates information as of December 31, 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 115,140,175 shares of common stock outstanding
as of December 31, 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 129,140,175 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 31, 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)(15)...................... 62,107,790 53.9% 48.1%
SOFTBANK Affiliates
William L. Burnham(3)................... 24,239,436 21.1 18.8
Edward S. Russell(4).................... 14,055,845 12.2 10.9
Total SOFTBANK Affiliates(5)............ 38,295,281 33.3 29.7
David B. Ingram(6)........................ 5,258,633 4.6 4.1
Gregory J. Hawkins(7)..................... 4,542,281 3.8 3.4
John C. Herr(8)........................... 539,061 * *
Mitch C. Hill(9).......................... 1,211,099 1.0 *
Brent Rusick(10).......................... 937,500 * *
Murray H. Williams(11).................... 703,124 * *
Donald M. Kendall(12)..................... 62,416,630 54.1 48.3
Wayne T. Thorson(12)...................... 62,416,630 54.1 48.3
James B. Roszak(12)....................... 62,416,630 54.1 48.3
John Sculley(13).......................... 308,840 * *
Charles W. Richion(13).................... 308,840 * *
All directors and officers as a group
(17 persons)(14)(15)..................... 117,541,875 93.7% 84.3%
</TABLE>
- --------
* Less than one percent
(1) The address for each of our officers and directors is c/o BUY.COM at 85
Enterprise, Aliso Viejo, California 92656. The address for the SOFTBANK
Technology Funds is 200 West Evelyn Avenue, Suite 200, Mountain View,
California 94043. The address for the other SOFTBANK funds is 10 Langley
Road, Suite 403, Newton Center, Massachusetts 02159.
(2) Consists of shares held by the Scott A. Blum Separate Property Trust, the
Will Scott Blum Trust, the Emma Rose Blum Trust and the Scott Blum GRAT.
The address for the Blum Trusts is 33971 Selva Road, Suite 200, Dana
Point, California 92629.
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<PAGE>
(3) Includes 10,741,324 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 12,980,426 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 10,741,324 shares, 2,091,356 shares, 3,137,025 shares, 12,980,426
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 5,099,258 shares held by Ingram Capital, Inc. Mr. Ingram is the
majority stockholder of Ingram Entertainment Holdings, Inc., which is the
parent corporation of Ingram Capital, 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 options that are
exercisable within 60 days of December 31, 1999.
(7) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 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 options that are
exercisable within 60 days of December 31, 1999.
(9) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of December 31, 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 and 13,125 shares subject to options that have been
transferred to members of his family.
(10) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(11) This amount includes 660,937 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.
(12) Includes 178,125 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999. Includes 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. Each trustee disclaims beneficial ownership
of the shares held in the trust.
(13) Includes 178,125 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(14) Includes 10,370,566 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(15) 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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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and provisions of our
certificate of incorporation and bylaws is only a summary. You should also
refer to the copies of our certificate and bylaws which have been filed with
the Securities and Exchange Commission as exhibits to our registration
statement, of which this prospectus forms a part. The description of common
stock and preferred stock reflect changes to our capital structure that will
occur upon the closing of this offering in accordance with the terms of the
certificate of incorporation that will be adopted by us immediately prior to
the closing of this offering.
Upon the closing of this offering, our authorized capital stock will consist
of 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 31, 1999, 115,140,175 shares of common stock were deemed outstanding
and held of record by approximately 55 holders, assuming the conversion of all
shares of preferred stock into common stock. 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 12,175,706 shares of our Series A
convertible participating preferred stock and 9,923,276 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
74
<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 31, 1999, options to purchase a total of 22,324,104 shares of
common stock were outstanding, and up to 570,424 additional shares of common
stock may be subject to options granted in the future under our stock plans,
excluding the 1999 Stock Incentive Plan and 1999 Employee Stock Purchase Plan,
which become effective upon the signing of the underwriting agreement in
connection with this offering. 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 129,140,175 shares of common
stock outstanding assuming no exercise of options after December 31, 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, 93,233,047 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 effectiveness.. 14,000,000 Freely tradable shares sold in this
offering
90 days............. 15,684 Shares saleable under Rule 144 that
are not subject to 180-day lock-up
180 days............ 93,233,047 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 31, 1999, the holders of options to purchase approximately 22,324,104
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
24,769,525 shares of common stock subject to outstanding stock
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<PAGE>
options or reserved for issuance under our stock plans. 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," "--Employee Benefit Plans--1998 Stock
Option/Stock Issuance Plan" "--Employee Benefit Plans--Special Executive Stock
Option Plan" and "--Employee Benefit Plans--1999 Stock Plans."
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 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, which may 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 $1.6 million 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
81
<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.
82
<PAGE>
EXPERTS
The consolidated balance sheets of BUY.COM INC. as of December 31, 1997 and
1998, and September 30, 1999, 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, for the year ended December 31,
1998, and for the nine months ended September 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.
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 for 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.
The financial statements of SpeedServe Inc. as of December 31, 1997 and
December 31, 1996 and for the year ended December 31, 1997 and the period from
October 17, 1996 (inception) through December 31, 1996 included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to BUY.COM's purchase of SpeedServe) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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.
83
<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-26
Balance Sheets........................................................... F-27
Statements of Operations................................................. F-28
Statements of Stockholders' Equity....................................... F-29
Statements of Cash Flows................................................. F-30
Notes to Financial Statements............................................ F-31
FINANCIAL STATEMENTS OF SPEEDSERVE INC.
Report of Independent Accountants........................................ F-39
Balance Sheets........................................................... F-40
Statements of Operations and Accumulated Deficit......................... F-41
Statements of Cash Flows................................................. F-42
Notes to Financial Statements............................................ F-43
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation.................................................... PF-1
Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998............................................ PF-2
Unaudited Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1999.................................... PF-3
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30,
1999.................................................................... PF-4
</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
January 10, 2000
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
September 30, 1999, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the period from June 7, 1997, (Inception)
to December 31, 1997, the year ended December 31, 1998, and for the nine month
period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BUY.COM INC. and
subsidiaries as of December 31, 1997 and 1998, and September 30, 1999, and the
results of their operations and their cash flows for the period from June 7,
1997, (Inception) to December 31, 1997, the year ended December 31, 1998, and
for the nine month period ended September 30, 1999, in conformity with
generally accepted accounting principles.
Orange County, California
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)
(note 8)
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash......................................... $ 34 $ 9,221 $ 3,231
Accounts receivable, net of allowances of $0
and $50 at December 31, 1997 and 1998,
respectively, and $766 at September 30,
1999........................................ 178 4,986 16,062
Prepaid expenses and other current assets.... 4 1,258 1,422
--------------- ---------------- ---------------
Total current assets....................... 216 15,465 20,715
Property and equipment, net................... 50 2,895 5,286
Intangibles, net.............................. -- 8,212 7,187
Other noncurrent assets....................... 1 265 701
--------------- ---------------- ---------------
$ 267 $ 26,837 $ 33,889
=============== ================ ===============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable............................. $ 361 $ 16,270 $ 68,455
Line of credit............................... -- -- 12,377
Accrued expenses............................. 11 438 3,695
Deferred revenue............................. 22 2,295 826
Income taxes payable......................... 2 3 3
Note payable to stockholder.................. 211 -- 5,000
Current portion of long-term debt............ -- 21 313
--------------- ---------------- ---------------
Total current liabilities.................. 607 19,027 90,669
--------------- ---------------- ---------------
Long-Term Debt, net of current portion........ -- 1,175 1,818
--------------- ---------------- ---------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Convertible preferred stock--Series A,
$0.0001 par value;
Authorized shares--150,000,000 at September
30, 1999; Issued and outstanding--
12,175,706 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--850,000,000 at September
30, 1999; Issued and outstanding--
86,860,649 at December 31, 1998, 89,326,751
at September 30, 1999, and 115,140,062
pro forma (unaudited)....................... -- 9 9 12
Additional paid-in capital................... -- 9,664 30,607 169,810
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) $ 65,665
--------------- ---------------- --------------- ---------------
$ 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 88,801,360
Pro forma (note 8):
Net loss per share:
Basic and diluted
(unaudited)............ $ (0.70)
Weighted average number
of common shares
outstanding:
Basic and diluted
(unaudited)............ 114,614,671
</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
------------------- -------------------- --------------------------
Additional
Preferred Paid-in
Units Capital Shares Stock Shares Par Capital
---------- ------- ---------- --------- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception of Company, June 7, 1997
Members' contributions.................................. 9,000,000 $ 50 -- $ -- -- $ -- $ --
Net loss................................................ -- -- -- -- -- -- --
---------- ---- ---------- ------- ---------- ---- -------
Balance, December 31, 1997.............................. 9,000,000 50 -- -- -- -- --
Reorganization of Company, August 3, 1998:
Retirement of members' units........................... (9,000,000) (50) -- -- -- -- --
Allocation of accumulated loss to paid-in capital...... -- -- -- -- -- -- (2,692)
Issued Series A preferred stock........................ -- -- 3,043,921 2 -- -- --
Issued common stock.................................... -- -- -- -- 81,331,078 8 40
Issuance of Series A preferred stock for cash........... -- -- 9,131,785 14,941 -- -- --
Issuance of common stock for acquisition of Speedserve.. -- -- -- -- 5,529,571 1 9,082
Deferred compensation related to stock options granted.. -- -- -- -- -- -- 3,234
Amortization of deferred compensation................... -- -- -- -- -- -- --
Net loss................................................ -- -- -- -- -- -- --
---------- ---- ---------- ------- ---------- ---- -------
Balance, December 31, 1998.............................. -- -- 12,175,706 14,943 86,860,649 9 9,664
Exercise of stock options for cash...................... -- -- -- -- 1,979,997 -- 21
Issuance of common stock for cash....................... -- -- -- -- 317,296 -- 1,974
Common stock issued for purchases of domain names....... -- -- -- -- 168,809 -- 861
Issuance of warrants for supply and debt agreements..... -- -- -- -- -- -- 7,021
Deferred compensation related to stock options granted.. -- -- -- -- -- -- 11,066
Amortization of deferred compensation................... -- -- -- -- -- -- --
Net loss................................................ -- -- -- -- -- -- --
---------- ---- ---------- ------- ---------- ---- -------
Balance, September 30, 1999............................. -- $ -- 12,175,706 $14,943 89,326,751 $ 9 $30,607
========== ==== ========== ======= ========== ==== =======
<CAPTION>
Total
Stockholders'
Deferred Accumulated Equity
Compensation Deficit (Deficit)
------------ ----------- -------------
<S> <C> <C> <C>
Inception of Company, June 7, 1997
Members' contributions.................................. $ -- $ -- $ 50
Net loss................................................ -- (390) (390)
-------- -------- --------
Balance, December 31, 1997.............................. -- (390) (340)
Reorganization of Company, August 3, 1998:
Retirement of members' units........................... -- -- (50)
Allocation of accumulated loss to paid-in capital...... -- 2,692 --
Issued Series A preferred stock........................ -- -- 2
Issued common stock.................................... -- -- 48
Issuance of Series A preferred stock for cash........... -- -- 14,941
Issuance of common stock for acquisition of Speedserve.. -- -- 9,083
Deferred compensation related to stock options granted.. (3,234) -- --
Amortization of deferred compensation................... 795 -- 795
Net loss................................................ -- (17,844) (17,844)
-------- -------- --------
Balance, December 31, 1998.............................. (2,439) (15,542) 6,635
Exercise of stock options for cash...................... -- -- 21
Issuance of common stock for cash....................... -- -- 1,974
Common stock issued for purchases of domain names....... -- -- 861
Issuance of warrants for supply and debt agreements..... -- -- 7,021
Deferred compensation related to stock options granted.. (11,066) -- --
Amortization of deferred compensation................... 5,417 -- 5,417
Net loss................................................ -- (80,527) (80,527)
-------- -------- --------
Balance, September 30, 1999............................. $ (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 nine 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 nine 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
Net revenues include product sales net of returns and allowances,
advertising sales, warranty sales net of amounts paid to the national insurance
provider, and gross outbound shipping and handling charges. The Company
recognizes revenue from product sales, net of discounts, coupon redemption and
estimated sales returns, when the products are shipped to customers. Gross
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 goods
to the customer. For all product sales transactions with its customers, the
Company acts as a principal, takes title to all products sold upon shipment,
bears credit risk, and bears inventory risk for returned products that are not
successfully returned to suppliers, although these risks are mitigated through
arrangements with credit card issuers, shippers and suppliers.
F-9
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. In September 1999,
the Company entered into a three-year advertising contract. Under the terms of
this contract, the Company will receive monthly payments of equal amounts. This
long-term contract comprised less than 10% of the Company's advertising
revenues in the nine month period ended September 30, 1999. The Company has no
other advertising contract with a term in excess of one year.
For the year ended December 31, 1998 and the nine month period ended
September 30, 1999, the Company recognized advertising revenues of $2.4 million
and $8.5 million respectively.
The Company recognizes revenue from warranty sales net of amounts paid to
the national insurance provider that underwrites the extended warranties.
Revenue from warranty sales is recognized as the warranty contracts are sold to
customers.
Cost of Goods Sold
Cost of goods sold includes product costs, direct costs associated with
advertising revenues and shipping and handling costs paid by the Company in the
fulfillment of customer orders.
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 as 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.
F-10
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED 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 SFAS No. 123, Accounting for
Stock-Based Compensation. APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based on the
intrinsic value of stock options granted. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact
of applying the fair value method of SFAS No. 123. This method recognizes the
fair value of stock options granted at the date of grant in earnings over the
vesting period of the options.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency. Assets and liabilities of subsidiaries with international operations
are translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average exchange rates prevailing as they occur.
Translation adjustments, if material, are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Transaction gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved, which are
immaterial, are included in the consolidated statements of operations. The
Company has not entered into any foreign currency exchange contracts or other
derivative financial instruments.
Segment and Geographic Information
The Company operates in one principal business segment across domestic
markets. Substantially all of the operating results and identifiable assets are
in the United States.
Concentration Risks
At December 31, 1997 and 1998, the Company had no significant concentrations
of credit risk.
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, 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
F-11
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Use. SOP 98-1 requires all costs related to the development of internal use
software other than those incurred during the application development stage to
be expensed as incurred. Costs incurred during the application development
stage are required to be capitalized and amortized over the estimated useful
life of the software. SOP 98-1 was adopted by the Company on January 1, 1999.
Adoption did not have a material effect on the Company's consolidated financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and
requires costs of start-up activities and organization costs to be expensed as
incurred. Adoption did not have a material effect on the Company's consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. The Company does not expect that adoption of SFAS
No. 133 will have a material impact on its consolidated financial position or
results of operations as the Company does not currently hold any derivative
financial instruments.
3. Business Acquisitions, Dispositions and Investments
Business Acquisitions
In December 1998, the Company acquired all of the outstanding capital stock
of Speedserve. Speedserve was an internet retailer of books, videos, DVD's and
video games. The aggregate purchase price of the 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 unaudited 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 $ 23,992 $ 96,188
Basic and diluted
weighted average net
loss per share......... $ (0.03) $ (0.28) $ (0.84)
</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
F-12
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
Business Disposition
In October 1999, the Company declared a common stock dividend of 75% of the
capital stock, on an "as converted" basis, of one wholly owned subsidiary,
BUYNOW INC. ("BUYNOW") to all stockholders of record as of October 13, 1999.
The Company has retained preferred stock representing 25% of the capital stock
of BUYNOW, on an "as converted" basis. The BUYNOW preferred stock has a
liquidation preference over the common stock and is convertible into BUYNOW
common stock.
Joint Ventures
In July 1999, the Company entered into an agreement with United Airlines
Inc. ("UA") to form BuyTravel.com LLC ("Buy Travel") to market and sell travel
services and products on the internet. The Company and UA will each own 50% of
BuyTravel. The Company and UA have each agreed to provide advertising and
marketing support to BuyTravel up to a gross amount of $18.0 million over three
years from the effective date of the agreement. Furthermore, the Company and UA
have each committed to contribute capital of $2.0 million within the first four
months of the agreement to establish and support continuing operations. In
addition, 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 the
warrant of $7.0 million was expensed as contract costs in the period the
warrant was issued. The fair market value of the warrant 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.
F-13
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
received 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 commenced on June 1, 1999 at a rate of $10,000 per
month. The Company's initial investment in this entity was recorded at cost and
is immaterial to the consolidated statements of position and results of
operations for all periods. The agreements between the Company and BuyGolf
continued in effect until the Company acquired BuyGolf on October 25, 1999.
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
------ ------- ------- -------------
<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
------ ------- ------- -------------
<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 a warrant to the bank to purchase a
number of shares of the Company's common stock to be determined by an
F-14
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
the warrant 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.
On July 21, 1999, the Company obtained an irrevocable standby letter of
credit in the amount of $2.6 million from a commercial bank in order to secure
additional office space to be used by the Company.
7. Commitments and Contingencies
Leases
During 1997 and 1998, the Company leased office facilities and fixed assets
under non-cancelable operating leases. Rental expense under operating lease
agreements for 1997 and 1998 was approximately $12,000 and $195,000,
respectively.
In June 1999, the Company entered into a five-year non-cancelable capital
lease agreement for office furniture and equipment with monthly lease payments
of approximately $5,000. In July 1999, the Company also entered into a three-
year non-cancelable capital lease agreement for computer software with monthly
lease payments of approximately $18,000. In September 1999, the Company entered
into a two-year non-cancelable capital lease agreement for telephone systems
with monthly payments of approximately $6,700.
Future minimum commitments on leases, including those leases entered into
subsequent to December 31, 1998, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31,
1999................................................... $ 173 $ 629
2000................................................... 363 1,851
2001................................................... 335 1,721
2002................................................... 173 1,514
2003................................................... 63 1,511
Thereafter............................................. 51 2,141
------ ------
Total minimum lease payments............................. 1,158 $9,367
======
Less--Amount representing interest....................... 156
------
Present value of net minimum lease payments.............. 1,002
Less--Current portion.................................... 173
------
$ 829
======
</TABLE>
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 online 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. Pursuant to this
agreement, if the Company does not purchase at least $350.0 million of product
annually, Ingram may revise the pricing schedules. Ingram has also agreed to
help the Company secure a minimum dollar amount of marketing related vendor
advertising based on a specified percentage of the Company's net purchases from
Ingram in any twelve month period. However, this marketing arrangement is
contingent upon the Company's achieving and maintaining $500.0 million in
annual product purchases from Ingram. 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 notice.
F-15
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In December 1998, the Company acquired Speedserve in exchange for shares of
the Company's common stock. In conjunction with this acquisition, the Company
obtained a three-year supply commitment from Ingram Entertainment, Speedserve's
former parent company.
On January 18, 1999, the Company entered into an agreement to provide
extended warranties to customers on computer hardware products sold on the
Company's Web site. In accordance with the terms of the agreement, the
Company's liability on the extended warranties is assumed by a national
insurance provider. The extended warranties are sold on the Company's Web site
and payments are received by the Company. The Company remits a fixed fee based
upon the type of warranty purchased by the customer as mutually agreed upon in
the agreement.
On February 1, 1999, the Company entered into a two-year agreement to
outsource the picking, packing and shipping functions for orders placed on the
Company's BUYMUSIC.COM Web site. Pricing is based on a fee that is contingent
upon sales volume levels, which increase over the term of the agreement. 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 discount programs and
fulfillment and cooperative advertising services. These agreements expire in
September 2003. 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
F-16
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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 seek, therefore, loss is not
reasonably estimable 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 12,666,542 shares of common stock and 1,298,742 shares of
Series A convertible participating preferred stock, par value $0.0001 per
share, ("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 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 12,666,542 shares
to 850,000,000 shares. In addition, the Board of Directors approved an increase
in the number of authorized shares of preferred stock from 1,298,742
F-17
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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).
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 9,131,785 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 9,923,276 shares of Series B
convertible participating preferred stock, par value $0.0001 per share ("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 agreements,
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
December 31, 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 and the
unaudited pro forma net loss per share and weighted average number of shares
outstanding for the nine months ended September 30, 1999 gives effect to this
conversion, the issuance of 1,125,000 shares of common stock in connection with
a sponsorship agreement entered into with the PGA TOUR and the issuance of
2,589,329 shares of common stock to acquire BuyGolf.com 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
F-18
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 September 30, 1999,
there were no shares subject to repurchase.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
June 7, 1997
(Inception) to Year Ended Nine Months Ended
December 31, 1997 December 31, 1998 September 30, 1999
------------------ -------------------- --------------------
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 $0.01 14,530,276 $1.65
Granted.............. 2,109,375 0.01 12,439,651 1.91 8,504,129 5.18
Exercised............ -- -- -- -- (1,979,997) 0.01
Forfeited/expired.... -- -- (18,750) 3.83 (915,468) 2.46
--------- ----- ---------- ----- ---------- -----
Options outstanding,
End of period........... 2,109,375 $0.01 14,530,276 $1.65 20,138,940 $3.27
========= ===== ========== ===== ========== =====
Options exercisable at
end of period.......... 2,109,375 $0.01 14,530,276 $1.65 20,138,940 $3.27
</TABLE>
All options issued by the Company are immediately exercisable upon grant.
Options exercisable at December 31, 1997, December 31, 1998, and September 30,
1999, of 2,109,375, 13,827,151, and 17,721,756, respectively, are subject to
continued vesting requirements.
The following table summarizes all stock options outstanding as of September
30, 1999:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------------------
Weighted Average
Number of Remaining Weighted
Range of Shares Contractual Life Average
Exercise Price Outstanding (years) Exercise Price
-------------- ----------- ----------------- --------------
<S> <C> <C> <C>
$ 0.01 5,088,751 9.48 $0.01
$ 1.64 to $3.83 12,985,824 9.55 $3.64
$ 6.79 to $9.14 2,064,365 9.59 $8.97
----------
20,138,940
==========
</TABLE>
F-19
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Had compensation cost for stock options awarded under this plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have reflected the following pro forma amounts (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
September 30,
December 31, December 31, --------------------
1997 1998 1998 1999
------------ ------------ ----------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net loss, as reported......... $ (390) $(17,844) $(4,668) $(80,527)
Pro forma compensation
expense...................... -- (281) -- (2,012)
------ -------- ------- --------
Pro forma net loss............ $ (390) $(18,125) $(4,668) $(82,539)
====== ======== ======= ========
Basic and diluted net loss per
share, as reported........... $(0.00) $ (0.22) $ (0.06) $ (0.93)
Basic and diluted net loss per
share, pro forma............. $(0.00) $ (0.22) $ (0.06) $ (0.72)
</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 $1.02, 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 5.49%, respectively; expected life of 3.00
years, 3.82 years, and 3.99 years, respectively; and weighted average
volatility and weighted average dividend yield of 0.00% for all periods.
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 has adopted the 1999 Stock Incentive Plan (the "1999 Plan"). The
1999 Plan was approved by the Company's board of directors in December 1999 and
by its stockholders in January 2000.
F-20
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The 1999 Plan is intended to be the successor plan to the 1998 ISO Plan, the
Executive Plan and the BuyGolf.com, Inc. 1998 Stock Option 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.
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
F-21
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 88,801,360
----------- ----------- ----------- -----------
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 88,801,360
Stock options
adjustment............. -- -- -- --
Convertible preferred
stock adjustment....... -- -- -- --
----------- ----------- ----------- -----------
Average common shares
outstanding............ 81,331,078 81,815,869 81,331,078 88,801,360
----------- ----------- ----------- -----------
Net loss per common
share.................. $ (0.00) $ (0.22) $ (0.06) $ (0.91)
=========== =========== =========== ===========
</TABLE>
At December 31, 1997, December 31, 1998, and September 30, 1999,
respectively, options to purchase 2,109,375, 14,530,276, and 20,156,518 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 $88.6 million
respectively, related to federal and state income taxes which can be used to
offset future federal and state taxable income from operations. Substantially
all of these carryforwards will begin to expire in 2004.
F-22
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Significant components of the Company's deferred tax asset at December 31,
1997 and 1998, and September 30, 1999, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards............. $ -- $ 5,128 $ 35,459
Depreciation and amortization................ -- 1,758 1,666
Other........................................ -- 47 1,162
------- -------- --------
Gross deferred tax assets.................. -- 6,933 38,287
Valuation allowance.......................... -- (6,933) (38,287)
------- -------- --------
Net deferred tax assets.................... $ -- $ -- $ --
======= ======== ========
</TABLE>
Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50.0% over a three year period. The
impact of any limitations that may be imposed for future issuances of equity
securities, including issuances with respect to acquisitions, has not been
determined.
12. Related Party Transactions
Transactions with the Founder/Shareholder and Directors
At December 31, 1997, a loan to the Founder/Shareholder in the amount of
$211,000 was outstanding. This loan was paid in full in 1998. Interest income
earned during 1998 in connection with this loan was $7,000.
On October 8, 1998, the Company loaned the Founder/Shareholder $1.0 million.
The loan was repaid in two equal installments of $500,000 during October 1998.
Interest income earned during 1998 in connection with this loan was $4,000.
On October 15, 1998, the Company paid $125,000 to an unrelated party as
consideration to terminate a building lease early. The Founder/Shareholder
purchased the building with the intent of leasing the building to the Company.
This lease commenced in 1999.
In December 1998, the Company acquired all of the outstanding capital stock
of Speedserve. Speedserve was a subsidiary of Ingram Entertainment, a company
controlled by an outside director of the Company. Ingram Entertainment supplies
books, videos, DVD's and video games to the Company.
In December 1998, the Company borrowed $1.2 million for the purchase of an
office building. A trust controlled by the Founder/Shareholder guaranteed this
loan.
In five separate transactions, the Founder/Shareholder sold 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.
F-23
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-24
<PAGE>
BUY.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 4,351,327 stock
options exercisable at the estimated fair value of the underlying common stock,
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 five-for-eight 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.
F-25
<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-26
<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-27
<PAGE>
BUYGOLF.COM, INC.
STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 1, 1998 Six Months Three Months
(Inception) to Ended 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-28
<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-29
<PAGE>
BUYGOLF.COM, INC.
STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
December 1, 1998 Six Months Three Months
(Inception) to Ended 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-30
<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 provider.
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 (pre-split) 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-31
<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
Net revenues includes product sales net of returns and allowances, and gross
outbound shipping and handling charges. The Company recognizes revenue from
product sales, net of discounts and estimated sales returns, upon shipment to
its customers. Gross outbound shipping and handling charges are included in net
sales. For all product sales transactions with its customers, the Company acts
as a principal, takes title to all products sold upon shipment, and bears
credit risk and inventory risk, although these risks are mitigated through
arrangements with credit card issuers, shippers and suppliers.
Cost of Goods Sold
Cost of goods sold includes product costs and shipping and handling costs
paid by the Company in the fulfillment of customer orders.
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.
F-32
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Loss Per Share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common stock and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation if their effect is antidilutive.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by the Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
APB No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123.
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.
F-33
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Property and Equipment
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
Useful December 31, June 30,
Lives 1998 1999
------ ------------ --------
<S> <C> <C> <C>
Computers and equipment......................... 3-5 $ -- $148
Furniture and fixtures.......................... 7 -- 17
---- ----
-- 165
Less--accumulated depreciation.................. -- (16)
---- ----
Property and equipment, net................... $ -- $149
==== ====
</TABLE>
4. Intangibles
Intangibles consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
Useful December 31, June 30,
Lives 1998 1999
------ ------------ --------
<S> <C> <C> <C>
Supply and fulfillment agreement................ 1 $ -- $ 675
Domain names.................................... 3 -- 91
---- -----
-- 766
Less--accumulated amortization.................. -- (118)
---- -----
Intangibles, net.............................. $ -- $ 648
==== =====
</TABLE>
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.
F-34
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Supply and Fulfillment and Arrangement
On May 3, 1999, the Company entered into an exclusive one-year agreement
with Las Vegas Golf and Tennis, Inc. ("LVG"). This agreement provides that LVG
sell goods to the Company at cost plus shipping costs and a $1 per order
packaging fee. Per this agreement, LVG received 7.5% of the Company's
outstanding common stock. An intangible asset has been recognized (based on the
value of the common stock at the time of the transaction) related to this
agreement that is being amortized over the life of the agreement. Amortization
expense related to this agreement was $112,000 in the six months ended June 30,
1999.
Marketing Agreements
The Company has entered into certain marketing agreements, which include
fixed fees payable through the year 2000. The total of these commitments are
$1.0 million for the remaining six months ended December 31, 1999 and $652,000
for the year ended December 31, 2000.
6. Stockholders' Equity
Effective December 1, 1998, the Company incorporated in the State of
Delaware as BuyGolf.com, Inc. The State of Delaware authorized the Company to
issue 10,000,000 shares of common stock and 5,000,000 shares of preferred
stock.
In December 1998 the Company commenced negotiations with BUY.COM to acquire
a non-transferable and non-sublicensable license to use domain names owned by
BUY.COM, solely in connection with the operation of an internet retail
operation selling golf equipment and golf-related products. In consideration
for the license, the Company agreed to issue BUY.COM a 5% ownership (subject to
anti-dilution provisions) in the Company. The distribution of said shares
occurred at the time negotiations commenced. In May 1999, the Company finalized
the agreement with BUY.COM for such license.
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
F-35
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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%.
F-36
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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
F-37
<PAGE>
BUYGOLF.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of SpeedServe Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of SpeedServe Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
year ended December 31, 1997 and the period from inception (October 17, 1996)
through December 31, 1996 in conformity with accounting principles generally
accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Nashville, Tenessee
August 17, 1998, except as to
Note 8, which is as of
December 3, 1998
F-39
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
--------- ---------
Assets
<S> <C> <C>
Current Assets:
Cash.................................................... $ 32,075 $ 2,440
Accounts receivable, less allowance for doubtful
accounts of $79 and $0 in 1997 and 1996, respectively.. 2,713 5,742
Receivable from Ingram.................................. 18,425 --
Inventories............................................. -- 2,726
Prepaid expenses........................................ 1,940 --
--------- ---------
Total current assets................................... 55,153 10,908
Property and equipment, net.............................. 12,078 606,881
--------- ---------
$ 67,231 $ 617,789
========= =========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities:
Accounts payable........................................ $ 26,026 $ 67,578
Payable to Ingram....................................... -- 373,520
Accrued expenses........................................ -- 54,591
Deferred income taxes................................... 188 28,704
--------- ---------
Total current liabilities.............................. 26,214 524,393
--------- ---------
Stockholders' Equity:
Common stock, no par value, 10,000 shares authorized,
issued and outstanding.................................. 508,625 508,625
Stock subscriptions receivable........................... (454,276) --
Accumulated deficit...................................... (13,332) (415,229)
--------- ---------
Total stockholders' equity............................. 41,017 93,396
--------- ---------
Commitments and contingencies (Note 7).................
--------- ---------
Total liabilities and stockholders' equity............... $ 67,231 $ 617,789
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Period from
Inception
(October 17, 1996)
through Year Ended
December 31, 1996 December 31, 1997
------------------ -----------------
<S> <C> <C>
Net sales................................ $ 39,748 $ 178,822
Costs of sales........................... 27,776 145,500
-------- ---------
Gross profit............................. 11,972 33,322
-------- ---------
Operating expenses:
Marketing and sales..................... 10,843 169,098
Technical and system development........ -- 72,099
General and administrative.............. 25,904 411,928
-------- ---------
Total operating expenses............... 36,747 653,125
-------- ---------
Operating loss........................... (24,775) (619,803)
Other income and (expenses):
Interest, net........................... 6,158 5,730
Other................................... (1,864) 579
-------- ---------
Total other income and expenses........ 4,294 6,309
-------- ---------
Loss before income taxes................. (20,481) (613,494)
Benefit for income taxes................. (7,149) (211,597)
-------- ---------
Net loss............................... (13,332) (401,897)
======== =========
Accumulated deficit -- beginning of
year.................................... -- (13,332)
-------- ---------
Accumulated deficit -- end of year....... $(13,332) $(415,229)
======== =========
Net loss per share:
Basic and diluted....................... $ (1) $ (42)
Weighted average number of common shares
outstanding:
Basic................................... 10,000 10,000
Diluted................................. 10,000 10,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(October 17, 1996) Year Ended
through December December 31,
31, 1996 1997
------------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(13,332) $(401,897)
Adjustment to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................ 290 55,152
Changes in assets and liabilities:
Trade and other receivables.................. (2,713) (3,029)
Inventories.................................. -- (2,726)
Prepaid expenses............................. 438 1,940
Accounts payable and accrued expenses........ 26,026 96,143
Income taxes payable......................... 188 28,516
Receivable/Payable from/to Ingram............ (18,425) 391,945
-------- ---------
Cash provided by (used in) operating
activities.................................... (7,528) 166,044
Cash flows from investing activities:
Purchase of fixed assets...................... (9,145) (649,955)
Cash flows from financing activities:
Proceeds from issuance of common stock........ 48,748 454,276
-------- ---------
Increase (decrease) in cash.................... 32,075 (29,635)
Cash at beginning of the year.................. -- 32,075
-------- ---------
Cash at end of the year........................ $ 32,075 $ 2,440
======== =========
Cash paid for interest......................... $ -- $ 7,005
======== =========
Cash paid for income taxes..................... $ -- $ --
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
SpeedServe Inc. (the "Company") is an Internet entertainment retailer that
sells a large selection of videos, games and books to consumers at competitive
prices. The Company was incorporated on October 17, 1996 as BookServe Inc. and
in July 1997 changed its name to SpeedServe Inc. In connection with the
incorporation of the Company, Ingram Entertainment Inc. ("Ingram") committed to
pay $500,000 for an 88% (8,800 shares of common stock) ownership interest and
two minority shareholders contributed $8,625 in cash, prepaid expenses, and
fixed assets for a 12% (1,200 shares of common stock) ownership interest, which
is divided equally among the two minority shareholders. Ingram remitted $45,724
and $454,276 to the Company for common stock in 1996 and 1997, respectively.
Risks and Uncertainties
The Company is subject to all of the inherent risks in an early stage
business in the technology and retail industries. These risks include, but are
not limited to: limited operating history, management of a changing business,
reliance on merchandise vendors, the competitive nature of the industry,
dependence on the Internet and related security risks, and the uncertain
ability to protect proprietary intellectual properties.
Use of Estimates
The presentation 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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash, Payable to Ingram and Receivable from Ingram
The Company has a cash management program with Ingram which provides for the
transfer of available cash balances to meet the Company's working capital
requirements.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, which include
accounts receivable, prepaid expenses, accounts payable and accrued expenses is
considered to approximate fair value due to the relatively short maturities of
the respective instruments.
Accounts Receivable
Accounts receivable are valued net of reserves for bad debts, returns,
discounts, and allowances. Calculations of reserves are based on historical
experience.
Inventories
The Company purchases all videos and games from Ingram and a substantial
majority of its book offerings from one vendor (97% and 98% in 1997 and 1996,
respectively). The Company purchases all inventory from Ingram at what
management believes are terms that are not more favorable than other customers
receive. Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
F-43
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The Company primarily purchases inventory from its vendors when a customer
places an order. Primarily all book inventory is shipped by the Company to the
customer and primarily all video inventory is drop shipped from an Ingram
warehouse to the customer.
Property and Equipment
All fixed assets are recorded at cost. The Company computes depreciation on
a straight-line basis for financial reporting purposes and uses accelerated
depreciation methods for tax purposes, where appropriate.
Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer. The
Company provides an allowance for sales returns, which have been insignificant
based on historical experience.
Earnings (Loss) per Share
Basic earnings (loss) per share is calculated using the average shares of
common stock outstanding, while diluted earnings per share reflects the
potential dilution that could occur if stock options and warrants were
exercised. Stock options and warrants are excluded from the calculation if
their effect would be antidilutive. As of December 31, 1997, the Company has
not issued any stock options or warrants.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years arising from differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision (benefit) for income taxes represents the tax payable
(receivable) for the period and the change during the period in deferred tax
assets and liabilities.
Technical and Systems Development
Development expenses consist primarily of consulting fees and systems
infrastructure related to the Company's Web sites and order fulfillment
systems. Costs incurred for internal-use computer software has been capitalized
in accordance with SOP 98-1 as described below and are depreciated over a three
year useful life. All other technical and system development costs have been
expensed as incurred.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued FAS 130,
Reporting Comprehensive Income, which establishes standards for the reporting
and display of comprehensive income and its components. FAS 130 has been
adopted in these financial statements. Adoption had no impact on the Company's
net loss or stockholders' equity as the comprehensive loss was the same as the
net loss.
In June 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosures about Segments of an Enterprise and Related Information. FAS 131
establishes standards for the way that public reporting enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in annual financial reports issued to stockholders. The Company
operates under one segment as defined by FAS 31.
F-44
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. Costs incurred prior to the initial application of SOP 98-1,
whether capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. SOP 98-1 was adopted by the Company for the fiscal year ended
December 31, 1997. For the year ended December 31, 1997, the Company
capitalized approximately $587,000 of software development costs in accordance
with SOP 98-1.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------- ------
<S> <C> <C>
Books....................................................... $ -- $2,039
Videos...................................................... -- 687
------- ------
Total inventories......................................... $ -- $2,726
======= ======
</TABLE>
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- Depreciable
1996 1997 Lives
------- -------- -----------
<S> <C> <C> <C>
Computer software......................... $ 2,366 $586,721 3 years
Computer hardware......................... 8,144 40,824 3 years
Leasehold improvements.................... 0 21,616 12 years
Furniture and fixtures.................... 1,438 12,875 5 years
Machinery and equipment................... 420 1,951 5 years
------- --------
12,368 663,987
Less: accumulated depreciation and
amortization............................. (290) (57,106)
------- --------
Net property and equipment................ $12,078 $606,881
======= ========
</TABLE>
4. Employee Benefit Plans
The Company participates in a multi-employer defined contribution 401(k)
salary deferral plan sponsored by Ingram. The Company contributes to the 401(k)
plan by matching a percentage of employee voluntary contributions. The plan
covers substantially all full-time employees. Expenses related to the defined
contribution 401(k) plan were $4,403 in 1997 and $0 in 1996.
5. Income Taxes
The Company is included in the consolidated federal income tax return filed
by Ingram. Income taxes related to the Company are determined on a separate
entity basis. A tax sharing agreement between the Company and Ingram permits
Ingram to utilize all tax benefits resulting from operating losses generated by
the Company. All of the Company's net operating losses have been utilized by
Ingram.
F-45
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The income tax benefit for the year ended December 31, 1997 and the period
October 17, 1996 through December 31, 1996, was as follows:
<TABLE>
<CAPTION>
1996 1997
------- ---------
<S> <C> <C>
Current benefit
Federal............................................... $(7,337) $(240,113)
State................................................. 0 0
Deferred expense
Federal............................................... 188 28,516
State................................................. 0 0
------- ---------
Total benefit........................................ $(7,149) $(211,597)
======= =========
</TABLE>
The benefit for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pretax
losses, as a result of the following differences for the year ended December
31, 1997 and the period October 17, 1996 through December 31, 1996:
<TABLE>
<CAPTION>
1996 1997
------- ---------
<S> <C> <C>
Tax benefit at statutory rates........................ $(7,168) $(214,723)
Other................................................. 19 3,126
------- ---------
Total income tax benefit............................ $(7,149) $(211,597)
======= =========
</TABLE>
Deferred income taxes result from temporary differences between the
financial reporting basis and income tax bases of assets and liabilities and
relate principally to certain expenses as follows:
<TABLE>
<CAPTION>
1996 1997
---- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................................ $188 $28,742
Other....................................................... 0 (38)
---- -------
Total deferred tax liabilities............................. $188 $28,704
==== =======
</TABLE>
6. Transactions with Ingram
The Company receives administration services, office space, management
information systems and finance services from Ingram. The allocation method
for finance and administration services and management information systems is
based on the actual payroll costs incurred by Ingram. Office space charges
were allocated based on the square footage occupied by the Company in an
Ingram facility and the total facility charges incurred by Ingram. Management
deems this allocation method to be reasonable. All expenses, except for
management information systems, totaled $31,323 in 1997 and are recorded as
general and administrative expenses. Management information systems costs of
$527,315 related to technical and system development services were capitalized
to computer software in 1997. No amounts were charged by Ingram for these
services in 1996 based on the de minimis nature of the charges for the
Company.
The actual expenses for these services that will be incurred by the Company
in the future may be different if either the nature of the control
relationship with Ingram changes or Ingram's allocation method is changed.
The Company purchased $27,230 and $0 of video product from Ingram in 1997
and 1996, respectively.
F-46
<PAGE>
SPEEDSERVE INC.
(a majority-owned subsidiary of Ingram Entertainment Inc.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
7. Commitments and Contingencies
In October 1997, the Company entered into an agreement with a navigational
Web site ("NWS") whereby the NWS will display a link to a Company website,
VideoServe.com, each time a NWS user performs an informational search using a
certain key word or words. This link will permit NWS users to navigate directly
from the NWS to a VideoServe.com web page dedicated to the on-line purchase of
videos through November 1999. In exchange for this service, the Company has
agreed to pay a fee of $3,120,000. The monthly fee escalates over the period of
the contract, as the number of website visitors/purchasers is expected to
increase over time. The Company recorded $90,000 as marketing and sales expense
in 1997 and is committed to pay $1,155,000 and $1,875,000 in 1998 and 1999,
respectively.
In addition to the terms noted above, the Company has agreed to pay the NWS
a referral fee equal to $0.10 per click-through, not to exceed $435,000 through
November of 1999. The number of click-throughs in 1997 was de minis and no
expense was recorded in 1997.
The entire agreement is cancelable by either party under certain terms
depending on the Web site popularity of the NWS or VideoServe.com.
8. Subsequent Events
In January 1998, Ingram and the minority stockholders contributed additional
capital in the amounts of $2,323,200 and $316,800, respectively.
On December 3, 1998, the Company was sold to BUY.COM INC. In exchange for
the net assets of the Company and $1,000,000, the primary shareholder, Ingram,
received approximately 4.4% ownership interest in BUY.COM INC.
F-47
<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, Speedserve
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
acquisition of BuyGolf.com 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 a 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 a material impact on results of operations or financial
position.
The Unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1998 is presented as if BUY.COM had completed the
acquisition of Speedserve as of January 1, 1998.
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 issuance of the Series B convertible preferred participating stock,
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>
Year Ended December 31, 1998
-----------------------------------------------------
Buy.com Speedserve, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues............ $ 125,290 $ 1,278 $ -- $ 126,568
Cost of goods sold...... 123,527 1,070 124,597
----------- ----------- ----------- -----------
Gross profit............ 1,763 208 -- 1,971
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing... 13,430 1,425 -- 14,855
Product development... 950 1,133 -- 2,083
General and
administrative....... 4,250 600 -- 4,850
Depreciation and
amortization......... 377 373 2,820 (b) 3,570
Amortization of
deferred
compensation......... 795 -- -- 795
----------- ----------- ----------- -----------
Total operating
expense............ 19,802 3,531 2,820 26,153
----------- ----------- ----------- -----------
Operating loss...... (18,039) (3,323) (2,820) (24,182)
----------- ----------- ----------- -----------
Other income (expense):
Interest income
(expense), net....... 202 38 -- 240
Other................. (4) (43) -- (47)
----------- ----------- ----------- -----------
Total other income
(expense).......... 198 (5) -- 193
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (17,841) (3,328) (2,820) (23,989)
Provision for income
taxes.................. 3 (1,011) 1,011 (c) 3
----------- ----------- ----------- -----------
Net loss................ $ (17,844) $ (2,317) $ (3,831) $ (23,992)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted..... $ (0.24)
Weighted average number
of common shares
outstanding:
Basic and diluted(d).. 99,060,348
</TABLE>
- --------
(a) Speedserve was acquired by BUY.COM on December 3, 1998, in a purchase-type
transaction. BUY.COM issued 5,529,571 shares of common stock pursuant to
the acquisition. This presentation shows the pro forma effects of the
operations of Speedserve as if the acquisition occurred on January 1,
1998.
(b) Represents the amortization of $2.8 million goodwill that would have been
recorded for the year ended December 31, 1998, if the acquisition of
Speedserve occurred January 1, 1998. 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 Speedserve.
(c) Represents tax benefits eliminated upon the acquisition of Speedserve by
BUY.COM.
(d) Reflects conversion of all preferred stock outstanding at December 31, 1998
and the issuance of common stock for the acquisition of Speedserve.
PF-2
<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)
======== ======= ======== ============
Net loss per share:
Basic and diluted...... $ (0.84)
Weighted average number
of common shares
outstanding:
Basic and diluted(d)... 114,614,671
</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.
The results of operations for BuyGolf.com from October 1, 1999, through
October 25, 1999, are immaterial to our consolidated results. 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 December 31,
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-3
<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 20,571 (e)(f) 54,663
Deferred compensation....... (8,088) -- -- (8,088)
Accumulated deficit......... (96,069) (3,429) 3,429 (f) (96,069)
-------- ------- -------- --------
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 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
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. The results of operations for BuyGolf.com from October 1, 1999,
through October 25, 1999, are immaterial to our consolidated results. 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 shares of common stock 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.
(f) Represents the elimination of accumulated deficit resulting from the
acquisition of BuyGolf.com on October 25, 1999.
PF-4
<PAGE>
[Inside Back Cover]
Inside Back Cover of Prospectus
1. Annotations:
"buy.com"
<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.
Chase H&Q
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.................................................. 19,820
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.................................................... 46,480
----------
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 9,131,785 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 to the Bank of Nova Scotia, our commercial lender, 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 9,923,276 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 to employees, non-employee directors and consultants, options to
purchase 812,500 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 12,041,296 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. Between June 29, 1999
and October 14, 1999, we granted options to purchase 3,156,996 shares of common
stock at an exercise price per share of $9.14 to certain employees, non-
employee directors and consultants. On October 20, 1999, we granted an option
to purchase 28,125 shares of common stock at an exercise price per share of
$ 9.52 to an employee. In October 1999, we assumed options to purchase an
aggregate of 162,175 shares of common stock in connection with our acquisition
of BuyGolf.com, Inc. On October 25, 1999, we granted an option to purchase
25,000 shares of common stock at an exercise price per share of $9.86 to an
employee. On October 26, 1999, we granted options to purchase 19,375 shares of
common stock at an exercise price per share of $9.92 to certain employees and
consultants. On November 9, 1999, we granted an option to purchase 468,750
shares of common stock at an exercise price per share of $10.82 to an employee.
On November 11, 1999, we granted an option to purchase 9,375 shares of common
stock at an exercise price per share of $10.94 to an employee. On November 17,
1999, we granted an option to purchase 9,375 shares of common stock at an
exercise price per share of $11.34 to an employee. On November 19, 1999, we
granted options to purchase 775,000 shares of common stock at an exercise price
per share of $11.47 to certain employees and consultants. On November 29, 1999,
we granted an option to purchase 1,875 shares of common stock at an exercise
price per share of $12.11 to an employee. On December 2, 1999, we
II-3
<PAGE>
granted options to purchase 56,250 shares of common stock at an exercise price
per share of $12.32 to certain employees and consultants. On December 6, 1999,
we granted an option to purchase 14,062 shares of common stock at an exercise
price per share of $12.58 to an employee. Between December 15, 1999 and
December 23, 1999, we granted options to purchase 349,998 shares of common
stock at an exercise price per share of $9.90 to certain employees and
consultants.
(18) During the year ended December 31, 1999, we issued and sold 1,980,123
shares of common stock upon the exercise of stock options for an aggregate
consideration of $21,598.
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
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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.
10.8 Employment Agreement dated March 1, 1999 by and between BUY.COM
and Gregory Hawkins; Amendment No. 1 to the Employment
Agreement.
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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.
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 25, 1999 by and
between BUY.COM INC. and PGA TOUR, Inc.
10.35 BUY.COM Tour Agreement dated October 25, 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.
10.39 Fourth Amended and Restated Investor's Rights Agreement dated
November 17, 1999.
10.40 Special Executive Stock Option Plan
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.
23.4 Consent of PricewaterhouseCoopers LLP.
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.
II-6
<PAGE>
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Purchase Agreement certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
BUY.COM pursuant to the foregoing provisions, or otherwise, BUY.COM has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by BUY.COM of expenses
incurred or paid by a director, officer or controlling person of BUY.COM in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, BUY.COM will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by BUY.COM pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-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 13th day of January, 2000.
BUY.COM INC.
By: /s/ Mitch C. Hill
_________________________________
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, January 13, 2000
_________________________________ President and Director
Gregory J. Hawkins (principal executive officer)
/s/ Mitch C. Hill Chief Financial Officer January 13, 2000
_________________________________ (principal financial and
Mitch C. Hill accounting officer)
* Director January 13, 2000
_________________________________
William L. Burnham
* Director January 13, 2000
_________________________________
David B. Ingram
* Director January 13, 2000
_________________________________
Donald M. Kendall
* Director January 13, 2000
_________________________________
Charles W. Richion
* Director January 13, 2000
_________________________________
James B. Roszak
* Director January 13, 2000
_________________________________
Edward S. Russell
* Director January 13, 2000
_________________________________
John Sculley
* Director January 13, 2000
_________________________________
Wayne T. Thorson
</TABLE>
/s/ Mitch C. Hill
*By: _________________________
Mitch C. Hill,
Attorney-in-Fact
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 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.
10.8 Employment Agreement dated March 1, 1999 by and between BUY.COM
and Gregory Hawkins; Amendment No. 1 to the Employment
Agreement.
10.9** 1998 Stock Option/Stock Issuance Plan.
10.12 1999 Stock Incentive Plan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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.
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 25, 1999 by and
between BUY.COM INC. and PGA TOUR, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
10.35 BUY.COM Tour Agreement dated October 25, 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.
10.39 Fourth Amended and Restated Investor's Rights Agreement dated
November 17, 1999.
10.40 Special Executive Stock Option Plan
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.
23.4 Consent of PricewaterhouseCoopers LLP.
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 1.1
================================================================================
BUY.COM INC.
(a Delaware corporation)
14,000,000 Shares of Common Stock
PURCHASE AGREEMENT
------------------
Dated: , 2000
================================================================================
1
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
-------
<S> <C> <C>
Section 1. Representations and Warranties.................................................. 3
(a) Representations and Warranties by the Company................................... 3
(i) Compliance with Registration Requirements............................. 3
(ii) Independent Accountants............................................... 4
(iii) Financial Statements.................................................. 4
(iv) No Material Adverse Change in Business................................ 5
(v) Good Standing of the Company.......................................... 5
(vi) Good Standing of Subsidiaries......................................... 5
(vii) Capitalization........................................................ 6
(viii) Authorization of Agreement............................................ 6
(ix) Authorization and Description of Securities........................... 6
(x) Absence of Defaults and Conflicts..................................... 7
(xi) Absence of Labor Dispute.............................................. 7
(xii) Absence of Proceedings................................................ 7
(xiii) Accuracy of Exhibits.................................................. 8
(xiv) Possession of Intellectual Property................................... 8
(xv) Absence of Further Requirements....................................... 8
(xvi) Possession of Licenses and Permits.................................... 9
(xvii) Title to Property..................................................... 9
(xviii) Compliance with Cuba Act.............................................. 9
(xix) Investment Company Act................................................ 9
(xx) Environmental Laws.................................................... 10
(xxi) Registration Rights................................................... 10
(b) Officer's Certificates.......................................................... 10
SECTION 2. Sale and Delivery to Underwriters; Closing...................................... 10
(a) Initial Securities.............................................................. 11
(b) Option Securities............................................................... 11
(c) Payment......................................................................... 11
(d) Denominations; Registration..................................................... 12
SECTION 3. Covenants of the Company........................................................ 13
(a) Compliance with Securities Regulations and Commission Requests.................. 13
(b) Filing of Amendments............................................................ 13
(c) Delivery of Registration Statements............................................. 13
(d) Delivery of Prospectuses........................................................ 14
(e) Continued Compliance with Securities Laws....................................... 14
(f) Blue Sky Qualifications......................................................... 14
(g) Rule 158........................................................................ 15
(h) Use of Proceeds................................................................. 15
(i) Listing......................................................................... 15
(j) Restriction on Sale of Securities............................................... 15
(k) Reporting Requirements.......................................................... 16
(l) Compliance with NASD Rules...................................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(m) Compliance with Rule 463........................................................ 16
SECTION 4. Payment of Expenses............................................................. 16
(a) Expenses........................................................................ 16
(b) Termination of Agreement........................................................ 17
SECTION 5. Conditions of Underwriters' Obligations......................................... 17
(a) Effectiveness of Registration Statement......................................... 17
(b) Opinion of Counsel for Company.................................................. 18
(c) Opinion of Counsel for Underwriters............................................. 18
(d) Officers' Certificate........................................................... 18
(e) Accountant's Comfort Letter..................................................... 19
(f) Bring-down Comfort Letter....................................................... 19
(g) Approval of Listing............................................................. 19
(h) No Objection.................................................................... 19
(i) Lock-up Agreements.............................................................. 19
(j) Conditions to Purchase of Option Securities..................................... 20
(i) Officers' Certificate................................................. 20
(ii) Opinion of Counsel for Company........................................ 20
(iii) Opinion of Counsel for Underwriters................................... 20
(iv) Bring-down Comfort Letter............................................. 20
(k) Additional Documents............................................................ 20
(l) Termination of Agreement........................................................ 21
SECTION 6. Indemnification................................................................. 21
(a) Indemnification of Underwriters................................................. 21
(b) Indemnification of Company, Directors and Officers.............................. 23
(c) Actions against Parties; Notification........................................... 23
(d) Settlement without Consent if Failure to Reimburse.............................. 24
(e) Indemnification for Reserved Securities......................................... 25
SECTION 7. Contribution.................................................................... 25
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.................. 26
SECTION 9. Termination of Agreement........................................................ 26
(a) Termination; General............................................................ 27
(b) Liabilities..................................................................... 27
SECTION 10. Default by One or More of the Underwriters...................................... 27
SECTION 11. Notices......................................................................... 28
SECTION 12. Parties......................................................................... 28
SECTION 13. GOVERNING LAW AND TIME.......................................................... 29
SECTION 14. Effect of Headings.............................................................. 29
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SCHEDULES
Schedule A - List of Underwriters................................................. Sch A-1
Schedule B - Pricing Information.................................................. Sch B-1
Schedule C - List of Persons subject to Lock-up................................... Sch C-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.................................. A-1
Exhibit B- Form of Lock-up Letter................................................ B-1
</TABLE>
iii
<PAGE>
BUY.COM INC.
(a Delaware corporation)
14,000,000 Shares of Common Stock
(Par Value $.0001 Per Share)
PURCHASE AGREEMENT
------------------
, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
Hambrecht & Quist LLC
U.S. Bancorp Piper Jaffray Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
BUY.COM INC., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Bear, Stearns & Co. Inc., Hambrecht & Quist LLC
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives (in such
capacity, the "Representatives"), with respect to the issue and sale by the
Company and the purchase by the Underwriters, acting severally and not jointly,
of the respective numbers of shares of Common Stock, par value $.0001 per share,
of the Company (the "Common Stock") set forth in said Schedule A, and with
respect to the grant by the Company to the Underwriters, acting severally and
not jointly, of the option described in Section 2(b) hereof to purchase all or
any part of 2,100,000 additional shares of Common Stock to cover over-
allotments, if any. The aforesaid 14,000,000 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part of
the 2,100,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 1,400,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the
<PAGE>
Underwriters to certain eligible employees and persons having business
relationships with the Company, as part of the distribution of the Securities by
the Underwriters, subject to the terms of this Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such Reserved Securities are not orally confirmed for purchase by
such eligible employees and persons having business relationships with the
Company by the end of the first business day after the date of this Agreement,
such Reserved Securities may be offered to the public as part of the public
offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-89737) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b).
The information included in such prospectus or in such Term Sheet, as the case
may be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 2000 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:
2
<PAGE>
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto complied and
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and the Prospectus,
any preliminary prospectus and any supplement thereto or prospectus wrapper
prepared in connection therewith, at their respective times of issuance and at
the Closing Time, complied and will comply in all material respects with any
applicable laws or regulations of foreign jurisdictions in which the Prospectus
and such preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither the Prospectus nor any amendments or supplements thereto (including any
prospectus wrapper), at the time the Prospectus or any such amendment or
supplement was issued and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is used,
the Company will comply with the requirements of Rule 434 and the Prospectus
shall not be "materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or Prospectus made
in reliance upon and in conformity with information furnished to the Company in
writing by any Underwriter through Merrill Lynch expressly for use in the
Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all
material respects with the 1933 Act Regulations and each preliminary prospectus
and the Prospectus delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are
3
<PAGE>
independent public accountants as required by the 1933 Act and the 1933 Act
Regulations.
(iii) Financial Statements. The financial statements included in the
--------------------
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company,
its consolidated subsidiaries and BuyGolf.com, Inc. ("BuyGolf") at the
dates indicated and the statement of operations, stockholders' equity and
cash flows of the Company, its consolidated subsidiaries and BuyGolf for
the periods specified; said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied
on a consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected consolidated financial data and the summary consolidated financial
information included in the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement. The
pro forma condensed and combined financial statements, the related notes
thereto and the selected pro forma condensed and combined financial
statements included in the Registration Statement and the Prospectus
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly organized
----------------------------
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as
a foreign corporation to transact business and is in good standing in
each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
4
<PAGE>
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
-----------------------------
the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each
a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21
to the Registration Statement and (b) certain other subsidiaries which,
considered in the aggregate as a single Subsidiary, do not constitute a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus or
pursuant to the exercise of convertible securities or options referred to
in the Prospectus). The shares of issued and outstanding capital stock of
the Company have been duly authorized and validly issued and are fully paid
and non-assessable; none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar rights
of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities have
-------------------------------------------
been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued and delivered by the Company pursuant to
this Agreement against payment of the consideration set forth herein, will
be validly issued and fully paid and non-assessable; the Common Stock
conforms to all statements relating thereto contained in the Prospectus and
such description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be subject to personal
liability by reason of being such a holder; and the issuance of the
Securities is not subject to the preemptive or other similar rights of any
securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any of
---------------------------------
its subsidiaries is in violation of its charter or bylaws or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other
5
<PAGE>
agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults that
would not result in a Material Adverse Effect; and the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated herein and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectus under the caption
"Use of Proceeds") and the compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions of
the charter or bylaws of the Company or any subsidiary or any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any subsidiary or any of their
assets, properties or operations. As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness by the Company or any subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees of
------------------------
the Company or any subsidiary exists or, to the knowledge of the Company,
is imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
or Prospectus (other than as disclosed therein), or which might reasonably
be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Company of its obligations hereunder;
the aggregate of all pending legal or governmental proceedings to which the
Company or any subsidiary is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, could not reasonably be expected to result in a Material
Adverse Effect.
6
<PAGE>
(xiii) Accuracy of Exhibits. There are no contracts or documents which
--------------------
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect .
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws, (ii) such as may be required by the
rules and regulations of the National Association of Securities Dealers,
Inc. (the "NASD") and (ii) such as have been obtained under the laws and
regulations of jurisdictions outside the United States in which the
Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to possess or comply
would not, singly or in the aggregate, have a Material Adverse Effect; all
of the Governmental Licenses are valid and in full force and effect, except
when the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have good
-----------------
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages,
7
<PAGE>
pledges, liens, security interests, claims, restrictions or encumbrances of
any kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company or any of its subsidiaries; and all of the leases
and subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the Company nor any subsidiary has any notice
of any material claim of any sort that has been asserted by anyone adverse
to the rights of the Company or any subsidiary under any of the leases or
subleases mentioned above, or affecting or questioning the rights of the
Company or such subsidiary to the continued possession of the leased or
subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with, and
------------------------
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
8
<PAGE>
(xxi) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act.
(xxii) Year 2000 Compliance. Except where failure to be Year 2000
--------------------
Compliant (as defined below) would not have a Material Adverse Effect on
the Company, all of the products and services of the Company and its
subsidiaries (including any products and systems under development) will
record, store, process, calculate and present calendar dates falling on and
after (and if applicable, spans of time including) January 1, 2000, and
will calculate any information dependent on or relating to such dates in
substantially the same manner, and with the same functionality, data
integrity and performance, as such products and services record, store,
process, calculate and present calendar dates on or before December 31,
1999, or calculate any information dependent on or relating to such dates
(collectively, "Year 2000 Compliant"). Except where failure to be Year 2000
Compliant would not have a Material Adverse Effect on the Company, the
Company's internal computer and technology products, equipment and systems
are Year 2000 Compliant.
(xxiii) Systems and Controls. The Company maintains a system of
--------------------
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit timely preparation of financial statements in conformity in all
material respects with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(xxiv) Voting Trust Agreement. The Voting Trust Agreement dated as of
----------------------
October 26, 1999 (the "Voting Trust Agreement") among the Company, Scott A.
Blum ("Blum"), the trusts listed on Exhibit A thereto (the "Trusts") and
the outside directors of the Company listed on Exhibit B thereto (the
"Outside Directors") has been duly authorized, executed and delivered by
the Company and the Trusts and duly executed and delivered by Blum and the
Outside Directors.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in Schedule B, the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter, plus any
9
<PAGE>
additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Underwriters, severally and
not jointly, to purchase up to an additional [ ] shares of Common Stock at the
price per share set forth in Schedule B, less an amount per share equal to any
dividends or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
Securities upon notice by the Representatives to the Company setting forth the
number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Representatives, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the Option Securities, each of the Underwriters, acting
severally and not jointly, will purchase that proportion of the total number of
Option Securities then being purchased which the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such adjustments as the
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Brobeck, Phleger & Harrison LLP, 38 Technology Drive, Irvine, California 92618,
or at such other place as shall be agreed upon by the Representatives and the
Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by
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any Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives notice
of its intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)), any Term Sheet or any amendment,
supplement or revision to either the prospectus included in the Registration
Statement at the time it became effective or to the Prospectus, will furnish the
Representatives with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Representatives and counsel for the Underwriters, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without
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exhibits) for each of the Underwriters. The copies of the Registration Statement
and each amendment thereto furnished to the Underwriters will be identical to
the electronically transmitted copies thereof filed with the Commission pursuant
to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws The Company will comply with
the 1933 Act and the 1933 Act Regulations so as to permit the completion of the
distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the later of the effective date of the Registration Statement
and any Rule 462(b) Registration Statement.
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(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and maintain
the quotation of the Securities on the Nasdaq National Market and will file with
the Nasdaq National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the over-
the-counter market and quotations for which are reported by the Nasdaq National
Market.
(j) Restriction on Sale of Securities. During a period of 180 days from the
date of the Prospectus, the Company will not, without the prior written consent
of Merrill Lynch, (i) 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 to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee
director stock plan or dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the NASD
or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of this Agreement. The Underwriters
will notify the Company as to which persons will need to be so restricted. At
the request of the Underwriters, the Company will direct the transfer agent to
place a stop transfer restriction upon such securities for such period of time.
Should the Company release, or seek to release, from such restrictions any of
the Reserved Securities, the Company agrees to reimburse the Underwriters for
any reasonable expenses (including, without limitation, legal expenses) they
incur in connection with such release.
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(m) Compliance with Rule 463 The Company will file with the Commission
such reports on Form SR as may be required pursuant to Rule 463 of the 1933 Act
Regulations.
SECTION 4. Payment of Expenses.
-------------------
(a) Expenses. The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the Underwriters, including any stock or other transfer taxes
and any stamp or other duties payable upon the sale, issuance or delivery of the
Securities to the Underwriters, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the NASD of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the inclusion
of the Securities in the Nasdaq National Market and (xi) all costs and expenses
of the Underwriters, including the fees and disbursements of counsel for the
Underwriters, in connection with matters related to the Reserved Securities
which are designated by the Company for sale to employees and others having a
business relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
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reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of Brobeck,
Phleger & Harrison LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for
the Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in clauses
(i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by
operation of law or under the charter or bylaws of the Company), (viii) through
(x), inclusive, (xii), (xiv) (solely as to the information in the Prospectus
under "Description of Capital Stock--Common Stock") and the penultimate
paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as
to all matters governed by the laws of jurisdictions other than the law of the
State of California, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Arthur Andersen LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of
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such letter for each of the other Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from Arthur Andersen LLP a letter, dated as of Closing Time, to
the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (e) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to Closing
Time.
(g) Approval of Listing At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(h) No Objection. The NASD shall have confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Representatives
shall have received an agreement substantially in the form of Exhibit B hereto
signed by each person listed on Schedule C hereto.
(j) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of Delivery,
---------------------
of the President or a Vice President of the Company and of the chief
financial or chief accounting officer of the Company confirming that the
certificate delivered at the Closing Time pursuant to Section 5(d) hereof
remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of Brobeck,
------------------------------
Phleger & Harrison LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by Section 5(b)
hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
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<PAGE>
(iv) Bring-down Comfort Letter. A letter from Arthur Andersen LLP, in
form and substance satisfactory to the Representatives and dated such Date
of Delivery, substantially in the same form and substance as the letter
furnished to the Representatives pursuant to Section 5(f) hereof, except
that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date of
Delivery.
(k) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(l) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of foreign jurisdictions where Reserved Securities have
been offered and (B) any untrue statement or alleged untrue statement of a
material fact included in the supplement or prospectus wrapper material
distributed in foreign jurisdictions in connection with the
17
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reservation and sale of the Reserved Securities to eligible employees,
directors and other persons having relationships with the Company or the
omission or alleged omission therefrom of a material fact necessary to make
the statements therein, when considered in conjunction with the Prospectus
or preliminary prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation of
the nature referred to in Section 6(a)(ii)(A) hereof, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission or
in connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof, to the extent that any such expense is not paid under
(i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to
-------- -------
any loss, liability, claim, damage or expense to the extent arising out of
any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through Merrill Lynch expressly for use
in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through Merrill
Lynch expressly for use in the Registration Statement (or any amendment thereto)
or such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
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(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) or Section 6(a)(iii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of employees, directors and other persons having
relationships with the Company to pay for and accept delivery of Reserved
Securities which, by the end of the first business day following the date of
this Agreement, were subject to a properly confirmed agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in Section 6
------------
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party
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shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions,
or in connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof, which resulted in such losses, liabilities, claims, damages
or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission or any violation of the nature referred to in Section 6(a)(ii)(A)
hereof.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
20
<PAGE>
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
-------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or controlling
person, or by or on behalf of the Company, and shall survive the delivery of the
Securities to the Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (iv)
if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
------------------------------------------
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less
21
<PAGE>
than all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with respect
to any Date of Delivery which occurs after the Closing Time, the obligation
of the Underwriters to purchase and of the Company to sell the Option
Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Equity Capital
Markets; and notices to the Company shall be directed to it at BUY.COM, 21
Brookline, Aliso Viejo, California 92656, attention of Gregory J. Hawkins.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
-------
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No
22
<PAGE>
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
----------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
23
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms.
Very truly yours,
BUY.COM INC.
By ___________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By ____________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
SIGNATURE PAGE TO PURCHASE AGREEMENT
24
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Name of Underwriter Initial Securities
<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>
Sch A-1
<PAGE>
SCHEDULE B
BUY.COM INC.
14,000,000 Shares of Common Stock
(Par Value $.0001 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $[ ].
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $[ ], being an amount equal to the
initial public offering price set forth above less $[ ] per share;
provided that the purchase price per share for any Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
List of persons and entities
subject to lock-up
1. Scott Russell
2. SOFTBANK America, Inc.
3. SOFTBANK Contents Fund
4. SOFTBANK Ventures, Inc.
5. SOFTBANK Technology Advisors Fund LP
6. SOFTBANK Technology Advisors Fund V LP
7. SOFTBANK Technology Ventures IV, LP
8. SOFTBANK Technology Ventures V, LP
9. SOFTBANK Capital Partners L.P.
10. SOFTBANK Capital Advisors Fund L.P.
11. SOFTBANK Technology Entrepreneurs Fund V LP
12. David Ingram
13. Ingram Entertainment, Inc.
14. Ingram Entertainment Holdings, Inc.
15. Ingram Capital, Inc.
16. Murray Williams
17. Murray Williams Children's Trust
18. Murray Williams Siblings' Trust
19. Murray Williams College Fund Trust
20. Scott Blum
21. Scott A. Blum Separate Property Trust
22. Greg Hawkins
23. Donald Kendall
24. Charles W. Richion
25. James B. Roszak
26. John Sculley
27. Wayne R. Thorson
28. Bank of Nova Scotia
29. United Air Lines, Inc.
30. Michael Mason
31. David Mason
32. Roland Serna
33. Jennifer Blanchfield
34. Robb Brock
35. Wanda Brock
36. Tom Ko
37. Marc Raygoza
38. Benson York Group, Inc.
39. William Blum
40. Danna Murphy
Sch C-1
<PAGE>
41. Steve J. Mason
42. Kruz Roberts
43. Kevin Richards
44. Raj Patel
45. Amanda Kent McDonald
46. Vivendi
47. ePartners
48. Will Scott Blum Trust
49. Emma Rose Blum Trust
50. Scott Blum GRAT
51. Mitch Hill
52. PGA Tour, Inc.
53. John Herr
54. Steve Murray
55. Sincorp Investments Limited
56. Las Vegas Golf & Tennis, Inc.
57. Bradford Allen
58. Joseph and April Kramer
59. Harpeth Holdings, Inc.
Sch C-2
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus and to enter into and perform its obligations under the
Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus in the column entitled "Actual" under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus) and conforms to
the description thereof set forth in the Prospectus under the caption
"Description of Capital Stock." The shares of issued and outstanding capital
stock of the Company have been duly authorized and validly issued and are fully
paid and non-assessable; and none of the outstanding shares of capital stock of
the Company was issued in violation of the preemptive or other similar rights of
any securityholder of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable for, any
capital stock of the Company other than as accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options and other rights which may be
granted thereunder, set forth in the Prospectus under the caption "Management--
Employee Benefit Plans" accurately summarizes the information required to be
shown with respect to such plans, arrangements, options and rights to the extent
required under the 1933 Act and the 1933 Act Regulations.
(v) The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment of
the consideration set forth in the Purchase Agreement, will be validly issued
and fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company.
A-1
<PAGE>
(vii) Each Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and, to the best of our knowledge, is owned by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding
shares of capital stock of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the Registration
Statement and Prospectus as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we express no opinion) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and bylaws of the Company and the
requirements of the Nasdaq National Market.
(xiii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Company or
any subsidiary is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or governmental agency or
body, domestic or foreign, which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions
A-2
<PAGE>
contemplated in the Purchase Agreement or the performance by the Company of its
obligations thereunder.
(xiv) The information in the Prospectus under the captions "Business--
Strategic Relationship with United Airlines," "Business--Recent Acquisition of
BUYGOLF.COM," "Business--International Joint Ventures," "Business--Distribution
Network," "Business--Intellectual Property," "Business--Legal Proceedings,"
"Business--Facilities," "Management--Employee Benefit Plans," "Certain
Transactions," "Description of Capital Stock" and "Shares Eligible For Future
Sale" and in the Registration Statement under Item 14 and Item 15, to the extent
that it constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal proceedings, or legal conclusions, has been reviewed
by us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xvii) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or bylaws and no default by the
Company or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we express no
opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance
or sale of the Securities.
(xix) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and the
compliance by the Company with its obligations under the Purchase Agreement do
not and will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to
A-3
<PAGE>
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or any other agreement or instrument, known to us, to which the
Company or any subsidiary is a party or by which it or any of them may be bound,
or to which any of the property or assets of the Company or any subsidiary is
subject (except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or bylaws of the
Company or any subsidiary, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their respective properties, assets or
operations.
(xx) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the Company
under the 1933 Act.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
(xxii) The Voting Trust Agreement among the Company, Blum, the Trusts
and the Outside Directors has been duly authorized, executed and delivered by
the Company and the Trusts and duly executed and delivered by Blum and the
Outside Directors.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we make no statement), at the time the Prospectus was
issued, at the time any such amended or supplemented prospectus was issued or at
the Closing Time, included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-4
<PAGE>
Exhibit B
BUY.COM INC.
Lock-Up Agreement
_____________, 1999
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith,
Incorporated
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Hambrecht & Quist LLC
1 Bush Street
San Francisco, California 94104
U.S. Bancorp Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, Minnesota 55402
Re: Proposed Public Offering by BUY.COM INC.
----------------------------------------
Dear Sirs:
The undersigned, a security holder of BUY.COM Inc. (the "Company"),
understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith,
Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc., Hambrecht & Quist LLC
and U.S. Bancorp Piper Jaffray Inc. (collectively, the "Underwriters") propose
to enter into a Purchase Agreement (the "Purchase Agreement") with the Company
providing for the initial public offering of shares (the "Securities") of the
Company's common stock, par value $.0001 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a security holder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 180 days from the date of the Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) 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 the Common Stock or any securities convertible into or
exchangeable or exercisable for shares of the Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of
B-1
<PAGE>
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of shares of the Common Stock or other securities, in cash or otherwise.
Notwithstanding the foregoing, such restrictions shall not apply to: (i) shares
of the Common Stock disposed of by the undersigned as bona fide gifts; provided
that the donee agrees in writing with the Underwriters to be bound by the
provisions hereof; (ii) pledges of shares of the Common Stock by the undersigned
for the purposes of securing a loan or similar obligation from the Company to
the holder; (iii) the exercise of outstanding stock options issued under the
Company's stock option plan; provided that the shares of Common Stock issued
upon exercise of said options shall be subject to the restrictions set forth
herein; (iv) shares of the Common Stock distributed to partners, members or
shareholders of the undersigned; provided that each distributee agrees in
writing with the Underwriters to be bound by the provisions hereof; and (v)
shares purchased in the public market by the undersigned in the initial public
offering or after the date of such offering.
In addition, the undersigned agrees that it will not, without the prior
written consent of Merrill Lynch, during a period of 180 days from the date of
the Purchase Agreement, make any demand for, or exercise any right with respect
to, the registration of any shares of the Common Stock or any securities
convertible into or exchangeable or exercisable for shares of the Common Stock.
The undersigned understands that the Company and the Underwriters are
relying upon this agreement in proceeding toward consummation of the initial
public offering of the Securities. The undersigned further understands and
agrees that this agreement is irrevocable and shall be binding upon the
undersigned's heirs, legal representatives, successors and assigns.
Very truly yours,
Signature:_______________________
Print Name:______________________
B-2
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BUY.COM INC.
The undersigned Gregory J. Hawkins and Keven F. Baxter, hereby certify
that:
ONE: They are the duly elected and acting President and Secretary,
---
respectively, of said corporation.
TWO: The original Certificate of Incorporation of the Corporation was
---
filed with the Secretary of State of Delaware on August 3, 1998, under the name
"Buy Corp." On August 18, 1998, the Corporation filed a Restated Certificate of
Incorporation. On November 16, 1998, the Corporation filed a Certificate of
Amendment changing the name of the Corporation to "BUY.COM INC." On January 28,
1999, the Corporation filed an Amended and Restated Certificate of
Incorporation. On April 14, 1999, the Corporation filed another Amended and
Restated Certificate of Incorporation. On July 14, 1999 the Corporation filed
another Amended and Restated Certificate of Incorporation. On October 7, 1999,
the Corporation filed an Amended and Restated Certificate of Incorporation.
THREE: The Amended and Restated Certificate of Incorporation of said
-----
corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is BUY.COM INC. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent. The name
of the Corporation's registered agent at such address is National Registered
Agents, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the
<PAGE>
Corporation is authorized to issue is One Billion (1,000,000,000). Nine Hundred
Ninety Million (990,000,000) shares shall be Common Stock, par value $0.0001 per
share, and Ten Million (10,000,000) shares shall be Preferred Stock, par value
$0.0001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. The rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
----------
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote), or senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. The Board of Directors is also authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of
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the Class I directors shall expire and Class I directors shall be elected for a
full term of three (3) years. At the second annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three (3) years. At the third
annual meeting of stockholders following the initial public offering of the
Corporation's Common Stock, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three (3)
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three (3) years to succeed the directors of the class
whose terms expire at such annual meeting. If the number of directors is
hereafter changed, each director then serving as such shall nevertheless
continue as a director of the Class of which he is a member until the expiration
of his current term and any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take actions by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Chairman of the Board of
Directors or a majority of the Board of Directors. The books of the Corporation
may be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.
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No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or limitation
of the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving
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that the claimant has not met the standards of conduct for permissible
indemnification set forth in the GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOURTH: The foregoing amendment and restatement has been duly adopted
------
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
January _____, 2000.
---------------------------------------
Gregory J. Hawkins
Chief Executive Officer and President
---------------------------------------
Keven F. Baxter
Secretary
5
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
BUY.COM INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Dover,
----------
County of Kent, State of Delaware.
Section 2. The corporation may also have offices at such other places
----------
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
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directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
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and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholders
shall elect directors to succeed those directors whose terms expire in that year
and shall transact such other business as may properly be brought before the
meeting.
Section 3. Written notice of the annual meeting stating the place,
----------
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
----------
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to
<PAGE>
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 5. Special meetings of the stockholders, for any purpose or
----------
purposes, may only be called by the Chairman of the Board or a majority of the
Board.
Section 6. Written notice of a special meeting stating the place,
----------
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
----------
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
----------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, either the Chairman of the
Board, or the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted that might have been
transacted at the meeting as originally notified. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
----------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable statute
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 10. Unless otherwise provided in the certificate of
-----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. Nominations for election to the Board of Directors must
-----------
be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the
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following information as to each proposed nominee and as to each person, acting
alone or in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such business
-----------
shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
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<PAGE>
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by this Section 12, and if such person should so determine, such
person shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
----------
public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
----------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class to hold office initially for a
term expiring at the annual meeting to be held in 2001, another class to hold
office initially for a term expiring at the annual meeting of stockholders held
in 2002 and another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2003, with the members of each
class to hold office until their successors are elected and qualified. At each
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election.
Section 2. Vacancies and newly created directorships resulting from
----------
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chosen and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
----------
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
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MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
Section 4. The Board of Directors of the corporation may hold
----------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
----------
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
----------
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
----------
Chairman of the Board or the president on twelve (12) hours' notice to each
director by phone, fax or electronic mail; special meetings shall be called by
the Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of a majority of the Board unless the Board
consists of only one director, in which case special meetings shall be called by
the Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of the sole director.
Section 8. At all meetings of the board a majority of the directors
----------
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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COMMITTEES OF DIRECTORS
-----------------------
Section 11. The Board of Directors may, by resolution passed by a
-----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
-----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
-------------------------
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
----------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of
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<PAGE>
these Bylaws), but such notice may be given in writing, by mail, addressed to
such director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
----------
Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors may also choose one or more vice-
presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
----------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
-------------------------
Section 6. The Chairman of the Board, if any, shall preside at all
----------
meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
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<PAGE>
Section 7. In the absence of the Chairman of the Board, the
----------
president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
---------------------------------
Section 8. The president shall be the chief executive officer of the
----------
corporation and in the absence of the Chairman of the Board, he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
-------------------------------------
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody
of the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one,
-----------
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary
8
<PAGE>
and shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
---------------------------
Section 13. The chief financial officer shall be the chief financial
-----------
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may
-----------
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the corporation.
Section 15. If required by the Board of Directors, he/she shall give
-----------
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 16. The treasurer or an assistant treasurer, in the order
-----------
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Chief Financial
Officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
----------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative,
9
<PAGE>
participating, optional or other special rights of each class of stock or series
thereof and the qualification, limitations or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate that the corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided in section 202 of
the General Corporation Law of Delaware, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate that the
corporation shall issue to represent such class or series of stock, a statement
that the corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
-----------------
Section 2. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
-----------------
Section 3. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
------------------
Section 4. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60)
10
<PAGE>
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
-----------------------
Section 5. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
---------
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
------
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
-----------
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
----
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
11
<PAGE>
INDEMNIFICATION
---------------
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been
12
<PAGE>
"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, Section 145 of the General Corporation Law of Delaware shall,
for the purposes of this Section 6, be interpreted as follows: an "other
enterprise" shall be deemed to include such an employee benefit plan, including
without limitation, any plan of the corporation which is governed by the Act of
Congress entitled "Employee Retirement Income Security Act of 1974," as amended
from time to time; the corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
13
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
BUY.COM INC.
The undersigned, Keven F. Baxter, hereby certifies that he is the duly
elected and acting Secretary of BUY.COM INC., a Delaware corporation (the
"Corporation"), and that the Bylaws attached hereto constitute the Bylaws of
said Corporation as duly adopted by the Board of Directors on ______________,
1999 and the Stockholders on _______________, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of January, 2000.
_______________________________________
Keven F. Baxter
Secretary
14
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of March 1, 1999, by and between BUY.COM Inc., a Delaware corporation (the
"Company"), and Greg Hawkins ("Executive").
I.
EMPLOYMENT
1.1 Position and Duties. The Company hereby engages and employs
-------------------
Executive as Chief Executive Officer for the terms set forth in this Agreement.
The Company's Board of Directors (the "Board") may provide such
additional designations of title to Executive as the Board, in its discretion,
may deem appropriate. Executive shall perform the executive duties and
functions related to the above positions, subject to the reasonable limitations
of authority set forth from time to time in the resolutions of the Board and
applicable law.
1.2 Best Efforts. Executive agrees to devote his full time and
------------
attention to the Company, to use his best efforts to advance the business and
welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities. Notwithstanding anything herein to
the contrary, Executive shall not be precluded from (a) engaging in charitable
activities and community affairs or (b) managing his personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of his duties and responsibilities under this Agreement.
II.
COMPENSATION AND BENEFITS
2.1 Base Salary. For all services to be rendered by Executive under
-----------
this Agreement, the Company agrees to pay Executive an annual base salary of Two
Hundred Forty Thousand Dollars ($240,000.00), less deductions required by law,
payable in accordance with the normal payroll practices of the Company.
2.2 Stock Options. The Company shall grant Executive an option to
-------------
purchase Four Hundred Eighty Four Thousand (484,000) shares of the Company's
common stock, subject to the vesting structure noted in the Offer Letter dated
February 12, 1999 and the provisions set forth in the Company's Stock Option
Plan and Stock Option agreement.
2.3 Other Benefits. The Company shall further provide to Executive
--------------
the following other benefits:
(a) An automobile allowance of Eight Hundred dollars ($800.00) per
month; and
<PAGE>
(b) Full participation, on a basis commensurate with his position
with the Company, in all plans of life, accident, disability and health
insurance that generally are made available to senior executives of the Company.
2.4 Expense Reimbursement. The Company shall promptly reimburse
---------------------
Executive for all actual and reasonable business expenses incurred by Executive
in promoting the business of the Company, including expenditures for car phone,
entertainment, travel, or other expenses, provided that (a) such expenditures
are of a nature qualifying them as legitimate business deductions and (b)
Executive furnishes to the Company adequate records and other documentary
evidence reasonably required by the Company to substantiate such expenditures.
III.
TERMINATION AND SEVERANCE PAY
3.1 At Will. Executive and the Company acknowledge and agree that
-------
Executive's employment with the Company is expressly "at-will" both during and
after the term of this Agreement. This means that either party may terminate
Executive's employment with or without cause. Any termination of Executive's
employment is, however, subject to the terms and provisions of this Agreement as
to severance pay and other obligations.
3.2 Involuntary Termination.
-----------------------
(a) Severance Pay. In the event that Executive's employment with the
-------------
Company is terminated by the Company for Cause (as defined in Section 3.2(c)),
--------------
Executive shall be entitled to no severance pay. In the event that Executive's
employment with the Company is terminated by the Company other than for Cause,
then in consideration of Executive's compliance with his obligations under
Article V and Article VI and Executive's execution of a general release in favor
- --------- ----------
of the Company, Executive, on March 1 2000, shall have the right to exercise the
One Hundred and Eight Thousand - Nine Hundred (108,900) options that vest on
March 1, 2000 in accordance with Executive's option grant dated March 1, 1999;
and Executive shall be entitled to severance pay ("Severance Pay") in the form
of monthly payments to Executive in the amount of Executive's monthly base
salary as in effect on the date of termination, payable in accordance with
customary payroll practices, and related health benefits for the greater of (i)
the remainer of the initial one year term as defined in Section 4.1, or (ii) six
(6) months. Executive acknowledges and agrees that in the event Executive
breaches any provision of Article V or Article VI, his right to receive
--------- ----------
severance payments under this Section 3.2(a) shall automatically terminate.
--------------
(b) Benefits. Following termination, Executive shall cease to be a
--------
Company employee and shall not be entitled to any employee benefits. This shall
not preclude Executive from exercising his COBRA benefits under applicable law.
(c) Cause. For purposes of this Agreement, "Cause" shall mean (i) the
-----
willful refusal of Executive to comply with a lawful instruction of the Board;
(ii) an act or acts of personal dishonesty by Executive that were intended to
result in personal enrichment of Executive at the expense of the Company; (iii)
Executive's conviction of any felony; (iv) performing an act of race, sex,
national origin, religion, disability, age-based or other illegal discrimination
or an act of sexual harassment; or (v) Executive's willful insubordination or
misconduct, intentional or persistent
2
<PAGE>
failure to abide by the Company's policies, or material breach of any provision
of this Agreement, including any representation or covenant contained in
Article V or Article VI of this Agreement.
- --------- ----------
3.3 Voluntary Termination.
---------------------
(a) Severance Pay. In the event Executive voluntarily terminates his
-------------
employment with the Company, Executive shall be entitled to no severance pay.
For purposes of this Agreement, the term "voluntarily terminates" shall not
include a resignation that is tendered by Executive pursuant to a direct request
for the Board. A resignation tendered by Executive pursuant to a direct request
of the Board shall, for purposes of this Agreement, be treated as an involuntary
termination, and Executive's entitlement to severance pay in accordance with the
provisions of Section 3.2(a) shall depend upon whether the Board's request was
--------------
based on Cause (as defined in Section 3.2(c)).
--------------
3.4 Death. In the event of Executive's death, this Agreement shall
-----
automatically terminate and shall be of no further force and effect.
Termination of Executive's employment as a result of his death shall not result
in any obligation by the Company to pay severance pay or other benefits to
Executive's estate or heirs.
3.5 Disability. In the event of Executive's Disability (as defined
----------
below) during the term of this Agreement for any period of at least three (3)
consecutive months, the Company shall have the right, which may be exercised in
its sole discretion, to terminate this Agreement. In the event the Company does
elect to terminate this Agreement, Executive shall not be entitled to any
severance pay at any time but shall be entitled to normal disability benefits in
accordance with the policies established from time to time by the Company. For
purposes of this Agreement, "Disability" shall mean the inability of Executive
to perform his employment services hereunder by reason of physical or mental
illness or incapacity as determined by a physician chosen by the Company and
reasonably satisfactory to Executive or his legal representative.
IV.
TERM
4.1 Term. The term of Executive's employment under this Agreement
----
shall commence on the date hereof and shall continue for one year from the date
hereof, as such date may be extended from time to time.
V.
NONDISCLOSURE OF INFORMATION
AND NON-SOLICITATION OF EMPLOYEES
5.1 Nondisclosure of Confidential Information. Except in the
-----------------------------------------
performance of his duties hereunder, Executive shall not disclose to any person
or entity or use for his own direct or indirect benefit any Confidential
Information (as defined below) pertaining to the Company obtained by Executive
in the course of his employment with the Company. For purposes of this
Agreement, "Confidential Information" shall include the Company's products,
services, processes, suppliers, customers, customers' account executives,
employees, financial, sales and distribution
3
<PAGE>
information, price lists, identity and list of actual and potential customers,
trade secrets, technical information, business plans, payroll information and
strategies to the extent that such information has not been publicly
disseminated by the Company, other than through a breach hereof.
5.2 Return of Information. Upon termination of Executive's
---------------------
employment, Executive will deliver to the Company all customer lists, proposals,
reports, memoranda, computer software and programming, budgets and other
financial information, and other materials or records or writings of any type
(including any copies thereof and regardless of the medium in which the
information exists) made, used or obtained by Executive in connection with his
employment by the Company.
5.3 Employee Proprietary Information and Inventions Agreement.
---------------------------------------------------------
Executive shall be subject to the provisions of the Company's Employee
Proprietary Information and Inventions Agreement, a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference.
---------
5.4 Non-Solicitation. Executive agrees that, so long as he is
----------------
employed by the Company and for a period of one (1) year after termination of
his employment for any reason, he shall not (a) directly or indirectly solicit,
induce or attempt to solicit or induce any Company employee to discontinue his
or her employment with the Company, (b) usurp any opportunity of the Company
that Executive became aware of during his tenure at the Company or which is made
available to him on the basis of the belief that Executive is still employed by
the Company, or (c) directly or indirectly solicit or induce or attempt to
influence any person or business that is an account, customer or client of the
Company to restrict or cancel the business of any such account, customer or
client with the Company.
VI.
NON-COMPETITION
Executive agrees that given the extent and nature of the Confidential
Information he obtains during the course of his employment, it would be
inevitable that such Confidential Information would be disclosed or utilized by
the Executive should he obtain employment from, or become associated with, an
entity or person that is engaged in a business whose products or services are
substantially similar in function or capability to the products or services then
being developed, manufactured or sold by the Company, and are marketed to
substantially the same type of user as that to which the products and services
of the Company are marketed or proposed to be marketed. In order to protect the
Confidential Information Executive obtains during the course of his employment,
Executive agrees that, so long as Executive is employed by the Company and for a
period of six (6) months after termination of his employment for any reason,
Executive shall not, without the prior written consent of the Company, either
directly or indirectly, including without limitation through a partnership,
joint venture, corporation or other entity or as a consultant, director or
employee, engage in a business whose products or services are substantially
similar in function or capability to the products or services then being
developed, manufactured or sold by the Company, and are marketed to
substantially the same type of user as that to which the products and services
of the Company are marketed or proposed to be marketed.
4
<PAGE>
The parties hereto agree that both the scope and nature of the
covenant and the duration and area for which the covenant not to compete set
forth in this Article VI is to be effective are reasonable in light of all facts
----------
and circumstances. In the event that any provision of this Agreement, including
without limitation any provision of this Article VI, shall to any extent be held
----------
invalid, unreasonable or unenforceable, in any circumstances, the parties hereto
agree that the remainder of this Agreement and the application of such provision
of this Agreement to other circumstances shall be valid and enforceable to the
fullest extent permitted by law. If any provision, or any part thereof, is held
to be unenforceable because of the scope or duration of or the area covered by
such provision, the parties hereto agree that the court making such
determination shall have the power, and is hereby asked by the parties, to
reduce the scope, duration and/or areas of such provisions (and to substitute
appropriate provisions for any such unenforceable provisions) in order to make
such provisions enforceable to the fullest extent permitted by law, and/or to
delete specific words and phrases, and such modified provisions shall then be
enforceable and shall be enforced.
VII.
MISCELLANEOUS
7.1 Successors; Binding Agreement. This Agreement shall not be
-----------------------------
terminated by the voluntary or involuntary dissolution of the Company or by any
merger or consolidation, whether or not the Company is the surviving or
resulting corporation, or upon any transfer of all or substantially all of the
assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall bind and inure to the
benefit of the surviving or resulting corporation, or the corporation to which
such assets shall have been transferred, as the case may be; provided, however,
that the Company will require any successor to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
7.2 Arbitration. Any disputes or controversy between the parties to
-----------
this Agreement, including allegations of fraud and misrepresentation arising
from or as a result of this Agreement, the resulting business dealings between
Company and Executive, Executive's employment or the termination thereof,
including any claims of discrimination or other claims under any federal, state,
or local law or regulation now in existence or hereinafter enacted concerning in
any way the subject of Executive's employment with Company or its termination,
shall be resolved, after the parties attempt informal resolution, exclusively by
arbitration in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association. All arbitration
hearings shall be held in Orange County, California within one hundred twenty
days from the date arbitration is demanded by any of the parties and the
arbitrator shall render his/her written decision within thirty days after the
arbitration hearing has concluded. The decision of the arbitrator shall be final
and binding on all parties, and may be entered as a judgment by any party with
any federal or state court of competent jurisdiction. The parties to the
arbitration hearing shall share any filing fees and arbitrator's fees which must
be paid in advance of the hearing equally; however, as set forth below the
prevailing party shall be entitled to recover from the losing party all costs
that it has incurred as a result of the arbitration hearing, including fees paid
to the arbitrator, travel costs and attorneys' fees. This provision shall not
alter
5
<PAGE>
the rights of the parties to seek and obtain the provisional equitable remedies
provided under any applicable state or federal law. Executive represents, by her
signature, that he is making a voluntary and knowing waiver of her right to
pursue any and all employment-related claims in court.
7.3 No Waiver. The waiver by either party of a breach of any
---------
provision of this Agreement shall not operate as or be construed as a waiver of
any subsequent breach thereof.
7.4 Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws and decisions of the State of California.
7.5 Entire Agreement; Modifications. This Agreement represents the
-------------------------------
entire agreement between the parties with respect to the matters set forth
herein and supersedes all prior agreements and understandings between the
parties relating to the employment of Executive by the Company, and it may not
be changed or terminated orally. No modification, termination, or attempted
waiver of any other provisions of this Agreement shall be valid unless in
writing signed by the party against whom the same is sought to be enforced.
7.6 Jurisdiction; Venue. The parties do hereby agree and submit to
-------------------
personal jurisdiction in the State of California for the purposes of any
proceedings brought to enforce or construe the terms of this Agreement or to
resolve any dispute or controversy relating to Executive's employment or arising
under, as a result of, or in connection with this Agreement, and do hereby agree
and stipulate that any such proceedings shall be venued and held in Orange
County, California.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
The "COMPANY":
BUY.COM Inc.
a Delaware corporation
By: ____________________________
Its:____________________________
"EXECUTIVE":
________________________________
Name: __________________________
EXHIBITS
EXHIBIT A Employee Proprietary
Information and Inventions
Agreement
6
<PAGE>
AMENDMENT NO. 1
TO THE
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT (the "Amendment") is made
and entered into effective as of this ___ day of July, 1999 (the "Effective
Date") by and between Buy.Com Inc., a Delaware corporation (the "Company"), and
Greg Hawkins, an individual ("Executive").
RECITALS
--------
A. The Company and Executive entered into that certain Employment Agreement
(the "Employment Agreement") dated March 1, 1999 governing the terms of
Executive's employment with the Company and certain related compensation
matters. Capitalized terms, unless expressly defined herein, shall have the
same meaning herein as provided in the Employment Agreement.
B. The parties hereto desire to amend the Employment Agreement as provided in
this Amendment.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto agree as follows:
1. Term.
----
Section 4.1 of the Employment Agreement is hereby amended and restated in
its entirety to provide as follows:
"4.1 Term. The term of Executive's employment under this Agreement shall
----
commence on March 1, 1999 and shall continue for one year from such date, as
such date may be extended from time to time. After expiration of the initial one
year period of this Agreement, Executive's employment will automatically renew
for a period of one year, each year, on the same terms and conditions as are set
forth herein except as provided below, unless either party gives the other
notice of non-renewal at least thirty (30) days prior to the end of the initial
term of employment, or for any year in which the employment was renewed,
whichever the case may be. Notwithstanding anything to the contrary contained
herein, Sections 3.2, 3.3, 3.4 and 3.5 of this Agreement shall not apply or have
any force or effect any time after the initial one year term."
2. Stock Options
-------------
Section 2.2 of the Employment Agreement is hereby amended and restated in
its entirety to provide as follows:
<PAGE>
"2.2 Stock Options. The Company shall grant Executive an option to
-------------
purchase Four Hundred Eighty Four Thousand Five Hundred and Ten (484,510) shares
of the Company's common stock, subject to the vesting structure noted in the
Offer Letter dated February 12, 1999 and the provisions set forth in the
Company's Stock Option Plan and Stock Option agreement."
3. Effect of Amendment.
-------------------
Except as hereby modified and amended by this Amendment, the Employment
Agreement shall remain unchanged and shall continue in full force and effect.
4. General Provisions.
------------------
3.1 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.2 Headings. The various headings used in this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of the Employment Agreement, as amended by this Amendment, or any provision
thereof.
3.3 Entire Amendment. This Amendment, the Executive Agreement (and
those Agreements incorporated by reference therein) constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersede all prior agreements, representations, undertakings and
understandings, both written and oral, between the Company and Executive with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 to
the Employment Agreement effective as of the day and year first above written.
The "COMPANY":
BUY.COM INC., a Delaware corporation
By:__________________________________
Its:_________________________________
"EXECUTIVE":
_____________________________________
Name: Greg Hawkins
<PAGE>
AMENDMENT NO. 1
TO THE
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT (the "Amendment") is made
and entered into effective as of this ___ day of July, 1999 (the "Effective
Date") by and between Buy.Com Inc., a Delaware corporation (the "Company"), and
Greg Hawkins, an individual ("Executive").
RECITALS
--------
A. The Company and Executive entered into that certain Employment Agreement
(the "Employment Agreement") dated March 1, 1999 governing the terms of
Executive's employment with the Company and certain related compensation
matters. Capitalized terms, unless expressly defined herein, shall have
the same meaning herein as provided in the Employment Agreement.
B. The parties hereto desire to amend the Employment Agreement as provided in
this Amendment.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto agree as follows:
1. Term.
----
Section 4.1 of the Employment Agreement is hereby amended and restated in
its entirety to provide as follows:
"4.1 Term. The term of Executive's employment under this Agreement shall
----
commence on March 1, 1999 and shall continue for one year from such date, as
such date may be extended from time to time. After expiration of the initial
one year period of this Agreement, Executive's employment will automatically
renew for a period of one year, each year, on the same terms and conditions as
are set forth herein except as provided below, unless either party gives the
other notice of non-renewal at least thirty (30) days prior to the end of the
initial term of employment, or for any year in which the employment was renewed,
whichever the case may be. Notwithstanding anything to the contrary contained
herein, Sections 3.2, 3.3, 3.4 and 3.5 of this Agreement shall not apply or have
any force or effect any time after the initial one year term."
2. Stock Options
-------------
Section 2.2 of the Employment Agreement is hereby amended and restated in
its entirety to provide as follows:
<PAGE>
"2.2 Stock Options. The Company shall grant Executive an option to
-------------
purchase Four Hundred Eighty Four Thousand Five Hundred and Ten (484,510) shares
of the Company's common stock, subject to the vesting structure noted in the
Offer Letter dated February 12, 1999 and the provisions set forth in the
Company's Stock Option Plan and Stock Option agreement."
3. Effect of Amendment.
-------------------
Except as hereby modified and amended by this Amendment, the Employment
Agreement shall remain unchanged and shall continue in full force and effect.
4. General Provisions.
------------------
3.1 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.2 Headings. The various headings used in this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of the Employment Agreement, as amended by this Amendment, or any provision
thereof.
3.3 Entire Amendment. This Amendment, the Executive Agreement (and
those Agreements incorporated by reference therein) constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersede all prior agreements, representations, undertakings and
understandings, both written and oral, between the Company and Executive with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 to
the Employment Agreement effective as of the day and year first above written.
The "COMPANY":
BUY.COM INC., a Delaware corporation
By:_________________________________
Its:________________________________
"EXECUTIVE":
____________________________________
Name: Greg Hawkins
<PAGE>
EXHIBIT 10.12
BUY.COM INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
BUY.COM Inc., a Delaware corporation, by providing eligible persons in the
Corporation's service with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity incentives
programs:
- the Discretionary Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,
- the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock directly,
either through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible non-employee
Board members shall automatically receive option grants at designated intervals
over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee Board
members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall serve
for such period of time as the Board may determine and may be removed by the
Board at any time. The Board may also at any time terminate the functions of any
Secondary Committee and reassume all powers and authority previously delegated
to such committee.
C. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority to
determine which Section 16 Insiders and other highly compensated Employees shall
be eligible for participation in the Salary Investment Option Grant Program for
one or more calendar years. However, all option grants under the Salary
Investment Option Grant Program shall be made in accordance with the express
terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee Option
Grant Programs shall be self-executing in accordance with the terms of those
programs, and no Plan Administrator shall exercise any discretionary functions
with respect to any option grants or stock issuances made under those programs.
2
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors of
any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide services
to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly compensated
individuals shall be eligible to participate in the Salary Investment Option
Grant Program.
C. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine, (i) with respect
to the option grants under the Discretionary Option Grant Program, which
eligible persons are to receive such grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding and (ii) with respect to stock issuances
under the Stock Issuance Program, which eligible persons are to receive such
issuances, the time or times when the issuances are to be made, the number of
shares to be issued to each Participant, the vesting schedule (if any)
applicable to the issued shares and the consideration for such shares.
D. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the Automatic
Option Grant Program shall be limited to (i) those individuals who first become
non-employee Board members on or after the Underwriting Date, whether through
appointment by the Board or election by the Corporation's stockholders, and (ii)
those individuals who continue to serve as non-employee Board members at one or
more Annual Stockholders Meetings held after the Underwriting Date. A non-
employee Board member who has previously been in the employ of the Corporation
(or any Parent or Subsidiary) shall not be eligible to receive an option grant
under the Automatic Option Grant Program at the time he or she first becomes a
non-employee Board member, but shall be eligible to receive periodic option
grants under the Automatic Option Grant Program while he or she continues to
serve as a non-employee Board member.
F. All non-employee Board members shall be eligible to participate in the
Director Fee Option Grant Program.
3
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed twenty-four
million seven hundred sixty-nine thousand five hundred twenty-five (24,769,525)
shares. Such reserve shall consist of (i) the number of shares/1/ estimated to
remain available for issuance, as of the Plan Effective Date, under the
Predecessor Plans as last approved by the Corporation's stockholders, including
the shares subject to outstanding options under the Predecessor Plans, (ii) plus
an additional increase of approximately one million eight hundred seventy-five
thousand (1,875,000) shares to be approved by the Corporation's stockholders
prior to the Underwriting Date.
B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2001, by
an amount equal to three percent (3%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
four million (4,000,000) shares.
C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than one million five hundred thousand (1,500,000) shares of Common Stock
in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
_____________
/1/ All numbers in this document reflect the eight (8)-to-five (5) reverse
stock split to be effected by the Board of Directors prior to the Plan
Effective Date.
4
<PAGE>
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
E. If any change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made by
the Plan Administrator to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the maximum number and/or class of securities for
which any one person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar year,
(iii) the number and/or class of securities for which grants are subsequently to
be made under the Automatic Option Grant Program to new and continuing non-
employee Board members, (iv) the number and/or class of securities and the
exercise price per share in effect under each outstanding option under the Plan,
(v) the number and/or class of securities and exercise price per share in effect
under each outstanding option incorporated into this Plan from the Predecessor
Plans and (vi) the maximum number and/or class of securities by which the share
reserve is to increase automatically each calendar year pursuant to the
provisions of Section V.B of this Article One. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section I of Article Seven and
the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period necessary
to avoid a charge to the Corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required
to be withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's cessation of
Service for any reason shall remain exercisable for such period of time
thereafter as shall be determined by the Plan Administrator and set forth
in the documents evidencing the option, but no such option shall be
exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for Misconduct or
should the Optionee otherwise engage in Misconduct while holding one or
more outstanding options under this Article Two, then all those options
shall terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares for which the option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise period
or (if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Service, terminate and cease to be outstanding
to the extent the option is not otherwise at that time exercisable for
vested shares.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
7
<PAGE>
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall have no stockholder
------------------
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion to
-----------------
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. Non-Statutory Options shall be subject to the
same restriction, except that a Non-Statutory Option may be assigned in whole or
in part during the Optionee's lifetime to one or more members of the Optionee's
family or to a trust established exclusively for one or more such family members
or to Optionee's former spouse, to the extent such assignment is in connection
with the Optionee's estate plan or pursuant to a domestic relations order. The
assigned portion may only be exercised by the person or persons who acquire a
proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
Notwithstanding the foregoing, the Optionee may also designate one or more
persons as the beneficiary or beneficiaries of his or her outstanding options
under this Article Two, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Seven shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
---
8
<PAGE>
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Dollar Limitation. The aggregate Fair Market Value of the shares of
-----------------
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become exercisable for all the
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully vested shares of Common Stock. However,
an outstanding option shall not become exercisable on such an accelerated basis
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, to be assumed by the successor corporation (or parent thereof) or
(ii) such option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate, and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Corporate Transaction, except to the extent: (i)
those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction, all
outstanding options shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof).
9
<PAGE>
D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments to reflect such Corporate Transaction shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year and (iv) the maximum number and/or class of securities by
which the share reserve is to increase automatically each calendar year. To the
extent the actual holders of the Corporation's outstanding Common Stock receive
cash consideration for their Common Stock in consummation of the Corporate
Transaction, the successor corporation may, in connection with the assumption of
the outstanding options under the Discretionary Option Grant Program, substitute
one or more shares of its own common stock with a fair market value equivalent
to the cash consideration paid per share of Common Stock in such Corporate
Transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.
F. The Plan Administrator shall have full power and authority to structure
one or more outstanding options under the Discretionary Option Grant Program so
that those options shall become exercisable for all the shares of Common Stock
at the time subject to those options in the event the Optionee's Service is
subsequently terminated by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those options are assumed and do not
otherwise accelerate. In addition, the Plan Administrator may structure one or
more of the Corporation's repurchase rights so that those rights shall
immediately terminate with respect to any shares held by the Optionee at the
time of his or her Involuntary Termination, and the shares subject to those
terminated repurchase rights shall accordingly vest in full at that time.
10
<PAGE>
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plans) and to grant in substitution new options covering the same or a different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
11
<PAGE>
B. The following terms shall govern the grant and exercise of tandem stock
appreciation rights:
(i) One or more Optionees may be granted the right, exercisable upon
such terms as the Plan Administrator may establish, to elect between the
exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is approved
by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and exercise of limited stock
appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each individual holding
one or more options with such a limited stock appreciation right shall have
the unconditional right (exercisable for a thirty (30)-day period following
such Hostile Take-Over) to surrender each such option to the Corporation.
In return for the surrendered option, the Optionee shall receive a cash
distribution from the Corporation in an amount equal to the excess of (A)
the Take-Over Price of the shares of Common Stock at the time subject to
such option (whether or not the option is otherwise exercisable for those
shares) over (B) the aggregate exercise price payable for those shares.
Such cash distribution shall be paid within five (5) days following the
option surrender date.
12
<PAGE>
(iii) At the time such limited stock appreciation right is granted,
the Plan Administrator shall pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no
further approval of the Plan Administrator or the Board shall be required
at the time of the actual option surrender and cash distribution.
13
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
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<PAGE>
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of the option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
15
<PAGE>
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
- --------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. The Primary Committee shall, at the time the
option with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under the Salary Investment Option Grant Program, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
16
<PAGE>
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
17
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or
18
<PAGE>
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
19
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
20
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a non-
employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase Twenty-Four Thousand (24,000) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase Eight Thousand (8,000) shares of Common Stock,
provided such individual has served as a non-employee Board member for at least
six (6) months. There shall be no limit on the number of such Eight Thousand
(8,000)-share option grants any one Eligible Director may receive over his or
her period of Board service, and non-employee Board members who have previously
been in the employ of the Corporation (or any Parent or Subsidiary) or who have
otherwise received one or more stock option grants from the Corporation prior to
the Underwriting Date shall be eligible to receive one or more such annual
option grants over their period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
Twenty-Four Thousand (24,000)-share grant shall vest, and the Corporation's
repurchase right shall lapse with respect to, (i) twenty-five percent (25%) of
the
21
<PAGE>
Option Shares upon Optionee's completion of one (1) year of Service as a Board
member measured from the Option Grant Date and (ii) the balance of the Option
Shares in a series of thirty-six (36) successive equal monthly installments upon
Optionee's completion of each additional month of Service as a Board member over
the thirty-six (36)-month period measured from the first anniversary of the
Option Grant Date. In no event shall any additional Option Shares vest after
Optionee's cessation of Service. The shares subject to each annual Eight
Thousand (8,000)-share option grant shall initially be unvested and the
Corporation's Repurchase Right shall lapse with respect to, (i) twenty-five
percent (25%) of the Option Shares upon Optionee's completion of one (1) year of
Service as a Board member measured from the Option Grant Date and (ii) the
balance of the Option Shares in a series of thirty-six (36) successive equal
monthly installments upon Optionee's completion of each additional month of
Service as a Board member over the thirty-six (36)-month period measured from
the first anniversary of the Option Grant Date. In no event shall any additional
Option Shares vest after Optionee's cessation of Service.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with the Optionee's estate plan
or pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or the
laws of inheritance or the designated beneficiary or beneficiaries of such
option) shall have a twelve (12)-month period following the date of such
cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares
22
<PAGE>
of Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as fully
vested shares of Common Stock.
23
<PAGE>
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service for any reason
other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, the shares of Common Stock at the time subject to each
outstanding option held by that Optionee under this Automatic Option Grant
Program but not otherwise vested shall automatically vest in full so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the option shares as fully vested shares
of Common Stock and may be exercised for any or all of those vested shares.
Immediately following the consummation of the Corporate Transaction, each
automatic option grant shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
B. In the event of any Change in Control while the Optionee remains a
Board member, the shares of Common Stock at the time subject to each outstanding
option held by that Optionee under this Automatic Option Grant Program but not
otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the option shares as fully vested shares of Common Stock and
may be exercised for any or all of those vested shares. Each such option shall
remain exercisable for such fully vested option shares until the expiration or
sooner termination of the option term or the surrender of the option in
connection with a Hostile Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
24
<PAGE>
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under the Automatic Option Grant Program, substitute one or more shares
of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
25
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
26
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Six, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as a
-----------------------------
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from
27
<PAGE>
the date of such cessation of Board service. In the event of the Optionee's
death while holding such option, the option may be exercised by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or the laws of inheritance
or by the designated beneficiary or beneficiaries of such option.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains a
Board member, each outstanding option held by such Optionee under this Director
Fee Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
- --------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the
28
<PAGE>
Take-Over Price of the shares of Common Stock at the time subject to each
surrendered option (whether or not the option is otherwise at the time
exercisable for those shares) over (ii) the aggregate exercise price payable for
such shares. Such cash distribution shall be paid within five (5) days following
the surrender of the option to the Corporation. No approval or consent of the
Board or any Plan Administrator shall be required at the time of the actual
option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under the Director Fee Option Grant Program, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
E. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
29
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest-bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
Stock Delivery: The election to deliver to the Corporation, at
-------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
30
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such grants
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plans,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plans after the Plan Effective Date. All options outstanding under
the Predecessor Plans on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plans which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i)
--------
December 17, 2009, (ii) the date on which all shares available for issuance
under the Plan shall have been issued as fully vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Should the Plan terminate on December 17, 2009, then all option
grants and unvested stock issuances outstanding at that time shall continue to
have force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
31
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
32
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
-----
C. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
<PAGE>
G. Corporation shall mean BUY.COM Inc., a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of BUY.COM Inc. which shall by appropriate action adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Eligible Director shall mean a non-employee Board member eligible
-----------------
to participate in the Automatic Option Grant Program or the Director Fee Option
Grant Program in accordance with the eligibility provisions of Articles One,
Five and Six.
K. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per share
at which the Common Stock is to be sold in the initial public offering pursuant
to the Underwriting Agreement.
A-2
<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
-----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3
<PAGE>
U. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
-------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plans shall mean the Corporation's 1998 Stock Plan,
-----------------
the BuyGolf.com, Inc. 1998 Stock Option Plan, as assumed by the Corporation in
connection with the Corporation's acquisition of BuyGolf.com, Inc., and the
Corporation's Special Executive Stock Option Plan, all as in effect immediately
prior to the Plan Effective Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
A-4
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the Corporation
-------
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
HH. Stock Issuance Agreement shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
JJ. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. 10% Stockholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
OO. Withholding Taxes shall mean the Federal, state and local income and
-----------------
employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
<PAGE>
EXHIBIT 10.13
BUY.COM INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of BUY.COM Inc., a Delaware corporation, by providing eligible employees with
the opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll deduction-based employee stock purchase plan designed
to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to one million
two hundred fifty thousand (1,250,000) shares./1/
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2001, by
an amount equal to one percent (1%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
one million three hundred thousand (1,300,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable in total by all Participants on any one Purchase Date,
(iv) the maximum number
_____________________________
/1/ All numbers in this document reflect the eight (8)-to-five (5) reverse stock
split to be effected by the Board of Directors prior to the Plan Effective
Date.
<PAGE>
and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in January
2002. The next offering period shall commence on the first business day in
February 2002, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall consist of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February to the last business day in July each year and from the
first business day in August each year to the last business day in January in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in July 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an offering period may be any multiple
of one percent (1%) of the Cash Earnings paid to the Participant during each
Purchase Interval within that offering period, up to a maximum of the lesser of
i) ten percent (10%) or ii) ten thousand dollars ($10,000) per calendar year.
The deduction rate so authorized shall continue in effect throughout the
offering period, except to the extent such rate is changed in accordance with
the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator. The
Participant may not, however, effect more than one (1) such reduction per
Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the ten percent (10%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Rights. A Participant shall be granted a
------------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan
Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common Stock
--------------
will be purchased on the Participant's behalf on each Purchase Date within the
offering period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common Stock
----------------------------
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 550 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum number of
shares of Common Stock purchasable in total by all Participants on any one
Purchase Date shall not exceed 312,500 shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable prior
to the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in total by all Participants on each Purchase Date during that offering
period.
4
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the offering period for
which the terminated purchase right was granted. In order to resume
participation in any subsequent offering period, such individual must re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into that offering
period.
(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while his or
her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for the
Purchase Interval in which the purchase right so terminates shall be immediately
refunded. However, should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the Participant shall have
the right, exercisable up until the last business day of the Purchase Interval
in which such leave commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase Interval or (b) have
such funds held for the purchase of shares on his or her behalf on the next
scheduled Purchase Date. In no event, however, shall any further payroll
deductions be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (x) within ninety (90) days following the
commencement of such leave or (y) prior to the expiration of any longer period
for which such Participant's right to reemployment with the Corporation is
guaranteed by statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in
5
<PAGE>
effect at the time the leave began, unless the Participant withdraws from the
Plan prior to his or her return. An individual who returns to active employment
following a leave of absence that exceeds in duration the applicable (x) or (y)
time period will be treated as a new Employee for purposes of subsequent
participation in the Plan and must accordingly re-enroll in the Plan (by making
a timely filing of the prescribed enrollment forms) on or before his or her
scheduled Entry Date into the offering period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in total
by all Participants on any one Purchase Date.
The Corporation shall use its best efforts to provide at least ten
(10) days' prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares of
----------------------------
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by the
-------------
Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder rights
------------------
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accured under other employee stock purchase plans
6
<PAGE>
(within the meaning of Code Section 423)) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions that the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on December 17, 1999, and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in January 2010, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of New York without resort to that State's conflict-of-laws rules.
8
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
BUY.COM Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Cash Earnings shall mean (i) the regular base salary paid to a
-------------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any contributions made by the Participant to any Code
Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall not include any contributions made by
the Corporation or any Corporate Affiliate on the Participant's behalf to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).
C. Change in Control shall mean a change in ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by or is under common control with the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's stockholders.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
A-1
<PAGE>
F. Corporate Affiliate shall mean any parent or subsidiary corporation
-------------------
of the Corporation (as determined in accordance with Code Section 424), whether
now existing or subsequently established.
G. Corporation shall mean BUY.COM Inc., a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of BUY.COM Inc. that shall by appropriate action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate that becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).
J. Entry Date shall mean the date an Eligible Employee first commences
----------
participation in the offering period in effect under the Plan. The earliest
Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period that begins at
the Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is sold in the initial public offering
pursuant to the Underwriting Agreement.
A-11
<PAGE>
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be July 31, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-12
<PAGE>
EXHIBIT 10.35
BUY.COM TOUR AGREEMENT
----------------------
THIS AGREEMENT ("Agreement") is made and entered into as of the 25th day of
October, 1999 (the "Effective Date") by and between PGA TOUR, INC., a Maryland
corporation ("TOUR"), and BUY.COM, INC., a Delaware corporation ("BUY.COM").
BACKGROUND FACTS
- ----------------
A. TOUR is the organization of certain professional tournament golfers of
worldwide stature that, among other things, sanctions and co-sponsors certain
professional golf tournaments (the "PGA TOUR," "SENIOR PGA TOUR" and what is
currently referred to as the "NIKE TOUR").
B. BUY.COM is recognized in the electronic commerce industry.
C. BUY.COM and TOUR desire for BUY.COM to become the umbrella sponsor of the
professional golf circuit currently known as the NIKE TOUR and to have such tour
be renamed the BUY.COM TOUR.
D. Pursuant to the umbrella sponsorship of the BUY.COM TOUR, BUY.COM will
receive certain promotional rights, corporate hospitality benefits and media
exposure, subject to the terms and conditions set forth herein.
RECITAL OF CONSIDERATION
- ------------------------
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, TOUR and BUY.COM hereby agree as
follows:
<PAGE>
AGREEMENT OF THE PARTIES
- ------------------------
1. ACCURACY OF RECITALS.
--------------------
To the best of the parties' knowledge, the statements set forth above in
the section labeled "Background Facts" are true and correct. Neither party is
aware of any fact or circumstance that would render such statements misleading.
2. UMBRELLA SPONSORSHIP.
--------------------
2.1 Name. BUY.COM acknowledges the existence of the professional golf
----
circuit owned and operated by TOUR which is currently known as the "NIKE TOUR"
(the "Professional Circuit"). TOUR and BUY.COM hereby agree that as of the
Effective Date, (i) BUY.COM shall become the exclusive umbrella sponsor of the
Professional Circuit, (ii) the Professional Circuit shall be renamed the BUY.COM
TOUR, and (iii) each individual event which is part of the BUY.COM TOUR (each a
"TOUR Event") shall include the BUY.COM name (e.g., BUY.COM Knoxville Open)
(such renamed Professional Circuit shall be referred to herein as the "BUY.COM
TOUR").
2.2 Exclusivity. BUY.COM shall have the exclusive right to have its name
-----------
included in the title of the BUY.COM TOUR and in the title of each TOUR Event.
No other sponsor shall have its name or other identification included in the
name of the BUY.COM TOUR or in the name of any individual TOUR Event; provided
that, BUY.COM acknowledges and agrees TOUR shall have the right to sell other
non-title sponsorships associated with individual or multiple TOUR Events,
including, without limitation, presenting sponsorships (e.g., BUY.COM Knoxville
Open presented by Buick), so long as no such sponsors are "Competitors" (as such
term is defined in Exhibit A attached hereto), or are otherwise harmful to
---------
the image or reputation of BUY.COM.
2.3 BUY.COM TOUR Operation. BUY.COM acknowledges and agrees that TOUR
----------------------
shall be solely responsible for all aspects of operating the BUY.COM TOUR,
including, without limitation, promulgating and enforcing BUY.COM TOUR
Tournament Regulations; provided that TOUR will solicit BUY.COM's advice and
counsel on all major
Page 2
<PAGE>
elements of the BUY.COM TOUR, including feedback on issues including, but not
limited to, brand positioning, market scheduling, television strategy, and
promotion. Within fourteen (14) days of the Effective Date, a task force from
each party shall be created to oversee the initial transition and branding of
the BUY.COM TOUR. Thereafter during the "Term" (as defined herein), this task
force will meet on a quarterly basis to address various issues associated with
the BUY.COM TOUR. TOUR agrees to explore with BUY.COM the possibility of BUY.COM
selling newly created or existing but unsold sponsorship positions at TOUR
Events so long as any such arrangement results in a net increase in revenue for
the applicable TOUR Event.
2.4 Events and Markets.
------------------
2.4.1 Number of Events. In 1999, the Professional Circuit consisted of
the thirty (30) annual events listed on Exhibit B. During the Term, the parties
---------
agree to maintain the BUY.COM TOUR at a quality and number of events that is in
all respects comparable to or better than the 1999 Professional Circuit. TOUR
shall have the right to add new TOUR Events and extend the number of TOUR Events
on the BUY.COM TOUR beyond the current annual schedule of thirty (30), provided
such additional TOUR Events are of comparable or better quality to the events on
the 1999 Professional Circuit. References herein to the BUY.COM TOUR shall
include the thirty (30) TOUR Events on Exhibit B, any successors of such TOUR
---------
Events, and any new TOUR Events added to the BUY.COM TOUR. TOUR and
BUY.COM shall also analyze the possibility of establishing a number of "marquee"
events on the BUY.COM TOUR (similar to THE PLAYERS CHAMPIONSHIP on the PGA
TOUR). If in any year during the Term the number of TOUR events changes, the
parties agree to follow the procedures set forth on Exhibit C.
---------
2.4.2 Markets. The parties hereto acknowledge and agree that TOUR
-------
Events will take place in a wide variety of markets, generally characterized as
"mid-sized," where there is typically not a PGA TOUR or SENIOR PGA TOUR
tournament presence. TOUR will solicit information regarding, and consider
BUY.COM's objectives and desires with respect to, the markets in which the TOUR
Events are placed. Prior to the scheduling of all new TOUR Events, or the
relocation of an existing TOUR Event, TOUR will discuss with BUY.COM all
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market options and use commercially reasonable efforts to accommodate BUY.COM's
requests. The parties agree that they will focus their respective efforts
towards adding new TOUR Events of a caliber and quality that are comparable to,
or better than, TOUR Events played on the Professional Circuit in 1999.
Additionally, TOUR shall seek to increase the number of TOUR Events conducted at
Tournament Players Clubs.
2.4.3 International Market Expansion. In the event TOUR desires
------------------------------
to expand the BUY.COM TOUR to include TOUR Events outside the United States,
TOUR will so notify BUY.COM in writing pursuant to the procedures set forth in
Exhibit D.
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2.4.4 Purse. TOUR agrees that during the Term, the purse levels
-----
for TOUR Events will be as set forth on Exhibit E.
---------
2.5 PGA TOUR Access. TOUR agrees that it will not decrease the number
---------------
of opportunities for players on the BUY.COM TOUR to earn the right to play on
the PGA TOUR from the number of opportunities that existed on the 1999
Professional Circuit.
3. BUY.COM TOUR MARK.
-----------------
3.1 Creation of BUY.COM TOUR Logo. TOUR and BUY.COM agree that the
-----------------------------
logo attached hereto as Exhibit F shall be the official logo of the BUY.COM TOUR
--------
(the "BUY.COM TOUR Logo"). The BUY.COM TOUR Logo together with the word mark
BUY.COM TOUR shall be collectively referred to herein as the "BUY.COM TOUR
Mark". Neither party shall take any action to register the BUY.COM TOUR Mark
without the prior written approval of the other party.
3.2 Use of BUY.COM TOUR MARK by TOUR. During the Term and subject to
--------------------------------
Sections 8 and 9, TOUR shall have the right to use, and shall use, the BUY.COM
TOUR MARK and/or BUY.COM TOUR name in connection with all activities associated
with the BUY.COM TOUR, including, but not limited to, marketing and media
materials. The parties acknowledge and agree that TOUR shall have the sole and
exclusive right to manufacture,
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distribute and sell BUY.COM TOUR merchandise and to allow other third parties to
accomplish these tasks (the "Merchandise"), and TOUR shall be entitled to retain
all revenue associated therewith; provided that (i) BUY.COM shall have the sole
and exclusive right to conduct all e-commerce sales or distribution of the
Merchandise, and to retain all revenues associated therewith, and (ii) TOUR
shall consider from time to time requests from BUY.COM to source Merchandise
through third party vendors, if such vendors can produce Merchandise of equal
quality at a lower price. In addition, TOUR shall make the Merchandise available
to BUY.COM, at prices equal to TOUR's cost for such merchandise, for electronic
distribution by BUY.COM. TOUR agrees that BUY.COM shall have a limited right to
sell Merchandise other than through on-line sales, subject to TOUR approval.
TOUR agrees that all uses of BUY.COM TOUR Mark outside the promotion and
sponsorship by BUY.COM TOUR or other than as expressly provided in this
Agreement shall be subject to BUY.COM's prior written approval.
3.3 Rebranding Program. TOUR shall implement a rebranding campaign,
------------------
regarding the BUY.COM TOUR and the BUY.COM TOUR MARK, the specifics of which are
attached hereto as Exhibit G. As part of this rebranding effort, TOUR shall
---------
create a new television institutional advertisement regarding the new BUY.COM
TOUR to be broadcast in a variety of TOUR television vehicles at TOUR's expense.
The schedule for television and other media spots for the first quarter of 2000
is also set forth on Exhibit G. Additionally, TOUR shall work closely with its
---------
broadcast rights holders to ensure continued and correct usage of
in-program graphics, announcer mentions, leaderboard signage, and on-course
signage related to BUY.COM TOUR Events, players, and alumni, at TOUR's expense.
3.4 Quality of Operation. The parties acknowledge the goodwill which
--------------------
TOUR and BUY.COM will develop in connection with the BUY.COM TOUR MARK.
Accordingly, the parties agree that each will not knowingly nor intentionally
take any actions which could adversely affect such goodwill as developed by TOUR
and BUY.COM.
3.5 Quality Control. All promotional or advertising material
---------------
containing the BUY.COM TOUR MARK shall be of a high quality that does not
derogate from or adversely affect the BUY.COM TOUR MARK or the goodwill and
reputation associated therewith.
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3.6 Termination. The parties acknowledge and agree that upon the
-----------
expiration or the earlier termination of this Agreement for any reason, neither
party shall use the BUY.COM TOUR MARK in any manner (except by TOUR for
historical references to statistics, events, etc.).
4. MEDIA EXPOSURE.
--------------
4.1 BUY.COM TOUR Event Telecasts. BUY.COM acknowledges that under
----------------------------
TOUR's current television agreements, which are in effect through the year 2002,
The Golf Channel has the exclusive rights to all TOUR Events, with a minimum
obligation to provide broadcast coverage of ten (10) TOUR Events annually, with
the season-ending BUY.COM TOUR Championship carried on The Golf Channel and Fox
Sports Net. The parties acknowledge that television coverage for the BUY.COM
TOUR after 2002 will be subject to new broadcast television agreements, which
will be negotiated by TOUR in 2001; provided that TOUR shall consult with
BUY.COM regarding ongoing negotiations and discussions for such television
coverage. TOUR will use its commercially reasonable best efforts in these
negotiations to maintain comparable, if not gain increased coverage of, the TOUR
Events. BUY.COM shall have the option to purchase advertising units within the
BUY.COM TOUR Event telecasts subject to the mutual agreement of BUY.COM and the
applicable broadcaster.
4.2 Updates in PGA TOUR and SENIOR PGA TOUR Telecasts. BUY.COM
-------------------------------------------------
acknowledges that TOUR's current PGA TOUR television contracts and practice are
in effect through 2002 and SENIOR PGA TOUR television contracts and practice are
in effect through 2000. These existing television contracts provide for the
BUY.COM TOUR to receive event updates and upcoming event promotions in the
television coverage during most every PGA TOUR and SENIOR PGA TOUR event
throughout the year as set forth on Exhibit H.
---------
4.3 International Television. The television broadcasts that provide
------------------------
BUY.COM TOUR exposure through updates and promotions within PGA TOUR and SENIOR
PGA TOUR telecasts referenced in Section 4.2 above will continue to be
distributed
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internationally via TOUR's international television agreements. During the Term,
TOUR will ensure that this international exposure will continue for the term of
those agreements and any extensions, renewals or successor agreements. In
addition, TOUR will provide for such continued international exposure during the
Term by entering into new contracts, extensions or renewals of such
international television agreements.
4.4 PGA TOUR.COM Exposure. TOUR shall ensure that the BUY.COM TOUR
---------------------
MARK will receive prominent, above-the-fold exposure on the PGATOUR.com web site
(and any successor web site) (the "TOUR Site") during the Term, including,
without limitation, BUY.COM TOUR MARK utilization on the home page of the TOUR
Site; BUY.COM TOUR MARK utilization on all BUY.COM TOUR player biography,
statistics and tournament pages; BUY.COM TOUR MARK utilization on the BUY.COM
TOUR's live scoring pages; and BUY.COM TOUR MARK or name utilization in
substantial BUY.COM TOUR editorial features and/or promotions undertaken on the
TOUR Site. The BUY.COM TOUR MARK will be a hot link to the home page of the
BUY.COM TOUR section of the TOUR Site and TOUR and BUY.COM will establish a
mutually acceptable reciprocal, above the fold link between such page and
BUY.COM's web site.
4.5 TOUR Media. TOUR agrees that the BUY.COM TOUR will be featured
----------
prominently in all TOUR owned and/or controlled media that may exist at any time
during the Term, which currently includes the "Inside the PGA TOUR" and "Inside
the SENIOR PGA TOUR" television shows, "PGA TOUR Partners Magazine," the annual
TOUR Magazine insert in "Golf Magazine," and TOUR Media Guides and applicable
press releases. During the Term in any TOUR media where there is currently a
feature referring to NIKE TOUR, that feature will reference the BUY.COM TOUR,
including, without limitation, all of the "Inside the PGA TOUR" and "Inside the
SENIOR PGA TOUR" television shows which currently feature NIKE TOUR recaps
and/or promotions, shall continue as BUY.COM TOUR recaps and/or promotions
during the Term.
4.6 Earned Media. The BUY.COM TOUR will receive significant national
------------
and local media exposure through both television and print media during the
course of the
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BUY.COM TOUR's editorial and news coverage by third parties. TOUR will develop a
transitional rebranding campaign to be launched no later than January 1, 2000
for the media to editorially ingrain BUY.COM's position as the new umbrella
title sponsor.
4.7 Media Value. As set forth in this Section 4, certain facets of
-----------
future BUY.COM TOUR media exposure are subject to future negotiations between
TOUR and third parties. The parties acknowledge and agree that the maintenance
and expansion of such media exposure is in their mutual best interests. TOUR
shall use its commercially reasonable best efforts to obtain comparable or
superior media value for the BUY.COM TOUR. In the event TOUR is unable to
provide comparable media value, TOUR will provide additional, comparable
exposure or value from its other media inventory. In the event TOUR is unable to
provide such additional value, TOUR shall provide an appropriate reduction in
the "Sponsorship Fee" (as defined herein), which shall be mutually agreed upon
by the parties.
5. ON-SITE EXPOSURE.
----------------
5.1 BUY.COM TOUR Tournament Elements. TOUR will place the BUY.COM TOUR
--------------------------------
MARK prominently on all publications, merchandise, advertising and other
marketing elements associated with each individual TOUR Event, and TOUR will
place the BUY.COM TOUR MARK on the electronic scoreboards, tournament signage,
tickets, publications, pairing sheets, caddie vests, hole flags and volunteer
uniforms for each TOUR Event. TOUR will use commercially reasonable best efforts
to use the BUY.COM TOUR MARK on concessions cups and the like.
5.2 Additional On-Site Opportunities. At BUY.COM's election and
--------------------------------
expense, BUY.COM shall have the right to showcase its products and services at
individual TOUR Event venues (including, without limitation, the opportunity to
present a BUY.COM TOUR on-line store via kiosks to tournament fans, on-site
coupon distribution, product sampling, etc. ). BUY.COM will choose the size and
location of such display areas (minimum size of 10' x 10'), subject to TOUR's
approval which shall not be unreasonably withheld.
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6. ADDITIONAL PROMOTIONAL VALUE FOR BUY.COM.
----------------------------------------
6.1 Tickets. Each year during the Term, BUY.COM will receive two
-------
hundred (200) grounds credentials for each TOUR Event at no cost to BUY.COM. In
addition, each year during the Term, BUY.COM will receive, at no cost to
BUY.COM, an aggregate of two hundred (200) tournament credentials (each such
credential providing access to a tournament for one (1) week) for use at PGA
TOUR Events and SENIOR PGA TOUR Events. No more than one hundred twenty (120)
such credentials may be used on any one (1) TOUR, and no more than ten (10)
tickets may be used at any one (1) event. Additional credentials will be
provided through TOUR at the price paid by TOUR for such credentials.
6.2 Pro-Am Spots. Each year during the Term, BUY.COM will receive, at
------------
no cost, twelve (12) Pro-Am spots in the Official Wednesday Pro-Am of each TOUR
Event. BUY.COM may use its Pro-Am spots for any amateur player of reasonable
capability, at the discretion of BUY.COM. In addition, each year during the
Term, BUY.COM will receive an aggregate of four (4) Pro-Am spots on each of the
PGA TOUR and SENIOR PGA TOUR. Selection of such Pro-Am spots will be determined
by TOUR, after consultation with BUY.COM, provided that TOUR shall provide such
Pro-Am spots in at least two different events on each of the PGA TOUR and SENIOR
PGA TOUR. BUY.COM may purchase additional Pro-Am spots, subject to availability,
at the price paid by TOUR for such additional Pro-Am spots.
6.3 TPC Club Membership. At no cost to BUY.COM, BUY.COM will receive
-------------------
one (1) corporate membership to the Tournament Players Club network providing
two (2) designees at any one (1) time who will be entitled to full membership
privileges at the Tournament Players Club at Sawgrass. Such membership
privileges shall permit the designees to play golf at the Tournament Players
Club at Sawgrass without the payment of initiation fees, annual membership fees
or greens fees and also allow the use of locker room facilities. The designees
may also bring or send guests to other Tournament Players Club facilities
worldwide, subject to the Bylaws of the Tournament Players Club at Sawgrass and
each other Tournament Players Club. Such corporate membership shall
automatically terminate and be deemed revoked
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as of the expiration or earlier termination of the Term. BUY.COM shall have the
right to change the designees upon thirty (30) days written notice to TOUR.
6.4 Client Functions. Each year during the Term, TOUR shall invite
----------------
certain BUY.COM executives, at the discretion of TOUR, to TOUR's annual
client functions, so long as such functions remain in existence. The location
and activities of the client functions may change each year, but provide an
opportunity for networking with other TOUR sponsors.
6.5 BUY.COM Hospitality. Each year during the Term, TOUR shall provide
-------------------
BUY.COM, at no cost, with an 18th hole hospitality tent or skybox (generally for
groups of fifty (50) including Clubhouse credentials with VIP access (or similar
hospitality)) at each BUY.COM TOUR Event. The specifics of each package is to be
determined by TOUR. Food and beverage for such hospitality area shall be at
BUY.COM's expense. BUY.COM may, from time to time, and subject to TOUR approval,
transfer or resell its hospitality inventory, BUY.COM pro-am spots and/or TOUR
Event tickets to third parties, so long as such sales or transfers do not
adversely affect the applicable TOUR Event's sales of similar items.
6.6 World Golf Championships Hospitality. Each year during the Term,
------------------------------------
and at no cost to BUY.COM, TOUR shall provide BUY.COM an Embassy Row Hospitality
Tent (inclusive of food, beverages and forty (40) admission passes for each of
the following three (3) days (Wednesday, Friday and Sunday)) at the World Golf
Championships Andersen Consulting Match Play Championship in Carlsbad,
California, for so long as that event shall continue to be played in Carlsbad
during the Term. If the tournament is not played in Carlsbad, California, TOUR
will provide comparable hospitality at a mutually acceptable alternative PGA
TOUR event.
7. CONSUMER PROMOTIONAL PROGRAMS. BUY.COM shall have the right to conduct
-----------------------------
consumer promotions around a BUY.COM TOUR theme, including print, radio,
television and Internet advertising. These promotions may include hospitality or
ticket giveaways, sweepstakes opportunities, etc. (all in accordance with
existing TOUR policies that have been previously provided to BUY.COM and all
applicable laws). All such promotions are
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subject to TOUR's prior approval, such approval not to be unreasonably withheld.
BUY.COM shall also have the right to use the designation "Official Online
Superstore of the PGA TOUR", or such other designation that is mutually agreed
upon by TOUR and BUY.COM (the "Designation") solely in conjunction with the
BUY.COM brand. Use of the Designation shall be subject to a separate mutually
acceptable license agreement.
8. USE OF BUY.COM MARKS.
--------------------
8.1 License. For the Term of this Agreement, BUY.COM hereby grants to
TOUR a fully-paid, nonexclusive, nontransferable, nonsublicensable, royalty-
free, worldwide license to use the trademarks of BUY.COM attached hereto as
Exhibit I, for which BUY.COM is the sole owner (the "BUY.COM MARKS") alone and
- ---------
as part of the BUY.COM TOUR MARK and solely in accordance with this Agreement.
8.2 Proprietary Markings. TOUR hereby agrees to ensure that all
trademark and other proprietary notices of BUY.COM affixed to or displayed on
the BUY.COM MARKS will not be removed, obscured or modified; except that, with
respect to the BUY.COM TOUR Mark only, such proprietary notices shall only be
included adjacent to the exterior of the BUY.COM TOUR MARK.
8.3 BUY.COM Trademarks. TOUR acknowledges that BUY.COM is the owner of
all right, title and interest in and to the BUY.COM MARKS, together with any new
or revised names, designs or designations that BUY.COM may adopt during the
Term, and TOUR agrees not to use the BUY.COM MARKS in any manner whatsoever
except as expressly provided in this Agreement. In addition, BUY.COM shall
provide TOUR with the specifications, style and other requirements for the use
of the BUY.COM MARKS (the "Specifications"), attached hereto as Exhibit I. TOUR
---------
shall abide by the Specifications when using the BUY.COM MARKS. TOUR
shall execute any documents reasonably requested by BUY.COM to assist BUY.COM in
the prosecution, maintenance, protection or defense of the BUY.COM MARKS.
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8.4 Use Guidelines. Subject to the foregoing, BUY COM acknowledges and
agrees that TOUR shall not be required to obtain approval from BUY.COM for any
day to day uses by TOUR of the BUY.COM TOUR MARK (provided they are used in
accordance with this Agreement and the terms and conditions of Section 9
herein). Any other use of the BUY.COM MARKS is subject to the following: (a)
they must be used solely in accordance with the Specifications, and (b) such use
shall be subject to prior written approval of BUY.COM, in accordance with the
procedures set forth below in this paragraph. In addition, in advance of any
dissemination or use by TOUR of any: (i) art work involving the BUY.COM MARKS;
or (ii) advertising or promotional material or literature bearing the BUY.COM
MARKS, TOUR, at its own expense, shall submit one (1) sample of each such art
work, advertising or promotional material or literature to BUY.COM, at the
address specified by BUY.COM in accordance with this Agreement, for its prior
approval. BUY.COM shall have ten (10) business days after receipt of any such
sample during which to approve or disapprove the proposed use or design. If
BUY.COM does not notify TOUR of its disapproval of any such proposed use or
design on or before the conclusion of such ten (10) business day period, BUY.COM
shall be deemed to have approved such proposed use or design. BUY.COM shall not
unreasonably withhold approval. If any such proposed usage is disapproved by
BUY.COM, along with its notice of disapproval, BUY.COM shall supply TOUR with
written notice of the specific reasons for such disapproval, but in any event
BUY.COM's decision shall be final and TOUR shall abide by any such disapproval
of BUY.COM. TOUR shall have the right to resubmit modified materials.
8.5 Quality of Operation. TOUR acknowledges the goodwill which BUY.COM
--------------------
has developed in connection with the BUY.COM MARKS. Accordingly, TOUR agrees
that it will not knowingly and intentionally take any actions which could
adversely affect such goodwill as developed by BUY.COM.
8.6 Reservation of Rights. All right, title and interest to the BUY.COM
---------------------
MARKS, and other intellectual property and proprietary rights associated
therewith other than those specifically granted herein, shall at all times
remain that of BUY.COM for its own exclusive use and benefit, and all use of the
BUY.COM name and BUY.COM MARKS shall inure solely to the benefit of BUY.COM.
TOUR understands and agrees that upon the expiration
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or the earlier termination of this Agreement for any reason, all of its rights
and interests granted herein in the BUY.COM MARKS and any other intellectual
property of BUY.COM shall cease, and all such rights and interests shall revert
to BUY.COM.
8.7 Quality Control. All promotional or advertising material containing
---------------
the BUY.COM MARKS shall be of a high quality that does not derogate from or
adversely affect the BUY.COM MARKS or the goodwill and reputation associated
therewith.
8.8 No Prejudice of Trademarks. TOUR agrees that it will not use at any
--------------------------
time during the Term any other trademark, brand name, trade name, symbol, design
or the like that BUY.COM reasonably believes is similar to or possibly may be
confused with the BUY.COM MARKS. TOUR will not intentionally take any action
that will harm or prejudice the BUY.COM MARKS or BUY.COM's rights therein in any
way. TOUR agrees not to apply for registration anywhere in the world of any
trademarks of BUY.COM, including the BUY.COM MARKS or any mark confusingly
similar thereto, and TOUR also agrees not to use or contest, during or after the
term of this Agreement, the BUY.COM Marks or any other trademark or logo adopted
by BUY.COM, so long as such logos are not confusingly similar to any marks used
by TOUR.
8.9 Change of BUY.COM MARKS. In the event BUY.COM desires to change the
-----------------------
BUY.COM MARKS, BUY.COM shall notify TOUR of the change (the "Change Notice").
TOUR shall implement the change within the BUY.COM TOUR MARK and all of its uses
where possible within twelve (12) months of TOUR's receipt of the Change Notice.
BUY.COM shall reimburse TOUR for fifty percent (50%) of the actual costs of
implementing such change.
9. USE OF BUY.COM TOUR MARK. BUY.COM agrees that all uses of the BUY.COM
------------------------
TOUR MARK by BUY.COM shall be subject to the prior approval of TOUR, except that
specific uses, as well as categories or types of uses, that are approved once
will not require separate approval in each instance, and internal BUY.COM uses
shall not require approval. In advance of any dissemination or use by BUY.COM of
any: (i) art work involving
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the BUY.COM TOUR MARK; or (ii) advertising or promotional material or literature
bearing the BUY.COM TOUR MARK, BUY.COM, at its own expense, shall submit one (1)
sample of each such art work, advertising or promotional material or literature
to TOUR at the address specified by TOUR in accordance with this Agreement. TOUR
shall have ten (10) business days after receipt of any such sample during which
to approve or disapprove the proposed use or design. If TOUR does not notify
BUY.COM of its disapproval of any such proposed use or design on or before the
conclusion of such ten (10) business day period, TOUR shall be deemed to have
approved such proposed use or design. TOUR shall not unreasonably withhold
approval. If any such proposed usage is disapproved by TOUR, along with its
notice of disapproval, TOUR shall supply BUY.COM with written notice of the
specific reasons for such disapproval, but in any event, TOUR's decision shall
be final and BUY.COM shall abide by any such disapproval of TOUR. BUY.COM shall
have the right to resubmit modified materials.
9.1 Quality of Operation. The parties acknowledge the goodwill which
--------------------
TOUR and BUY.COM will develop in connection with the BUY.COM TOUR MARK.
Accordingly, the parties agree that each will not knowingly and intentionally
take any actions with could adversely affect such goodwill as developed by TOUR
and BUY.COM.
9.2 Reservation of Rights. The parties understand and agree that upon
---------------------
the expiration or the earlier termination of this
Agreement for any reason, all of the rights and interests granted herein in the
BUY.COM TOUR MARK shall cease, and neither party shall have any rights to or use
in any manner the BUY.COM TOUR MARK.
9.3 Quality Control. All promotional or advertising material containing
---------------
the BUY.COM TOUR MARK shall be of a high quality that does not derogate from or
adversely affect the BUY.COM TOUR MARK or the goodwill and reputation associated
therewith.
9.4 No Prejudice of Trademarks. BUY.COM agrees that, after prior written
--------------------------
notice from TOUR, it will not use at any time during the Term any other
trademark, brand name, trade name, symbol, design or the like that TOUR
reasonably believes is similar to or possibly may be confused with the BUY.COM
TOUR MARK, excluding the "BUY.COM" portion
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thereof. BUY.COM will not intentionally take any action that will harm or
prejudice the BUY.COM TOUR MARK or either party's rights therein in any way.
10. TERM.
----
10.1 The term of this Agreement shall commence as of the date of this
Agreement, and terminate on December 31, 2004, unless sooner terminated or
extended in accordance with this Section 10 (the "Term"); provided, however, the
parties acknowledge and agree that the renaming of the BUY.COM TOUR and the
operational aspects of this Agreement shall not begin until January 1, 2000.
10.2 This Agreement will automatically terminate upon the occurrence of
any one (1) of the following events:
(a) Upon the occurrence of certain events in accordance with
Section 11;
(b) Upon an Event of Default as described in Section 13 hereof; or
(c) Upon the termination or expiration of that certain E-Commerce
Agreement by and between TOUR and BUY.COM of even date herewith (the "E-Commerce
Agreement").
10.3 Either party may terminate this Agreement immediately upon written
notice to the other party in the event that such other party is finally
adjudicated by a court of competent jurisdiction to have committed any act or
done anything which shall be an offense involving moral turpitude under federal,
state or local laws.
10.4 Effect of Termination. In the event of termination of this
---------------------
Agreement by BUY.COM or TOUR, TOUR may only retain cash and common stock that in
the aggregate is equal to the Sponsorship Fees for the period that has expired
from January 1, 2000 until the
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effective date of termination (with part years pro-rated). For purposes of this
Section 10.4, the market value of the common stock shall be determined as
follows:
(a) If traded on a national securities exchange or through the
NASDAQ National Market, the value shall be deemed to be the average of the
last reported sale or closing prices of the securities on such exchange or
market over the last ten (10) trading days immediately prior to the
effective date of termination);
(b) If there is no active public market, the value shall be the
fair market value thereof, as determined in good faith by Williamette
Valuation (if separately engaged for this purpose) or such other
independent auditor as the parties may mutually agree.
Notwithstanding the foregoing, in the event of any termination by TOUR
pursuant to Section 11, the provisions of Section 11 shall control and this
Section 10 shall have no effect. Any repurchase of BUY.COM stock by BUY.COM
shall be in accordance with the terms of that certain Common Stock Issuance
Agreement between the parties of equal date herewith (the "Stock Issuance
Agreement").
11. SPONSORSHIP FEE.
----------------
Subject to the terms and conditions of this Agreement, the parties
agree that the total Sponsorship Fee due for the five year Term shall be funded
by BUY.COM's issuance of 1,800,000 shares of BUY.COM Common Stock, payment of
$8.5 million upon completion of BUY.COM's initial public offering and securing a
$17 million letter of credit, all of which shall be subject to the terms and
conditions set forth on Exhibit J (the "Sponsorship Fee"). BUY.COM acknowledges
---------
that TOUR's internal annual allocations of such funds are as set forth in
Exhibit K.
- ---------
12. REPRESENTATIONS AND WARRANTIES.
------------------------------
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12.1 By BUY.COM. As a material inducement for TOUR to enter into this
----------
Agreement, BUY.COM represents and warrants to TOUR (and unless otherwise
specified, such representations and warranties are true as of the date hereof
and will continue to be effective at all times, as if continuously reiterated
through the Term) that:
(a) BUY.COM is a corporation, duly organized and in good standing
under the laws of the State of Delaware. BUY.COM has full power and authority to
execute and deliver this Agreement and all documents now or hereafter to be
executed and delivered by it pursuant to this Agreement, and to perform all
obligations arising under this Agreement and under such other agreements. This
Agreement constitutes the legal, valid and binding obligation of BUY.COM,
enforceable in accordance with its terms, covenants and conditions against
BUY.COM; and
(b) This Agreement does not contravene any provision of the
corporate powers of BUY.COM, any judgment, order, decree, writ or injunction, or
any provision of any applicable law or regulation, and the delivery of this
Agreement will not result in a breach of, constitute a default under, or require
consent pursuant to any credit agreement, lease, indenture, mortgage, deed of
trust, purchase agreement, guaranty or other instrument to which BUY.COM is a
party or by which BUY.COM or its assets are bound or affected.
12.2 By TOUR. As a material inducement for BUY.COM to enter into this
-------
Agreement, TOUR represents and warrants to BUY.COM (and unless otherwise
specified, such representations and warranties are true as of the date hereof
and will continue to be effective at all times, as if continuously reiterated
through the Term) that:
(a) TOUR is a corporation, duly organized and in good standing
under the laws of the State of Maryland. TOUR has full power and authority to
execute and deliver this Agreement and all documents now or hereafter to be
executed and delivered by it pursuant to this Agreement, and to perform all
obligations arising under this Agreement and under such other agreements. This
Agreement constitutes the legal, valid and binding obligation of TOUR,
enforceable in accordance with its terms, covenants and conditions against TOUR;
and
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(b) This Agreement does not contravene any provision of the
corporate powers of TOUR, any judgment, order, decree, writ or injunction, or
any provision of any applicable law or regulation, and the delivery of this
Agreement will not result in a breach of, constitute a default under, or require
consent pursuant to any credit agreement, lease, indenture, mortgage, deed of
trust, purchase agreement, guaranty or other instrument to which TOUR is a party
or by which TOUR or its assets are bound or affected.
13. EVENTS OF DEFAULT; RIGHTS AND REMEDIES. The occurrence of any one
--------------------------------------
(1) or more of the following events prior to the expiration of the Term hereof
shall constitute an "Event of Default" hereunder:
13.1 Default by either party in the performance or observance of any of
the material terms, agreements, covenants or conditions of this Agreement (other
than payment terms which are addressed in Section 11 above), which default
continues uncured for thirty (30) days after written notice thereof;
13.2 The application by either party hereto (or its corporate parent)
for, or consent to, the appointment of a receiver, trustee, liquidator or
custodian (or similar official) of it or of all or a substantial part of its
assets, or if either party (or its corporate parent) shall: (i) make a general
assignment for the benefit of creditors; (ii) be adjudicated a bankrupt or
insolvent; (iii) file a voluntary petition in bankruptcy or a petition or an
answer seeking reorganization or any arrangement with creditors or to take
advantage of any insolvency law; (iv) file an answer admitting the material
allegations of a petition filed against it in any bankruptcy, reorganization or
insolvency proceeding; or (v) if any corporate action shall be taken by it for
the purpose of effecting any of the foregoing; or if an order, judgment or
decree shall be entered by any court or tribunal of competent jurisdiction
approving a petition seeking reorganization or appointing a receiver, trustee,
liquidator or custodian (or other similar official) of either party hereto (or
its corporate parent) or of all or a substantial part of its assets, and such
order, judgment or decree shall continue unstayed and in effect for a period of
thirty (30) consecutive days;
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13.3 Any representation or warranty contained in this Agreement shall
be false or misleading in any material respect and remains uncorrected for
thirty (30) days after written notice thereof; or
13.4 The occurrence of a material breach under the E-Commerce Letter
Agreement with a material breach by BUY.COM thereunder shall be deemed an Event
of Default by BUY.COM hereunder, and a material breach by TOUR thereunder shall
be deemed an Event of Default by TOUR hereunder.
14. PGA TOUR PLAYERS. BUY.COM acknowledges that TOUR does not have the
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right to use the name, signature, photograph or likeness of any PGA TOUR, SENIOR
PGA TOUR or BUY.COM TOUR player in connection with a commercial product or
service, including, without limitation, any product or service marketed by
BUY.COM, unless so authorized by the player. BUY.COM agrees that it will not
exercise the rights granted in this Agreement in any manner that constitutes an
endorsement of any commercial product or service by any PGA TOUR, SENIOR PGA
TOUR or BUY.COM TOUR player without having obtained proper advance written
authorization from such player. BUY.COM acknowledges that it shall be its
obligation to obtain any such written authorization.
15. INDEMNIFICATION.
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15.1 BUY.COM covenants and agrees to indemnify and hold TOUR, and its
officers, directors, employees, agents and affiliated entities and their
respective officers, directors and employees (the "TOUR Indemnitees") harmless
from and against any and all losses, claims, damages, expenses, judgments,
awards, petitions, demands or liabilities (including, without limitation,
reasonable counsel and expert witness fees whether incurred in preparation for
trial, at trial, on appeal or in bankruptcy proceedings), joint or several, to
which any of the TOUR Indemnitees may become subject on account of any breach or
alleged breach or failure of any agreements, obligations, representations or
warranties of BUY.COM under this Agreement or any other act, omission or
representation by BUY.COM; provided that TOUR will notify BUY.COM promptly in
writing upon receipt of notice of any such claim and will tender to BUY.COM the
opportunity to defend and/or settle such claim at BUY.COM's expense and will
reasonably assist and cooperate with BUY.COM in defending and/or settling such
claim (so long as such settlement or culpability on the part of BUY.COM includes
(x) a general release of BUY.COM from all liability in connection therewith and
(y) does not contain any admission of wrongdoing or culpability on the party of
BUY.COM). TOUR shall not agree to the settlement of any such claim, action or
proceeding without the prior written consent of BUY.COM, which shall not be
unreasonably withheld.
15.2 TOUR covenants and agrees to indemnify and hold BUY.COM, and its
officers, directors, employees, agents and affiliated entities and their
respective officers, directors and employees (the "BUY.COM Indemnitees")
harmless from and against any and all losses, claims, damages, expenses,
judgments, awards, petitions, demands or liabilities (including, without
limitation, reasonable counsel and expert witness fees whether incurred in
preparation for trial, at trial, on appeal or in bankruptcy proceedings), joint
or several, to which any of the BUY.COM Indemnitees may become subject on
account of any breach or alleged breach or failure of any agreements,
obligations, representations or warranties of TOUR under this Agreement or any
other act, omission or representation by TOUR; provided that BUY.COM will notify
TOUR promptly in writing upon receipt of notice of any such claim and will
tender to TOUR the opportunity to defend and/or settle such claim at TOUR's
expense and will reasonably assist and cooperate with TOUR in defending and/or
settling such claim (so long as such settlement or culpability on the party of
TOUR includes (x) a general release of TOUR
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from all liability in connection therewith and (y) does not contain any
admission of wrongdoing or culpability on the part of TOUR). BUY.COM shall not
agree to the settlement of any such claim, action or proceeding without the
prior written consent of TOUR, which shall not be unreasonably withheld.
16. CONFIDENTIALITY. Except to the extent otherwise required by
---------------
applicable law, neither TOUR nor BUY.COM shall make any public disclosure of any
of the financial terms contained in this Agreement without the prior written
consent of the other party in each instance; provided, however, that either
party may, after providing advance written notice to the other party, disclose
the terms of this Agreement and/or the transactions contemplated hereby in any
filing made pursuant to the Securities Act of 1933 ( the "Securities Act") or
the Securities Exchange Act of 1934 (the "Exchange Act"), to the extent that
such party, after consultation with outside legal counsel, determines that such
disclosure is required under the Securities Act or Exchange Act, as applicable.
17. NO AGENCY OR JOINT VENTURE. This Agreement shall not be construed as
--------------------------
in any way establishing a partnership, joint venture, express or implied agency,
employer-employee or special fiduciary relationship between the parties hereto.
18. NOTICES.
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18.1 All notices, consents, requests and other communications hereunder
shall be in writing and shall be sent by hand delivery, by certified or
registered mail (return receipt requested), or by a recognized national
overnight courier service as set forth below:
If to BUY.COM: BUY.COM, INC.
85 Enterprise
Aliso Viejo, California 92656
Attn: Greg Hawkins
Copy: General Counsel
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If to TOUR: PGA TOUR, Inc.
112 PGA TOUR Boulevard
Ponte Vedra Beach, Florida 32082
Attn: Commissioner
18.2 Notices delivered pursuant to Section 18.1 shall be deemed given:
(i) at the time delivered, if personally delivered; (ii) at the time received,
if mailed; and (iii) one (1) business day after timely delivery to the courier,
if by overnight courier service.
18.3 Any party hereto may change the address to which notice is to be
sent by written notice the other party in accordance with this Section 18.
19. MISCELLANEOUS.
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19.1 This Agreement including all Exhibits hereto (all of which are
incorporated herein by this reference), contains the entire agreement and
understanding concerning the subject matter hereof between the parties hereto.
19.2 No waiver, termination or discharge of this Agreement, or any of
the terms or provisions hereof, shall be binding upon either party unless
confirmed in writing. No waiver by either party hereto of any term or provision
of this Agreement or of any default hereunder shall affect such party's rights
thereafter to enforce such term or provision or to exercise any right or remedy
in the event of any other default, whether or not similar. This Agreement may
not be modified or amended except by a writing executed by both parties hereto.
19.3 If any provision of this Agreement shall be held void, voidable,
invalid or inoperative, no other provision of this Agreement shall be affected
as a result thereof, and, accordingly, the remaining provisions of this
Agreement shall remain in full force and effect as though such void, voidable,
invalid or inoperative provision had not been contained herein.
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19.4 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
19.5 Neither party hereto may assign this Agreement, in whole or in
part, without the prior written consent of the other party, and any attempted
assignment not in accordance herewith shall be null and void and of no force or
effort, provided that, either party may assign this Agreement to another
subsidiary or affiliate as part of a corporate reorganization or restructure, so
long as no third party owns a part of or otherwise controls such subsidiary or
affiliate.
19.6 This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, representatives,
successors and permitted assigns.
19.7 Upon the reasonable request of the other party hereto, each party
agrees to take any and all actions, including, without limitation, the execution
of certificates, documents or instruments, necessary or appropriate to give
effect to the terms and conditions set forth in this Agreement.
19.8 This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute the same Agreement. Any signature page of any such counterpart, or
any electronic facsimile thereof, may be attached or appended to any other
counterpart to complete a fully executed counterpart of this Agreement, and any
telecopy or other facsimile transmission of any signature shall be deemed an
original and shall bind such party.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date and year first above written.
PGA TOUR, INC.
By:
W. William Calfee
Executive Vice President
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BUY.COM, INC.
By:
Greg Hawkins
Chairman and Chief Executive Officer
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<PAGE>
EXHIBIT 10.39
BUY.COM INC.
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Fourth amended and Restated Investors' Rights Agreement (the
"Agreement") is entered into as of the 17th day of November, 1999, by and among
Buy.Com Inc., a Delaware corporation (the "Company"), the holders of the
Company's Series A Convertible Participating Preferred Stock (the "Series A
Stock") set forth on Exhibit A hereto, the holders of the Company's Series B
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Convertible Participating Preferred Stock (the "Series B Stock") and Common
Stock set forth on Exhibit B hereto, the Founders set forth on Exhibit C hereto,
--------- ---------
Ingram Capital Inc. ("Ingram") as the assignee of Ingram Entertainment Inc., The
Bank of Nova Scotia ("Nova Scotia"), United Air Lines, Inc. ("UA") and Harpeth
Holdings, Inc. ("Harpeth"). The holders of the Series A Stock shall be referred
to hereinafter as the "Series A Investors" and each individually as a "Series A
Investor." The holders of the Series B Stock shall be referred to hereinafter
as the "Series B Investors" and each individually as a "Series B Investor." The
Series A Investors and the Series B Investors shall be referred to collectively
as the "Investors" and each individually as an "Investor." The Founders shall
be referred to hereinafter together as the "Founders" and each individually as a
"Founder." As a matter of clarity, a list of all Holders and the Registrable
Securities held by each is attached hereto as Exhibit D.
---------
WHEREAS, the Company (under its previous name: "Buy Corp."), the Series A
Investors and the Founders were parties to an Investors' Rights Agreement, dated
as of August 18, 1998 (the "Original Agreement").
WHEREAS, the Company acquired SpeedServe, Inc. ("SpeedServe") by way of a
merger ("Merger") of SpeedServe with and into a wholly owned subsidiary of the
Company in which Ingram, as the principal stockholder of SpeedServe, received
shares of the Company's Common Stock.
WHEREAS, the Original Agreement was amended and restated to extend to
Ingram certain registration rights, information rights and other rights pursuant
to that certain Amended and Restated Investors' Rights Agreement dated December
3, 1998 (the "First Amended and Restated Agreement").
WHEREAS, the Company secured a credit facility with Nova Scotia pursuant to
a Credit Agreement (the "Credit Agreement") dated July 20, 1999 in connection
with which Nova Scotia received a warrant (the "Nova Scotia Warrant") to
purchase shares of the Company's Common Stock.
WHEREAS, the Company effected a 15 for 1 stock split of its Common Stock
and Preferred Stock (the "Stock Split"), effective as of July 14, 1999 and the
share numbers in the Second Amended and Restated Agreement were adjusted to give
effect to the Stock Split.
WHEREAS, the Company and UA formed a Delaware limited liability company
("BuyTravel.com") to operate an internet based travel service, and in connection
with the
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BuyTravel.com joint venture, the Company issued to UA a warrant to
purchase 2,000,000 shares of the Company's Common Stock (the "UA Warrant").
WHEREAS, the First Amended and Restated Agreement was amended and restated
to extend to Nova Scotia and UA certain registration rights and other rights
pursuant to that certain Second Amended and Restated Investors' Rights Agreement
dated July 20, 1999 (the "Second Amended and Restated Agreement").
WHERAS, pursuant to the terms and conditions of that certain Series B
Convertible Participating Preferred Stock Purchase Agreement, dated September 2,
1999, the Series B Investors have purchased an aggregate of 15,877,249 shares of
Series B Stock.
WHEREAS, the Second Amended and Restated Agreement was amended and restated
pursuant to that certain Third Amended and Restated Investors' Rights Agreement
dated as of September 2, 1999 (the "Third Amended and Restated Agreement").
WHEREAS, the Company has entered into a Memorandum of Understanding and a
Fulfillment Services Agreement, both dated as of October 8, 1999, in connection
with which Harpeth received a warrant to purchase shares of the Company's Common
Stock (the "Harpeth Warrant").
Now, Therefore, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, the Series A
Investors, the Series B Investors, Ingram, Nova Scotia, UA, Harpeth and the
Founders who are parties to the Third Amended and Restated Agreement hereby
agree that the Third Amended and Restated Agreement shall be superseded and
replaced by this Agreement, and the parties hereto further mutually agree as
follows:
1. General
1.1 Definitions.
(a) "Common Stock" shall mean the common stock, $.0001 par value per
share, of the Company.
(b) "Equity Securities" shall mean (i) any Common Stock, Preferred
Stock or other equity security of the Company, (ii) any security convertible
into any Common Stock, Preferred Stock or other equity security (including any
option to purchase such a security), (iii) any security carrying any warrant or
right to subscribe to or purchase any Common Stock, Preferred Stock or other
equity security or (iv) any such warrant or right.
(c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(d) "Form S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
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<PAGE>
(e) "Holder" means any Investor, Founder, Ingram, Nova Scotia,
Harpeth or UA owning of record Registrable Securities that have not been sold to
the public or any assignee of record of such Registrable Securities in
accordance with Section 3.9 hereof.
(f) "Initial Offering" shall mean the Company's first Qualified
Public Offering.
(g) "Investor Holders" means the holders of Registrable Securities
owned of record by the Investors.
(h) "Preferred Stock" shall mean the preferred stock, including the
Series A Stock and Series B Stock of the Company.
(i) "Qualified Public Offering" shall mean an underwritten public
offering covering the offer and sale of Common Stock of the Company in which the
per share price to the public is at least $2.053 per share (as adjusted for
stock splits, recapitalizations and the like subsequent to the Stock Split Date)
and the net cash proceeds to the Company (after underwriting discounts,
commissions and fees) are at least $30,000,000.
(j) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of
effectiveness of such registration statement or document.
(k) The term "Registrable Securities" shall mean (i) Common Stock
held by the Founders, (ii) the Common Stock of the Company issued or issuable
upon conversion of the Shares, (iii) the Common Stock purchased by the Investors
from the Scott A. Blum Separate Property Trust, David Mason and Michael Mason
pursuant to that certain Stock Purchase Agreement dated as of September 2, 1999,
(iv) Common Stock held by Ingram and acquired in connection with the Merger, (v)
the Common Stock acquired by Ingram Entertainment, Inc. and the Series A
Investors upon their exercise of the right of first offer on March 10, 1999,
April 5, 1999 and June 29, 1999, (vi) except for purposes of Section 3.1 and
Section 3.3, the Common Stock issuable to Nova Scotia upon exercise of the Nova
Scotia Warrant, (vii) except for purposes of Section 3.1 and Section 3.3, the
Common Stock issuable to Harpeth upon exercise of the Harpeth Warrant, (viii)
Common Stock issued to UA upon the exercise of the UA Warrant, and (ix) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of,
(i), (ii), (iii), (iv), (v), (vi), (vii) or (viii) above. Notwithstanding the
foregoing, Registrable Securities shall not include any securities sold by a
person to the public either pursuant to a registration statement or Rule 144 or
sold in a private transaction in which the transferor's rights under Section 3
of this Agreement with respect to such registration rights are not assigned. As
a matter of clarity, neither Nova Scotia nor Harpeth shall have demand
registration rights or Form S-3 registration rights pursuant to Section 3.1 and
3.3.
(l) "Registrable Securities then outstanding" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are
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Registrable Securities and either (i) are then issued and outstanding or (ii)
are issuable pursuant to then exercisable or convertible securities.
(m) "Rule 144" shall mean Rule 144 of the rules and regulations
promulgated under the Securities Act.
(n) "SEC" means the Securities and Exchange Commission.
(o) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(p) "Shares" shall mean the Company's Series A Stock and Series B
Stock issued or sold to and held by the Investors listed on Exhibits A and B
----------------
hereto and their permitted assigns.
2. Restrictions On Transfer.
2.1 Restrictions on Transfer.
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until the transferee
has agreed in writing for the benefit of the Company to be bound by this
Agreement unless and until:
(i) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(ii) (A) Such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition and (B)
if reasonably requested by the Company, such Holder shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such shares
under the Securities Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(iii) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder which is (A) a partnership to any or
all of its partners or former partners, (B) a corporation to its
stockholders in accordance with their interests in the corporation, (C) a
limited liability company to its members or former members in accordance
with their membership interests, (D) by a trust to its beneficiaries in
accordance with their interests in the trust or (E) to the Holder's family
member or trust for the benefit of an individual Holder; provided, however
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that, notwithstanding anything in this Section 2.1 to the contrary, (I) the
Investors shall be permitted to sell, transfer, assign or pledge all or any
part of the Shares to (i) any direct or indirect, wholly-owned subsidiary
of SOFTBANK Corp. or of such Investor or (ii) any partnership or other
entity of which any direct or indirect subsidiary of SOFTBANK Corp. is a
general partner (any person or entity referred to in clause (i) or (ii)
being herein referred to as a "SOFTBANK Entity"),
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(II) UA shall be permitted to sell, transfer, assign or pledge all or any
part of the UA Warrant or Common Stock issuable upon exercise thereof to
any direct or indirect, subsidiary of UA or any entity which controls, is
controlled by, or is under common control with UA or any direct or indirect
subsidiary of UA, and (III) Ingram Entertainment, Inc. shall be permitted
to transfer the Common Stock described in Section 1.1(k)(v) to Ingram and
Ingram shall be permitted to sell, transfer, assign or pledge all or any
part of the Common Stock held by Ingram to any direct or indirect, wholly
owned subsidiary of Ingram or any entity which controls, is controlled by
or under common control with Ingram or any direct or indirect subsidiary of
Ingram; provided, further that, the transferee will be subject to the terms
of this Agreement to the same extent as if he were an original Holder
hereunder.
(b) Each certificate representing Shares or Registrable Securities
shall (unless otherwise permitted by the provisions of this Agreement) be
stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws or as provided elsewhere in this Agreement):
First Legend:
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED.
Second Legend:
--------------
THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE
FOURTH AMENDED AND RESTATED INVESTORS" RIGHTS AGREEMENT, DATED NOVEMBER 17, 1999
AS AMENDED FROM TIME TO TIME, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE
ISSUER.
(c) The Company shall reissue promptly unlegended certificates at the
request of any holder thereof if the holder shall have obtained an opinion of
counsel (which counsel may be counsel to the Company) reasonably acceptable to
the Company to the effect that the securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
2.2 "Market Stand Off" Agreement. Each Holder hereby agrees that during
the one hundred twenty (120)-day period following the effective date of a
registration statement of the Company filed under the Securities Act (the
"Market Stand Off Period"), it shall not, to the
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extent requested by the Company and/or the managing underwriter, sell or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any Common Stock of the Company held by it at any time during such period
except Common Stock included in such registration; provided, that, officers and
directors of the Company (as determined by the managing underwriter) enter into
similar agreements. The Holders agree to increase the Market Stand Off Period to
one hundred eighty (180) days at the request of the managing underwriter.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such one hundred twenty (120)-day or
longer period as provided above.
3. Registration.
3.1 Demand Registration.
(a) Subject to the conditions of this Section 3.1:
(i) If the Company shall receive a written request from the
Series A Investor Holders of at least forty percent (40%) of the total
Registrable Securities then outstanding and held by the Series A Investors
("Series A Investor Initiating Holders") that the Company file a
registration statement under the Securities Act covering the registration
of Registrable Securities covering at least twenty percent (20%) of the
Registrable Securities then held by the Series A Investors (or any lesser
percentage if the anticipated aggregate offering price to the public would
exceed $5,000,000), then the Company shall, within fifteen (15) days of the
receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(ii) If the Company shall receive a written request from the
Series B Investor Holders of at least forty percent (40%) of the total
Registrable Securities then outstanding and held by the Series B Investor
Holders ("Series B Investor Initiating Holders") that the Company file a
registration statement under the Securities Act covering the registration
of Registrable Securities covering at least twenty percent (20%) of the
Registrable Securities then held by the Series B Investors (or any lesser
percentage if the anticipated aggregate offering price to the public would
exceed $5,000,000), then the Company shall, within fifteen (15) days of the
receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(iii) If the Company shall receive a written request from Ingram
("Ingram Initiating Holder") that the Company file a registration statement
under the Securities Act covering the registration of Registrable
Securities covering at least forty percent (40%) of the Common Stock issued
to and held by Ingram in connection with the Merger (or any lesser
percentage if the anticipated aggregate offering price to the public
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<PAGE>
would exceed $5,000,000), then the Company shall, within fifteen (15) days
of the receipt thereof, give written notice of such request to all Holders,
and subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(iv) If the Company shall receive a written request from UA
("UA Initiating Holder") that the Company file a registration statement
under the Securities Act covering the registration of Registrable
Securities covering at least forty percent (40%) of the Common Stock issued
or issuable upon the exercise of the UA Warrant held by UA (or any lesser
percentage if the anticipated aggregate offering price to the public would
exceed $5,000,000), then the Company shall, within fifteen (15) days of the
receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 3.1, use its best efforts to
effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
(v) If the Company shall receive a written request from a
Founder ("Founder Initiating Holder") that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities covering at least forty percent (40%) of the Common Stock held
by Founder (or any lesser percentage if the anticipated aggregate offering
price to the public would exceed $5,000,000), then the Company shall,
within fifteen (15) days of the receipt thereof, give written notice of
such request to all Holders, and subject to the limitations of this Section
3.1, use its best efforts to effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that
the Holders request to be registered.
(b) If the Initiating Holders (for purposes of this Section
3.1, the term "Initiating Holder" shall mean a Series A Investor Initiating
Holder, a Series B Investor Initiating Holder, the Ingram Initiating Holder, the
UA Initiating Holder or the Founder Initiating Holder, as applicable) intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 3.1, and the Company shall include such information in
the written notice referred to in Section 3.1(a). In such event, the right of
any Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders (which underwriter or underwriters shall be reasonably acceptable to the
Company). In the event the underwriter determines in good faith that marketing
factors require a limitation of the number of shares to be underwritten, the
number of shares that may be included in the underwriting shall be allocated
among the Holders in accordance with Section 3.2. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from the
registration.
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(c) The Company shall not be required to effect a registration
pursuant to this Section 3.1:
(i) in the case of a demand by a Series A Investor Initiating
Holder, prior to the earlier of (A) the consummation by the Company of an
Initial Offering and (B) August 18, 2001; or
(ii) in the case of a demand by a Series B Investor Initiating
Holder, prior to the earlier of (A) the consummation by the Company of an
Initial Public Offering and (B) September 2, 2002; or
(iii) in the case of a demand by the Ingram Initiating Holder,
prior to the earlier of (A) the first anniversary of the consummation by
the Company of an Initial Offering and (B) December 3, 2001; or
(iv) in the case of a demand by the UA Initiating Holder,
prior to the earlier of (A) the 6 months anniversary of the consummation by
the Company of an Initial Offering and (B) July 20, 2002; or
(v) in the case of a demand by the Founder Initiating Holder,
prior to the earlier of (A) the 6 months anniversary of the consummation by
the Company of an Initial Offering and (B) the third anniversary of the
date hereof; or
(vi) in the case of a demand by a Series A Investor Initiating
Holder, after the Company has filed three (3) registration statements at
the request of the Series A Investor Initiating Holder pursuant to Section
3.1(a)(i), and such registrations have been declared or ordered effective;
or
(vii) in the case of a demand by a Series B Investor Initiating
Holder, after the Company has filed three (3) registration statements at
the request of the Series B Investor Initiating Holder pursuant to Section
3.1(a)(ii), and such registrations have been declared or ordered effective;
or
(viii) in the case of a demand by Ingram, after the Company has
filed one (1) registration statement pursuant to Section 3.1(a)(iii), and
such registration has been declared or ordered effective; or
(ix) in the case of a demand by UA, after the Company has
filed one (1) registration statement pursuant to Section 3.1(a)(iv), and
such registration statement has been declared or ordered effective; or
(x) in the case of a demand by Founder, after the Company has
filed two (2) registration statements pursuant to Section 3.1(a)(v), and
such registration statements have been declared or ordered effective; or
(xi) during the period starting with the date of filing of,
and ending on the date one hundred eighty (180) days following the closing
of the Company's Initial
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Offering; provided, that, the Company makes reasonable good faith efforts
to cause such registration statement to become effective; or
(xii) if within fifteen (15) days of receipt of a written
request from Initiating Holders pursuant to Section 3.1(a), the Company
gives notice to the Holders of the Company's intention to make an Initial
Offering within ninety (90) days; or
(xiii) if the Company shall furnish to the Investor Holders
requesting a registration statement pursuant to this Section 3.1, a
certificate signed by the President and Chairman of the Board stating that
in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be effected at such time, in which event the
Company shall have the right to defer such filing for a period of not more
than ninety (90) days after receipt of the request of the Initiating
Holders; provided, that, the right to delay a request may be exercised by
the Company not more than once in any twelve (12)-month period.
3.2 Piggyback Registrations. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to initial or secondary offerings of securities
of the Company and to offerings of securities of the Company initiated by any
party exercising its demand registration rights, but excluding registration
statements relating to employee benefit plans and corporate reorganizations or
other transactions under Rule 145 of the Securities Act) and will afford each
such Holder an opportunity to include in such registration statement all or part
of such Registrable Securities held by such Holder. Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Securities held by it shall, within fifteen (15) days after receipt of the
above-described notice from the Company, so notify the Company in writing. Such
notice shall state the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
If the registration statement under which the Company gives notice under
this Section 3.2 is for an underwritten offering, the Company shall so advise
the Holders of Registrable Securities. In such event, the right of any such
Holder to be included in a registration pursuant to this Section 3.2 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this
Agreement, if the underwriter determines in good faith that marketing factors
require a limitation of the number of shares to be underwritten, the number of
shares that may be included in the underwriting shall be allocated as follows:
(i) first, to the Company, up to fifty percent (50%) of the aggregate offering
amount; (ii) second, to Founder, the Investor Holders,
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Ingram, Nova Scotia, Harpeth and UA on an Adjusted Pro Rata (as defined below)
basis; (iii) third, to Founder, the Investor Holders, Ingram, Nova Scotia,
Harpeth and UA on a pro rata basis based on the total number of Registrable
Securities respectively held by the Founder, the Investor Holders, Ingram, Nova
Scotia, Harpeth and UA; (iv) fourth, to the Company, and (v) fifth, to any
stockholder of the Company (other than a Holder) on a pro rata basis. No such
reduction shall (i) reduce the securities being offered by the Company for its
own account to be included in the registration and underwriting below fifty
percent (50%) of the total amount of securities included in such registration,
unless the Company elects to offer less than 50% of the total amount of
securities included in such registration or (ii) reduce the amount of securities
of the selling Holders included in the registration below fifty percent (50%) of
the total amount of securities included in such registration, unless the Holders
elect to offer less than 50% of the total amount of securities included in such
registration or (iii) reduce the amount of securities of the Founder included in
the registration and underwriting below seven and one half percent (7.5%) of the
total amount of the securities included in such registration, unless the Founder
elects to offer less than seven and one half percent (7.5%) of the total amount
of securities included in such registration; provided, however, if such offering
is the Initial Offering and such registration does not include shares of any
other selling stockholders, then any or all of the Registrable Securities of the
Holders may be excluded at the request of the underwriter. In no event will
shares of any other selling stockholder be included in such registration which
would reduce the number of shares which may be included by the Investor Holders,
Founder, Ingram, Nova Scotia, Harpeth or UA, without the written consent of a
majority in interest of the Registrable Securities proposed to be sold in the
offering by the Series A Investors, a majority in interest of the Registrable
Securities proposed to be sold in the offering by the Series B Investors, the
written consent of Founder, the written consent of Ingram, the written consent
of Nova Scotia, the written consent of Harpeth and the written consent of UA.
For purposes of this Section 3.2, "Adjusted Pro Rata" shall mean, with respect
to each of Founder, any Series A Investor, any Series B Investor, Ingram, Nova
Scotia, Harpeth or UA, the fraction of which (A) the numerator ("Numerator") is
equal to the number of shares of Registrable Securities then held by Founder,
any Series A Investor, any Series B Investor, Ingram, Nova Scotia, Harpeth or
UA, as applicable, (B) the denominator ("Denominator") is equal to the aggregate
number of Registrable Securities then held by Founder, the Series A Investors,
the Series B Investors, Ingram, Nova Scotia, Harpeth and UA; provided, that so
long as Softbank Technology Ventures IV LP, Softbank Technology Ventures V, LP
Softbank Technology Advisors Fund V, LP, Softbank Technology Entrepreneurs Fund
V, LP and Softbank Technology Advisors Fund LP (collectively, "Softbank Tech")
holds or beneficially owns Registrable Securities, (A) the Numerator in any
calculation of Adjusted Pro Rata share for Founder shall be equal to the number
of Registrable Securities then held or beneficially owned by Softbank Tech and
(B) the Denominator in any calculation of Adjusted Pro Rata share for Founder,
any Series A Investor, any Series B Investor, Ingram, Nova Scotia, Harpeth or UA
shall be reduced by the difference obtained by subtracting (i) the number of
Registrable Securities then held or beneficially owned by Softbank Tech from
(ii) the number of Registrable Securities then held or beneficially owned by
Founder; provided, further, that in no event shall Founder's Adjusted Pro Rata
share equal less than 15%. The Company shall have the right to terminate or
withdraw any registration initiated by it under this Section 3.2 prior to the
effectiveness of such registration whether or not any Holder has elected to
include securities in such registration. The registration expenses of
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such withdrawn registration shall be borne by the Company in accordance with
Section 3.4 hereof.
3.3 Form S-3 Registration. In case the Company shall receive a written
request from the Holders (other than Nova Scotia or Harpeth) that the Company
effect a registration on Form S-3 (or any successor to Form S-3) or any similar
short-form registration statement and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such
Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request given within fifteen (15)
days after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 3.3:
(i) if Form S-3 (or any successor or similar form) is not
available for such offering by the Holders; or
(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any)
at an aggregate price to the public of less than $3,000,000; or
(iii) if the Company shall furnish to the Holders a certificate
signed by the President and Chairman of the Board of Directors of the
Company stating that, in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the
Form S-3 registration statement for a period of not more than ninety (90)
days after receipt of the request of the Holders under this Section 3.3;
provided, that, the right to delay a request may be exercised by the
Company not more than once in any twelve (12)-month period.
(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All such registration expenses incurred in
connection with registrations requested pursuant to this Section 3.3 after the
first three (3) registrations per calendar year shall be paid by the selling
Holders pro rata in proportion to the number of shares sold by each.
3.4 Registration Expenses. Except as set forth in Section 3.3(c), the
Company shall bear all fees and expenses incurred in connection with any
registration under this Agreement,
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including without limitation all registration, filing, qualification, printers'
and accounting fees, fees and disbursements of counsel for the Company in its
capacity as counsel to the selling Holders hereunder; if the Company counsel
does not make itself available for this purpose, the Company will pay the
reasonable fees and disbursements of a single special counsel for the Holders,
except that each participating Holder shall bear its proportionate share of all
amounts payable to underwriters in connection with such offering for discounts
and commissions. The Company shall not, however, be required to pay for expenses
of any registration proceeding begun pursuant to Sections 3.1 or 3.3, the
request of which has been subsequently withdrawn by the Founder, the Investor
Holders, Ingram, or UA, as applicable, unless the withdrawal is based upon
material adverse information concerning the Company of which the Founder, the
Investor Holders, Ingram, or UA, as applicable, initiating the registration
request were not aware at the time of such request. If the Holders are required
to pay their registration expenses, such expenses shall be borne by the holders
of securities (including Registrable Securities) requesting such registration in
proportion to the number of shares for which registration was requested.
3.5 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder which have not
yet been sold, keep such registration statement effective for up to one hundred
eighty (180) days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits
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to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing.
3.6 Termination of Registration Rights. All registration rights granted
under this Section 3 shall terminate and be of no further force and effect five
(5) years after the Company has completed its Initial Offering. In addition,
the right of any Holder to request inclusion of Registrable Securities in any
registration pursuant to this Section 3 shall terminate when (i) all Registrable
Securities held by and issuable to such Holder (and its affiliates, partners and
former partners) may be sold under Rule 144 during any ninety (90)-day period
and (ii) the Company has completed its Initial Offering and is subject to the
provisions of the Exchange Act.
3.7 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 3 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
3.8 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 3.
3.9 Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Section 3 may be assigned by a
Holder to a transferee or assignee of Registrable Securities which (a) is a
subsidiary, parent, general partner, limited partner, retired partner,
shareholder, member, retired member, affiliate or trust beneficiaries of a
Holder, (b) is a Holder's family member or trust for the benefit of an
individual Holder, (c) acquires at least twenty percent (20%) of the Holder's
Registrable Securities (as adjusted for stock dividends, stock splits and
combinations); provided, that, notwithstanding anything in this Section 3.9 to
--------
the contrary, but subject to Section 2.1 hereof, the Investors shall be
permitted to assign the rights to cause the Company to register Registrable
Securities to any transferee or assignee of Registrable Securities that is a
SOFTBANK Entity; provided, further, (A) the transferor shall, within ten (10)
days after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (B) such transferee shall agree
in writing to be subject to the terms of this Agreement.
3.10 Amendment or Waiver of Registration Rights. Any provision of this
Section 3 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, Ingram, at least a
majority in interest of the Registrable Securities owned by the Series A
Investors, and at least a majority in interest of the Registrable Securities
owned by the Series B Investors, provided that any amendment or modification of
the registration rights of UA, Nova Scotia, Harpeth or Founder that would
adversely effect the rights of UA, Nova Scotia, Harpeth or Founder, as the case
may be, shall require the prior written consent of UA, Nova Scotia, Harpeth or
Founder, as the case may be. Any amendment or waiver effected in accordance
with this Section 3.10 shall be binding upon each Holder and the Company. By
acceptance of any
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benefits under this Agreement, Holders of Registrable Securities hereby agree to
be bound by the provisions hereunder.
3.11 Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 3.1, 3.2 or 3.3:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of each Holder,
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Securities Act or the Exchange Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "Violation") by the Company: (i) any untrue statement or
alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any Rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law in connection with the
offering covered by such registration statement; and the Company will reimburse
each such Holder, partner, officer or director, underwriter or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, the Company shall not be liable in any such case for
any such loss, claim, damage, liability or action to the extent that it arises
out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration qualifications or compliance is being effected, indemnify and hold
harmless the Company, each of its directors and its officers, and each person,
if any, who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Holder, or partner,
director, officer or controlling person of such other Holder may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will reimburse any legal
or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
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investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 3.11(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; provided further, that in no event
shall any indemnity under this Section 3.11(b) exceed the net proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
3.11 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 3.11, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to actual or reasonably likely differing interests between such indemnified
party and any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action, if materially prejudicial to its
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 3.11, but the omission to
so deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 3.11.
(d) If the indemnification provided for in this Section 3.11 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that, in no event shall any contribution by a
Holder hereunder exceed the proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this Section
3.11 shall survive completion of any offering of Registrable Securities in a
registration statement. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, which
consent shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
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thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
3.12 Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous Rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public.
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any time after it has become subject
to such reporting requirements); a copy of the most recent annual or quarterly
report of the Company; and such other reports and documents as a Holder may
reasonably request in availing itself of any Rule or regulation of the SEC
allowing it to sell any such securities without registration.
3.13 Other Registration Rights. After the date hereof, the Company shall
not grant to any holder of securities of the Company or to any person as an
inducement to become a holder of securities of the Company, any registration
rights that have a priority greater than or that otherwise adversely affect the
registration rights of the Holders hereunder without the prior written consent
of the Holders of a majority in interest of the Registrable Securities,
excluding the Registrable Securities held by Founder; provided, however, that if
any of Founder, Ingram, UA, Nova Scotia or Harpeth's registration rights are
affected in an adverse manner which is different from the manner in which all
Holders' registration rights are affected as a result of the grant of new
registration rights or the subordination of the Holders' registration rights
pursuant to the prior sentence of this Section 3.13, such Holder must consent in
writing to the grant of new registration rights or to the subordination of such
Holder's registration rights.
4. Covenants Of The Company.
4.1 Basic Financial Information and Reporting.
(a) The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, the Company will
furnish each Investor and Ingram an audited consolidated balance sheet of the
Company, as at the end of such fiscal year,
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an audited consolidated statement of income and an audited consolidated
statement of cash flows of the Company, for such year, all prepared in
accordance with generally accepted accounting principles and setting forth in
each case, in comparative form, the figures for the previous fiscal year, all in
reasonable detail.
(c) The Company will furnish each Investor and Ingram, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, an unaudited consolidated balance sheet of the Company as
of the end of each such quarterly period, an unaudited consolidated statement of
income and an unaudited consolidated statement of cash flows of the Company for
such period and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles, with the exception that no notes need
be attached to such statements and year-end audit adjustments may not have been
made.
(d) The Company will furnish each Investor and Ingram at least thirty
(30) days prior to the beginning of each fiscal year an annual budget and
operating plan for such fiscal year (and as soon as available, any subsequent
revisions thereto).
4.2 Inspection Rights. Each Investor and Ingram shall have the right to
visit and inspect any of the properties of the Company or any of its
subsidiaries, and to discuss the affairs, finances and accounts of the Company
or any of its subsidiaries with its officers, and to review such information as
is reasonably requested all at such reasonable times and as often as may be
reasonably requested; provided, however, that the Company shall not be obligated
to provide access to information which it deems in good faith to be trade secret
or similar confidential information.
4.3 Confidentiality of Records. Each Investor, Founder and Ingram agree
to use, and to use its best efforts to insure that its authorized
representatives use, the same degree of care as such Investor, Ingram or Founder
uses to protect its own confidential information to keep confidential any
information furnished to it which the Company identifies as being confidential
or proprietary (so long as such information is not in the public domain), except
that such Investor and Ingram may disclose such proprietary or confidential
information to any partner, subsidiary or parent of such Investor for the
purpose of evaluating its investment in the Company as long as such partner,
subsidiary or parent is advised of the confidentiality provisions of this
Section 4.3.
4.4 Reservation of Common Stock. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
Series A Stock and Series B Stock, all Common Stock issuable from time to time
upon such conversion.
4.5 SEC Compliance. During any time that the Company is subject to the
reporting requirements of the Exchange Act, the Company shall timely file all
required reports pursuant to the Exchange Act. Additionally, the Company shall
make available to Investors, Ingram, Nova Scotia, Harpeth and UA the information
contemplated by Rule 144A. At such time that any stock held by an Investor,
Ingram, Nova Scotia, Harpeth or UA is eligible for transfer pursuant to Rule
144(k), the Company shall, upon the request of such Investor, Ingram, Nova
Scotia, Harpeth and UA remove any restrictive legend from the applicable stock
certificate at no cost to such Investor, Ingram, Nova Scotia, Harpeth and UA.
17
<PAGE>
4.6 NonDisclosure and Developments Agreement. The Company shall require
all employees and consultants to execute and deliver Employee NonDisclosure and
Developments Agreements in substantially the forms attached to the Purchase
Agreement.
4.7 Committees. In the event that the Board of Directors establishes any
committees of the Board of Directors pursuant to the authority granted in the
Company's Bylaws, each such committee shall include the board representatives of
the Investors.
4.8 Expenses; Compensation. The Company shall reimburse the reasonable
out-of-pocket travel expenses of each director incurred to attend Board or
committee meetings, as well as any other travel expenses approved by the
Company's Board of Directors.
4.9 Stock Vesting. Unless otherwise approved by the Board of Directors
(including the representatives of the Investors) all stock options and other
stock equivalents issued after the date of this Agreement to employees,
directors, consultants and other service providers shall be subject to vesting
that is no less favorable to the Company than as follows: no more than twenty-
five percent (25%) of such stock options and stock equivalents shall vest on
each anniversary of the date of grant.
4.10 Visitation Rights. In addition to its representation on the Board of
Directors, for so long as SOFTBANK Technology Ventures (or its affiliates) hold
at least ten percent (10%) of the Shares, including shares of Common Stock
issued upon conversion of the Shares, the Company shall allow one representative
designated by SOFTBANK Technology Ventures IV L.P. to attend all meetings of the
board and committees thereof in a nonvoting capacity, and in connection
therewith, the Company shall give such representative copies of all notices,
minutes, consents and other materials, financial or otherwise, which the Company
provides to its board of directors; provided, that, any such representative
shall agree to leave all or any portion of a meeting of the Board of Directors
or any committee thereof if allowing such representative to remain in such
meeting would result in a waiver of the attorney-client privilege or if, in the
reasonable good faith belief of the Board of Directors, allowing such
representative to remain in the meeting would otherwise result in a conflict of
interest.
4.11 Termination of Covenants. All covenants of the Company contained in
Section 4 of this Agreement shall expire and terminate as to each Investor,
Ingram, Nova Scotia, Harpeth and UA on the effective date of the registration
statement pertaining to the Initial Offering.
5. Rights of First Offer.
5.1 Subsequent Offerings of Equity Securities. So long as the Investors
hold at least ten percent (10%) of the Shares (the "Investor Threshold"),
including shares of Common Stock issued upon conversion of the Shares or so long
as Ingram holds at least twenty percent (20%) (the "Ingram Threshold") of the
shares of Common Stock acquired by it in the Merger, in the event the Company
proposes to issue any Equity Securities, including, without limitation, any
preferred stock (other than Equity Securities excluded by Section 5.6 hereof),
the Company shall first offer to sell all of such Equity Securities (the
"Offered Securities") to the Investors (provided that the Investors meet or
exceed the Investor Threshold) and to Ingram (provided that
18
<PAGE>
Ingram meets or exceeds the Ingram Threshold) on a pro rata basis, as set forth
herein, and each Investor and Ingram shall have a right to purchase up to its
pro rata share of the Offered Securities. For purposes of this Section 5 only,
each Investor's and Ingram's pro rata share is equal to the ratio of (A) the
number of shares of the Company's Common Stock (including all shares of Common
Stock issued or issuable upon conversion of the Shares) which such Investor or
Ingram owns or is deemed to own immediately prior to the offering of the Offered
Securities to (B) the total number of shares of the Company's outstanding Common
Stock on a fully diluted basis (including all shares of Common Stock issued or
issuable upon conversion of the Shares and excluding all stock options and
shares of Common Stock issuable upon the exercise of such stock options)
immediately prior to the offering of the Offered Securities.
5.2 Exercise of Rights. The Company shall give each Investor and Ingram
written notice of its intention to issue any Equity Securities, which notice
shall describe the Offered Securities, the price, and the terms and conditions
upon which the Company proposes to issue the Offered Securities. Each Investor
and Ingram shall have fifteen (15) days from the receipt of such notice to agree
to purchase up to its pro rata share of the Offered Securities for the price and
upon the terms and conditions specified in the notice by giving written notice
to the Company and stating therein the quantity of Offered Securities to be
purchased. Notwithstanding the foregoing, the Company shall not be required to
offer or sell any Offered Securities to any Investor or to Ingram if such sale
would cause the Company to be in violation of applicable federal securities laws
by virtue of such offer or sale.
5.3 Issuance of Offered Securities to Other Investors. If not all of the
Investors and Ingram elect to purchase their pro rata share of the Offered
Securities, then the Company shall promptly notify in writing the Investors and
Ingram who do so elect and shall offer such Investors and Ingram the right to
acquire such unsubscribed shares. The Investors and Ingram shall have ten (10)
days after receipt of such notice to notify the Company of their respective
election to purchase all or a portion thereof of the unsubscribed shares. If
the Investors and Ingram fail to exercise in full their rights of first offer as
set forth herein, the Company shall have ninety (90) days thereafter to sell the
Offered Securities in respect of which such rights were not exercised, at a
price and upon terms and conditions no more favorable to the purchasers thereof
than specified in the Company's notice to the Investors and Ingram pursuant to
Section 5.2 hereof. If the Company has not sold such Offered Securities within
one hundred twenty (120) days of the notice provided pursuant to Section 5.2,
the Company shall not thereafter issue or sell any Offered Securities, without
first offering such securities to the Investors and Ingram in the manner
provided by this Section 5.
5.4 Termination of Rights of First Offer. The rights of first offer
established by this Section 5 shall not apply to, and shall terminate upon the
effective date of the registration statement pertaining to a Qualified Public
Offering.
5.5 Transfer of Rights of First Offer. The rights of first offer granted
to each Investor and Ingram under this Section 5 may be transferred to the same
parties, subject to the same restrictions, as any transfer of registration
rights pursuant to Section 3.9.
5.6 Excluded Securities. The rights of first offer established by this
Section 5 shall have no application to any of the following Equity Securities:
19
<PAGE>
(a) shares of Common Stock (and/or options, warrants or other Common
Stock purchase rights issued pursuant to such options, warrants or other rights)
issued or to be issued to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors,
including the representatives designated by the holders of the Shares but
excluding the Founders;
(b) stock issued pursuant to any rights or agreements outstanding as
of the date of this Agreement, options, warrants (including the Nova Scotia,
Harpeth and UA Warrants) and convertible promissory notes outstanding as of the
date of this Agreement; and stock issued pursuant to any such rights or
agreements granted after the date of this Agreement, provided, that, the rights
of first offer established by this Section 5 applied with respect to the initial
sale or grant by the Company of such rights or agreements;
(c) any Equity Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination;
(d) after the date hereof, any Equity Securities which in the
aggregate exceed ten percent (10%) of the Company's outstanding capital stock on
a fully diluted basis issued to a potential or existing customer or supplier or
other strategic relationship or issued in connection with a credit facility or
equipment lease transaction;
(e) shares of Common Stock issued in connection with any stock split,
stock dividend or recapitalization by the Company;
(f) shares of Common Stock issued upon conversion of the Shares;
(g) any Equity Securities that are issued by the Company pursuant to a
registration statement filed under the Securities Act.
6. Miscellaneous.
6.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Delaware without regard to principles of conflict of
laws.
6.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
6.3 Severability. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
20
<PAGE>
6.4 Amendment and Waiver.
(a) Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of (i) the Company; (ii) the
holders of a majority in interest of the Registrable Securities owned of record
by the Series A Investors; (iii) the holders of a majority in interest of the
Registrable Securities owned of record by the Series B Investors; and (iv) any
party whose rights and interests under this Agreement would be adversely
affected by such an amendment or modification.
(b) Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of a majority in interest of the Registrable Securities
owned of record by the Series A Investors; and the holders of a majority in
interest of the Registrable Securities owned of record by the Series B
Investors; provided, however, no waiver shall be effective without the consent
of any party whose rights and interests under this Agreement would be adversely
affected by such waiver.
6.5 Notices, Etc. All notices required or permitted hereunder shall be
deemed effectively given: (i) upon personal delivery to the party to be
notified, (ii) when sent by confirmed telex or facsimile if sent during normal
business hours of the recipient; if not, then on the next business day, (iii)
five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (iv) one (1) day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address set forth on the signature pages hereto or Exhibit
-------
A, Exhibit B or Exhibit C hereto or at such other address as such party may
- - --------- ---------
designate by ten (10) days advance written notice to the other parties hereto.
6.6 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6.7 Complete Agreement. This Agreement constitutes the entire agreement
and supersedes all other prior and contemporaneous agreements and undertakings,
both written and oral, between the parties hereto with regard to the subject
matter hereof.
6.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.9 Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.10 Supersedence. This Agreement supersedes in its entirety the Third
Amended and Restated Agreement by and between the Company, the Investors,
Ingram, Nova Scotia, UA and the Founder, and the Third Amended and Restated
Agreement shall be of no further force or effect.
21
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
22
<PAGE>
In Witness Whereof, the parties hereto have executed this Fourth Amended
and Restated Investors' Rights Agreement as of the date set forth in the first
paragraph hereof.
COMPANY:
BUY.COM INC.
By:__________________________________________
Name:
Title:
INVESTORS:
SOFTBANK Technology Ventures IV L.P.
By: STV IV LLC
Its General Partner
By:__________________________________________
Name:
Title:
SOFTBANK Technology Advisors Fund L.P.
By: STV IV LLC
Its: General Partner
By:__________________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
SOFTBANK Capital Partners LP
By: Softbank Capital Partners LLC
Its: General Partner
By:__________________________________________
Name:
Title:
SOFTBANK Capital Advisors
Fund LP
By: Softbank Capital Partners LLC
Its: General Partner
By:__________________________________________
Name:
Title:
SOFTBANK America Inc.
By:__________________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
SOFTBANK Technology Ventures V LP
By: SBTV V LLC
Its: General Partner
By:__________________________________________
Name: Edward Scott Russell
Title: Managing Director
SOFTBANK Technology Advisors Fund V LP
By: SBTV V LLC
Its: General Partner
By:__________________________________________
Name: Edward Scott Russell
Title: Managing Director
SOFTBANK Technology Entrepreneurs Fund V LP
By: SBTV V LLC
Its: General Partner
By:__________________________________________
Name: Edward Scott Russell
Title: Managing Director
Investors' Rights Agreement
<PAGE>
e Partners
By:__________________________________________
Name:
Title:
Vivendi
By:__________________________________________
Name:
Title:
Investors' Rights Agreement
<PAGE>
INGRAM:
INGRAM CAPITAL INC.
By:__________________________________________
Name:
Title:
Address: Two Ingram Blvd.
La Vergne, TN 37089
Attn: President
NOVA SCOTIA:
THE BANK OF NOVA SCOTIA
By:__________________________________________
Name:
Title:
Address: ___________________
___________________
___________________
UA:
UNITED AIR LINES, INC.
By:__________________________________________
Name:
Title:
Address: ___________________
___________________
___________________
Investors' Rights Agreement
<PAGE>
HARPETH:
HARPETH HOLDINGS, INC.
By:__________________________________________
Name:
Title:
Address: ___________________
___________________
___________________
Investors' Rights Agreement
<PAGE>
FOUNDERS:
The Scott A. Blum Separate Property Trust u/d/t
8/2/95
By:__________________________________________
Name:
Title:
Investors' Rights Agreeement
<PAGE>
Exhibit A
BUY.COM INC.
Investors' Rights Agreement
Series A Preferred Stock Purchasers
<TABLE>
<CAPTION>
Name and Address Series A
Shares
- -------------------------------------------------------------------
<S> <C>
SOFTBANK Technology Ventures IV L.P. 19,114,890
c/o STV IV LLC
333 W. San Carlos
San Jose, CA 95110
SOFTBANK Technology Advisors Fund L.P. 366,240
c/o STV IV LLC
333 W. San Carlos
San Jose, CA 95110
----------
Total: 19,481,130
</TABLE>
<PAGE>
Exhibit B
BUY.COM INC.
Investors' Rights Agreement
Series B Preferred Stock Purchasers
<TABLE>
<CAPTION>
Name and Address Common Series B
Shares(1) Shares
- -----------------------------------------------------------------------
<S> <C> <C>
SOFTBANK Capital Partners LP 2,835,295 10,207,063
SOFTBANK Capital Advisors Fund LP 41,133 148,079
SOFTBANK America Inc. 8,820,694 --
SOFTBANK Technology Ventures IV LP 282,154 1,015,735
SOFTBANK Technology Advisors Fund LP 5,405 19,462
SOFTBANK Technology Ventures V LP 287,549 1,035,196
e Partners 575,109 2,070,393
Vivendi 383,700 1,381,321
----------------------------
Total: 13,231,040 15,877,249
</TABLE>
(1) Reflects Common Stock purchased from the Scott A. Blum Separate Property
Trust and the Masons pursuant to a Stock Purchase Agreement dated as of
September 2, 1999.
<PAGE>
Exhibit C
BUY.COM INC.
Investors' Rights Agreement
Founders
<TABLE>
<CAPTION>
Name and Address Shares
- -------------------------------------------------------------------------
<S> <C>
The Scott A. Blum Separate Property Trust u/d/t 8/2/95 99,164,464
3 Ritz Cove
Monarch Beach, CA 92629
</TABLE>
<PAGE>
Exhibit D
BUY.COM INC.
Investors' Rights Agreement
Schedule of Registrable Securities
<TABLE>
<CAPTION>
Total
Registrable
Holder Warrant Common(2) Series A Series B Securities
------ ------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
SOFTBANK Technology Ventures IV LP -- 638,059 19,114,890 1,015,735 20,768,684
SOFTBANK Technology Advisors Fund LP -- 12,230 366,240 19,462 397,932
SOFTBANK Technology Ventures V LP -- 287,549 -- 1,035,196 1,322,745
SOFTBANK Capital Partners LP -- 2,835,295 -- 10,207,063 13,042,358
SOFTBANK Capital Advisors Fund LP -- 41,133 -- 148,079 189,212
SOFTBANK America Inc. -- 8,820,694 -- 0 8,820,694
e Partners -- 575,109 -- 2,070,393 2,645,502
Vivendi -- 383,700 -- 1,381,321 1,765,021
United Air Lines Inc. 2,000,000 -- -- -- 2,000,000
The Bank of Nova Scotia(1) 43,500 -- -- -- 43,500
Harpeth Holdings, Inc. 1,000,000 -- -- -- 1,000,000
The Scott A. Blum Separate Property
Trust -- 99,164,464 -- -- 99,164,464
Ingram Capital -- 7,930,560 -- -- 7,930,560
---------- ----------- ----------- ---------- -----------
Total 3,043,500 120,688,793 19,481,130 15,877,249 159,090,672
</TABLE>
(1) The Bank of Nova Scotia shares are based upon an estimate. The actual
number of shares may vary based upon the terms of the Warrant.
(2) Reflects ownership after closing of the Series B Convertible Participating
Preferred Stock financing and the sale of 13,231,040 shares of Common Stock.
Also includes shares of Common Stock acquired by Ingram and the Series A
Investors upon the exercise of their right of first offer on March 10, April
5, and June 29, 1999.
<PAGE>
EXHIBIT 10.40
BUY.COM INC.
SPECIAL EXECUTIVE STOCK OPTION PLAN
-----------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This Special Executive Stock Option Plan is intended to promote the
interests of Buy.com Inc., a Delaware corporation, by providing eligible persons
in the Corporation's employ or service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to continue in such employ or service.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority (subject to
the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding options thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator shall be final and binding on all parties who have an
interest in the Plan or any option grant thereunder.
C. All stock options under the Plan shall be made in compliance with the
applicable requirements of Section 25102(f) of the California Corporations Code
so that the qualification of those securities shall not be required in the State
of California.
III. ELIGIBILITY
A. The persons eligible to participate in the Plan shall be limited
solely to (i) Employees who are officers of the Corporation or other highly
compensated individuals and (ii) the non-employee members of the Board.
<PAGE>
B. The Plan Administrator shall have full authority to determine which
eligible persons are to receive such grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 5,000,000
shares.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan.
C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan and (ii) the number and/or class of securities and the exercise price per
share in effect under each outstanding option in order to prevent the dilution
or enlargement of benefits thereunder. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive. In no event shall any
such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
2
<PAGE>
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator, but in no event shall such exercise price per share be less than
eighty-five percent (85%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in cash or check made payable to
the Corporation. Should the Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the exercise price may also
be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (B) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10)
years measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service for any reason
other than death, Disability or Misconduct, then the Optionee shall have a
period of three (3) months following the date of such cessation of Service
during which to exercise each outstanding option held by such Optionee.
3
<PAGE>
(ii) Should Optionee's Service terminate by reason of Disability,
then the Optionee shall have a period of twelve (12) months following the
date of such cessation of Service during which to exercise each outstanding
option held by such Optionee.
(iii) If the Optionee dies while holding an outstanding option,
then the personal representative of his or her estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance shall have a twelve (12)-month period following
the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any such option be
exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding with respect to any and all option shares for which the
option is not otherwise at the time exercisable or in which the Optionee is
not otherwise at that time vested.
(vi) Should Optionee's Service be terminated for Misconduct or
should Optionee otherwise engage in Misconduct while holding one or more
outstanding options under the Plan, then all outstanding options held by
the Optionee shall terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following Optionee's cessation of Service or death from the
limited period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
4
<PAGE>
D. Stockholder Rights. The holder of an option shall have no stockholder
------------------
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become the recordholder
of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the discretion to
---------------
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.
F. First Refusal Rights. Until such time as the Common Stock is first
--------------------
registered under Section 12 of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the Optionee
(or any successor in interest) of any shares of Common Stock issued under the
Plan. Such right of first refusal shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document
evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of inheritance
following the Optionee's death. However, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members or to the Optionee's former spouse, to the extent such
assignment is in connection with the Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Three shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options shall not be subject
to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less than
--------------
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
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<PAGE>
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
-----------------
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price paid shall not be less
than the one hundred ten percent (110%) of the Fair Market value per share of
Common Stock on the option grant date and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the Plan at the
time of a Corporate Transaction shall automatically vest in full so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully vested shares of Common Stock. However, the shares subject to an
outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and any repurchase rights of the
Corporation with respect to the unvested option shares are concurrently assigned
to such successor corporation (or parent thereof) or (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested option shares at the time of the
Corporate Transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in
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<PAGE>
consummation of such Corporate Transaction, had the option been exercised
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to (i) the number and class of securities available for issuance
under the Plan following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same. To the extent the actual holders of the Corporation's outstanding
Common Stock receive cash consideration for their Common Stock in consummation
of the Corporate Transaction, the successor corporation may, in connection with
the assumption of the outstanding options under this Plan, substitute one or
more shares of its own common stock with a fair market value equivalent to the
cash consideration paid per share of Common Stock in such Corporate Transaction.
E. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to structure one or more options so that those options shall
automatically accelerate and vest in full (and any repurchase rights of the
Corporation with respect to the unvested shares subject to those options shall
immediately terminate) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed in the Corporate Transaction.
F. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully vested option
shares until the expiration or sooner termination of the option term. In
addition, the Plan Administrator may provide that one or more of the
Corporation's outstanding repurchase rights with respect to shares held by the
Optionee at the time of such Involuntary Termination shall immediately terminate
on an accelerated basis, and the shares subject to those terminated rights shall
accordingly vest at that time.
G. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is
not exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7
<PAGE>
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
ARTICLE THREE
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee to pay the option
exercise price by delivering a full-recourse, interest-bearing promissory note
payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event may
the maximum credit available to the Optionee exceed the sum of (i) the aggregate
option exercise price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee in
connection with the option exercise.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, until the Plan is approved by
the Corporation's stockholders. If such stockholder approval is not obtained
within twelve (12) months after the date of the Board's adoption of the Plan,
then all options previously granted under the Plan shall terminate and cease to
be outstanding, and no further options shall be granted under the Plan. Subject
to such limitation, the Plan Administrator may grant options under the Plan at
any time after the effective date of the Plan and before the date fixed herein
for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration of
--------
the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. All options
outstanding at the time of a clause (i) termination event shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing those options.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options at the time outstanding under the Plan unless the Optionee consents to
such amendment or modification. In addition,
8
<PAGE>
certain amendments may require stockholder approval pursuant to applicable laws
and regulations.
B. Options may be granted in excess of the number of shares of Common
Stock then available for issuance under the Plan, provided any excess shares
actually issued under the Plan shall be held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess grants are made, then (i) any unexercised options granted
on the basis of such excess shares shall terminate and cease to be outstanding
and (ii) the Corporation shall promptly refund to the Optionees the exercise
price paid for any excess shares issued under the Plan and held in escrow,
together with interest (at the applicable Short Term Federal Rate) for the
period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options granted under the Plan shall be subject to the
satisfaction of all applicable Federal, state and local income and employment
tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Common Stock upon the exercise of any
option shall be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan and
the options granted under it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining such person) or of the Optionee, which rights are hereby
expressly reserved by each, to terminate such person's Service at any time for
any reason, with or without cause.
9
<PAGE>
APPENDIX
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The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as amended.
----
C. Committee shall mean a committee of two (2) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
F. Corporation shall mean Buy.com Inc., a Delaware corporation, and
-----------
any successor corporation to all or substantially all of the assets or voting
stock of Buy.com Inc. which shall by appropriate action adopt the Plan.
G. Disability shall mean the inability of the Optionee to engage in
----------
any substantial gainful activity by reason of any medically determinable
physical or mental impairment and shall be determined by the Plan Administrator
on the basis of such medical evidence as the Plan Administrator deems warranted
under the circumstances.
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
A-1
<PAGE>
J. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
K. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
L. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change
in his or her position with the Corporation which materially reduces his or
her duties and responsibilities or the level of management to which he or
she reports, (B) a reduction in his or her level of compensation (including
base salary, fringe benefits and target bonus under any corporate-
performance based bonus or incentive programs) by more than fifteen percent
(15%) or (C) a relocation of such individual's place of employment by more
than fifty (50) miles, provided and only if such change, reduction or
relocation is effected without the individual's consent.
A-2
<PAGE>
M. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee, any unauthorized use or disclosure by such person
of confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee or other person in the Service of the Corporation (or any Parent or
Subsidiary).
N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
O. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
P. Optionee shall mean any person to whom an option is granted under
--------
the Plan.
Q. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
R. Plan shall mean the Corporation's Special Executive Stock Option
----
Plan, as set forth in this document.
S. Plan Administrator shall mean either the Board or the Committee
------------------
acting in its capacity as administrator of the Plan.
T. Service shall mean the provision of services to the Corporation
-------
(or any Parent or Subsidiary) by a person in the capacity of an Employee or a
nonemployee member of the board of directors, except to the extent otherwise
specifically provided in the documents evidencing the option grant.
U. Stock Exchange shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
V. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
W. 10% Stockholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-3
<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
January 14, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of
BUY.COM INC. of our report dated August 17, 1998, except as to Note 8 which is
as of December 3, 1998, relating to the financial statements of SpeedServe Inc.,
which appears in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Nashville, Tennessee
January 13, 2000
