<PAGE>
As filed with the Securities and Exchange Commission on February 16, 2000
Registration No. 333-93015
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 3
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOMEGROCER.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 5411 91-1863408
<CAPTION>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
10230 N.E. Points Drive
Kirkland, Washington 98033
(425) 201-7500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
Mary Alice Taylor
HomeGrocer.com, Inc.
Chief Executive Officer
10230 N.E. Points Drive
Kirkland, Washington 98033
(425) 201-7500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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COPIES TO:
<TABLE>
<S> <C>
William W. Ericson, Esq. Daniel G. Kelly, Jr., Esq.
Sonya F. Erickson, Esq. DAVIS POLK & WARDWELL
VENTURE LAW GROUP 1600 El Camino Real
A Professional Corporation Menlo Park, CA 94025
4750 Carillon Point
Kirkland, WA 98033
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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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 that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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Explanatory Note
This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of shares of common stock. The second prospectus relates
to a concurrent offering outside the United States and Canada of an aggregate
of shares of common stock. The prospectuses for each of the U.S.
offering and the international offering will be identical with the exception
of an alternate front cover page for the international offering. This
alternate page appears in this registration statement immediately following
the complete prospectus for the U.S. offering.
<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 we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 2000
22,000,000 Shares
[LOGO OF HOMEGROCER.COM]
Common Stock
------------
HomeGrocer.com, Inc. is offering 22,000,000 shares of common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $10 and
$12 per share.
------------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "HOMG."
------------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
------------
PRICE $ A SHARE
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions HomeGrocer.com
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<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
HomeGrocer.com has granted the underwriters the right to purchase up to an
additional 3,300,000 shares to cover over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares of common stock to purchasers on
, 2000.
------------
MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
BANC OF AMERICA SECURITIES LLC
J.C. BRADFORD & CO.
, 2000
<PAGE>
Gatefold
The gatefold includes five photographs of the following:
1. A woman and child sitting at a computer with the caption "Convenient
online shopping;"
2. HomeGrocer.com employees performing tasks in a customer fulfillment
center with the caption "Efficient order fulfillment system;"
3. A HomeGrocer.com truck driving through a neighborhood with the caption
"Custom designed tri-temperature trucks for product freshness;"
4. A screen shot of HomeGrocer.com's web site with the caption "Easy to
navigate web site;" and
5. A HomeGrocer.com delivery person bringing bags of groceries to a
customer's kitchen counter with the caption "Friendly, professional
drivers bring the groceries right to the kitchen."
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 18
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial Data............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 28
Management......................... 41
Related Party Transactions......... 56
Principal Stockholders............. 59
Description of Capital Stock....... 61
Shares Eligible for Future Sale.... 65
Material U.S. Federal Tax
Considerations for Non-U.S.
Holders........................... 67
Underwriters....................... 69
Legal Matters...................... 72
Experts............................ 72
Additional Information Available to
You............................... 72
Index to Financial Statements...... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in those jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale of our common stock.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
Until , 2000, 25 days after commencement of the offering, all dealers
effecting transactions in our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding HomeGrocer.com and our financial statements and the
related notes appearing elsewhere in this prospectus.
HomeGrocer.com
Our Business
HomeGrocer.com is a retailer of grocery and other consumer products on the
Internet. Using our state-of-the-art distribution system, we offer next-day
home delivery of high quality products at prices comparable to local
supermarkets. Our product selection currently includes fresh fruit, vegetables,
dairy products, baked goods, meat, fish and a wide assortment of non-perishable
items and household products. We also offer health and beauty products, wine
and beer, fresh flowers, pet products, home office supplies, postage stamps,
seasonal items and top-selling books, video games and movies.
Since January 1, 1999, we have made deliveries to over 55,000 different
households. We have rapidly expanded since our initial launch of service in
June 1998 and currently serve customers in three markets: Seattle, Washington;
Portland, Oregon; and Orange County/Los Angeles, California. We expect to begin
service in eight to ten additional metropolitan areas in the next twelve
months.
Our History of Losses
We incurred net losses of $7.9 million for the fiscal year ended January 2,
1999 and $84.0 million for the fiscal year ended January 1, 2000. Because of
the start-up expenses at the numerous customer fulfillment centers that we
intend to open over the next few years, we expect to incur substantial losses
and negative operating cash flow for the foreseeable future. As of January 1,
2000, we had an accumulated deficit of $93.3 million.
Our Market Opportunity
We believe a significant market opportunity exists for an online store that
can offer consumers an Internet shopping experience for grocery and other
consumer products. Most consumers dislike the traditional grocery shopping
experience. Online grocery shopping has the opportunity to eliminate many of
the burdens of the traditional grocery shopping experience. Forrester Research
estimates that online grocery shopping in the United States will grow from a
$513 million market in 1999 to a $16.8 billion market by 2004 and that online
sales of health and beauty products, another market that we address, will grow
from $509 million in 1999 to $10.3 billion in 2004.
Our Strategy
Our goal is to be our customers' preferred regular supplier of a wide range
of consumer products. Our web site is designed to reduce average shopping time
by creating an easy to use, interactive and customized format for each
customer. Our professional buyers purchase high quality products available from
premium specialty suppliers and local sources, in addition to national
suppliers. Our delivery staff is selected and trained to deliver friendly,
efficient and reliable customer service. We believe that our success in
reliably delivering quality groceries into the home provides us with a strong
platform to expand into other product and service areas. Amazon.com, our
largest shareholder, has agreed to introduce our service to its customers
residing in our service areas under our advertising agreement with them. In
addition, we recently entered into a five-year agreement with America Online
under which our grocery shopping services will be prominently featured on the
web sites of AOL and its affiliated networks.
3
<PAGE>
Our History
We were incorporated in British Columbia, Canada in January 1997,
reincorporated in Delaware in September 1997 and plan to reincorporate in
Washington in the first quarter of 2000. After this offering, our officers,
directors and their affiliates will control approximately 65% of our
outstanding common stock and could prevent or delay beneficial corporate
actions. Our principal executive offices are located at 10230 N.E. Points
Drive, Kirkland, Washington 98033, and our telephone number is (425) 201-7500.
Information contained in our web site at www.homegrocer.com does not constitute
part of this prospectus.
THE OFFERING
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<C> <S>
Common stock offered....................... 22,000,000 shares
Common stock to be outstanding after the
offering.................................. 124,812,274 shares
Use of proceeds............................ Finance the first phase of a national
expansion, including the establishment of
new customer fulfillment centers, and other
general corporate purposes
Proposed Nasdaq National Market symbol..... HOMG
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at January 1, 2000.
This number does not take into account 5,886,342 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $1.69 per share, 2,749,248 shares of common stock issuable
upon exercise of warrants at a weighted average exercise price of $1.00 per
share and 14,287,122 shares of common stock available for grant under our
existing stock option plans at January 1, 2000.
"HomeGrocer," "HomeGrocer.com," "Peach Party," "here comes the grocery
store" and the HomeGrocer.com corporate logo are trademarks of HomeGrocer.com.
All other brand names or trademarks appearing in this prospectus are the
property of their respective holders.
Unless otherwise indicated, all information contained in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. assumes our anticipated reincorporation from Delaware to Washington upon
effectiveness of this offering;
. reflects the 2-for-1 stock split of the common stock effected in
November 1999; and
. gives effect to the conversion of all outstanding shares of preferred
stock into 73,206,738 shares of common stock effective upon the closing
of this offering.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table contains summary financial data for HomeGrocer.com. You
should read this information along with our financial statements and related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
51 Weeks From 52 Weeks 52 Weeks
January 15, 1997 Ended Ended
(Inception) to January 2, January 1,
January 3, 1998 1999 2000
---------------- ---------- ----------
(in thousands, except share and per
share amounts)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales............................ $ -- $ 1,094 $ 21,648
Cost of sales........................ -- 1,018 19,515
---------- ---------- ----------
Gross profit....................... -- 76 2,133
Selling, general, and administrative
expenses, excluding stock-based
compensation........................ 1,064 7,455 59,208
Stock-based compensation expense..... 230 412 28,158
---------- ---------- ----------
Loss from operations............... (1,294) (7,791) (85,233)
Other income/(expense), net.......... (61) (118) 1,240
---------- ---------- ----------
Net loss........................... $ (1,355) $ (7,909) $ (83,993)
========== ========== ==========
Basic and diluted net loss per
share............................... $ (0.14) $ (0.72) $ (5.56)
========== ========== ==========
Pro forma basic and diluted net loss
per share (1)....................... $ (1.28)
==========
Weighted average shares outstanding
used to compute basic and diluted
net loss per share.................. 10,034,721 11,044,174 15,102,698
========== ========== ==========
Weighted average shares outstanding
used to compute pro forma basic and
diluted net loss per share (1)...... 65,382,807
==========
</TABLE>
The actual column in the following table sets forth HomeGrocer.com's summary
balance sheet data as of January 1, 2000. The pro forma as adjusted column
reflects the conversion of all outstanding shares of preferred stock into
73,206,738 shares of common stock and the sale of 22,000,000 shares of our
common stock in this offering at an assumed initial public offering price of
$11.00 per share and the application of our estimated net proceeds.
<TABLE>
<CAPTION>
At January 1, 2000
--------------------
Pro Forma
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and marketable securities....... $ 77,568 $301,320
Working capital........................................... 66,593 290,656
Total assets.............................................. 146,929 370,094
Long-term obligations, less current portion............... 17,790 17,790
Total shareholders' equity................................ 112,147 335,807
</TABLE>
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(1) See note 1 of notes to financial statements for an explanation of the
determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
5
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involves a high degree
of risk. You should carefully consider the following risks before making an
investment decision. The trading price of our common stock could decline if any
of these risks materializes, and investors could lose all or part of their
investment. You also should refer to the other information appearing elsewhere
in this prospectus, including our financial statements and the related notes.
We anticipate significant increases in our operating expenses and continuing
losses for the foreseeable future.
We incurred net losses of $7.9 million, or 723% of our revenues, for the
fiscal year ended January 2, 1999 and $84.0 million, or 388% of our revenues,
for the fiscal year ended January 1, 2000. We intend to open one or more
customer fulfillment centers in each of eight to ten new markets within the
next twelve months. Because all of our customer fulfillment centers have lost
money over their first several quarters of operation and none are yet
profitable, we anticipate that our net losses for the fiscal year ended
December 30, 2000 will be significantly greater than in prior years. As of
January 1, 2000, we had an accumulated deficit of $93.3 million. Although we
cannot be certain of the size of the capital commitment we will make and the
operating expenses we will incur, we expect the expansion will include:
. approximately $4 to $7 million to equip each new customer fulfillment
center in additional geographic markets;
. approximately $5 to $8 million for brand development, marketing and
other promotional activities in each new geographic market; and
. continued investment in our computer network, web site, warehouse
management and order fulfillment systems and delivery and corporate
infrastructure.
We anticipate using the proceeds of this offering, our revenues from
operations and funds from future debt and equity offerings to finance these
expenses. We expect to continue to experience substantial operating losses on a
quarterly and annual basis for the foreseeable future. At current numbers of
customers and orders, the geographic density of customers and productivity of
employees, we are not profitable and cannot predict when or if we will be
profitable.
We are an early stage company operating in the e-commerce market, which makes
it difficult for investors to evaluate our business and prospects.
Prior to June 1998, we were focused on developing our web site and
constructing and equipping our first customer fulfillment center serving the
Seattle, Washington area. We did not begin commercial operations in the Seattle
area until June 1998, the Portland, Oregon area until May 1999, and the Orange
County, California area until September 1999. Our limited operating history
makes it difficult to evaluate our financial results and future plans. You must
consider our business and prospects in light of the risks and difficulties we
encounter as an early stage company in the new and rapidly evolving market of
e-commerce. Our failure to address such risks and difficulties could hurt our
business.
If a sufficient number of grocery shoppers do not accept our online shopping
service, we may never become profitable.
We have not operated profitably to date and cannot predict when or if we
will achieve profitability overall or in any single customer fulfillment
center. If we do not achieve and maintain customer volumes and sufficient
density of our deliveries in our market areas at a reasonable cost, we will not
be able to increase our revenues or achieve profitability. The market for e-
commerce is new and rapidly evolving. It is uncertain whether e-commerce will
achieve and sustain high levels of demand and market acceptance, particularly
in the home
6
<PAGE>
delivery industry. Our success will depend to a substantial extent on the
willingness of consumers to increase their use of online services as a means
of buying groceries and other products and services. We may not be able to
convert a large number of consumers from traditional shopping methods to
online shopping for groceries and other consumer products. Even if we are
successful in attracting online customers, we expect that it may take several
years to achieve a sufficient base of customers in a given market. Specific
factors that could prevent widespread customer acceptance include:
. prolonged delivery time compared to the immediate receipt of products at
a traditional store;
. perceptions that online delivery services are premium services and
therefore may be more expensive than traditional grocery stores;
. customers' desire to see and touch products, particularly fresh produce,
prior to purchase;
. product selection that is less varied than customers desire;
. perceived or actual lack of security or privacy of online transactions;
and
. difficulties in making accurate and timely deliveries to customers.
Moreover, the growth of our business will depend on the growth of the
number of consumers who have access to personal computers or other systems
that can access the Internet. If e-commerce, especially in the grocery
industry, does not achieve high levels of demand and market acceptance, we may
never become profitable.
Our customer fulfillment center and delivery service model may not be readily
or cost-effectively replicable in additional geographic markets; as a result,
we may fail to expand our business effectively.
A critical part of our business strategy is to expand our business by
opening customer fulfillment centers in additional geographic markets at a
rapid pace. Our expansion strategy is dependent upon our ability to replicate
our customer fulfillment center and delivery service model in a timely and
cost-effective manner. Our strategy of using proprietary technology that can
be implemented in pre-existing warehouses to quickly open customer fulfillment
centers may not be as effective as we anticipate. In addition, our existing
customer fulfillment centers have been limited to locations on the west coast,
and we may fail to recognize specific issues associated with expansion beyond
the west coast. Because our three principal customer fulfillment centers have
been operational for less than six months, we have not yet demonstrated
whether our customer fulfillment centers and delivery service model are in
fact readily and cost-effectively replicable for long-term use or across
additional markets. If we fail to launch our service in new markets in a
timely and cost effective manner or if the market fails to accept our new
services, we may not generate the revenue we expect, and we could incur
substantial additional operating costs.
We may be unable to upgrade our existing technology in a cost-effective and
efficient manner to accommodate the increased volumes of Internet traffic and
transactions that may arise from our expansion, which could hurt our business.
The launch of the HomeGrocer.com service in additional metropolitan
locations may require us to expand and upgrade our technology, including our
integrated set of software tools and business processes for delivery
management, web site production, customer service and order fulfillment. Our
existing technology may not be able to accommodate increased volumes of
traffic and transactions that may arise in the future from our expansion into
other metropolitan locations. To the extent that customer traffic grows
substantially, we will need to expand the capacity of our web site and
transaction processing systems to accommodate a larger number of customers. If
we are unable to upgrade our technology, we may suffer from unanticipated
system disruptions, slower response times, degradation in levels of customer
service, impaired quality and speed of order fulfillment or delays in
reporting accurate financial information. We may not accurately predict the
rate or timing of increases in the use of our web site to allow us to
effectively upgrade or expand our transaction
7
<PAGE>
processing systems. Upgrading our current technology could result in material
expenses. If we fail to cost-effectively and efficiently upgrade and expand
our current technology, our business will suffer.
Expansion of our service in additional geographic markets may place a greater
than expected strain on our personnel and systems and jeopardize future
scheduled expansion.
The strain placed on our employees, management and systems by simultaneous
launches of the HomeGrocer.com service in multiple metropolitan locations may
jeopardize future scheduled launches or the quality of our service in a
particular location. The lack of sufficient resources to operate in multiple
locations could cause our quality of service or number of customers to
decline. If we fail to adequately predict and maintain the personnel and
systems necessary to successfully manage multiple customer fulfillment
centers, we may be forced to delay our expansion and our business will suffer.
We may incur unexpected costs or face substantial delays in finding adequate
facilities for our customer fulfillment centers, which could hurt our
business.
Much of our expansion is dependent on our ability to locate and lease
suitable sites for additional customer fulfillment centers. We may be unable
to find adequate facilities to lease that meet our timing, location and cost
expectations. Even if we are able to locate an adequate facility, we may face
additional delays and costs in negotiating and reviewing the lease agreement,
examining the site for compliance with governmental regulations, such as
zoning and environmental compliance, and procuring the necessary permits for
our operation. If we incur significant unexpected costs or face substantial
delays in finding adequate facilities for our customer fulfillment centers, we
may never achieve profitability.
We have limited experience in managing geographically diverse operations,
which may inhibit our growth.
Although we have expanded geographically, we have limited experience
operating or managing customer fulfillment centers in multiple regions. To
date, our existing customer fulfillment centers have been limited to locations
on the west coast of the United States, and we may fail to address different
shopping patterns or regional tastes in our service or product offering when
we expand beyond the west coast. If we fail to adequately adjust our business
plans to account for differences in regional preferences, we may not attract
the customers we need and our business would suffer. Accordingly, the success
of our current and planned expansion into new geographic regions will depend
upon a number of factors, including:
. our ability to integrate the operations of new customer fulfillment
centers into our existing operations;
. our ability to address regional differences between our customer
fulfillment centers;
. our ability to coordinate and manage distribution operations in
multiple, geographically distant locations; and
. our ability to establish and maintain adequate management and
information systems and financial controls.
Our failure to successfully address these factors could inhibit our growth.
If we encounter operational difficulties, our business could suffer erosion of
customer trust and loss of income.
Our business relies on complex systems to manage the process from the
receipt of orders to the delivery of goods to our customers. The satisfactory
performance, reliability and availability of our web site and transaction
processing systems are critical to our reputation and our ability to attract
and retain customers and maintain adequate customer service levels.
Our web site has experienced numerous outages since inception. Prior to
December 1, 1999, outage and impact data was not collected systematically;
however, system outages of over three hours occurred at least
8
<PAGE>
three times in the first eleven months of 1999. From December 1, 1999 to
January 22, 2000, there were 13 web site outages that totaled 515 minutes. The
longest of these systems outages was 2 hours and 12 minutes.
In addition to outages, we occasionally experience periods of slow site
response times. We have, from time to time, also experienced operational "bugs"
in our systems and technologies that have resulted in order errors, such as
missing items and delays in deliveries. Operational bugs may arise from one or
more factors including mechanical equipment failures, computer server or system
failures, network outages, software bugs, power failures and human error. We
may not be able to correct every problem in a timely manner. We expect bugs to
continue to occur from time to time and our operations may experience
significant inefficiencies or failures. If we are unable to meet customer
demand or service expectations as a result of operational issues, we may be
unable to develop customer relationships that result in repeat orders, which
would hurt our business.
Our communications hardware is located at a third party hosting provider and
natural disasters and any other unanticipated problems faced by our hosting
provider may reduce our capacity or damage our systems.
Our communications hardware and other computer hardware operations are
located at a web site hosting provider in Seattle, Washington. The hardware for
our warehouse management and inventory system is maintained in our corporate
data center in Kirkland, Washington. Fires, floods, earthquakes, power losses,
telecommunications failures, break-ins and similar events could damage these
systems or cause them to fail completely. In addition, our hosting provider is
responsible for the allocation of our system capacity and any unanticipated
problems with the telecommunications network providers with whom it contracts
or with the systems by which it allocates capacity among its customers could
reduce our system capacity. As of January 1, 2000, we use less than ten percent
of our system capacity and our maximum system use for any five-minute period
has been 30% of our system capacity. We estimate we currently have sufficient
system capacity to process over 4,000 orders per day, and with the addition of
off-the-shelf hardware could process approximately 24,000 orders per day.
Natural disasters and any other unanticipated problems faced by our hosting
provider could adversely impact the customer shopping experience and,
consequently, our business.
We will need substantial additional capital to fund our operations and planned
expansion, and we cannot be sure that additional financing will be available.
We require substantial amounts of working capital to fund our business. In
addition, the opening of new customer fulfillment centers and the continued
development of our order fulfillment and delivery systems require significant
amounts of capital. For example, we anticipate that we will require
approximately $4 to $7 million to equip each new customer fulfillment center
and approximately $5 to $8 million for brand development, marketing and other
promotional activities in each new geographic market. In addition, we will need
substantial additional capital to fund growth beyond the initial phase of our
expansion into eight to ten new markets or if we encounter unexpected costs in
the initial phase of our expansion, such as higher than anticipated real
estate, technology or customer acquisition costs. Since our inception, we have
experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the foreseeable future. In
the past, we have funded our operating losses and capital expenditures through
proceeds from equity offerings, debt financing and equipment leases. We expect
to require substantial additional capital to fund our expansion program and
operating expenses beyond those raised in this offering. Our future capital
needs will be highly dependent on the number and actual cost of additional
customer fulfillment centers we open, the timing of openings and the success of
our facilities once they are launched. We cannot be certain that additional
financing will be available to us on favorable terms when required, or at all.
If we are unable to obtain sufficient additional capital when needed, we could
be forced to alter our business strategy, delay or abandon some of our
expansion plans or sell assets. Any of these events would have a material
adverse effect on our business, financial condition and our ability to reduce
losses or generate profits. In addition, if we raise additional funds through
the issuance of equity, debt or other securities, those securities may have
rights, preferences or privileges senior or equal to those of the rights of our
common stock and our stockholders may experience dilution.
9
<PAGE>
Our limited operating history makes it difficult for us to forecast our future
financial results.
As a result of our limited operating history, it is difficult to accurately
forecast our total revenue, revenue per customer fulfillment center, gross and
operating margins, real estate and labor costs, average order size, number of
orders per day and other financial and operating data. We have a limited amount
of meaningful historical financial data upon which to base planned operating
expenses. Sales and operating results are difficult to forecast because they
generally depend on the growth of our customer base and the volume of the
orders we receive, as well as the mix of products sold. As a result, we may be
unable to make accurate financial forecasts and adjust our spending in a timely
manner to compensate for any unexpected revenue shortfall. This inability to
accurately forecast our results could cause our net losses in a given quarter
to be greater than expected and could cause a decline in the trading price of
our common stock.
Our quarter-to-quarter operating results are expected to be volatile and
difficult to predict.
We expect our quarterly operating results to fluctuate significantly in the
future based on a variety of factors including:
. the timing of our expansion plans as we build out and begin to operate
new customer fulfillment centers in additional geographic markets;
. changes in pricing policies or our product and service offerings;
. our ability to manage our distribution and delivery operations to handle
significant increases in the number of customers and orders or to
overcome system or technology difficulties associated with these
increases; and
. competitive factors.
Due to these factors, we expect our operating results to be volatile and
difficult to predict. As a result, quarter-to-quarter comparisons of our
operating results may not be good indicators of our future performance. In
addition, it is possible that in the future quarterly operating results could
be below the expectations of investors of HomeGrocer.com. In that event, the
price of our common stock could decline substantially.
Our quarter-to-quarter operating results are expected to fluctuate based upon
seasonal purchasing patterns, and are therefore difficult to predict.
Our quarter-to-quarter operating results are expected to fluctuate based
upon seasonal purchasing patterns of our customers and the mix of groceries and
other products sold by us. For instance, we expect a reduction in sales in the
summer months, which is a popular vacation season in most markets, and higher
sales during the weeks preceding Thanksgiving. Because of our short operating
history and limited geographical experience, we may not accurately predict the
seasonal purchasing patterns of our customers and may experience unexpected
difficulties in matching inventory to demand by customers.
Our business will suffer if we fail to manage our growth properly.
We have expanded our operations rapidly since our inception. We continue to
increase the scope of our operations and have increased our headcount
substantially. Our total number of employees grew from approximately 100 on
January 1, 1999 to approximately 1,060 on January 1, 2000. Based on our current
expansion plans, we expect to hire between 4,000 and 5,000 additional employees
in the next year. This growth has placed, and our anticipated growth in future
operations will continue to place, a significant strain on our management
systems and resources. Our ability to successfully offer our service and
implement our business plan in a rapidly evolving market requires an effective
planning and management process. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and
procedures, and will need to continue to expand, train and manage our work
force nationwide. Competition for highly skilled and customer service oriented
employees is intense. We may fail to attract, assimilate or retain qualified
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personnel to fulfill our current or future needs. Our planned rapid growth
places a significant demand on management and financial and operational
resources. In order to grow and achieve financial success, we must:
. retain existing personnel;
. hire, train, manage and retain additional qualified personnel; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
Our failure to do so would harm our business, decrease our revenue and
hinder us from being able to achieve profitability.
If we fail to generate sufficient levels of repeat orders and market
penetration, our revenues could be significantly lower than expected.
In the online retail industry, customer attrition rates, or the rates at
which subscribers cancel a service, are generally high. Although we do not
charge a subscription fee for our service, we do depend upon customers to
continue to order from us after their initial order is placed. We compete to
retain customers once they have used our service. We currently track our repeat
customers and the data we have gathered shows that since January 1, 1999,
approximately 64% of our orders have been from repeat customers. A critical
part of our business strategy depends on hiring, training and retaining
customer friendly delivery persons to interact directly with the customer on a
regular basis and promote customer loyalty. In addition, we must ensure that
our customer service agents who answer telephone and email inquiries offer
prompt attention and helpful information in response to our customers'
concerns. If we fail to provide high quality customer care and experience
significant decreases in repeat customer orders as a percentage of orders
delivered, or if we are unable to establish sufficient customer loyalty needed
for market penetration, our business could be hurt. Retention of customers is
also dependent on operational execution. If orders are incomplete or not
delivered on time, customer retention rates could decline, causing revenue and
profitability to decline as well.
We face intense competition from traditional grocery retailers and anticipate
increased competition from online grocery retailers in our existing and future
markets.
The grocery retailing market is extremely competitive. Local, regional, and
national food chains, independent food stores and markets, as well as online
grocery retailers comprise our principal competition, although we also face
substantial competition from convenience stores, liquor retailers, membership
warehouse clubs, specialty retailers, supercenters and drugstores. Many of our
existing and potential competitors, particularly traditional grocers and
retailers, have existed for a longer period of time, have greater financial
resources and have more established relationships with leading manufacturers,
suppliers and advertisers than we do.
In November 1999, a traditional grocery chain, Albertson's, introduced an
Internet based service in the Seattle area and Webvan, an online grocery
retailer, recently announced it will introduce its online grocery service in
the Seattle area sometime in 2000. We expect our competition will intensify as
more traditional and online grocery retailers offer competitive services, both
in Seattle and other markets.
The number and nature of competitors and the amount of competition we will
experience will vary by market area. We expect to compete with traditional
grocery stores in every market, including Albertson's, Safeway, Quality Food
Centers and Kroger, and other online grocers in most markets, including
companies such as Webvan, Peapod, HomeRuns, ShopLink.com and Streamline.com.
The principal competitive factors that affect our business are product
selection, product quality, customer service, price and convenience. For
traditional grocers, convenience is largely a function of location and hours of
operation. For online grocers, it is primarily determined by ease of use of the
web site and availability of delivery times. If we fail to effectively compete
in any of these areas, we may lose existing and potential customers and face
decreased demand for our products and services, which would hurt our business.
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If our efforts to build strong brand identity and customer loyalty are not
successful, our business will suffer.
We believe that customers may direct future grocery purchases to those
online and traditional grocers for whose brands they feel loyalty and personal
affinity. If we do not increase spending substantially to create and maintain
brand loyalty, we may not attract and retain consumers and respond to
competitive pressures. We believe the cost of our advertising campaigns could
increase substantially in the future. The costs required to successfully
establish our brand may exceed the benefits associated with creating our brand
identity and loyalty. If we fail to establish and maintain brand identity and
brand loyalty, we may not attract the customers we need in order to be
profitable.
Customer loyalty will also depend on our success in consistently providing a
high quality shopping experience for purchasing groceries and other products.
If consumers do not perceive our service offerings to be of high quality, or if
we introduce new services that are not favorably received by consumers, the
value of the HomeGrocer.com brand could be harmed. Any loss of value of our
brand could decrease the attractiveness of HomeGrocer.com to consumers, which
could harm our reputation, reduce our sales and cause us to lose customers.
We do not have long term contracts with our suppliers and could face
disruptions in our supply of products.
We purchase products from a network of suppliers, wholesalers, brokers and
distributors. We do not have long term or exclusive contracts with these
suppliers. The loss of any of our suppliers could cause disruptions in our
supply of products and harm our business. We purchase a number of top brands
and high volume items directly from manufacturers and may increase our use of
direct suppliers as our product volumes increase with additional customer
fulfillment centers. We also utilize premium specialty suppliers and local
sources for gourmet foods, traditional and organic produce, bakery items, fish
and meats and floral products. From time to time, we may experience difficulty
in obtaining sufficient product allocations from a key vendor. In addition, our
key vendors may establish their own online retailing efforts, which may impact
our ability to obtain sufficient product allocations from these vendors. Many
of our key vendors also supply products to the retail grocery industry and our
online competitors. If we are unable to obtain sufficient quantities of
products in a timely fashion from our key vendors to meet customer demand, our
business would suffer.
At each of our customer fulfillment centers, a significant percentage of our
current product offering is sourced through a single supplier and the loss of
that supplier could cause disruptions in our supply and harm our business.
We are dependent on single suppliers for a significant percentage of our
products. Approximately 47% of our current product offering in the Seattle and
Portland markets is sourced through a single wholesaler, SuperValu. For our
three new customer fulfillment centers in Orange County, Certified Grocers is
our principal supplier and supplies approximately 50% of our current product
offering in that market. SuperValu does not operate in Southern California and
Certified Grocers does not operate in Seattle or Portland. We have no
contractual relationship with either SuperValu or Certified Grocers that
requires either of them to continue to supply our needs in the future. The loss
of either of these two suppliers could cause disruptions in our supply and harm
our business.
The loss of the services of one or more of our key personnel would seriously
harm our business.
The loss of the services of one or more of our key personnel, including Mary
Alice Taylor, our chairman and chief executive officer, and J. Terrence
Drayton, our president, could seriously harm our business. We depend on the
continued services and performance of our senior management and other key
personnel. In addition, Mr. Drayton and Ken Deering, our vice president of
Storefront, are Canadian citizens who hold visas to work in the United States.
If the Immigration and Naturalization Service were to deny a renewal of either
of these visas and we were to lose the services of either of these officers,
our business could suffer.
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We may not be able to hire and retain qualified employees necessary to support
our business, which would threaten our future growth.
Our future success depends upon attracting and retaining the continued
service of our executive officers, delivery persons, and other key software
development, merchandising, marketing and support personnel. Our relationships
with all of our employees are at will. Additionally, there are low levels of
unemployment in the Seattle, Portland, and Orange County/Los Angeles areas, as
well as in many of the regions in which we plan to operate. These low levels of
unemployment have led to upward pressure on wage rates, which can make it more
difficult and costly for us to attract and retain qualified employees. The
failure to attract and retain qualified employees, could adversely affect our
business.
Several key members of our management team have only recently joined us and if
they are not successfully integrated into our business or fail to work together
as a management team, our business will suffer.
Several key members of our management team have joined us since September 1,
1999, including Mary Alice Taylor, our chairman and chief executive officer,
Daniel R. Lee, our senior vice president and chief financial officer, Rex L.
Carter, our senior vice president of systems development & technology, Corwin
J. Karaffa, our senior vice president of operations, David A. Pace, our senior
vice president of people capability, and Kristin H. Stred, our senior vice
president, general counsel and secretary. If we do not effectively integrate
these executives and key personnel into our business, or if they do not work
together with existing personnel as a management team to enable us to implement
our business strategy, our business will suffer.
We may not be able to obtain required licenses or permits for the sale of
alcohol in a cost-effective manner or at all, which would hurt our sales and
profitability.
For the fiscal year ended January 1, 2000, sales of alcohol accounted for
approximately 4% of our sales. We will be required to obtain state, and in some
cases county and municipal, licenses and permits for the sale and delivery of
alcohol in new markets. Some jurisdictions do not allow companies such as ours
to sell alcohol. We cannot assure you that we will be able to obtain any or all
required permits or licenses in a timely manner, or at all. We may be forced to
incur substantial costs and experience significant delays in obtaining these
permits or licenses. In addition, the U.S. Congress is considering enacting
legislation, which would restrict the interstate sale of alcoholic beverages
over the Internet. Changes to existing laws or our inability to obtain required
permits or licenses could prevent us from selling alcohol in one or more of our
geographic markets or in a portion of those markets. In those locations where
we cannot obtain alcohol permits or licenses, we will be unable to sell these
items and will lose an opportunity to increase revenue.
We are required to verify the age of purchasers of our alcohol and tobacco
products and the failure to do so may have a negative impact on our reputation
and make us vulnerable to liability claims.
We are required to verify the age of purchasers of our alcohol and tobacco
products. If our delivery personnel fail to request the proper identification
or if false identification cards are presented by the purchaser, we could face
substantial penalties and legal liability for sales of alcohol and tobacco
products to underage persons. Any inquiry or investigation from a regulatory
authority could have a negative impact on our reputation and any liability
claims could require us to spend significant time and money in litigation.
We may incur significant costs or experience product availability delays in
complying with regulations applicable to the sale of food products, which may
hurt our business.
As of the date of this prospectus, we are not regulated by the U.S.
Department of Agriculture, or USDA. Whether the handling of food items in our
customer fulfillment centers, such as meat and fish, will subject us to USDA
regulation in the future will depend on several factors, including whether we
sell food products on a wholesale basis or whether we obtain food products from
non-USDA inspected facilities. In the future the USDA may require costly
changes to our food handling operations. We are also required to comply with
local health regulations concerning the preparation and packaging of any
prepared food items, such as deli salads that
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we prepare on site. Applicable federal, state or local regulations may cause us
to incur substantial compliance costs or delay the availability of items at one
or more of our customer fulfillment centers. In addition, any inquiry or
investigation from a food regulatory authority could have a negative impact on
our reputation. The occurrence of any of these events could delay or impair our
expansion plans and could cause us to lose customers.
We depend on only five customer fulfillment centers to fulfill customer orders;
the loss or interruption of operations of any of these centers could
significantly harm our business.
We currently operate five customer fulfillment centers. Of the five, one
customer fulfillment center is located in the Seattle, Washington area, one
customer fulfillment center is located in the Portland, Oregon area, and three
customer fulfillment centers are located in the Orange County/Los Angeles,
California area. Our business could be hurt if any external factors affect our
current customer fulfillment centers in any of these areas. Such factors may
include:
. prolonged power or equipment failures;
. traffic congestion;
. prolonged gasoline shortages;
. disruptions in the transportation infrastructure including bridges,
tunnels and roads;
. refrigeration failures; or
. fires, floods, earthquakes, adverse weather conditions or other
disasters.
Since each of our current customer fulfillment centers is located in an
earthquake-prone area, we are particularly susceptible to the risk of damage
to, or total destruction of, these customer fulfillment centers and the
surrounding transportation infrastructure. We may not be adequately insured to
cover the total amount of any losses caused by any of the above events. In
addition, we are not insured against any business interruptions caused by
earthquakes or to major transportation infrastructure disruptions or other
events that do not occur on our premises.
We could face liability based on the actions of our drivers.
We use our own professional drivers to deliver products from our customer
fulfillment centers to our customers as well as to transport non-perishable
goods between customer fulfillment center. We may face potential liability
related to the actions of our delivery drivers while on duty. For example, one
of our drivers was involved in a motor vehicle accident that recently resulted
in a lawsuit being filed against us for compensatory damages. This proceeding
is currently pending. If negligent, illegal or unprofessional conduct of our
drivers were to occur, it could harm our reputation and our business.
Our reputation and business will be harmed if our online security measures
fail.
Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. We rely on security and authentication
technology to perform real-time credit card authorizations. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information. Furthermore,
our computer servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. We cannot assure you that we can
prevent all security breaches, and any failure to do so could hurt our
reputation and business.
We may need to make costly changes in how we conduct our business if government
regulation of the Internet and e-commerce increases.
The adoption or modification of laws or regulations relating to the
Internet, e-commerce and large-scale retail store operations could adversely
affect the manner in which we currently conduct our business. In
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addition, the growth and development of the market for e-commerce may lead to
more stringent consumer protection laws, which may impose additional burdens on
us. Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The U.S. government recently enacted
Internet laws regarding privacy, copyrights, taxation and the transmission of
sexually explicit material. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. If we
are required to comply with new regulations or legislation or new
interpretations of existing regulations or legislation, this compliance could
cause us to incur additional expenses or alter our business model.
We may face product claims that create liability and adverse publicity.
Grocery and other related products can contain contaminants due to inherent
defects in the products or improper storage or handling. If any of the products
that we sell causes harm to any of our customers, we could be vulnerable to
product liability lawsuits. If we are found liable under a product liability
claim, or even if we successfully defend ourselves against this type of a
claim, we could be forced to spend a substantial amount of money in litigation
expenses, our reputation could suffer and customers may substantially reduce
their orders or stop ordering from us.
If the protection of our patents, trademarks and proprietary rights is
inadequate, our business may be seriously harmed.
We regard patents, copyrights, service marks, trademarks, trade secrets and
similar intellectual property as important to our success. We rely on patent,
trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to
protect our proprietary rights; however, the steps we take to protect our
proprietary rights may be inadequate and legal means afford only limited
protection. For example, our confidentiality and license agreements may be
unenforceable in some jurisdictions and, as a result, offer no protection of
our proprietary rights. In addition, traditional legal protections may not be
applicable in the Internet context. Because our business and technology have
developed rapidly since our incorporation, the ownership of proprietary rights
in our technology may be subject to uncertainty. Our failure to protect our
proprietary rights could materially harm our business and competitive position.
We currently have no patents. On January 10, 2000, we filed three
provisional patent applications with the U.S. Patent and Trademark Office. From
time to time, we may decide to file additional patent applications relating to
aspects of our proprietary technology. Other parties may independently develop
similar or competing technology or design around any patents that may be issued
to us. We cannot assure you that any of our pending provisional patent
applications will be approved, that any issued patents will protect our
intellectual property or that any issued patents will not be challenged by
third parties.
Intellectual property claims against us can be costly and could result in the
loss of significant rights.
Intellectual property rights are becoming increasingly important to us and
other e-commerce retailers. Many companies are devoting significant resources
to developing patents that could affect many aspects of our business. Other
parties may assert infringement or unfair competition claims against us that
could relate to any aspect of our technologies, business processes or other
intellectual property. We cannot predict whether third parties will assert
claims of infringement against us, the subject matter of any of these claims,
or whether these assertions or prosecutions will harm our business. If we are
forced to defend ourselves against any of these claims, whether they are with
or without merit or are determined in our favor, then we may face costly
litigation, diversion of technical and management attention, an inability to
use our current web site technology or product shipment delays. As a result of
a dispute, we may have to develop non-infringing technology or enter into
royalty or licensing agreements. These royalty or licensing agreements, if
required, may be
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unavailable on terms acceptable to us, or at all. If there is a successful
claim of infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis,
our business and competitive position may be hurt.
We may not be able to protect our domain names against all infringers, which
could decrease the value of our brand name and proprietary rights.
We currently own the Internet domain name "homegrocer.com," as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we could be unable to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our brand name, trademarks and other proprietary rights.
We may be liable for the Internet content that we publish.
As a publisher of online content, we face potential liability based on the
nature and content of materials that we publish or distribute. If we face
liability, then our reputation and our business may suffer.
After this offering, our officers and directors and some existing stockholders
will control approximately 65% of our outstanding common stock and could
prevent or delay beneficial corporate actions.
After this offering, our executive officers and directors and their
immediate family members and affiliated venture capital funds beneficially will
own or control approximately 65% of our outstanding common stock. Individually,
after this offering, Amazon.com will beneficially own approximately 22% of our
outstanding common stock. As a result, these stockholders are able to exercise
significant control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could delay or prevent another entity from acquiring or merging with us.
See "Principal Stockholders."
Provisions of our charter documents and state law could discourage our
acquisition by a third party.
Specific provisions of our articles of incorporation and bylaws, and
Delaware and Washington law could make it more difficult for a third party to
acquire HomeGrocer.com, even if doing so would be beneficial to our
shareholders.
Our proposed Washington articles of incorporation and bylaws provide for the
establishment of a classified board of directors, the elimination of the
ability of shareholders to call special meetings and of cumulative voting for
directors, and procedures for advance notification of shareholder proposals.
The presence of a classified board and the elimination of cumulative voting may
make it more difficult for an acquirer to replace our board of directors.
Further, the elimination of cumulative voting substantially reduces the ability
of minority shareholders to obtain representation on the board of directors.
Upon completion of this offering, our board of directors will have the
authority to issue up to 10,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including the
voting rights, of those shares without any further vote or action by our
shareholders. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change of control of HomeGrocer.com and may
adversely affect the market price of our common stock.
Washington law imposes restrictions on some transactions between a
corporation and significant shareholders. Chapter 23B.19 of the Washington
Business Corporation Act prohibits a "target corporation," with some
exceptions, from engaging in particular significant business transactions with
an "acquiring person," which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target
cooperation, for a period of five years after the acquisition, unless the
transaction or
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acquisition of shares is approved by a majority of the members of the target
corporation's board of directors prior to the acquisition. Prohibited
transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive any disproportionate benefit as
a shareholder.
A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of
HomeGrocer.com.
Prior to our anticipated reincorporation from the state of Delaware into the
state of Washington, we will be restricted by the anti-takeover provisions of
the Delaware General Corporation Law, which regulates corporate acquisitions.
Delaware law prevents us from engaging in a business combination with any
interested stockholder. For purposes of Delaware law, a business combination
includes a merger or consolidation or the sale of more than 10% of our assets.
In general, Delaware law defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of a
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person. Under Delaware law, a Delaware corporation
may opt out of the anti-takeover provisions. We do not intend to opt out of
these anti-takeover provisions of Delaware law.
The foregoing provisions of our charter documents and state law could have
the effect of making it more difficult or more expensive for a third party to
acquire, or could discourage a third party from attempting to acquire, control
of HomeGrocer.com. These provisions may therefore have the effect of limiting
the price that investors might be willing to pay in the future for our common
stock. For a more complete discussion of these provisions, see "Description of
Capital Stock."
Future sales of our common stock may cause our stock price to decline.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decline. Based on shares outstanding as of January 1, 2000, upon
completion of this offering we will have outstanding 124,812,274 shares of
common stock, assuming no exercise of the underwriters' over-allotment option.
Of these shares, almost all of the 22,000,000 shares of our common stock sold
in this offering will be freely tradable, without restriction, in the public
market.
We have agreed not to sell any shares of common stock for period of 180 days
after this offering without the consent of Morgan Stanley & Co. Incorporated.
We have no agreement with Morgan Stanley for a waiver of this restriction.
However, Morgan Stanley may, in its discretion, release us from the agreement.
In some cases underwriters have agreed to waive lock-up restrictions when a
company's stock has performed well and market conditions are favorable, in
order to allow a follow-on offering of common stock. Any decision by Morgan
Stanley to waive the lock-up restrictions would depend on a number of factors
including market conditions, the performance of our common stock in the market
and our financial condition at that time. If Morgan Stanley were to waive the
lock-up restrictions prior to the expiration of the 180 day period, and we were
to sell additional shares of common stock to the public, the market price of
our common stock could decline.
In addition, approximately 8,635,590 shares under outstanding options and
warrants and approximately 14,287,122 shares available for grant under our
existing stock option plans as of January 1, 2000 will become eligible for sale
in the public market once permitted by provisions of various vesting
agreements, lock-up agreements and Rules 144 and 701 under the Securities Act,
as applicable. See "Shares Eligible for Future Sale."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that may be affected by
a number of risks and uncertainties, many of which are beyond our control. Some
of these forward-looking statements are attributable to third parties and
relate to their statements regarding the growth of the e-commerce market and
the number of Internet users. All statements, other than statements of
historical facts included in this prospectus, regarding our strategy, future
operations, financial position, estimated revenues or losses, projected costs,
prospects, plans and objectives of management are forward-looking statements.
When used in this prospectus, the words "will," "believe," "anticipate,"
"intend," "estimate," "expect," "project" and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. All forward-looking statements
speak only as of the date of this prospectus. Although we believe that our
plans, intentions and expectations reflected in or suggested by the forward-
looking statements we make in this prospectus are reasonable, we can give no
assurance that these plans, intentions or expectations will be achieved. We
disclose some of the important factors that could cause our actual results to
differ materially from our expectations under "Risk Factors" and elsewhere in
this prospectus. These cautionary statements qualify all forward-looking
statements attributable to us or persons acting on our behalf.
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock in this
offering are estimated to be $223.7 million after deducting the underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $257.4 million.
The principal purpose of this offering is to fund the first phase of our
expansion into eight to ten new markets, including approximately $4 to $7
million to equip each new customer fulfillment center and approximately $5 to
$8 million for promotional expenses in each market. The secondary purposes of
this offering are to increase our working capital, fund operating losses,
create a public market for our common stock, facilitate our future access to
the public capital markets and increase our visibility in the marketplace. We
expect to use the net proceeds of the offering for expansion and general
corporate purposes. Pending such uses, we intend to invest the net proceeds
from the offering in interest-bearing, investment grade securities. We also
intend to use a portion of the net proceeds to pay our current obligations to
America Online pursuant to our agreement, which requires us to pay AOL a total
of approximately $60 million over the next four and half years. In fiscal year
2000, we are obligated to pay AOL approximately $18 million.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and reinvest any future earnings
in the growth of our business and do not anticipate paying any cash dividends
in the foreseeable future.
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CAPITALIZATION
The actual column in the following table sets forth HomeGrocer.com's
capitalization as of January 1, 2000. The pro forma column reflects the
conversion of all outstanding shares of preferred stock into 73,206,738 shares
of common stock.
The pro forma as adjusted column in the following table gives effect to:
. The anticipated filing of an amendment to our articles of incorporation
to provide for authorized capital stock of 1,000,000,000 shares of
common stock and 10,000,000 shares of undesignated preferred stock;
. The conversion of all outstanding shares of preferred stock into shares
of common stock upon the closing of this offering; and
. The receipt of the net proceeds from the sale by HomeGrocer.com of the
shares of common stock at the assumed initial public offering price of
$11.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
January 1, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share and
per share amounts)
<S> <C> <C> <C>
Cash, cash equivalents and marketable
securities.................................... $ 77,568 $ 77,568 $301,320
======== ======== ========
Current portion of long-term obligations....... $ 4,061 $ 4,061 $ 4,061
======== ======== ========
Long-term obligations, less current portion.... 17,790 17,790 17,790
-------- -------- --------
Shareholders' equity:
Convertible preferred stock, $0.001 par
value; authorized: 78,357,142 shares actual
and pro forma, 10,000,000 shares pro forma
as adjusted; issued and outstanding:
73,206,738 shares actual, none pro forma and
pro forma as adjusted....................... 73 -- --
Common stock, $0.001 par value; authorized:
130,000,000 shares actual and pro forma,
1,000,000,000 shares pro forma as adjusted;
issued and outstanding: 29,605,536 shares
actual, 102,812,274 shares pro forma and
124,812,274 pro forma as adjusted........... 30 103 125
Additional paid-in capital................... 250,151 250,151 473,789
Notes receivable from officers for common
stock....................................... (3,231) (3,231) (3,231)
Deferred stock-based compensation............ (41,619) (41,619) (41,619)
Accumulated deficit.......................... (93,257) (93,257) (93,257)
-------- -------- --------
Total shareholders' equity................. 112,147 112,147 335,807
-------- -------- --------
Total capitalization..................... $129,937 $129,937 $353,597
======== ======== ========
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of January 1, 2000 and excludes:
. options outstanding to purchase a total of 5,886,342 shares of common
stock at a weighted average exercise price of $1.69 per share and an
additional 14,287,122 shares of common stock available for grant under
our existing stock option plans; and
. warrants outstanding to purchase a total of 2,749,248 shares of common
stock with a weighted average exercise price of $1.00 per share (of
which warrants to purchase 2,015,666 shares were subsequently
exercised).
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of January 1, 2000 was $112.1
million or approximately $1.09 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding, after giving effect to the conversion of all shares of outstanding
preferred stock into 73,206,738 shares of common stock upon the closing of this
offering. Pro forma net tangible book value per share excludes options and
warrants outstanding as of January 1, 2000. Dilution in pro forma net tangible
book value per share represents the difference between the amount per share
paid by purchasers of shares of common stock in the offering made hereby and
the net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the shares of
common stock offered by us at the assumed initial public offering price of
$11.00 per share and after deducting the underwriting discount and estimated
offering expenses, the net tangible book value of HomeGrocer.com at January 1,
2000 would have been $335.8 million or approximately $2.69 per share. This
represents an immediate increase in net tangible book value of $1.60 per share
to existing stockholders as of January 1, 2000 and an immediate dilution of
$8.31 per share to new investors of 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 before the offering........... $1.09
Increase attributable to new investors.......................... 1.60
-----
Pro forma net tangible book value after the offering.............. 2.69
------
Dilution per share to new investors............................... $ 8.31
======
</TABLE>
The following table summarizes, as of January 1, 2000, the differences
between the existing stockholders and new investors with respect to the number
of shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 102,812,274 82.4% $186,196,000 43.5% $ 1.81
New investors........... 22,000,000 17.6 242,000,000 56.5 11.00
----------- ----- ------------ -----
Totals................ 124,812,274 100.0% $428,196,000 100.0%
=========== ===== ============ =====
</TABLE>
The number of shares held by new public investors will be 22,000,000 or
approximately 17.6% (25,300,000 shares, or approximately 19.7% if the
underwriters' over-allotment option is exercised in full) of the total number
of shares of common stock outstanding after this offering. See "Principal
Stockholders" for a more detailed description of our stockholders prior to this
offering.
The tables above assume no exercise of stock options and warrants
outstanding at January 1, 2000. As of January 1, 2000, there were:
. options outstanding to purchase a total of 5,886,342 shares of common
stock at a weighted average exercise price of $1.69 per share and an
additional 14,287,122 shares of common stock available for grant under
our existing stock option plans.
. warrants outstanding to purchase a total of 2,749,248 shares of common
stock with a weighted average exercise price of $1.00 per share (of
which warrants to purchase 2,015,666 shares were subsequently
exercised); and
To the extent outstanding options and warrants are exercised, there will be
further dilution to new investors.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements of HomeGrocer.com and the related
notes included elsewhere in this prospectus. The selected statement of
operations data set forth below for the period from January 15, 1997
(inception) to January 3, 1998 and for the fiscal years ended January 2, 1999,
and January 1, 2000, and the selected balance sheet data as of January 3, 1998,
January 2, 1999 and January 1, 2000 have been derived from the audited
financial statements of HomeGrocer.com included elsewhere in this prospectus,
which have been audited by Ernst & Young LLP, Independent Auditors. The
selected balance sheet data as of January 3, 1998 has been derived from the
audited financial statements of HomeGrocer.com not included in this prospectus,
which has been audited by Ernst & Young LLP, Independent Auditors. The
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
51 Weeks From
January 15, 1997 52 Weeks Ended
(Inception) to January 2, 52 Weeks Ended
January 3, 1998 1999 January 1, 2000
---------------- -------------- ---------------
(in thousands, except share and per share
amounts)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales...................... $ -- $ 1,094 $ 21,648
Cost of sales.................. -- 1,018 19,515
----------- ----------- -----------
Gross profit................. -- 76 2,133
Selling, general, and
administrative expenses,
excluding stock-based
compensation.................. 1,064 7,455 59,208
Stock-based compensation
expense....................... 230 412 28,158
----------- ----------- -----------
Loss from operations......... (1,294) (7,791) (85,233)
Other income/(expense), net.... (61) (118) 1,240
----------- ----------- -----------
Net loss..................... $ (1,355) $ (7,909) $ (83,993)
=========== =========== ===========
Basic and diluted net loss per
share......................... $ (0.14) $ (0.72) $ (5.56)
=========== =========== ===========
Pro forma basic and diluted net
loss per share (1)............ $ (1.28)
===========
Weighted average shares
outstanding used to compute
basic and diluted net loss per
share......................... 10,034,721 11,044,174 15,102,698
=========== =========== ===========
Weighted average shares
outstanding used to compute
pro forma basic and diluted
net loss per share (1)........ 65,382,807
===========
</TABLE>
<TABLE>
<CAPTION>
As of
------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
--------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and
marketable securities....... $ 313 $1,084 $ 77,568
Working capital (deficit).... (1,296) 373 66,593
Total assets................. 997 3,558 146,929
Long-term obligations, less
current portion............. -- 880 17,790
Total shareholders' equity
(deficit).................... (643) 1,387 112,147
</TABLE>
- --------
(1) See note 1 of notes to financial statements for an explanation of the
determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This prospectus contains statements of a forward-looking nature relating to
future events or the future financial performance of HomeGrocer.com.
Prospective investors are cautioned that such statements involve risks and
uncertainties, and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically consider
the various factors identified in this prospectus, including the matters set
forth under the caption "Risk Factors," which could cause actual results to
differ materially from those indicated by such forward-looking statements.
Overview
HomeGrocer.com is a retailer of grocery and other consumer products on the
Internet. We operate our own state-of-the-art distribution system providing
next-day home delivery of a wide range of products, including high quality food
items, at prices competitive with local supermarket prices. Our goals are to
expand nationally and to be our customers' preferred regular provider of
household consumer products. Our technology and the design of our customer
fulfillment centers, permit us to rapidly expand our service into new markets.
We believe that our core grocery business provides us with a strong platform to
expand into other product and service areas.
We commercially launched our Storefront at www.homegrocer.com and began
delivering groceries to the Seattle market from our Bellevue, Washington
customer fulfillment center in June 1998. We have rapidly expanded since our
initial launch of service and currently serve customers in two additional
markets: Portland, Oregon since May 1999 and Orange County/Los Angeles,
California since September 1999. We relocated our Bellevue customer fulfillment
center to a significantly larger and more automated facility in Renton,
Washington on October 31, 1999, and opened second and third customer
fulfillment centers in the Orange County/Los Angeles, California market in
November 1999 and January 2000. We expect to begin service in eight to ten
additional metropolitan areas, including Dallas, Texas; Southern Connecticut
and nearby suburbs of New York City; San Diego, California; Atlanta, Georgia;
and the Bay Area, California in the next 12 months. We also expect to open
additional customer fulfillment centers in the Orange County/Los Angeles area
during 2000 and are currently negotiating for sites in the Washington, D.C.
metropolitan area.
Since our inception, we have devoted significant resources to the following
activities:
. developing our business plan;
. designing, implementing and enhancing our Storefront;
. recruiting and training a team of experienced employees;
. designing and integrating business with technology;
. designing, equipping and operating our customer fulfillment centers;
. establishing relationships with our vendors;
. promoting the HomeGrocer.com brand; and
. raising capital.
We have incurred net losses of $93.3 million from inception to January 1,
2000. We believe that we will continue to incur net losses for the foreseeable
future and that the amount of these losses will increase significantly from
current levels. Many of our first-time customers cite word-of-mouth and the
visibility of our distinctive trucks in their neighborhoods as the foremost
factors attracting them to our Storefront. Hence, sales in new markets increase
gradually as word-of-mouth spreads and more people see our trucks.
We have operated in the Seattle market for 20 months, and while revenues
have grown steadily over this period, our Seattle operations are not yet cash
flow positive. We believe that our operations in subsequent
22
<PAGE>
markets will achieve positive operating cash flow faster than our Seattle
operations, in part because of the knowledge obtained in the Seattle market. We
also anticipate that increased customer acceptance of the Internet and the
national growth in online grocery shopping will enable our revenues to grow at
a more rapid pace in new markets. Many of the markets where we intend to begin
operations in the next few years also have larger populations than the Seattle
metropolitan area.
As we expand our operations into new markets over the next several years,
our business will consist of a mix of mature and new customer fulfillment
centers. Our growth plans over the next several years are aggressive and will
likely result in substantially greater losses from a large number of new
facilities than the earnings anticipated from a smaller number of mature
facilities. As such, we anticipate reporting substantial net losses over the
next few years, with the magnitude of such losses being related to the speed,
scope and success of our expansion plans.
We estimate that our cash on hand and the estimated proceeds of this
offering are sufficient to establish more than ten to 12 new customer
fulfillment centers in new and existing markets. This takes into consideration
the costs of leasehold improvements in each customer fulfillment center, the
anticipated negative cash flows from each customer fulfillment center in its
initial several quarters of operation and corporate overhead. We anticipate
opening numerous additional customer fulfillment centers in each of the next
several years. These expansion plans will require significantly more capital
than the proceeds of this offering. If capital is not available at some future
date at a reasonable cost, we may decide to reduce the number of new customer
fulfillment centers that are developed by us in future years. We believe that a
reduction in the speed or scope of our expansion could result in our achieving
profitability at an earlier date than would otherwise be possible. However, the
level of such profitability might ultimately be less than what might be
achieved if capital is available and we are able to execute our entire
expansion strategy.
We have a limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of the risks,
expenses and difficulties encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets like e-
commerce. See "Risk Factors" for a more complete description of the many risks
we face.
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 and operating expenses as a
percentage of net sales, are not necessarily meaningful and should not be
relied upon as an indication of future performance. We report on a fiscal year
basis that ends on the Saturday nearest December 31. Our financial results are
summarized below.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales......................................... $ -- $ 1,094 $ 21,648
Cost of sales..................................... -- 1,018 19,515
------- ------- --------
Gross profit.................................... -- 76 2,133
Selling, general, and administrative expenses,
excluding stock-based compensation............... 1,064 7,455 59,208
Stock-based compensation expense.................. 230 412 28,158
------- ------- --------
Loss from operations............................ (1,294) (7,791) (85,233)
Interest expense.................................. (61) (172) (384)
Interest income................................... -- 54 2,232
Other expense..................................... -- -- (608)
------- ------- --------
Net loss........................................ $(1,355) $(7,909) $(83,993)
======= ======= ========
</TABLE>
23
<PAGE>
Fiscal 1998 vs. Fiscal 1999
Net Sales. Our sales, net of returns and promotional discounts, increased
from $1.1 million in fiscal 1998 to $21.6 million in fiscal 1999. This increase
in net sales resulted from the increase in the number of markets served, a full
period of service in the Seattle market, an increase in the average number of
orders per day and an increase in the average size in fiscal 1998 orders. The
average order size in the Seattle market was $100 in fiscal 1999, compared to
$93 for deliveries in fiscal 1998 since we launched our storefront in June
1998. The average number of orders delivered per day in the Seattle market was
241, 365, 426 and 625 in the first, second, third and fourth quarters of 1999,
respectively, compared to 36 and 108 in the third and fourth quarters of 1998.
Gross Profit. Our cost of sales consists of the cost of merchandise sold to
customers, including inbound freight costs and free products. Gross profit
increased from $76,000 in the 52 weeks ended January 2, 1999 to $2.1 million in
the same period of the current year. The increase in gross profit was primarily
due to increased sales volumes. As a percentage of net sales, gross profit
increased from 6.9% in fiscal 1998 to 9.9% in fiscal 1999. We currently
anticipate the gross profit percentage to be approximately 15% in the first
year of operation for each customer fulfillment center. The total gross profit
achieved each year will be dependent on the mix of new and mature centers.
During the thirty-nine weeks ended October 2, 1999, our gross profit
percentage was 18.1%. In the fourth quarter of 1999, temporary factors related
primarily to the opening of three new fulfillment centers in the September
through December timeframe resulted in a fourth quarter gross profit percentage
of 1.5%. Our sales in the fourth quarter exceeded our combined sales of the
prior three quarters, so the low gross profit percentage in the quarter had a
disproportionate impact on the gross profit percentage for the year.
Selling, General and Administrative. Our selling, general and administrative
expenses include costs related to fulfillment and occupancy, delivery of
products, customer service, advertising and promotional expenditures,
information technology and administration, and corporate overhead. Selling,
general and administrative expenses increased from $7.5 million in fiscal 1998
to $59.2 million in fiscal 1999. This increase was primarily due to increased
payroll and other costs associated with operating four customer fulfillment
centers during fiscal 1999 as compared to one customer fulfillment center that
operated during only part of the prior year period. Payroll and other costs
associated with operating our customer fulfillment centers, including delivery
of products and customer service increased from approximately $1.4 million in
fiscal 1998 to approximately $22.2 million in fiscal 1999. Advertising and
promotional expenses increased from $1.0 million in fiscal 1998 to $7.7 million
in fiscal 1999. Corporate overhead, including information technology and
administration, increased from approximately $5.1 million in fiscal 1998 to
approximately $29.3 million in fiscal 1999. Selling, general and administrative
expenses are expected to continue to increase in absolute dollars as we
continue to execute our expansion plans, aggressively market the HomeGrocer.com
brand and continue enhancing and expanding our information systems.
Stock-Based Compensation Expense. Stock-based compensation expense consists
primarily of the amortization of deferred stock compensation resulting from the
grant of stock options or sale of restricted stock at exercise or sale prices
subsequently deemed to be less than the fair value of the common stock on the
grant or sale date. We recorded total deferred stock-based compensation of
$67.7 million for fiscal 1999 in connection with stock options granted and
restricted stock issued during the period. This cost is being amortized to
expense over the vesting periods of the applicable agreements, resulting in
amortization of deferred stock-based compensation totaling $26.1 million for
fiscal 1999. Additionally, $2.0 million of stock-based compensation expense was
recorded in connection with stock options granted to outside consultants. The
$41.6 million of deferred stock-based compensation for stock options and
restricted stock issued through January 1, 2000 is expected to be amortized in
the amounts of $23.9 million for fiscal year 2000, $11.6 million for fiscal
year 2001, $5.1 million for fiscal year 2002 and $1.0 for fiscal year 2003.
Such amortization amounts assume that all vesting periods are completed by all
employees; to the extent that unvested options are
24
<PAGE>
forfeited by an employee, previously recorded amortization related to the
unvested options will be credited to stock-based compensation expense.
Interest Income. Interest income of $2.2 million in fiscal 1999 resulted
from the investment of cash, cash equivalents and marketable securities. Such
funds were provided primarily from our sale of equity.
Interest Expense. Interest expense increased from $172,000 in fiscal 1998 to
$384,000 in fiscal 1999 as a result of borrowing arrangements we entered into
primarily to finance purchases of fixed assets and fund operations and
expansion.
Other Expense. Other expense of $608,000 in fiscal 1999 resulted primarily
from the write-off of certain machinery and equipment due to the relocation of
our Bellevue, Washington customer fulfillment center to Renton, Washington.
Income Taxes. There was no provision or benefit for income taxes for any
period since inception due to our operating losses. As of January 1, 2000, we
had approximately $66.0 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2017. In 1999, due to the
issuance and sale of Series C preferred stock, we incurred an ownership change
pursuant to applicable regulations under the Internal Revenue Code of 1986, as
amended. Therefore, our use of $11.5 million of losses incurred through the
date of these ownership changes will be limited to approximately $1.0 million
per year during the carryforward period. Our anticipated initial public
offering is not expected to cause an additional ownership change. We have
provided a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, because we believe there is
substantial uncertainty as to our ability to use such tax loss carryforwards.
Fiscal 1997 vs. Fiscal 1998
Fiscal 1997 was a 51-week year that commenced at inception on January 15,
1997 and ended on January 3, 1998 and fiscal 1998 was a 52-week year that ended
on January 2, 1999.
Net Sales. We commercially launched our storefront and began delivering to
customers in the Seattle market in June 1998.
Gross Profit. The fiscal 1998 gross profit is reflective of low sales volume
and competitive pricing, as well as various types of promotional discounts and
incentives offered to increase HomeGrocer.com brand awareness and loyalty.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.1 million in fiscal 1997 to $7.5 million in fiscal
1998 primarily as a result of costs associated with launching our storefront
and commencing delivery operations in June 1998. In fiscal 1998, we increased
headcount in all functional areas, increased advertising and promotional
expenditures and began leasing our first customer fulfillment center, delivery
vehicles and corporate headquarters. Payroll and other costs associated with
operating our first customer fulfillment center increased from $62,000 in
fiscal 1997 to $1.4 million in fiscal 1998. Advertising and promotional
expenses increased from $82,000 in fiscal 1997 to $1.0 million in fiscal 1998.
Corporate overhead, including information technology and administration,
increased from approximately $920,000 in fiscal 1997 to $5.1 million in fiscal
1998.
Stock-Based Compensation Expense. Stock-based compensation expense for
fiscal 1997 and fiscal 1998 related to stock options granted to outside
consultants in exchange for services rendered.
Interest Income. Interest income increased as our average cash and cash
equivalents balance increased. Funds for investment were provided primarily
from the sale of equity.
Interest Expense. Interest expense increased as a result of borrowing
arrangements we entered into primarily to finance purchases of fixed assets and
fund operating activities.
25
<PAGE>
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through sales of
preferred stock with net cash proceeds of $168.4 million through January 1,
2000.
Net cash used in operating activities was $7.5 million and $45.7 million for
fiscal 1998 and fiscal 1999, respectively. Net cash used in operating
activities for each of these periods consisted primarily of our net losses,
offset in part by non-cash charges and increases in accounts payable and other
current liabilities.
Net cash used in investing activities was $1.3 million and $81.5 million for
fiscal 1998 and fiscal 1999, respectively. Net cash used in investing
activities for both periods consisted of purchases of fixed assets and, for
fiscal 1999, also consisted of purchases of marketable securities and an
increase in deposits and restricted cash balances. The restricted cash balances
were a result of deposits required to support letters of credit.
Net cash provided by financing activities was $9.6 million and $165.9
million for fiscal 1998 and fiscal 1999, respectively. Net cash provided by
financing activities consisted primarily of proceeds from sales of equity.
As of January 1, 2000, we had $77.6 million of cash and cash equivalents and
marketable securities. As of that date, our principal commitments consisted of
minimum lease payments due under operating leases totaling approximately $92.2
million over 15 years, and agreements to purchase additional delivery vehicles
in fiscal 2000 totaling approximately $35.6 million. On February 15, 2000, we
entered into a marketing agreement with America Online with a commitment of
approximately $60 million over four and a half years. We anticipate a
substantial increase in our capital expenditures and lease commitments as we
construct customer fulfillment centers and begin operations in new markets.
We currently expect that the net proceeds of this offering, together with
our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures for the next 12 months. We have
adequate cash available to fund our operations for the next 12 months without
the proceeds from this offering, although it would require us to decrease
corporate overhead and reduce or delay our current expansion plans. Our capital
needs and the pace of our expansion plans are highly interdependent. We
anticipate that, before the end of 2001, we will need to raise additional funds
through the issuance of equity, debt or other securities or we will have to
reduce our expansion plans. Such securities may have rights, preferences or
privileges senior or equal to those of the rights of our common stock and our
shareholders may experience dilution. We cannot be certain that additional
financing will be available to us on acceptable terms when required, or at all.
New 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. We adopted SOP 98-1 on January
3, 1999 and there was no significant impact on our financial position or
operating results upon adoption.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. SOP
98-5 requires costs of start-up activities and organization costs be expensed
as incurred. We adopted SOP 98-5 on January 3, 1999 and there was no
significant impact on our financial position or operating results upon
adoption.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 did not impact the way we currently recognize revenue.
26
<PAGE>
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. We do not expect that the
adoption of SFAS No. 133 will have a material impact on our financial
statements because we do not currently hold any derivative instruments.
In January 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF Statement No. 99-17 "Accounting For Barter Transactions" involving a
nonmonetary exchange of advertising. This EITF consensus does not impact our
results of operations as we do not have any advertising barter transactions.
Year 2000 Issues
The impact of the Year 2000 on our technology systems to date has been
insignificant. The total cost associated with our Year 2000 remediation effort
has not been material and is not expected to be material in future periods. On
and after January 1, 2000, our customers were able to access our web site and
we were subsequently able to assemble and deliver their orders.
Quantitative and Qualitative Disclosure About Market Risk
We maintain a short-term investment portfolio consisting of commercial paper
with maturities of four months or less. Such securities are subject to interest
rate risk and will rise and fall in value if market interest rates change. The
extent of this risk is not quantifiable or predictable due to the variability
of future interest rates.
Our restricted cash is invested in certificates of deposit. There is
inherent risk in these instruments as they mature and are immediately renewed
at current market rates. The extent of this risk is not quantifiable or
predictable due to the variability of future interest rates.
We believe that the market risk arising from our holdings of financial
instruments is not material.
The following table provides information about our investment portfolio,
restricted cash, capital lease obligations and long-term debt as of January 1,
2000, principal cash flows and related weighted average interest rates by
expected maturity dates.
<TABLE>
<CAPTION>
Year of Maturity
----------------------------------------------- Total
After Carrying
2000 2001 2002 2003 2004 2004 Value
------- ------ ------ ------ ------ ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $39,806 -- -- -- -- -- $39,806
Average interest rate.. 5.8% -- -- -- -- -- 5.8%
Marketable securities... $37,762 -- -- $37,762
Average interest rate.. 5.9% -- -- -- -- -- 5.9%
Restricted cash-
certificates of
deposit................ $ 7,932 -- -- -- -- -- $ 7,932
Average interest rate.. 5.9% -- -- -- -- -- 5.9%
Capital lease
obligations............ $ 3,081 $3,463 $3,440 $2,828 $1,628 $5,682 $20,122
Average fixed
interest.............. 9.1% 9.2% 8.5% 8.2% 7.6% 7.6% 8.4%
Long-term debt.......... $ 980 $ 535 $ 214 -- -- -- 1,729
Average fixed
interest.............. 9.5% 9.5% 9.5% -- -- -- 9.5%
</TABLE>
Cash and cash equivalents and marketable securities consist primarily of
instruments with fixed rates of interest. Fair value approximates carrying
value for the above financing instruments.
27
<PAGE>
BUSINESS
Overview
HomeGrocer.com is a retailer of grocery and other consumer products on the
Internet. We operate our own state-of-the-art distribution system providing
next-day home delivery of a wide range of products, including high quality food
items, at prices competitive with local supermarket prices. Our goals are to
expand nationally and to be our customers' preferred regular provider of
household consumer products.
We have rapidly expanded since our initial launch of service in June 1998,
and currently serve customers in three markets: Seattle, Washington; Portland,
Oregon; and Orange County/Los Angeles, California. We expect to begin service
in eight to ten additional metropolitan areas, including Dallas, Texas;
Southern Connecticut, which will also serve some suburbs of New York City; San
Diego, California; Atlanta, Georgia; and the Bay Area, California in the next
12 months. In addition, we are currently in negotiations for sites in the
Washington, D.C. metropolitan area. In some of these markets, we may open more
than one customer fulfillment center. We designed a standardized model for our
customer fulfillment centers that we believe can be easily replicated in future
locations. However, the ease of replication is highly dependent on the
availability of suitable real estate in each new market.
Our web site, www.homegrocer.com, features an extensive product selection,
including fresh fruit, vegetables, dairy products, baked goods, meat and fish
and a wide assortment of non-perishable items and household products. We also
offer health and beauty products, wine and beer, fresh flowers, pet products,
home office supplies, postage stamps, seasonal items and top-selling books,
video games and movies. Our professional buyers purchase high quality products
available from premium specialty suppliers and local sources, in addition to
national suppliers.
We believe that our emphasis on high-quality customer service has created
significant brand awareness and loyalty for the HomeGrocer.com shopping
experience. Since January 1, 1999, we have made deliveries to over 55,000
different households. Since January 1, 1999, approximately 64% of our orders
have been from repeat customers and approximately 36,000 customers have placed
an order at least two times. For the fiscal year ended January 1, 2000, our
customers' average order size was approximately $99. We believe that our core
grocery business provides us with a strong platform to expand into other
product and service areas.
Our management team has extensive technology, grocery and merchandising
experience, as well as experience in developing national distribution and
delivery systems. Amazon.com, our largest shareholder, will introduce our
service to its customers residing in our service areas under our agreement with
them.
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Industry
Growth of the Internet and E-Commerce
The Internet has emerged as a mass market communications medium, enabling
millions of users to obtain and share information, interact with each other
and conduct business electronically. The increasing affordability of personal
computers and Internet access, coupled with increasing speed, convenience and
improvements in content, have led to rapid growth in Internet usage. Market
research firm International Data Corporation estimates that the number of
individuals in the United States using the Internet will increase from
approximately 62.8 million at the end of 1998 to approximately 177.0 million
at the end of 2003, representing a compound annual growth rate of over 23%.
The chart below illustrates the historical and anticipated growth in the
number of households with personal computers and Internet subscriptions.
[Bar chart entitled "Numbers of Personal Computers and Online Subscriptions in
U.S. Households" The chart has two bars for each year from 1997 until 2002.
The first bar is labeled "Total Households with PCs at End of Year" and the
second bar is labeled "Total Households with Online Subscriptions at End of
Year." There are labels on the right side of the chart indicating that the
compounded annual growth rate is 27% for the first bar and 5% for the second
bar. Below the chart is a caption that reads: "Source: International Data
Corporation"]
The Internet has also emerged as a significant channel for the electronic
transaction of business or e-commerce. According to IDC, over the next five
years the number of individuals in the United States making purchases online
will increase at a compound annual growth rate of approximately 28% from 21.1
million in 1998 to 72.1 million in 2003. Forrester Research, another market
research firm, has estimated that this growing group of consumers, with each
individual making increasing amounts of online purchases, will cause total
U.S. Internet retail commerce to grow from approximately $20.2 billion in 1999
to approximately $184.5 billion in 2004, representing a compound annual growth
rate of over 55%.
Traditional Grocery Retailing
The grocery market is one of the largest retail segments of the U.S.
economy. Retail supermarket sales were approximately $449 billion in 1998,
according to the Food Marketing Institute. In addition, sales of over-the-
counter medication and non-medication health and beauty products were
approximately $57 billion in 1998 according to the National Association of
Chain Drug Stores. Both markets are localized and fragmented.
The retail industry has principally evolved into very large stores offering
a wide variety of items. Typical large grocery stores, for example, offer from
15,000 to as many as 40,000 items, including many different sized packages of
the same products. We estimate, based on the historical shopping patterns of
our customers, that the typical household regularly purchases less than 200
different grocery items. Hence, on a typical shopping trip to a traditional
store, the consumer must sort through thousands of items to locate the dozens
of items to be purchased. Most traditional retailers compound this burden by
positioning staple products in inconvenient locations within the store to
induce impulse purchases while the consumer seeks the items on his or her
shopping list. For example, milk is typically found at the back of a
traditional store while the checkout counter is surrounded by candies, toys
and magazines. This system is time-consuming and tiring for the consumer.
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According to Andersen Consulting, the average customer at a traditional
grocery store spent approximately 47 minutes per shopping trip in 1998, not
including travel time. Traditional retail shoppers are also burdened with
carrying shopping bags and bulky items to their cars and then again into their
homes. Grocery shopping is inconvenient for many consumers and a particularly
difficult experience for elderly persons, disabled individuals or parents with
small children. According to a study conducted by the Food Marketing Department
of Philadelphia's St. Joseph's University, two-thirds of U.S. consumers dislike
the grocery shopping experience. Yet, according to A.C. Nielsen, the average
U.S. household shops for groceries more than 100 times per year, spending,
according to FMI, more than $4,500 per year. Based on the above data, the
average U.S. household spends over 125 hours per year on a necessary task that
most consumers dislike.
The traditional grocery store format also creates numerous difficulties for
the retailer. Grocery chains typically have distribution centers near each
major city and multiple stores, each with a large parking lot, on expensive
real estate throughout the metropolitan area. Large inventories must be
maintained within each store in order to provide the consumer with the expected
visual appearance. The size of such inventories can result in spoilage or less
fresh product being sold to the consumer. Often, the ambient temperature and
lighting that is preferred by the customer in such stores is not the ideal
environment for the products themselves, particularly for meats, dairy products
and produce. Additionally, fruits and vegetables, in particular are regularly
handled by numerous employees and customers, resulting in significant product
damage. Finally, each store must have a sufficient number of checkout and food
service counters. The needs for staffing these areas can vary widely during the
year, the week and the operating day.
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Online Grocery Retailing Opportunity
The evolution of the Internet and other computer technologies has created
opportunities to provide a much more convenient shopping experience at prices
similar to those available in traditional stores. Forrester Research estimates
that online grocery spending in the United States will grow at a compound
annual growth rate of 101% over the next five years, from $513 million in 1999
to $16.8 billion by 2004. Despite its size in absolute terms, this spending is
expected to represent less than 5% of the total U.S. market for grocery
products in 2004. Forrester Research also estimates that online sales of
health and beauty products, another market that HomeGrocer.com addresses, will
grow from $509 million in 1999 to $10.3 billion in 2004. Even at that level,
online sales will represent only a small part of the total U.S. market for
health and beauty products in 2004. Given the growing use of the Internet,
online grocery retailers have the opportunity to expand rapidly into a void in
a large marketplace.
The chart below shows the total sizes of various retail segments in which
products are offered by HomeGrocer.com. Currently, we offer only best-selling
books and videos and we may not be able to sell alcoholic beverages in every
market.
[Bar chart entitled "Total U.S. Retail Market Segments" The chart contains
eight bars that are labeled from left to right as follows: "Groceries(1)";
"Home Meal Replacements(2); "OTC Medications and Non-Medication HBA(3)";
"Wine/Beer/Spirits(4)"; "Books(5)"; "Pet Food/Pet Supplies(6)";
"Videocassettes(7)"; "Cut Flowers and Cut Greens(8)." Below the chart is a
caption that reads: "Source: (1) Food Marketing Institute; (2) AC Nielsen; (3)
IMS Health, National Association of Chain Drug Stores, A.C. Nielsen; (4) Adams
Business Media; (5) American Association of Publishers; (6) Pet Industry Joint
Advisory Council; (7) Paul Kagan Associates; (8) U.S. Department of
Agriculture."]
We believe online grocery retailing permits operators to offer a better
shopping experience while having reduced capital and operating expenses
compared to traditional retail stores. For example, our search, personal
shopping list and checkout functions can greatly expedite the process of
selecting and purchasing a customer's groceries. Meanwhile, online operators
can also avoid many of the significant real estate, personnel and inventory
costs of operating multiple stores in a particular area.
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The HomeGrocer.com Shopping Experience
We provide a compelling value proposition for our customers by providing
high quality products at competitive prices in a convenient manner. The
HomeGrocer.com shopping experience provides:
Convenience. Our service makes it easy for consumers to restock their
households. Our Internet ordering process, available 24 hours each day, seven
days each week, allows our customers to shop whenever they want from their
homes, offices or any location with Internet access. Customers then select a
convenient time when they can be home to accept delivery. By offering a
convenient alternative to a traditional store, we transform an unpleasant task
into a fast, enjoyable shopping experience.
High Quality Products. We focus on earning our customers' trust by
delivering high quality products, especially perishable items such as meat,
breads, fruits and vegetables. Before we enter a geographic market, we identify
and establish relationships with high quality suppliers. We equip both our
trucks and our customer fulfillment centers with ambient, refrigerated and
frozen zones to ensure product freshness at the customer's door. Our personal
shoppers, proprietary technology and distribution process ensure that our
products are inspected for quality, handled fewer times than at least one of
our online competitors, and stored in proper temperature settings, leading to
improved product quality and reduced spoilage. For example, we designed our
distribution process to handle our produce six times or less prior to delivery.
In comparison, produce is handled an average of eight times before the customer
receives it from one of our online competitors. In traditional grocery stores,
customers may handle the produce countless times prior to its purchase.
Competitive Prices. Our prices are competitive with local supermarket
prices. We do not charge any membership fees or delivery fees for first-time
orders or for subsequent orders over $75. Our efficient supply chain and
proprietary technology allow us to provide free home delivery, while charging
competitive prices for our products.
Complete Product Offering. We offer a broad range of consumer products and
strive to satisfy all of our customers' household needs. This includes offering
a significant number of specialty products, such as premium pet supplies that
generally are not available at traditional grocery stores, and products that
reflect local market tastes. We have relationships with local suppliers in each
of our markets.
High Quality Customer Service. We seek to provide the best customer service
at every opportunity. Our toll-free help line is staffed seven days each week
from 8 a.m. to 11 p.m., and we strive to answer customer emails within four
hours. Those customers who have shopped with us at least five times shop an
average of approximately twice every four weeks. Each shopping experience
concludes with a HomeGrocer.com delivery person interacting face-to-face with
our customer, typically in our customer's kitchen. Our delivery staff is
selected and trained to deliver friendly, efficient and reliable customer
service. From January through December 1999, our on-time delivery rate was
greater than 97%.
Highly Interactive and Personalized Storefront. Our web site, which we call
our Storefront, is designed to provide our customers with a convenient shopping
experience. Our personalization features can reduce the average shopping time
for a repeat shopper to as little as 10-15 minutes. Our Storefront enables a
customer to quickly and easily reorder products from an automatically generated
list, called the "My HomeGrocer List", or to create customized lists such as a
weekly shopping list or diet-based list of favorite products. Customers can
also order all of the ingredients for featured recipes with a single click.
Accurate and Timely Fulfillment. Our technologies fully integrate our
Storefront, warehouse management, inventory, billing and routing systems.
Throughout the process, our proprietary software maintains a perpetual
inventory of the items on the shelves of each customer fulfillment center, the
precise location within the customer fulfillment center of each item, the items
in each customer's tote and the location of each tote. This system ensures the
accuracy and timeliness of delivery of each customer's order.
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Growth Strategy
HomeGrocer.com intends to establish itself as the leading provider of
friendly, reliable home delivery of groceries. Our goal is to establish a long-
term relationship with our customers and earn their trust to deliver other high
quality products to their homes. Key elements of our growth strategy include:
Accelerate National Expansion. We believe that a significant opportunity
exists to expand our service into metropolitan areas across the United States.
We currently offer service in Seattle, Washington; Portland, Oregon; and Orange
County/Los Angeles, California. We intend to initiate delivery service in
approximately eight to ten additional U.S. markets over the next 12 months
including Dallas, Texas; Southern Connecticut, which will also serve some
suburbs of New York City; San Diego, California; Atlanta, Georgia; and the Bay
Area, California. In addition, we are currently in negotiations for sites in
the Washington D.C. metropolitan area. Although we had previously projected
opening up to 20 customer fulfillment centers in the year 2000, we have revised
this estimate based on our review of available real estate as well as our
capital and human resources. In some markets, we anticipate that multiple
customer fulfillment centers will be required to adequately serve demand. In
those markets, we may open with a single "hub" customer fulfillment center
servicing the entire metropolitan area. As demand grows, we may add additional
customer fulfillment centers in those markets.
Capitalize on Easily Replicated Model. By converting existing warehouse
space or warehouses already under construction, we are able to establish
operations in new markets rapidly. We can use an existing customer fulfillment
center to begin to serve nearby areas and generate revenues, while we establish
a new customer fulfillment center for that area. Our customer fulfillment
centers and delivery services are designed to be easily and rapidly replicated.
Our warehouse management system has been designed to be flexible to allow
different product and warehouse configurations and to enable us to add new
customer fulfillment centers on an aggressive rollout schedule. By opening
three new facilities in three months during the fall of 1999, we have proven
our ability to expand quickly and to operate in multiple locations.
Extend Our Brand to Expand Market Share. We have positioned HomeGrocer.com
as a leading brand for quality products and convenient, friendly and reliable
delivery service. Through our television and radio advertising campaigns,
community promotional activities, media relationships and the visibility of our
logo on our trucks, we build and reinforce consumer recognition of our brand.
We believe that becoming a reliable supplier of quality groceries to the home
is a platform for us to expand our offerings into numerous other consumer
products and services. Since inception, we have expanded our product offerings
to include pet supplies, fresh flowers, health and beauty products, wine,
postage stamps and top-selling books, video games and movies. We intend to
continue to expand our product and service offerings in an effort to become an
essential shopping resource for the home. Such additional products may include
cookware and housewares, photo finishing and prepared meals.
Maximize Delivery Density in Each Market. By providing excellent and
reliable service and through direct marketing programs, we intend to build the
density of our customer base in each market. This density is important in
increasing the efficiency of the distribution network and creating a
competitive advantage over our traditional and online competitors.
Realize Economies of Scale and Purchasing Power. We have invested heavily in
our Storefront and other technologies and have assembled a corporate team to
plan and execute our national expansion. We expect that overhead expenses will
not grow as rapidly as our revenue in future periods. Furthermore, as we grow,
we intend to take advantage of our increased purchasing power to receive better
pricing from our suppliers, to purchase more frequently directly from
manufacturers rather than wholesalers and to expand our private label
offerings, which have higher profit margins.
HomeGrocer.com Operations
There are three key operational aspects to HomeGrocer.com: our Storefront,
our customer fulfillment centers and our delivery service with its integrated
technology and distinctive trucks with the "Peach" logo. Our commitment to
technology and our focus on satisfying our customers permeate our operations.
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The HomeGrocer.com Storefront
Our Storefront is a user-friendly, informative and personalized web site
that enables users to quickly and easily navigate and purchase from a wide
selection of items. Some of the key features of our Storefront are evident in
the illustrations and description below:
The "What's New" page is the home page for repeat shoppers.
[Screen shot of HomeGrocer's "What's New" web site page.]
The main shopping page currently features the major categories on the left,
the items in a selected category in the center and a perpetual shopping basket
on the right.
[Screen shot of HomeGrocer's main shopping web site page]
. The main shopping page allows access to all of the approximately 9,000
to 12,000 items, including different sized packages of the same
products, in stock at the appropriate customer fulfillment center for
the customer's zip code, using an intuitively organized list of
categories.
. The customer has an opportunity to see all products in a particular
category before making a selection, similar to scanning the shelves of a
traditional store.
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. We provide high-quality pictures of products photographed in our in-
house digital studio.
. The "My HomeGrocer List" feature automatically lists items that the
customer has purchased previously. Thus, after one or two shopping
visits, the customer no longer has to sort through the entire available
selection to find his or her most frequently purchased items.
. The "What's New" section provides customers and suppliers with a
merchandising format to highlight products and product categories.
. The "Lists" function allows the customer to establish a standard weekly
or monthly shopping list, making it easy for the customer to re-supply
his or her kitchen with the household's standard items.
. The "Search" feature allows the customer to quickly search the entire
database for specific items. This supplants the process of physically
searching through the aisles of a traditional store.
. Throughout the shopping experience, the customer's screen contains a
continuously updated list of the items in the customer's virtual
shopping cart and the total cost of the order.
. The "Recipes" function provides menu planning suggestions and allows the
customer to order all of the ingredients for a recipe with a single
click.
. The customer's shopping cart is maintained at all times on our servers.
If a customer's connection is interrupted or his or her personal
computer is turned off, the shopping cart in progress is still intact
for future ordering. This also allows the customer to use our site as a
perpetual shopping list to accumulate items until he or she is ready to
schedule a delivery.
. The customer, either before or after shopping, can reserve a specific
delivery window, which may be on the next day or at any time within the
next two weeks. We currently use 90 minute delivery windows and, in
fiscal year 1999 had on-time delivery rates of greater than 97%.
. We currently offer delivery windows from 1:30 p.m. to 9:30 p.m. Monday
through Friday, 9:30 a.m. to 4:00 p.m. on Saturday, and 1:30 p.m. to
8:00 p.m. on Sunday.
. The customer can modify his or her order until 11:00 p.m. on the day
prior to the scheduled delivery.
Customer Fulfillment Centers
We operate large customer fulfillment centers that are organized for
efficient assembling of orders. Perishable items, such as meats, dairy
products, produce and frozen foods, are kept in rooms with temperatures
appropriate for each product.
We locate our customer fulfillment centers in non-retail districts where
real estate is considerably less expensive than the locations of most
supermarkets. Given the size of our facilities and because there is no need to
have surplus product for customer displays, our customer fulfillment centers
can operate with less inventory relative to sales than traditional supermarkets
and have higher inventory turnover. Our customer fulfillment centers also have
fewer limitations on shelf space and are designed to serve a larger customer
base than traditional supermarkets; therefore, we believe we can eventually
offer a significantly larger selection of products than most traditional
grocery stores.
We currently operate customer fulfillment centers of approximately 100,000
square feet each in Renton, Washington, and Irvine, Fullerton and Azusa,
California. We also operate a smaller customer fulfillment center of
approximately 20,000 square feet in Tualatin, Oregon that, together with our
Renton facility, serves customers in the Portland metropolitan area. Identical
software systems are implemented at each customer fulfillment center, allowing
for efficient central management and enabling the continued easy replication of
our customer fulfillment center model across multiple locations. When operating
near designed capacity, assuming a single shift, each full-sized customer
fulfillment center, together with its related delivery infrastructure, should
employ approximately 300 individuals.
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Our current facilities were originally designed to process 2,500 orders per
day in a single shift operation based on numerous assumptions. The number of
orders that can be delivered each day is sometimes constrained by the number of
delivery vehicles and employees. To date, the most orders processed in one day
by any of our customer fulfillment centers is approximately 1,530. We have
therefore not yet proven that our facilities are capable of assembling or
delivering 2,500 orders per day.
During the fourth quarter of 1999, our Seattle customer fulfillment center,
which also fulfills the non-perishable portion of orders for the Portland
market, averaged 941 orders per day. Our Irvine, California facility, which
began operations on September 9, 1999 averaged 260 orders per day during the
fourth quarter of 1999. Our Fullerton, California facility opened on November
17, 1999 and averaged 129 orders per day over its 42 days of operation in the
fourth quarter of 1999.
Our Technology and Delivery Systems
We have invested heavily in proprietary and third party technologies that
fully integrate our Storefront and our warehouse management, inventory and
delivery routing systems. This integrated technology handles the complex
logistics of thousands of available items, three temperature zones, multiple
truck routes and numerous delivery windows. The core of this technology is our
proprietary software that enables reliable and efficient transaction processing
through Internet and application servers. This technology enables our Internet
and application servers to scale up to large volumes of transactions at
multiple locations.
We designed our system to use technology to enhance the efficiency of
personal shoppers assembling the customer orders in the warehouse. Personal
shoppers wear wrist-mounted display devices that provide instructions from the
system and direct the shopper, using the most efficient sequence, to the
location of the specific customer items. A finger-mounted bar-code scanner
confirms that the proper item was selected and has been placed into the correct
customer's tote. We have successfully deployed this technology in all of our
customer fulfillment centers in multiple markets. We have designed the process
to establish new distribution operations quickly and efficiently and to
increase volume without compromising product quality or order accuracy.
We also employ a routing and scheduling system that manages the delivery of
orders. Trucks deliver orders to assigned neighborhoods. Each route has
timeslots that are 90 minute time windows in which orders are scheduled to be
delivered. This system spreads the truck loads in an orderly manner. Once a
delivery is scheduled, a route-planning feature of the system determines the
most efficient route to deliver goods to the customer's home. Each aspect of
this process is tightly integrated and enables us to provide high quality and
timely service to our customers.
Our drivers are our ambassadors of customer care. Selected and trained to be
courteous and efficient, the drivers, if requested, carry the products directly
into the customer's kitchen. Each driver is authorized to replace items or
credit the customer's bill if the customer is not 100% satisfied. Drivers are
forbidden to solicit or accept tips. Whenever possible, we schedule our drivers
to visit the same neighborhoods on a regular schedule, thereby providing the
drivers an opportunity to establish relationships with our regular customers.
We believe the direct personal interaction between our employees and our
customers, which is rare in the Internet industry, fosters the development of
long-term relationships with our customers.
Customer Care
Ongoing customer support is important to our ability to establish and
maintain long-term relationships with our customers. We seek frequent
meaningful communication with our customers to enable us to continually improve
our service. For example, a customer service representative calls each customer
after the delivery of the first order to ensure his or her satisfaction. We
also offer numerous automated help options on the Storefront and a rapid email
response service. Our team of customer support and service personnel handle
general customer inquiries, answer customer questions about the ordering
process, and investigate the status of orders, deliveries and payments. Our
customer service representatives are available through our toll free telephone
number seven days each week from 8 a.m. to 11 p.m.
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Strategic Relationships
HomeGrocer.com pursues strategic relationships to increase its access to
online customers, build brand recognition and expand its online presence. To
date, we have established the following strategic relationships:
Amazon.com. We have entered into a $10 million advertising agreement with
Amazon.com that calls for Amazon.com to introduce our service to its customers
residing in our service areas. We believe that the benefits of our relationship
with Amazon.com include their introduction of our web site to their customers
and the beneficial aspects of our being associated with one of the premier e-
commerce companies. Amazon.com is our largest shareholder and David Risher,
Amazon.com's Senior Vice President and General Manager, U.S. Retail, is a
member of our board of directors.
America Online. We have entered into an agreement with America Online, an
Internet online service provider with over 21 million members, establishing
HomeGrocer.com as AOL's primary and preferred provider of online grocer
services on AOL and its affiliated networks. Our agreement provides for limited
exclusivity in the online grocery sector and expires in February 2005. In
addition, AOL has agreed to promote and advertise HomeGrocer in online areas
controlled by AOL and to deliver a minimum number of annual page views to the
online areas promoting HomeGrocer.com. Over the five year term of the
agreement, we are obligated to make payments totaling up to $60 million to AOL,
as well as pay a referral fee for each new customer above specified thresholds
referred by AOL to us. AOL can reduce or eliminate the limited exclusivity at
various times after twenty-four months in the event AOL has delivered specified
numbers of impressions to HomeGrocer.com.
Marketing and Promotion
Our marketing and promotion programs are designed to strengthen the
HomeGrocer.com brand name, encourage trials of our service in our target
markets, build strong customer loyalty, maximize repeat purchases and increase
our average order size. We intend to build our brand name and customer loyalty
through our 100% customer satisfaction guarantee, public relations programs,
advertising campaigns, promotional activities and the visibility of our branded
trucks and uniformed delivery employees in customer neighborhoods.
Amazon.com, our largest shareholder, will introduce our service to its
customers residing in our service areas under our agreement with them.
We have recently begun television advertising to build consumer awareness
for HomeGrocer.com. In addition, we utilize extensive radio advertising and
direct mail programs to attract first-time shoppers. To encourage a second
shopping experience and to demonstrate the high quality of our fresh produce,
we provide a free bag of produce with every first-time order. The second
shopping experience also allows a customer to experience the "My HomeGrocer
List" feature, which is designed to make online shopping faster and more
convenient with every subsequent purchase.
We also conduct corporate and "Peach Party" marketing programs. Through our
corporate programs, we offer employees of some Fortune 500 and other large
corporations special incentives and discounts to encourage their use of our
service. The "Peach Party" marketing programs involve a customer hosting a
party for acquaintances and neighbors. We provide sample food and refreshments
and a trained representative demonstrates the use of our Storefront.
In the future, we expect to be able to provide, using collaborative
filtering technology, increasingly targeted and customized services based on
customer purchasing, preference and behavioral data generated through our
Storefront. We believe that personalization of our services will significantly
increase the value of our shopping experience for our customers.
Supply Relationships
We source products from a network of food, houseware and health and beauty
aid manufacturers, wholesalers, brokers and distributors. We currently rely on
rapid fulfillment from national and regional
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distributors for a substantial portion of our products. In the Seattle and
Portland markets, approximately 47% of our current product offerings are
sourced through a single wholesaler, SuperValu. For our three new customer
fulfillment centers in Orange County/Los Angeles, California, we are using
Certified Grocers, who supplies approximately 50% of our current product
offering in that market. We have no contractual relationship with either
SuperValu or Certified Grocers that requires them to continue to supply our
needs in the future. We purchase a number of top brands and high volume items
directly from manufacturers and may increase our use of this direct purchasing
as our product volumes increase with additional customer fulfillment centers.
We also utilize premium specialty suppliers or local sources for gourmet foods,
traditional and organic produce, bakery items, fish and meats and floral
products. As of January 1, 2000, we were purchasing products from over 150
distributors and manufacturers.
Competition
We are the first major online grocery retailer to operate in the Seattle,
Portland and Orange County/Los Angeles markets. However, the grocery retailing
market is extremely competitive. Local, regional, and national grocery stores,
independent food stores and supermarkets, as well as online grocery retailers,
comprise our principal competition, although we also face substantial
competition from convenience stores, liquor retailers, membership warehouse
clubs, specialty retailers, supercenters, and drugstore chains. Many of our
existing and potential competitors, primarily traditional grocers and retailers
including Albertson's, Walmart, Safeway, Quality Food Centers and Kroger, are
larger and have substantially greater resources than we do. We expect online
competition from other online and traditional grocers and retailers to
intensify in the future.
Currently, our potential competitors include between five and ten online
grocery retailers such as Webvan, Peapod, NetGrocer, HomeRuns, ShopLink.com and
Streamline.com and an expanding number of traditional retailers entering the
market. For example, in November 1999, Albertson's introduced an Internet based
service in the Seattle area, and Webvan recently announced it will introduce
its online grocery service in the Seattle area sometime in 2000. The number and
nature of competitors and the amount of competition we will experience will
vary over time and by market area.
The principal competitive factors that affect our business are convenience,
quality of products and service, breadth of product selection, price and
customer loyalty to traditional and online grocery retailers. We believe that
we compare favorably to other online grocery retailers with respect to each of
these factors. However, many traditional grocery retailers may have
substantially greater levels of customer loyalty and serve many more locations
than we currently do. Consumers are often familiar with the layout of a
specific traditional store and may be resistant to learning other layouts or
shopping techniques. If we fail to effectively compete in any one of these
areas, we may lose existing and potential customers. This could materially harm
our business.
Government Regulation
In addition to regulations applicable to businesses generally or directly
applicable to e-commerce, we are subject to a variety of regulations concerning
the handling, sale and delivery of food, alcohol and tobacco products.
Currently, we are not subject to regulation by the U.S. Department of
Agriculture, or USDA. Whether the handling of food items in our distribution
facility, such as meat and fish, will subject us to USDA regulation in the
future will depend on several factors, including whether we sell food products
on a wholesale basis or whether we obtain food products from non-USDA inspected
facilities. Although we have designed our food handling operations to comply
with USDA regulations, in the future the USDA may require changes to our food
handling operations. We are also required to comply with local health
regulations concerning the preparation and packaging of any prepared food
items, such as deli salads that we prepare on site. Any applicable federal,
state or local regulations may cause us to incur substantial compliance costs
or delay the availability of a number of items at one or more of our customer
fulfillment centers. In addition, any inquiry or investigation from a food
regulatory authority could have a negative impact on our reputation. Any of
these events could delay or impair our business and expansion plans and could
cause us to lose customers.
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We will be required to obtain state, and in some cases county and municipal,
licenses and permits for the sale of alcohol in each location in which we
deliver. We cannot assure you that we will be able to obtain any required
permits or licenses in a timely manner, or at all. We may be forced to incur
substantial costs and experience significant delays in obtaining these permits
or licenses. In addition, the U.S. Congress is considering enacting legislation
that would restrict the interstate sale of alcoholic beverages over the
Internet. Changes to existing laws or our inability to obtain required permits
or licenses could prevent us from selling alcohol or tobacco products in one or
more of our geographic markets or a portion of those markets where a market
extends over two or more licensing jurisdictions. In those locations where we
cannot obtain alcohol permits or licenses, we will be unable to sell these
items, which could hurt our business.
In addition, it is possible that a number of laws and regulations may be
adopted with respect to the Internet and e-commerce that could adversely affect
the manner in which we currently conduct our business. In addition, the growth
and development of the market for e-commerce may lead to more stringent
consumer protection laws which may impose additional burdens on us. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The U.S. government recently enacted Internet laws
regarding privacy, copyrights, taxation and the transmission of sexually
explicit material. The law of the Internet, however, remains largely unsettled,
even in areas where there has been some legislative action. It may take years
to determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. If we are required
to comply with new regulations or legislation or new interpretations of
existing regulations or legislation, this compliance could cause us to incur
additional expenses or alter our business model.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel and export
or import matters. The vast majority of these laws were adopted prior to the
wide use of the Internet. As a result, they do not contemplate or address the
unique issues of the Internet and related technologies. Changes in laws
intended to address these issues could create uncertainty in the Internet
marketplace. This uncertainty could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Intellectual Property
We regard patents, copyrights, service marks, trademarks, trade secrets and
similar intellectual property as important to our success. We rely on patent,
trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to
protect our proprietary rights; however, the steps we take to protect our
proprietary rights may be inadequate. We have a registered trademark in the
United States for "HomeGrocer," and have filed trademark registration
applications for the marks "HomeGrocer.com," "Peach Party," the HomeGrocer.com
logo in the United States and abroad. We have also filed a trademark
application for our slogan "here comes the grocery store" in the United States.
On January 10, 2000, we filed three provisional patent applications with the
U.S. Patent and Trademark Office. From time to time, we may file additional
patent applications directed to aspects of our proprietary technology. We
currently have no patents protecting our technology. We cannot assure you that
any of our pending patent applications will be approved, that any issued
patents will protect our intellectual property or that any issued patents or
trademark registrations will not be challenged by third parties.
Employees
As of January 1, 2000, we had 1,064 employees, consisting of 128 employed in
the information technology area, 72 in operations and administration, 38 in
merchandising, 23 in marketing and 803 at our customer fulfillment centers and
performing related delivery services. We expect to hire additional personnel as
we expand operations and staff additional customer fulfillment centers. We
expect to hire between 4,000 and
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<PAGE>
5,000 additional employees in the next year. Although some companies that
operate in the trucking, warehouse and grocery industries are subject to
collective bargaining agreements, we are not currently represented by a labor
union. We have not experienced any work stoppages and consider our employee
relations to be good.
Development of Our Business
We believe that due to our current cash position, which includes the
proceeds from the sale of our preferred stock in September, October and
November of 1999, and our flexibility with respect to the number and timing of
additional customer fulfillment centers we open, the net proceeds of this
offering, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through the next
12 months. Our future capital needs will be highly dependent on the pace of our
expansion plans while conversely our expansion plans may be affected by the
availability and cost of capital. During the next few years, we expect a
substantial increase in our capital expenditures and lease commitments as we
equip customer fulfillment centers and begin operations in new markets. Our
expansion will result in a material increase in our number of employees as we
staff our new customer fulfillment centers and add personnel engaged in systems
development and technology, operations, marketing and merchandising.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business.
On January 7, 2000, a personal injury action was filed against us in the
Superior Court of California for Orange County. The plaintiffs are seeking
compensatory damages in the amount of approximately $3.2 million plus loss of
earnings and future earning capacity resulting from a motor vehicle accident
involving one of our delivery trucks. We believe our insurance policies will
cover us for any damages awarded to plaintiffs.
Facilities
Our corporate offices are located in Kirkland, Washington where we lease
approximately 81,000 square feet. We lease approximately 72,000 square feet of
that space under a lease that expires in 2004, with an option to renew for two
additional five-year terms. We sublease from another tenant the remaining
approximately 9,000 square feet of space under a sublease that expires in 2008,
with no option to renew. Of this 81,000 square feet, we currently occupy
approximately 64,000 square feet and sublease approximately 17,000 square feet
to another tenant under a sublease that expires in August 31, 2000. We
anticipate we will require additional office space in the future to accommodate
our growth.
We lease approximately 320,000 square feet for our Renton, Washington
customer fulfillment center under a lease that expires in 2007, with an option
to renew for an additional five years. We currently sublease approximately
200,000 square feet of this space to third parties. We also lease an aggregate
of approximately 1,368,000 square feet for our current and future customer
fulfillment centers in the Portland, Oregon; Southern California; Dallas,
Texas; San Diego, California; Stamford, Connecticut; Atlanta, Georgia; and the
Bay Area, California markets under leases that expire from 2009 to 2015. We are
evaluating sites and negotiating leases for customer fulfillment centers in
additional markets. Although we expect those sites to be available, we cannot
assure you that suitable sites will be available on commercially reasonable
terms. We do not own any real estate and we expect, wherever possible, to lease
customer fulfillment centers in the additional markets we enter.
Environmental Matters
We are subject to various environmental laws and regulations governing the
maintenance of our vehicles, the operation of real property, and the
generation, storage, use, emission, discharge, transportation and disposal of
oil or other hazardous materials, and the health and safety of our employees.
These laws may impose liability even if we did not know of, or were not
responsible for, the contamination or other damage. Based on current
information, however, we are aware of no liabilities under environmental laws
which would be expected to have a material adverse effect on our business,
results of operations or financial condition.
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MANAGEMENT
Executive Officers and Directors
The names and ages of the executive officers and directors of HomeGrocer.com
as of January 1, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Mary Alice Taylor........... 49 Chief Executive Officer and Chairman of the
Board
J. Terrence Drayton......... 39 President and Director
Daniel R. Lee............... 43 Senior Vice President and Chief Financial
Officer
Mary B. Anderson............ 44 Vice President of Finance
Rex L. Carter............... 47 Senior Vice President of Systems Development
& Technology
Ken Deering................. 40 Vice President of Storefront
Robert G. Duffy............. 39 Chief Information Officer
Corwin J. Karaffa........... 45 Senior Vice President of Operations
Jonathan W. Landers......... 47 Senior Vice President of Marketing and Sales
Daniel J. Murphy............ 53 Vice President of Merchandising
David A. Pace............... 40 Senior Vice President of People Capability
Kristin H. Stred............ 40 Senior Vice President, General Counsel and
Secretary
Tom A. Alberg(1)............ 59 Director
Charles K. Barbo............ 58 Director
James L. Barksdale(2)....... 56 Director
Mark P. Gorenberg(1)........ 44 Director
Jonathan D. Lazarus(2)...... 48 Director
Douglas Mackenzie(2)........ 40 Director
David Risher(1)............. 34 Director
Philip S. Schlein........... 65 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mary Alice Taylor has served as chairman and chief executive officer of
HomeGrocer.com since September 1999. Prior to joining HomeGrocer.com, Ms.
Taylor served as corporate executive vice president of Global Operations and
Technology for Citigroup, a financial services organization, from January 1997
to September 1999 where she was responsible for standardizing and centralizing
worldwide operations and leading quality and cost-effectiveness efforts. From
June 1980 until January 1997, Ms. Taylor held various positions with Federal
Express, an overnight courier service, serving most recently as senior vice
president of Ground Operations where she was responsible for all aspects of
pickup and delivery operations in North America. Prior to her positions at
Citigroup and Federal Express, from 1977 to 1980 she was the financial planning
manager of U.S. Operations with Northern Telecom, Inc., a telecommunications
company, From 1973 to 1977 Ms. Taylor was the controller at Cook Investment
Properties, a division of Cook Industries and from 1971 to 1973, Ms. Taylor
served as senior accountant, oil and gas explorations with Shell Oil. Ms.
Taylor also serves as a director on the boards of Autodesk, a supplier of PC
design software, and Dell Computer. Previously she served on the boards of The
Perrigo Company, a manufacturer of store brand items, and Allstate Insurance
Company. Ms. Taylor holds a B.A. in finance from Mississippi State University
and is a Certified Public Accountant.
J. Terrence Drayton co-founded HomeGrocer.com and has served as its
president since the incorporation of its predecessor in January 1997. Mr.
Drayton also served as chief executive officer of HomeGrocer.com from January
1997 until September 1999. From February 1996 through January 1997, Mr. Drayton
was the President of Terran Ventures, Inc., a venture capital and consulting
company, where he focused on activities leading to the formation of
HomeGrocer.com's predecessor company. Prior to co-founding HomeGrocer.com, Mr.
Drayton was involved for more than ten years as co-founder and senior manager
of two of the leading
41
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bottled water companies in Canada. From November 1991 to January 1996, Mr.
Drayton was the president of the home and office division of Aquaterra, a
Canadian bottled water company producing the brand names Crystal Springs and
Labrador. From September 1989 through September 1991 Mr. Drayton served as
chairman and chief executive officer of Telepost Communications, a publicly
traded Canadian film and video post-production company. From March 1986 to May
1989 Mr. Drayton was the co-founder, executive vice president and co-chief
executive officer for Laurentian Spring Valley Water. He holds a B.Comm. from
the University of Calgary and an M.B.A. from York University.
Daniel R. Lee joined HomeGrocer.com as chief financial officer in November
1999 and was also appointed senior vice president in December 1999. From
February 1992 to September 1999, Mr. Lee served as chief financial officer,
treasurer and senior vice president of finance and development for Mirage
Resorts, a publicly traded company (NYSE:MIR) that develops and operates large-
scale resort hotels. From February 1990 to February 1992, he was a director of
equity research for CS First Boston, an investment bank. From July 1980 to
February 1990, he held various positions with the investment bank Drexel
Burnham Lambert, most recently as a managing director. Mr. Lee holds a B.S. and
an M.B.A., both from Cornell University, and he is a Chartered Financial
Analyst.
Mary B. Anderson joined HomeGrocer.com as a full-time consultant in February
1999 and has served as vice president of finance since August 1999. Prior to
joining HomeGrocer.com, Ms. Anderson was executive vice president and chief
financial officer of CyberSafe, an enterprise network security software
company, from June 1997 to November 1998. From June 1995 to June 1997, Ms.
Anderson served as chief financial officer and vice president of business
operations at AT&T Wireless Services, Wireless Data Division; a
telecommunications company, (formerly McCaw Cellular Communications). From
April 1991 to June 1995, Ms. Anderson served as vice president of finance for
McCaw Cellular Communications and LIN Broadcasting, each a telecommunications
company. From June 1979 to April 1991 she served in various capacities at
Seafirst Bank, most recently as senior vice president. Ms. Anderson holds a
B.S. in Management from Purdue University and an M.B.A. from the University of
Washington. She is also a Washington State Certified Public Accountant.
Rex L. Carter has served as vice president of systems development and
technology of HomeGrocer.com since November 1999 and was also appointed senior
vice president in December 1999. Prior to joining HomeGrocer.com, from February
1993 to November 1999, Mr. Carter was with the Carlson Companies, an owner and
operator of hotels, restaurants and travel agencies, most recently serving as
senior vice president and chief information officer. From May 1991 to February
1993, Mr. Carter was a senior manager with EDS (Electronic Data Systems), an
information technology consulting firm. From September 1978 to May 1991, Mr.
Carter held a variety of officer positions, including vice president of
telecommunications and technology centers, for the subsidiary companies of
Texas Air Corporation, now known as Continental Airlines. From 1974 to 1978,
Mr. Carter held the positions of consultant and senior consultant with Booz,
Allen & Hamilton, management consultants. Mr. Carter holds a B.S. in
engineering from Purdue University. He also attended Xavier (Ohio) Graduate
School of Business and is a registered Professional Engineer with the State of
Ohio.
Ken Deering co-founded HomeGrocer.com. Since inception, he has held several
positions with HomeGrocer.com and its predecessor, including marketing manager
from August 1996 to October 1997, vice president of business development from
October 1997 to May 1999 and vice president of storefront from May 1999 to the
present. Prior to his involvement with HomeGrocer.com, Mr. Deering was an
independent management consultant through his firm, Heldeer Ventures, from
August 1994 to August 1996. From January 1992 to July 1994, Mr. Deering held
the positions of general manager and then vice president of sales and marketing
for Offshore Systems, a developer of electronic marine positioning systems.
Over the prior 12 years, Mr. Deering held various marketing and operations
positions, including six years at Glenayre Technologies, a developer of
software for wireless personal communication systems. Mr. Deering has a sales
and marketing management diploma from the University of British Columbia.
Robert G. Duffy joined HomeGrocer.com in June 1998 as its chief technology
officer and since September 1998 has served as its chief information officer.
From January 1998 to May 1998, Mr. Duffy was a
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<PAGE>
management consultant at Analytical Software, a technology consulting firm,
where he led the technology initiatives that launched HomeGrocer.com. From
March 1993 to December 1997, Mr. Duffy was a management consultant and one of
the founders of the systems integration practice of BEST Consulting where he
provided management and technology consulting services to various Fortune 100
companies. From October 1985 to February 1993, he worked for Andersen
Consulting, a management consulting company, and co-founded Andersen's
Workstation Technology Group where he managed the development of a high volume
perishables warehouse management system. From May 1983 to September 1985, he
was a software engineer with NASA's Johnson Space Center. Mr. Duffy has a B.S.
in applied mathematics/operations research from the University of Tulsa's
College of Engineering.
Corwin J. Karaffa has served as vice president of operations of
HomeGrocer.com since September 1999 and was appointed senior vice president in
December 1999. Before joining HomeGrocer.com, from January 1995 to August 1999,
Mr. Karaffa was the vice president of distribution of Certified Grocers of
California, a retailer-owned grocery cooperative serving 2,700 retail stores.
From March 1985 to January 1995, Mr. Karaffa held various management positions
with Procter & Gamble, a manufacturer of household consumer products, most
recently as manager of distribution development. From June 1977 to March 1985,
Mr. Karaffa was a U.S. Naval aviator. Mr. Karaffa has a B.S. in political
science from the United States Naval Academy in Annapolis, Maryland.
Jonathan W. Landers has served as vice president of marketing and sales for
HomeGrocer.com since November 1998 and was appointed senior vice president in
December 1999. Prior to joining HomeGrocer.com, Mr. Landers was the vice
president of marketing for Norm Thompson Outfitters, Inc., a consumer specialty
retailer of high quality merchandise, in Hillsboro, Oregon from May 1997 to
November 1998. From April 1992 to April 1997, Mr. Landers was vice president of
corporate marketing and new business development for the National Geographic
Society in Washington D.C. From October 1991 to March 1992, he was interim vice
president of corporate marketing for Russell Athletic, a clothing manufacturer,
in Alexander City, Alabama. From February 1989 to December 1991, Mr. Landers
was the president and chief executive officer of Neuhaus (U.S.A.), a Belgian
chocolate retailer, in Port Washington, New York and from August 1983 to
January 1989, Mr. Landers held various positions within Sara Lee subsidiaries
including Hanes, a manufacturer of cotton goods, and Coach Leatherware, a
specialty retailer of leather goods. Mr. Landers holds a B.A. in government
from Bowdoin College and an M.B.A. from Columbia University.
Daniel J. Murphy has served as vice president of merchandising for
HomeGrocer.com since May 1999. Prior to joining HomeGrocer.com, from October
1998 to May 1999, Mr. Murphy was vice president of U.S.A., Retail Client
Services for Inter-Act Systems, a provider of electronic coupon technology to
manufacturers and retailers. Prior to that, from October 1997 to October 1998,
Mr. Murphy was vice president of sales and merchandising for Super Fresh Food
Markets. From July 1989 to October 1997, he was vice president of sales and
merchandising for Shop Rite Supermarkets, a subsidiary of Wakefern Food
Corporation. From May 1985 to July 1989, Mr. Murphy was the director of
merchandising for Wakefern Food Corporation, a member-owned food cooperative,
and from September 1979 to May 1985, he was the director of chain store sales
for The Coca-Cola Bottling Co. of New York. He holds a B.A. in business
administration and a B.S. in secondary education from John F. Kennedy College.
David A. Pace joined HomeGrocer.com in September 1999 as vice president of
people capability, with primary responsibility for human resources, and was
appointed senior vice president in December 1999. Prior to joining
HomeGrocer.com, from October 1997 to September 1999, Mr. Pace was with Tricon
Restaurants International, a restaurant management company, most recently as
senior vice president of human resources. Prior to his position with Tricon,
from June 1981 to October 1997, Mr. Pace was with PepsiCo, a beverage and
restaurant company, throughout the United States, Africa, Middle East and
Europe, most recently as senior vice president, Human Resources for PepsiCo
Restaurants International. Mr. Pace holds a B.S. in industrial and labor
relations from Cornell University.
Kristin H. Stred joined HomeGrocer.com as vice president and general counsel
in September 1999 and was appointed senior vice president in December 1999.
Prior to joining HomeGrocer.com, from July 1992 to
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<PAGE>
September 1999, Ms. Stred held various positions with Shurgard Storage Centers,
a developer of self-storage properties, and its predecessor companies, where
she was most recently senior vice president and general counsel. From October
1991 to July 1992, she was an attorney with Boeing and from July 1987 to
September 1991, Ms. Stred was assistant general counsel at King Broadcasting, a
regional broadcasting company. From June 1984 to July 1987, she practiced law
at Garvey, Schubert & Barer, a Seattle based law firm. Ms. Stred holds a B.A.
in history and a J.D., both from Harvard University.
Tom A. Alberg has served as a director of HomeGrocer.com since June 1998 as
Madrona Investment Group's designee under a voting agreement that will expire
upon effectiveness of this offering. He has been a principal of Madrona
Investment Group, a venture investment firm focused on capital investments in
early stage technology companies, since January 1996 and a managing director of
Madrona Venture Fund, a venture capital fund, since October 1999. Prior to that
time, Mr. Alberg was the President and a director of LIN Broadcasting, a
cellular telephone company, from April 1991 to October 1995, and an Executive
Vice President of AT&T Wireless Services, formerly McCaw Cellular
Communications, from July 1990 to October 1995. Prior to July 1990, Mr. Alberg
was chairman of the executive committee and a partner in the law firm of
Perkins Coie in Seattle. Mr. Alberg is also a director of Active Voice, a
provider of unified messaging and computer telephony software, Advanced Digital
Information, a hardware and software based data storage solutions company,
Amazon.com, an Internet retailer of books and other consumer products,
Emeritus, an assisted living community company, Teledesic, a telecommunications
network provider, and Visio Corporation, a diagramming software provider. Mr.
Alberg received his B.A. from Harvard University and his J.D. from Columbia
University.
Charles K. Barbo has served as a director of HomeGrocer.com since October
1997. In 1972, Mr. Barbo co-founded the predecessor of Shurgard Storage
Centers, a developer of self-storage properties, and served most recently as
president and chairman of the board until March 1995 when he became chairman
and chief executive officer of Shurgard Storage Centers. Mr. Barbo is a
graduate of the Owner/President Management Program of Harvard Business School
and has a B.A. in history from the University of Washington.
James L. Barksdale has served as a director of HomeGrocer.com since April
1999 as The Barksdale Group's designee under a voting agreement that will
expire upon effectiveness of this offering. Mr. Barksdale has been managing
partner of The Barksdale Group, an investment and advisory group, since May
1999. He was president and chief executive officer of Netscape Communications
from January 1995 until March 1999, when Netscape was acquired by America
Online. From January 1992 to December 1994, Mr. Barksdale served as president
and chief operating officer of AT&T Wireless Services, Wireless Data Division
(formerly McCaw Cellular Communications), and from September 1994 to December
1994 also served as the chief executive officer. Prior to that, from April 1983
to January 1992, he served as executive vice president and chief operating
officer of Federal Express, an overnight courier service, and from 1979 to 1983
he served as the chief information officer. Mr. Barksdale is also a director of
3Com, a provider of information access products and network systems; Liberate
Technologies, a provider of software delivering Internet content to television
sets; Federal Express, Robert Mondavi, a winery; Respond.com, an online
shopping service; Sun Microsystems, a provider of Internet hardware, software
and services; and America Online, a provider of Internet services.
Mr. Barksdale holds a B.A. in business from the University of Mississippi.
Mark P. Gorenberg has served as a director of HomeGrocer.com since March
1999 as Hummer Winblad Venture Partners' designee under a voting agreement that
will expire upon effectiveness of this offering. Since July 1993, Mr. Gorenberg
has been a general partner of Hummer Winblad Venture Partners, an investment
partnership, and, from July 1990 to June 1993, Mr. Gorenberg was an associate
of Hummer Winblad Venture Partners. Prior to joining Hummer Winblad Venture
Partners, Mr. Gorenberg was a senior software manager in Advanced Product
Development at Sun Microsystems. Mr. Gorenberg is also a director of AdForce, a
provider of online advertisement management services, and seven private
companies. Mr. Gorenberg received a B.S. in electrical engineering from the
Massachusetts Institute of Technology, an M.S. in electrical engineering from
the University of Minnesota and an M.S. in engineering management from Stanford
University.
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Jonathan D. Lazarus has served as a director of HomeGrocer.com since
September 1998. Since retiring from Microsoft in September 1996, Mr. Lazarus
has spent most of his time working with small companies who are exploring the
commercial entrepreneurial opportunities of the Internet and personal
computing. From July 1988 to September 1996, Mr. Lazarus worked at Microsoft,
where he served most recently as vice president, strategic relations. Mr.
Lazarus currently serves on the boards of directors of Ziff-Davis, a technology
media and marketing company; DataChannel, a XML-based enterprise information
portal provider; and Vision Solutions, a developer of information management
software. Mr. Lazarus holds a B.S. in communications from Temple University.
Douglas Mackenzie has served as a director of HomeGrocer.com since September
1998 as Kleiner Perkins Caufield & Byers's designee under a voting agreement
that will expire upon effectiveness of this offering. Mr. Mackenzie has been a
partner with Kleiner Perkins Caufield & Byers, a venture capital firm, since
1992. Currently, Mr. Mackenzie also serves on the boards of directors of Visio
Corporation, a diagramming software provider; Marimba, a provider of Internet
management software; Pivotal Corporation, a developer of e-commerce solutions;
and E.piphany, a provider of real-time analytical applications. Mr. Mackenzie
holds an A.B. in economics and an M.S. in industrial engineering, both from
Stanford University, and an M.B.A. from Harvard Business School.
David Risher has served as a director of HomeGrocer.com since April 1999 as
Amazon.com's designee under a voting agreement that will expire upon
effectiveness of this offering. From February 1997 to the present, Mr. Risher
has held several positions at Amazon.com., an Internet retailer of books and
other consumer products, where he is presently the senior vice president of
product development. From July 1991 to February 1997, Mr. Risher held a variety
of marketing and project management positions at Microsoft, most recently as
founder and product unit manager for MS Investor, Microsoft's web site for
personal investment. Mr. Risher received his B.A. in comparative literature
from Princeton University and an M.B.A. from Harvard Business School.
Philip S. Schlein has served as a director of HomeGrocer.com from October
1997 to December 1997 and from April 1998 through the present. Mr. Schlein has
been a general partner, and subsequently a venture partner, of U.S. Venture
Partners, a venture capital firm, since April 1985. Mr. Schlein held various
executive positions with Macy's, a retail department store, from 1957 to 1973
and was president and chief executive officer of Macy's California division
from 1974 to 1985. Additionally, Mr. Schlein currently serves as a director of
bebe stores, a women's specialty clothing retailer; Ross Stores, a discount
department store; Xoom.com, a direct e-commerce retailer; Burnham Pacific, a
real estate investment trust; and Quick Response Services, a provider of
business-to-business e-commerce services. Mr. Schlein holds a B.S. in economics
from the University of Pennsylvania.
Board Composition
Our bylaws currently authorize ten directors and we have ten directors on
our board. Each director is elected for a period of one year at the annual
meeting of stockholders and serves until the next annual meeting or until a
successor is duly elected and qualified. Our executive officers serve at the
discretion of our board of directors. There are no family relationships among
any of our directors or executive officers.
Our board of directors will be divided into three classes effective upon an
amendment to our articles of incorporation which will occur upon the closing of
the offering. The Class I directors, James L. Barksdale, Mark P. Gorenberg, and
Philip S. Schlein, will serve an initial term until the 2000 annual meeting of
stockholders, the Class II directors, Charles K. Barbo, J. Terrence Drayton,
Jonathan D. Lazarus and Douglas Mackenzie, will serve an initial term until the
2001 annual meeting of stockholders, and the Class III directors, Tom A.
Alberg, David Risher and Mary Alice Taylor, will serve an initial term until
the 2002 annual meeting of stockholders. Each class will be elected for a
three-year term following its initial term.
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<PAGE>
Board Compensation
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. Directors are also eligible to
participate in our 1997 stock incentive compensation plan and our 1999 stock
incentive plan, and beginning as of the effective date of this offering, they
will be eligible to participate in our 1999 Directors' Stock Option Plan and in
our 1999 Employee Stock Purchase Plan. All of our 1999 plans are subject to
stockholder approval, which we expect to receive prior to the closing of this
offering. See "Stock Plans."
Pursuant to our 1997 stock incentive compensation plan, in April 1998, Mr.
Barbo was granted an option to purchase 500,000 shares of common stock and an
additional option to purchase 200,000 shares of common stock, each with an
exercise price of $0.25 per share; in April 1998, Mr. Schlein was granted an
option to purchase 200,000 shares of common stock at an exercise price of $0.25
per share; in June 1998, Mr. Alberg was granted an option to purchase 200,000
shares of common stock at an exercise price of $0.25 per share; in November
1998, Mr. Lazarus was granted an option to purchase 200,000 shares of common
stock at an exercise price of $0.25 per share; and in April 1999, Mr. Barksdale
was granted an option to purchase 200,000 shares of common stock at an exercise
price of $0.45 per share. Each of these options is fully vested and exercisable
at this time.
Board Committees
In April 1998, the board established an audit committee and a compensation
committee. The audit committee reviews our annual audit, meets with independent
auditors and oversees the effectiveness of financial management practices. The
audit committee currently consists of Tom A. Alberg, Mark P. Gorenberg and
David Risher. The compensation committee recommends compensation for senior
management to the board and administers our stock plans. The compensation
committee currently consists of James L. Barksdale, Jonathan D. Lazarus and
Douglas Mackenzie.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
46
<PAGE>
Executive Compensation
The following table provides summary information concerning the compensation
received for services rendered to HomeGrocer.com during the fiscal years ended
January 2, 1999 and January 1, 2000 by our chief executive officer and each of
the other most highly compensated executive officers whose aggregate
compensation during fiscal years 1998 and 1999 exceeded $100,000. Throughout
this prospectus, we refer to the following officers as our named executive
officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------------- ------------
Securities
Name and Principal Fiscal Other Annual Underlying
Positions Year Salary ($) Bonus ($) Compensation ($) Options (#)
- ------------------ ------ ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Mary Alice Taylor(1).... 1999 $63,846 $ -- $29,316 4,500,000
Chief Executive Officer
and Chairman
of the Board
J. Terrence Drayton(2).. 1999 172,446 -- 8,740 1,650,000
President, Director and 1998 81,411 -- -- --
Former Chief
Executive Officer
Ken Deering............. 1999 131,388 41,137 4,596 200,000
Vice President of 1998
Storefront 99,539 43,468 -- 520,000
Robert G. Duffy......... 1999 124,788 38,438 92 100,000
Chief Information 1998
Officer 69,231 9,885 -- 200,000
Jonathan W. Landers..... 1999 182,150 56,209 8,517 100,000
Senior Vice President 1998
of Marketing and Sales 20,192 -- -- 200,000
</TABLE>
- --------
(1) Mary Alice Taylor has served as chief executive officer of HomeGrocer.com
since September 2, 1999.
(2) Mr. Drayton served as chief executive officer of HomeGrocer.com from
January 1997 to September 1999.
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<PAGE>
Option Grants
The following table provides summary information regarding stock options
granted to the named executive officers during the fiscal year ended January 1,
2000. The options were granted pursuant to our 1997 stock incentive
compensation plan and 6,150,000 options were granted to two officers outside
the plan. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option, the period from the grant date to the expiration date, giving
effect to an assumed initial public offering price of $11.00 per share and
based on assumed rate of stock appreciation of 5% and 10%, compounded annually.
These rates are mandated by the Securities and Exchange Commission and do not
represent our estimate of our future common stock price. Actual gains, if any,
on stock option exercises will depend on the future performance of our common
stock. In the fiscal year ended January 1, 2000, we granted options to acquire
up to an aggregate of 16,960,400 shares of common stock to employees,
consultants and directors, all at exercise prices equal to the deemed fair
market value of our common stock on the date of grant as determined in good
faith by our board of directors.
Option Grants in the Fiscal Year Ended January 1, 2000
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value At Assumed
Number Of Percent Of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted To Exercise Or For Option Term
Options Employees In Base Price Expiration ------------------------
Name Granted(#) Fiscal Year ($/Share) Date 5% 10%
- ---- ---------- ------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mary Alice Taylor(1).... 4,500,000 26.5% $0.45 9/9/09 $75,596,474 $117,862,774
J. Terrence Drayton(2).. 1,650,000 9.7 0.45 9/9/09 27,718,707 43,216,351
Ken Deering(3).......... 200,000 1.2 0.45 6/11/09 3,319,487 5,115,668
Robert G. Duffy(4)...... 100,000 0.6 0.45 6/11/09 1,659,744 2,557,834
Jonathan W. Landers(5).. 100,000 0.6 0.45 6/11/09 1,659,744 2,557,834
</TABLE>
- --------
(1) Ms. Taylor's option was granted outside of the 1997 stock incentive
compensation plan and she exercised this option in full on September 9,
1999. Ms. Taylor has granted us a right of repurchase on these shares.
This right lapses as to one-fourth of the shares on September 2, 2000, and
thereafter on the second day of every month at a rate of one forty-eighth
of the total number of shares until all the shares are released from the
repurchase option.
(2) Mr. Drayton's option was granted outside of the 1997 stock incentive
compensation plan and he exercised this option in full on September 9,
1999. Mr. Drayton has granted us a right of repurchase on these shares.
This right lapses as to one-fourth of the shares on June 11, 2000, and
thereafter on the eleventh day of every month at a rate of one forty-
eighth of the total number of shares until all the shares are released
from the repurchase option.
(3) Mr. Deering exercised this option as to 100,000 shares on September 22,
1999 and 50,000 shares on December 13, 1999 and has granted us a right of
repurchase to these shares as required under the 1997 stock incentive
compensation plan.
(4) Mr. Duffy exercised this option as to 50,000 shares on November 10, 1999
and has granted us a right of repurchase to these shares as required under
the 1997 stock incentive compensation plan.
(5) Mr. Landers exercised this option in full on December 13, 1999 and has
granted us a right of repurchase to these shares as required under the
1997 stock incentive compensation plan.
48
<PAGE>
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the named
executive officers as of January 1, 2000.
Aggregated Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired Options at January 1, 2000 January 1, 2000(2)
On Option -------------------------------- -------------------------
Name Exercise Value Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- ---------------- -------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mary Alice Taylor....... 4,500,000 $ -- -- -- $ -- --
J. Terrence Drayton..... 1,650,000 -- -- -- -- --
Ken Deering............. 670,000 225,700 50,000 -- 527,500 --
Robert G. Duffy......... 250,000 -- 50,000 -- 527,500 --
Jonathan W. Landers..... 300,000 655,000 -- -- -- --
</TABLE>
- --------
(1) Equal to the deemed fair market value of the purchased shares on option
exercise date as determined in good faith by our board of directors, less
the exercise price paid for such shares.
(2) Value is determined by subtracting the exercise price from the proposed
initial public offering price of $11 for the common stock, and multiplying
by the number of shares underlying the options.
Employment Agreements
We have entered into employment agreements with five of our executive
officers:
Mary Alice Taylor. In September 1999, we entered into an employment
agreement with Mary Alice Taylor, our chairman and chief executive officer.
Under the agreement, we agreed to pay Ms. Taylor an annual base salary of
$200,000 and a quarterly bonus to be determined by the compensation committee.
In connection with this employment agreement we also granted Ms. Taylor an
option to purchase 4,500,000 shares of our common stock. On September 9, 1999
Ms. Taylor purchased 1,500,000 shares of our common stock at a purchase price
of $0.45 per share for an aggregate purchase price of $675,000 and exercised
options to purchase 4,500,000 shares of common stock at an exercise price of
$0.45 per share for an aggregate purchase price of $2,025,000. We also loaned
Ms. Taylor a total of $2,241,000 pursuant to two full recourse promissory
notes, each with an annual interest rate of 5.98%. Ms. Taylor used this loan
and cash to purchase the 1,500,000 shares and to exercise the 4,500,000
options. All principal and accrued interest under the loan remains outstanding
and is due and payable on September 9, 2004. As of January 1, 2000, the
outstanding balance of Ms. Taylor's loan was approximately $2,283,000.
As of January 1, 2000, HomeGrocer.com had a right to repurchase 4,500,000
shares of unvested common stock held by Ms. Taylor. This right lapses with
respect to one-fourth (1/4th) of the unvested shares on September 2, 2000, and
thereafter on the second day of every month at a rate of one forty-eighth
(1/48th) of the total number of shares, until all of the shares are released
from the repurchase option, subject to Ms. Taylor's continued service with
HomeGrocer.com. If Ms. Taylor dies or becomes permanently disabled, the
repurchase right will lapse to the extent of the greater of 50% of the shares
still subject to the repurchase right or the number of shares that would have
vested had Ms. Taylor continued in the employment of HomeGrocer.com for an
additional 12 months. If Ms. Taylor's employment is terminated without cause or
she resigns for good reason, the lesser of 750,000 shares or all of the shares
still subject to the repurchase right shall be released from the repurchase
right and we will pay Ms. Taylor's salary for two years after the date of her
termination or resignation. If HomeGrocer.com merges into or is acquired by
another entity and Ms. Taylor is not offered a similar position with similar
responsibilities by the surviving entity, the greater of 3,000,000 shares or
the number of shares that would have been released from the repurchase right if
Ms. Taylor had continued her employment for another two years, will be released
from the repurchase right. Under the terms of the agreement, we also granted
Ms. Taylor piggyback registration rights for her shares of common stock.
HomeGrocer.com will also pay relocation-related expenses incurred by Ms.
Taylor.
49
<PAGE>
J. Terrence Drayton. In June 1999, we entered into an employment agreement
with J. Terrence Drayton, our president. Under the employment agreement, we
agreed to pay Mr. Drayton a base salary of $200,000 per year and a quarterly
bonus to be determined by the compensation committee. In connection with this
employment agreement, we also granted Mr. Drayton an option to purchase
1,650,000 shares of our common stock. On September 9, 1999 Mr. Drayton
purchased 550,000 shares of HomeGrocer.com common stock at a price of $0.45 per
share for an aggregate purchase price of $247,500 and exercised options to
purchase 1,650,000 shares of common stock at an exercise price of $0.45 per
share for an aggregate purchase price of $742,500. We also loaned Mr. Drayton
$990,000 pursuant to two full recourse promissory notes, each with an annual
interest rate of 5.98%. Mr. Drayton used this loan to purchase the 550,000
shares and to exercise the 1,650,000 options. All principal and accrued
interest under the loan remains outstanding and is due and payable on September
9, 2004. As of January 1, 2000, the outstanding balance of Mr. Drayton's loan
was approximately $1,008,000.
As of January 1, 2000, HomeGrocer.com had a right to repurchase 1,650,000
shares of unvested common stock held by Mr. Drayton. This right will lapse with
respect to one-fourth (1/4th) of the total number of shares as of June 11,
2000, and thereafter on the eleventh day of every month at a rate of one forty-
eighth (1/48th) of the total number of shares, until all of the shares are
released from the repurchase option, subject to Mr. Drayton's continued service
with HomeGrocer.com. If Mr. Drayton dies or becomes permanently disabled, the
repurchase right will lapse to the extent of the greater of 50% of the shares
still subject to the repurchase right or the number of shares that would have
vested had Mr. Drayton continued in the employment of HomeGrocer.com for 12
months. Under the agreement, if Mr. Drayton's employment is terminated without
cause or he resigns for good reason, the lesser of 270,000 shares or all of the
shares still subject to the repurchase right shall be released from the
repurchase right and we will pay Mr. Drayton's salary for two years after the
date of his termination or resignation. If HomeGrocer.com merges into or is
acquired by another entity and Mr. Drayton is not offered a similar position
with similar responsibilities by the surviving entity, the greater of
1,100,000 shares or the number of shares that would have been released from the
repurchase right if Mr. Drayton had continued his employment for another two
years will be released from the repurchase right. Under the terms of the
agreement, we also granted Mr. Drayton piggyback registration rights for his
shares of common stock.
Daniel R. Lee. In November 1999, we entered into an employment agreement
with Daniel R. Lee, our senior vice president and chief financial officer.
Under the agreement, we agreed to pay Mr. Lee a base salary of $180,000 per
year and a quarterly bonus to be determined by the compensation committee. The
bonus is guaranteed to be at least $50,000 for 2000. We granted Mr. Lee an
option to purchase 1,200,000 shares of our common stock at an exercise price of
$2.50 per share. Mr. Lee exercised such options on December 13, 1999 for an
aggregate purchase price of $3,000,000. As of January 1, 2000, HomeGrocer.com
had a right to repurchase the 1,200,000 shares held by Mr. Lee. Such right
lapses with respect to one-fourth of the shares on November 3, 2000 and as to
25,000 additional shares on the third day of every month thereafter at the rate
of 25,000 shares per month. If Mr. Lee's employment is terminated by
HomeGrocer.com during the first year, HomeGrocer.com's repurchase right shall
lapse in accordance with the pro-rated number of months that he was employed
with HomeGrocer.com. HomeGrocer.com will also pay relocation-related expenses
incurred by Mr. Lee.
David A. Pace. In August 1999, we entered into an employment agreement with
David A. Pace, our senior vice president of people capability. Under the
agreement, we agreed to pay Mr. Pace a base salary of $175,000 per year and a
quarterly bonus guaranteed to be $50,000 for 1999. If Mr. Pace's employment is
terminated by HomeGrocer.com during the first year, Mr. Pace is entitled to
receive continuation of his salary for 12 months beyond the date of his
termination.
Rex L. Carter. In November 1999, we entered into an employment agreement
with Rex L. Carter, our senior vice president of systems development and
technology. Under the agreement, we agreed to pay Mr. Carter a base salary of
$175,000 per year and an annual bonus of $50,000 based on the achievement of
mutually agreed upon objectives for the calendar year. In addition, Mr. Carter
is entitled to receive
50
<PAGE>
reimbursement of reasonable expenses incurred by him and his family relating
to his move to the Seattle, Washington region from Minnesota.
Stock Plans
1999 Stock Incentive Plan. The 1999 stock incentive plan was adopted by the
board of directors in December 1999. We will be submitting it for approval by
the stockholders prior to the closing of this offering. We have reserved a
total of 12,500,000 shares plus an annual increase on the first day of each of
the next five HomeGrocer.com fiscal years beginning in 2001 equal to the
lesser of 2,500,000 shares or 2.5% of the outstanding shares of common stock
on the last day of the preceding fiscal year for issuance under the 1999 stock
incentive plan. HomeGrocer.com has not issued any options or other stock
awards under the 1999 stock incentive plan to date. The 1999 stock incentive
plan provides for the grant of incentive stock options to employees and
directors who are employees, and the grant of nonstatutory stock options and
awards of restricted stock, stock appreciation rights and stock units to
employees, non-employee directors and consultants. The compensation committee
currently administers the 1999 stock incentive plan. The administrator of the
1999 stock incentive plan will determine number, vesting schedule, and
exercise price for options, or conditions for awards of restricted stock,
stock appreciation rights and stock units granted under the 1999 stock
incentive plan, provided, however, an individual employee may not receive
aggregate option grants and other stock awards for more than 2,500,000 shares
in any fiscal year, and the exercise price of incentive stock options must be
at least equal to the fair market value of the common stock on the date of
grant or, in the case of a 10% shareholder, at least equal to 110% of the fair
market value of the common stock on the date of grant. Payment of the exercise
price or purchase price may be made in cash or other consideration as
determined by the administrator. In the event a participant is terminated from
service for HomeGrocer.com in circumstances that may constitute cause, the
participant's right to exercise any award is suspended until the administrator
determines whether cause existed, and if so, the participant's rights with
respect to the award are forfeited.
In the event of a sale of all or substantially all of the assets of
HomeGrocer.com, or the merger or consolidation of HomeGrocer.com with or into
another corporation, the administrator may take any one or more of the
following actions, in its discretion:
. Provide that outstanding awards, or types of outstanding awards, shall
be assumed or equivalent awards be substituted by the successor
corporation;
. Provide notice to award recipients that all awards, or types of awards,
to the extent then exercisable or to be exercisable as a result of the
transaction, must be exercised on or before a specified date after which
the awards terminate;
. Terminate each award, or types of awards, in exchange for a payment
equal to the excess of the fair market value of the shares underlying
the award that are vested and exercisable immediately prior to the
closing of the transaction over the exercise price with respect to such
shares;
. Facilitate the exercise of awards that become exercisable as a result of
the transaction by adopting procedures providing for the exercise of
unvested awards contingent on the consummation of the transaction; or
. Provide that repurchase rights with respect to stock purchased upon
exercise of an option or a stock purchase right be assigned to the
successor corporation, or if not so assigned, lapse in full upon the
consummation of the transaction.
The board of directors may amend or terminate the 1999 stock incentive plan
provided that no action that impairs the rights of any holder of an
outstanding option may be taken without the holder's consent. In addition, we
will obtain requisite stockholder approval for any action requiring
stockholder approval under applicable law. The 1999 stock incentive plan will
terminate in December 2009 unless the board of directors terminates it
earlier.
51
<PAGE>
1997 Stock Incentive Compensation Plan. The 1997 plan was adopted by the
board of directors and approved by the stockholders on October 7, 1997. It
provides for the grant of incentive stock options to employees and the grant of
nonstatutory stock options and stock awards to employees, non-employee
directors and consultants. A total of 15,924,334 shares of common stock has
been reserved for issuance under the 1997 plan as of the date of this offering.
As of January 1, 2000, options to purchase 8,250,870 shares of common stock had
been exercised, options to purchase a total of 5,886,342 shares at a weighted
average exercise price of $1.69 were outstanding and 1,787,122 shares remained
available for future grants. The plan has no fixed expiration date; provided,
however, that no incentive stock options may be granted more than ten years
after the plan's adoption (on October 7, 1997). Accordingly, after October 7,
2007, no incentive stock options may be granted under the 1997 plan.
Some of our employees reside in California and have received and exercised
options under our 1997 plan. We recently discovered that under the laws of
California, our 1997 plan did not include an exhibit that is required under the
laws of that state. To remedy this situation and comply with California law, we
expect to offer rescission rights to such employees, meaning that they would be
permitted to reverse their exercise of their options. As of January 17, 2000,
the situation involves a maximum of 782,000 shares of our common stock that
were issued upon the exercise of stock options and an additional 1,320,650
options that have not yet been exercised. The maximum amount payable by us if
all of our employees residing in California were to rescind their previous
exercise of options is approximately $776,531.
The 1997 plan is currently administered by the compensation committee of the
board of directors. The terms of options and stock awards granted under the
1997 Plan are determined by the administrator, including the number of shares
underlying options, exercise price, term and exercisability. The term of
options shall be 10 years from date of grant unless otherwise established by
the administrator, and options generally vest at the rate of 25% of the total
number of shares subject to options 12 months after the date of grant and
1/48th of the total number of shares subject to options each month thereafter.
The exercise price of incentive stock options must be at least equal to the
fair market value of the common stock on the date of grant or, in the case of a
10% shareholder, at least equal to 110% of the fair market value of the common
stock on the date of grant. Payment of the exercise price or purchase price may
be made in cash or other consideration as determined by the administrator. The
1997 plan does not impose an annual limitation on the number of shares subject
to options that may be issued to any individual employee.
In addition, upon a sale of all or substantially all of the HomeGrocer.com
assets, or a merger or consolidation of HomeGrocer.com with or into another
corporation, all options outstanding under the 1997 plan will be assumed or
equivalent options substituted by the successor corporation, unless the
successor corporation does not agree to this assumption or substitution, in
which case the options shall automatically accelerate so that each option
shall, immediately prior to the closing of the transaction, become 100% vested
and exercisable. Any options that are assumed or replaced in the sale, merger
or consolidation that do not otherwise accelerate, shall be accelerated in the
event that the option holder's employment or services are terminated within two
years following the transaction unless the option holder is terminated for
cause or leaves voluntarily without good reason. Also, the acceleration of
options shall not occur if it would make unavailable "pooling of interest"
accounting treatment for the sale, merger or consolidation.
1999 Directors' Stock Option Plan. The 1999 directors' plan was adopted by
our board of directors in December 1999 and will become effective upon the
closing of this offering. We will be submitting it for approval by the
stockholders prior to the closing of this offering. A total of 500,000 shares
of common stock has been reserved for issuance under the directors' plan. The
directors' plan provides for the grant of nonstatutory stock options to non-
employee directors of HomeGrocer.com. The directors' plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the board of directors. To the extent that
conflicts of interest arise, it is expected that conflicts will be addressed by
having any interested director abstain from both deliberations and voting
regarding matters in which the director has a personal interest. Unless
terminated earlier, the directors' plan will terminate in December 2009.
52
<PAGE>
The directors' plan provides that each person who becomes a non-employee
director of HomeGrocer.com will be granted a nonstatutory stock option to
purchase 20,000 shares of common stock on the date on which he or she first
becomes a non-employee director of HomeGrocer.com, which option will vest and
become exercisable in installments of 25% of the total number of shares subject
to the option on the first, second, third and fourth anniversaries of the date
of grant. Thereafter, on the date of our annual stockholders' meeting each year
following the year of the initial grant, each non-employee director of
HomeGrocer.com will be granted an additional option to purchase 5,000 shares of
common stock if, on that date, he or she has served on our board of directors
for at least six months, which option shall be fully vested and exercisable on
the date of grant. Such annual grants become exercisable in full on the fourth
anniversary of the date of grant. No option granted under the directors' plan
is transferable by the option holder other than by will or the laws of descent
or distribution or under a domestic relations order, and each option is
exercisable, during the lifetime of the option holder, only by that option
holder. The exercise price of all stock options granted under the directors'
plan shall be equal to the fair market value of a share of HomeGrocer.com
common stock on the date of grant of the option. Options granted under the
directors' plan have a term of ten years. However, unvested options will
terminate when the optionee ceases to serve as a director and vested options
will terminate if they are not exercised within 12 months after the director's
death or disability or within 90 days after the director ceases to serve as a
director for any other reason.
In the event of a sale of all or substantially all of the assets of
HomeGrocer.com, or the merger or consolidation of HomeGrocer.com with or into
another corporation in which HomeGrocer.com is not the surviving corporation or
in which the ownership of more than 50% of the total combined voting power of
HomeGrocer.com outstanding securities changes hands, or if during any two
consecutive two-year periods persons who constitute the board at the beginning
of such period (or who were appointed by a majority of the board in place at
the beginning of such period) cease to constitute at least 50% of the board,
each option outstanding under the directors' plan will be assumed or equivalent
options substituted by our acquirer, unless our acquirer does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously exercised. In
connection with any acquisition, each director holding options under the
directors' plan will have the right to exercise his or her options immediately
before the consummation of the merger as to all shares underlying the options,
including shares which would not have been vested and exercisable but for the
acquisition. Our board of directors may amend or terminate the directors' plan
as long as such action does not adversely affect any outstanding option and we
obtain stockholder approval for any amendment to the extent required by law.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan, or
the 1999 purchase plan, provides our employees with an opportunity to purchase
our common stock through accumulated payroll deductions. This plan will become
effective upon the closing of this offering. A total of 3,000,000 shares of
common stock have been reserved for issuance under the 1999 purchase plan, plus
an annual increase on the first day of each of our next five fiscal years from
2001 through 2005 equal to the lesser of:
. 500,000 shares;
. 0.5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. any lesser amount determined by the board.
The 1999 purchase plan will be administered by the board of directors or by
a committee appointed by the board. The 1999 purchase plan permits eligible
employees to purchase common stock through payroll deductions up to a maximum
of $25,000 of fair market value of such stock in each calendar year or up to a
maximum of 2,500 shares for each purchase period, whichever is lesser.
Employees are eligible to participate if they are employed by us or any
majority-owned subsidiary for at least an average of 20 hours per week and
customarily more than five months in any calendar year. However, an employee
cannot participate in the plan at any time his or her participation in the plan
would cause his or her outstanding options plus ownership of stock to equal 5%
or more of the total voting power or value of all classes of our stock.
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<PAGE>
The 1999 purchase plan provides that unless the board of directors or its
committee determines otherwise, the plan will operate by a series of
overlapping offering periods of approximately 12 months' duration, with new
offering periods (other than the first offering period) commencing on the first
trading day on or after January 1 and July 1 of each year. Each offering period
will generally consist of two consecutive purchase periods of six months'
duration, at the end of which the amount in participants' accounts will be used
to make an automatic purchase of shares to be held in a plan account on their
behalf.
The board has determined that the first offering period will commence upon
the effective date of this offering and end on December 31, 2000 with a single
corresponding purchase period, and that, notwithstanding the flexibility in the
plan that allows twelve month periods, beginning January 1, 2001, the offering
period shall be of six months' duration with a coinciding six month purchase
period. The price at which common stock will be purchased under the 1999
purchase plan is equal to 85% of the fair market value of the common stock on
the first day of the offering period or on the last day of the applicable
purchase period, whichever is lower. The initial purchase period will commence
on the date of this prospectus and end on the last trading day on or before
June 30, 2000, with a subsequent purchase period commencing on the first
trading day on or after July 1 and ending on the last day of the offering
period in December 2000. Employees may end their participation in an offering
period at any time, and participation automatically ends on termination of
employment, with accrued funds as of the date of termination being returned to
the employee.
In the event we are acquired or we sell substantially all of our assets,
each outstanding option to purchase shares under the 1999 purchase plan will be
assumed or an equivalent option substituted by our acquirer. If our acquirer
does not agree to assume or substitute for the option, any offering period then
in progress will be shortened and a new purchase date occurring prior to the
closing of the transaction will be set.
Generally, our board may change or terminate offering, holding and purchase
periods, including extending new offering periods to up to 27 months' duration,
and may amend, modify or terminate the 1999 purchase plan at any time as long
as such action does not adversely affect any outstanding rights to purchase
stock under the 1999 purchase plan. However, the board may amend or terminate
the 1999 purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
The employee may be required to hold the stock for a minimum period established
at the board of directors' or its committee's discretion within the applicable
laws, after purchase. Unless terminated earlier by the board, the 1999 purchase
plan will terminate twenty years after the closing of the offering. The 1999
purchase plan is intended to qualify under Section 423 of the Internal Revenue
Code of 1986, as amended.
401(k) Plan
We maintain the HomeGrocer.com 401(k) Plan for eligible employees. In order
to be a participant in the 401(k) plan, an employee must have attained age 21
and have worked for HomeGrocer.com for three months. Eligible employees may
join the plan at the beginning of each quarter. A participant may contribute up
to the lesser of 20% of his or her total annual compensation to the 401(k) plan
on a pre-tax basis, or a statutorily prescribed pre-tax annual limit. The
annual limit for 1999 is $10,000. Each participant is fully vested in his or
her deferred salary contributions. Participant contributions are held and
invested by the 401(k) plan's trustee.
Currently, we match participant contributions dollar for dollar up to 5% of
their compensation if the participant has performed at least 1,000 hours of
service during the year. Matching contributions vest 33% after two years of
service, 66% after three years of service, and 100% after four years of
service. HomeGrocer.com currently pays the administrative costs for the plan.
The 401(k) plan is intended to qualify under Section 401 of the Internal
Revenue Code, so that contributions by us or our employees to the 401(k) plan,
and income earned on the 401(k) plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan, and so that our contributions
will be deductible by us when made.
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Limitation of Liability and Indemnification Matters
Our articles of incorporation which we expect to be in force on the date of
this prospectus, limit the liability of directors to the fullest extent
permitted by the Washington Business Corporation Act as it currently exists or
as it may be amended in the future. Consequently, subject to the Washington
Business Corporation Act, no director shall be personally liable to
HomeGrocer.com or its shareholders for monetary damages resulting from his or
her conduct as a director of HomeGrocer.com, except liability for:
. acts or omissions involving intentional misconduct or knowing violations
of law;
. unlawful distributions; or
. transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our articles of incorporation also provide that we shall indemnify any
individual made a party to a proceeding because that individual is or was a
director of HomeGrocer.com and shall advance or reimburse reasonable expenses
incurred by such individual in advance of the final disposition of the
proceeding to the full extent permitted by applicable law. Any repeal of or
modification to our articles of incorporation may not adversely affect any
right of a director of HomeGrocer.com who is or was a director at the time of
such repeal or modification. To the extent the provisions of our articles of
incorporation provide for indemnification of directors for liabilities arising
under the Securities Act of 1933, those provisions are, in the opinion of the
Securities and Exchange Commission, against public policy as expressed in the
Securities Act and they are therefore unenforceable.
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our employees and agents to the full extent permitted by law. In
addition, we have entered into separate indemnification agreements with our
directors and executive officers that could require us, among other things, to
indemnify them against liabilities that arise because of their status or
service as directors or executive officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. Finally, we intend to purchase and maintain a liability insurance
policy pursuant to which our directors and officers may be indemnified against
liability they may incur for serving in their capacities as directors and
officers of HomeGrocer.com.
We believe that the limitation of liability provision in our articles of
incorporation, the indemnification provisions in our bylaws, the
indemnification agreements and the liability insurance policy will facilitate
our ability to continue to attract and retain qualified individuals to serve as
directors and officers of HomeGrocer.com.
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RELATED PARTY TRANSACTIONS
From our inception through January 1, 2000, we have issued and sold shares
of our capital stock as follows:
. 29,605,536 shares of common stock at a weighted average price of $0.53
per share of cash and other consideration,
. 8,000,000 shares of Series A preferred stock at a price of $0.50 per
share in February, April, June and July 1998,
. 16,857,142 shares of Series B preferred stock at a price of $0.35 per
share in September 1998,
. 29,942,050 shares of Series C preferred stock at a price of $1.75 per
share in April and May 1999,
. 18,407,546 shares of Series D preferred stock at a price of $5.80 per
share in September through November 1999,
. warrants to purchase 1,800,000 shares of common stock at a price of
$0.375 per share,
. warrants to purchase 1,269,786 shares of common stock at a price of
$0.50 per share,
. warrants to purchase 153,600 shares of Series C preferred stock at a
price of $0.78125 per share, and
. warrants to purchase 275,862 shares of Series D preferred stock at a
price of $5.80 per share.
The following table summarizes the shares of capital stock purchased by
executive officers, directors and five-percent shareholders of HomeGrocer.com,
and persons and entities associated with them, in the private placement
transactions described above. Shares held by affiliated persons and entities
have been added together for the purposes of this chart.
<TABLE>
<CAPTION>
Outstanding
Warrants
Series A Series B Series C Series D to Purchase
Common Preferred Preferred Preferred Preferred Common
Investor Stock Stock Stock Stock Stock Stock
- -------- --------- --------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mary Alice Taylor (1)... 6,000,000 -- -- -- 17,240 --
J. Terrence Drayton
(2).................... 6,150,000 -- -- 2,758 -- 100,000
Amazon.com, Inc. (3).... -- -- -- 24,285,716 3,448,274 --
Hummer Winblad Venture
Partners (3)........... 700,000 800,000 8,285,714 484,732 3,448,274 --
Kleiner Perkins Caufield
& Byers (4)............ 1,300,000 200,000 8,285,714 484,732 3,448,274 200,000
The Barksdale Group,
L.L.C. (5)............. 200,000 -- -- 2,857,142 2,586,206 --
Charles Barbo (6)....... 1,000,000 700,000 -- 38,618 229,490 --
Madrona Investment
Group, LLC (7)......... 200,000 500,000 -- 27,586 862,068 300,000
Ken Deering (8)......... 1,170,000 -- -- -- -- --
Lazarus Family
Investments LLC (9).... 200,000 200,000 285,714 26,798 170,756 --
Philip S. Schlein....... 200,000 50,000 -- 2,758 20,000 --
</TABLE>
- --------
(1) Includes shares held by Mary Alice Taylor, Mary Alice Taylor 1999 5-Year
GRAT, Taylor Family 1999 Trust, Emery DeWitt Wooten 1999 5-Year GRAT and
GMME Partnership, L.P. Ms. Taylor is our chief executive officer and a
director of HomeGrocer.com. 4,500,000 of Ms. Taylor's shares are subject
to a repurchase right in favor of HomeGrocer.com pursuant to an agreement
between Ms. Taylor and HomeGrocer.com.
(2) Includes shares held by J. Terrence Drayton, Terran Ventures, Inc.,
Drayton Resources Ltd. and Drayton Consulting Services, Ltd. Mr. Drayton
is our president and a director of HomeGrocer.com. 1,650,000 of Mr.
Drayton's shares are subject to a repurchase right in favor of
HomeGrocer.com pursuant to an agreement between Mr. Drayton and
HomeGrocer.com. Includes warrants to purchase 100,000 shares of common
stock held by Terran Ventures, Inc.
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<PAGE>
(3) Includes shares held by Hummer Winblad Venture Partners III, L.P., Hummer
Winblad Venture Partners IV, L.P. and Hummer Winblad Technology Fund III,
L.P., together a 13% shareholder of HomeGrocer.com.
(4) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P., KPCB
VIII Founders Fund, L.P. and KPCB Information Sciences Zaibatsu Fund II,
L.P., together a 13% shareholder of HomeGrocer.com Includes warrants to
purchase 200,000 shares of common stock held by Kleiner Perkins Funds-
related entities.
(5) Includes shares held by The Barksdale Group, L.L.C., Peter L.S. Currie (a
principal and officer of The Barksdale Group, LLC), James L. Barksdale,
Pickwick Group, L.P. and Barksdale Investments, L.L.C., together a 5.5%
shareholder of HomeGrocer.com The other Barksdale-related entities
disclaim beneficial ownership of 344,740 shares of Series D preferred
stock held by Mr. Currie.
(6) Includes shares held by C&LB Family Limited Partnership, Charles Barbo, a
director of HomeGrocer.com, Charles K. and Linda K. Barbo, Anne Barbo,
Julie Anne Barbo Trust dated 12/10/91 and Sarah Barbo Staiger.
(7) Includes warrants to purchase 300,000 shares of common stock held by
Madrona Investment Group, LLC, 431,034 shares held by Madrona Holding I,
L.L.C. for the benefit of Madrona Venture Fund I-A, L.P., Madrona Venture
Fund I-B, L.P. and Madrona Managing Director Fund, LLC, together a 1.5%
shareholder of HomeGrocer.com.
(8) Does not include an option to purchase 50,000 shares of common stock held
by Mr. Deering, our vice president of Storefront.
(9) Includes shares held by Lazarus Family Investments LLC, Lazarus Family
Investments III, LLC and Lazarus Family Investments II, LLC. Jonathan
Lazarus, a director of HomeGrocer.com, is a principal in each of these
funds.
HomeGrocer.com has had discussions with Fitpro Pty Ltd., an Australian
company and a shareholder of HomeGrocer.com, concerning the possibility of
developing a joint venture to introduce the HomeGrocer.com business to South
East Asia, including Australia, New Zealand and Singapore. In the absence of an
agreement on mutually satisfactory terms to form such a joint venture, Fitpro
Pty Ltd. may have certain rights of first refusal regarding the HomeGrocer.com
service in South East Asia. HomeGrocer.com has no current plans to expand to
the South East Asian market in the foreseeable future.
In September 1999, we made loans to Mary Alice Taylor, our chief executive
officer, and Mr. Drayton in connection with their exercises of stock options
and purchases of our common stock. We loaned Ms. Taylor a total of $2,241,000
and Mr. Drayton a total of $990,000, each pursuant to two full recourse
promissory notes, all with an annual interest rate of 5.98%. All principal and
accrued interest under the loans remain outstanding and are due and payable on
September 9, 2004. As of January 1, 2000, the outstanding balance of Ms.
Taylor's loan was approximately $2,283,000 and the outstanding balance of Mr.
Drayton's loan was approximately $1,008,000.
In September 1999, we entered into an agreement with Ms. Taylor pursuant to
which she purchased an aggregate of 6,000,000 shares of our common stock
outside of our 1997 stock incentive compensation plan for an aggregate purchase
price of $2,700,000. As part of such agreement, Ms. Taylor has granted to us a
right of repurchase with respect to 4,500,000 shares of our common stock. Our
repurchase right lapses over a period of four years.
In June 1999, we entered into an agreement with Mr. Drayton pursuant to
which he purchased an aggregate of 2,200,000 shares of our common stock outside
of our 1997 stock incentive compensation plan for an aggregate purchase price
of $990,000. As part of such agreement, Mr. Drayton has granted to us a right
of repurchase with respect to 1,650,000 shares of our common stock. Our
repurchase right lapses over a period of four years.
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<PAGE>
In November 1999, we entered into an agreement with Amazon.com, LLC under
which we have agreed to pay Amazon an aggregate of $10 million over the next
two years to deliver advertising mailings up to two million of their customers
residing in our service areas. Amazon.com, LLC is a wholly owned subsidiary of
Amazon.com, Inc., a 27% shareholder. Two of our board members, Tom Alberg and
David Risher, are Amazon.com affiliates: Mr. Alberg is a member of
Amazon.com's board of directors and Mr. Risher is Amazon.com's senior vice
president of product development.
Amazon.com, Inc. also has special shareholder rights pursuant to an
agreement with Homegrocer.com:
. If we receive an offer to purchase capital stock representing more than
20% of our capital stock or all or substantially all of our assets, we
must give notice of the terms of the offer to Amazon.com, and Amazon.com
then has seven days to determine whether to accept the terms. If
Amazon.com does not accept the terms, we are free to complete such a
transaction with a third party on no more favorable terms for a period
of 60 days. After this 60 day period, we must again give Amazon notice
of any such offer. This right expires four years after the closing of
this offering.
. Amazon.com had the right to purchase its pro rata portion of the shares
issued in this offering to maintain its percentage ownership of
HomeGrocer.com. Amazon.com has waived this right.
. Amazon.com may not acquire more than 35% of our capital stock unless
Amazon.com first negotiates with us to purchase all of our capital
stock. This restriction will terminate on the closing of this offering.
Julie Barbo, daughter of HomeGrocer.com director Charles K. Barbo, has
served as a business and legal consultant to HomeGrocer.com and was our
assistant secretary until December 1999.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 1, 2000 and as adjusted to reflect
the sale of the common stock offered by HomeGrocer.com under this prospectus
by:
. each of HomeGrocer.com directors and named executive officers;
. all directors and executive officers as a group; and
. each person who is known to own beneficially more than 5% of our common
stock.
Except as otherwise noted, the address of each person listed in the table is
c/o HomeGrocer.com, 10230 N.E. Points Drive, Kirkland, Washington 98033. The
table includes all shares of common stock issuable within 60 days of January 1,
2000 upon the exercise of options and other rights beneficially owned by the
indicated stockholders on that date. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To the knowledge
of HomeGrocer.com, except under applicable community property laws or as
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all shares beneficially owned. Assuming the
conversion of all outstanding shares of preferred stock, the applicable
percentage of ownership for each stockholder is based on 102,812,274 shares of
common stock outstanding as of January 1, 2000, together with applicable
options for that stockholder. The number of shares underlying options and
warrants listed below includes only those shares underlying options and
warrants immediately exercisable or exercisable within 60 days of January 1,
2000. Shares of common stock issuable upon exercise of options and other rights
beneficially owned were deemed outstanding for the purpose of computing the
percentage ownership of the person holding these options and other rights, but
are not deemed outstanding for computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Number of Shares Outstanding (1)
Shares Underlying -----------------
Name and Address of Beneficial Beneficially Options & Before After
Owner Owned Warrants Offering Offering
- ------------------------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Amazon.com, Inc. (2)............... 27,733,990 -- 26.98% 22.22%
1200 12th Avenue S., Suite 1200
Seattle, WA 98144
Kleiner Perkins Caufield & Byers
(3)............................... 13,718,720 200,000 13.51 11.13
2750 Sand Hill Road
Menlo Park, CA 94025
Hummer Winblad Venture Partners
(4)............................... 13,718,720 -- 13.34 10.99
2 South Park, 2nd Floor
San Francisco, CA 94107
J. Terrence Drayton (5)............ 6,152,758 100,000 6.08 5.01
Mary Alice Taylor (6).............. 6,017,240 -- 5.85 4.82
The Barksdale Group, L.L.C. (7).... 5,643,348 -- 5.49 4.52
2730 Sand Hill Road, Suite 100
Menlo Park, CA 94043
Charles K. Barbo (8)............... 1,968,108 -- 1.91 1.58
1155 Valley Street, Suite 400
Seattle, WA 98109
Madrona Investment Group, LLC (9).. 1,589,654 300,000 1.83 1.51
1000 Second Avenue, Suite 3700
Seattle, WA 98104
Ken Deering........................ 1,170,000 50,000 1.19 *
Jonathan D. Lazarus (10)........... 883,268 -- * *
One Mercer Plaza 2835 82nd Avenue
S.E., Suite 310
Mercer Island, WA 98040
Jonathan W. Landers................ 300,000 -- * *
Philip S. Schlein.................. 272,758 -- * *
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Robert G. Duffy.................... 250,000 50,000 * *
All directors and executive
officers as a group (20
persons) (11)..................... 81,697,564 1,551,000 79.77 65.88
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
59
<PAGE>
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) David Risher, a director of HomeGrocer.com and a vice president of
Amazon.com, Inc., disclaims beneficial ownership of the shares held by
Amazon.com.
(3) Includes shares held by Hummer Winblad Venture Partners III, L.P., Hummer
Winblad Venture Partners IV, L.P. and Hummer Winblad Technology Fund III,
L.P. Mark Gorenberg, a director of HomeGrocer.com, is a principal in
Hummer Winblad Venture Partners. Mr. Gorenberg disclaims beneficial
ownership of the shares held by these entities except to the extent of his
pecuniary interest in those shares.
(4) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P., KPCB
VIII Founders Fund, L.P. and KPCB Information Sciences Zaibatsu Fund II,
L.P. Douglas Mackenzie, a director of HomeGrocer.com, and a general
partner of the Kleiner Perkins funds, disclaims beneficial ownership of
shares held by these entities except to the extent of his pecuniary
interest therein; also includes 200,000 shares issuable upon exercise of
warrants held by affiliates of Kleiner Perkins Caufield & Byers VIII, L.P.
(5) Includes shares held by J. Terrence Drayton, Terran Ventures, Inc.,
Drayton Resources Ltd. and Drayton Consulting Services Ltd. Mr. Drayton
disclaims beneficial ownership of shares held by Drayton Consulting
Services, Ltd. As of January 1, 2000, 1,650,000 of Mr. Drayton's shares
are subject to a repurchase right in favor of HomeGrocer.com pursuant to
an agreement between Mr. Drayton and HomeGrocer.com; also includes
100,000 shares issuable upon exercise of warrants held by Terran Ventures,
Inc.
(6) Includes shares held by Mary Alice Taylor, Mary Alice Taylor 1999 5-Year
GRAT, Taylor Family 1999 Trust, Emery DeWitt Wooten 1999 5-Year GRAT and
GMME Partnership, L.P. Ms. Taylor, chief executive officer and chairman of
the board of directors of HomeGrocer.com, disclaims beneficial ownership
of the shares held by the Taylor Family 1999 Trust. As of January 1, 2000,
4,500,000 of Ms. Taylor's shares are subject to a repurchase right in
favor of HomeGrocer.com pursuant to an agreement between Ms. Taylor and
HomeGrocer.com.
(7) Includes shares held by The Barksdale Group, L.L.C., Peter LS Currie (a
principal and officer of The Barksdale Group, LLC), James L. Barksdale,
Pickwick Group, L.P. and Barksdale Investments, L.L.C. The other
Barksdale-related entities disclaim beneficial ownership of 344,740 shares
of Series D preferred stock held by Mr. Currie.
(8) Includes shares held by C&LB Family Limited Partnership, Charles K. Barbo,
Charles K. and Linda K. Barbo, Anne Barbo, Julie Anne Barbo Trust dated
12/10/91 and Sarah Barbo Staiger. Charles K. Barbo, a director of
HomeGrocer.com, disclaims beneficial ownership of the shares held by Anne
Barbo, the Julie Anne Barbo Trust dated 12/10/91 and Sarah Barbo Staiger.
(9) Includes 300,000 shares issuable upon exercise of warrants held by Madrona
Investment Group, LLC and 431,034 shares held by Madrona Holdings I,
L.L.C. for the benefit of Madrona Venture Fund I-A, L.P., Madrona Venture
Fund I-B, L.P. and Madrona Managing Director Fund, L.L.C. Mr. Alberg, a
director of HomeGrocer.com and a principal of Madrona Investment Group,
LLC and the Madrona funds, disclaims beneficial ownership of the shares
held by Madrona Investment Group, LLC and the Madrona funds except to the
extent of his pecuniary interest therein.
(10) Includes shares held by Lazarus Family Investments LLC, Lazarus Family
Investments III, LLC and Lazarus Family Investments II, LLC. Jonathan
Lazarus, a director of HomeGrocer.com, is a principal in each of these
funds.
(11) Includes all shares described above and an additional 3,130,000 shares
held by other executive officers, of which 2,279,000 shares were
outstanding as of January 1, 2000 and 851,000 shares were subject to
options exercisable within 60 days of January 1, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, HomeGrocer.com will be authorized to
issue 1,000,000,000 shares of common stock, no par value per share, and
10,000,000 shares of undesignated preferred stock, no par value per share. All
currently outstanding shares of preferred stock will be converted into common
stock upon the closing of this offering.
Common Stock
As of January 1, 2000, there were 102,812,274 shares of common stock
outstanding that were held of record by 348 stockholders after giving effect to
the conversion of all outstanding shares of our preferred stock into common
stock. After giving effect to this offering and the conversion of our currently
outstanding preferred stock into common stock upon the closing of this
offering, there will be 124,812,274 shares of common stock outstanding,
assuming no exercise of the underwriter's over-allotment option.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any preferred stock that may be
outstanding after the completion of this offering, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available for that purpose. In the event of
liquidation, dissolution or winding up of HomeGrocer.com, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the prior distribution rights of any preferred stock
that may be outstanding after the completion of this offering. The common stock
has no preemptive or conversion rights or other subscription rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued upon completion of this offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 73,206,738 shares of common stock and automatically
retired. Thereafter, the board of directors will have the authority, without
further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock, no par value, in one or more series. The board of directors
will also have the authority to designate the rights, preferences, privileges
and restrictions of each such series, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of HomeGrocer.com without further
action by the stockholders. The issuance of preferred stock with voting and
conversion rights may also adversely affect the voting power of the holders of
common stock. In some circumstances, an issuance of preferred stock could have
the effect of decreasing the market price of the common stock. HomeGrocer.com
currently has no plans to issue any shares of preferred stock.
Warrants
As of January 1, 2000, there were warrants outstanding to purchase an
aggregate of 2,749,248 shares of common stock, at a weighted average exercise
price of $1.00 per share. Warrants to purchase 2,015,666 shares of common stock
will expire, if not exercised, upon completion of the offering. Warrants to
purchase the other 733,582 shares of common stock will expire between July 20,
2005 and September 15, 2009. Generally, each warrant contains provisions for
the adjustment of the exercise price and the aggregate number of shares
issuable upon the exercise of the warrant under some circumstances, including
stock dividends, stock splits, reorganizations, reclassifications or
consolidations.
Registration Rights
The holders of 84,481,738 shares of common stock (assuming the conversion of
all outstanding preferred stock upon completion of this offering) and warrants
to purchase 2,749,248 shares of common stock or their
61
<PAGE>
transferees are entitled to rights with respect to the registration of such
shares under the Securities Act. These rights are provided under the terms of
various agreements between HomeGrocer.com and the holders of these securities.
Subject to limitations in these agreements, the holders of at least 25% of
these securities then outstanding, or a lesser amount if the offering price to
the public would be an aggregate of at least $5,000,000, may require on two
occasions beginning six months after the date of this prospectus that we use
our best efforts to register these securities for public resale if Form S-3 is
not available. If HomeGrocer.com registers any of its common stock either for
its own account or for the account of other security holders, the holders of
these securities are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering. The holders of these securities may also
require us, not more than twice in any 12-month period, to register all or a
portion of these securities on Form S-3 when the use of that form becomes
available, provided, among other limitations, that the proposed aggregate
selling price, net of any underwriters' discounts or commissions, is at least
$1,000,000. We will be responsible for paying all registration expenses, and
the holders selling their shares will be responsible for paying all selling
expenses.
State Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of state law and our articles of incorporation and bylaws could
make more difficult the acquisition of HomeGrocer.com by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of HomeGrocer.com to first negotiate with
us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure HomeGrocer.com outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
Election and Removal of Directors. Effective upon the closing of this
offering, our articles of incorporation will provide for the division of our
board of directors into three classes, as nearly as equal in number as
possible, with the directors in each class serving for a three-year term, and
one class being elected each year by our shareholders. The initial term of the
Class I directors expires at our annual meeting of shareholders to be held in
2000; the initial term of the Class II directors expires at our annual meeting
of shareholders to be held in 2001; and the initial term of the Class III
directors expires at our annual meeting of shareholders to be held in 2002.
Thereafter, the term of each class of directors will be three years. This
system of electing and removing directors generally makes it more difficult for
shareholders to replace a majority of the members of our board of directors and
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of HomeGrocer.com and may have the effect of
maintaining the incumbency of our board of directors.
Supermajority Vote to Amend Bylaw Provisions. Effective upon the completion
of this offering, our bylaws will provide that (1) any amendment to the bylaws
that increases or reduces the authorized number of directors shall require the
affirmative approval of at least two-thirds of the directors and (2) any
amendment or repeal of the bylaws relating to these provisions by the
shareholders will require the affirmative approval of holders of at least two-
thirds of our outstanding capital stock. This provision is principally intended
to prevent a shareholder or shareholders having a majority of the common stock
from making changes in the bylaws to increase the number of directors or reduce
the authority of our board or directors. It also may have the effect of
discouraging efforts to acquire control of the board of directors and thus make
takeovers or changes in control more difficult.
Shareholder Meetings. Effective upon the completion of this offering, our
bylaws will provide that, except as otherwise required by law or by our
articles of incorporation, special meetings of the shareholders may only be
called pursuant to a resolution adopted by our chief executive officer,
president, the chairman of our board of directors or a majority of the board of
directors. These provisions of our articles of incorporation and bylaws could
discourage potential acquisition proposals and could delay or prevent a change
of control.
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<PAGE>
Our intent in using these provisions is to enhance the likelihood of continuity
and stability in the composition of our board of directors and in the policies
formulated by them and to discourage transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage tactics
that may be used in proxy fights. However, these provisions could have the
effect of discouraging others from making tender offers for our shares and, as
a consequence, they could inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. Such
provisions could have the effect of preventing changes in our management.
Requirements for Advance Notification of Shareholder Nominations and
Proposals. Effective upon the completion of this offering, our bylaws will
contain advance notice procedures with respect to shareholder proposals and the
nomination of candidates for election as directors, other than nominations made
by or at the direction of the board of directors or a committee thereof.
Elimination of Shareholder Action by Written Consent. Effective upon the
closing of this offering, our articles of incorporation will not permit
shareholders to act by written consent.
Elimination of Cumulative Voting. Effective upon the closing of this
offering, our articles of incorporation and bylaws will not provide for
cumulative voting in the election of directors.
Undesignated Preferred Stock. Effective upon the closing of this offering,
our board of directors, without shareholder approval, has the authority under
our articles of incorporation to issue up to 10,000,000 shares of preferred
stock with rights superior to the rights of our common stock. The authorization
of undesignated preferred stock makes it possible for our board of directors to
issue preferred stock with voting or other rights or preferences that could
defer hostile takeovers or delay changes in control or management of
HomeGrocer.com.
Approval of Business Combinations. Upon completion of this offering, our
articles of incorporation will require that business combinations (including a
merger, share exchange and the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance of a substantial portion of our
assets other than in the usual and regular course of business) be approved by
the holders of at least two-thirds of our outstanding capital stock.
Washington Anti-Takeover Law. Washington law imposes restrictions on some
transactions between a corporation and significant shareholders. Chapter 23B.19
of the Washington Business Corporation Act prohibits a "target corporation",
with some exceptions, from engaging in significant business transactions with
an "acquiring person", which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors prior to the time of such
acquisition. Such prohibited transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with the "fair price" provisions of the statute. A
corporation may not opt out of this statute. This provision may have the effect
of delaying, deterring or preventing a change of control of HomeGrocer.com.
Delaware Anti-Takeover Law. Prior to our reincorporation from the state of
Delaware into the state of Washington, Section 203 of the Delaware General
Corporation Law, which regulates corporate acquisitions, will apply to us and
could make more difficult the acquisition of HomeGrocer.com by a third party
and the removal of incumbent officers and directors. These provisions,
summarized below, are expected to discourage
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<PAGE>
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of HomeGrocer.com to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure HomeGrocer.com outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. In general, Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers and shares in employee stock plans in which the participants
have no right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting of stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
In addition to the provisions summarized above, Amazon.com's right of first
refusal may also delay, defer or prevent a change of control. See "Related
Party Transactions."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services LLC. The Transfer Agent's address is 520 Pike Street,
Suite 1220, Seattle, WA 98101, and its telephone number is (206) 674-3030.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of contractual and legal restrictions on resale, sales of substantial amounts
of our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of the offering, we will have 124,812,274 shares of common
stock outstanding. Of these shares, 22,000,000 shares sold in the offering
(plus any shares issued upon exercise of the underwriters' over-allotment
option) will be freely tradable without restriction under the Securities Act,
unless purchased by "affiliates" of HomeGrocer.com as that term is defined in
Rule 144 under the Securities Act, which generally includes officers, directors
or 10% stockholders, or unless purchased by employees of HomeGrocer.com
directly from the underwriters'.
The remaining 102,812,274 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 promulgated under the
Securities Act, which are summarized below. Sales of these shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
Each of our officers, directors and most of our stockholders have entered
into lock-up agreements generally providing that they will not sell, otherwise
dispose of or transfer any of the economic consequences of ownership of our
common stock or other securities during the period ending 180 days after the
date of this prospectus without the prior written consent of Morgan Stanley &
Co. Incorporated. See "Underwriters" for a more complete description of the
lock-up agreements. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 and 701, shares subject to lock-up agreements will not be salable
from the date of this prospectus until such agreements expire or are waived by
the designated underwriters' representative. Taking into account the lock-up
agreements, and assuming Morgan Stanley & Co. Incorporated does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the 22,000,000
shares sold in the offering will be immediately available for sale in
the public market.
. Beginning 180 days after the effective date, approximately 8,238,870
shares will be eligible for sale pursuant to Rule 701 (assuming no
exercise of options) and approximately 78,595,612 additional shares will
be eligible for sale pursuant to Rule 144, of which all but
approximately 17,488,010 shares are held by affiliates.
. Approximately an additional 20,423,212 shares will be eligible for sale
pursuant to Rule 144 at various times after September 15, 2000. Shares
eligible to be sold pursuant to Rule 144 may be subject to volume
restrictions as described below.
In addition, if the reported last sale price of the common stock on the
Nasdaq National Market is at least twice the initial public offering price per
share for 20 of the 30 trading days ending on the last trading day preceding
the 90th day after the date of this prospectus, 25% of the shares of our common
stock that are held by our employees who are not officers of directors of
HomeGrocer.com, or a total of approximately 418,492 shares, subject to the 180-
day restriction described above will be released from these restrictions. The
release of these shares will occur on the later to occur of:
. the 90th day after the date of this prospectus if we make our first
post-offering public release of our quarterly or annual earnings results
during the period beginning on the eleventh trading day after the date
of this prospectus and ending on the day prior to the 90th day after the
date of this prospectus, or
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. on the second trading day following the first public release of our
quarterly or annual results occurring on or after the 90th day after the
date of this prospectus, if we do not make our first post-offering
public release as set forth in the preceding clause.
Morgan Stanley & Co. Incorporated may in its sole discretion choose to release
any or all of these shares from such restrictions prior to the expiration of
such 90 or 180-day period.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements (180 days after the date of this
prospectus) of a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (1) 1% of the number of shares of common stock then outstanding
(which will equal approximately 1,248,123 shares immediately after the
offering); or (2) the average weekly trading volume of the common stock during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to manner of sale provisions and notice requirements and to the
availability of current public information about HomeGrocer.com. Under Rule
144(k), a person who is not deemed to have been an affiliate of HomeGrocer.com
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
The holders of approximately 84,481,738 shares of common stock and warrants
to purchase 2,749,248 shares of common stock or their transferees are also
entitled to rights with respect to registration of their shares of common stock
for offer or sale to the public. If the holders, by exercising their
registration rights, cause a large number of shares to be registered and sold
in the public market, the sales could have a material adverse effect on the
market price for our common stock.
As a result of the lock-up agreements, all of our employees holding shares
of common stock or stock options may not sell shares acquired upon exercise
until 180 days after the date of this prospectus. Beginning 180 days after the
date of this prospectus, any employee, officer or director of or consultant to
HomeGrocer.com who purchased shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, we intend to file
registration statements under the Securities Act as promptly as possible after
the effective date to register shares to be issued pursuant to our employee
benefit plans. As a result, any options exercised under the Stock Plan or any
other benefit plan after the effectiveness of such registration statement will
also be freely tradable in the public market, except that shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of January 1, 2000, there were outstanding options
to purchase 5,886,342 shares of common stock, of which options to purchase
approximately 327,352 shares were vested and exercisable.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of common stock by
a beneficial owner that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a person
or entity that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership, or a foreign estate
or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended,
and administrative interpretations as of the date of this prospectus, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign jurisdiction. Prospective holders should consult
their tax advisors with respect to the particular tax consequences to them of
owning and disposing of common stock, including the consequences under the laws
of any state, local or foreign jurisdiction.
Dividends
Although we do not anticipate paying any dividends in the foreseeable
future, dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding tax at a 30% rate or a reduced rate specified by an
applicable income tax treaty. For purposes of determining whether tax is to be
withheld at a reduced rate under an income tax treaty, HomeGrocer.com will
presume that dividends, if any, paid on or before December 31, 2000 to an
address in a foreign country are paid to a resident of that country unless it
has knowledge that the presumption is not warranted.
In order to obtain a reduced rate of withholding for dividends paid after
December 31, 2000, a Non-U.S. Holder will be required to provide an Internal
Revenue Service Form W-8BEN certifying its entitlement to benefits under a
treaty. In addition, in cases where dividends are paid to a Non-U.S. Holder
that is a partnership or other pass-through entity, persons holding an interest
in the entity may need to provide the required certification.
The withholding tax does not apply to dividends paid to a Non-U.S. Holder
that provides a Form 4224 or, after December 31, 2000, a Form W-8ECI,
certifying that the dividends are effectively connected with the Non-U.S.
Holder's conduct of a trade or business within the United States. Instead, the
effectively connected dividends will be subject to regular U.S. income tax as
if the Non-U.S. Holder were a U.S. resident. A non-U.S. corporation receiving
effectively connected dividends may also be subject to an additional "branch
profits tax" imposed at a rate of 30% (or a lower treaty rate) on an earnings
amount that is net of the regular tax.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on gain realized on a sale or other disposition of common stock unless:
. the gain is effectively connected with a trade or business of the Non-
U.S. Holder in the United States,
. in the case of Non-U.S. Holders who are non-resident alien individuals
and hold the common stock as a capital asset, the individuals are
present in the United States for 183 or more days in the taxable year of
the disposition,
. the Non-U.S. Holder is subject to tax under the provisions of the Code
regarding the taxation of U.S. expatriates, or
. HomeGrocer.com is or has been a U.S. real property holding corporation
at any time within the five-year period preceding the disposition or the
Non-U.S. Holder's holding period, whichever period is shorter.
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The tax relating to stock in a U.S. real property holding corporation does
not apply to a Non-U.S. Holder whose holdings, actual and constructive, at all
times during the applicable period, amount to 5% or less of the common stock of
a U.S. real property holding corporation, provided that the common stock is
regularly traded on an established securities market. Generally, a corporation
is a U.S. real property holding corporation if the fair market value of its
U.S. real property interests, as defined in the Code and applicable
regulations, equals or exceeds 50% of the aggregate fair market value of its
worldwide real property interests and its other assets used or held for use in
a trade or business. HomeGrocer.com believes that it is not, and does not
anticipate becoming, a U.S. real property holding corporation.
Information Reporting Requirements and Backup Withholding
HomeGrocer.com must report to the IRS the amount of dividends paid, the name
and address of the recipient, and the amount of any tax withheld. A similar
report is sent to the Non-U.S. Holder. Under tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence. Dividends paid on or before December 31, 2000 at an
address outside the United States are not subject to backup withholding, unless
the payor has knowledge that the payee is a U.S. person. However, a Non-U.S.
Holder may need to certify its non-U.S. status in order to avoid backup
withholding at a 31% rate on dividends paid after December 31, 2000 or
dividends paid on or before that date at an address inside the United States.
U.S. information reporting and backup withholding generally will not apply
to a payment of proceeds of a disposition of common stock where the transaction
is effected outside the United States through a non-U.S. office of a non-U.S.
broker. However, a Non-U.S. Holder may need to certify its non-U.S. status in
order to avoid information reporting and backup withholding at a 31% rate on
disposition proceeds where the transaction is effected by or through a U.S.
office of a broker. In addition, U.S. information reporting requirements may
apply to the proceeds of a disposition effected by or through a non-U.S. office
of a U.S. broker, or by a non-U.S. broker with specified connections to the
United States.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. When withholding results in an overpayment of taxes, a refund may be
obtained if the required information is furnished to the IRS.
Federal Estate Tax
An individual Non-U.S. Holder who is treated as the owner of, or has made
lifetime transfers of, an interest in the common stock will be required to
include the value of the stock in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Hambrecht & Quist LLC, Banc of America Securities LLC
and J.C. Bradford & Co. are acting as U.S. representatives, and the
international underwriters named below for whom Morgan Stanley & Co.
International Limited, Donaldson, Lufkin & Jenrette International, Hambrecht &
Quist LLC, Bank of America International Limited and J.C. Bradford & Co. are
acting as international representatives, have severally agreed to purchase, and
HomeGrocer.com has agreed to sell to them, severally, the number of shares
indicated below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
Hambrecht & Quist LLC............................................
Banc of America Securities LLC...................................
J.C. Bradford & Co. .............................................
Morgan Stanley Dean Witter Online Inc............................
DLJdirect Inc....................................................
Subtotal.........................................................
=========
International Underwriters:
Morgan Stanley & Co. International Limited.......................
Donaldson, Lufkin & Jenrette International.......................
Hambrecht & Quist LLC............................................
Bank of America International Limited............................
J.C. Bradford & Co. .............................................
Subtotal.........................................................
Total..........................................................
=========
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively
referred to as the "underwriters" and the "representatives," respectively. The
underwriters are offering the shares of common stock subject to their
acceptance of the shares from HomeGrocer.com and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval of legal matters by
their counsel and to other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered by this prospectus if any
such shares are taken. However, the underwriters are not required to take or
pay for the shares covered by the underwriters' over-allotment option described
below.
In the agreement between U.S. and international underwriters, sales may be
made between U.S. underwriters and international underwriters of any number of
shares as may be mutually agreed. The per share price of any shares sold by the
underwriters shall be the public offering price listed on the cover page of
this prospectus, in U.S. dollars, less an amount not greater than the per share
amount of the concession to dealers described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to dealers.
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After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the representatives.
HomeGrocer.com has granted to the U.S. underwriters an option, exercisable
for 30 days from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
U.S. underwriters may exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each U.S. underwriter will become obligated, subject to conditions, to purchase
about the same percentage of the additional shares of common stock as the
number listed next to the U.S. underwriter's name in the preceding table bears
to the total number of shares of common stock listed next to the names of all
U.S. underwriters in the preceding table. If the U.S. underwriters' option is
exercised in full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ and total proceeds to
HomeGrocer.com would be $ .
The underwriting discounts and commissions will be determined by
negotiations between us and the representatives. Among the factors to be
considered in determining the discounts and commissions will be the size of
offering, the nature of the security offered and the discounts and commissions
charged in comparable transactions.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley & Co.
Incorporated, and DLJdirect Inc., are acting as underwriters in connection with
the offering and will distribute shares of common stock over the Internet to
their respective eligible account holders.
The underwriters have informed HomeGrocer.com that they do not intend sales
to discretionary accounts to exceed 5% of the total number of shares of common
stock offered by them.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "HOMG."
Each of HomeGrocer.com and the directors, executive officers and other
stockholders of HomeGrocer.com have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it
will not, during the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. This lock-up restriction
is subject in certain circumstances, for shares held by employees other than
executive officers and directors, to earlier release. For a description of
circumstances leading to this earlier release, please see "Shares Eligible for
Future Sale." In addition, employees of HomeGrocer.com who purchase reserved
shares directly from the Underwriters will also be required to agree to these
restrictions. The restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by HomeGrocer.com of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing;
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. the grant by HomeGrocer.com of options to purchase shares of common
stock pursuant to the 1997 Stock Incentive Compensation Plan, 1999 Stock
Incentive Plan and 1999 Director's Stock Option Plan and the issuance by
HomeGrocer.com of purchase rights or shares of common stock pursuant to
the 1999 Employee Stock Purchase Plan, provided that the recipient of
such option or share of common stock shall agree as a condition to be
bound by the terms of the lock-up agreement;
. transactions by any person other than HomeGrocer.com relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares; or
. shares of stock issued in conjunction with an acquisition.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-
allot in connection with the offering, creating a short position in the common
stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a dealer
for distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
HomeGrocer.com and the underwriters have agreed to indemnify each other
against some liabilities, including liabilities under the Securities Act.
At the request of HomeGrocer.com, the underwriters have reserved for sale,
at the initial offering price, up to 2.2 million shares offered hereby for our
directors, officers, employees, business associates, and related persons.
Employees of HomeGrocer.com who purchase these reserved shares will be subject
to contractual resale restrictions for a period of 180 days beginning on the
date of this prospectus. The 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 that are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered hereby.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between HomeGrocer.com and the U.S. representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of HomeGrocer.com and its industry in general, sales, earnings and
other financial operating information of HomeGrocer.com in recent periods, and
the price-earnings ratios, price-sales ratios, market prices of securities and
financial and operating information of companies engaged in activities similar
to those of HomeGrocer.com. The estimated initial public offering price range
set forth on the cover page of this preliminary prospectus is subject to change
as a result of market conditions and other factors.
As of the date of this prospectus, Access Technology Partners, L.P. owns
689,656 shares of our Series D preferred stock. Access Technology Partners is a
fund of investors that is managed by an entity associated with Hambrecht &
Quist LLC, one of the representatives in this offering. Employees and entities
associated with Hambrecht & Quist LLC own an aggregate of 172,412 shares of our
Series D preferred stock.
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LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
HomeGrocer.com by Venture Law Group, A Professional Corporation, Kirkland,
Washington. Legal matters in connection with this offering will be passed upon
for the underwriters by Davis Polk & Wardwell, Menlo Park, California. As of
the date of this prospectus, directors of Venture Law Group and an investment
partnership affiliated with Venture Law Group own 53,878 shares of our Series D
preferred stock, which will convert into 53,878 shares of common stock upon
completion of this offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at January 2, 1999 and January 1, 2000 and for the period from
January 15, 1997 (inception) to January 3, 1998 and for the years ended January
2, 1999 and January 1, 2000, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION AVAILABLE TO YOU
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules. For further
information with respect to HomeGrocer.com and the common stock offered hereby,
we refer you to the registration statement and to the exhibits and schedules.
Statements made in this prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed as an exhibit to the registration statement, we refer you to the
exhibit for a more complete description of the matter involved. The
registration statement and the exhibits and schedules may be inspected without
charge at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any part of the registration statement may be
obtained from the SEC's offices upon payment of fees prescribed by the SEC. The
SEC maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the site is www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Shareholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
HomeGrocer.com, Inc.
We have audited the accompanying balance sheets of HomeGrocer.com, Inc. as of
January 2, 1999 and January 1, 2000, and the related statements of operations,
shareholders' equity, and cash flows for the period from January 15, 1997
(inception) to January 3, 1998 and the years ended January 2, 1999 and January
1, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 HomeGrocer.com, Inc. at
January 2, 1999 and January 1, 2000, and the results of its operations and its
cash flows for the period from January 15, 1997 (inception) to January 3, 1998
and the years ended January 2, 1999 and January 1, 2000, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Seattle, Washington
January 18, 2000, except for Note 9,
as to which the date is February 15, 2000
F-2
<PAGE>
HOMEGROCER.COM, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
Equity
January 2, January 1, January 1,
1999 2000 2000
---------- ---------- -------------
(Note 6)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 1,084 $ 39,806
Marketable securities.................... -- 37,762
Inventories.............................. 284 2,555
Prepaid expenses and other current
assets.................................. 296 3,032
------- --------
Total current assets.................... 1,664 83,155
Fixed assets, net.......................... 1,237 52,066
Deposits and other long-term assets........ 657 3,776
Restricted cash............................ -- 7,932
------- --------
Total assets............................ $ 3,558 $146,929
======= ========
Liabilities & Shareholders' Equity
Current liabilities:
Accounts payable......................... $ 199 $ 4,396
Accrued liabilities...................... 522 4,856
Accrued compensation and related
liabilities............................. 239 3,249
Current portion of capital lease
obligations............................. 209 3,081
Current portion of long-term debt........ 122 980
------- --------
Total current liabilities............... 1,291 16,562
Capital lease obligations, less current
portion................................... 602 17,041
Long-term debt, less current portion....... 278 749
Other long-term liabilities................ -- 430
------- --------
Total liabilities....................... 2,171 34,782
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $0.001 par
value:
78,357,142 shares authorized;
Series A, 8,000,000 shares authorized,
8,000,000 issued and outstanding (none
pro forma); liquidation preference of
$4,000 (none pro forma);............... 8 8
Series B, 16,857,142 shares authorized,
16,857,142 issued and outstanding (none
pro forma); liquidation preference of
$5,900 (none pro forma);............... 17 17
Series C, 30,200,000 shares authorized,
29,942,050 issued and outstanding at
January 1, 2000 (none pro forma);
liquidation preference of $52,399 at
January 1, 2000 (none pro forma)....... -- 30
Series D, 23,300,000 shares authorized,
18,407,546 issued and outstanding at
January 1, 2000 (none pro forma);
liquidation preference of $106,764 at
January 1, 2000 (none pro forma)....... -- 18
Common stock, $0.001 par value:
130,000,000 shares authorized;
12,416,666 issued and outstanding at
January 2, 1999 and 29,605,536 at
January 1, 2000 (102,812,274 pro
forma)................................. 12 30 $ 103
Additional paid-in-capital............... 10,614 250,151 250,151
Notes receivable from officers for common
stock................................... -- (3,231) (3,231)
Deferred stock-based compensation........ -- (41,619) (41,619)
Accumulated deficit...................... (9,264) (93,257) (93,257)
------- -------- --------
Total shareholders' equity.............. 1,387 112,147 $112,147
------- -------- ========
Total liabilities & shareholders'
equity................................. $ 3,558 $146,929
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
HOMEGROCER.COM, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
51 Weeks from 52 Weeks 52 Weeks
January 15, 1997 Ended Ended
(Inception) to January 2, January 1,
January 3, 1998 1999 2000
---------------- ---------- ----------
<S> <C> <C> <C>
Net sales............................. $ -- $ 1,094 $ 21,648
Cost of sales......................... -- 1,018 19,515
---------- ---------- ----------
Gross profit........................ -- 76 2,133
Selling, general and administrative
expenses, excluding stock-based
compensation......................... 1,064 7,455 59,208
Stock-based compensation expense...... 230 412 28,158
---------- ---------- ----------
Loss from operations................ (1,294) (7,791) (85,233)
Interest expense...................... (61) (172) (384)
Interest income....................... -- 54 2,232
Other expense......................... -- -- (608)
---------- ---------- ----------
Net loss............................ $(1,355) $(7,909) $(83,993)
========== ========== ==========
Basic and diluted net loss per share.. $ (0.14) $ (0.72) $ (5.56)
========== ========== ==========
Pro forma basic and diluted net loss
per share (unaudited)................ $ (1.28)
==========
Weighted average shares outstanding
used to compute basic and diluted net
loss per share....................... 10,034,721 11,044,174 15,102,698
========== ========== ==========
Weighted average shares outstanding
used to compute pro forma basic and
diluted net loss per share (unau-
dited)............................... 65,382,807
==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
HOMEGROCER.COM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Preferred Stock
----------------------------------------------------------------------
Notes
Series A Series B Series C Series D Common Stock Additional Receivable
---------------- ----------------- ----------------- ----------------- ------------------ Paid-in from
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Officers
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common
stock........... -- $-- -- $-- -- $-- -- $-- 15,200,000 $ 15 $ 277 $ --
Issuance of
common stock
warrants with
convertible
promissory
notes........... -- -- -- -- -- -- -- -- -- -- 190 --
Stock issued and
stock options
granted in
exchange for
consulting
services........ -- -- -- -- -- -- -- -- 800,000 1 229 --
Net loss and
comprehensive
loss for the
period ended
January 3,
1998............ -- -- -- -- -- -- -- -- -- -- -- --
--------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- -------- -------
Balance at
January 3,
1998............ -- -- -- -- -- -- -- -- 16,000,000 16 696 --
Repurchase of
common stock.... (3,333,334) (4) 2
Issuance of
common stock
warrants for
goods and
services........ -- -- -- -- -- -- -- -- -- -- 27 --
Stock options
granted in
exchange for
consulting
services........ -- -- -- -- -- -- -- -- -- -- 191 --
Issuance of
Series A
preferred stock,
net of offering
costs of $73.... 7,500,000 8 -- -- -- -- -- -- -- -- 3,669 --
Issuance of
Series A
preferred stock
for consulting
services........ 500,000 -- -- -- -- -- -- -- -- -- 250 --
Issuance of
Series B
preferred stock,
net of offering
costs of $48.... -- -- 16,857,142 17 -- -- -- -- -- -- 5,835 --
Issuance of
Series C
preferred stock
warrants for
goods and
services........ -- -- -- -- -- -- -- -- -- -- 84 --
Common stock
returned in
settlement with
service
provider........ -- -- -- -- -- -- -- -- (250,000) -- (140) --
Net loss and
comprehensive
loss for the
year ended
January 2,
1999............ -- -- -- -- -- -- -- -- -- -- -- --
--------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- -------- -------
Balance at
January 2,
1999............ 8,000,000 8 16,857,142 17 -- -- -- -- 12,416,666 12 10,614 --
Issuance of
Series C
preferred stock,
net of offering
costs of $48.... -- -- -- -- 29,942,050 30 -- -- -- -- 52,320 --
Issuance of
Series D
preferred stock,
net of offering
costs of $291... -- -- -- -- -- -- 18,407,546 18 -- -- 106,455 --
Issuance of
series D
preferred stock
warrants for
goods and
services........ -- -- -- -- -- -- -- -- -- -- 1,361 --
Stock options
granted in
exchange for
consulting
services........ -- -- -- -- -- -- -- -- -- -- 2,028 --
Exercise of
common stock
options......... -- -- -- -- -- -- -- -- 14,400,870 14 8,429 --
Repurchase of
restricted
common stock.... -- -- -- -- -- -- -- -- (12,000) 1 (5) --
Issuance of
restricted
common stock.... -- -- -- -- -- -- -- -- 2,050,000 2 920 --
Exercise of
warrants to
purchase common
stock........... -- -- -- -- -- -- -- -- 750,000 1 280 --
Notes receivable
from officers
for common
stock........... -- -- -- -- -- -- -- -- -- -- -- (3,231)
Deferred stock-
based
compensation.... -- -- -- -- -- -- -- -- -- -- 67,749 --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- -- -- --
Net loss and
comprehensive
loss for the
year ended
January 1,
2000............ -- -- -- -- -- -- -- -- -- -- -- --
--------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- -------- -------
Balance at
January 1,
2000............ 8,000,000 $ 8 16,857,142 $ 17 29,942,050 $ 30 18,407,546 $ 18 29,605,536 $ 30 $250,151 $(3,231)
========= ==== ========== ==== ========== ==== ========== ==== ========== ==== ======== =======
<CAPTION>
Total
Deferred Shareholders'
Stock-based Accumulated Equity
Compensation Deficit (Deficit)
------------ ----------- -------------
<S> <C> <C> <C>
Sale of common
stock........... $ -- $ -- $ 292
Issuance of
common stock
warrants with
convertible
promissory
notes........... -- -- 190
Stock issued and
stock options
granted in
exchange for
consulting
services........ -- -- 230
Net loss and
comprehensive
loss for the
period ended
January 3,
1998............ -- (1,355) (1,355)
------------ ----------- -------------
Balance at
January 3,
1998............ -- (1,355) (643)
Repurchase of
common stock.... (2)
Issuance of
common stock
warrants for
goods and
services........ -- -- 27
Stock options
granted in
exchange for
consulting
services........ -- -- 191
Issuance of
Series A
preferred stock,
net of offering
costs of $73.... -- -- 3,677
Issuance of
Series A
preferred stock
for consulting
services........ -- -- 250
Issuance of
Series B
preferred stock,
net of offering
costs of $48.... -- -- 5,852
Issuance of
Series C
preferred stock
warrants for
goods and
services........ -- -- 84
Common stock
returned in
settlement with
service
provider........ -- -- (140)
Net loss and
comprehensive
loss for the
year ended
January 2,
1999............ -- (7,909) (7,909)
------------ ----------- -------------
Balance at
January 2,
1999............ -- (9,264) 1,387
Issuance of
Series C
preferred stock,
net of offering
costs of $48.... -- -- 52,350
Issuance of
Series D
preferred stock,
net of offering
costs of $291... -- -- 106,473
Issuance of
series D
preferred stock
warrants for
goods and
services........ -- -- 1,361
Stock options
granted in
exchange for
consulting
services........ -- -- 2,028
Exercise of
common stock
options......... -- -- 8,443
Repurchase of
restricted
common stock.... -- -- (4)
Issuance of
restricted
common stock.... -- -- 922
Exercise of
warrants to
purchase common
stock........... -- -- 281
Notes receivable
from officers
for common
stock........... -- -- (3,231)
Deferred stock-
based
compensation.... (67,749) -- 0
Amortization of
stock-based
compensation.... 26,130 -- 26,130
Net loss and
comprehensive
loss for the
year ended
January 1,
2000............ -- (83,993) (83,993)
------------ ----------- -------------
Balance at
January 1,
2000............ $ (41,619) $ (93,257) $ 112,147
============ =========== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
HOMEGROCER.COM, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
51 Weeks Ended 52 Weeks 52 Weeks
January 15, 1997 Ended Ended
(inception) to January 2, January 1,
January 3, 1998 1999 2000
---------------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net loss................................ $(1,355) $(7,909) $(83,993)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation.......................... 7 175 2,881
Amortization.......................... 57 132 120
Stock-based compensation expense...... 230 412 28,158
Loss on disposal of fixed assets...... -- -- 628
Changes in operating assets and
liabilities:
Prepaid expenses and other current
assets............................... (165) (265) (2,736)
Inventories........................... -- (284) (2,271)
Accounts payable...................... 740 49 4,197
Accrued liabilities................... -- (68) 4,334
Accrued compensation and related
liabilities.......................... -- 239 3,010
------- ------- --------
Net cash used in operating activities... (486) (7,519) (45,672)
Investing Activities:
Purchases of fixed assets............... (393) (737) (34,387)
Purchases of marketable securities...... -- -- (37,762)
Deposits and other...................... -- (571) (1,448)
Restricted cash......................... -- -- (7,932)
------- ------- --------
Net cash used in investing activities... (393) (1,308) (81,529)
Financing Activities:
Net proceeds from sale of Series A
preferred stock........................ -- 2,926 --
Net proceeds from sale of Series B
preferred stock........................ -- 5,852 --
Net proceeds from sale of Series C
preferred stock........................ -- -- 52,350
Net proceeds from sale of Series D
preferred stock........................ -- -- 106,473
Proceeds from sale of common stock...... 292 -- 459
Repurchase of common stock.............. -- (2) (4)
Proceeds from exercise of stock
options................................ -- -- 5,675
Proceeds from exercise of warrants...... -- -- 281
Proceeds from convertible notes......... 900 -- --
Repayment of convertible notes.......... -- (100) --
Proceeds from notes payable............. -- 900 --
Repayment of notes payable.............. -- (500) --
Proceeds from sale leaseback............ -- 522 --
Proceeds from long-term debt............ -- -- 2,309
Repayments of long-term debt............ -- -- (980)
Repayments of capital lease
obligations............................ -- -- (640)
------- ------- --------
Net cash provided by financing
activities............................. 1,192 9,598 165,923
------- ------- --------
Net increase in cash and cash
equivalents............................ 313 771 38,722
Cash and cash equivalents, beginning of
period................................. -- 313 1,084
------- ------- --------
Cash and cash equivalents, end of
period................................. $ 313 $ 1,084 $ 39,806
======= ======= ========
Supplemental Cash Flow Information:
Cash paid during the period for
interest............................... $ -- $ 35 $ 509
Noncash Financing and Investing
Activities:
Fixed assets acquired through capital
lease.................................. -- 811 19,951
Issuance of warrants to purchase common
stock in connection with convertible
notes issued........................... 190 -- --
Conversion of notes to Series A
preferred stock (net of convertible
note origination fees)................. -- 751 --
Issuance of warrants to purchase
preferred stock in connection with loan
agreement.............................. -- -- 1,361
Issuance of notes receivable for
officers to purchase common stock...... -- -- (3,231)
</TABLE>
See accompanying notes.
F-6
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
HomeGrocer.com, Inc. (the "Company") is an Internet retailer of grocery and
other consumer products. The Company operates its own distribution system
providing next-day delivery of products. The Company began delivering groceries
to the Seattle market from its first customer fulfillment center located in
Bellevue, Washington in June 1998. As of January 1, 2000, the Company was
delivering groceries from four customer fulfillment centers in the following
markets:
<TABLE>
<CAPTION>
Customer Fulfillment Center
Location Delivery Commencement Market Served
- --------------------------- --------------------- -------------
<S> <C> <C>
Renton, WA (formerly Bellevue) June 1998 Seattle
Tualatin, OR May 1999 Portland
Irvine, CA September 1999 Orange County
Fullerton, CA November 1999 Orange County/Los Angeles
</TABLE>
The Company was incorporated on January 15, 1997 in British Columbia, Canada
as GrocerNet Home Shopping, Inc. On September 29, 1997, the Company
reincorporated in Delaware as HomeGrocer.com, Inc.
The Company has incurred significant operating losses since its inception.
To date, the Company has financed its operations primarily through the issuance
of equity securities. The Company's current expansion plans as well as costs
associated with increasing its customer base in its existing markets will
require additional financing. The Company believes that additional financing
can be obtained from existing or new investors.
Fiscal Year
The Company reports on a 52/53 week fiscal year basis that ends on the
Saturday nearest December 31. Because the Company commenced on January 15, 1997
(inception), the fiscal year ended January 3, 1998 was a 51-week year. Fiscal
years 1998 and 1999 were 52-week years that ended on January 2, 1999 and
January 1, 2000, respectively.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents are carried at fair market value, which approximates cost.
Marketable Securities
The Company considers all investments with a maturity of more than three
months but less than one year when purchased and investments to be sold within
one year to be short-term and available-for-sale. The Company's marketable
securities consists of commercial paper.
F-7
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of its holdings of cash, cash equivalents
and marketable securities. Banking and investing with credit-worthy financial
institutions mitigates risks associated with cash, cash equivalents and
marketable securities.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, marketable
securities, capital leases and other long-term obligations. The carrying value
of all financial instruments approximates fair market value.
Inventories
Inventories are stated at the lower of cost (using the weighted average cost
method) or market. The Company's largest vendor accounted for approximately 29%
and 32% of the Company's purchases in fiscal 1998 and 1999, respectively. In
addition, another vendor accounted for approximately 11% of the Company's
purchases in fiscal 1999. Although products are readily available from other
sources, the vendors' inability to supply product in a timely manner or on
terms acceptable to the Company could adversely affect the Company's ability to
meet customers' demands.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Fixed assets are depreciated on a straight-line basis over the
estimated useful lives of the assets, which range from two to fifteen years.
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 lease term.
The Company evaluates the recoverability of its long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Impairment is measured by comparing the carrying
value of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition. In
circumstances where impairment is determined to exist, the Company writes down
the impaired asset to its fair value based on the present value of estimated
expected future cash flows.
Restricted Cash
The Company has entered into various lease agreements requiring standby
letters of credit. The bank has required the Company to maintain certain
balances on deposit as security for the letters of credit. These letters of
credit expire at various dates ranging from July 2000 through August 2015. As
of January 1, 2000, standby outstanding letters of credit totalled $7.9
million.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are recovered. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
Revenue Recognition
The Company recognizes revenue from product sales, net of promotional
discounts, when products are delivered to customers. The Company provides an
allowance for sales returns, which have been insignificant, based upon
historical experience.
F-8
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cost of Sales
Cost of sales includes the cost of merchandise sold to customers, inbound
freight costs and the cost of free product given to customers. Cost of sales
also includes a provision for inventory loss resulting from shrinkage and
damaged and spoiled inventory. The Company adjusts its provision based on
historical experience.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include payroll and other costs
associated with operating the Company's customer fulfillment centers, delivery
fleet and related expenses, advertising and promotional expenditures,
information technology and corporate overhead.
Advertising Costs
The costs of advertising are expensed as incurred. The Company incurred
advertising costs of $1.0 million and $7.7 million for the 52 weeks ended
January 2, 1999, and January 1, 2000, respectively. No similar costs were
incurred in fiscal 1997.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123").
Under APB No. 25 compensation expense related 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 pro forma
disclosure of the impact of applying the fair value method of SFAS No. 123. The
Company recognizes compensation expense for options granted to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force consensus Issue 96-18, Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, which require using a Black-Scholes option pricing model and
remeasuring such stock options to the current fair market value until the
performance date has been reached.
Deferred stock-based compensation consists of amounts recorded when the
exercise price of an option or the sales price of restricted stock was lower
than the subsequently determined deemed fair value for financial reporting
purposes. Deferred stock-based compensation is amortized over the vesting
period of the underlying options.
Net Loss Per Share
Net loss per share is calculated using the weighted average number of common
shares outstanding less the number of shares subject to repurchase. Common
stock that the Company has the right to repurchase and shares associated with
outstanding stock options, warrants and convertible preferred stock are not
included in the calculation of diluted loss per share because they are
antidilutive.
Pro forma net loss per share is calculated using the weighted average number
of common shares outstanding less shares subject to repurchase, including the
pro forma effects of the automatic conversion of all outstanding convertible
preferred stock into shares of common stock effective upon closing of the
Company's initial public offering as if such conversion had occurred at the
original date of issuance.
F-9
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted loss per
share and pro forma basic and diluted loss per share for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1998 1999
----------- ----------- -----------
(in thousands, except share and per
share amounts)
<S> <C> <C> <C>
Numerator:
Net loss.............................. $ (1,355) $ (7,909) $ (83,993)
=========== =========== ===========
Denominator:
Weighted average common shares
outstanding.......................... 15,868,041 13,833,333 18,587,559
Less: Weighted average shares subject
to repurchase agreements............. (5,833,320) (2,789,159) (3,484,861)
----------- ----------- -----------
Denominator for basic and diluted
calculation.......................... 10,034,721 11,044,174 15,102,698
=========== =========== ===========
Weighted average effect of pro forma
conversion of securities:
Series A convertible preferred
stock.............................. 8,000,000
Series B convertible preferred
stock.............................. 16,857,142
Series C convertible preferred
stock.............................. 21,381,550
Series D convertible preferred
stock.............................. 4,041,417
-----------
Denominator for pro forma basic and
diluted (unaudited).................. 65,382,807
===========
Net loss per share:
Basic and diluted..................... $ (0.14) $ (0.72) $ (5.56)
=========== =========== ===========
Pro forma basic and diluted
(unaudited).......................... $ (1.28)
===========
</TABLE>
At January 3, 1998, January 2, 1999 and January 1, 2000, 3,666,653,
7,642,986, and 19,782,460, respectively, shares of common stock subject to
repurchase, stock options and warrants were excluded from the computation of
actual and pro forma diluted loss per share, as their impact was antidilutive.
If the Company had reported net income, the calculation of earnings per share
would have included the dilutive effect of these common stock equivalents using
the treasury stock method.
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS No. 130 on January 4, 1998. The
Company has no items of other comprehensive income or loss.
Segment Information
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. The Company
adopted SFAS No. 131 on January 4, 1998. The Company operates in one principal
business segment across domestic markets.
F-10
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
New 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"). 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. The Company adopted SOP 98-1 on
January 3, 1999 and there was no significant impact on the Company's financial
position or operating results.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP
98-5"). SOP 98-5 requires costs of start-up activities and organization costs
be expensed as incurred. The Company adopted SOP 98-5 on January 3, 1999 and
there was no significant impact on the Company's financial position or
operating results.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 did not impact the
Company's revenue recognition policy.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). 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. The Company does not expect that the
adoption of SFAS No. 133 will have a material impact on its financial
statements because the Company does not currently hold any derivative
instruments.
2. Fixed Assets
Fixed assets, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
---------- ----------
<S> <C> <C>
Computer equipment and software........................ $ 923 $17,163
Machinery and equipment................................ 110 8,000
Delivery fleet......................................... -- 12,846
Furniture and fixtures................................. 224 1,951
Leasehold improvements................................. 162 6,481
Construction in progress............................... -- 8,564
------ -------
1,419 55,005
Less accumulated depreciation and amortization......... (182) (2,939)
------ -------
$1,237 $52,066
====== =======
</TABLE>
At January 2, 1999 and January 1, 2000, fixed assets held under capital
leases totaled $811,000 and $20.8 million, respectively, and accumulated
amortization for these assets totaled $25,000 and $867,000, respectively.
Construction in progress at January 1, 2000 consists primarily of leasehold
improvements and equipment purchases related to customer fulfillment centers
which were not placed in service as of January 1, 2000.
The Company capitalized interest of approximately $246,000 in fiscal 1999
during the acquisition and construction of certain assets.
F-11
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Debt
Long-Term Debt
The Company has entered into various Payment Plan Agreements with Oracle
Credit Corporation. The dates of the agreements range from November 1998
through May 1999 and have payment terms ranging from seven to 12 quarters. The
interest rates on the agreements range from 6.72% to 13.65%.
Maturities of the amounts outstanding under the Payment Plan Agreements are
as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2000................................................................. $ 980
2001................................................................. 535
2002................................................................. 214
------
$1,729
======
</TABLE>
In September 1999, the Company entered into a Subordinated Loan and
Security Agreement with Comdisco. Under the terms of the agreement, Comdisco
agreed to loan up to $10.0 million to the Company in minimum installments of
$1.0 million. Borrowings under the agreement are due and payable in 36 equal
monthly payments and amounts outstanding bear interest at 11%. No amounts were
outstanding under the agreement at January 1, 2000. In connection with the
Subordinated Loan and Security Agreement, the Company granted Comdisco a
warrant to purchase 275,862 shares of Series D preferred stock at an exercise
price of $5.80 per share. The warrant is exercisable for a period of ten years
from the date of issuance or five years from the date of the Company's initial
public offering, whichever is earlier. The fair value of this warrant was
determined to be $1.4 million and is being amortized as interest expense over
40 months which is the term of the underlying Subordinated Loan and Security
Agreement. The fair value of the warrant was determined using the following
assumptions: expected life of ten years; risk-free interest rate of 6.25%; no
dividends during the expected term and volatility of 80%.
During fiscal 1998, the Company incurred debt of $400,000 through a credit
facility with Silicon Valley Bank bearing interest at prime plus 1% and
requiring 36 equal payments commencing January 1999. The general assets of the
Company exclusive of intellectual property secured the facility. All amounts
outstanding under the credit facility at January 2, 1999 were repaid in August
1999 and the agreement was terminated.
Convertible Promissory Notes
In November and December 1997, the Company issued convertible promissory
notes with an aggregate face amount of $900,000. The notes bear interest at 6%
per annum and were convertible or redeemable upon completion of the Series A
preferred stock financing. The notes also contained a provision providing for
the issuance of warrants to purchase 1,800,000 shares of common stock at $0.38
per share and expire on the earlier of December 31, 2000, or an initial public
offering. The fair value of these warrants was determined to be $190,000 and
was amortized to interest expense during fiscal 1997 and 1998. The fair value
was calculated at the time of issuance using the Black-Scholes pricing model
with the following assumptions: expected life of three years; risk free
interest rate of 5%; no dividends during the term and volatility of 50%.
During fiscal 1999, warrants to purchase 750,000 shares were exercised and the
remaining warrants to purchase 1,050,000 shares are exercisable at January 1,
2000.
In February 1998, holders of the convertible notes elected to convert
$800,000 of the outstanding notes into 1,600,000 shares of Series A preferred
stock. The Company redeemed the remaining $100,000 outstanding convertible
notes.
F-12
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Leases
The Company leases its corporate offices, operating facilities, certain
operating equipment and its delivery fleet under noncancelable leases. The
leases have lives of three to 15 years and generally contain renewal options
for up to ten years.
Aggregate rental expense for the 51 weeks ended January 3, 1998, 52 weeks
ended January 2, 1999 and the 52 weeks ended January 1, 2000 was $50,000,
$603,000 and $3.2 million, respectively. Future minimum payments under capital
leases and noncancelable operating leases during the next five years for leases
with a remaining life in excess of one year at January 1, 2000 were as follows
(in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000....................................................... $ 4,872 $ 8,363
2001....................................................... 4,894 9,090
2002....................................................... 4,482 9,466
2003....................................................... 3,544 9,754
2004....................................................... 2,125 8,909
Thereafter................................................. 6,283 46,586
------- -------
Total minimum payments..................................... 26,200 $92,168
=======
Less amounts representing interest......................... 6,078
-------
Present value of minimum lease payments.................... 20,122
Less current portion of capital lease obligations.......... 3,081
-------
Noncurrent capital lease obligations....................... $17,041
=======
</TABLE>
In January 2000, leases for four additional operating facilities were
executed with future minimum lease commitments totalling $36.4 million.
In July and October 1998, the Company issued warrants to purchase 304,120
shares of common stock in connection with equipment lease and loan agreements.
The fair value of this warrant was determined to be $27,000 and is being
amortized to interest expense over the terms of the agreements. The fair value
of the warrants was calculated at the time of issuance using the Black-Scholes
option pricing model with the following assumptions: expected life of seven
years; risk-free interest rate of 5%; no dividends during the expected term and
volatility of 50%. This warrant has an exercise price of $0.50 per share and is
exercisable on or before the later of seven years from the date of issuance, or
three years from the closing of an initial public offering.
In November 1998, the Company entered into a Master Lease Agreement with
Comdisco, Inc. ("Comdisco"), under which Comdisco agreed to provide the Company
lease financing, up to an aggregate purchase price of $3.0 million. In
addition, during fiscal 1999, Comdisco agreed to provide an additional
$5.0 million of lease financing. As of January 2, 1999 and January 1, 2000,
leases executed pursuant to this loan agreement aggregated to approximately
$811,000 and $8.0 million, respectively and provide for equal monthly payments
over a 30, 42- or 48-month term with implicit interest rates ranging from 8% to
18%. Amounts outstanding under the lease agreement are secured by the equipment
which has a net book value of $6.8 million at January 1, 2000. The Company
accounts for its obligations under the Master Lease Agreement as capital
leases. As part of the Master Lease Agreement, the Company granted Comdisco a
warrant to purchase 153,600 shares of Series C preferred stock at an exercise
price of $0.78 per share. This warrant is exercisable for a period of seven
years from the date of issuance or three years from the date of the Company's
initial public offering, whichever is longer. The fair value of this warrant
was determined to be $84,000. The fair value of the warrants was calculated at
the time of issuance using the Black-Scholes pricing model with the
F-13
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
following assumptions: expected life seven years; risk-free interest rate of
5%; no dividends during the expected term and volatility of 50%.
In August 1999, the Company entered into a Lease Agreement with Valley
Freightliner, Inc ("VFI") and a related financing agreement with Mercedes-Benz
Credit Corporation ("MBCC"). Under the terms of the Lease Agreement, the
Company will lease its delivery fleet from VFI for a period of 84 months
following receipt of the vehicles. The Company has no option to purchase the
vehicles at any time and is obligated to pay VFI a guaranteed residual value of
$12,500 per vehicle at the end of the lease term. The Company accounts for its
obligations under this Lease Agreement as capital leases. The financing
agreement entered into with MBCC is a revolving line of credit under which the
Company may borrow up to $15.0 million for the purchase of delivery vehicles or
to finance the lease of such vehicles. As of January 1, 2000, leases executed
pursuant to this agreement aggregated approximately $12.7 million. Amounts
available under the agreement will increase to $20.0 million if the Company
raises an additional $44.0 million in equity financing. The financing agreement
restricts the Company's ability to pay dividends and expires on June 30, 2000.
Borrowings under the line are payable in 84 monthly installments and are
secured by the delivery vehicles which have a net book value of $12.6 million
at January 1, 2000.
5. Income Taxes
The Company did not provide any current or deferred United States federal
income tax provision or benefit for any of the periods presented because it has
experienced operating losses since inception. The Company provided a full
valuation allowance on the net deferred tax asset, consisting primarily of net
operating loss carryforwards, because management believes there is substantial
uncertainty as to its ability to use such tax loss carryforwards.
As of January 1, 2000, the Company had approximately $66.0 million of net
operating loss carryforwards for federal income tax purposes, which expire
beginning in 2017. In 1999, due to the issuance and sale of Series C preferred
stock, the Company incurred an ownership change pursuant to applicable
regulations under the Internal Revenue Code of 1986, as amended. The Company's
use of the $11.5 million of net operating losses incurred through the date of
ownership change will be limited to approximately $1.0 million per year in
order to offset future taxable income. To the extent that any single-year loss
is not utilized to the full amount of the limitation, such unused loss is
carried over to subsequent years until the earlier of its utilization or the
expiration of the relevant carryforward period. The Company's anticipated
initial public offering is not likely to cause an additional ownership change.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 2,796 $ 23,109
Stock-based compensation.............................. -- 307
Accrued liabilities and other......................... 336 370
------- --------
Total deferred tax assets........................... 3,132 23,786
Deferred tax liabilities--depreciation and other...... 46 575
------- --------
Net deferred tax assets............................. 3,086 23,211
Less valuation allowance............................ (3,086) (23,211)
------- --------
$ 0 $ 0
======= ========
</TABLE>
F-14
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Because the Company's utilization of these deferred tax assets is dependent
on future profits that are not assured, a valuation allowance equal to the
deferred tax assets has been provided. The valuation reserve increased $2.6
million and $20.1 million during fiscal 1998 and 1999, respectively.
6. Stockholders' Equity
Stock Split
In November 1999, the Company's shareholders approved a two-for-one stock
split of shares, warrants and options outstanding which became effective on
November 23, 1999. All share and per share amounts in the accompanying
financial statements have been adjusted to reflect the stock split.
Proposed Initial Public Offering of Common Stock
On December 14, 1999, the Board of Directors authorized the Company to
proceed with an initial public offering of its common stock. If the offering
is consummated as currently expected, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
shareholders' equity at January 1, 2000 reflects the anticipated conversion of
all outstanding shares of Series A, Series B, Series C and Series D preferred
stock into 73,206,738 shares of common stock upon completion of the offering.
Common Stock
In fiscal 1997, the Company sold 15,200,000 shares of common stock for cash
consideration of $292,000.
In September 1997, the Company's founders entered into common shareholders'
agreements whereby the Company had the right to repurchase 6,000,000 shares of
common stock held by the founders at the original purchase price of $0.0005
per share if their employment terminated under certain circumstances. The
Company's right of repurchase originally lapsed quarterly from December 31,
1997 through September 30, 2000. In addition, the Company had the option to
purchase any unrestricted shares from the founders upon termination at fair
market value.
In December 1997, one founder left the employment of the Company. The
Company exercised its repurchase right in February 1998 as to 2,000,000 shares
for $1,000. In August 1998, another founder left the employment of the
Company. The Company exercised its repurchase right as to 1,333,334 shares for
$667. The Company did not exercise its right to purchase either of the
founders' unrestricted shares.
In August 1998, as a part of the Series B preferred stock financing, the
lapsing schedule for the Company's remaining founder was accelerated such that
his remaining shares became fully vested by January 1, 2000.
The Company entered into a service agreement in April 1997 with a
consultant pursuant to which the Company issued 800,000 shares of common stock
($230,000) in 1997 and 500,000 shares of Series A preferred stock ($250,000)
in 1998 for services provided. In October 1998, the service agreement was
terminated and the consultant returned 250,000 shares of common stock.
Preferred Stock
In February, April, June and July 1998, the Company issued 8,000,000 shares
of Series A preferred stock. Net proceeds of $3.7 million were obtained from
the conversion of $800,000 of notes for 1,600,000 shares, the sale of
5,900,000 shares at $0.50 per share and the issuance of 500,000 shares in
exchange for services. In
F-15
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
June 1998, the Company issued a warrant to purchase 965,666 shares of common
stock to an investor as part of the Series A preferred stock financing. The
exercise price of this warrant is $0.50 per share and it is exercisable through
December 31, 2000, but terminates upon an initial public offering.
In September 1998, 16,857,142 shares of Series B preferred stock were issued
at a price of $0.35 per share, resulting in net proceeds of $5.9 million.
In January and February 1999, certain preferred stock shareholders provided
$2.0 million of bridge financing. In April and May 1999, 29,942,050 shares of
Series C preferred stock were sold at a price of $1.75 per share, resulting in
net proceeds of $52.4 million, including $1.7 million of shareholder loans
obtained in 1999 that were converted into 969,464 shares of Series C preferred
stock. As part of the Series C preferred stock offering, the Company granted
one of the Series C investors an initial public offering purchase option, which
was waived in December 1999.
In September, October and November 1999, 18,407,546 shares of Series D
preferred stock were sold at a price of $5.80 per share, resulting in net
proceeds of $106.5 million.
Subject to certain conditions, the preferred stock has mandatory conversion
requirements in the event of a qualified initial public offering of the
Company's common stock in which net proceeds exceed $75.0 million and a price
of not less than $5.80 per share, or if a majority of the preferred
stockholders, voting as a single class, elects to convert to common stock. In
the event of any distribution of assets upon liquidation of the Company,
holders of Series A, Series B, Series C and Series D preferred stock shall
first receive a liquidation preference of $0.50 per share, $0.35 per share,
$1.75 per share and $5.80 per share respectively, plus cumulative dividends, if
and when declared, at an annual rate of 9%. Each share of outstanding preferred
stock has voting rights equivalent to the number of common shares issuable, if
converted.
Stock Option Plans
In October 1997, the Company adopted the 1997 Stock Incentive Compensation
Plan ("1997 Plan"), under which the Company grants incentive stock options and
nonqualified stock options to employees, officers and consultants. Incentive
stock options are issued only to employees and are exercisable at prices that
are no less than the fair market value of the stock on the date of grant.
Generally, options granted under the 1997 Plan become exercisable immediately
and vest over four years. 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. During fiscal 1999, the Company repurchased 12,000
shares of restricted common stock from employees who terminated prior to the
lapsing of the repurchase restrictions at their original price of an aggregate
of $4,000. At January 1, 2000, 4,996,870 shares of restricted common stock
issued were subject to repurchase at a weighted average exercise price of
$0.97 per share. Nonqualified stock options are granted at a price and vesting
period determined by the Plan administrator. Options under the 1997 Plan
generally have a term of ten years. Unless earlier terminated by the Board of
Directors, the 1997 Plan expires in October 2007.
On December 14, 1999, the Company's 1999 Stock Incentive Plan ("1999 Stock
Plan") was adopted by the Board of Directors, subject to shareholder approval.
A total of 12,500,000 shares have been reserved for issuance under the plan
subject to an annual increase on the first day of each of the Company's next
five fiscal years beginning in fiscal 2001 equal to the lesser of 2,500,000
shares or 2.5% of outstanding shares on the last day of the preceding fiscal
year. The number of options granted, the exercise price of the option and the
option vesting period will be determined by the Plan administrator, subject to
certain restrictions. Unless terminated earlier by the Board of Directors, the
1999 Stock Plan will terminate in December 2009.
F-16
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On December 14, 1999, the Company's 1999 Directors' Stock Option Plan ("1999
Directors' Plan") was adopted by the Board of Directors, subject to shareholder
approval and the completion of the initial public offering. A total of 500,000
shares of common stock has been reserved for issuance under the plan. The 1999
Directors' Plan provides for a nonqualified stock option grant to purchase
20,000 shares of common stock on the date on which the individual becomes a
non-employee director. Thereafter, on the date of the Company's annual
shareholders' meeting, each non-employee director who has served as a director
of the Company for six months will be granted an additional option to purchase
5,000 shares. Options granted under the plan will vest ratably over four years
and have a term of ten years. Unless terminated earlier, the 1999 Directors
Plan will terminate in December 2009.
A summary of activity related to the Company's 1997 plan follows:
<TABLE>
<CAPTION>
Shares Available Weighted-Average
for Future Grant Options Exercise Price
---------------- ---------- ----------------
<S> <C> <C> <C>
1997 Plan adoption................ 10,124,334 -- $ --
Granted......................... (4,509,000) 4,509,000 0.24
Canceled........................ 656,000 (656,000) 0.25
----------- ----------
Balance, January 2, 1999.......... 6,271,334 3,853,000 0.24
1997 Plan amendment............. 5,800,000 -- --
Granted......................... (10,810,400) 10,810,400 1.39
Exercised....................... -- (8,250,870) 0.69
Canceled........................ 526,188 (526,188) 0.62
1999 Stock Plan adoption........ 12,500,000 -- --
----------- ----------
Balance, January 1, 2000.......... 14,287,122 5,886,342 $1.69
=========== ==========
</TABLE>
The following information is provided for options outstanding and vested at
January 1, 2000:
<TABLE>
<CAPTION>
Outstanding Vested
------------------------------------------- ------------------------
Weighted-Average Number
Range of Number of Weighted-Average Remaining of Weighted-Average
Exercise Prices Options Exercise Price Contractual Life Options Exercise Price
--------------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.00--$0.09 40,000 $0.09 8.3 40,000 $0.09
$0.10--$0.25 414,442 $0.25 8.7 178,953 $0.25
$0.26--$0.45 2,825,300 $0.45 9.6 100,000 $0.45
$0.46--$2.50 1,781,000 $2.50 9.9 8,399 $2.50
$2.51--$5.00 825,600 $5.00 10.0 -- $5.00
--------- -------
$0.00--$5.00 5,886,342 $1.69 9.7 327,352 $0.35
========= =======
</TABLE>
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation was
recorded when the exercise price of an option or the sales price of restricted
stock was lower than the subsequently determined deemed fair value for
financial reporting purposes of the underlying common stock. The Company
recorded aggregate deferred stock-based compensation of $67.7 million in fiscal
1999 and will amortize the deferred stock-based compensation over the vesting
period of the underlying options, which is typically four years. Amortization
of deferred stock-based compensation was $26.1 million in fiscal 1999.
Had the Company elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS 123, the pro forma net loss would
have been $8.0 million or $(0.73) per share in fiscal 1998 and pro forma net
loss of $80.0 million or $(5.30) per share in fiscal 1999. The fair value of
each option
F-17
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
grant was estimated on the date of grant using the minimum value method and the
following assumptions: average expected option life of four years, risk-free
interest rates from 4.1% to 6.4%, and no expected dividends. The weighted-
average fair value of options granted during 1998 and 1999 was $0.04 and $3.93
per share, respectively. No options were granted during 1997. The initial
impact on pro forma net loss may not be representative of compensation expense
in future years, when the effect of the amortization of multiple awards will be
reflected in the results of operations.
Stock Option Grants and Restricted Stock Sales
In September 1999, two officers of the Company were granted nonqualified
stock options to purchase 6,150,000 shares of the Company's common stock for
$0.45 per share. The options were granted outside of the Company's 1997 Plan
and vest over a period of four years. Each option agreement also provide that
in the event the officer's employment is terminated for other than cause or in
the event of a change in control whereby the officer is not offered a position
with similar responsibilities, additional shares will vest to the officer.
These shares are subject to a repurchase option which gives the Company the
right to purchase such shares at a price equal to that paid by the officers.
The repurchase option expires over the original vesting schedule of the
underlying option and no shares were vested at January 1, 2000. In addition to
the stock options, in September 1999, the Company sold 2,050,000 shares of
restricted common stock to the same two officers at $0.45 per share. The shares
are fully vested but are subject to a right of first refusal, whereby the
Company has the right to purchase the shares for the same price and terms as
offered to the officers by a third party. This right expires upon the Company's
successful completion of an initial public offering.
In September 1999, the Company loaned the two officers $3,231,000 to enable
them to exercise the stock options granted to them and purchase the restricted
shares of the Company's common stock. The promissory notes are with full
recourse against the officers, bear interest at 5.98% and are payable in full
on September 9, 2004. Principal amounts outstanding under the notes are
reflected as a component of shareholders' equity.
Common Stock Reserved
The following shares of common stock were reserved for future issuance:
<TABLE>
<CAPTION>
January 1,
2000
----------
<S> <C>
Outstanding stock options....................................... 5,886,342
Stock options available for future grant........................ 14,287,122
Warrants to purchase common stock............................... 2,319,786
Conversion of convertible preferred stock:
Series A....................................................... 8,000,000
Series B....................................................... 16,857,142
Series C....................................................... 29,942,050
Series D....................................................... 18,407,546
Warrant to purchase preferred stock that is convertible to
common stock................................................... 429,462
----------
Total common shares reserved for future issuance................ 96,129,450
==========
</TABLE>
7. Employee Benefit Plans
The Company has a 401(k) Plan that is available to all employees over the
age of 21 who have been with the Company three months. Eligible employees may
contribute up to 20% of their annual compensation to the 401(k) Plan, subject
to limitations imposed by federal income tax regulations. Each participant is
fully vested in
F-18
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
his or her deferred salary contribution. The Company matches participants'
contributions to the 401(k) Plan up to 5% of the participants' compensation if
the participant has performed at least 1,000 hours of service during the year.
The Company's fiscal 1998 and 1999 matching contributions were $23,000 and
$318,000, respectively. The Company's matching contributions vest 33% after two
years of service, 66% after three years of service and 100% after four years of
service.
On December 14, 1999, the Company's 1999 Employee Stock Purchase Plan ("1999
ESPP") was adopted by the Board of Directors, subject to shareholder approval.
If approved by the shareholders, the 1999 ESPP will become effective upon the
completion of the initial public offering and completion of the initial public
offering. A total of 3,000,000 shares of common stock has been reserved for
issuance under the 1999 ESPP plus an annual automatic increase on the first day
of each fiscal year beginning in 2001 and continuing through 2005 equal to the
lesser of 500,000 shares, 0.5% of the Company's outstanding shares or the
number of shares determined by the Board of Directors. Under the 1999 ESPP,
eligible employees may purchase common stock at 85% of the lesser of the fair
market value of the Company's common stock on the first or last day of the
previous six or 12 months. Employees may end their participation in the 1999
ESPP at any time during the offering period. Unless terminated earlier, the
1999 ESPP will terminate in December 2019.
8. Commitments and Contingencies
In November 1999, the Company entered into a noncancelable advertising
agreement with one of its investors under which the Company will pay an
aggregate sum of $10.0 million for a maximum of 2.0 million advertising
mailings. The $10.0 million is due in eight quarterly installments commencing
on March 31, 2000, subject to acceleration if certain milestones are achieved.
As of January 1, 2000, the Company has signed agreements to acquire
additional delivery vehicles with an estimated cost of $35.6 million and had
construction-related commitments of approximately $6.5 million.
The Company is party to routine claims and litigation incidental to its
business. The Company believes the ultimate resolution of these routine matters
will not have a material adverse effect on its financial position, results of
operations or cash flows.
9. Subsequent Event
On February 15, 2000, the Company entered into a marketing agreement with
America Online ("AOL"), an Internet online service provider. Under the terms of
the agreement, AOL has agreed to promote the Company online and to deliver a
minimum number of annual page views. Over the five year term of the agreement,
the Company is obligated to make payments totaling up to $60 million to AOL and
pay a referral fee for each new customer referred by AOL to the Company above
specified thresholds.
F-19
<PAGE>
Back Inside Cover
The back inside cover contains a heading reading "Easy to navigate web site" and
three screen shots of HomeGrocer.com's web site having the following three
captions:
1. "Large selection of products with personalized lists for quick
shopping;"
2. "Easy-to-shop categories, product photos, nutritional information and
more;"
3. "Simple and quick checkout."
The HomeGrocer.com peach logo and corporate name are at the bottom of the page.
<PAGE>
[ARTWORK]
[Photograph of the back of a HomeGrocer.com delivery truck displaying
HomeGrocer.com's peach logo driving through a neighborhood]
<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 we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 2000
Shares
[LOGO OF HOMEGROCER.COM]
Common Stock
------------
HomeGrocer.com, Inc. is offering shares of common stock. This is
our initial public offering and no public market currently exists for our
shares.
------------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "HOMG."
------------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
------------
PRICE $ A SHARE
------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions HomeGrocer.com
-------- ------------- --------------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
</TABLE>
HomeGrocer.com has granted the underwriters the right to purchase up to an
additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. International Limited expects to deliver the shares of
common stock to purchasers on , 2000.
------------
MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
BANK OF AMERICA INTERNATIONAL LIMITED
J.C. BRADFORD & CO.
, 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 by HomeGrocer.com in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee........................................... $ 80,151
NASD filing fee................................................ 30,500
Nasdaq National Market listing fee............................. 90,000
Printing and engraving expenses................................ 250,000
Legal fees and expenses........................................ 500,000
Accounting fees and expenses................................... 300,000
Blue Sky qualification fees and expenses....................... 10,000
Transfer Agent and Registrar fees.............................. 15,000
Miscellaneous fees and expenses................................ 124,349
----------
Total...................................................... $1,400,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") and Section 145 of the Delaware General
Corporation Law (the "DGCL") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under some circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The registrant's Bylaws (Exhibits 3.4 and 3.5 hereto)
provide for indemnification of the registrant's directors, officers, employees
and agents to the maximum extent permitted by Washington or Delaware law, as
applicable. The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. The registrant's Articles of Incorporation (Exhibit 3.2 hereto) and
Certificate of Incorporation (Exhibit 3.1) contain provisions implementing, to
the fullest extent permitted by Washington or Delaware law, as applicable, such
limitations on a director's liability to the registrant and its shareholders.
The registrant will enter into indemnification agreements with its officers
and directors, the form of which is attached as Exhibit 10.26 to this
Registration Statement and incorporated herein by reference. The
indemnification agreements provide the registrant's officers and directors with
indemnification to the maximum extent permitted by the WBCA.
Item 15. Recent Sales of Unregistered Securities
Since HomeGrocer.com's inception through January 1, 2000, HomeGrocer.com has
issued and sold the following unregistered securities:
1. From inception to January 1, 2000, HomeGrocer.com granted and issued
options to purchase 15,319,400 shares of its common stock with a weighted
average price of $1.05 to a number of employees,
II-1
<PAGE>
directors and consultants of HomeGrocer.com pursuant to its 1997 stock
incentive compensation plan. Among those receiving options were Tom A.
Alberg, Mary B. Anderson, Charles K. Barbo, James L. Barksdale, Rex L.
Carter, Ken Deering, Robert Duffy, Corwin Karaffa, Jonathan Landers,
Jonathan D. Lazarus, Daniel R. Lee, Daniel J. Murphy, David A. Pace, Philip
S. Schlein and Kristin H. Stred.
2. From inception to January 1, 2000, HomeGrocer.com has issued an
aggregate of 8,250,870 shares of its common stock to executive officers,
directors and employees upon the exercise of stock options granted pursuant
to the HomeGrocer.com 1997 stock incentive compensation plan with an
aggregate exercise price of $5,674,568. Among those that HomeGrocer.com
issued shares to were Tom A. Alberg, Mary B. Anderson, Charles K. Barbo,
James L. Barksdale, Rex L. Carter, Ken Deering, Robert Duffy, Corwin
Karaffa, Jonathan D. Lazarus, Jonathan Landers, Daniel R. Lee, David A.
Pace, Philip S. Schlein and Kristin H. Stred.
3. On September 29, 1997, HomeGrocer.com issued an aggregate of
15,200,000 shares of its common stock to investors and J. Terrence Drayton,
our president, in connection with the domestication of its Canadian
predecessor into the state of Delaware for consideration of the Canadian
shares.
4. On October 15, 1997 and September 1, 1998, HomeGrocer.com issued
Organic Online, Inc. a total of 800,000 shares of its common stock and
500,000 shares of its Series A preferred stock for consideration of
services rendered. On May 21, 1999, HomeGrocer repurchased 250,000 shares
of this common stock from Organic Online, Inc. in connection with an
agreement to terminate services.
5. On February 11, 1998, HomeGrocer.com granted and issued warrants with
an expiration date of December 31, 2000, to purchase an aggregate of
1,800,000 shares of its common stock, at an exercise price of $0.375 per
share, to the following investors in connection with a bridge loan
financing: an entity affiliated with the Barbo Group, Madrona Investment
Group, LLC, Geoffrey A. Boguch, an entity affiliated with Kleiner Perkins
Group, Michael B. Donald, an entity affiliated with the Heffring Group,
Richard J. Robbins and Bonnie B Robbins (as Tenants in Common), Spanish
Caravan Investments, LLC, Dennis M. Weibling, Arthur W. Harrigan, John
Maynard and Terran Ventures, Inc., Terran Ventures is an affiliate of J.
Terrence Drayton, an executive officer.
6. On June 25, 1998, HomeGrocer.com granted and issued a warrant with an
expiration date of December 31, 2000, to purchase 965,666 shares of its
common stock at an exercise price of $0.50 per share to Fitpro Pty. Ltd, in
connection with a bridge loan financing.
7. In July 1998, HomeGrocer.com granted and issued warrants with an
expiration date of July 2005 or three years from the effective date of this
offering, whichever is earlier,, to purchase an aggregate of 300,000 shares
of its common stock at an exercise price of $0.50 per share to First
Portland Corp. and Silicon Valley Bank, each in connection with a
commercial loan.
8. On September 1, 1998, HomeGrocer.com issued 16,857,142 shares of its
Series B preferred stock to investors, including to entities affiliated
with Hummer Winblad Group, entities affiliated with Kleiner Perkins Group
and the Lazarus Family Investments LLC for an aggregate cash consideration
of approximately $5,900,000.
9. On October 19, 1998, HomeGrocer.com granted and issued a warrant with
an expiration date of October 19, 2005 or three years from the effective
date of this offering, whichever is earlier, to purchase 4,120 shares of
its common stock at an exercise price of $0.50 per share to First Portland
Corp. in connection with a equipment leasing arrangement.
10. On November 9, 1998, HomeGrocer.com granted and issued a warrant,
with an expiration date of November 9, 2005 or three years from the
effective date of this offering, whichever is earlier, to purchase 153,600
shares of its Series C to Comdisco, Inc., with an exercise price of
$0.78125 per share, in connection with a equipment leasing arrangement.
11. On February 11, 1999, April 3, 1998, June 2, 1998, and July 16,
1998, HomeGrocer.com issued 8,000,000 shares of its Series A preferred
stock to investors, including but not limited to Fitpro Pty Ltd.,
II-2
<PAGE>
Stewart A. Konzen, entities affiliated with Hummer Winblad Group, entities
affiliated with the Barbo Group, Madrona Investment Group, LLC, Organic,
Inc., Richard J. Robbins and Bonnie B. Robbins (Tenants in Common),
Geoffrey A. Boguch, R. Kirk Wilson, entities affiliated with the Sonntag
Group, Lazarus Family Investments LLC, and entities associated with Kleiner
Perkins Group for an aggregate cash consideration of $4,000,000. Of the
8,000,000 shares of Series A preferred stock, HomeGrocer.com issued 50,000
shares to Terran Ventures, Inc., an affiliate of our president, J. Terrence
Drayton. Of the 8,000,000 shares of Series A preferred stock,
HomeGrocer.com issued 100,000 shares to Director Charles Barbo.
12. On March 15, 1999, HomeGrocer.com issued 300,000 shares of its
common stock at an exercise price of $0.375 per share to C&LB Family
Limited Partnership, an entity associated with the Barbo Group, pursuant to
a common stock warrant dated February 11, 1998, for an aggregate cash
consideration of $112,500.
13. On March 30, 1999, HomeGrocer.com issued 300,000 shares of its
common stock at an exercise price of $0.375 per share to Geoffrey A.
Boguch, pursuant to a common stock warrant dated February 11, 1998, for an
aggregate cash consideration of $112,500.
14. On April 13, 1999 and May 13, 1999, HomeGrocer.com issued 29,942,050
shares of its Series C preferred stock to investors, including but not
limited to Amazon.com, Inc., entities affiliated with the Barksdale Group,
Liberty HG, Inc., entities affiliated with the Hummer Winblad Group and
entities affiliated with the Kleiner Perkins Group for an aggregate cash
consideration of approximately $52,399,000. Of the issued 29,942,050 shares
of its Series C preferred stock, HomeGrocer.com issued 5,516 shares to
director Charles Barbo.
15. On September 9, 1999, HomeGrocer.com granted Mary Alice Taylor, our
Chairman and Chief Executive Officer and J. Terrence Drayton, our president
and a director of HomeGrocer.com, options to purchase an aggregate of
6,150,000 shares of common stock at an exercise price of $0.45 per share
and the two officers exercised the options to purchase the shares on that
date. The options were exercised for aggregate consideration of $2,767,500
in the form of cash and promissory notes from the officers. Additionally,
on September 9, 1999, HomeGrocer.com sold the two officers an aggregate of
2,050,000 shares of common stock at an exercise price of $0.45 per share
for aggregate consideration of $922,500 in the form of cash and promissory
notes from the officers.
16. On September 15, 1999, HomeGrocer.com granted and issued a warrant,
with an expiration date of September 15, 2006 or three years from the
effective date of this offering to purchase 275,862 shares of its Series D
preferred stock to Comdisco, Inc., with an exercise price $5.80 per share.
17. On October 19, 1999, HomeGrocer.com issued 100,000 shares of its
common stock at an exercise price of $0.375 per share to Spanish Caravan
Investments, LLC, pursuant to a common stock warrant dated February 11,
1998, for an aggregate cash consideration of $37,500.
18. On October 21, 1999, HomeGrocer.com issued 50,000 shares of its
common stock at an exercise price of $0.375 per share to Arthur W.
Harrigan, Jr., pursuant to a common stock warrant dated February 11, 1998,
for an aggregate cash consideration of $18,750.
19. On September 30, 1999, October 13, 1999, October 29, 1999, November
12, 1999 and November 18, 1999, HomeGrocer.com issued 18,407,546 shares of
its Series D preferred stock to investors, including but not limited to
Amazon.com, Inc., an entity affiliated with the Hummer Winblad Group,
entities affiliated with the Kleiner Perkins Group, entities associated
with the Barksdale Group, entities associated with Hambrecht & Quist Group,
Liberty HG, Inc., Madrona Investment Group, entities affiliated with Van
Wagoner Group, Martha Stewart, Comdisco, Inc., and entities affiliated with
the Lazarus Group for an aggregate cash consideration of approximately
$106,764,000. Of the 18,407,546 shares of its Series D preferred stock,
HomeGrocer.com also issued 17,200 shares to Director Charles Barbo.
Additionally, chief executive officer Mary Alice Taylor was issued 17,240
shares.
II-3
<PAGE>
20. In January 2000, HomeGrocer.com issued an aggregate of 1,050,000
shares of its common stock at an exercise price of $0.375 per share upon
the exercise of common stock warrants dated February 11, 1998 and April 26,
1999, for an aggregate cash consideration of $393,750, to: Madrona
Investment Group, Michael B. Donald, Heffring Investment Group, Richard &
Bonnie Robbins, Spanish Caravan Investments, Dennis M. Weibling, Arthur W.
Harrigan, Jr., Terran Ventures, Inc., John Maynard and entities affiliated
with the Kleiner Perkins Group.
21. In January and February 2000, HomeGrocer.com issued an aggregate of
965,666 shares of its common stock to Fitpro Pty. Ltd. at an exercise price
of $0.50 per share upon exercise of common stock warrants dated June 25,
1998, for an aggregate cash consideration of $482,833.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) and
Regulation D as transactions by an issuer not involving any public offering. In
addition, issuances described in Items 1 and 2 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with HomeGrocer.com, to information about HomeGrocer.com.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of HomeGrocer.com.
3.2** Amended and Restated Articles of Incorporation of HomeGrocer.com.
3.3** Second Amended and Restated Articles of Incorporation of
HomeGrocer.com (proposed).
3.4** Bylaws of HomeGrocer.com (Delaware).
3.5** Bylaws of HomeGrocer.com (Washington).
4.1** Specimen Stock Certificate.
4.2** Third Amended and Restated Investors Rights Agreement dated September
30, 1999, as amended.
4.3** Warrant Agreement to purchase Series C Preferred Stock dated November
9, 1998 issued by HomeGrocer.com in favor of Comdisco, Inc.
4.4** Warrant Agreement to purchase Series D Preferred Stock dated September
15, 1999 issued by HomeGrocer.com in favor of Comdisco, Inc.
4.5** Form of Common Stock Purchase Warrant issued by HomeGrocer.com to
certain lenders.
4.6** Form of Common Stock Warrant Certificate issued by HomeGrocer.com in
connection with its preferred stock financings.
5.1 Opinion of Venture Law Group regarding the legality of the common
stock being registered.
10.1**+ Advertising Agreement dated November 18, 1999 between HomeGrocer.com
and Amazon.com, LLC.
10.2** Lease Agreement dated August 16, 1999 between HomeGrocer.com and
Valley Freightliner, Inc.
10.3** Revolving Line of Credit Commitment Letter dated June 11, 1999 by
Mercedes-Benz Credit Corporation in favor of HomeGrocer.com, Inc.
10.4** Master Lease Agreement dated November 9, 1998 between HomeGrocer.com
and Comdisco, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.5** Addendum to Master Lease Agreement dated as of November 9, 1999
between HomeGrocer.com and Comdisco, Inc.
10.6** Subordinated Loan and Security Agreement dated September 15, 1999
between HomeGrocer.com and Comdisco, Inc.
10.7** Form of Promissory Note dated September 9, 1999 issued by Mary Alice
Taylor in favor of HomeGrocer.com.
10.8** Form of Promissory Note dated September 9, 1999 issued by J. Terrence
Drayton in favor of HomeGrocer.com.
10.9** Employment Agreement dated September 2, 1999 between HomeGrocer.com
and Mary Alice Taylor.
10.10** Employment Agreement dated June 1, 1999 between HomeGrocer.com and J.
Terrence Drayton.
10.11** Employment Agreement dated November 3, 1999 between HomeGrocer.com and
Daniel R. Lee.
10.12** Employment Agreement dated August 31, 1999 between HomeGrocer.com and
David A. Pace.
10.13** Facility Lease dated May 19, 1999 between HomeGrocer.com, as
sublessee, and The Plaza at Yarrow Bay, LLC.
10.14** Facility Sublease dated July 22, 1999 between HomeGrocer.com, as
sublessor, and AT&T Wireless Services of Washington, Inc.
10.15** Facility Sublease dated April 8, 1999 between HomeGrocer.com, as
sublessee, and Delta Engineering and Manufacturing.
10.16** Facility Lease dated July 23, 1999 between HomeGrocer.com, as lessee,
and Exposition Property Associates (interest transferred from The
Ezralow Company, LLC).
10.17** Facility Lease dated November 4, 1996 between HomeGrocer.com, as
successor in interest to the lessee, and Benaroya Capital Company,
LLC.
10.18** Facility Sublease dated June 24, 1999 between HomeGrocer.com, as
sublessor, and A&M Warehouses, Incorporated.
10.19** Facility Lease dated July 8, 1999 between HomeGrocer.com, as lessee,
and Lincoln-RECP Fullerton OPCO, LLC.
10.20** Facility Lease dated August 10, 1999 between HomeGrocer.com, as
lessee, and Realty Associates Iowa Corporation.
10.21** Facility Lease dated May 24, 1999 between HomeGrocer.com, as
sublessee, and The Concourse Joint Venture.
10.22** Amendment No. 1 dated June 21, 1999 to the Facility Lease dated May
24, 1999 between HomeGrocer.com, as sublessee, and The Concourse Joint
Venture.
10.23** Facility Sublease dated November 15, 1999 between HomeGrocer.com, as
sublessee, and Thyssen Dover Elevator.
10.24** Facility Lease dated November 15, 1999 between HomeGrocer.com, as
lessee, and Watson Partners, L.P.
10.25** Commercial Lease Agreement dated December 17, 1999 between
HomeGrocer.com as Lessee, and CB Luna Industrial No. 3, Ltd.
10.26** Form of Indemnification Agreement between HomeGrocer.com and each of
its Officers and Directors.
10.27** 1997 Stock Incentive Compensation Plan dated April 1997.
10.28** 1999 Stock Incentive Plan dated December 1999.
10.29** 1999 Employee Stock Purchase Plan dated December 1999.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.30** 1999 Directors' Stock Option Plan dated December 1999.
10.31** Network Services Agreement dated December 17, 1997 between
HomeGrocer.com and InterNAP Network Services Corporation.
10.32** Employment Agreement dated November 22, 1999 between HomeGrocer.com
and Rex L. Carter.
10.33** Facility Lease dated January 14, 2000 between HomeGrocer.com and
Reliance Hamilton Associates, LLC.
10.34 Facility Lease dated October 1, 1999 between HomeGrocer.com and Waples
Corporation.
10.35 Facility Lease dated January 4, 2000 between HomeGrocer.com and The
Irvine Company.
10.36 Facility Lease dated January 25, 2000 between HomeGrocer.com and Mercy
Capital Center Joint Venture.
10.37 Retailer's Agreement dated December 10, 1997 between HomeGrocer.com
and SuperValu.
10.38*+ Interactive Marketing Agreement dated February 15, 2000 between
HomeGrocer.com and America Online, Inc.
21.1** List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Venture Law Group (included in Exhibit 5.1).
24.1** Power of Attorney (included in signature page to Registration
Statement).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested for portions of the copy of the
exhibit filed with the Securities and Exchange Commission. The omitted
information has been filed separately with the Securities and Exchange
Commission under our application for confidential treatment.
(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 undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Kirkland,
State of Washington on February 16, 2000.
HomeGrocer.com, Inc.
/s/ Mary Alice Taylor
By: _________________________________
Mary Alice Taylor
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mary Alice Taylor Chairman of the Board and February 16, 2000
______________________________________ Chief Executive Officer
Mary Alice Taylor
* Chief Financial Officer February 16, 2000
______________________________________
Daniel R. Lee
* President and Director February 16, 2000
______________________________________
J. Terrence Drayton
* Director February 16, 2000
______________________________________
Tom A. Alberg
* Director February 16, 2000
______________________________________
Charles K. Barbo
* Director February 16, 2000
______________________________________
James L. Barksdale
* Director February 16, 2000
______________________________________
Mark P. Gorenberg
* Director February 16, 2000
______________________________________
Jonathan D. Lazarus
* Director February 16, 2000
______________________________________
Douglas Mackenzie
* Director February 16, 2000
______________________________________
David Risher
* Director February 16, 2000
______________________________________
Philip S. Schlein
/s/ Mary Alice Taylor February 16, 2000
*By: _________________________________
Mary Alice Taylor
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of HomeGrocer.com.
3.2** Amended and Restated Articles of Incorporation of HomeGrocer.com.
3.3** Second Amended and Restated Articles of Incorporation of
HomeGrocer.com (proposed).
3.4** Bylaws of HomeGrocer.com (Delaware).
3.5** Bylaws of HomeGrocer.com (Washington).
4.1** Specimen Stock Certificate.
4.2** Third Amended and Restated Investors Rights Agreement dated September
30, 1999, as amended.
4.3** Warrant Agreement to purchase Series C Preferred Stock dated November
9, 1998 issued by HomeGrocer.com in favor of Comdisco, Inc.
4.4** Warrant Agreement to purchase Series D Preferred Stock dated September
15, 1999 issued by HomeGrocer.com in favor of Comdisco, Inc.
4.5** Form of Common Stock Purchase Warrant issued by HomeGrocer.com to
certain lenders.
4.6** Form of Common Stock Warrant Certificate issued by HomeGrocer.com in
connection with its preferred stock financings.
5.1 Opinion of Venture Law Group regarding the legality of the common
stock being registered.
10.1**+ Advertising Agreement dated November 18, 1999 between HomeGrocer.com
and Amazon.com, LLC.
10.2** Lease Agreement dated August 16, 1999 between HomeGrocer.com and
Valley Freightliner, Inc.
10.3** Revolving Line of Credit Commitment Letter dated June 11, 1999 by
Mercedes-Benz Credit Corporation in favor of HomeGrocer.com, Inc.
10.4** Master Lease Agreement dated November 9, 1998 between HomeGrocer.com
and Comdisco, Inc.
10.5** Addendum to Master Lease Agreement dated as of November 9, 1999
between HomeGrocer.com and Comdisco, Inc.
10.6** Subordinated Loan and Security Agreement dated September 15, 1999
between HomeGrocer.com and Comdisco, Inc.
10.7** Form of Promissory Note dated September 9, 1999 issued by Mary Alice
Taylor in favor of HomeGrocer.com.
10.8** Form of Promissory Note dated September 9, 1999 issued by J. Terrence
Drayton in favor of HomeGrocer.com.
10.9** Employment Agreement dated September 2, 1999 between HomeGrocer.com
and Mary Alice Taylor.
10.10** Employment Agreement dated June 1, 1999 between HomeGrocer.com and J.
Terrence Drayton.
10.11** Employment Agreement dated November 3, 1999 between HomeGrocer.com and
Daniel R. Lee.
10.12** Employment Agreement dated August 31, 1999 between HomeGrocer.com and
David A. Pace.
10.13** Facility Lease dated May 19, 1999 between HomeGrocer.com, as
sublessee, and The Plaza at Yarrow Bay, LLC.
10.14** Facility Sublease dated July 22, 1999 between HomeGrocer.com, as
sublessor, and AT&T Wireless Services of Washington, Inc.
10.15** Facility Sublease dated April 8, 1999 between HomeGrocer.com, as
sublessee, and Delta Engineering and Manufacturing.
10.16** Facility Lease dated July 23, 1999 between HomeGrocer.com, as lessee,
and Exposition Property Associates (interest transferred from The
Ezralow Company, LLC).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.17** Facility Lease dated November 4, 1996 between HomeGrocer.com, as
successor in interest to the lessee, and Benaroya Capital Company,
LLC.
10.18** Facility Sublease dated June 24, 1999 between HomeGrocer.com, as
sublessor, and A&M Warehouses, Incorporated.
10.19** Facility Lease dated July 8, 1999 between HomeGrocer.com, as lessee,
and Lincoln-RECP Fullerton OPCO, LLC.
10.20** Facility Lease dated August 10, 1999 between HomeGrocer.com, as
lessee, and Realty Associates Iowa Corporation.
10.21** Facility Lease dated May 24, 1999 between HomeGrocer.com, as
sublessee, and The Concourse Joint Venture.
10.22** Amendment No. 1 dated June 21, 1999 to the Facility Lease dated May
24, 1999 between HomeGrocer.com, as sublessee, and The Concourse Joint
Venture.
10.23** Facility Sublease dated November 15, 1999 between HomeGrocer.com, as
sublessee, and Thyssen Dover Elevator.
10.24** Facility Lease dated November 15, 1999 between HomeGrocer.com, as
lessee, and Watson Partners, L.P.
10.25** Commercial Lease Agreement dated December 17, 1999 between
HomeGrocer.com as Lessee, and CB Luna Industrial No. 3, Ltd.
10.26** Form of Indemnification Agreement between HomeGrocer.com and each of
its Officers and Directors.
10.27** 1997 Stock Incentive Compensation Plan dated April 1997.
10.28** 1999 Stock Incentive Plan dated December 1999.
10.29** 1999 Employee Stock Purchase Plan dated December 1999.
10.30** 1999 Directors' Stock Option Plan dated December 1999.
10.31** Network Services Agreement dated December 17, 1997 between
HomeGrocer.com and InterNAP Network Services Corporation.
10.32** Employment Agreement dated November 22, 1999 between HomeGrocer.com
and Rex L. Carter.
10.33** Facility Lease dated January 14, 2000 between HomeGrocer.com and
Reliance Hamilton Associates, LLC.
10.34 Facility Lease dated October 1, 1999 between HomeGrocer.com and Waples
Corporation.
10.35 Facility Lease dated January 4, 2000 between HomeGrocer.com and The
Irvine Company.
10.36 Facility Lease dated January 25, 2000 between HomeGrocer.com and Mercy
Capital Center Joint Venture.
10.37 Retailer's Agreement dated December 10, 1997 between HomeGrocer.com
and SuperValu.
10.38*+ Interactive Marketing Agreement dated February 15, 2000 between
Homegrocer.com and America Online, Inc.
21.1** List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Venture Law Group (included in Exhibit 5.1).
24.1** Power of Attorney (included in signature page to Registration
Statement).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested for portions of the copy of the
exhibit filed with the Securities and Exchange Commission. The omitted
information has been filed separately with the Securities and Exchange
Commission under our application for confidential treatment.
<PAGE>
EXHIBIT 1.1
22,000,000 Shares
HOMEGROCER.COM, INC.
COMMON STOCK, NO PAR VALUE
UNDERWRITING AGREEMENT
__________, 2000
<PAGE>
_____________, 2000
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
Banc of America Securities LLC
J.C. Bradford & Co.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Donaldson Lufkin & Jenrette International
Hambrecht & Quist LLC
Bank of America International Limited
J.C. Bradford & Co.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
HomeGrocer.com, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters (as defined below) 22,000,000 shares
of its Common Stock (no par value) (the "Firm Shares").
It is understood that, subject to the conditions hereinafter stated,
____________ Firm Shares (the "U.S. Firm Shares") will be sold to the several
U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters") in
connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement between U.S. and International Underwriters of even
date herewith), and __________ Firm Shares (the "International Shares") will be
sold to the several International Underwriters named in Schedule II hereto (the
"International Underwriters") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
<PAGE>
Banc of America Securities LLC and J.C. Bradford & Co. shall act as
representatives (the "U.S. Representatives") of the several U.S. Underwriters,
and Morgan Stanley & Co. International Limited, Donaldson, Lufkin & Jenrette
International, Hambrecht & Quist LLC, Bank of America International Limited and
J.C. Bradford & Co. shall act as representatives (the "International
Representatives") of the several International Underwriters. The U.S.
Underwriters and the International Underwriters are hereinafter collectively
referred to as the "Underwriters".
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional 3,300,000 shares of its Common Stock
(no par value) (the "Additional Shares") if and to the extent that the U.S.
Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of common stock granted to the
U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares
are hereinafter collectively referred to as the "Shares." The shares of the
Common Stock (no par value) of the Company to be outstanding after giving effect
to the sales contemplated hereby are hereinafter referred to as the "Common
Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus." If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve
a portion of the Shares to be purchased by it under this Agreement for sale to
the Company's directors, officers, employees and business associates and other
parties related to the Company (collectively, "Participants"), as set forth in
the
2
<PAGE>
Prospectus under the heading "Underwriters" (the "Directed Share Program").
The Shares to be sold by Morgan Stanley and its affiliates pursuant to the
Directed Share Program are referred to hereinafter as the "Directed Shares."
Any Directed Shares not orally confirmed for purchase by any Participants by the
end of the business day on which this Agreement is executed will be offered to
the public by the Underwriters as set forth in the Prospectus.
1. Representations and Warranties. The Company represents and warrants to
and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain
any 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, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated and is validly existing as
a corporation under the laws of the jurisdiction of its incorporation, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
3
<PAGE>
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights except as described in
the Prospectus.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or by-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, except where such contravention would not singly or in the
aggregate, have a material adverse effect on the Company, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
of its obligations under this Agreement, except such as may be required by
the securities or Blue Sky
4
<PAGE>
laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary 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 Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not, and after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, required to register as an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable Canadian, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (ii are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
5
<PAGE>
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(p) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company or to require the Company to include such securities with the
Shares registered pursuant to the Registration Statement.
(q) The Registration Statement, the Prospectus and any preliminary
prospectus comply, and any amendments or supplements thereto will comply,
with any applicable laws or regulations of foreign jurisdictions in which
the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (ii the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (ii there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus.
(s) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not 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 and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
6
<PAGE>
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in each
case except as described in the Prospectus.
(t) Except as described in the Prospectus, the Company and its
subsidiaries own or possess, or can acquire on reasonable terms, all
material 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 and trade names currently employed by them in
connection with the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or,
to the knowledge of the Company, is imminent; and the Company is not aware
of any existing, threatened or imminent labor disturbance by the employees
of any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(v) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries has been
refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all material
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any of its subsidiaries
has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
7
<PAGE>
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(x) The Company and each of its subsidiaries maintain 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 preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (ii
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.
(y) Except as described in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), the Company has not sold, issued or distributed any shares of
Common Stock during the six-month period preceding the date hereof,
including any sales pursuant to Rule 144A under, or Regulation D or S of,
the Securities Act, other than shares issued pursuant to employee benefit
plans, qualified stock option plans or other employee compensation plans or
pursuant to outstanding options, rights or warrants.
(z) No consent, approval, authorization or order of, or qualification
with, any governmental body or agency, other than those obtained, is
required in connection with the offering of the Directed Shares in any
jurisdiction where the Directed Shares are being offered.
(aa) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share
Program with the intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$_____ a share ("Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to
8
<PAGE>
the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally and not jointly, up to 3,300,000
Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf
of the U.S. Underwriters, elect to exercise such option, the U.S.
Representatives shall so notify the Company in writing not later than 30 days
after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering over-
allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of the Prospectus, (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 to purchase, lend
or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (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 Shares to be sold hereunder, (B) shares or other securities issued in
exchange for all of the equity or substantially all of the equity or assets of a
company in connection with a merger or acquisition, provided that prior to any
such issuance the recipients of such securities shall have agreed with the
Underwriters in writing to be bound by this provision for the remainder of the
180-day period, (C) the issuance by the Company of shares of Common Stock upon
the exercise of an option or warrant or the conversion of a security outstanding
on the date hereof of which the Underwriters have been advised in writing, (D)
the grant of options to purchase shares of Common Stock pursuant to the
Company's 1997 Stock Incentive Compensation Plan, 1999 Stock Incentive Plan and
1999 Director's Stock Option Plan or (E) the issuance of purchase rights or
shares of Common Stock pursuant to the 1999 Employee Stock Purchase Plan;
provided that with respect to clauses D
9
<PAGE>
and E the recipient of such shares or rights shall agree as a condition to be
bound by the terms of this paragraph.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$_____ a share (the "Public Offering Price") and to certain dealers selected
by you at a price that represents a concession not in excess of U.S.$____ a
share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of U.S.$____ a share, to
any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to the
Company in Federal or other funds immediately available in New York City against
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 2000, or at
such other time on the same or such other date, not later than _________, 2000,
as shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 2 or at such other time on the same or on such other date, in any event
not later than _______, 2000, as shall be designated in writing by the U.S.
Representatives. The time and date of such payment are hereinafter referred to
as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to
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<PAGE>
the condition that the Registration Statement shall have become effective not
later than 4:30 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5 and 5 above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Venture Law Group, outside counsel for the Company, dated the
Closing Date, to the effect that:
11
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(i) the Company has been duly incorporated and is validly
existing as a corporation under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated,
is validly existing and/or in good standing as a corporation under the
laws of the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement against
payment therefore, will be validly issued, fully paid and non-
assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights;
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(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the articles of
incorporation or by-laws of the Company or, to such counsel's
knowledge, any agreement or other instrument binding upon the Company
or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except for (i) the
registration of the Shares under the Securities Act of 1933, as
amended, (ii) such consents, approvals, registrations or
qualifications as may be required under the Exchange Act of 1934, as
amended, and (iii) applicable state or foreign securities laws in
connection with the purchase and distribution of the Shares by the
Underwriters (as to which we express no opinion);
(ix) the statements (A) in the Prospectus under the captions
"Management," "Related Party Transactions," "Principal Stockholders,"
"Description of Capital Stock," "Shares Eligible for Future Sale,"
and, with respect to matters relating to the Company and its officers
and directors, "Underwriters" and (B) in the Registration Statement in
Part II, Items 14 and 15, in each case insofar as such statements
constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(x) to such counsel's knowledge there are no legal or
governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of the properties
of the Company or any of its subsidiaries is subject that are required
to be described in the Registration Statement or the Prospectus and
are not so described or of any statutes, regulations, contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement by the Securities Act of 1933, as amended or by
the Applicable Rules and Regulations, that
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have not been described in the Registration Statement or the
Prospectus or filed as exhibits to the Registration Statement;
(xi) the Company is not, and after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus will not be, required to register as an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended; and
(xii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus and each amendment or supplement thereto made
by the Company on or prior to the date hereof (except for financial
statements, supporting schedules and other financial and statistical
data derived therefrom as to which such counsel need not express any
opinion or belief) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except for
financial statements, supporting schedules and other financial and
statistical data derived therefrom as to which such counsel need not
express any belief or opinion) the Registration Statement and the
prospectus included therein at the time the Registration Statement
became effective, contained any 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 and (C) has no
reason to believe that (except for financial statements, supporting
schedules and other financial and statistical data derived therefrom
as to which such counsel need not express any belief or opinion) the
Prospectus as of its date contained any untrue statement of a material
fact or omitted 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.
(d) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 5, 5, 5 (but
only as to the statements in the Prospectus under "Description of Capital
Stock," "Material U.S. Tax Considerations for Non-U.S. Holders" and
"Underwriters") and 5 above.
With respect to Section 5(c)(xii) above, Venture Law Group and Davis
Polk & Wardwell may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto made by the
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Company on or prior to the date hereof and review and discussion of the
contents thereof, but are without independent check or verification, except
as specified.
The opinion of Venture Law Group described in Section 5 above shall be
rendered to the Underwriters at the request of the Company and shall so
state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Ernst & Young LLP, independent public accountants, 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; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to the delivery to the U.S. Representatives on the
Option Closing Date of such documents as they may reasonably request with
respect to the valid existence of the Company, the due authorization and
issuance of the Additional Shares and other matters related to the issuance of
the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, eleven signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6 below, as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may reasonably
request.
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(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; provided that the Company shall not be required to: (i) qualify as
a foreign corporation or as a dealer in securities in any jurisdiction
where it would not otherwise be required to qualify but for this Agreement
or (ii) take any action that would subject it to general service of process
in suits or to taxation in any such jurisdiction where it is not then so
subject.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending [March 30, 2001] that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or
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cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers,
in the quantities hereinabove specified, (ii) all costs and expenses
related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) the cost of
printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state securities
laws and all expenses in connection with the qualification of the Shares
for offer and sale under state securities laws as provided in Section 6
hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky or Legal Investment memorandum (not to exceed
U.S. $10,000), (iv) all filing fees and the reasonable fees and
disbursements of counsel to the Underwriters incurred in connection with
the review and qualification of the offering of the Shares by the National
Association of Securities Dealers, Inc. (the "NASD"), (v) all fees and
expenses in connection with the preparation and filing of the registration
statement on Form 8-A relating to the Common Stock and all costs and
expenses incident to listing the Shares on the Nasdaq National Market, (vi)
the cost of printing certificates representing the Shares, (vii) the costs
and charges of any transfer agent, registrar or depositary, (viii) the
costs and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the offering of
the Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
one-half of the cost of any aircraft chartered in connection with the road
show, (ix) all fees and disbursements of foreign counsel (including
Canadian counsel) incurred by the Underwriters in connection with the
Directed Share Program and stamp duties, similar taxes or duties or other
taxes, if any, incurred by the Underwriters in connection with the Directed
Share Program, (x) all expenses in connection with any offer and sale of
the Shares outside of the United States, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with offers and sales outside of the United States," and (xi)
all other costs and expenses incident to the
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performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. Notwithstanding the foregoing
sentence, the Underwriters shall reimburse certain of the Company's
expenses up to an aggregate of U.S. $300,000. It is understood, however,
that except as provided in this Section, Section 7 entitled "Indemnity and
Contribution", and the last paragraph of Section 10 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements
of their counsel, stock transfer taxes payable on resale of any of the
Shares by them and any advertising expenses connected with any offers they
may make.
(g) To place stop transfer orders on any Directed Shares that have
been sold to Participants subject to the three month restriction on sale,
transfer, assignment, pledge or hypothecation imposed by the NASD under its
Interpretative Material 2110-1 on free-riding and withholding to the extent
necessary to ensure compliance with the three month restrictions.
(h) To comply with all applicable securities and other applicable
laws, rules and regulations in each jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of
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the Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such losses, claims, damages or
liabilities, unless such failure is the result of noncompliance by the Company
with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Company to such Underwriter,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7 or 7, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7, and by the Company, in the case of
parties indemnified pursuant to Section 7. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall
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<PAGE>
have requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel as contemplated by the second and third sentences of
this paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 60 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or 7(b)
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying party
under such paragraph, in lieu of indemnifying such indemnified party thereunder,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (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 Shares
or (ii if the allocation provided by clause 7(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 7(d)(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 that resulted in such losses,
claims, damages or liabilities, 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
Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Shares (before deducting expenses) received by
the Company and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Shares. 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 the untrue
or alleged untrue statement of a material fact or the 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.
The Underwriters' respective obligations to contribute pursuant to this Section
7 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
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(e) The Company and the Underwriters agree that it would not be just or
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 that does not take account of the
equitable considerations referred to in Section 7. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. 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 Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by reason
of 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 Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The remedies provided
for in this Section 7 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law or in
equity.
(f) The indemnity and contribution provisions contained in this Section 7
and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter or
by or on behalf of the Company, its officers or directors or any person
controlling the Company and (ii acceptance of and payment for any of the Shares.
8. Directed Share Program Indemnification. (a) The Company agrees to
indemnify and hold harmless Morgan Stanley and its affiliates and each person,
if any, who controls Morgan Stanley within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act ("Morgan Stanley
Entities"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) (i)
caused by any untrue statement or alleged untrue statement of a material fact
contained in any material prepared by or with the consent of the Company for
distribution to Participants in connection with the Directed Share Program, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (ii) caused by the failure of any Participant to pay for and accept
delivery of Directed Shares that the Participant has agreed to purchase; or
(iii) related to, arising out of, or in connection with the Directed Share
Program other than losses, claims, damages or
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liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Morgan
Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeking indemnity shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any other the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Morgan Stanley Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not, in respect of the legal expenses of the Morgan Stanley
Entities in connection with any proceeding or related proceedings the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Morgan Stanley Entities. Any such
firm for the Morgan Stanley Entities shall be designated in writing by Morgan
Stanley. The Company shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the Company agrees to indemnify the
Morgan Stanley Entities from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time a
Morgan Stanley Entity shall have requested the Company to reimburse it for fees
and expenses of counsel as contemplated by the second and third sentences of
this paragraph, the Company agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement is
entered into more than 60 days after receipt by the Company of the aforesaid
request and (ii) the Company shall not have reimbursed the Morgan Stanley Entity
in accordance with such request prior to the date of such settlement. The
Company shall not, without the prior written consent of Morgan Stanley, effect
any settlement of any pending or threatened proceeding in respect of which any
Morgan Stanley Entity is or could have been a party and indemnity could have
been sought hereunder by such Morgan Stanley Entity, unless such settlement
includes an unconditional release of the Morgan Stanley Entities from all
liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
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claims, damages or liabilities referred to therein, then the Company, in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and of the Morgan Stanley Entities on the other hand in connection with
the offering of the Directed Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Directed Shares (before
deducting expenses) and the total underwriting discounts and commissions
received by the Morgan Stanley Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Shares. If the loss, claim, damage or
liability is caused by an untrue or alleged untrue statement of a material fact,
the relative fault of the Company on the one hand and the Morgan Stanley
Entities on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement or the omission or
alleged omission relates to information supplied by the Company or by the Morgan
Stanley Entities and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not be
just or equitable if contribution pursuant to this Section 8 were determined by
pro rata allocation (even if the Morgan Stanley Entities were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 8(c). The amount
paid or payable by the Morgan Stanley Entities as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the Morgan Stanley
Entities in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Morgan Stanley Entity shall
be required to contribute any amount in excess of the amount by which the total
price at which the Directed Shares distributed to the public were offered to the
public exceeds the amount of any damages that such Morgan Stanley Entity has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The remedies provided for in this
Section 8 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any Morgan Stanley Entity at law or in equity.
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(e) The indemnity and contribution provisions contained in this Section 8
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. Termination. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market,
(ii trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (ii a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses 9 through 9, such event,
singly or together with any other such event, makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I or Schedule II bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is
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<PAGE>
more than one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
25
<PAGE>
13. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
HOMEGROCER.COM, INC.
By:
------------------------------------
Name: Daniel R. Lee
Title: Senior Vice President and
Chief Financial Officer
26
<PAGE>
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
HAMBRECHT & QUIST LLC
BANC OF AMERICA SECURITIES LLC
J.C. BRADFORD & CO.
Acting severally on behalf of themselves and the
several U.S. Underwriters named in Schedule I
hereto.
By: Morgan Stanley & Co. Incorporated
By:
-------------------------------------------------
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL
LIMITED
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
HAMBRECHT & QUIST LLC
BANK OF AMERICA INTERNATIONAL
LIMITED
J.C. BRADFORD & CO.
Acting severally on behalf of themselves and the
several International Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
-------------------------------------------------
Name:
Title:
27
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter To Be Purchased
- ---------------------------------------------- -----------------------
<S> <C>
Morgan Stanley & Co. Incorporated.............
Donaldson, Lufkin & Jenrette Securities
Corporation..............................
Hambrecht & Quist LLC.........................
Banc of America Securities LLC................
J.C. Bradford & Co............................
-----------------------
Total U.S. Firm Shares...................
=======================
</TABLE>
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares
To Be Purchased
- ---------------------------------------------- -----------------------
<S> <C>
Morgan Stanley & Co. International Limited....
Donaldson, Lufkin & Jenrette International....
Hambrecht & Quist LLC.........................
Bank of America International Limited.........
J.C. Bradford & Co............................
-----------------------
Total International Firm Shares..........
=======================
</TABLE>
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
December 17, 1999
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities
Corporation
Hambrecht & Quist LLC
Banc of America Securities LLC
J.C. Bradford & Co.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Donaldson, Lufkin & Jenrette International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and Morgan Stanley & Co. International Limited ("MSIL") propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") with
HomeGrocer.com, Inc., a Delaware corporation (the "Company") providing for the
public offering (the "Public Offering") by the several Underwriters, including
Morgan Stanley, Donaldson, Lufkin & Jenrette, Banc of America Securities LLC,
J.C. Bradford & Co., MSIL and Donaldson, Lufkin & Jenrette International (the
"Underwriters") of shares (the "Shares") of the Common Stock (including par
value) of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof
2
<PAGE>
and ending 180 days after the date of the final prospectus relating to the
Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock,
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares
to the Underwriters pursuant to the Underwriting Agreement, (b) transactions
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the Public Offering, (c) the transfer of
Common Stock or other securities as a bona fide gift or gifts, provided that the
donee or donees thereof agree in writing to be bound by the restrictions set
forth herein or (d) the transfer of Common Stock or other securities to any
trust for the direct or indirect benefit of the undersigned or the immediate
family of the undersigned; provided in the case of clauses (c) and (d) above
that (x) the donee or transferee agrees in writing to be bound by the foregoing
in the same manner as it applies to the undersigned and (y) if the donor or
transferor is a reporting person subject to Section 16(a) of the Securities
Exchange Act of 1934 (the "Exchange Act"), any gifts or transfer made in
accordance with this paragraph shall not require such person to, and such person
shall not voluntarily, file a report of such transaction of Form 4 under the
Exchange Act. For the purposes of this agreement, "immediate family" shall mean
spouse, lineal descendants, father, mother, brother or sister of the transferor
and father, mother, brother or sister of the transferor's spouse.
In addition, notwithstanding the foregoing, if the undersigned is a
corporation, the corporation may transfer the capital stock of the Company to
any wholly-owned subsidiary of such corporation; and, if the undersigned is a
partnership, the partnership may transfer any shares of capital stock of the
Company to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, and any such partner who is an individual may
transfer shares of capital stock, by will or intestate succession, to his or her
immediate family; provided that (x) the donee or transferee agrees in writing to
be bound by the foregoing in the same manner as it applies to the undersigned
and (y) if the donor or transferor is a reporting person subject to Section
16(a) of the Exchange Act, any gifts or transfer made in accordance with this
paragraph shall not require such person to, and such person shall not
voluntarily, file a report of such transaction of Form 4 under the Exchange Act.
3
<PAGE>
The undersigned also agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
----------------------------------------
Name
----------------------------------------
Address
4
<PAGE>
EXHIBIT 5.1
[Letterhead of Venture Law Group]
February 16, 2000
HomeGrocer.com, Inc.
10230 N.E. Points Drive
Kirkland, Washington 98033
Registration Statement on Form S-1 (File No. 333-93015)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
93015) (the "Registration Statement") filed by you, HomeGrocer.com, Inc., with
the Securities and Exchange Commission on December 17, 1999, as amended on
January 10, 2000 by Amendment No. 1 to the Registration Statement, as amended on
January 31, 2000 by Amendment No. 2 to the Registration Statement and as amended
on February 16, 2000 by Amendment No. 3, in connection with the registration
under the Securities Act of 1933 of shares of your Common Stock (the "Shares").
As your legal counsel in connection with this transaction, we have examined the
proceedings taken and we are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement and in any amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/S/ VENTURE LAW GROUP
<PAGE>
EXHIBIT 10.34
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
October 1, 1999, is made by and between Waples Corporation, a Delaware
corporation ("Lessor") and HomeGrocer.com, Inc., a Delaware corporation
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including alt improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 9389 Waples Street, San Diego located in the County of San Diego, State
of California, and generally described as (describe briefly the nature of the
property and, if applicable, the "Project", if the property is located within a
Project) the real property located at the above-referenced address which real
property includes improvements containing approximately 101,560 sq. ft. of
distribution and warehouse space, including approximately 10,000 sq. ft. of
improved office space ("Premises"). (See also Paragraph 2)
1.3 Term: Ten (10) years and no months ("Original Term") commencing
February 1, 2000 ("Commencement Date") and ending January 31, 2010 ("Expiration
Date"), subject, however, to Paragraph 50. (See also Paragraph 3)
1.4 Early Possession: N/A ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)
1.5 Base Rent: $68,045.20 per month subject to increase and as increased
in accordance with Paragraph 51 ("Base Rent"), payable on the first day of each
month commencing on the Commencement Date. (See also Paragraph 4)
[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $68,045.20 as Base Rent for the
period _______.
1.7 Security Deposit: $136,090 ("Security Deposit"). (See also Paragraph
5)
1.8 Agreed Use: To the extent permitted by the zoning ordinance(s)
applicable to the Premises, general office, warehouse and distribution of
products. (See also Paragraph 6)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See also Paragraph 8)
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively, the
"Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
[X] Capital Structures Corporation represents Lessor exclusively
("Lessor's Broker");
[X] CB Richard Ellis represents Lessee exclusively ("Lessee's Broker"); or
[_] [deletion]
-------------------------------------------------------------------------
[Deletion]
1.11 Addenda and Exhibits. Attached hereto is an Addendum [text deleted]
consisting of Paragraphs 50 through 71 and Exhibits A, B, C, D, E and F, all of
which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 Condition. [Deletion] The term "Start Date" shall mean the
Commencement Date or the Early Possession Date, whichever first occurs ("Start
Date"): the term "HVAC' shall mean the existing electrical, plumbing, fire
sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC");
and the term "Building" shall mean any buildings on the Premises. [Deletion]
See also Paragraph 52.
2.3 Compliance. [Deletion] The term "Applicable Requirements" shall mean
all applicable laws, covenants or restrictions of record, building codes,
regulations and ordinances ("Applicable Requirements") in effect on the Start
Date. Lessee is responsible for determining whether or not the zoning is
appropriate for Lessee's intended use, and acknowledges that past uses of the
Premises may no longer be allowed. If the Premises do not comply with [deletion]
Applicable Requirements, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense. If the Applicable
Requirements are hereafter changed [deletion] so as to require during the term
of this Lease the construction of an addition to [illegible] alteration of the
Building, or the reinforcement or other physical modification of the Building
("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work
as follows:
-1-
<PAGE>
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if (i) Paragraph 23(c)
below does not apply, (ii) such Capital Expenditure is required during the last
two (2) years of this Lease and (iii) the cost thereof exceeds the Aggregate
Total (as defined in Paragraph 2.3(b) below, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the Aggregate Total. If Lessee
elects termination, Lessee shall immediately cease the use of the Premises which
requires such Capital Expenditure and deliver to Lessor written notice
specifying a termination date at least ninety (90) days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1(c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor,
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure: provided, further, that if
Lessee's share of the costs of' such Capital Expenditure (exclusive of Interest)
exceeds the aggregate total of the next six (6) months of Base Rent then
becoming due or, if' less than six (6) months remain in the term of this Lease,
the aggregate total of six (6) times the Base Rent for the last full month of
the term of this Lease ("Aggregate Total"), then Lessee shall have the option to
terminate this Lease upon ninety (90) clays prior written notice to Lessor,
unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of
Lessee's termination notice, that Lessor will pay for Lessee's share of the
Capital Expenditure to the extent, but only to the extent, that it exceeds the
Aggregate Total. Upon receiving notice or information that a Capital
Expenditure is or may be required, the party receiving such notice or
information shall, as soon as reasonably possible thereafter, provide notice of
the same to the other party. If Lessor does not elect to terminate, and fails
to tender its share of any such Capital Expenditure, Lessee may advance such
funds and deduct same, with Interest, from Rent until Lessor's share of such
costs have been fully paid.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use; (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises; and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease.
3. Term.
3.1 Term. Subject to Paragraph 50, the Commencement Date, Expiration Date
and Original Term of this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including, but not limited to, the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay In Possession. Lessor agrees to [text deleted] deliver
possession of the Premises to Lessee immediately following the full execution
and delivery of this Lease by the parties.
3.4 Lessee Compliance. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, it Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. Rent. See also Paragraphs 51 and 70.
4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in Paragraph 2.3(b) of this Lease), on or before the day
on which it is due. Rent for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of said month. Payment of Rent shall be made to Lessor at its address
stated herein or to such other persons or piece as Lessor may from time to time
designate in writing. Acceptance of a payment which is less than the amount then
due shall not be a waiver of Lessors rights to the balance of such Rent,
regardless of Lessors endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee tails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with
-2-
<PAGE>
Lessor sufficient to restore said Security Deposit to the full amount required
by this Lease. If the Base Rent increases during the term of this Lease, Lessee
shell, upon written request from Lessor, deposit additional monies with Lessor
so that the total amount of the Security Deposit shall at all times bear the
same proportion to the increased Base Rent as the initial Security Deposit bore
to the initial Base Rent. Should the Agreed Use be amended to accommodate a
material change in the business of Lessee or to accommodate a sublessee or
assignee, Lessor shall have the right to increase the Security Deposit to the
extent necessary, in Lessors reasonable judgment, to account for any increased
wear and tear that the Premises may suffer as a result thereof. [Deletion]
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease. See also Paragraph 57.
6. Use.
6.1 Use. Lessee may use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose; provided, however, that, to the extent legally necessary and only to
such extent, to enable Lessee to sell, for off-site distribution, alcoholic
beverages as part of its retail home grocery distribution business, Lessee may
(if permitted by but only in compliance with Applicable Requirements) operate an
on-site store for the retail sale of alcoholic beverages of a size and a
capacity not larger than the minimum reasonably necessary, in the opinion of
Lessee's counsel, to qualify for the license needed for the sale for off-site
delivery of alcoholic beverages as part of Lessee's home grocery retail sale and
distribution business. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or causes damage
to neighboring properties. Lessor shall not unreasonably withhold or delay its
consent to any written request for a modification of the Agreed Use, so long as
the same will not impair the structural integrity of the improvements on the
Premises or the mechanical or electrical systems therein, is not significantly
more burdensome to the Premises. If Lessor elects to withhold consent, Lessor
shall within five (5) business days after such request give written notification
of same, which notice shall include an explanation of Lessors objections to the
change in use.
6.2 Hazardous Substances. See Paragraph 54. [Deletion]
6.3 Lessee's Compliance with Applicable Requirements. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verify
compliance by Lessee with this Lease. The cost of any such inspection shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination and such violation or
contamination did not exist prior to the date of Lessee's first use or occupancy
of the Premises and was not caused by Lessor's negligence or intentional acts or
omissions.
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 2.2 (Condition),
2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2
(Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee
shall, at Lessee's sole expense, keep the Premises, Utility Installations, and
Alterations in good order, condition and repair (whether or not the portion of
the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including but not limited to, all
equipment or facilities, such as plumbing, heating, ventilating, air-
conditioning, electrical, lighting facilities, boilers, pressure vessels, fire
protections system, fixtures, walls (interior and exterior, but subject to
Paragraphs 7.2 and 72) ceilings, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, or adjacent to the Premises. Lessee, in keeping
the Premises in good order, condition and repair, shall exercise and perform
good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of
this Lease, keep the exterior appearance of the Building in a first-class
condition consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in the maintenance of the
following equipment and improvements, if any, if and when installed on the
Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire
extinguishing systems, including fire alarm and/or smoke detection, (iv)
landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways
and parking lots, (vii) clarifiers, (viii) basic utility feed to the perimeter
of the Building, and (ix) any other equipment, if reasonably required by Lessor.
-3-
<PAGE>
(c) Replacement. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if an item described in Paragraph 7.1(b) cannot be repaired other
that at a cost which is in excess of 50% of the cost of replacing such item,
then such item shall be replaced by Lessor, and the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on which Base
Rent is due, an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which is one, and the denominator of
which is one-hundred forty -three (including, that is plus, interest on the
unamortized balance), which Lessee reserving the right to prepay its obligation
at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction), and 14 (Condemnation)
and 72 (Operating Expenses), it is intended by the Parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises, or the equipment therein, all of which obligations are intended to be
that of the Lessee. It is the intention of the Parties that the terms of (his
Lease govern the respective obligations of the Parties as to maintenance and
repair of the Premises, and they expressly waive the benefit of any statute now
or hereafter in effect to the extent it is inconsistent with the terms of this
Lease. Subject to Paragraphs 7.1(a) and 72 and except as a result of Lessee's
acts or omissions, Lessee is not obligated to maintain or liable for the
structural elements of the roof, bearing walls and foundation of the Building.
7.3 Utility Installations; Trade Fixtures; Alterations. See also
Paragraph 69.8.
(a) Definitions; Consent Required. The term "Utility Installations"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may. however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during this Lease as extended does not exceed $50,000 in the aggregate
or $15,000 in any one year; see, however, Paragraph 55. If Lessor's consent is
required in connection with a proposed Alteration and Lessor does not notify
Lessee in writing within thirty (30) days following Lessor's receipt of Lessee's
request for approval and all other documentation and information as Is required
pursuant to Paragraph 7.3(b), then, subject to compliance with the terms of this
Lease, in general, and the conditions contained in Paragraph 7.3(b), in
particular, Lessor shall deemed to have approved the proposed Alteration.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
- - in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. It Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. [Deletion] Except as provided in Paragraph 69, all
Alterations and Utility Installations made by Lessee shall be the property of
Lessee, but considered a part of the Premises. [Deletion]
(b) Removal. [Deletion] Except as provided in Paragraph 69, all
Lessee Owned Alterations or Utility Installations shall be removed by the
expiration or termination of this Lease. Lessor may require the removal at any
time of all or any part of any Lessee Owned Alterations or Utility Installations
made without the required consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
(including wear and tear caused by Lessor's own negligent or intentional
wrongful acts or omissions) excepted. "Ordinary wear and tear" shall not include
any damage or deterioration that would have been prevented by good maintenance
practice. Lessee shall repair any damage occasioned by the installation,
maintenance or removal of Trade Fixtures, Lessee Owned Alterations antler
Utility Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by Lessee. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee. The
failure by Lessee to timely vacate the Premises pursuant to this Paragraph
7.4(c) without the express written consent of Lessor shall constitute a holdover
under the provisions of Paragraph 26 below.
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8. Insurance; Indemnity.
8.1 Payment For Insurance. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $10,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment hall
be made by Lessee to Lessor within ten (10) days following receipt of an Invoice
or, if Lessor so instructs, in accordance with Paragraph 7.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $5,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an 'insured contract' for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit- the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
Insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) Carried by Lessor. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), In addition to, and not in lieu of, the Insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any groundlessor, and to any Lender(s) Insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof, If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor, If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(including the perils of flood and/or earthquake), including coverage for debris
removal and the enforcement of any Applicable Requirements requiring the
upgrading, demolition, reconstruction or replacement of any portion of the
Premises as the result of a covered loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss.
(b) Rental Value. The Insuring Party shall obtain and keep in force
a policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such toss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance. See also Paragraph
56
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per -occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least A-X, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders"
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evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the Insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for toss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of Insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the Insurance is not
invalidated thereby. The waivers set forth in this Paragraph 8.6 shall remain In
full force and effect irrespective of whether either party elects to "self-
insure." However, Lessee acknowledges and agrees that Lessee has no right to
"self-insure."
8.7 Indemnity. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, representatives, employees, officers,
directors, shareholders. members and trustees, as well as Lessor's master or
ground lessor, partners and Lenders, of, from and against any and all claims,
demands, losses (including without limitation loss of rents or permits),
damages, costs, liens, judgments, penalties, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection with,
the use and/or occupancy of the Premises by Lessee, the conduct of Lessee's
business, any act, omission or neglect of Lessee, or its agents.
representatives, employees, contractors, or invitees and/or any Default or
Breach by Lessee in the performance in a timely manner of any obligation on
lessee's part to be performed under this Lease. The foregoing shall include, but
not limited to, defense or pursuit of any claim or any action or proceeding
Involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified. Lessee's
Indemnity and other obligations, liabilities and duties under this paragraph
shall survive the expiration or earlier termination of this Lease.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or Injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires.
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon ether portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
Income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in six (6) months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within thirty (30) days from the damage or destruction as to whether or not
damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage-Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall make any applicable
insurance proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, such shortage was due to the fact that, by reason of the
unique nature of the improvements, full replacement cost insurance coverage was
not commercially reasonable and available, Lessor shall have no obligation to
pay for the shortage in insurance proceeds or to fully restore the unique
aspects of the Premises unless Lessee provides Lessor with the funds to cover
the same, or adequate assurance thereof within said ten (10) day period, the
party responsible for making the repairs shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
such funds or assurance are not received, Lessor may nevertheless elect by
written notice to Lessee within ten (10) days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds
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contributed by the Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage-Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee ( in which event Lessee shall make the repairs at Lessee's expense).
Lessee may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice to Lessor of Lessee's commitment to pay for the repair of such
damage without reimbursement from Lessor. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within thirty (30) days after making
such commitment. In such event this Lease shall continue in full force and
effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damages or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of this Lease there is damage for which the cost of repairs exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period
and provides Lessor with funds (or adequate assurance thereof) to cover any
shortage in insurance proceeds, Lessor shall at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurances during such period, then this Lease shall
terminate on the date specified in the termination notice and the Lessee's
option shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or Premises
Total Destruction or Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value insurance. All other
obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.
(b) [Deletion]
9.7 Termination - Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, Lessor shall refund to Lessee any
unearned an equitable adjustment shall be made concerning advance Base Rent
provided to the date of termination and any other unearned advance payments made
by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of
Lessee's Security Deposit as has not been, or is not then required to be, used
by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent Inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate. general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal Income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises. The term "Real Property Taxes" shall not, however, Include
documentary transfer taxes paid in connection with the recording of a deed
transferring title to the Premises from any person(s) or entity(ies) to another
(or others).
10.2
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b) and to lessor providing to Lessee, at least twenty (20) days prior to
any delinquency date, the original or a copy of the bill(s) or statement(S) for
such Real Property Taxes, all such payments shall be made at least ten (10) days
prior to any delinquency date: in the event that Lessor falls to timely provide
to Lessee bill(s) or statement(s), Lessee shall, nonetheless, pay the Real
Property Taxes as soon as reasonably possible after the receipt of the same.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes shall cover any period of time prior to or
after the expiration or termination of this Lease, Lessee's share of such taxes
shall be prorated to cover only that portion of the bill applicable
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to the period that this Lease is in effect, and Lessor shall reimburse Lessee
for any required payment. If Lessee shall fail to pay any required Real Property
Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse
Lessor therefor upon demand.
(b) Advance Payment. In the event Lessee incurs a late charge on any
Rent payment, Lessor may, at Lessor's option, estimate the current Real Property
Taxes, and require that such taxes be paid in advance to Lessor by Lessee,
either: (i) in a lump sum amount equal to the installment due, at least twenty
(20) days prior to the applicable delinquency date, or (ii) monthly in advance
with the payment of the Base Rent. If Lessor elects to require payment monthly
in advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of taxes divided by the number of months remaining before
the month in which said Installment becomes delinquent. When the actual amount
of the applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes, If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All monies paid to
Lessor under this Paragraph may be intermingled with other monies of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, at the option of Lessor, be treated
as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. See also Paragraph 71.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of fifty percent (50%)
or more of the voting control of Lessee shall constitute a change in control for
this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing.
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee if, after such reduction, the
net worth of Lessee (including any successor or surviving entity/lee that is/are
liable under this Lease as Lessee) is not $500,000,000.00 or more, [deletion]
shall be considered an assignment of this Lease to which Lessor may withhold its
consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any
guarantors) established under generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) terminate this Lease, or (ii) upon thirty (30) days written
notice, increase the monthly Base Rent to one hundred ten percent (110%) of the
Base Rent then In effect. Further, in the event of such Breach and rental
adjustment, (I) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
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(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $1,000
[deletion] as consideration for Lessor's considering and processing said
request. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent Lessor shall not, by reason of the foregoing or any
assignment of such sublease, nor by reason of the collection of Rent, be deemed
liable to the sublessee for any failure of Lessee to perform and comply with any
of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes
and directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor all Rent due and to become due under the sublease.
Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to
Lessor without any obligation or right to inquire as to whether such Breach
exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies,
13.1 Default; Breach. A"Default" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A Breach is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance or surety bond, or
to fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) business days
following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by. Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice:
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for Its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. (S) 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
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restored to Lessee within thirty (30) days: or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph 13.1 (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor; (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty: (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing: (iv) a Guarantor's refusal to honor the guaranty: or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 Remedies. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option. may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination: (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises. However, Lessor
shall, if and to the extent required by law, take commercially reasonable steps
to mitigate its damages.
13.3 Inducement Recapture. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referred to as "Inducement Provisions,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor of Rent or the cure of the Breach which initiated the
operation of this paragraph shall not be deemed a waiver by Lessor of the
provisions of this paragraph unless specifically so stated in writing by Lessor
at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late
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charge is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding any provision of this Lease to
the contrary, Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for non-
scheduled payment, shall bear interest from the date when due, as to scheduled
payments, or the thirty-fIrst (31st) day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be equal to the prime rate
reported in the Wall Street Journal as published closest prior to the date when
plus four percent (4%), but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided for in
Paragraph 13.4.
13.6 Breach by Lessor.
(a) Lessor shall not be deemed in breach of this Lease unless Lessor
fails within a reasonable time to perform an obligation required to be performed
by Lessor. For purposes of this Paragraph, a reasonable time shall in no event
be less than thirty (30) days after receipt by Lessor, and any Lender whose name
and address shall have been furnished Lessee in writing for such purpose, of
written notice specifying wherein such obligation of Lessor has not been
performed; provided, however, that if the nature of Lessor's obligation is such
that more than thirty (30) days are reasonably required for its performance,
then Lessor shall not be in breach if performance is commenced within such
thirty (30) day period and thereafter diligently pursued to completion.
(b) [Deleted]
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
Premises, or more than twenty-five percent (25%) of the land area portion of the
Premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that his Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Broker's Fee.
15.1 Additional Commission. [Section deleted]
15.2 Assumption of Obligations. [Section deleted]
15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Broker is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, and/or attorneys' fees reasonably incurred with respect thereto.
16. Estoppel Certificates. See Paragraph 58.1
(a) [deleted]
(b) [deleted]
(c) If Lesser desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lesser such financial statements as may be
reasonably required by such lender or purchaser, including, but net limited to,
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth. See also
Paragraph 58.2.
17. Definition of Lessor. The term "Lesser" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, and
provided the successor Lessor has assumed in writing all obligations of Lessor
under this Lease, the prior Lessor shall be relieved of all liability with
respect to the obligations and/or covenants under this Lease thereafter to be
performed by the Lesser. Subject to the foregoing, the obligations and/or
covenants in this Lease to be performed by the Lessor shall be binding only upon
the Lessor as hereinabove defined. Notwithstanding the above, and subject to the
previsions of Paragraph 20 below, the original Lessor under this Lease, and all
subsequent holders of the Lessor's interest in this Lease shall remain liable
and responsible with regard to the potential duties and liabilities of Lessor
pertaining to Hazardous Substances as outlined in Paragraph 6 above.
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18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the previsions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises (as well as (i) funds drawn improperly on the Security Deposit,
LOG or LOG Security Deposit and (ii). to the extent used In violation of the
terms of this Lease. condemnation proceeds), and to no other assets of Lessor,
for the satisfaction of any liability of Lessor with respect to this Lease, and
shall not seek recourse against the individual partners of Lessor, or its or
their individual partners, directors, officers or shareholders, or any of their
personal assets for such satisfaction. See also Paragraph 59.
21. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease
22. No Prior or Other Agreements [deletion]. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
[Deletion]
23. Notices. See Paragraph 60. [Deleted]
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, convenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of monies or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment. No waiver by Lessee of any
default or breach of any term, covenant or condition hereof by Lessor, shall be
deemed a waiver of any other term, covenant or condition hereof, or of any
subsequent default or breach by Lessor of the same or of any other term,
covenant or condition hereof. Any payment by Lessor may be accepted by Lessee on
account of moneys or damages due Lessee, notwithstanding any qualifying
statements or conditions made by Lessor In conjunction therewith, which such
statements and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessee at or before the time of deposit of
such payment.
25. Recording. See Paragraph 61. [Deleted]
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. [Deletion] Construction of Agreement. [Deletion] In construing this Lease,
all headings and titles are for the convenience of the Parties only and shall
not be considered a part of this Lease. Whenever required by the context, the
singular shall include the plural and vice versa. This Lease shall not be
construed as if prepared by one of the Parties, but rather according to its fair
meaning as a whole, as if both Parties had prepared it.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor; or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and
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this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premises. Further, within sixty (60) days after the execution of
this Lease, Lessor shall use its commercially reasonable efforts to obtain a
Non-Disturbance Agreement from the holder of any pre-existing Security Device
which is secured by the Premises. In the event that Lessor is unable to provide
the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 Self-Executing. The agreements contained In this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein
and such other agreements as Lender shall reasonably request.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"Prevailing Party" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, where a Default
or Breach has actually occurred and is not merely alleged by Lessor, Lessor
shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary:
provided, however, that Lessor shah make commercially reasonable efforts to
ensure that such repairs do not unreasonably Interfere with the operation of
Lessee's business or the occupancy or use of the Premises by Lessee. All such
activities shall be without abatement of rent or liability to Lessee. Lessor may
at any time place on the Premises any ordinary "For Sale" signs and Lessor may
during the last six (6) months of the term hereof place on the Premises any
ordinary "For Lease" signs. Lessee may at any time place on or about the
Premises any ordinary "For Sublease" sign.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. Signs. [Deletion] Lessee shall not place any sign upon the Premises
without Lessor's prior written consent. All signs must comply with all
Applicable Requirements as well as Paragraph 62.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including, but not limited to, architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including, but not limited to,
consents to an assignment, a subletting or the presence or use of a Hazardous
Substance, shall be paid by Lessee upon receipt of an invoice and supporting
documentation therefor. Lessor's consent to any act, assignment or subletting
shall not constitute an acknowledgment that no Default or Breach by Lessee of
this Lease exists, nor shall such consent be deemed a waiver of any then
existing Default or Breach, except as may be otherwise specifically stated in
writing by Lessor at the time of such consent. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given. In the event that either Party disagrees with any determination made by
the other hereunder and reasonably requests the reasons for such determination,
the determining party shall furnish its reasons in writing and in reasonable
detail within ten (10) business days following such request.
37. Guarantor.
37.1 [Deleted]
37.2 [Deleted]
38. Quiet Possession. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean: the right to extend the term of this
Lease as set forth in Paragraph 68. [deletion]
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full
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<PAGE>
possession of the Premises and, if requested by Lessor, with Lessee certifying
that Lessee has no intention of thereafter assigning or subletting.
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default (so long as in fact,
there was such a Default) and continuing until said Default is cured, (ii)
during the period of time any Rent is unpaid (without regard to whether notice
thereof is given Lessee), (iii) during the time Lessee is in Breach of this
Lease, or (iv) in the event that Lessee has been given three (3) or more notices
of separate Default (so long as, in fact, such Defaults occurred), whether or
not the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default (so long as, in fact, such
Defaults occurred) during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay. The party holding the funds shall
return funds to the ether party within thirty (30) days after a final ruling by
a court of competent Jurisdiction that such funds were not owed by the other
party.
44. Authority. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.
45. [Deleted]
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. [Deleted]
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Glendale, California Executed at:
----------------------------- ----------------------
on: January 27, 2000 on: January____, 2000
-------------------------------------- ----------------------------
By LESSOR: By: LESSEE:
WAPLES CORPORATION HOMEGROCER.COM, INC.,
- ----------------------------------------- -------------------------------
a Delaware corporation a [deletion] corporation
- ----------------------------------------- -------------------------------
By: /s/ Greg Blohstrand By: /s/ Mary Alice Taylor
-------------------------------------- ----------------------------
Name Printed: GREG BLOHSTRAND Name Printed: MARY ALICE TAYLOR
---------------------------- ------------------
Title: ASST. MANAGER Title: C.E.O.
----------------------------------- -------------------------
By: By:
-------------------------------------- ----------------------------
Name Printed: Name Printed:
---------------------------- ------------------
Title: Title:
----------------------------------- -------------------------
Address: 700 North Brand Blvd., Suite 300 Address: 10230 NE Points Drive
--------------------------------- -----------------------
Glendale, California 91203 Kirkland, Washington 98033
----------------------------------- --------------------------
Telephone: (818) 545-3762; ext. 259 Telephone: (425) 201-7500
------------------------------- ---------------------
Facsimile: (818) 545-8460 Facsimile: (425) 201-7575
------------------------------- ---------------------
NOTE: These forms are often modified to meet the changing requirements of law
and industry needs. Always write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
Street, Suite 800, Los Angeles, California 90017, (213) 687-8777, Fax No. (213)
687-8616
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EXHIBIT 10.35
INDUSTRIAL LEASE
----------------
(Single Tenant; Net; Stand-Alone)
"AS-IS"
-----
THIS LEASE is made as of the 4th day of January 2000, by and between The
Irvine Company, hereafter called "Landlord," and HOMEGROCER.COM, INC., a
Delaware corporation hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section 2.1.
2. Address of Building: 985 Almanor Avenue, Sunnyvale, CA 94086.
3. Use of Premises: Warehousing, office, retail distribution and other legal
related uses (including, without limitation, the retail distribution of
alcoholic beverages to the extent permitted under applicable laws).
4. Commencement Date: February 1, 2000
5. Lease Term: The Term of this Lease shall expire at midnight on October 31,
2005.
6. Basic Rent: One Hundred Ten Thousand Nine Hundred Fifty-eight Dollars
($110,958.00) per month, based on $0.80 per rentable square foot.
Basic Rent is subject to adjustment as follows:
Commencing November 1, 2000, the Basic Rent shall be One Hundred Sixty-Six
Thousand Four Hundred Thirty-Eight Dollars ($166,438.00) per month, based
on $1.20 per rentable square foot.
Commencing November 1, 2001, the Basic Rent shall be One Hundred Seventy
Three Thousand Three Hundred Seventy-Three Dollars ($173,373.00) per month,
based on $1.25 per rentable square foot.
Commencing November 1, 2002, the Basic Rent shall be One Hundred Eighty
Thousand Three Hundred Seven Dollars ($180,307.00) per month, based on
$1.30 per rentable square foot.
Commencing November 1, 2003, the Basic Rent shall be One Hundred Eighty
Seven Thousand Two Hundred Forty-Two Dollars ($187,242.00) per month, based
on $1.35 per rentable square foot.
Commencing November 1, 2004, the Basic Rent shall be One Hundred Ninety
Four Thousand One Hundred Seventy-Seven Dollars ($194,177.00) per month,
based on $1.40 per rentable square foot.
7. Guarantor(s): None
8. Floor Area of Premises: approximately 138,698 rentable square feet
9. Security Deposit: $213,595.00, plus Letter of Credit (see Section 4.4).
10. Broker(s): Ernst & Young
11. Additional Insureds: Insignia/ESG of California, Inc.
12. Address for Payments and Notices:
LANDLORD TENANT
INSIGNIA/ESG OF CALIFORNIA, INC. HOMEGROCER.COM, INC.
1 Ada, Suite 270 985 Alamanor Avenue
Irvine, CA 92618 Sunnyvale, CA 94086
With a copy of notices to: With a copy of notices to:
IRVINE INDUSTRIAL COMPANY HomeGrocer.com
P.O. Box 6370 Attn: Legal Department
Newport Beach, CA 92658-6370 10203 NE Points Drive
Attn: Vice President, Industrial Operations Kirkland, WA 98033
Phone: (425) 201-7500
Fax: (425) 201-7575
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<PAGE>
HomeGrocer.com
Attn: Vice President of Operations
10203 NE Points Drive
Kirkland, WA 98033
Phone: (425) 201-7500
Fax: (425) 201-7875
13. Tenant's Liability Insurance Requirement: $2,000,000.00
14. Vehicle Parking Spaces: All on-Site spaces
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<PAGE>
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in EXHIBIT A (the "Premises"), including the
---------
building identified in Item 2 of the Basic Lease Provisions (which together with
the underlying real property, is called the "Building"), and containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions.
The Building is located on the site (the "Site") shown on EXHIBIT A-1 attached
-----------
hereto.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that neither
Landlord nor any representative of Landlord has made any representation or
warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, including without limitation any
representations or warranties regarding zoning or other land use matters, and
that neither Landlord nor any representative of Landlord has made any
representations or warranties regarding (i) what other tenants or uses may be
permitted or intended in the Building and the Project, or (ii) any exclusivity
of use by Tenant with respect to its permitted use of the Premises as set forth
in Item 3 of the Basic Lease Provisions. Tenant further acknowledges that
neither Landlord nor any representative of Landlord has agreed to undertake any
alterations or additions to the Premises except as expressly provided in this
Lease. It is further understood that Tenant shall take possession of the
Premises as of the Commencement Date of this Lease in an "as-is" condition
without further obligation on Landlord's part as to improvements whatsoever
except as expressly provided in Section 7.2 below.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name
selected by Landlord from time to time for the Building as any part of Tenant's
corporate or trade name. Landlord shall have the right to change the name,
address, number or designation of the Building without liability to Tenant.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in Item 5 of
the Basic Lease Provisions. The Term shall commence ("Commencement Date") on the
date set forth in Item 4 of the Basic Lease Provisions and shall expire on the
corresponding date (the "Expiration Date") of the expiration of the Term.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the
Commencement Date, this Lease shall not be void or voidable nor shall Landlord
be liable to Tenant for any resulting loss or damage. However, Tenant shall not
be liable for any rent and the Commencement Date shall not occur until Landlord
delivers possession of the Premises and the Premises are in fact available for
Tenant's occupancy, except that if Landlord's failure to so deliver possession
on the Commencement Date is attributable to any action or inaction by Tenant,
then the Commencement Date shall not be advanced to the date on which possession
of the Premises is tendered to Tenant, and Landlord shall be entitled to full
performance by Tenant (including the payment of rent) from the date Landlord
would have been able to deliver the Premises to Tenant but for Tenant delay(s).
SECTION 3.3. RIGHT TO EXTEND THIS LEASE. Provided that Tenant is not in
default under any provision of this Lease, either at the time of exercise of the
extension right granted herein or at the time of the commencement of such
extension, and provided further that Tenant is occupying the entire Premises and
has not assigned this Lease or sublet, in the aggregate, more than twenty-five
percent (25%) of the Premises (other than an assignment or subletting permitted
to be made without Landlord's consent pursuant to Section 9.4 below), Tenant may
extend the Term of this Lease for one (1) period of sixty (60) months. Tenant
shall exercise its right to extend the Term by and only by delivering to
Landlord, not less than six (6) months or more than nine (9) months prior to the
expiration date of the Term, Tenant's irrevocable written notice of its
commitment to extend (the "Commitment Notice"). The Basic Rent payable under the
Lease during any extension of the Term shall be determined as provided in the
following provisions.
If Landlord and Tenant have not by then been able to agree upon the Basic
Rent for the extension of the Term, then within one hundred twenty (120) and
ninety (90) days prior to the expiration date of the Term, Landlord shall notify
Tenant in writing of the Basic Rent that would reflect the prevailing market
rental rate for a 60-month renewal of comparable space in the Project (together
with any increases thereof during the extension period) as of the commencement
of the extension period ("Landlord's Determination"). Should Tenant disagree
with the Landlord's Determination, then Tenant shall, not later than twenty (20)
days thereafter, notify Landlord in writing of Tenant's determination of those
rental terms ("Tenant's Determination"). In no event, however, shall Landlord's
Determination or Tenant's Determination be less than the Basic Rent payable by
Tenant during the final month of the initial Term. Within ten (10) days
following delivery of the Tenant's Determination, the parties shall attempt to
agree on an appraiser to determine the fair market rental. If the parties are
unable to agree in that time, then each party shall designate an appraiser
within ten (10) days thereafter. Should either party fail to so designate an
appraiser within that time, then the appraiser designated by the other party
shall determine the fair market rental. Should each of the parties timely
designate an appraiser, then the two appraisers so designated shall appoint a
third appraiser who shall, acting alone, determine the fair market rental for
the Premises. Any appraiser designated hereunder shall have an MAI certification
with not less than five (5) years experience in the valuation of commercial
industrial buildings in the vicinity of the Project.
Within thirty (30) days following the selection of the appraiser and such
appraiser's receipt of the Landlord's Determination and the Tenant's
Determination, the appraiser shall determine whether the rental rate determined
by Landlord or by Tenant more accurately reflects the fair market rental rate
for the 60-month renewal of the Lease for the Premises, as reasonably
extrapolated to the commencement of the extension period.
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<PAGE>
Accordingly, either the Landlord's Determination or the Tenant's Determination
shall be selected by the appraiser as the fair market rental rate for the
extension period. In making such determination, the appraiser shall consider
rental comparables for the Project (provided that if there are an insufficient
number of comparables within the project, the appraiser shall consider rental
comparables for similarly improved space within the vicinity of the Project with
appropriate adjustment for location and quality of project), taking into account
any concessions (or lack thereof) or brokerage commissions obligations (or lack
thereof) in making its determination of the fair market rental rate. At any time
before the decision of the appraiser is rendered, either party may, by written
notice to the other party, accept the rental terms submitted by the other party,
in which event such terms shall be deemed adopted as the agreed fair market
rental. The fees of the appraiser(s) shall be borne entirely by the party whose
determination of the fair market rental rate was not accepted by the appraiser.
Within twenty (20) days after the determination of the fair market rental,
Landlord shall prepare an appropriate amendment to this Lease setting forth the
Basic Rent payable by Tenant for the extension period (as determined pursuant to
the foregoing provisions), and Tenant shall execute and return same to Landlord
within twenty (20) days. Should the fair market rental not be established by the
commencement of the extension period, then Tenant shall continue paying rent at
the rate in effect during the last month of the initial Term, and a lump sum
adjustment shall be made promptly upon the determination of such new rental.
If Tenant fails to timely comply with any of the provisions of this
paragraph, Tenant's right to extend the Term shall be extinguished and the Lease
shall automatically terminate as of the expiration date of the Term, without any
extension and without any liability to Landlord. Any attempt to assign or
transfer any right or interest created by this paragraph shall be void from its
inception (other than an assignment made in connection with an assignment of
this Lease permitted to be made without Landlord's consent pursuant to Section
9.4 below). Tenant shall have no other right to extend the Term beyond the
single sixty (60) month extension period created by this paragraph. Unless
agreed to in a writing signed by Landlord and Tenant, any extension of the Term,
whether created by an amendment to this Lease or by a holdover of the Premises
by Tenant, or otherwise, shall be deemed a part of, and not in addition to, any
duly exercised extension period permitted by this paragraph.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant shall
pay to Landlord without deduction or offset, Basic Rent for the Premises in the
total amount shown (including subsequent adjustments, if any) in Item 6 of the
Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be deemed to
occur on the specified monthly anniversary of the Commencement Date, whether or
not that date occurs at the end of a calendar month. The rent shall be due and
payable in advance commencing on the Commencement Date (as prorated for any
partial month) and continuing thereafter on the first day of each successive
calendar month of the Term. No demand, notice or invoice shall be required for
the payment of Basic Rent. An installment of rent in the amount of one (1) full
month's Basic Rent at the initial rate specified in Item 6 of the Basic Lease
Provisions shall be delivered to Landlord concurrently with Tenant's execution
of this Lease and shall be applied against the Basic Rent first due hereunder.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, "Building Costs"
and "Property Taxes," as those terms are defined below, incurred by Landlord in
the operation of the Building. For convenience of reference, Property Taxes and
Building Costs shall be referred to collectively as "Operating Expenses".
(b) Commencing prior to the start of the first full "Expense Recovery
Period" (as defined below) of the Lease, and prior to the start of each full or
partial Expense Recovery Period thereafter, Landlord shall give Tenant a written
estimate of the amount of Operating Expenses for the Expense Recovery Period.
Tenant shall pay the estimated amounts to Landlord in equal monthly
installments, in advance, with Basic Rent. If Landlord has not furnished its
written estimate for any Expense Recovery Period by the time set forth above,
Tenant shall continue to pay cost reimbursements at the rates established for
the prior Expense Recovery Period, if any; provided that when the new estimate
is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any
accrued cost reimbursements based upon the new estimate. For purposes hereof,
"Expense Recovery Period" shall mean every twelve month period during the Term
(or portion thereof for the first and last lease years) commencing July 1 and
ending June 30. Estimates of Operating Expenses payable by Tenant during each
Expense Recovery Period shall not be greater than one hundred ten percent (110%)
of actual Operating Expenses for the immediately preceding Expense Recovery
Period unless, in Landlord's reasonable estimation, it is expected that actual
Operating Expenses for the Expense Recovery Period in question will be greater
than one hundred ten percent (110%) of actual Operating Expenses for the
immediately preceding Expense Recovery Period. The foregoing limitation on
estimated payments of Operating Expenses shall in no way limit Tenant's
obligation to pay actual Operating Expenses as provided in this Section 4.2, it
being the intent of the parties that Tenant shall be fully responsible for
actual Operating Expenses (whether or not Tenant's estimated payments are mote
or less than actual Operating Expenses).
(c) Within one hundred twenty (120) days after the end of each Expense
Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to Tenant's actual owed amounts as shown by the annual statement. Any delay
or failure by Landlord in delivering any statement hereunder shall not
constitute a waiver of Landlord's right to require Tenant to pay Operating
Expenses pursuant hereto. Any amount due Tenant
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<PAGE>
shall be credited against installments next coming due under this Section 4.2,
and any deficiency shall be paid by Tenant together with the next installment
coming due under this Section 42. If Tenant has not made estimated payments
during the Expense Recovery Period, any amount owing by Tenant pursuant to
subsection (a) above shall be paid to Landlord in accordance with Article XVI.
Should Tenant fail to object in writing to Landlord's determination of actual
Operating Expenses within sixty (60) days following delivery of Landlord's
expense statement, Landlord's determination of actual Operating Expenses for the
applicable Expense Recovery Period shall be conclusive and binding on the
parties and any future claims to the contrary shall be barred.
Provided Tenant is not then in default under this Lease beyond any
applicable notice and cure periods, Tenant shall have the right to have an
independent certified public accountant audit Landlord's Operating Expenses,
subject to the terms and conditions hereof. In no event, however, shall such
auditor be compensated by Tenant on a "contingency" basis, or on any other basis
tied to the results of said audit. Tenant shall give written notice to Landlord
of Tenant's intent to audit Operating Expenses, if at all, within sixty (60)
days following delivery of Landlord's expense statement for the Expense Recovery
Period in question. Following at least ten (10) business days notice to
Landlord, such audit shall be conducted at a mutually agreeable time during
normal business hours at the office of Landlord or its management agent where
records are maintained in Santa Clara County, California. Landlord shall in good
faith cooperate with Tenant during any such audit. If Tenant's audit reveals
that actual Operating Expenses have been overstated by five percent (5%) or
more, then, subject to Landlord's right to review and/or contest the results of
the audit (as provided below), Landlord shall reimburse Tenant within thirty
(30) days after Tenant's demand therefor for Tenant's reasonable actual out-of-
pocket costs of such audit supported by bona-fide "paid" invoices therefor. All
information obtained by Tenant and/or its auditor in connection with any audit,
as well as any compromise, settlement or adjustment reached between Landlord and
Tenant as a result thereof, shall be held in strict confidence by Tenant and its
auditor and, except as may be required pursuant to any litigation or as may
otherwise be required by law, shall not be disclosed to any third party,
directly or indirectly, by Tenant or its auditor or any of their respective
officers, agents or employees. Landlord may require Tenant's auditor to execute
a separate confidentiality agreement affirming the foregoing as a condition
precedent to any audit. If, following Landlord's review of Tenant's audit,
Landlord disputes the same, Landlord shall have the right, upon written notice
to Tenant within a reasonable time following its receipt of the audit, to
contest such audit by demanding binding arbitration with JAMS Endispute in Santa
Clara County, California ("JAMS"). Tenant agrees to submit to such arbitration
upon such written notice from Landlord. Within ten (10) business days following
submission of the dispute by Landlord to JAMS, JAMS shall designate three (3)
arbitrators and each party may, within five (5) business days thereafter, veto
one (1) of the three (3) persons so designated. If two (2) different designated
arbitrators have been vetoed, the third arbitrator shall hear and decide the
matter. Any arbitration pursuant to this paragraph shall be decided within
thirty (30) days of submission to JAMS. The decision of the arbitrator shall be
final and binding on the parties. The award rendered by the arbitrator shall be
final, and judgment may be entered upon it in accordance with applicable law in
any court having jurisdiction thereof. Except by written consent of the person
or entity sought to be joined, no arbitration under this paragraph shall
include, by consolidation, joinder or in any other manner, any person or entity
not a party to this Lease unless (i) such person or entity is substantially
involved in a common question of fact or law, (ii) the presence of such person
or entity is required if complete relief is to be accorded in the arbitration,
or (iii) the interest or responsibility of such person or entity in the matter
in not insubstantial. All costs associated with the arbitration (excluding the
cost of the audit) shall be awarded to the prevailing party as determined by the
arbitrator. The foregoing agreement to arbitrate shall be specifically
enforceable under prevailing law. In the event that, based on Tenant's audit
(and, if the results thereof are contested by Landlord as provided above, the
award rendered by the arbitrator), it is determined that actual Operating
Expenses have been overstated by Landlord, then any overpayment of actual
Operating Expenses by Tenant revealed thereby (less any prior credits or rebates
given with respect thereto) shall be credited by Landlord against installments
next becoming due under this Section 4.2 (or, if the Lease has expired or
terminated at the time of such determination, such overpayment (less any prior
credits or rebates given with respect thereto) shall be rebated by Landlord to
Tenant within thirty (30) days following such determination). Conversely, in the
event that, based on Tenant's audit (and, if the results thereof are contested
by Landlord as provided above, the award rendered by the arbitrator), it is
determined that actual Operating Expenses have been understated by Landlord,
then any deficiencies in the payment of actual Operating Expenses by Tenant
revealed thereby (less any prior payments made by Tenant with respect thereto)
shall be paid by Tenant together with the next installment coming due under this
Section 4.2 (or, if the Lease has expired or terminated at the time of such
determination, such deficiency (less any prior payments made by Tenant with
respect thereto) shall be paid by Tenant upon notice from Landlord).
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Operating Expenses for the
Expense Recovery Period in which the Lease terminates, Tenant shall upon notice
pay the entire amount of actual Operating Expenses due over the estimated
expenses paid. Conversely, any overpayment made in the event actual Operating
Expenses due are less than the estimated expenses paid shall be rebated by
Landlord to Tenant within thirty (30) days after the final determination.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then the estimate of Operating Expenses shall be increased for the month
in which such rate(s) or amount(s) becomes effective and for all succeeding
months by an amount equal to the increase. Landlord shall give Tenant written
notice of the amount or estimated amount of the increase, the month in which the
increase will become effective, and the month for which the payments are due.
Tenant shall pay the increase to Landlord as a part of Tenant's monthly payments
of estimated expenses as provided in paragraph (b) above, commencing with the
month in which effective.
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(f) The term "Building Costs" shall include all expenses of operation
and maintenance of the Building and all landscaping, walkways, parking areas and
lighting of the Site to the extent such expenses are not billed to and paid
directly by Tenant; and shall include the following charges by way of
illustration but not limitation: water and sewer charges; insurance premiums or
reasonable premium equivalents should Landlord elect to self-insure any risk
that Landlord is authorized to insure hereunder, license, permit, and inspection
fees; heat; light; power; air conditioning; supplies; materials; equipment;
tools; the cost of any environmental, insurance, tax or other consultant
utilized by Landlord in connection with the Building; costs incurred in
connection with compliance of any laws or changes in laws applicable to the
Building; the cost of any capital investments (other than tenant improvements
for specific tenants) to the extent of the amortized amount thereof over the
useful life of such capital investments calculated at a market cost of funds,
all as reasonably determined by Landlord, for each such year of useful life
during the Term; costs incurred in connection with the Ground Lease (as such
term is defined in Section 6.2(b)) or any renewals, amendments or replacements
of same, including but not limited to base rent, taxes and insurance premiums
payable thereunder, to the extent such costs relate to the Site; labor;
reasonably allocated wages and salaries, fringe benefits, and payroll taxes for
administrative and other personnel directly applicable to the Building,
including both Landlord's personnel and outside personnel; any expense incurred
pursuant to Sections 6.1, 6.2, 7.2, and 10.2; and a reasonable
overhead/management fee for the professional operation of the Building.
Notwithstanding anything to the contrary contained herein, the amount of such
overhead/management fee to be charged to Tenant shall be determined by
multiplying the actual fee charged (which from time to time may be with respect
to the Building only or the Building together with other properties owned by
Landlord and/or its affiliates) by a fraction, the numerator of which is the
floor area of the Premises (as set forth in Item No. 8 of the Basic Lease
Provisions) and the denominator of which is the total square footage of space
charged with such fee actually leased to tenants (including Tenant). It is
understood that Building Costs shall include competitive charges for direct
services provided by any subsidiary or division of Landlord, and may include the
Building's or the Site's proportionate share of the cost of maintenance or
repair contracts which cover the Building and/or the Site and other buildings
and/or projects in Landlord's portfolio, as reasonably allocated by Landlord.
(g) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease, to the
Building or to the Site, and any improvements, fixtures and equipment and other
property of Landlord located in the Building or on the Site, except that general
net income and franchise taxes imposed against Landlord shall be excluded; and
(iii) all assessments and fees for public improvements, services, and facilities
and impacts thereon, including without limitation arising out of any Community
Facilities Districts, "Mello Roos" districts, similar assessment districts, and
any traffic impact mitigation assessments or fees; and (iv) any tax, surcharge
or assessment which shall be levied in addition to or in lieu of real estate or
personal property taxes, other than taxes covered by Article VIII; and (v) costs
and expenses incurred in contesting the amount or validity of any Property Tax
by appropriate proceedings. Landlord reserves the right at its election to at
any time contest the amount or validity of any Property Taxes by appropriate
proceedings. In the event that Landlord elects to so contest any Property Taxes,
Landlord shall provide Tenant with written notice thereof and, if such contest
relates to any alterations, additions or improvements made by Tenant, then
Landlord shall permit Tenant, at its election, to reasonably participate, at its
sole cost and expense, with Landlord in pursuing such tax contest to the extent
that it relates to any alterations, additions or improvements made by Tenant. In
addition, if Tenant reasonably believes that the amount or validity of any
increase in Property Taxes that is due to a change in ownership or any
alterations, additions or improvements made by Tenant is improper, Tenant may
notify Landlord in writing of Tenant's desire that such increase in Property
Taxes be contested by Landlord (which notice by Tenant shall include the basis
for Tenant's contention that such increase in Property Taxes is improper). Upon
Landlord's receipt of any such notice from Tenant and unless Landlord has
otherwise elected to contest the same, Landlord and Tenant shall promptly meet
to discuss the merits of contesting the Property Taxes in question. If,
following such discussion, Tenant desires that Landlord proceed with contesting
such increase in Property Taxes, then, following written notice thereof to
Landlord given within fifteen (15) days following such discussion, Landlord
shall pursue contesting such increase in Property Taxes by appropriate
proceedings (and Landlord shall keep Tenant informed of the status of any such
tax contest and permit Tenant, at its election, to reasonably participate, at
its sole cost and expense, with Landlord in pursuing such tax contest). If
Landlord is successful in contesting any Property Taxes and is entitled to
receive a refund for any overpayment of Property Taxes, Tenant shall be entitled
to a refund of any overpayment of the contested Property Taxes made by Tenant,
which refund shall be made by Landlord to Tenant within thirty (30) days
following Landlord's receipt of such refund from the applicable taxing
authority.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this
Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of
the Basic Lease Provisions, to be held by Landlord as security for the full and
faithful performance of Tenant's obligations under this Lease (the "Security
Deposit"). Subject to the last sentence of this Section, the Security Deposit
shall be understood and agreed to be the property of Landlord upon Landlord's
receipt thereof. Upon any default by Tenant, including specifically Tenant's
failure to pay rent or to abide by its obligations under Sections 7.1 and 15.3
below and Tenant's failure to cure the same within any applicable cure period,
whether or not Landlord is informed of or has knowledge of the default, the
Security Deposit shall be deemed to be automatically and immediately applied,
without waiver of any rights Landlord may have under this Lease or at law or in
equity as a result of the default, as a setoff for full or partial compensation
for that default. If any portion of the Security Deposit is applied after a
default by Tenant, Tenant shall within five (5) days after written demand by
Landlord deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its original amount. Landlord shall not be required to keep
this Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on the Security Deposit. If Tenant fully performs its
obligations under this Lease, the Security Deposit or any balance thereof shall
be returned to Tenant (or, at Landlord's option, to the last assignee of
Tenant's interest in this Lease) within thirty (30) days after the
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expiration of the Term, provided that Landlord may retain the Security Deposit
to the extent and until such time as all amounts due from Tenant in accordance
with this Lease have been determined and paid in full.
SECTION 4.4. LETTER OF CREDIT. In addition to the Security Deposit and as
additional security for the full and faithful performance of Tenant's
obligations under this Lease, Tenant shall deliver to landlord, concurrently
with Tenant's execution and delivery of this Lease, a letter of credit in the
amount of One Million Dollars ($1,000,000.00), which letter of credit shall be
in form and with the substance of Exhibit F attached hereto, and issued by a
---------
financial institution reasonably acceptable to Landlord. The letter of credit
shall provide for automatic yearly renewals throughout the Term of this Lease.
Upon (i) any default by Tenant, including specifically Tenant's failure to pay
rent or to abide by its obligations under Sections 7.1 and 15.3 below and
Tenant's failure to cure the same within any applicable cure period, and (ii)
Landlord's application of the entire Security Deposit, Landlord shall be
entitled to draw upon said letter of credit by the issuance of Landlord's sole
written demand to the issuing financial institution. Any such draw shall be
without waiver or any rights Landlord may have under this Lease or at law or in
equity as a result of the default, as a setoff for full or partial compensation
for the default. If any portion of the letter of credit is drawn after a default
by Tenant, Tenant shall within five (5) days after written demand by Landlord
restore the letter of credit. Upon the expiration of the twelfth (12th), twenty-
fourth (24th), thirty-sixth (36th), forty-eighth (48th) and sixty-ninth (69th)
Lease months during the Term, in the event Tenant has not been in monetary or
material non-monetary default under this Lease during the immediately preceding
twelve (12) month period ending on each such expiration date (or the immediately
preceding twenty-one (21) month period ending on the expiration of the sixty-
ninth (69th) Lease month with respect to the final reduction) (each period being
referred to herein as a "Reduction Period"), and provided further that Tenant
has not during the applicable Reduction Period been more than five (5) days late
more than twice with respect to any payments of rent due under this Lease, then
upon the written request of Tenant, Landlord shall authorize in writing a
reduction to the principal amount of the letter of credit in the amount of Two
Hundred Thousand Dollars ($200,000.00) with respect to the Reduction Period in
question. In the event Tenant has been in monetary or material non-monetary
default under this Lease during a particular Reduction Period or has during such
Reduction Period been more than five (5) days late more than twice with respect
to any payments of rent due under this Lease, then Tenant's right to a
$200,000.00 reduction for such Reduction Period shall be forever forfeited by
Tenant (notwithstanding the fact that Tenant may be entitled to a $200,000.00
reduction hereunder with respect to subsequent Reduction Period(s)).
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities. The
parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not use or allow
the Premises to be used for any unlawful purpose, nor shall Tenant permit any
nuisance or commit any waste in the Premises. Tenant shall not do or permit to
be done anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building or its contents (unless, with respect to any
such increase in such cost, Tenant shall promptly upon demand reimburse Landlord
for the increased cost), and shall comply with all applicable insurance
underwriters rules and the requirements of the Pacific Fire Rating Bureau or any
other organization performing a similar function. Tenant shall comply at its
expense with all present and future laws, ordinances, restrictions, regulations,
orders, rules and requirements of all governmental authorities that pertain to
Tenant or its use of the Premises, including without limitation all federal and
state occupational health and safety requirements, whether or not Tenant's
compliance will necessitate expenditures or interfere with its use and enjoyment
of the Premises. Tenant shall comply at its expense with all present and future
covenants, conditions, easements or restrictions now or hereafter affecting or
encumbering the Building, and any amendments or modifications thereto, including
without limitation the payment by Tenant of any periodic or special dues or
assessments charged against the Premises or Tenant which may be allocated to the
Premises or Tenant in accordance with the provisions thereof. Tenant shall
promptly upon demand reimburse Landlord for any additional insurance premium
charged by reason of Tenant's failure to comply with the provisions of this
Section, and shall indemnify Landlord from any liability and/or expense
resulting from Tenant's noncompliance.
SECTION 5.2. SIGNS. Except as approved in writing by Landlord, which
approval shall not be unreasonably withheld, conditioned or delayed, Tenant
shall have no right to maintain identification signs in any location in, on or
about the Premises or the Building and shall not place or erect any signs,
displays or other advertising materials that are visible from the exterior of
the Building. The size, design, graphics, material, style, color and other
physical aspects of any permitted sign shall be subject to Landlord's written
approval prior to installation (which approval may be withheld in Landlord's
discretion), any covenants, conditions or restrictions encumbering the Premises,
Landlord's signage program, if any, as in effect from time to time ("Signage
Criteria"), and any applicable municipal or other governmental permits and
approvals. Tenant acknowledges having received and reviewed a copy of the
current Signage Criteria, if applicable. Tenant shall be responsible for the
cost of any permitted sign, including the fabrication, installation, maintenance
and removal thereof. If Tenant fails to maintain its sign, or if Tenant fails to
remove same upon termination of this Lease and repair any damage caused by such
removal, Landlord may do so at Tenant's expense.
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SECTION 5.3. HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous Materials to be
brought upon, stored, used, generated, released or disposed of on, under, from
or about the Premises or the Site (including without limitation the soil and
groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord, to use, store, handle and dispose of within
the Premises (a) reasonable quantities of customary janitorial supplies that may
contain Hazardous Materials, (b) packaged products intended for resale to
consumers that may contain Hazardous Materials (including, without limitation,
hair spray, household cleaners, automotive products, antifreeze, dog food,
fertilizer), and (c) standard office products that may contain Hazardous
Materials (such as photocopy toner, "White Out", and the like), provided
--------
however, that (i) Tenant shall maintain such supplies and products in their
- -------
original retail packaging, shall follow all instructions on such packaging with
respect to the use, storage, handling and disposal of such supplies and
products, and shall otherwise comply with all applicable laws with respect to
such supplies and products (including, without limitation, securing all required
governmental approvals relating to the lawful use, storage, handling and
disposal of such supplies and products), and (ii) all of the other terms and
provisions of this Section 5.3 shall apply with respect to Tenant's use,
storage, handling and disposal of all such supplies and products. Landlord may,
in its sole discretion, place such conditions as Landlord deems appropriate with
respect to any such Hazardous Materials, and may further require that Tenant
demonstrate that any such Hazardous Materials are necessary or useful to
Tenant's business and will be generated, stored, used and disposed of in a
manner that complies with all applicable laws and regulations pertaining thereto
and with good business practices. Tenant understands that Landlord may utilize
an environmental consultant to assist in determining conditions of approval in
connection with the storage, generation, release, disposal or use of Hazardous
Materials by Tenant on or about the Premises, and/or to conduct periodic
inspections of the storage, generation, use, release and/or disposal of such
Hazardous Materials by Tenant on and from the Premises, and Tenant agrees that
any costs incurred by Landlord in connection therewith shall be reimbursed by
Tenant to Landlord as additional rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B attached
---------
hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing the names and amounts of all Hazardous Materials
which were stored, generated, used, released and/or disposed of on, under or
about the Premises for the twelve-month period prior thereto, and which Tenant
desires to store, generate, use, release and/or dispose of on, under or about
the Premises for the succeeding twelve-month period. In addition, to the extent
Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant
shall promptly provide Landlord with complete and legible copies of all the
following environmental documents relating thereto: reports filed pursuant to
any self-reporting requirements; permit applications, permits, monitoring
reports, workplace exposure and community exposure warnings or notices and all
other reports, disclosures, plans or documents (even those which may be
characterized as confidential) relating to water discharges, air pollution,
waste generation or disposal, and underground storage tanks for Hazardous
Materials; orders, reports, notices, listings and correspondence (even those
which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other legal
documents filed by or against Tenant related to Tenant's use, handling, storage,
release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises, the Site and/or the
soil or groundwater thereunder at any time to determine whether Tenant is
complying with the terms of this Section 5.3, and in connection therewith Tenant
shall provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Section 5.3, or in the event of a release of any Hazardous Material on, under or
about the Premises and/or the Site caused or permitted by Tenant, its agents,
employees, contractors, licensees or invitees, Landlord and its agents shall
have the right, but not the obligation, without limitation upon any of
Landlord's other rights and remedies under this Lease, to immediately enter upon
the Premises and/or the Site without notice and to discharge Tenant's
obligations under this Section 5.3 at Tenant's expense, including without
limitation the taking of emergency or long-term remedial action. Landlord and
its agents shall endeavor to minimize interference with Tenant's business in
connection therewith, but shall not be liable for any such interference. In
addition, Landlord, at Tenant's expense, shall have the right, but not the
obligation, to join and participate in any legal proceedings or actions
initiated in connection with any claims arising out of the storage, generation,
use, release and/or disposal by Tenant or its agents, employees, contractors,
licensees or invitees of Hazardous Materials on, under, from or about the
Premises and/or the Site.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises and/or the Site caused or permitted by Tenant or its agents,
employees, contractors, licensees or invitees results in (i) injury to any
person, (ii) injury to or any contamination of the Premises and/or the Site, or
(iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises, the Site and any other affected real or personal property
owned by Landlord to the condition
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existing prior to the introduction of such Hazardous Materials and to remedy or
repair any such injury or contamination, including without limitation, any
cleanup, remediation, removal, disposal, neutralization or other treatment of
any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not,
without Landlord's prior written consent, take any remedial action in response
to the presence of any Hazardous Materials on, under or about the Premises, the
Site or any other affected real or personal property owned by Landlord or enter
into any similar agreement, consent, decree or other compromise with any
governmental agency with respect to any Hazardous Materials claims; provided
however, Landlord's prior written consent shall not be necessary in the event
that the presence of Hazardous Materials on, under or about the Premises, the
Site or any other affected real or personal property owned by Landlord (i)
imposes an immediate threat to the health, safety or welfare of any individual
or (ii) is of such a nature that an immediate remedial response is necessary and
it is not possible to obtain Landlord's consent before taking such action. To
the fullest extent permitted by law, Tenant shall indemnify, hold harmless,
protect and defend (with attorneys acceptable to Landlord) Landlord and any
successors to all or any portion of Landlord's interest in the Premises, the
Site and any other real or personal property owned by Landlord from and against
any and all liabilities, losses, damages, diminution in value, judgments, fines,
demands, claims, recoveries, deficiencies, costs and expenses (including without
limitation attorneys' fees, court costs and other professional expenses),
whether foreseeable or unforeseeable, arising directly or indirectly out of the
use, generation, storage, treatment, release, on- or off-site disposal or
transportation of Hazardous Materials on, into, from, under or about the
Premises, the Site and any other real or personal property owned by Landlord to
the extent that such use, generation, storage, treatment, release, on- or off-
site disposal and/or transportation is caused or permitted by Tenant, its
agents, employees, contractors, licensees or invitees, specifically including
without limitation the cost of any required or necessary repair, restoration,
cleanup or detoxification of the Premises, the Site and any other real or
personal property owned by Landlord, and the preparation of any closure or other
required plans, whether or not such action is required or necessary during the
Term or after the expiration of this Lease. If Landlord at any time discovers
that Tenant or its agents, employees, contractors, licensees or invitees may
have caused or permitted the release of a Hazardous Material on, under, from or
about the Premises, the Site or any other real or personal property owned by
Landlord, Tenant shall, at Landlord's request, immediately prepare and submit to
Landlord a comprehensive plan, subject to Landlord's approval, specifying the
actions to be taken by Tenant to return the Premises, the Site or any other real
or personal property owned by Landlord to the condition existing prior to the
introduction of such Hazardous Materials. Upon Landlord's approval of such
cleanup plan, Tenant shall, at its expense, and without limitation of any rights
and remedies of Landlord under this Lease or at law or in equity, immediately
implement such plan and proceed to cleanup such Hazardous Materials in
accordance with all applicable laws and as required by such plan and this Lease.
The provisions of this subsection (e) shall expressly survive the expiration or
sooner termination of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Premises
and/or the Site known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit C attached hereto. Tenant shall have no
---------
liability or responsibility with respect to the Hazardous Materials facts
described in Exhibit C, nor with respect to any Hazardous Materials which Tenant
---------
proves were not caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees. Notwithstanding the preceding two sentences,
Tenant agrees to notify its agents, employees, contractors, licensees, and
invitees of any exposure or potential exposure to Hazardous Materials at the
Premises and/or the Site that Landlord brings to Tenant's attention in the form
of a written notice, setting forth with particularity the exposure or potential
exposure to which Landlord refers.
ARTICLE VI. SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for water,
gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used by
Tenant in, on or about the Premises during the Term, together with any taxes
thereon. Landlord shall not be liable for damages or otherwise for any failure
or interruption of any utility or other service furnished to the Premises, and
no such failure or interruption shall be deemed an eviction or entitle Tenant to
terminate this Lease or withhold or abate any rent due hereunder, provided,
however, if any such failure or interruption is due to the sole active
negligence or willful misconduct of Landlord, its employees or authorized agents
(a "Landlord-Caused Service Interruption") and is not restored by Landlord
within five (5) business days following written notice by Tenant of the
Landlord-Caused Service Interruption in question, then Tenant shall be entitled
to an abatement of Basic Rent reasonably allocable to that portion of the
Premises that Tenant is prevented from using by reason of such Landlord-Caused
Service Interruption, which abatement shall commence on the sixth (6th) business
day following Tenant's notice of the Landlord-Caused Service Interruption in
question and shall continue for the balance of the period during which Tenant is
so prevented from using the affected portion of the Premises. The foregoing
abatement provisions shall be the sole and exclusive remedy of Tenant with
respect to any Landlord-Caused Service Interruption. Landlord shall use
commercially reasonable efforts to restore any Landlord-Caused Service
Interruption as soon as reasonably possible following its receipt of notice of
the occurrence thereof. Landlord shall at all reasonable times have free access
to all electrical and mechanical installations of Landlord.
SECTION 6.2. PARKING.
(a) Tenant shall be entitled to Tenant's Share of the vehicle parking
spaces on those portions of the Common Areas designated by Landlord for parking,
on an unreserved and unassigned basis. Tenant shall not use more parking spaces
than such number. Tenant shall not permit or allow any vehicles that belong to
or are controlled by Tenant or Tenant's employees, suppliers, shippers,
customers or invitees to be loaded, unloaded or parked in areas other than those
designated by Landlord for such activities. If Tenant permits or allows any of
the
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prohibited activities described above, then Landlord shall have the right,
without notice, in addition to such other rights and remedies that Landlord may
have, to remove or tow away the vehicle involved and charge the costs to Tenant.
Parking shall be limited to striped parking stalls, and no parking shall be
permitted in any driveways, access ways or in any similar area. Nothing
contained in this Lease shall be deemed to create liability upon Landlord for
any damage to motor vehicles of visitors or employees, for any loss of property
from within those motor vehicles, or for any injury to Tenant, its visitors or
employees, unless ultimately determined to be caused by the sole active
negligence or willful misconduct of Landlord, its employees or authorized
agents. Landlord shall have the right to establish, and from time to time amend,
and to enforce in a non-discriminatory manner against all users all reasonable
rules and regulations (including the designation of areas for employee parking)
that Landlord may deem necessary and advisable for the proper and efficient
operation and maintenance of parking. Landlord shall have the right to
construct, maintain and operate lighting facilities within the parking areas; to
change the area, level, location and arrangement of the parking areas and
improvements therein; and to do and perform such other acts in and to the
parking areas and improvements therein as, in the use of good business judgment,
Landlord shall determine to be advisable, except that Landlord shall not make
any material changes to the parking areas unless such changes are otherwise
required by law or are necessitated by any taking by any lawful authority by
exercise of the right of eminent domain (or sold to prevent a taking) (subject,
however, to Tenant's rights under Section 12.3 below) or any matters beyond the
reasonable control of Landlord. Parking areas shall be used only for parking
vehicles. Tenant shall be liable for any damage to the parking areas caused by
Tenant or Tenant's employees, suppliers, shippers, customers or invitees,
including without limitation damage from excess oil leakage. Except as otherwise
permitted pursuant to Section 7.3 below, Tenant shall have no right to install
any fixtures, equipment or personal property in the parking areas.
(b) Tenant acknowledges that a portion of the Common Area ("Ground
Lease Premises") used for access to and parking for the Site is subject to that
certain Ground Lease dated March 8, 1999 between the City and County of San
Francisco ("Ground Lessor") and Landlord, a copy of which is attached hereto as
Exhibit G (as the same may be amended, the "Ground Lease"). Without limiting the
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requirements of Section 6.2(a) and except as set forth in Section 6.2(c) below,
Tenant shall be bound by and comply with all of the terms, covenants and
conditions applicable to Landlord under the Ground Lease with respect to the
Ground Lease Premises (including without limitation all waivers of claims given
by Landlord) and shall satisfy all applicable terms, covenants and conditions of
the Ground Lease relating to the Ground Lease Premises for the benefit of both
Landlord and Ground Lessor. Landlord shall provide Tenant with timely written
notice of all amendments to the Ground Lease.
(c) Notwithstanding Section 6.2(b) above, (i) the responsibility for
maintenance and repair of the Ground Lease Premises shall be governed by Section
7.2 of this Lease; (ii) the responsibility for paying base rent, taxes and other
charges under Sections 5 and 6 of the Ground Lease shall be the responsibility
of Landlord (but the cost of which shall constitute Operating Expenses as
provided in Section 4.2(f)); (iii) the responsibility for procuring insurance
required under Section 18.1 of the Ground Lease shall be the responsibility of
Landlord (but the cost of which shall constitute an Operating Expense as
provided in Section 4.2(f)); (iv) Section 15 of the Ground Lease (assignment and
subletting) shall not be applicable to Tenant as Tenant does not have an
exclusive right to use the Ground Lease Premises; (v) Tenant shall have no
obligation to provide or right to receive an estoppel certificate under Section
20 of the Ground Lease; (vi) the responsibility for the condition of the Ground
Lease Premises upon the expiration or earlier termination of this Lease shall be
governed by Section 15.3 of this Lease; and (vii) Tenant shall have no
responsibility for paying the security deposit under Section 23 of the Ground
Lease except to the extent such deposit is depleted as a result of Tenant's
failure to comply with the terms, covenants and conditions of this Lease
(including this Section 6.2).
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense
shall comply with all applicable laws and governmental regulations governing the
Premises and make all repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the improvements may
have been installed), excepting ordinary wear and tear and subject to Landlord's
obligations under Section 7.2 below, including without limitation the electrical
and mechanical systems, any air conditioning, ventilating or heating equipment
which serves the Premises, all walls (excluding exterior walls), glass, windows,
doors, door closures, hardware, fixtures, electrical, plumbing, fire
extinguisher equipment and other equipment. Any damage or deterioration of the
Premises shall not be deemed ordinary wear and tear if the same could have been
prevented by good maintenance practices by Tenant. As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request, provide Landlord
with copies of all maintenance schedules, reports and notices prepared by, for
or on behalf of Tenant. Tenant shall obtain preventive maintenance contracts
from a licensed heating and air conditioning contractor to provide for regular
inspection and maintenance of the heating, ventilating and air conditioning
systems servicing the Premises, all subject to Landlord's reasonable approval.
All repairs shall be at least equal in quality to the original work, shall be
made only by a licensed contractor approved in writing in advance by Landlord
and shall be made only at the time or times reasonably approved by Landlord. Any
contractor utilized by Tenant shall be subject to Landlord's standard
requirements for contractors, as modified from time to time. Landlord shall have
the right at all times, upon not less than twenty-four (24) hours written notice
to Tenant (which notice may be given by facsimile) (except in emergencies or any
suspected violation by Tenant of the provisions of Section 5.3 above, in which
case no notice shall be required), to inspect Tenant's maintenance of all
equipment (including without limitation air conditioning, ventilating and
heating equipment) provided Landlord uses commercially reasonably efforts to
minimize interference with Tenant's business operations with the Premises during
any such inspections, and may impose reasonable restrictions and requirements
with respect to repairs, as provided in Section 7.3 (provided any such
restrictions or requirements do not unreasonably limit or restrict Tenant's use
of the Premises for the purposes permitted under this Lease), and the provisions
of Section 7.4 shall
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apply to all repairs. Alternatively, Landlord may elect to make any repair or
maintenance required hereunder on behalf of Tenant and at Tenant's expense, and
Tenant shall promptly reimburse Landlord for all costs incurred upon submission
of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1 and
Article XI, Landlord shall provide service, maintenance and repair with respect
to the roof (including roof membrane), foundations, interior load bearing walls,
and footings of the Building, all landscaping, walkways, parking areas, exterior
lighting of the Site, any latent defects in the construction of the Building,
and the exterior surfaces of the exterior walls of the Building, except that
Tenant at its expense shall make all repairs which Landlord deems reasonably
necessary as a result of the act or negligence of Tenant, its agents, employees,
invitees, subtenants or contractors. Landlord shall have the right to employ or
designate any reputable person or firm, including any employee or agent of
Landlord or any of Landlord's affiliates or divisions, to perform any service,
repair or maintenance function. Landlord need not make any other improvements or
repairs except as specifically required under this Lease, and nothing contained
in this Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Tenant further understands that Landlord shall not be
required to make any repairs under this Section 7.2 unless and until Tenant has
notified Landlord in writing of the need for such repair (or Landlord otherwise
has actual knowledge of the need for such repair) and Landlord shall have a
reasonable period of time thereafter to commence and complete said repair, if
warranted. All costs of any maintenance and repairs on the part of Landlord
provided hereunder shall be considered part of Building Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises or the outside areas without the prior written
consent of Landlord, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, Tenant shall be permitted, without Landlord's
prior consent (but otherwise subject to all other terms and conditions of this
Section 7.3), to make any alterations, additions or improvements to the Premises
which, in the aggregate, cost less than Two Dollars ($2.00) per square foot of
the improved portions of the Premises (excluding warehouse square footage) and
do not (i) affect the exterior of the Building or outside areas (or be visible
from adjoining sites), or (ii) affect or penetrate any of the structural
portions of the Building, including but not limited to the roof, or (iii)
require any material change to any mechanical systems of the Premises, or any
governmental permit as a prerequisite to the construction thereof, or (iv)
interfere in any manner with the proper functioning of or Landlord's access to
any mechanical, electrical, plumbing or HVAC systems, facilities or equipment
located in or serving the Building. Tenant shall provide Landlord with not less
than ten (10) days prior written notice of any alterations, additions or
improvements permitted to be made by Tenant without Landlord's prior consent
pursuant to the immediately preceding sentence. Landlord may impose, as a
condition to Tenant making any alterations, additions or improvements (whether
or not Landlord's consent thereto is required hereunder), any requirements that
Landlord in its reasonable discretion may deem reasonable or desirable,
including but not limited to a requirement that all work be covered by a lien
and completion bond satisfactory to Landlord and requirements as to the manner,
time, and contractor for performance of the work. Tenant shall obtain all
required permits for the work and shall perform the work in compliance with all
applicable laws, regulations and ordinances, all covenants, conditions and
restrictions affecting the Premises, and the Rules and Regulations (hereafter
defined). If any governmental entity requires, as a condition to any proposed
alterations, additions or improvements to the Premises by Tenant, that
improvements be made to the outside areas, and if Landlord consents to such
improvements to the outside areas (which consent shall not be unreasonably
withheld, conditioned or delayed), then Tenant shall, at Tenant's sole expense,
make such required improvements to the outside areas in such manner, utilizing
such materials, and with such contractors (including, if required by Landlord,
Landlord's contractors) as Landlord may require in its reasonable discretion.
Under no circumstances shall Tenant make any improvement which incorporates any
Hazardous Materials, including without limitation asbestos-containing
construction materials into the Premises. Any request for Landlord's consent
shall be made in writing and shall contain architectural plans describing the
work in detail reasonably satisfactory to Landlord (and Landlord shall respond
to Tenant's request for consent within ten (10) business days following
Landlord's receipt of such architectural plans). Unless Landlord otherwise
agrees in writing, all alterations, additions or improvements affixed to the
Premises or the outside areas (excluding moveable trade fixtures and furniture)
shall become the property of Landlord and shall be surrendered with the Premises
at the end of the Term, except that Landlord may, by written notice to Tenant,
require Tenant to remove by the Expiration Date, or sooner termination date of
this Lease, all or any alterations, decorations, fixtures, additions,
improvements and the like installed either by Tenant or by Landlord at Tenant's
request and to repair any damage to the Premises arising from that removal
(which notice may be given by Landlord at any time, except that, if at the time
Tenant requests Landlord's consent to any alterations, decorations, fixtures,
additions or improvements, Tenant specifically requests in writing that Landlord
make such election concurrently with its consent (with specific reference in
Tenant's written request to the requirements of this sentence), then Landlord
shall provide such notice, if at all, concurrently with its consent to the
alterations, decorations, fixtures, additions or improvements in question).
Except as otherwise provided in this Lease or in any Exhibit to this Lease,
should Landlord make any alteration or improvement to the Premises for Tenant,
Landlord shall be entitled to prompt reimbursement from Tenant for all costs
incurred.
Landlord acknowledges that Tenant desires to install (a) antennas and
satellite dishes on the roof of the Building, (b) refrigeration equipment within
the Premises, and (c) supplemental heating, ventilation and air conditioning
equipment upon the roof of the Building. The planning, installation,
construction and removal of such improvements by Tenant shall be subject to and
made in accordance with the terms and conditions of this Lease, including,
without limitation, the terms and conditions of this Section 7.3 above (and, for
purposes of such application, the term "Premises" as used therein shall be
deemed to include the roof of the Building).
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SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from any
liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it deems proper, including payment of or
defense against the claim giving rise to the lien. All expenses so incurred by
Landlord, including Landlord's attorneys' fees, and any consequential or other
damages incurred by Landlord arising out of such lien, shall be reimbursed by
Tenant promptly following Landlord's demand, together with interest from the
date of payment by Landlord at the maximum rate permitted by law until paid.
Tenant shall give Landlord no less than twenty (20) days' prior notice in
writing before commencing construction of any kind on the Premises so that
Landlord may post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times,
upon not less than twenty-four (24) hours written notice to Tenant (which notice
may be given by facsimile) (except in emergencies or any suspected violation by
Tenant of the provisions of Section 5.3 above, in which case no notice shall be
required) have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests of Landlord in
the Premises, and to submit the Premises to prospective or actual ~ purchasers
or encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term, to prospective tenants), all without being deemed to have caused an
eviction of Tenant and without abatement of rent except as provided elsewhere in
this Lease. Landlord shall have the right, if desired, to retain a key (or other
applicable means of providing access) which unlocks all of the doors in the
Premises, excluding Tenant's secured cages, vaults and safes, and Landlord shall
have the right to use any and all means which Landlord may deem proper to open
the doors in an emergency in order to obtain entry to the Premises, and any
entry to the Premises obtained by Landlord shall not under any circumstances be
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or any eviction of Tenant from the Premises. Landlord agrees to use commercially
reasonably efforts to minimize interference with Tenant's business operations
with the Premises during any such entries made by Landlord hereunder. With
respect to any entries by Landlord into any computer or communications rooms
within the Premises, Tenant shall, at its election, be permitted to have a
representative accompany Landlord during any such entries (provided, however,
any such entries by Landlord shall not be delayed due to the unavailability of
such representative at the time of Landlord's desired entry).
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, and against any alterations, additions or like
improvements made to the Premises by or on behalf of Tenant. When possible
Tenant shall cause its personal property and alterations to be assessed and
billed separately from the real property of which the Premises form a part. If
any taxes on Tenant's personal property and/or alterations are levied against
Landlord or Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the inclusion of a value
placed upon the personal property and/or alterations of Tenant and if Landlord
pays the taxes based upon the increased assessment, Tenant shall pay to Landlord
the taxes so levied against Landlord or the proportion of the taxes resulting
from the increase in the assessment. In calculating what portion of any tax bill
which is assessed against Landlord separately, or Landlord and Tenant jointly,
is attributable to Tenant's alterations and personal property, Landlord's
reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the contrary but
subject to Section 9.4 below, Tenant will not, either voluntarily or by
operation of law, assign, sublet, encumber, or otherwise transfer all or any
part of Tenant's interest in this lease, or permit the Premises to be occupied
by anyone other than Tenant, without Landlord's prior written consent, which
consent shall not unreasonably be withheld in accordance with the provisions of
Section 9.l(b). Except as otherwise provided in Section 9.4 below, no assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, any such assignment or subletting or attempted assignment
or subletting shall constitute a material default of this Lease. Landlord shall
not be deemed to have given its consent to any assignment or subletting by any
other course of action, including its acceptance of any name for listing in the
Building directory. To the extent not prohibited by provisions of the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section
365(f)(1), Tenant on behalf of itself and its creditors, administrators and
assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless
the proposed assignee of the Trustee for the estate of the bankrupt meets
Landlord's standard for consent as set forth in Section 9.1(b) of this Lease. If
this Lease is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, any and all monies or other considerations to be delivered in
connection with the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed to have assumed all of the obligations
arising under this Lease on and after the date of the assignment, and shall upon
demand execute and deliver to Landlord an instrument confirming that assumption.
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(b) If Tenant desires to transfer an interest in this Lease, it shall
first notify Landlord of its desire and shall submit in writing to Landlord: (i)
the name and address of the proposed transferee; (ii) the nature of any proposed
subtenant's or assignee's business to be carried on in the Premises; (iii) the
terms and provisions of any proposed sublease or assignment, including a copy of
the proposed assignment or sublease form; (iv) evidence of insurance of the
proposed assignee or subtenant complying with the requirements of Exhibit D
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hereto; (v) a completed Environmental Questionnaire from the proposed assignee
or subtenant; and (vi) any other information reasonably and timely requested by
Landlord and reasonably related to the transfer. Except as provided in
Subsection (e) of this Section, Landlord shall not unreasonably withhold its
consent with respect to any transfer for which its consent is required
hereunder, provided: (1) the use of the Premises will be consistent with the
provisions of this Lease; (2) the proposed assignee or subtenant has not been
required by any prior landlord, lender or governmental authority to take
remedial action in connection with Hazardous Materials contaminating a property
arising out of the proposed assignee's or subtenant's actions or use of the
property in question and is not subject to any enforcement order issued by any
governmental authority in connection with the use, disposal or storage of a
Hazardous Material; (3) at Landlord's election, insurance requirements shall be
brought into conformity with Landlord's then current leasing practice; (4) any
proposed subtenant or assignee demonstrates that it is financially responsible
by submission to Landlord of all reasonable information as Landlord may request
concerning the proposed subtenant or assignee, including, but not limited to, a
balance sheet of the proposed subtenant or assignee as of a date within ninety
(90) days of the request for Landlord's consent and statements of income or
profit and loss of the proposed subtenant or assignee for the two-year period
preceding the request for Landlord's consent, and/or a certification signed by
the proposed subtenant or assignee that it has not been evicted or been in
arrears in rent at any other leased premises for the 3-year period preceding the
request for Landlord's consent; (5) any proposed subtenant or assignee
demonstrates to Landlord's reasonable satisfaction a record of successful
experience in business; and (6) the proposed transfer will not impose additional
burdens or adverse tax effects on Landlord, If Tenant has any exterior sign
rights under this Lease, such rights are personal to Tenant and may not be
assigned or transferred to any assignee of this Lease or subtenant of the
Premises without Landlord's prior written consent (except in connection with an
assignment or subletting permitted to be made without Landlord's consent
pursuant to Section 9.4 below), which may be withheld in Landlord's sole and
absolute discretion.
If Landlord consents to the proposed transfer, Tenant may within
ninety (90) days after the date of the consent effect the transfer upon the
terms described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set forth
in this Section. Landlord shall approve or disapprove any requested transfer
within fifteen (15) business days following receipt of Tenant's written request,
the information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, other than
with respect to a subletting for less than fifty percent (50%) of the Premises,
in lieu of consenting to a proposed assignment or subletting, Landlord may elect
to (i) sublease the Premises (or the portion proposed to be subleased), or take
an assignment of Tenant's interest in this Lease, upon the same terms as offered
to the proposed subtenant or assignee (excluding terms relating to the purchase
of personal property, the use of Tenant's name or the continuation of Tenant's
business), or (ii) terminate this Lease as to the portion of the Premises
proposed to be subleased or assigned with a proportionate abatement in the rent
payable under this Lease, effective on the date that the proposed sublease or
assignment would have become effective. Landlord may thereafter, at its option,
assign or re-let any space so recaptured to any third party, including without
limitation the proposed transferee of Tenant. The provisions of this Subsection
(c) shall not apply to any assignment of this Lease or subletting of the
Premises permitted to be made without Landlord's consent pursuant to Section 9.4
below.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by the
assignee or subtenant, however described, in excess of (i) the Basic Rent
payable by Tenant hereunder, or in the case of a sublease of a portion of the
Premises, in excess of the Basic Rent reasonably allocable to such portion, plus
(ii) Tenant's direct out-of-pocket costs which Tenant certifies to Landlord have
been paid to provide occupancy related services to such assignee or subtenant of
a nature commonly provided by landlords of similar space, shall be the property
of Landlord and such amounts shall be payable directly to Landlord by the
assignee or subtenant or, at Landlord's option, by Tenant. At Landlord's
request, a written agreement shall be entered into by and among Tenant, Landlord
and the proposed assignee or subtenant confirming the requirements of this
subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant, other than
with respect to any assignment of this Lease or subletting of the Premises
permitted to be made without Landlord's consent pursuant to Section 9.4 below.
Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord for
its costs of review and evaluation of a proposed assignee/sublessee, and
Landlord shall not be obligated to commence such review and evaluation unless
and until such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. Except as otherwise provided in Section
9.1(c) above, no subletting or assignment, even with the consent of Landlord,
shall relieve Tenant of its obligation to pay rent and to perform all its other
obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord
harmless, as provided in Section 10.3, for any act or omission by an assignee or
subtenant. Each assignee, other than Landlord, shall be deemed to assume all
obligations of Tenant under this Lease and shall be liable jointly and severally
with Tenant for the payment of all rent, and for the due performance of all of
Tenant's obligations, under this Lease. No transfer shall be binding on Landlord
unless any document memorializing the transfer is delivered to Landlord and,
other than with respect to any assignment of this Lease or subletting of the
Premises permitted to be made without Landlord's consent pursuant to Section 9.4
below, both the assignee/subtenant and Tenant deliver to Landlord an executed
consent to transfer instrument prepared by Landlord and consistent with the
requirements of this Article.
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The acceptance by Landlord of any payment due under this Lease from any other
person shall not be deemed to be a waiver by Landlord of any provision of this
Lease or to be a consent to any transfer. Consent by Landlord to one or more
transfers shall not operate as a waiver or estoppel to the future enforcement by
Landlord of its rights under this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than with
respect to the payment of rent hereunder) is incorporated by reference into and
made a part of such sublease, with "Landlord" hereunder meaning the sublandlord
therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by reason
of this assignment or the collection of sublease rentals, be deemed liable to
the subtenant for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon
receipt of a written notice from Landlord stating that an uncured default exists
in the performance of Tenant's obligations under this Lease, to pay to Landlord
all sums then and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord.
(c) In the event of the termination of this Lease, Landlord may, at
its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits.
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease, including without limitation
those pertaining to insurance and indemnification, shall be deemed incorporated
by reference into the sublease despite the termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially all of
Tenant's assets (other than bulk sales in the ordinary course of business) or,
if Tenant is a corporation, an unincorporated association, or a partnership, the
transfer, assignment or hypothecation of any stock or interest in such
corporation, association, or partnership in the aggregate of twenty-five percent
(25%) (except for publicly traded shares of stock constituting a transfer of
twenty-five percent (25%) or more in the aggregate) shall be deemed an
assignment within the meaning and provisions of this Article. Notwithstanding
the foregoing, Landlord's consent shall not be required for any of the following
transfers (each of which shall be a "Permitted Transfer"): (a) an assignment of
this Lease to any entity which controls, is controlled by or is under common
control with Tenant, (b) an assignment of this Lease to any successor entity
resulting from the merger or consolidation with Tenant, or (c) an assignment of
this Lease to any entity which acquires all or substantially all of the assets
or stock of Tenant, so long as, in each instance, (i) with respect to a
Permitted Transfer described in subsections (b) and/or (c) above, the net worth
of the assignee immediately following such assignment is at least equal to the
lesser of (A) the greater of the net worth of Tenant as of the execution of this
Lease by Landlord or the net worth of Tenant immediately prior to the date of
such assignment, or (B) One Hundred Million Dollars ($100,000,000), evidence of
which, reasonably satisfactory to Landlord, shall be presented to Landlord prior
to such assignment, (ii) Tenant shall provide to Landlord, prior to such
assignment, written notice of such assignment and such assignment documentation
and other information as Landlord may reasonably request in connection
therewith, and (iii) except as otherwise specifically provided in this Article,
all of the other terms and requirements of this Article shall apply with respect
to such assignment. In addition, Landlord's consent shall not be required for
the sublease of all or any portion of the Premises to any entity which controls,
is controlled by or is under common control with Tenant so long as (i) Tenant
shall provide to Landlord, prior to such sublease, written notice of such
sublease and such sublease documentation and other information as Landlord may
reasonably request in connection therewith, and (ii) except as otherwise
specifically provided in this Article, all of the other terms and requirements
of this Article shall apply with respect to such sublease. For purposes of this
Section 9.4, the term "control" means possession, directly or indirectly, of the
power to direct or cause the direction of the management, affairs and policies
of the entity in question, whether through the ownership of voting securities,
by contract or otherwise.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in Exhibit D.
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Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide
any or all of the following types of insurance, with or without deductible and
in amounts and coverages as may be determined by Landlord in its discretion
(provided, however, if deductibles are included with such insurance, the amount
of such deductibles shall be reasonable and comparable to those being carried
with respect to comparable projects in the area): "all risk" property insurance,
subject to standard exclusions, covering the Building, and such other risks as
Landlord or its mortgagees may from time to time deem appropriate, including
leasehold improvements made by
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Landlord, and commercial general liability coverage. Landlord shall not be
required to carry insurance of any kind on Tenant's property, including
leasehold improvements, trade fixtures, furnishings, equipment, plate glass,
signs and all other items of personal property, and shall not be obligated to
repair or replace that property should damage occur. All proceeds of insurance
maintained by Landlord upon the Building shall be the property of Landlord,
whether or not Landlord is obligated to or elects to make any repairs. At
Landlord's option, Landlord may self-insure all or any portion of the risks for
which Landlord elects to provide insurance hereunder.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by law
and except for claims, liabilities, costs and expenses arising from the sole
active negligence or willful misconduct of Landlord, its employees or authorized
agents, Tenant shall defend, indemnify, protect, save and hold harmless
Landlord, its agents, and any and all affiliates of Landlord, including, without
limitation, any corporations or other entities controlling, controlled by or
under common control with Landlord, from and against any and all claims,
liabilities, costs or expenses arising either before or after the Commencement
Date from Tenant's use or occupancy of the Premises or the Building, or from the
conduct of its business, or from any activity, work, or thing done, permitted or
suffered by Tenant or its agents, employees, invitees or licensees in or about
the Premises or the Building, or from any default in the performance of any
obligation on Tenant's part to be performed under this Lease, or from any act or
negligence of Tenant or its agents, employees, visitors, patrons, guests,
invitees or licensees (including without limitation any act or omission which
gives rise to Landlord's obligation to indemnify Ground Lessor and certain other
parties under the Ground Lease described in Section 6.2(b)). Landlord may, at
its option, require Tenant to assume Landlord's defense in any action covered by
this Section through counsel satisfactory to Landlord. The provisions of this
Section shall expressly survive the expiration or sooner termination of this
Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable to
Tenant, its employees, agents and invitees, and Tenant hereby waives all claims
against Landlord for loss of or damage to any property, or any injury to any
person, or loss or interruption of business or income, or any other loss, cost,
damage, injury or liability whatsoever (including without limitation any
consequential damages and lost profit or opportunity costs) resulting from, but
not limited to, Acts of God, acts of civil disobedience or insurrection, fire,
explosion, falling plaster, steam, gas, electricity, water or rain which may
leak or flow from or into any part of the Building or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building. it is understood that any such condition may require the temporary
evacuation or closure of all or a portion of the Building. Except as provided in
Sections 11.1 and 12.1 below, there shall be no abatement of rent and no
liability of Landlord by reason of any injury to or interference with Tenant's
business (including without limitation consequential damages and lost profit or
opportunity costs) arising from the making of any repairs, alterations or
improvements to any portion of the Building, including repairs to the Premises,
nor shall any related activity by Landlord constitute an actual or constructive
eviction; provided, however, that in making repairs, alterations or
improvements, Landlord shall interfere as little as reasonably practicable with
the conduct of Tenant's business in the Premises. Neither Landlord nor its
agents shall be liable for interference with light or other similar intangible
interests. Tenant shall immediately notify Landlord in case of fire or accident
in the Premises or the Building and of defects in any improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives
all rights of recovery against the other and the other's agents on account of
loss and damage occasioned to the property of such waiving party to the extent
only that such loss or damage is required to be insured against under any "all
risk" property insurance policies required by this Article X; provided however,
that (i) the foregoing waiver shall not apply to the extent of Tenant's
obligations to pay deductibles under any such policies and this Lease, and (ii)
if any loss is due to the act, omission or negligence or willful misconduct of
Tenant or its agents, employees, contractors, guests or invitees, Tenant's
liability insurance shall be primary and shall cover all losses and damages
prior to any other insurance hereunder. By this waiver it is the intent of the
parties that neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage insured against under any "all-risk" property insurance policies
required by this Article, even though such loss or damage might be occasioned by
the negligence of such party, its agents, employees, contractors, guests or
invitees. The provisions of this Section shall not limit the indemnification
provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall repair that damage as
soon as reasonably possible, at its expense, unless: (i) Landlord reasonably
determines that the cost of repair is not covered by Landlord's fire and
extended coverage insurance plus such additional amounts Tenant elects, at its
option, to contribute, excluding however the deductible (for which Tenant shall
be responsible for Tenant's proportionate share); (ii) Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be fully
repaired by Landlord (or cannot be safely repaired because of the presence of
hazardous factors, including without limitation Hazardous Materials, earthquake
faults, and other similar dangers) within two hundred seventy (270) days after
the date of the damage; (iii) an event of default by Tenant has occurred and is
continuing at the time of such damage; or (iv) the damage occurs during the
final twelve (12) months of the Term. Should Landlord elect not to repair the
damage for one of the preceding reasons, Landlord shall so notify Tenant in
writing within sixty (60) days after the damage occurs and this Lease shall
terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in accordance with
subsection (a) above, this Lease shall continue in effect for the remainder of
the Term; provided that so long as Tenant is not in default
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under this Lease, if the damage is so extensive that Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be repaired by
Landlord (or cannot be safely repaired because of the presence of hazardous
factors, earthquake faults, and other similar dangers) so as to allow Tenant's
substantial use and enjoyment of the Premises within two hundred seventy (270)
days after the date of damage, then Tenant may elect to terminate this Lease by
written notice to Landlord within the sixty (60) day period stated in subsection
(a).
(c) Commencing on the date of any damage to the Building, and ending
on the sooner of the date the damage is repaired or the date this Lease is
terminated, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Building that is rendered unusable (as
reasonably determined by Tenant) by the damage from time to time bears to the
total floor area of the Building, but only to the extent that any business
interruption insurance proceeds are received by Landlord therefor from Tenant's
insurance described in Exhibit D.
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(d) Notwithstanding the provisions of subsections (a), (b) and (c) of
this Section, and subject to the provisions of Section 10.5 above, the cost of
any repairs shall be borne by Tenant, and Tenant shall not be entitled to rental
abatement or termination rights, if the damage is due to the fault or neglect of
Tenant or its employees, subtenants, invitees or representatives. In addition,
the provisions of this Section shall not be deemed to require Landlord to repair
any improvements or fixtures that Tenant is obligated to repair or insure
pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing Tenant's
personal property and any debris from the Premises to facilitate all inspections
of the Premises and the making of any repairs. Notwithstanding anything to the
contrary contained in this Lease, if Landlord in good faith believes there is a
risk of injury to persons or damage to property from entry into the Building or
Premises following any damage or destruction thereto, Landlord may restrict
entry into the Building or the Premises by Tenant, its employees, agents and
contractors in a non-discriminatory manner, without being deemed to have
violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of,
or evicted Tenant from, the Premises. Upon request, Landlord shall consult with
Tenant to determine if there are safe methods of entry into the Building or the
Premises solely in order to allow Tenant to retrieve files, data in computers,
and necessary inventory, subject however to all indemnities and waivers of
liability from Tenant to Landlord contained in this Lease and any additional
indemnities and waivers of liability which Landlord may require.
SECTION 11.2. LEASE GOVERNS. The parties agree that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the
Premises (i.e., such portion of the Premises, as reasonably determined by
Tenant, without which Tenant cannot reasonably operate its business within the
Premises) is taken by any lawful authority by exercise of the right of eminent
domain, or sold to prevent a taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
the authority. In the event title to a portion of the Premises is taken or sold
in lieu of taking, and if Landlord elects to restore the Premises in such a way
as to alter the Premises materially, either party may terminate this Lease, by
written notice to the other party, effective on the date of vesting of title. In
the event neither party has elected to terminate this Lease as provided above,
then Landlord shall promptly, after receipt of a sufficient condemnation award,
proceed to restore the Premises to substantially their condition prior to the
taking, and a proportionate allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of the taking and restoration. In the event
of a taking, Landlord shall be entitled to the entire amount of the condemnation
award without deduction for any estate or interest of Tenant; provided that
nothing in this Section shall be deemed to give Landlord any interest in, or
prevent Tenant from seeking any award against the taking authority for, the
taking of personal property and fixtures belonging to Tenant or for relocation
or business interruption expenses or for loss of goodwill recoverable from the
taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed one hundred
eighty (180) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event that (i) there is a
taking of (a) more than twenty percent (20%) of the vehicle parking spaces
located on the Site as of the Commencement Date, or (b)more than ten percent
(10%) percent of the area designated on Exhibit A-2 attached hereto as the
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"Fenced Area", and (ii) Landlord is unable to substitute reasonably equivalent
parking in a location reasonably close to the Building within thirty (30) days
following the taking, then Tenant may, at its option, terminate this Lease by
written notice to Landlord within fifteen (15) days following the expiration of
such thirty (30) day period. if this Lease is not so terminated by Tenant, there
shall be no abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease shall be
either superior or subordinate to all ground or underlying leases, mortgages and
deeds of trust, if any, which may hereafter affect the
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Premises, and to all renewals, modifications, consolidations, replacements and
extensions thereof; provided, that so long as Tenant is not in default under
this Lease beyond any applicable cure period, this Lease shall not be terminated
or Tenant's quiet enjoyment of the Premises disturbed in the event of
termination of any such ground or underlying lease, or the foreclosure of any
such mortgage or deed of trust, to which Tenant has subordinated this Lease
pursuant to this Section. In the event of a termination or foreclosure, Tenant
shall become a tenant of and attorn to the successor-in-interest to Landlord
upon the same terms and conditions as are contained in this Lease, and shall
execute any instrument reasonably required by Landlord's successor for that
purpose. Tenant shall also, upon written request of Landlord, execute and
deliver all instruments as may be required from time to time to subordinate the
rights of Tenant under this Lease to any ground or underlying lease or to the
lien of any mortgage or deed of trust (provided that such instruments include
the nondisturbance and attornment provisions set forth above), or, if requested
by Landlord,, to subordinate, in whole or in part, any ground or underlying
lease or the lien of any mortgage or deed of trust to this Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10) days prior
written notice from Landlord, execute, acknowledge and deliver to Landlord, in
any form that Landlord may reasonably require, a statement in writing (i)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of the modification and certifying that this Lease,
as modified, is in full force and effect) and the dates to which the rental,
additional rent and other charges have been paid in advance, if any, and (ii)
acknowledging that, to Tenant's knowledge, there are no uncured defaults on the
part of Landlord, or specifying each default if any are claimed, and (iii)
setting forth all further information that Landlord may reasonably require.
Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than one month's
rental has been paid in advance.
SECTION 13.3. FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of this
Lease and thereafter at any time upon Landlord's request, Tenant's current
financial statements, certified true, accurate and complete by an officer of
Tenant, including a balance sheet and profit and loss statement for the most
recent prior year (collectively, the "Statements"), which Statements shall
accurately and completely reflect the financial condition of Tenant. Landlord
agrees that it will keep the Statements confidential, except that Landlord shall
have the right to deliver the same to any proposed purchaser or encumbrancer of
the Premises; provided, however, any such disclosure shall be strictly limited
to bona fide prospective purchasers and encumbrancers (and their respective
accountants, attorneys and financial advisers) and then shall only be permitted
to the extent that such bona fide prospective purchasers and encumbrancers (and
their respective accountants, attorneys and financial advisers to whom such
disclosures will be made) shall agree to preserve the confidentiality of the
substance and contents the Statements in question.
(b) Tenant acknowledges that Landlord is relying on the Statements in
its determination to enter into this Lease, and Tenant represents to Landlord,
which representation shall be deemed made on the date of this Lease and again on
the Commencement Date, that no material change in the financial condition of
Tenant, as reflected in the Statements, has occurred since the date Tenant
delivered the Statements to Landlord, other than such changes as Tenant may
disclose to Landlord in writing prior to Landlord's execution of this Lease. The
Statements are represented and warranted by Tenant to be correct and to
accurately and fully reflect Tenant's true financial condition as of the date of
submission by any Statements to Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default
set forth in this Lease, the occurrence of any one or more of the following
events shall constitute a default by Tenant (and, for purposes of this Lease,
the term "default", as used in each context relating to Tenant, shall mean):
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of three (3) business days after written notice from Landlord to
Tenant; provided, however, that any such notice shall be in lieu of, and not in
addition to, any notice required under California Code of Civil Procedure
Section 1161 and 1161(a) as amended. For purposes of these default and remedies
provisions, the term "additional rent" shall be deemed to include all amounts of
any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the
terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the Lease
by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy. or other means, without the prior
written consent of Landlord (other than an assignment of this Lease or a
subletting of the Premises permitted to be made without Landlord's consent
pursuant to Section 9.4 above).
(c) The discovery by Landlord that any financial statement provided by
Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
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(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or perform any of
the express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature
of the failure is such that more than thirty (30) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences the cure within thirty (30) days, and thereafter diligently pursues
the cure to completion.
(f) (i) The making by Tenant of any general assignment for the benefit
of creditors; (ii) the filing by or against Tenant of a petition to have Tenant
adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within thirty (30) days; or (v) Tenant's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Landlord shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Landlord, nor
shall there be any presumption attributable to Landlord of Tenant's insolvency.
In the event that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. Such
termination shall not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the Premises and
remove all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which the
unpaid rent and additional rent which would have been earned after termination
until the time of award exceeds the amount of such loss that Tenant proves could
have been reasonably avoided;
(3) The worth at the time of award of the amount by which the
unpaid rent and additional rent for the balance of the Term after the time of
award exceeds the amount of such loss that Tenant proves could be reasonably
avoided;
(4) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result from Tenant's default, including, but not limited to, the cost of
recovering possession of the Premises, refurbishment of the Premises, marketing
costs, commissions and other expenses of reletting, including necessary repair,
the unamortized portion of any tenant improvements and brokerage commissions
funded by Landlord in connection with this Lease, reasonable attorneys' fees,
and any other reasonable costs; and
(5) At Landlord's election, all other amounts in addition to
or in lieu of the foregoing as may be permitted by law. The term "rent" as used
in this Lease shall be deemed to mean the Basic Rent and all other sums required
to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum,
other than Basic Rent, shall be computed on the basis of the average monthly
amount accruing during the twenty-four (24) month period immediately prior to
default, except that if it becomes necessary to compute such rental before the
twenty-four (24) month period has occurred, then the computation shall be on the
basis of the average monthly amount during the shorter period. As used in
subparagraphs (1) and (2) above, the "worth at the time of award" shall be
computed by allowing interest at the rate of ten percent (10%) per annum. As
used in subparagraph (3) above, the "worth at the time of award" shall be
computed by discounting the amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce all
of its rights and remedies under this Lease, including the right to collect all
rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet
the Premises, or the appointment of a receiver to protect the Landlord's
interests under this Lease, shall not constitute a termination of the Tenant's
right to possession of the Premises. In the event that Landlord elects to avail
itself of the remedy
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provided by this subsection (ii), Landlord shall not unreasonably withhold its
consent to an assignment or subletting of the Premises subject to the reasonable
standards for Landlord's consent as are contained in this Lease.
(b) Landlord shall be under no obligation to observe or perform any
covenant of this Lease on its part to be observed or performed which accrues
after the date of any default by Tenant unless and until the default is cured by
Tenant, it being understood and agreed that the performance by Landlord of its
obligations under this Lease are expressly conditioned upon Tenant's full and
timely performance of its obligations under this Lease. The various rights and
remedies reserved to Landlord in this Lease or otherwise shall be cumulative
and, except as otherwise provided by California law, Landlord may pursue any or
all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of the right or remedy or of any default by
Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment without prejudice to
Landlord's right to recover the balance of the rent or pursue any other remedy
available to it. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease, and
the delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within five (5) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any default by Tenant under this Lease. In addition,
Tenant acknowledges that the late payment by Tenant to Landlord of rent will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult and impracticable to ascertain. Those costs
may include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Landlord by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Tenant shall not be received by Landlord or Landlord's designee
within five (5) days after the date due, then Tenant shall pay to Landlord, in
addition to the interest provided above, a late charge in a sum equal to the
greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars
($250.00) for each delinquent payment. Acceptance of a late charge by Landlord
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor shall it prevent Landlord from exercising any of its other rights
and remedies.
(b) Following each second consecutive installment of rent that is not
paid within five (5) days following notice of nonpayment from Landlord, Landlord
shall have the option to require that beginning with the first payment of rent
next due, rent shall no longer be paid in monthly installments but shall be
payable quarterly three (3) months in advance (provided, however, if Tenant
thereafter pays three (3) consecutive quarterly payments in a timely manner, the
payment of rent hereunder shall thereupon revert to monthly installments).
Should Tenant deliver to Landlord, at any time during the Term, two (2) or more
insufficient checks, the Landlord may require that all monies then and
thereafter due from Tenant be paid to Landlord by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to
be performed by Tenant under this Lease shall be performed at Tenant's sole cost
and expense and without any abatement of rent or right of set-off. If Tenant
fails to pay any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure continues
beyond any applicable grace period set forth in Section 14.1, then, upon notice
to Tenant and in addition to any other available remedies, Landlord may, at its
election make the payment or perform the other act on Tenant's part. Landlord's
election to make the payment or perform the act on Tenant's part shall not give
rise to any responsibility of Landlord to continue making the same or similar
payments or performing the same or similar acts. Tenant shall, promptly upon
demand by Landlord, reimburse Landlord for all sums paid by Landlord and all
necessary incidental costs, together with interest at the maximum rate permitted
by law from the date of the payment by Landlord. Landlord shall have the same
rights and remedies if Tenant fails to pay those amounts as Landlord would have
in the event of a default by Tenant in the payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease or
holding over of possession by Tenant after the
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expiration or earlier termination of this Lease, including without limitation
all costs, expenses and actual accountants, appraisers, attorneys and other
professional fees, and any collection agency or other collection charges, shall
be due and payable by Tenant to Landlord on demand, and shall bear interest at
the rate of ten percent (10%) per annum. Should either Landlord or Tenant bring
any action in connection with this Lease, the prevailing party shall be entitled
to recover as a part of the action its reasonable attorneys' fees, and all other
costs. The prevailing party for the purpose of this paragraph shall be
determined by the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord do not
constitute the personal obligations of the individual partners, trustees,
directors, officers or shareholders of Landlord or its constituent partners.
Should Tenant recover a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Building and out of the rent or other income from such property receivable
by Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Building (including from any Taking, in whole or in part, of the Site) or from
any insurance policies maintained by Landlord with respect to the Site, and no
action for any deficiency may be sought or obtained by Tenant.
SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim, demand or
right of any kind by Tenant which is based upon or arises in connection with
this Lease shall be barred unless Tenant commences an action thereon within
twelve (12) months after the date that the act, omission, event or default upon
which the claim, demand or right arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be the greater of (a) two
hundred percent (200%) of the Basic Rent for the month immediately preceding the
date of termination or (b) the then currently scheduled Basic Rent for
comparable space in the Building. If Tenant fails to surrender the Premises upon
the expiration of this Lease despite demand to do so by Landlord, Tenant shall
indemnify and hold Landlord harmless from all loss or liability, including
without limitation, any claims made by any succeeding tenant relating to such
failure to surrender. Acceptance by Landlord of rent after the termination shall
not constitute a consent to a holdover or result in a renewal of this Lease. The
foregoing provisions of this Section are in addition to and do not affect
Landlord's right of re-entry or any other rights of Landlord under this Lease or
at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
Tenant, reasonable wear and tear and repairs which are Landlord's obligation
excepted, and shall, without expense to Landlord, remove or cause to be removed
from the Premises all personal property and debris, except for any items that
Landlord may by written authorization allow to remain, and all alterations,
additions and improvements which Landlord, by written notice pursuant to Section
7.3 above, requires Tenant to remove. Tenant shall repair all damage to the
Premises resulting from the removal, which repair shall include the patching and
filling of holes and repair of structural damage, provided that Landlord may
instead elect to repair any structural damage at Tenant's expense. If Tenant
shall fail to comply with the provisions of this Section, Landlord may effect
the removal and/or make any repairs, and the cost to Landlord shall be
additional rent payable by Tenant upon demand. If Tenant fails to remove
Tenant's personal property from the Premises upon the expiration of the Term,
Landlord may remove, store, dispose of and/or retain such personal property, at
Landlord's option, in accordance with then applicable laws, all at the expense
of Tenant. If requested by Landlord, Tenant shall execute, acknowledge and
deliver to Landlord an instrument in writing releasing and quitclaiming to
Landlord all right, title and interest of Tenant in the Premises.
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ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either patty to the other may be delivered in person or by courier
or overnight delivery service to the other party, or may be deposited in the
United States mail, duly registered or certified, postage prepaid, return
receipt requested, and addressed to the other party at the address set forth in
Item 12 of the Basic Lease Provisions (and notices to the Premises may be made
whether or not Tenant has departed from, abandoned or vacated the Premises), or
may be delivered by telegram, telex or telecopy, provided that receipt thereof
is telephonically confirmed. Either party may, by written notice to the other,
served in the manner provided in this Article, designate a different address. If
any notice or other document is sent by mail, it shall be deemed served or
delivered twenty-four (24) hours after mailing. If more than one person or
entity is named as Tenant under this Lease, service of any notice upon any one
of them shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory
---------
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the Premises. Landlord shall not be liable to Tenant
for any violation of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's agents, employees,
contractors, quests or invitees. One or more waivers by Landlord of any breach
of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a
waiver of any subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a default under this
Lease. In the case of any conflict between the Rules and Regulations and this
Lease, this Lease shall be controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by Tenant in connection with
the negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease. If this Lease terminates prior to the Expiration Date
as the result of any default by Tenant, Landlord shall be entitled to recover
from Tenant the unamortized portion of any brokerage commission funded by
Landlord in addition to any other damages to which Landlord may be entitled.
Landlord warrants that it has had no dealings with any other real estate broker
or agent in connection with the negotiation of this Lease, and Landlord agrees
to indemnify and hold Tenant harmless from any cost, expense or liability
(including reasonable attorneys' fees) for any compensation, commissions or
charges claimed by any other real estate broker or agent employed or claiming to
represent or to have been employed by Landlord in connection with the
negotiation of this Lease. The foregoing agreement shall survive the termination
of this Lease.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's fee interest in the Premises,
the transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and provided
the transferee assumes in writing all of the transferor's obligations under this
Lease accruing from and after the date of the transfer and Tenant is notified of
the transfer as required by law. No holder of a mortgage and/or deed of trust to
which this Lease is or may be subordinate, and no landlord under a so-called
sale-leaseback, shall be responsible in connection with the Security Deposit,
unless the mortgagee or holder of the deed of trust or the landlord actually
receives the Security Deposit. It is intended that the covenants and obligations
contained in this Lease on the part of Landlord shall, subject to the foregoing,
be binding on Landlord, its successors and assigns, only during and in respect
to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or
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refund to, or the signature of, any one or more of them shall be binding on all
of them with respect to the tenancy of this Lease, including, but not limited
to, any renewal, extension, termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in a writing signed by Landlord.
The rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall be
delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises and the Building, and all preliminary
negotiations, oral agreements, understandings and/or practices, except those
contained in this Lease, are superseded and of no further effect. Tenant waives
its rights to rely on any representations or promises made by Landlord or others
which are not contained in this Lease. No verbal agreement or implied covenant
shall be held to modify the provisions of this Lease, any statute, law, or
custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. Each individual
executing this Lease on behalf of the corporation or partnership represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of the corporation or partnership, and that this Lease is binding upon
the corporation or partnership in accordance with its terms. Each party, upon
the request of the other party, shall deliver a certified copy of its board of
directors resolution or partnership agreement or certificate authorizing or
evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
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SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No actions, policies,
oral or informal arrangements, business dealings or other course of conduct by
or between the parties shall be deemed to modify this Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. [Intentionally deleted].
SECTION 22.2. [Intentionally deleted].
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining
financing for the Building, the lender shall request reasonable modifications in
this Lease as a condition to the financing, Tenant will not unreasonably
withhold or delay its consent, provided that the modifications do not materially
increase the obligations of Tenant or materially and adversely affect the
leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of
Landlord which would otherwise entitle Tenant to be relieved of its obligations
hereunder or to terminate this Lease shall result in such a release or
termination unless (a) Tenant has given notice by registered or certified mail
to any beneficiary of a deed of trust or mortgage covering the Premises whose
address has been furnished to Tenant and (b) such beneficiary is afforded a
reasonable opportunity to cure the default by Landlord (which in no event shall
be less than sixty (60) days). including, if necessary to effect the cure, time
to obtain possession of the Premises by power of sale or judicial foreclosure
provided that such foreclosure remedy is diligently pursued. Tenant agrees that
each beneficiary of a deed of trust or mortgage covering the Premises is an
express third party beneficiary hereof, Tenant shall have no right or claim for
the collection of any deposit from such beneficiary or from any purchaser at a
foreclosure sale unless such beneficiary or purchaser shall have actually
received and not refunded the deposit, and Tenant shall comply with any written
directions by any beneficiary to pay rent due hereunder directly to such
beneficiary without determining whether an event of default exists under such
beneficiary's deed of trust, and Landlord hereby consents to any such compliance
made in good faith by Tenant.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this Lease
shall be construed to be conditions as well as covenants as though the words
specifically expressing or imparting covenants and conditions were used in each
separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises. Tenant assumes all responsibility for
the protection of Tenant, its agents, invitees and property from acts of third
parties. Nothing herein contained shall prevent Landlord, at its sole option,
from providing security protection for the Premises or any part thereof, in
which event the reasonable cost thereof shall be included within the definition
of Building Costs.
SECTION 22.7. CONDITION TO LEASE. Tenant acknowledges that the Premises are
presently being leased to Silicon Graphics, Inc. ("SGI") pursuant to a certain
lease agreement dated June 30, 1995 (as amended, the "Existing SGI Lease"). This
Lease is expressly conditioned on the full execution of a lease termination
agreement on or before January 31, 2000, by and between Landlord and SGI, in a
form acceptable to Landlord in its sole discretion, pursuant to which Landlord
and SGI agree to an early termination of the Existing SGI Lease ("Condition to
Lease"). Landlord makes no representation or warranty to Tenant of any kind that
the Condition to Lease will be satisfied-on or before January 31, 2000 or any
other date. If for any reason the Condition to Lease is not satisfied on or
before January 31, 2000, this Lease shall automatically become null and void,
and shall be of no further force or effect. Tenant acknowledges and agrees that
Landlord shall have no obligation whatsoever to satisfy the Condition to Lease.
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LANDLORD: TENANT:
THE IRVINE COMPANY HOMEGROCER.COM, INC.,
a Delaware corporation
By /s/ Richard G. Sim By /s/ Terry Drayton
------------------------------------ --------------------------------
Richard G. Sim, Executive Vice Name: Terry Drayton
President of The Irvine Company Title: President
By /s/ Robert E. Williams, Jr. By /s/ Kristin H. Stred
------------------------------------ --------------------------------
Robert E. Williams, Jr., President Name: Kristin H. Stred
Irvine Industrial Company, Title: Corporate Secretary
A division of The Irvine Company
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EXHIBIT 10.36
LEASE AGREEMENT
ARTICLE ONE: BASIC TERMS.
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. Date of Lease: _____________, 2000
Section 1.02. Landlord (include legal entity): Mercy Capital Center Joint
Venture, a California general partnership
Address of Landlord: 4300 Paces Ferry Road, Suite 100, Atlanta,
Georgia 30339
Section 1.03. Tenant (include legal entity): HomeGrocer.com, Inc., a
Delaware corporation
Address of Tenant: 10230 N.E. Points Drive
Kirkland, WA 98033
ATTN: Vice President Operations
10230 N.E. Points Drive
Kirkland, WA 98033
ATTN: Legal Department
Section 1.04. Property (include street address, approximate square footage
and description): The Property is part of a multi-tenant real property
development in Gwinnett County, Georgia known as Newpoint, Buildings 1, 2A, 2B
and 3 and described or depicted on the attached Exhibit "A" (the "Project"). The
Project includes the land, the buildings and all other and future improvements
located on the land, and the common areas described in Paragraph 4.05(a). The
Property Is approximately 115,816 square feet of total gross area outlined in
red on the attached Exhibit "B" and being situated within Building 1, 4005
Newpoint Place, Lawrenceville, Georgia 30043, said Building containing 414,160
gross net rentable square feet.
Section 1.05. Lease Term: Approximately ten (10) years beginning on March
1, 2000 (the "Commencement Date"), and ending on the last day of the month in
which the date that is the ten (10) year anniversary of the Commencement Date
shall occur (the "Expiration Date").
Section 1.06. Permitted Uses (See Article Five): general office/warehouse,
shipping, receiving, distribution, and light manufacturing.
Section 1.07. Tenant's Guarantors (if none, so state): None
<PAGE>
Section 1.08. Brokers (See Article fourteen) (if none, so state):
Tenant's Broker: None
Landlord's Broker: None
Section 1.09. Commission Payable to Landlord's Broker (See Article
Fourteen): None
Section 1.10. Initial Security Deposit (See Section 3.02): $70,000.00
Section 1.11. Vehicle Parking Spaces Allocated to Tenant (See Section 4.05
and Rider): 192 employee spaces; 88 truck spaces, inclusive of Building loading
areas, all as shown as the parking plan attached as Exhibit "C" (the "Parking
Plan")
Section 1.12. Rent and Other Charges Payable by Tenant:
(a) BASE RENT: The Base Rent per annum for each Rental Lease Year and
per month shall be as follows:
Annual Monthly
------ -------
Years 1 -5 $375,243.84 $31,270.32
Years 6-10 $420,412.08 $35,034.34
The term "Rental Lease Year" shall be each twelve month period beginning on
March 1, in each year, with the first Rental Lease Year commencing on March 1,
2000 (the "Rental Commencement Date").
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02); (ii)
Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv)
Tenant's Initial Pro-Rata Share of Common Area Expenses ($.22 per square foot
within the Property per annum) (See Section 4.05); (v) Impounds for Insurance
Premiums and Property Taxes (See Section 4.08); (vi) Management Fees (see
Section 4.09); (vii) Maintenance, Repairs and Alterations (See Article Six).
Tenant's initial pro rata share of Real Property Taxes and Insurance premiums is
estimated to be $.34 per square foot within the Property per annum.
Section 1.13. Landlord's Share of Profit on Assignment or Sublease (See
Section 9.05): Fifty percent (50%) of the Net profit (the "Landlord's Share").
Section 1.14. Riders: The following Riders are attached to and made a part
of this Lease: (If none, so state) Rider of even date, containing paragraphs 1
through 6.
ARTICLE TWO: LEASE TERM.
Section 2.01. Lease of Property for Lease Term. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for
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the period stated in Section 1.05 above and shall begin and end on the dates
specified in Section 1.05 above, unless the beginning or end of the Lease Term
is changed under any provision of this Lease. The "Commencement Date" shall be
the date specified in Section 1.05 above for the beginning of the Lease Term.
Section 2.02. [Intentionally Deleted]
Section 2.03. Early Occupancy. If Tenant occupies the Property prior to the
Commencement Date, Tenant's occupancy of the Property shall be subject to all of
the provisions of this Lease. Early occupancy of the Property shall not advance
the expiration date of this Lease. Tenant shall have full, unrestricted access
to the Property and parking areas from the date of this Lease for the purpose of
installing trade fixtures and equipment, including but not limited to
communication systems, refrigeration and conveyor and racking systems and all
other Tenant Improvements. In the event Tenant uses the Property for storage of
product prior to the Commencement Date, Tenant shall not pay Base Rent but will
pay all other charges specified in this Lease for the early occupancy period.
Section 2.04. Holding Over. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Should Tenant continue to hold
the Property after the expiration or earlier termination of this Lease, or after
re-entry by Landlord without terminating this Lease, such holding over, unless
otherwise agreed to by Landlord in writing, shall constitute and be construed as
a tenancy at sufferance and not a tenancy at will. Tenant shall have no right to
notice under O.C.G.A. (S) 44-7-7 of the termination of its tenancy. Tenant shall
reimburse Landlord for and indemnify Landlord against all damages which Landlord
incurs from Tenant's delay in vacating the Property after written notice
specifying in reasonable detail Landlord's damages. If Tenant does not vacate
the Property upon the expiration or earlier termination of the Lease, or after
re-entry by Landlord without terminating this Lease as permitted hereunder, and
Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property
shall be a tenancy at will, subject to all of the terms of this Lease, except
any right to renew this Lease and except that the Base Rent then in effect shall
be increased by twenty-five percent (25%). The foregoing provisions of this
Section 2.04 shall survive the expiration or earlier termination of this Lease
and shall apply to any holding over after any renewal or extension of this
Lease.
ARTICLE THREE: BASE RENT.
Section 3.01. Time and Manner of Payment. Base Rent shall commence
to be payable on the Rental Commencement Date. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the monthly amount stated in
paragraph 1.12(a) above for the first installment of full monthly Base Rent due
under this Lease. On the first day of the calendar month after the month in
which the first installment of full monthly Base Rent is due, and on the first
day of each calendar month thereafter, Tenant shall pay Landlord the Base Rent
in equal monthly installments, in advance, without notice or prior demand,
unless otherwise provided herein, and without offset or deduction. The Base
Rent shall be payable at Landlord's address or at such other place as Landlord
may designate in advance and in writing. If the Rental Commencement Date falls
on a date other than the first day of a calendar month, Base Rent due for such
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fractional month shall be prorated on a per diem basis between Landlord and
Tenant and shall be payable on the first day of the calendar month after the
month in which the first installment of full monthly Base Rent is due.
Section 3.02. Security Deposit; Increases. Upon the execution of this
Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount
set forth in Section 1.10 above. Landlord may, after written notice, apply all
or part of the Security Deposit to any unpaid rent or other charges due from
Tenant or to cure any other defaults of Tenant. Such Security Deposit is not an
advance rental deposit or a measure of Landlord's damages in case of Tenant's
default. If Landlord properly uses any part of the Security Deposit, Tenant
shall restore the Security Deposit to its full amount within ten (10) days after
Landlord's written request. Tenant's failure to do so shall be a material
default under this Lease. No interest shall be paid on the Security Deposit.
Landlord shall not be required to keep the Security Deposit separate from its
other accounts and no trust relationship is created with respect to the Security
Deposit.
Section 3.03. Termination; Advance Payments. Upon termination of this Lease
under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Property in the manner required by this Lease, Landlord shall refund
or credit to Tenant (or Tenant's successor), on or before thirty (30)) days
after such termination and vacation, the unused portion of the Security Deposit,
any advance rent or other advance payments made by Tenant to Landlord, and any
amounts paid for real property taxes and other reserves which apply, to any time
periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT.
Section 4.01. Additional Rent. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. Property Taxes.
(a) Real Property Taxes. Tenant shall pay, in the manner provided in
Section 4.08 below, all real property taxes on the Property (including any fees,
taxes or assessments against, or as a result of, any tenant improvements
installed on the Property by or for the benefit of Tenant) during the Lease
Term. Landlord shall reimburse Tenant for any real property taxes paid by Tenant
covering any period of time prior to or after the Lease Term.
(b) Definition of "Real Property Tax." "Real Property Tax" means: (i) any
fee, ad valorem fee, license fee, license tax, business license fee, commercial
rental tax, levy charge, assessment, penalty or tax imposed by any taxing
authority against the Property; (ii) any tax on the Landlord's right to receive,
or the receipt of, rent or income from the Property or against Landlord's
business of leasing the Property; (iii) any tax or charge for fire protection,
streets, sidewalks, road maintenance, refuse or other services provided to the
Property by any governmental agency; (iv) any tax imposed upon this transaction
or based upon a re-assessment
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of the Property due to a change of ownership, as defined by applicable law, or
other transfer of all or part of Landlord's interest in the Property; and (v)
any charge or fee replacing any tax previously included within the definition of
Real Property Tax. "Real Property Tax" does not, however, include Landlord's
federal or state income, franchise, inheritance or estate taxes, and does not
include any taxes or other charges levied upon the event of transfer itself as
described in (iv) above.
(c) Joint Assessment. If the Property is not separately assessed, Landlord
shall reasonably determine Tenant's share of the real property tax payable by
Tenant under Paragraph 4.02(a) from the assessor's worksheets or other
reasonably available information. Tenant shall pay such share to Landlord within
fifteen (15) days after receipt of Landlord's written statement. Upon reasonable
notice to Landlord, Tenant will be entitled to examine at Landlord's offices in
which such are maintained, the books and records used to create such statements,
and reconcile such statements as reasonably necessary, including a refund if
such reconciliation shows an overpayment by Tenant.
(d) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
(e) Contesting of Taxes. In any year which Landlord does not protest the
real property tax assessment levied against the real property, Tenant may choose
to protest the assessment in Landlord's name. If Tenant chooses to protest the
assessment, Landlord shall fully cooperate with Tenant's efforts provided Tenant
pays all costs and expenses necessary to conduct such protest. In the event
Landlord protests such assessment and a reduction in the taxes for the Property
results, Tenant shall be entitled to the benefit of such reassessment, either as
a credit against the next payments of Rent and Additional Rent due under this
Lease or as a refund if this Lease has expired. If Tenant protests the
assessment and the taxes for the Property are reduced as a result of such
protest, Landlord and Tenant shall each be entitled to the benefit of such
reassessment. Tenant shall also be entitled to reimbursement of its expenses in
conducting such protest, such reimbursement to be in the form of a credit
against Additional Rent, but Tenant shall not be entitled to a credit in excess
of the reduced taxes as a result of such protest which accrue to Landlord's
benefit as to the remainder of the Building during the remainder of the Lease
Term.
Section 4.03. Utilities. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other properties, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to
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Landlord within thirty (30) days after receipt of Landlord's written statement.
Upon reasonable notice to Landlord, Tenant will be entitled to examine at
Landlord's office in which such are maintained, the books and records used to
create such statements, and reconcile such statements as reasonably necessary,
including a refund or credit if an overpayment by Tenant has occurred.
Section 4.04. Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be TWO MILLION DOLLARS ($2,000,000.00) per
occurrence and shall be subject to reasonable periodic increases based upon
inflation, increased liability awards, reasonable recommendations of Landlord's
professional insurance advisers and other relevant factors. The liability
insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary
and non-contributing; (ii) contain cross-liability endorsements; and (iii)
insure Landlord against Tenant's performance under Section 5.05, if the matters
giving rise to the indemnity under Section 5.05 result from the negligence of
Tenant. The amount and coverage of such insurance shall not limit Tenant's
liability nor relieve Tenant of any other obligations under this Lease. Landlord
shall also obtain comprehensive public liability insurance in an amount and with
coverage reasonably determined by Landlord insuring Landlord against liability
arising out of ownership, operation, use or occupancy of the Property. The
policy obtained by Landlord shall not be contributory and shall not provide
primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term, Landlord
shall maintain policies of insurance covering loss of or damage to the Building
in the full amount of its replacement value. Such policy shall contain an
inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Building after written notice. Landlord shall
not obtain insurance for Tenant's fixtures or equipment or building improvements
installed by Tenant on the Property. During the Lease Term, Landlord shall also
maintain a rental income insurance policy, with loss payable to Landlord, in an
amount equal to one (1) year's Base Rent, plus an amount equal to one (1) year's
reasonably estimated real property taxes and insurance premiums. Tenant shall be
liable for the payment of any deductible amount under Landlord's or Tenant's
insurance policies maintained pursuant to this Section 4.04, in an amount not to
exceed TWENTY-FIVE THOUSAND DOLLARS ($25,000.00). Tenant shall not do or permit
anything to be done by Tenant's agents which invalidates any such insurance
policies.
(c) Payment of Premiums. Subject to Section 4.08, Tenant shall pay Tenant's
share of all premiums for the insurance policies described in Paragraphs 4.04(a)
and (b) (whether obtained by Landlord or Tenant) within thirty (30) days after
Tenant's receipt of a copy of the
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premium statement or other evidence, of the amount due, except Landlord shall
pay all premiums for non-primary comprehensive public liability insurance which
Landlord elects to obtain as provided in Paragraph 4.04(a). If insurance
policies maintained by Landlord cover improvements on real property other than
the Property, Landlord shall deliver to Tenant a statement of the premium
applicable to the Property showing in reasonable detail how Tenant's share of
the premium was computed. If the Lease Term expires before the expiration of an
insurance policy maintained by Landlord, Tenant shall be liable for Tenant's
prorated share of the insurance premiums. Before the Commencement Date, Tenant
shall deliver to Landlord a copy of any policy of insurance which Tenant is
required to maintain under this Section 4.04. At least thirty (30) days prior to
the expiration of any such policy, Tenant shall deliver to Landlord a renewal of
such policy as an alternative to providing a policy of insurance. Tenant shall
have the right to provide Landlord a certificate of insurance, executed by an
authorized officer of the insurance company, showing that the insurance which
Tenant is required to maintain under this Section 4.04 is in full force and
effect and containing such other information which Landlord reasonably requires.
(d) General Insurance Provision.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to give
Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage. All such policies shall name
Landlord's mortgagee an additional insured or loss payee, as applicable.
(ii) If Tenant fails to deliver a policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if any
such policy is canceled or modified during the Lease Term without Landlord's
consent, Landlord may obtain such insurance, in which case Tenant shall
reimburse Landlord for the cost of such insurance within thirty (30) days after
receipt of a statement that indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as set forth
in the most current issue of "Best Key Rating Guide". Landlord and Tenant
acknowledge the insurance markets are rapidly changing and that insurance in the
form and amounts described in this Section 4.04 may not be available in the
future. Tenant acknowledges that the insurance described in this Section 4.04
is for the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease, Tenant
shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
as that coverage may change from time to time. Landlord makes no representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
interests. Therefore, Tenant shall obtain any such additional property or
liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of recovery
against the other, and against the officers, employees, agents or
representatives of the other, for loss of or damage to its
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property or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in this
Lease) at the time of such loss or damage. Upon obtaining the required policies
of insurance, Landlord and Tenant shall give notice to the insurance carriers of
this mutual waiver of subrogation.
Section 4.05. Common Areas: Use, Maintenance and Costs.
(a) Common Areas. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. The owner of the Common Areas, from time to time, may change the size,
location, nature and use of any of the Common Areas, convert Common Areas into
leasable areas, construct additional parking facilities (including parking
structures) in the Common Areas, and increase or decrease Common Area land
and/or facilities. Tenant acknowledges that such activities may result in
inconvenience to Tenant. Such activities are permitted if they do not materially
affect Tenant's use of the Property and do not increase the Common Areas beyond
the existing confines of the Project. Notwithstanding the foregoing, (a) the
access drives to Newpoint Place adjacent to the Building and owned by Landlord
and as shown on the Parking Plan may not be relocated or eliminated without
Tenant's prior written approval; and (b) Landlord shall not change or otherwise
alter the Parking Areas as marked in Exhibit "C".
(b) Use of Common Areas. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom the owners of the Common Areas
have granted or may grant such rights) to use the Common Areas for the purposes
intended, subject to such reasonable and non-discriminatory rules and
regulations as may be established from time to time. Tenant shall abide by such
reasonable and non-discriminatory rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by the owners' rules and regulations. At any time, the
owners of the Common Areas may temporarily close any Common Areas to perform any
acts in the Common Areas as, in the judgment of the owners of the Common Areas,
are desirable to improve the Project. Tenant shall not interfere with the rights
of the owners of the Common Areas, other tenants or any other person entitled to
use the Common Areas. Landlord shall not close or otherwise alter the Parking
Area as marked in Exhibit "C" except for reasonable maintenance which shall be
coordinated with Tenant.
(c) Specific Provision re: Vehicle Parking. Tenant shall be entitled to the
exclusive use of the number of employee vehicle and Tenant delivery truck
parking spaces within the designated parking areas shown on the attached Exhibit
"C", and allocated to Tenant in Section 1.11 of this Lease, during the initial
Lease Term and the Renewal Terms without paying any additional rent. Tenant may
only park in the Parking Areas marked on Exhibit "C". Employee parking shall be
limited to vehicles no larger than standard size automobiles or pickup utility
vehicles. Tenant shall not cause large trucks or other large vehicles to be
parked within other portions of the Project or on the adjacent public streets.
Temporary parking of large delivery vehicles in the Project may be permitted by
the rules and regulations established by Landlord.
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Provided Tenant has exclusive use of the parking as contemplated in Section 1.11
and 4.05, should Tenant's delivery trucks park outside of the areas designated
for such as shown on Exhibit "C" or should Tenant, its employees, licensees or
invitees park, at any one time, more vehicles in any parking areas than the
number set forth in Section 1.11 of this Lease, Landlord will be entitled, at
its option, to require Tenant to pay, as Additional Rent, the following:
Landlord will provide Tenant written notice of a violation of such parking
prohibition in order for Landlord to require Tenant to pay for subsequent
violations. If another violation occurs within fifteen (15) days after such
notice, the sum of One Hundred and No/100 Dollars ($100.00) will be payable to
Landlord on the next rent payment date. If yet another violation occurs within
fifteen (15) days after the second violation, an amount equal to One Hundred Ten
(110%) percent of the previous sum charged will be due on the next rent payment
date, with such charges continuing to increase for subsequent violations within
fifteen (15) days of a previous violation at the same one hundred ten percent
(110%) cumulative rate. Vehicles shall be parked only in striped parking spaces
and not in driveways, loading areas other than Tenant's loading areas or other
locations not specifically designated for parking. Handicapped spaces shall only
be used by those legally permitted to use them. If Tenant parks, at any one
time, more vehicles in any parking area than the number set forth in Section
1.11 of this Lease, such conduct shall also be a material breach of this Lease.
(d) Maintenance of Common Areas, Common Area Costs. Landlord shall maintain
the Common Areas owned by it in good order, condition and repair and shall
operate the Property, in Landlord's sole discretion, as a first-class
industrial/commercial real property development. Tenant shall pay Tenant's pro
rata share (as determined below) of all actual costs incurred for the operation
and maintenance of the Common Areas as permitted under the terms and conditions
of this Lease, such costs defined as "Common Area Costs" include, but are not
limited to, costs and expenses for the following: gardening and landscaping;
utilities, water and sewage charges; maintenance of signs (other than tenants'
signs); premiums for liability, property damage, fire and other types of
casualty insurance on the Common Areas and all Common Area improvements; all
property taxes and assessments levied on or attributable to the Common Areas and
all Common Area improvements; all personal property taxes levied on or
attributable to personal property used in connection with the Common Areas;
straight-line depreciation on personal property owned by Landlord which is
consumed in the operation or maintenance of the Common Areas; rental or lease
payments paid by Landlord for rented or leased personal property used in the
operation or maintenance of the Common Areas; fees for required licenses and
permits; repairing, resurfacing, repaving, maintaining, painting, lighting,
cleaning, refuse removal, security and similar items; a reasonable allowance to
Landlord for Landlord's supervision of the Common Areas (not to exceed five
percent (5%) of the gross rents of the Project for the calendar year); and
assessments imposed upon the Project pursuant to any Common Area maintenance
agreement or recorded covenants, conditions, restrictions or easements to which
the Project may be subject. Landlord may cause any or all of such services to be
provided by third parties and the cost of such services shall be included in
Common Area Costs. Common Area Costs shall not include (a) depreciation of any
real property forming part of the Common Areas or otherwise, (b) payment of
principal or interest due under any mortgage or deed of trust; (c) capital
improvement costs, whether principal or interest; (d) Landlord's costs of any
services sold or provided to tenants for which Landlord is entitled to be
reimbursed
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by such tenants under the Lease with such tenants; and (e) costs incurred for
any items to the extent of Landlord's recovery under a manufacturer's,
materialman's, vendor's or contractor's warranty.
(e) Tenant's Share and Payment. Tenant shall pay Tenant's pro rata share of
all Common Area Costs (prorated for any fractional month) upon written notice
from Landlord that such costs are due and payable, and in any event prior to
delinquency. Tenant's pro rata share shall be calculated by dividing the square
foot area of the Property, as set forth in Section 1.04 of this Lease, by the
total aggregate square foot area of the Project which is leasable by tenants, as
of the date on which the computation is made. Tenant's initial pro rata share is
set out in paragraph 1.12(b). Any changes in the Common Area Costs and/or the
aggregate area of the Project leased or held for lease during the Lease Term
shall be effective on the first day of the month after such change occurs.
Landlord may, at Landlord's election, at the beginning of each calendar year
during the term of this Lease for that calendar year, estimate in advance and
charge to Tenant as Common Area Costs, all real property taxes for which Tenant
is liable under Section 4.02 of this Lease, all insurance premiums for which
Tenant is liable under Section 4.04 of this Lease, all maintenance and repair
costs for which Tenant is liable under Section 6.04 of this Lease, and all other
Common Area Costs payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Area Costs shall be delivered monthly, quarterly
or at any other periodic intervals to be designated by Landlord. Within sixty
(60) days after the end of each calendar year of the Lease Term, Landlord shall
deliver to Tenant a statement prepared in accordance with generally accepted
accounting principles setting forth, in reasonable detail, the Common Area Costs
paid or incurred during the preceding calendar year and Tenant's pro rata share.
Upon receipt of such statement, there shall be an adjustment between Landlord
and Tenant, with payment to or credit given by Landlord (as the case may be) so
that Landlord shall receive the entire amount of Tenant's share of such costs
and expenses for such period, but no more than Tenant's share. Landlord may
increase the amount of estimated Common Area Costs in each subsequent calendar
year, provided such estimated increase does not exceed ten percent (10%) per
year, on a cumulative basis, and Landlord may increase such estimated Common
Area Costs during the year (without any limitation) provided any such mid year
increase is based upon actual increases for which Landlord has received written
confirmation. Upon reasonable notice to Landlord, Tenant will be entitled to
examine at Landlord's offices in which such are maintained, the books and
records used to create such statements, and reconcile such statements as
reasonably necessary, including a refund or credit if such reconciliation shows
an overpayment by Tenant.
Section 4.06. Late Charges. Tenant's failure to pay rent promptly may cause
Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or deed to secure debt
encumbering the Property. Therefore, if Landlord does not receive any rent
payment within the later of five (5) days after it becomes due or five (5) days
after Tenant's receipt of notice if Tenant is entitled to notice of non-payment
of rent under Section 10.02(b), Tenant shall pay to Landlord a late charge equal
to ten percent (10%) of the overdue amount. The parties agree that such late
charge represents a fair and reasonable estimate of the costs
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Landlord will incur by reason of such late payment and not payment for the use
of money or a penalty. The provision for late charges shall be in addition to
all of Landlord's other rights and remedies hereunder or at law and shall not be
construed as liquidating damages or as limiting Landlord's remedies in any
manner.
Section 4.07. Interest on Past Due Obligations. Any amount owed by Tenant
to Landlord which is not paid when due shall bear simple interest at the rate of
fifteen percent (15%) per annum from the due date of such amount after the
expiration of any notice period required under Section 10.02(b). However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law. The provision for late
charges and interest shall be in addition to all of Landlord's other rights and
remedies hereunder or at law and shall not be construed as liquidating damages
or as limiting Landlord's remedies in any manner.
Section 4.08. Manner of Payment of Insurance Premiums and Real Property
Taxes. Tenant shall pay Landlord a sum equal to one-twelfth (1/12th) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. If the Property is not separately assessed, Landlord shall reasonably
determine Tenant's share of the real property tax payable by Tenant under
Paragraph 4.02(a) from the assessor's worksheets or other reasonably available
information. If insurance policies maintained by Landlord cover improvements on
real property other than the Property, Landlord shall deliver to Tenant a
statement of the premium applicable to the Property showing in reasonable detail
how Tenant's share of the premium was computed. If the Lease Term expires before
the expiration of an insurance policy maintained by Landlord, Tenant shall be
liable for Tenant's prorated share of the insurance premiums. Tenant shall pay
any deficiency of funds with the payment of any other obligation of Tenant next
falling due to Landlord under this Lease. Any overage in such payment by Tenant
will be credited to any other obligation of Tenant next falling due to Landlord
under this Lease.
Section 4.09. Management Fees. Tenant shall reimburse Landlord monthly for
management fees incurred by Landlord in connection with the Property (which
reimbursement is included in Landlord's five percent [5%] supervisory allowance
under Section 4.05(d) of this Lease).
ARTICLE FIVE: USE OF PROPERTY.
Section 5.01. Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. Manner of Use. Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance, or
governmental regulation or order, which interferes with the rights of other
tenants of Landlord, or which constitutes a nuisance or waste. Tenant shall
obtain and pay for all permits, including a Certificate of
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Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act. However, nothing
herein is to be construed so as to obligate Tenant to modify or alter any aspect
of the Building which is solely Landlord's obligation as set forth in Section
6.01 below.
Section 5.03. Hazardous Materials. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including, without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees
without the prior written consent of Landlord. Landlord shall be entitled to
take into account such other factors or facts as Landlord may reasonably
determine to be relevant in determining whether to grant or withhold consent to
Tenant's proposed activity with respect to Hazardous Material. In no event,
however, shall Landlord be required to consent to the installation or use of any
Hazardous Material storage tanks on the Property. Notwithstanding anything
contained in this Lease to the contrary, (a) goods sold as part of Tenant's
business operations; (b) cleaning materials customarily used in Tenant's
industry); and (c) components incorporated in the following equipment and
systems, and small quantities of fluids, powders, toner and similar materials
routinely used in the operation thereof which are properly used, handled, stored
in appropriate containers and disposed of in accordance with any and all
applicable laws, rules and ordinances, shall not be deemed Hazardous Material
for the purposes of this Lease: photocopying equipment; word processors;
printers; telephone systems; computers; scanners; facsimile machines; binders;
televisions; refrigerators; microwave ovens; or any similar or related equipment
or systems now or hereafter routinely employed in connection with general office
warehouse use.
Section 5.04. Signs and Auctions. Subject to the provisions of any
recorded restrictions and the regulations and approval rights of Newpoint
Owner's Association, Tenant shall be allowed to install its pro rata share of
exterior signage on the Premises subject to applicable governmental authorities,
and subject to Landlord's standards and prior written approval, which will not
be unreasonably withheld or delayed. All signage shall be furnished and
installed at Tenant's expense. Tenant shall not conduct or permit any auctions
or sheriffs sates at the Property.
Section 5.05. Indemnity. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in
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or about the Property, including any contamination of the Property or any other
property resulting from the presence or use of Hazardous Material caused or
permitted by Tenant; (c) any breach or default in the performance of Tenant's
obligations under this Lease; (d) any misrepresentation or breach of warranty by
Tenant under this Lease; or (e) other acts or omissions of Tenant; however, such
indemnity shall not apply to claims or liability arising from Landlord's
negligent acts or omissions or willful misconduct. Tenant shall reasonably
defend Landlord against any such cost, claim or liability at Tenant's expense
with counsel reasonably acceptable to Landlord or, at Landlord's election, and
after written notice, Tenant shall reimburse Landlord for any legal fees or
costs incurred by Landlord in connection with any such claim. As a material part
of the consideration to Landlord, Tenant assumes all risk of damage to property
or injury to persons in or about the Property, and Tenant hereby waives all
claims in respect thereof against Landlord, except for any damage, injury or
claim arising out of Landlord's gross negligence or willful misconduct.
Section 5.06. Landlord's Access. Landlord or its agents may enter
the Property after twenty-four (24) hours prior written notice at all reasonable
times to show the Property to potential buyers, investors or other parties and,
during the last six (6) months of the Lease Term, to tenants which are not
competitors of Tenant in the internet-only based grocer-to-consumer delivery
business; to do any other act or to inspect and conduct tests in order to
monitor Tenant's compliance with all applicable environmental laws and all laws
governing the presence and use of Hazardous Material; or for any other purpose
Landlord deems necessary. Landlord shall give Tenant prior written notice of
such entry, except in the case of an emergency. In exercising its rights
hereunder, Landlord shall not interfere with Tenant's business operations.
Landlord may place customary "For Sale" or "For Lease" signs on the Property
which do not interfere with the visibility by the public of Tenant's signage.
Section 5.07. Quiet Possession. As long as Tenant is not in default
of this Lease, as defined in Section 10.02 below, Tenant may occupy and
peacefully enjoy as defined herein this Lease the Property including the Common
Areas, parking, and all appurtenant rights hereof for the full Lease Term,
subject to the provisions of this Lease.
ART1CLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS.
Section 6.01. Condition Upon Delivery. As of January 1, 2000,
Landlord warrants that the Building is in good condition and repair and the
electrical, mechanical, plumbing, and other systems serving the Property are in
good condition and repair, that the Building is in compliance with all
applicable laws, codes, ordinances, rules, regulations, and covenants; that the
Building is free of any adverse environmental condition; and that the Building
is not subject to any latent or patent structural defects. Landlord shall
indemnify Tenant against any costs or claims associated with any breach of the
above warranties by Landlord.
Section 6.02. Existing Conditions. Except as provided in Section
6.01 above, Tenant accepts the Property in its condition as of the execution of
the Lease and all recorded matters, laws, ordinances, and governmental
regulations and orders. Except as provided herein, Tenant
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acknowledges that neither Landlord nor any agent of Landlord has made any
representation as to the condition of the Property or the suitability of the
Property for Tenant's intended use. Tenant represents and warrants that Tenant
has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto, other than as set forth in this Lease.
Section 6.03. Exemption of Landlord from Liability. Landlord shall
not be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.03 shall not, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
As used in this Section, the term "Landlord" shall include Landlord's employees,
agents, contractors, and invitees, if applicable.
Section 6.04. Landlord's Obligations. Except as provided in Article
Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord shall
keep the following in good order, condition and repair as in a first class
industrial/commercial real property development: the foundations, exterior walls
and roof of the Property (including painting the exterior surface of the
exterior walls of the Property not more than once every five (5) years, if
necessary). However, Landlord shall not be obligated to maintain or repair
windows, doors, plate glass or the interior surfaces of exterior walls.
Landlord shall diligently make repairs under this Section 6.04 within a
reasonable time after receipt of written notice from Tenant of the need for such
repairs.
Section 6.05. Tenant's Obligations.
(a) Except as provided in Article Seven (Damage Destruction), Article
Eight (Condemnation), Section 4.05(d) above, and Section 6,04(a) above, Tenant
shall keep all portions of the Property (including nonstructural, interior,
exterior, and landscaped areas, portions, systems and equipment) in good order,
condition and repair (including interior repainting and refinishing, as
reasonably needed). If any portion of the Property or any system or equipment
in the Property which Landlord is not obligated to maintain and which Tenant is
obligated to repair cannot be fully repaired or restored, Tenant shall promptly
replace such portion of the Property or system or equipment or equipment in the
Property, regardless of whether the benefit of such replacement extends beyond
the Lease Term; but if the benefit or useful life of such replacement extends
beyond the Lease Term utilizing generally accepted accounting principles, Tenant
shall be liable only for that portion of the cost which is applicable to the
Lease Term (as extended). Tenant shall reasonably maintain a preventive
maintenance contract providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and air conditioning
contractor. If any part of the Property is
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damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of
repairing or replacing such damaged property, whether or not Landlord would
otherwise be obligated to pay the cost of maintaining or repairing such
property. It is the intention of Landlord and Tenant that at all times Tenant
shall maintain the portions of the Property which Tenant is obligated to
maintain in good order, condition and repair.
(b) Except as limited herein, Tenant shall fulfill all of Tenant's
obligations under this Section 6.05, at Tenant's sole expense. If Tenant fails
to maintain, repair or replace the Property as required by this Section 6.05,
Landlord may, upon ten (10) days' prior notice to Tenant (except that no notice
shall be required in the case of an emergency), enter the Property and
reasonably perform such maintenance or repair (including replacement, as needed)
on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all
costs incurred in performing such maintenance or repair.
Section 6.06. Alterations, Additions, and Improvements.
(a) Except for racking systems and except for non-structural
alterations made after the Commencement Date and which do not exceed Ten
Thousand and No/100 Dollars ($10,000.00) in cost cumulatively over the Lease
Term, Tenant shall not make any alterations, additions, or improvements,
including Tenant's Improvements, as defined in the Rider to this Lease to the
Property without Landlord's prior written consent, which shall not be
unreasonably withheld, conditioned or delayed. Landlord shall not be required
to notify Tenant of whether it consents to any alterations, additions or
improvements until it (a) has received plans and specifications therefor which
are sufficiently detailed to allow construction of the work depicted thereon to
be performed in a good workman-like manner, and (b) has had a commercially
reasonable opportunity to review them. Landlord shall provide a response to
Tenant's request within five (5) business days upon receipt of (a) above, and
Landlord's failure to respond within the five (5) business day period shall be
deemed by its approval of the same. If Landlord shall disapprove a request by
Tenant, Landlord shall within two (2) business days deliver to Tenant why and in
reasonable detail approval was denied. Tenant, at its sole cost and expense,
may from time to time install, and if so installed, shall maintain, rooftop
communication equipment (to include antennae and/or satellite dishes if screened
from view), and rooftop refrigeration, heating, ventilation and air conditioning
equipment, subject to the prior written approval of Landlord and its consultants
in their reasonable discretion as to the size, number and location of same and
subject to applicable recorded restrictions and rules and regulations of
Newpoint Owner's Association and applicable governmental authorities. Tenant
shall utilize Landlord's roofing contractor for the supervision and/or approval
of any penetrations made to the roof, but Tenant shall not be obligated to pay
Landlord any fees for the management or oversight of such work. Tenant may
erect shelves, bins, machinery and trade fixtures provided that such items (1)
do not alter the basic character of the Property or the Building; (2) do not
overload or damage the same; and (3) may be removed without irreparable damage
to the Property. Landlord may require Tenant to provide demolition and/or lien
and completion bonds in form and amount satisfactory to Landlord. Tenant shall
promptly remove any alterations, additions, or improvements constructed in
violation of this Paragraph 6.06(a) upon Landlord's written request. All
alterations, additions, and improvements shall be done in a good and workmanlike
manner, in
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conformity with all applicable laws and regulations, and by a contractor
reasonably approved by Landlord. Upon completion of any such work, Tenant shall
provide Landlord with "as built" plans, copies of all construction contracts,
and proof of payment, including lien waivers, for all labor and materials.
(b) If any alteration, addition or improvement will affect the
Building's structure, HVAC System, mechanical, electrical or plumbing systems,
the plans and specifications therefor must be prepared by a licensed engineer
reasonably acceptable to Landlord. Landlord's approval of any plans and
specifications shall not be representation that the plans or the work depicted
thereon will comply with the law or adequate for any purpose, but shall merely
be Landlord's consent to performance of the work.
(c) Tenant shall pay when due all claims for labor and material
actually furnished to the Property. Tenant shall give Landlord at least twenty
(20) days' prior written notice of the commencement of any work on the Property,
regardless of whether Landlord's consent to such work is required. Landlord may
elect to record and post notices of non-responsibility on the Property.
Section 6.07. Condition upon Termination. Upon the termination of
the Lease, Tenant shall surrender the Property to Landlord, broom clean and in
the same condition as received except for ordinary wear and tear which Tenant
was not otherwise obligated to remedy under any provision of this Lease.
However, Tenant shall not be obligated to repair any damage which Landlord is
required to repair under Article Seven (Damage or Destruction) or Section
4.05(d). In addition, Landlord may at its option require Tenant to remove or
demolish any alterations, additions or improvements (whether or not made with
Landlord's consent), including all interior, exterior and loading dock
improvements, prior to the expiration of the Lease Term and to restore the
Property to a condition equal to Landlord's standard building specifications,
all at Tenant's expense. Whether or not Landlord elects to require Tenant
demolish or restore improvements, Tenant shall restore the loading dock to its
original forty-eight inch (48") height and otherwise to a condition the same as
existed prior to execution of this Lease. If requested by Tenant, Landlord will
include within its consent to requested alterations, additions or improvements a
list of those of the requested alterations, additions or improvements items to
be removed or demolished by Tenant prior to the expiration of this Lease. In
the event Tenant delivers to Landlord the Early Termination Notice, Landlord
shall provide Tenant a list of items to be removed or demolished prior to the
Early Termination Date. Landlord shall allow Tenant no less than twenty-one
(21) days to remove or demolish the alterations, additions or improvements. In
the event Tenant fails to demolish or remove [or if Tenant fails to adequately
demolish or remove] any items which Landlord has included in the list, Tenant
shall upon demand reimburse Landlord for the cost of demolition or removal, and
Tenant shall be subject to damages equal to twenty-five percent (25%) of the
cost of such demolition or removal. The Parties acknowledge the difficulty of
ascertaining Landlord's actual damages and therefore agree that the above
amounts are a good faith reasonable attempt to identify and quantify Landlord's
actual damages and as such do not constitute a penalty. Tenant shall repair, at
Tenant's expense, any damage to the Property caused by the removal or demolition
of any such alterations, additions or improvements. All alterations, additions
and improvements, excepting Tenant's trade fixtures,
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personal property and removable equipment, which Landlord has not required
Tenant to remove shall become Landlord's property and shall be surrendered to
Landlord upon the expiration or earlier termination of the Lease. Unless
directed by Landlord to do so, Tenant shall not remove any of the following
materials or equipment, if permanently (but not temporarily) attached to the
Property (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; rooftop communication
equipment or other similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION.
Section 7.01. Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon Tenant's
learning of the occurrence of any damage to the Property. If the Property is
only partially damaged (i.e., less than fifty percent (50%) of the Property is
untenantable as a result of such damage), and such damage can reasonably be
repaired within one hundred eighty (180) days of the date of casualty and if
Landlord's lender makes available for rebuilding the proceeds of the insurance
policies described in Paragraph 4.04(b), this Lease shall remain in effect and
Landlord shall repair the damage as soon as reasonably possible. Landlord may
elect (but is not required) to repair any damage to Tenant's fixtures,
equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies under Paragraph 4.04, Landlord may elect either to (i)
repair the damage as soon as reasonably possible, in which case this Lease shall
remain in full force and effect, or (ii) terminate this Lease as of the date the
damage occurred. Landlord shall notify Tenant within thirty (30) days after
receipt of notice of the occurrence of the damage whether Landlord elects to
repair the damage or terminate the Lease. If Landlord elects to repair the
damage, Tenant shall pay Landlord the "deductible amount" (if any) under
Landlord's insurance policies and, if the damage was due to an act or omission
of Tenant, or Tenant's employees, agents, contractors or invitees, the
difference between the actual cost of repair and any insurance proceeds received
by Landlord. If Landlord elects to terminate the Lease, Tenant may elect to
continue this Lease in full force and effect, in which case Tenant shall repair
any damage to the Property and any building in which the Property is located.
Tenant shall pay the cost of such repairs, except that upon satisfactory
completion of such repairs, Landlord shall deliver to Tenant any insurance
proceeds received by Landlord for the damage repaired by Tenant. Tenant shall
give Landlord written notice of such election within ten (10) days after
receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6)
months of the Lease Term, as it may be extended, and such damage will require
more than thirty (30) days to repair, either Landlord or Tenant may elect to
terminate this Lease as of the date the damage occurred, regardless of the
sufficiency of any insurance proceeds. The party electing to terminate this
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Lease shall give written notification to the other party of such election within
thirty (30) days after Tenant's notice to Landlord of the occurrence of the
damage.
Section 7.02. Substantial or Total Destruction. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the
preceding sentence, if the Property can be rebuilt within one hundred eighty
(180) days after the date of destruction, Landlord may elect to rebuild the
Property at Landlord's own expense, in which case this Lease shall remain in
full force and effect. Landlord shall notify Tenant of such election within
thirty (30) days after Tenant's notice of the occurrence of total or substantial
destruction. If Landlord so elects, Landlord shall rebuild the Property at
Landlord's sole expense. Should Landlord so elect to rebuild and should
possession of the Property as rebuilt not be delivered to Tenant within such one
hundred eighty (180) day period, Tenant shall notify Landlord in writing and
Landlord shall have thirty (30) days after such notice in which to deliver such
possession to Tenant. If Landlord fails to deliver possession to Tenant within
such thirty (30) day period, Tenant may elect by written notice to Landlord
within five (5) business days after the expiration of said thirty (30) day
period to terminate this Lease, whereupon the terms and conditions hereof
regarding termination of the Lease Term shall apply.
Section 7.03. Temporary Reduction of Rent. If the Property is
destroyed or damaged and Landlord or Tenant repairs or restores the Property
pursuant to the provisions of this Article Seven, any rent payable during the
period of such damage, repair and/or restoration shall be reduced according to
the degree, if any, to which Tenant's business and overall use of the Property
is impaired. However, the reduction shall not exceed the sum of one year's
payment of Base Rent, insurance premiums and real property taxes. Except for
such possible reduction in Base Rent, insurance premiums and real property
taxes, Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of any damage, destruction, repair, or
restoration of or to the Property unless due to Landlord's gross negligence or
willful misconduct.
ARTICLE EIGHT: CONDEMNATION.
If all or any portion of the Property is taken under the power of
eminent domain or sold under the imminent threat of that power (all of which are
called "Condemnation"), this Lease shall terminate as to the part taken or sold
on the date the condemning authority takes title or possession, whichever occurs
first. If more than twenty percent (20%) of the floor area of the building in
which the Property is located, or which is located on the Property, is taken or
if Tenant's delivery truck or employee parking area as shown on the Parking Plan
is decreased in any way whatsoever and Landlord does not make promptly available
replacement parking in the vicinity, Tenant may terminate this Lease as of the
date the condemning authority takes title or possession, by delivering written
notice to Landlord within ten (10) days after receipt of written notice of such
taking (or in the absence of such notice, within ten (10) days after the
condemning authority takes title or possession). If Tenant does not terminate
this Lease, this Lease shall remain in effect as to the portion of the Property
not taken, except that the Base Rent and
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Additional Rent shall be reduced in proportion to the reduction in the floor
area of the Property. Any Condemnation award or payment shall be distributed in
the following order: (a) first, to any ground lessor, mortgagee or beneficiary
under a deed to secure debt encumbering the Property, the amount of its interest
in the Property; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property, loss of business, goodwill, and relocation costs;
and (c) third, to Landlord, the remainder of such award, whether as compensation
for reduction in the value of the leasehold, the taking of the fee, or
otherwise. If this Lease is not terminated, Landlord shall repair any damage to
the Property caused by the Condemnation, except that Landlord shall not be
obligated to repair any damage for which Tenant has been reimbursed by the
condemning authority. If the severance damages received by Landlord are not
sufficient to pay for such repair, Landlord shall have the right to either
terminate this Lease or make such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING.
Section 9.01. Landlord's Consent Required. No portion of the
Property or of Tenant's interest in this Lease may be acquired by any other
person or entity, whether by sale, assignment, mortgage, sublease, transfer,
operation of law, or act of Tenant, ("Transfer") without Landlord's prior
written consent, which shall not be unreasonably.withheld, conditioned or
delayed, except as provided in Section 9.02 below. Landlord has the right to
grant or withhold its consent as provided in Section 9.05 below. Any attempted
transfer without consent shall be void and shall constitute a non-curable breach
of this Lease except for those transfers permitted without Landlord's consent as
set forth in Section 9.02 below.
Section 9.02. Permitted Transfers. Without Landlord's consent,
Tenant may assign its leasehold interest to: (a) a parent, subsidiary,
affiliate, division, or corporation controlling, controlled by or under common
control with, Tenant; (b) a successor corporation related to Tenant by merger,
consolidation, non-bankruptcy reorganization or government action; or (c) a
purchaser of substantially all of Tenant's assets located in the Property. The
assignee or sublessee under clause (b) and (c) above must have minimum net worth
equal to $100,000,000 at the time of the assignment or sublease. In addition,
the restrictions on Transfer do not apply to the sale or other transfer of
Tenant's capital stock including: (i) transfer in connection with the merger,
consolidation or non-bankruptcy reorganization; (ii) any transaction related to
a public sale; (iii) transfer of any sale of stock amongst existing
shareholders; or (iv) activity in any company stock option programs.
Section 9.03. No Release of Tenant. No Transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one Transfer is not a consent to any subsequent transfer. If Tenant's
transferee defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing remedies against the transferee. Landlord may consent
to subsequent assignments or modifications of this Lease by Tenant's transferee,
without notifying Tenant or obtaining its consent. Such action shall not
relieve Tenant's liability under this Lease, provided, however, that
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unless Tenant consents to any such modification, Tenant will not be bound
by any provisions of such modification increasing the Tenant's obligations
hereunder.
Section 9.04. [Intentionally Omitted]
Section 9.05. Landlord's Consent.
(a) Tenant's request for consent to any Transfer described in Section
9.01 shall set forth in writing the reasonable details of the proposed transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transfer (e.g., the term of and
the rent and security deposit payable under any proposed assignment or
sublease), and any other reasonable information Landlord shall request.
Landlord shall have the right to withhold consent, if reasonable, or to grant
consent, based on the following factors: (i) the business of the proposed
assignee or subtenant and the proposed use of the Property, which shall not be
detrimental to the Project; (ii) the net worth and financial reputation of the
proposed assignee or subtenant if not reasonably consistent with the other
tenants of Landlord or it can be reasonably assumed the proposed assignee or
subtenant may not be able to pay rent for the term proposed; (iii) Tenant's
compliance with all of its obligations under the Lease; and (iv) such other
factors as Landlord may reasonably deem relevant. If Landlord objects to a
proposed assignment solely because of the net worth and/or financial reputation
of the proposed assignee, Tenant may nonetheless sublease (but not assign), all
or a portion of the Property to the proposed transferee, but only on the other
terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under
the Lease the Landlord's Share (stated in Section 1.13) of the Net Profit
(defined below) on any sublease as and when received by Tenant. All amounts due
under this Lease shall be paid by an assignee to Landlord directly and Landlord
will remit to Tenant its share of such Net Profit as and when received. The "Net
Profit" means (A) all amounts paid to Tenant for such assignment or sublease,
including "key" money, monthly rent in excess of the monthly rent payable under
the Lease, and all fees and other consideration paid for the assignment or
sublease, including fees under any collateral agreements, less (B) costs and
expenses incurred by Tenant in connection with the execution and performance of
such assignment or sublease to include real estate broker's commissions and
costs of renovation or construction of tenant improvements required under such
assignment of sublease. Tenant is entitled to recover such cost and expenses
before Tenant is obligated to pay the Landlord's Share to Landlord. The Net
Profit in the case of a sublease of less than all the Property is the rent
allocable to the subleased space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement
certifying all amounts to be paid from any assignment or sublease of the
Property within thirty (30) days after the transaction documentation is signed,
and Landlord may reasonably inspect Tenant's books and records to verify the
accuracy of such statement. On written request, Tenant shall promptly furnish to
Landlord copies of all the transaction documentation, all of which shall be
certified by Tenant to be complete, true and correct. Landlord's receipt of
Landlord's Share shall not be consent to any
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further assignment or subletting. The breach of Tenant's obligation under this
Paragraph 9.05(b) shall be a material default of the Lease.
Section 9.06. No Merger. No merger shall result from Tenant's
sublease of the Property under this Article Nine, Tenant's surrender of this
Lease or the termination of this Lease in any other manner. Upon the occurrence
of any such event, Landlord may after prior written notice to Tenant terminate
any or all subtenancies or succeed to the interest of Tenant as sublandlord
under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES.
Section 10.01. Covenants and Conditions. Tenant's performance of
each of Tenant's obligations under this Lease is a condition as well as a
covenant. Tenant's right to continue in possession of the Property is
conditioned upon such Tenant not being in default hereunder. Time is of the
essence in the performance of all covenants and conditions.
Section 10.02. Defaults. Tenant shall be in default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge within five (5)
days after written notice given not earlier than five (5) days after the due
date; or Tenant shall fail to pay rent or any other payment required herein
within five (5) days after the date due, at any time during a twelve (12) month
period in which Tenant has already received two (2) previous notices of its
failure to pay rent or other payments.
(c) If Tenant fails to perform any of Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days after written
notice from Landlord; provided that if more than thirty (30) days are required
to complete such performance, Tenant shall not be in default if Tenant commences
such performance within the thirty (30)-day period and thereafter diligently
pursues its completion. However, Landlord shall not be required to give such
notice if Tenant's failure to perform constitutes a non-curable breach of this
Lease. The notice required by this Paragraph is intended to satisfy any and all
notice requirements imposed by law on Landlord and is not in addition to any
such requirement.
(d) (i) If Tenant makes a general assignment or general arrangement
for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy
or for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such
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trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall
receive, as Additional Rent, the excess, if any, of the rent (or any other
consideration) paid in connection with such assignment or sublease over the rent
payable by Tenant under this Lease.
Section 10.03. Remedies. (a) If Tenant is in default as described under
Section 10.02 above, Landlord may, at any time thereafter, with notice, but
without limiting Landlord in the exercise of any right or remedy which Landlord
may have:
(i) Terminate this Lease, and Tenant shall remain liable for all Base
Rent, Additional Rent and all other obligations under this Lease arising up to
the date of such termination; or
(ii) Terminate this Lease, and Tenant shall remain liable for all
damages Landlord may incur by reason of Tenant's default, including, without
limitation, a sum which, at the date of such termination, represents the then
value of the excess, if any, of (1) the total Rent, Additional Rent and all
other obligations which would have been payable hereunder by Tenant for the
period commencing with the day following the date of such termination and ending
with the Expiration Date of the Lease Term, over (2) the total reasonable rental
value of the Property for the same period, plus (3) the costs of recovering the
Property and all other expenses incurred by Landlord due to Tenant's default,
including, without limitation, attorney's fees, plus (4) the unpaid Base Rent,
Additional Rent and other charges which Landlord earned as of the date of
termination plus interest at the "Interest Rate" (as hereinafter defined) on
such unpaid Base Rent, Additional Rent and other charges until paid, plus (5)
other sums of money and damages owing on the date of termination, all of which
excess sum shall be deemed immediately due and payable; or
(iii) Without terminating this Lease, declare immediately due and
payable the present value [using a discount rate equal to the discount rate of
the Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%)] of the sum of: (1) all Base Rent, Additional Rent and all other
obligations due and coming due under this Lease for the entire remaining Lease
Term hereof, plus (2) the cost of recovering the Property and all other expenses
incurred by Landlord in connection with Tenant's default, plus (3) the unpaid
Base Rent, Additional Rent and other charges earned as of the date of such
notice, plus (4) Interest at the "Interest Rate," on such unpaid Base Rent,
Additional Rent and other charges until paid, plus (5) all other sums of money
and damages owing by Tenant to Landlord under this Lease. Such payments shall
not be deemed a penalty or forfeiture but shall constitute payment of liquidated
damages for Tenant's failure to comply with the terms and provisions of this
Lease, it being understood and acknowledged by Landlord and Tenant that actual
damages to Landlord are extremely difficult, if not impossible, to ascertain,
and that the amount set forth above is a reasonable estimate thereof. Upon
making such payment, Tenant shall be entitled to receive from Landlord, as and
when they are received by Landlord, all rents received by Landlord from other
assignees, tenants, and subtenants on account of said Property during the Term
of this Lease, less all costs, expenses and attorney's fees of Landlord incurred
in connection with the reletting of the Property, provided that the monies to
which Tenant shall so become entitled shall
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in no event exceed the entire amount actually paid by Tenant to Landlord
pursuant to the preceding sentence; or
(iv) Without terminating this Lease, Landlord may in its own name but
as agent for Tenant enter into and upon and take possession of the Property or
any part thereof, and, at Landlord's option, remove persons and property
therefrom and such property, if any, may be removed and stored in a warehouse or
elsewhere at the cost of, and for the account of Tenant, all without being
deemed guilty of trespass or becoming liable for any loss or damage which may be
occasioned thereby, and Landlord may rent the Property or any portion thereof as
the agent of Tenant, with or without advertisement, and by private negotiations
and for any term upon such terms and conditions as Landlord may deem necessary
or desirable in order to relet the Property. Upon each such reletting, all
rentals received by Landlord from such reletting shall be applied: first, to the
payment of any indebtedness (other than any Rent or Additional Rent due
hereunder) from Tenant to Landlord; second, to the payment of any costs and
expenses of such reletting, including, without limitation, brokerage fees and
attorney's fees and costs of alterations and repairs; third, to the payment of
Rent, Additional Rent and other charges then due and unpaid hereunder; and the
residue, if any, shall be held by Landlord to the extent of and for application
in payment of future Rent, if any becomes owing, as the same may become due and
payable hereunder. In reletting the Property as aforesaid, Landlord may grant
rent concessions and Tenant shall not be credited therefor. If such rentals
received from such reletting shall at any time or from time to time be less than
sufficient to pay to Landlord the entire sums then due from Tenant hereunder,
Tenant shall pay any such deficiency to Landlord. Such deficiency shall, at
Landlord's option, be calculated and paid monthly. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect to
terminate this Lease for any such previous default provided same has not been
cured; or
(v) Without terminating this Lease, and with or without notice to
Tenant, Landlord may enter into and upon the Property and without being liable
for prosecution or any claim for damages therefor, maintain the Property and
repair or replace any damage thereto or do anything for which Tenant is
responsible hereunder. Tenant shall reimburse Landlord immediately upon demand
for any expenses which Landlord incurs in thus effecting Tenant's compliance
under this Lease, and Landlord shall not be liable to Tenant for any damages
with respect thereto; or
(vi) Terminate the Lease and Tenant's right to possession of the
Property; or
(vii) Enforce the performance of Tenant's obligations hereunder by
injunction or other equitable relief, which remedy may be exercised upon any
actual or threatened event of default by Tenant, without regard to whether
Landlord may have an adequate remedy at law; or
(viii) Foreclose any security interest in the property of Tenant
which Landlord may have under the laws of the State of Georgia or under this
Lease, including the immediate taking of possession of all property on or in the
Property; and
(ix) Pursue any combination of the foregoing remedies permitted by
law and such other remedies as are available at law or equity.
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(b) Whenever Landlord terminates this Lease pursuant to this Section 10.03,
it shall do so by giving Tenant written notice of termination, in which event
this Lease shall expire and terminate on the date specified in such notice with
the same force and effect as though the date specified were the date herein
originally fixed as the Lease Term Expiration Date, and all rights of Tenant
under this Lease and in and to the Property shall expire and terminate and
Tenant shall surrender the Property to Landlord on the date specified in such
notice, and if Tenant fails to so surrender, Landlord shall have the right,
without notice, and with or without resort to summary dispossessory proceedings,
to enter upon and take possession of the Property and to expel or remove Tenant
and its effects without being liable for prosecution or any claim for damages
therefor.
(c) Whenever Landlord terminates Tenant's right to possession of the
Property without terminating this Lease pursuant to this Section 10.03, it shall
do so by giving Tenant written notice of termination of its right of possession,
in which event Tenant shall surrender the Property to Landlord on the date
specified in such notice; and if Tenant fails to so surrender, Landlord shall
have the right without notice, and with or without resort to summary
dispossessory proceedings, to enter upon and take possession of the Property and
to expel or remove Tenant and its effects without being liable for prosecution
or any claim for damages therefor.
(d) If this Lease shall terminate as a result of or while there exists a
default hereunder, any funds of Tenant held by Landlord may be applied by
Landlord to unpaid Base Rent, Additional Rent and any damages payable by Tenant
(whether provided for herein or by law) as a result of such termination or
default, in Landlord's sole discretion.
(e) Tenant shall remain liable for all Rent, Additional Rent and all other
obligations as they accrue over the Lease Term after any writ of possession as
to the Property is issued to Landlord in dispossessory proceedings, or after
Landlord terminates the Lease or Tenant's right of possession. Upon the
occurrence of any default by Tenant hereunder, Landlord shall not, in any event,
have any duty to mitigate any damages or other amounts which Tenant might
otherwise be liable to pay to Landlord hereunder; provided, however, that in the
event Tenant is not in possession of the Property, Landlord agrees that it shall
make the Property available for lease and use reasonable efforts to respond in
the ordinary course of Landlord's business to inquiries concerning the Property,
but in no event shall Landlord be obligated to lease the Property to any
prospective tenant, and Tenant expressly acknowledges and agrees that Landlord
may lease other space in the Project or in other buildings controlled by
Landlord or an affiliate of Landlord, whether or not in the vicinity of the
Project, to a tenant otherwise qualified and/or suitable for the Property.
(f) If any statute or rule of law shall limit any of Landlord's remedies as
hereinabove set forth, Landlord shall nonetheless be entitled to any and all
other remedies hereinabove set forth.
(g) As used in this Section 10.03 "Interest Rate" means simple interest
from the date due until paid at the rate of fifteen percent (15%) per annum, or
such lesser amount as may then be the maximum lawful rate.
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(h) The foregoing provisions of this Section 10.03 shall survive the
expiration or earlier termination of this Lease and shall apply to any renewal
or extension of this Lease.
Section 10.04. [Intentionally Deleted]
Section 10.05. Automatic Termination. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof. On such termination, Landlord's damages for
default shall include all costs and fees, including attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to dispossess Tenant; or the pursuing of any action with respect to
Landlord's right to possession of the Property. All such damages suffered (apart
from Base Rent and other rent payable hereunder) shall constitute pecuniary
damages which must be reimbursed to Landlord prior to assumption of the Lease by
Tenant or any successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. Landlord Default.
(a) Notice of Default. Landlord shall not be deemed in breach of this Lease
unless Landlord fails within a reasonable time to perform an obligation required
to be performed by Landlord. For purposes of this Paragraph, a reasonable time
shall in no event be less than ten (10) days for non-monetary and thirty (30)
days for monetary after receipt by Landlord, and any Lender whose name and
address shall have been furnished Tenant in writing for such purpose, of written
notice specifying wherein such obligation of Landlord has not been performed
(either from Tenant or any third party); provided, however, that if the nature
of Landlord's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Landlord shall not be in breach if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(b) Performance by Tenant on Behalf of Landlord. In the event that Landlord
does not cure said breach within thirty (30) days after receipt of said notice,
or if having commenced said cure does not diligently pursue it to completion,
then Tenant may elect to cure said breach on behalf of Landlord. Landlord shall
reimburse such out-of-pocket costs incurred by Tenant, together with interest
from the data, of expenditure at the "Interest Rate" defined in Section 10.03
above, within thirty (30) days after receipt of written demand therefor from
Tenant together with copies of invoices and other documentation confirming such
amounts. Tenant shall reasonably document the cost of said cure and supply said
documentation to Landlord.
Section 10.07. Cumulative Remedies. The exercise of any right or remedy by
either party shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS.
Section 11.01. Subordination. Landlord shall have the right to subordinate
this Lease to any ground lease, deed to secure debt or mortgage encumbering the
Property, any advances made
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on the security thereof and any renewals, modifications, consolidations,
replacements or extensions thereof, whenever made or recorded. Tenant shall
cooperate with Landlord and any lender which is acquiring a security interest in
the Property or the Lease. Tenant shall execute such further documents and
assurances as such lender may reasonably require, provided that Tenant's
obligations under this Lease shall not be increased in any material way (the
performance of ministerial acts shall not be deemed material), and Tenant shall
not be deprived of its rights under this Lease. Tenant's right to quiet
possession of the Property during the Lease Term shall not be disturbed while
Tenant is not in default as defined by Section 10.02 above. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed to secure debt or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed
to secure debt or mortgage whether this Lease is dated prior or subsequent to
the date of said ground lease, deed to secure debt or mortgage or the date of
recording thereof.
Section 11.02. Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed to secure debt,
mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the
transferee or successor to Landlord's interest in the Property and recognize
such transferee or successor as Landlord under this Lease, and Tenant's rights
hereunder to quiet possession of the Property will not be disturbed by such
transferee or successor while Tenant is not in default as defined by Section
10.02 above.
Section 11.03. Signing of Documents. Tenant shall sign and deliver any
instrument or documents reasonably necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after written request, Tenant is deemed to have agreed to
such attornment or subordination.
Section 11.04. Estoppel Certificates.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or if they have been changed,
stating how they have been changed); (ii) that this Lease has not been canceled
or terminated; (iii) the last date of payment of the Base Rent and other charges
and the time period covered by such payment; (iv) that Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or reasonable information with respect
to Tenant or the Lease as Landlord may reasonably request or which any
prospective purchaser or encumbrancer of the Property may also reasonably
request. Tenant shall deliver such statement to Landlord within ten (10) days
after Landlord's request. Landlord may give any such statement by Tenant to any
prospective purchaser or encumbrancer of the Property. Such purchaser or
encumbrancer may rely conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10) day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been canceled
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or terminated except as otherwise represented by Landlord; (iii) that not more
than one month's Base Rent or other charges have been paid in advance; and (iv)
that Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts except to the extent any such
facts are manifestly untrue or deliberately false.
Section 11.05. Tenant's Financial Condition. Within ten (10) days after
written request from Landlord, but not more than twice per year, Tenant shall
deliver to Landlord such financial statements, in a form typically available
from publicly traded companies, as Landlord reasonably requires to verify the
net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In
addition, Tenant shall deliver to any lender designated by Landlord any such
financial statements required by such lender to facilitate the financing or
refinancing of the Property. Tenant represents and warrants to Landlord that
each such financial statement is a true and accurate statement as of the date of
such statement. All financial statements shall be confidential.
ARTICLE TWELVE: LEGAL COSTS.
Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall reimburse
the other party (the "Nondefaulting Party") upon demand for any reasonable costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such reasonable costs shall include legal fees
and costs incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; or (c) necessary to protect Landlord's interest
under this Lease in a bankruptcy proceeding, or other proceeding under Title 11
of the United States Code, as amended. Tenant shall defend Landlord against any
such claim or action at Tenant's expense with counsel reasonably acceptable to
Landlord or, at Landlord's election, Tenant shall reimburse landlord for any
legal fees or costs Landlord incurs in any such claim or action. Landlord shall
also indemnify Tenant against and hold Tenant harmless from all costs, expenses,
demands and liability Tenant may incur if Tenant becomes or is made a party to
any claim or action (a) instituted by Landlord against any third party, or by
any third party against Landlord, or by or against any person holding any
interest under or using the Project by license of or agreement with Landlord;
(b) for foreclosure of any lien for labor or material furnished to or for
Landlord or such other person; or (c) necessary to protect Tenant's interest
under this Lease in a bankruptcy proceeding, or other proceeding under Title 11
of the United States Code, as amended. Landlord shall defend Tenant against any
such claim or action at Landlord's expense with counsel reasonably acceptable to
Tenant or, at Tenant's election,
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Landlord shall reimburse landlord for any legal fees or costs Tenant incurs in
any such claim or action.
Section 12.02. Landlord's Consent. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
Such fees shall not exceed Two Thousand and No/100 Dollars ($2,000.00) per
occurrence.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS.
Section 13.01. Non-Discrimination. Tenant and Landlord will comply with all
legal prohibitions as to discrimination against, or segregation of, any person
or group of persons on the basis of race, color, sex, creed, national origin or
ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of
the Property or any portion thereof.
Section 13.02. Landlord's Liability; Certain Duties.
(a) As used in this Lease, the term "Landlord" means only the current owner
or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord that accrue under this Lease during the
time such Landlord owns such title or estate. Any Landlord who transfers all of
its right, title and interest is relieved of all liability with respect to the
obligations of Landlord under this Lease to be performed after the date of
transfer. However, each Landlord shall deliver to its transferee all funds that
Tenant previously paid if such funds have not yet been properly applied under
the terms of this Lease, and until such delivery, each such Landlord remains
liable for those funds.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed to secure debt encumbering the Property
whose name and address have been furnished in advance to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice except in an emergency
and/or a threat to life or property. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in default if
such cure is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(c) Notwithstanding anything contained elsewhere in this Lease, Tenant
shall have no claim, and hereby waives the right to any claim, against Landlord
for money damages by reason of any refusal, withholding or delaying by Landlord
of any consent, approval or statement of satisfaction required of Landlord by
this Lease or applicable law unless due to Landlord's or its agent's gross
negligence or willful misconduct. In such event, Tenant's only remedy for any
refusal, withholding or delay which is determined to be unreasonable or in
contravention of this Lease or applicable law shall be an action for specific
performance or an injunction to enforce any such requirement.
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(d) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Project, and neither the
Landlord nor its partners, shareholders, officers or other principals shall have
any personal liability under this Lease.
Section 13.03. Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. Interpretation. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. The terms "Tenant" and "Landlord" shall include successors and assigns.
Section 13.05. Incorporation of Prior Agreements; Modifications. This Lease
is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. Notices. All notices required or permitted under this Lease
shall be in writing and shall be sent by nationally recognized overnight
delivery service (such as Federal Express) with charges therefor billed to
shipper. Notices to Tenant shall be delivered to the address specified in
Section 1.03 above, and notices to Landlord shall be delivered to the address
specified in Section 1.02 above. All notices shall be effective upon delivery or
evidenced by a signed delivery receipt. Either party may change its notice
address upon written notice to the other party.
Section 13.07. Waivers. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement. No custom or practice which may develop between the parties in
connection with the terms of this Lease shall be construed to waive or lessen
Landlord's right to insist upon strict performance of the terms of this Lease,
without a written notice thereof to Tenant. Time is of the essence of this
Lease.
Section 13.08. No Recordation. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
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Section 13.09. Binding Effect; Choice of Law. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. This Lease shall create the relationship of Landlord
and Tenant between the parties hereto; no estate shall pass out of Landlord.
Tenant has only a usufruct, not subject to levy and sale, and not assignable by
Tenant except by Landlord's consent as specifically provided in this Lease or as
otherwise permitted herein. The laws of the state in which the Property is
located shall govern this Lease.
Section 13.10. Corporate Authority; Partnership Authority. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord evidence of such authority reasonably acceptable to
Landlord. If Tenant is a partnership, each person or entity signing this Lease
for Tenant represents and warrants that he or it is a general partner of the
partnership, that he or it has full authority to sign for the partnership and
that this Lease binds the partnership and all general partners of the
partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
Section 13.11. [Intentionally Deleted]
Section 13.12. [Intentionally Deleted]
Section 13.13. Execution of Lease. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. Survival. All representations and warranties of Landlord and
Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS.
Section 14.01. Broker's Fee. When this Lease is signed by and delivered to
both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, in the amounts and at the
times as provided in a separate written agreement between Landlord and
Landlord's Broker. Nothing contained in this Lease shall impose any obligation
on Landlord to pay a commission or fee to any party other than Landlord's
Broker.
Section 14.02. No Brokers. Landlord and Tenant each warrant that they have
dealt with no real estate broker(s) in connection with this transaction, Tenant
will compensate Ernst & Young, LLP, Tenant's consultants, pursuant to a separate
agreement between Tenant and Ernst & Young LLP.
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ARTICLE FIFTEEN: COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders which
are attached to or incorporated by reference in this Lease.
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"LANDLORD"
Signed on January 25, 2000 MERCY CAPITAL CENTER JOINT VENTURE,
at Monterey, CA a California general partnership
By: /s/ John E. Van Valkenburgh
John E. Van Valkenburgh, General Partner
[Signatures continue on next page]
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"TENANT"
Signed on______, 2000 HOMEGROCER.COM, INC.
at___________________ a Delaware corporation
By: /s/ Mary Alice Taylor
Its:_________________________________
Attest: /s/ Kristin Stred
Its: Secretary
(CORPORATE SEAL)
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EXHIBIT 10.37
SUPERVALU Retailer's Agreement
(with Store Identification)
SUPERVALU INC.
GENERAL OFFICES: P0 BOX 990, MINNEAPOLIS, MN 55440
AGREEMENT between SUPERVALU INC. ("SUPERVALU") and the undersigned
independent merchant ("Retailer") in consideration of the mutual promises
herein, SUPERVALU and Retailer agree as follows:
A. SUPERVALU WILL SO LONG AS RETAILER IS NOT IN DEFAULT ON ANY OBLIGATION TO
SUPERVALU:
1. License Retailer to identify and advertise itself as a "SUPERVALU"
independent retailer, and otherwise use in connection with its retail grocery
store and business at the address below, the SUPERVALU trade name, insignia,
emblem, mark and colors (the "Trade Name"). No license is given for Retailer to
use the Trade Name as, or on, a label, trademark on merchandise, or as a part of
any corporate name. SUPERVALU reserves the right to modify or replace the Trade
Name or any portion thereof from time to time. For the right to enter into or
maintain this SUPERVALU Retailer's Agreement, Retailer is not obligated to
obtain from SUPERVALU any particular product or services and need not pay
SUPERVALU any money for simply entering into this Retailer's Agreement.
2. Make available for lease to Retailer one or more storefront signs
bearing the Trade Name. If leased, such signs will be and remain the property of
SUPERVALU.
3. Make available to Retailer its entire line of products authorized for
sale by SUPERVALU to licensed SUPERVALU retailers at its applicable price end
fee schedule in effect at the time Retailer places each order for product.
SUPERVALU'S obligations under this paragraph are subject to the availability of
product: in eases of product shortage, SUPERVALU reserves the right to allocate
product at its discretion. All prices, fees, freight, terms and conditions are
subject to change by SUPERVALU at any time and from time to time. The Retailer's
price for each product purchase, including any fees, freight F.O.B. SUPERVALU
Warehouse, and services, will be as stated on the sales documents, including
invoices and weekly retailer statements, delivered to Retailer.
4. Make available to Retailer field advisory, warehousing, buying,
merchandising, shopping, advertising, accounting, store engineering, bulletin
services, and such other services as SUPERVALU may offer from time to time, on
SUPERVALU's established fee or charge basis, which fees and charges are subject
to change at any time and from time to time.
B. THE RETAILER WILL:
1. Cooperate with SUPERVALU with respect to ordering and delivery
procedures.
2. Pay to SUPERVALU the price for product, including any fees and freight
F.O.B. SUPERVALU Warehouse, and services as stated on the sales documents
delivered to Retailer. Unless otherwise specified by SUPERVALU, supply of
Retailer's orders will be conditioned upon prearranged authorization for payment
by electronic transfer of funds from Retailer's account to SUPERVALU or by
receipt of a signed blank check written in ink and payable to the order of
SUPERVALU INC. Notwithstanding any prior representation or agreement to the
contrary, SUPERVALU reserves the right at any time to condition delivery of
goods or services to Retailer on Retailer's payment of cash on delivery or
Retailer's prepayment by certified check, cashier's check, or wire transfer of
funds.
3. Observe all standards and conditions and requirements set forth in the
SUPERVALU Policy (a copy of which Retailer hereby acknowledges Retailer has
received, read, understands, and accepts) for the protection of the Trade Name.
<PAGE>
4. Upon termination hereof, immediately cease all use of the Trade Name or
any confusingly similar identification, trademark, or trade name.
5. Acknowledge SUPERVALU's right to choose and select its customers and
retailers and to enter into SUPERVALU Retailer Agreements with other parties at
SUPERVALU's sole choice and discretion, including but not limited to SUPERVALU's
right to own, operate, finance, serve or supply a store at any location. Further
acknowledge that in the event of termination of this agreement SUPERVALU has no
obligations to continue to sell or supply merchandise or services of any kind to
the Retailer.
6. Either subscribe to SUPERVALU's retail accounting service thereby
furnishing SUPERVALU periodic copies of accounting and sales reports and
statements, or maintain its own similar adequate system of accounting and
furnish SUPERVALU periodic copies of accounting and sales reports and statements
as requested by SUPERVALU.
7. Hold in confidence and not disclose to any other person all information
obtained from SUPERVALU regarding price, cost, discounts, merchandising,
equipment, sales and promotions.
8. Not use the Trade Name as, or on, a label, trademark on merchandise, or
as a part of any corporate name.
9. Retailer acknowledges that its use of the Trade Name is further
conditioned on Retailer adhering to the standards for services in the SUPERVALU
Policy which is incorporated herein by reference.
10. Not question or contest during or subsequent to the life of this
Agreement the validity of SUPERVALU's ownership, right or control of any Trade
Name, including trademark, trade name, trade dress, trade style, service mark,
medallion mark, emblem, insignia or colors.
C. TERM AND TERMINATION:
This agreement shall become effective an the date appearing below, and
shall continue in full force and effect until terminated by either party hereto
upon seven (7) days' notice in writing with or without cause. This agreement
shall terminate automatically end immediately if either SUPERVALU or Retailer
becomes bankrupt or insolvent or makes an assignment for the benefit of
creditors, if a receiver is appointed with authority to take possession of all
or part of its assets, if Retailer fails to pay its obligations to SUPERVALU
when due, or if Retailer becomes incapacitated or is dissolved. In the event of
termination, the Retailer agrees that within seven (7) days following the
effective date of such termination, Retailer will have removed from the store
location and from all literature and advertising material, and will have ordered
removed from all directory listings, all references to the Trade Name or other
identification employing the Trade Name or any confusingly similar trade name,
and will have taken steps necessary to change or cause to be changed its trade
name and corporate name so that such names do not include the licensed Trade
Name or words confusingly similar thereto. Within seven (7) days following the
effective date of such termination, Retailer will return any signs bearing the
Trade Name or any other signs belonging to SUPERVALU in good condition,
reasonable wear and tear excepted, transportation charges prepaid, and do all
things necessary to advise and inform the public that affiliation with SUPERVALU
has been terminated.
The termination of the relationship between SUPERVALU and Retailer shall
not affect the obligation of the Retailer to pay all monies owed to SUPERVALU
but unpaid or unpayable at the time of termination.
If Retailer fails to comply with the terms of this Agreement following its
termination, SUPERVALU shall have and is hereby given the right to enter the
Retailer's place of business and thereupon take possession for itself and for
its own use all identification bearing the Trade Name, and the Retailer hereby
agrees to reimburse SUPERVALU for SUPERVALU's cost and expense incurred in such
taking possession and removing and changing such identification, including but
not limited to reasonable attorneys' fees.
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<PAGE>
D. RELATIONSHIP QP PARTIES:
The relationship of the parties is that of arm's length independent buyer
and independent seller and not that of partners, joint venturers, principal and
agent, fiduciary and beneficiary, franchiser and franchisee, employer and
employee, or of special trust and confidence. There shall be no third party
beneficiaries to this Agreement. SUPERVALU will not be liable in any manner
whatsoever for the debts, liabilities, or obligations incurred by Retailer in
the operation of Retailer's business. Retailer shall indemnify and hold
SUPERVALU harmless from and against any and all claims, damages, or losses made
against or incurred by SUPERVALU, its officers, employees, or agents arising out
of the operation of Retailer's business.
E. ACKNOWLEDGEMENT OF RISKS AND RETAILER'S SOLE CONTROL OF ITS BUSINESS:
Retailer acknowledges that (i) the retail grocery business is highly
competitive and a high risk business and that SUPERVALU has not given end cannot
give any guaranty of the profitability, if any, of Retailer; (ii) Retailer may
be unprofitable and that a part or the whole of Retailer's investment in the
store may be lost in the event that Retailer is unprofitable; (iii) the business
and profitability of Retailer may be affected by many causes including, without
limitation, Retailer's sole control over its methods or operation and business
practices, competition, economic conditions, varying availability and price of
product, any lack of consumer confidence, uncertainty as to petroleum supplies,
inflation, deflation, strikes, embargoes, national emergencies, fire or other
casualty, acts of nature and other like or similar causes; (iv) SUPERVALU has no
intention or obligation in any way, directly or indirectly, to provide any
additional capital to Retailer so as to refinance Retailer or to provide
operating capital to Retailer, or to assist Retailer to obtain further funds.
F. ARBITRATION:
Any controversy or claim arising between the parties, including, but not
limited to, disputes relating to this Agreement, shall be resolved by binding
arbitration. This agreement to arbitrate shall continue in full force and effect
despite the expiration, rescission or termination of this Agreement. All
arbitration shall be undertaken pursuant to the Federal Arbitration Act, and the
decision of the arbitrator(s) shall be enforceable in any court of competent
jurisdiction. The parties knowingly and voluntarily waive their rights to have
their dispute tried and adjudicated by a judge or jury. The arbitrator(s) shall
apply the Law of the State of Minnesota, except as may be modified by this
Agreement. The arbitration shall be held in Minneapolis, Minnesota.
Any party may demand arbitration by sending written notice to the other
party. The arbitration and the selection of the arbitrator(s) shall be conducted
in accordance with such rules as may be agreed upon by the parties, or, failing
agreement within thirty (30) days after arbitration is demanded under the
Commercial Arbitration Rules of the American Arbitration Association ("AAA"), as
such rules may be modified by this agreement, in any dispute which involves more
than $100,000 in damages, three arbitrators shall be used. Unless the parties
agree otherwise, they shall be limited in their discovery to directly relevant
documents. Responses or objections to a document request shall be served twenty
(20) days after receipt of the request. The arbitrator(s) shall resolve any
discovery disputes.
The arbitrator(s) shall have the authority to award actual money damages
(with interest on unpaid amounts from the date due), specific performance, and
temporary injunctive relief, but the arbitrator(s) shall not have the authority
to award exemplary, punitive or consequential damages, and the parties expressly
waive any claimed right to such damages. The arbitration shall be of each
party's individual claims only, and no claim of any other party shall be subject
to arbitration in such proceeding. The costs of arbitration, but not the costs
and expenses of the parties, shall be shared equally by the parties. If a party
fails to proceed with arbitration, unsuccessfully challenges the arbitration
award, or fails to comply with the arbitration award, the other party is
entitled to costs, including reasonable attorney's fees, for having to compel
arbitration or defend or enforce the award. Except as otherwise required by law,
the parties and the arbitrator(s) agree to maintain as confidential all
information or documents obtained during the arbitration process, including the
resolution of the dispute.
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<PAGE>
Notwithstanding the above, the parties recognize that certain business
relationships could give rise to the need for one or more of the parties to seek
emergency, provisional or summary relief to repossess and sell or
otherwise dispose of goods and/or fixtures, to prevent the sale or transfer of
goods and/or fixtures, to protect real or personal property from injury, or to
obtain possession of real estate and terminate leasehold interests, and for
temporary injunctive relief. The parties agree that either shall be entitled to
pursue such rights and remedies for emergency. provisional, temporary injunctive
or summary relief; however, each party agrees that, immediately following the
issuance of any emergency, provisional, temporary injunctive or summary relief,
it will consent to the stay of judicial proceedings pending arbitration of all
underlying claims between the parties.
G. MISCELLANEOUS:
This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of the Retailer and SUPERVALU provided that neither this
Agreement, nor any right, title, interest or obligation hereunder may be
assigned or otherwise transferred by Retailer without the prior written consent
of SUPERVALU. Each party acknowledges that it has not been induced to enter
into this Agreement by any representations or statements, oral or written, not
expressly contained herein. This Agreement shall not be deemed or construed to
be modified, amended, rescinded, canceled or waived, in whole or in part, other
than by written instrument signed by the parties hereto. In the event that any
of the terms of this Agreement are in conflict with any rule or law or statutory
provision or otherwise unenforceable under the laws or regulations of any
government or subdivision thereof, such terms shall be deemed stricken from this
Agreement, and this Agreement shall continue in force, unless the invalidity or
unenforceability of any such provision thereof does substantial violence to, or
where the invalid or unenforceable provisions comprise an integral part of or
are otherwise inseparable from, the remainder of this Agreement. No failure by
any party to take any action or assert any right hereunder shall be deemed to be
a waiver of such right in the event of the continuation or repetition of the
circumstances giving rise to such right. In executing this agreement, Retailer
completely and unconditionally acknowledges and agrees that Retailer has had the
opportunity to consult with and receive the advice of Retailer's independent
attorney, has read and understood this Agreement and has executed this agreement
after independent investigation, voluntarily and without fraud, duress or undue
influence, and not in reliance on any inducements, promises or representations
by SUPERVALU or its attorneys. Retailer represents and warrants that the
undersigned has full power and authority to execute this Retailer's Agreement
for Retailer.
<TABLE>
<CAPTION>
<S> <C>
SUPERVALUE INC. STORE NAME HOMEGROCER.COM, INC.
---------------------------------------------
By Store Address 1445 120th Ave
------------------------------------------- -----------------------------------------
BELLEVUE, WA
Title ---------------------------------------------------------
---------------------------------------
Date Retailer's Corporation Name (if applicable):
----------------------------------------
---------------------------------------------------------
By By
------------------------------------------ -----------------------------------------------------
(Retailer's Authorized Signature)
Title Title SENIOR VICE PRESIDENT
--------------------------------------- --------------------------------------------------
Date Date DEC 10/97
----------------------------------------- ---------------------------------------------------
Witness /s/ Den Deering /s/ Josh Waltri
------------------------------------------------
Vice President / SV Business Development
</TABLE>
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<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 18,
2000, except for Note 9, as to which the date is February 15, 2000, in
Amendment No. 3 to the Registration Statement (Form S-1 No. 333-93015) and
related Prospectus of HomeGrocer.com, Inc. for the registration of shares of
its common stock.
Ernst & Young LLP
Seattle, Washington
February 16, 2000
