<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-93015
PROSPECTUS
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.
------------
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "HOMG."
------------
Investing in our common stock involves risks, including the risk that our
executive officers, directors and major shareholders will own approximately 65%
of our outstanding common shares. See "Risk Factors" beginning on page 6.
------------
PRICE $12 A SHARE
------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions HomeGrocer.com
-------- ------------- --------------
<S> <C> <C> <C>
Per Share............................. $12.00 $0.84 $11.16
Total................................. $264,000,000 $18,480,000 $245,520,000
</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
March 15, 2000.
------------
MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
BANC OF AMERICA SECURITIES LLC
J.C. BRADFORD & CO.
March 9, 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>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 19
Use of Proceeds..................... 19
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 21
Selected Financial Data............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................ 29
Management.......................... 42
Related Party Transactions.......... 57
Principal Shareholders.............. 60
Description of Capital Stock........ 62
Shares Eligible for Future Sale..... 66
Material U.S. Federal Tax
Considerations for Non-U.S.
Holders............................ 68
Underwriters........................ 70
Legal Matters....................... 73
Experts............................. 73
Additional Information Available to
You................................ 73
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 April 3, 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. We are obligated to pay AOL a
total of approximately $60 million over the next five years.
3
<PAGE>
Our History
We were incorporated in British Columbia, Canada in January 1997,
reincorporated in Delaware in September 1997 and reincorporated in Washington
in March 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
<TABLE>
<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;
. 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 the initial public offering price of $12.00
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 $321,780
Working capital........................................... 66,593 311,116
Total assets.............................................. 146,929 390,554
Long-term obligations, less current portion............... 17,790 17,790
Total shareholders' equity................................ 112,147 356,267
</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.
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 shareholders 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
10
<PAGE>
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.
11
<PAGE>
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.
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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
15
<PAGE>
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 shareholders
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 shareholders are able to exercise
significant control over all matters requiring shareholder 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 Shareholders."
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
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 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
16
<PAGE>
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.
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."
We may be required to repurchase shares of our common stock issued upon the
exercise of stock options and options to purchase our common stock that may
have been issued in violation of state securities laws.
We recently discovered that our 1997 Stock Incentive Compensation Plan did
not include special provisions that are required under the state securities
laws of California. Therefore, some of our employees, directors and consultants
who are California residents have been granted options of HomeGrocer.com that
may have been issued in violation of state securities laws. Some of these
option recipients have exercised their options. To remedy this situation and
comply with California law, HomeGrocer.com expects to offer to repurchase
shares and options to purchase shares of our common stock. Based upon stock
option issuances and exercises prior to January 10, 2000, when we amended our
option plan to comply with California securities laws, we expect to offer to
repurchase up to a maximum of 782,000 shares of our common stock issued upon
the exercise of stock options and options to purchase 1,013,350 shares of our
common stock. The 782,000 shares of common stock have a weighted average
purchase price of $0.44 per share. The options to purchase 1,013,350 shares of
our common stock have a weighted average exercise price of $2.47 per share.
Upon approval by the California Department of Corporations, HomeGrocer.com will
distribute a repurchase offer memorandum to holders of these shares and
options, and the offer will remain open for a period of 30 days from the date
of receipt. If the offer is accepted by all affected securityholders, we may be
required to pay up to a maximum of approximately $905,500 to repurchase these
shares and options.
Future sales of our common stock may cause our stock price to decline.
If our shareholders 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
17
<PAGE>
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.
Each of our officers, directors and most of our shareholders have entered
into lock-up agreements generally providing that they will not sell, otherwise
dispose of or transfer any of our common stock or other securities for the
period of 180 days after this offering without the consent of Morgan Stanley.
However, Morgan Stanley has agreed that 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 or directors of HomeGrocer.com, or a total of approximately
418,492 shares, subject to this 180-day restriction will be released from the
restriction.
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."
18
<PAGE>
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 $244.1 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 $280.9 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, 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 and Amazon.com,
LLC pursuant to advertising agreements. We are obligated to pay approximately
$15 million to AOL and $5 million to Amazon.com over the next 12 months.
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.
19
<PAGE>
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;
. The receipt of the net proceeds from the sale by HomeGrocer.com of the
shares of common stock at the initial public offering price of $12.00
per share, after deducting underwriting discounts and commissions and
estimated offering expenses; and
. Our reincorporation into the state of Washington in March 2000.
<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 $321,780
======== ======== ========
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
actual and pro forma, no par value pro forma
as adjusted; 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 actual and pro
forma, no par value pro forma as adjusted;
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....... 30 103 494,374
Additional paid-in capital................... 250,151 250,151 --
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................. 112,147 112,147 356,267
-------- -------- --------
Total capitalization..................... $129,937 $129,937 $374,057
======== ======== ========
</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).
20
<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 initial public offering price of $12.00 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 $356.3 million or approximately $2.85 per share. This
represents an immediate increase in net tangible book value of $1.76 per share
to existing shareholders as of January 1, 2000 and an immediate dilution of
$9.15 per share to new investors of common stock in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share .......................... $12.00
Pro forma net tangible book value before the offering........... $1.09
Increase attributable to new investors.......................... 1.76
-----
Pro forma net tangible book value after the offering.............. 2.85
------
Dilution per share to new investors............................... $ 9.15
======
</TABLE>
The following table summarizes, as of January 1, 2000, the differences
between the existing shareholders 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 shareholders... 102,812,274 82.4% $186,196,000 41.4% $ 1.81
New investors........... 22,000,000 17.6 264,000,000 58.6 12.00
----------- ----- ------------ -----
Totals................ 124,812,274 100.0% $450,196,000 100.0%
=========== ===== ============ =====
</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
Shareholders" for a more detailed description of our shareholders 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.
21
<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.
22
<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. 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. 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;
Washington, D.C.; Chicago, Illinois; 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.
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
23
<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>
24
<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 million for fiscal year
2003. Such amortization amounts assume that all vesting periods are completed
by all employees; to the extent that unvested options are forfeited by an
employee, previously recorded amortization related to the unvested options will
be credited to stock-based compensation expense.
25
<PAGE>
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. We did not have any net sales in
fiscal 1997. We had net sales of $1.1 million in fiscal 1998.
Gross Profit. We did not have any gross profit in fiscal 1997. The fiscal
1998 gross profit of $76,000 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 related
to stock options granted to outside consultants in exchange for services
rendered increased by $182,000 from $230,000 in fiscal 1997 to $412,000 in
fiscal 1998.
Interest Income. We did not have any interest income in fiscal 1997.
Interest income increased to $54,000 in fiscal 1998 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 by $111,000 from $61,000 in
fiscal 1997 to $172,000 in fiscal 1998 as a result of borrowing arrangements we
entered into primarily to finance purchases of fixed assets and fund operating
activities.
26
<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.
27
<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.
28
<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; Washington, D.C.; Chicago, Illinois; and
the Bay Area, California in the next 12 months. 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.
29
<PAGE>
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.
[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.
30
<PAGE>
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.
31
<PAGE>
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); "Over the Counter Medications/Health and Beauty
Aids(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.
32
<PAGE>
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.
33
<PAGE>
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; Washington,
D.C.; Chicago, Illinois; and the Bay Area, California. 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 more efficiently. 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. 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 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.
34
<PAGE>
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.
35
<PAGE>
. 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.
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
36
<PAGE>
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.
Advertising Agreements
HomeGrocer.com pursues advertising agreements to increase its access to
online customers, build brand recognition and expand its online presence. To
date, we have entered into the following advertising agreements:
37
<PAGE>
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 a five year 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
exclusivity in the online grocery sector on a limited number of AOL channels
and expires in February 2005. In addition, AOL has agreed to promote and
advertise HomeGrocer.com 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. Of this amount we paid $6
million in February 2000 and will pay $4 million quarterly in the year 2000
beginning in June and $3 million quarterly beginning March 2001 for the
remaining term of the agreement. In addition we will 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, in which case our payment obligations would be reduced.
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
38
<PAGE>
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.
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
39
<PAGE>
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 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.
40
<PAGE>
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.
On February 28, 2000, CNA Industrial Engineering, Inc. filed suit against
HomeGrocer.com in Superior Court of Washington for King County to collect
$473,357 which it claims it is owed for consulting, design and installation
services. We dispute the amount claimed and intend to vigorously defend the
lawsuit.
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 1,677,000 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;
Washington, D.C.; Chicago, Illinois; 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.
41
<PAGE>
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
42
<PAGE>
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
43
<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
44
<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.
45
<PAGE>
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 shareholders 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
shareholders, 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 shareholders, 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 shareholders. Each class will be elected for a
three-year term following its initial term.
46
<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
shareholder 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.
47
<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.
48
<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 the initial public offering price of $12.00 per share and based on
assumed rate of stock appreciation of 5% and 10%, compounded annually. These
rates are mandated by the Securities and Exchange Commission and do not
represent our estimate of our future common stock price. Actual gains, if any,
on stock option exercises will depend on the future performance of our common
stock. In the fiscal year ended January 1, 2000, we granted options to acquire
up to an aggregate of 16,960,400 shares of common stock to employees,
consultants and directors, all at exercise prices equal to the deemed fair
market value of our common stock on the date of grant as determined in good
faith by our board of directors.
Option Grants in the Fiscal Year Ended January 1, 2000
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value At Assumed
Number Of Percent Of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted To Exercise Or For Option Term
Options Employees In Base Price Expiration ------------------------
Name Granted(#) Fiscal Year ($/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 $82,640,519 $128,665,260
J. Terrence Drayton(2).. 1,650,000 9.7 0.45 9/9/09 30,301,523 47,177,262
Ken Deering(3).......... 200,000 1.2 0.45 6/11/09 3,628,731 5,584,150
Robert G. Duffy(4)...... 100,000 0.6 0.45 6/11/09 1,814,365 2,792,075
Jonathan W. Landers(5).. 100,000 0.6 0.45 6/11/09 1,814,365 2,792,075
</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.
49
<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 -- 577,500 --
Robert G. Duffy......... 250,000 -- 50,000 -- 577,500 --
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 initial
public offering price of $12 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.
50
<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
51
<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 and was approved by the shareholders in
February 2000. 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 shareholder approval for any action requiring
shareholder approval under applicable law. The 1999 stock incentive plan will
terminate in December 2009 unless the board of directors terminates it
earlier.
52
<PAGE>
1997 Stock Incentive Compensation Plan. The 1997 plan was adopted by the
board of directors and approved by the shareholders 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, directors and consultants reside in California and
received options under our 1997 plan. Some of these recipients have exercised
their options. We recently discovered that under the laws of California, our
1997 plan did not include special provisions that are required under the laws
of that state. To remedy this situation and comply with California law,
HomeGrocer.com expects to offer to repurchase shares and options to purchase
shares of our common stock. Based upon stock option issuances and exercises
prior to January 10, 2000, when we amended our option plan to comply with
California securities laws, we expect to offer to repurchase up to a maximum of
782,000 shares of our common stock issued upon the exercise of stock options
and options to purchase 1,013,350 shares of our common stock. The 782,000
shares of common stock have a weighted average purchase price of $0.44 per
share. The options to purchase 1,013,350 shares of our common stock have a
weighted average exercise price of $2.47 per share. Upon approval by the
California Department of Corporations, HomeGrocer.com will distribute a
repurchase offer memorandum to holders of these shares and options, and the
offer will remain open for a period of 30 days from the date of receipt. If the
offer is accepted by all affected securityholders, we may be required to pay up
to a maximum of approximately $905,500 to repurchase these shares and options.
We do not plan to use the proceeds from this offering to repurchase the shares
and options subject to the rescission offer.
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, was approved by the shareholders in
February 2000 and will become effective upon the closing of this offering. A
total of 500,000 shares of common stock has been reserved for issuance under
the
53
<PAGE>
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.
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 shareholders' 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 shareholder 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
54
<PAGE>
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.
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
55
<PAGE>
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.
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.
56
<PAGE>
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. and
Investment King. 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.
57
<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 190,572 shares of Series C preferred
stock and 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, 862,068 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, 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.
58
<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. We believe the terms of our agreement with
Amazon.com are as favorable as we could have obtained from an unaffiliated
third party.
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.
59
<PAGE>
PRINCIPAL SHAREHOLDERS
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 shareholders 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 shareholder is based on 102,812,274 shares of
common stock outstanding as of January 1, 2000, together with applicable
options for that shareholder. 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.
60
<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. and
Investment King. 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 190,572 shares
of Series C preferred stock and 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 862,068 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.
61
<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 shareholders 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 shareholders. 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 shareholders, 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 shareholders. 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
were exercised in January and February 2000. Warrants to purchase the remaining
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
62
<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.
63
<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.
64
<PAGE>
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.
65
<PAGE>
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% shareholders, 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 shareholders 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
shareholders 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, almost all of 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 or 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 our first post-
offering public release of our earnings results occurs between the
eleventh trading day after the date of this prospectus and the 89th day
after the date of this prospectus, or
66
<PAGE>
. on the second trading day following the first public release of our
earnings results, if we do not release our earnings results in the
period 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.
67
<PAGE>
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.
68
<PAGE>
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.
69
<PAGE>
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, Chase Securities Inc., 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, Chase
Securities Inc., 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............................... 6,480,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 5,184,000
Chase Securities Inc ........................................... 3,240,000
Banc of America Securities LLC.................................. 972,000
J.C. Bradford & Co. ............................................ 324,000
Robert W. Baird & Co. Incorporated.............................. 200,000
Dain Rauscher Wessels........................................... 200,000
First Union Securities, Inc..................................... 200,000
Edward D. Jones & Co., L.P...................................... 200,000
McAdams Wright Ragen, Inc....................................... 200,000
McDonald Investments Inc., A KeyCorp Company.................... 200,000
Pacific Crest Securities, Inc................................... 200,000
----------
Subtotal........................................................ 17,600,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited...................... 1,760,000
Donaldson, Lufkin & Jenrette International...................... 1,408,000
Chase Securities Inc. .......................................... 880,000
Bank of America International Limited........................... 264,000
J.C. Bradford & Co. ............................................ 88,000
----------
Subtotal........................................................ 4,400,000
----------
Total......................................................... 22,000,000
==========
</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
70
<PAGE>
concession not in excess of $0.50 a share under the public offering price. No
underwriter will allow, and no dealer will reallow, a concession to other
underwriters or to dealers. 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
3,300,000 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 $303,600,000, the total underwriters' discounts and commissions
would be $21,252,000 and total proceeds to HomeGrocer.com would be
$282,348,000.
HomeGrocer.com has advised the underwriters that the estimated expenses of
the offering, in addition to the underwriting discounts and commissions, are
approximately $1,400,000. The underwriters have agreed to reimburse certain of
HomeGrocer.com's expenses.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by HomeGrocer.com. These amounts are
shown assuming both no exercise and full exercise of the underwriters' over-
allotment option. 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.
<TABLE>
<CAPTION>
Per Share Total
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by
HomeGrocer.com........... $0.84 $0.84 $18,480,000 $21,252,000
Other amounts considered
to be underwriting
compensation by the
NASD..................... $ 1,068,954 $ 1,068,954
</TABLE>
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley & Co.
Incorporated, will distribute shares of common stock over the Internet to its
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 been approved 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
shareholders 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
71
<PAGE>
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;
. 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 Chase Securities
Inc., one of the representatives in this offering. Employees and entities
associated with Chase Securities Inc. own an aggregate of 172,412 shares of our
Series D preferred stock.
72
<PAGE>
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.
73
<PAGE>
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 $82,000, $1.0 million and $7.7 million for the 51 weeks
ended January 3, 1998 and 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. Shareholders' 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
shareholders, 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.
A total of 1,795,350 options under the 1997 Plan have been granted to
employees, directors and consultants who reside in California. Some of these
optionees have exercised their options prior to January 1, 2000. The 1997 Plan
did not include certain provisions required by California state securities
laws. The Company plans to offer to repurchase shares that were exercised
(782,000 shares) and to repurchase unexercised options (1,013,350 options). The
rescission offer aggregates $344,000 for outstanding common stock and $562,000
for outstanding stock options. The Company expects to make the rescission offer
in March 2000 and this offer will remain open for 30 days. Due to this
rescission offer, the $344,000 related to outstanding common stock should be
classified in the January 1, 2000 balance sheet outside of shareholders' equity
as mezzanine equity until the rescission offer expires, however this amount was
included within shareholders' equity because the amount is not considered
material.
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.
F-18
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
F-19
<PAGE>
HOMEGROCER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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-20
<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>
PROSPECTUS
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.
---------------
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "HOMG."
---------------
Investing in our common stock involves risks, including the risk that our
executive officers, directors and major shareholders will own approximately
65% of our outstanding common shares. See "Risk Factors" beginning on page 6.
---------------
PRICE $12 A SHARE
---------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions HomeGrocer.com
-------- ------------- --------------
<S> <C> <C> <C>
Per Share............................. $12.00 $0.84 $11.16
Total................................. $264,000,000 $18,480,000 $245,520,000
</TABLE>
HomeGrocer.com has granted the underwriters the right to purchase up to an
additional 3,300,000 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 March 15, 2000.
---------------
MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE
CHASE H&Q
BANK OF AMERICA INTERNATIONAL LIMITED
J.C. BRADFORD & CO.
March 9, 2000
