<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 2000
REGISTRATION NO. 333-92433
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PETS.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5999 95-4730753
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
435 BRANNAN STREET
SUITE 100
SAN FRANCISCO, CA 94107
(415) 222-9999
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JULIA L. WAINWRIGHT
CHIEF EXECUTIVE OFFICER
PETS.COM, INC.
435 BRANNAN STREET
SUITE 100
SAN FRANCISCO, CA 94107
(415) 222-9999
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN V. BAUTISTA, ESQ. KEVIN P. KENNEDY, ESQ.
FRANCES JOHNSTON, ESQ. SHEARMAN & STERLING
JOHN DUGAN, ESQ. 1550 EL CAMINO REAL
VENTURE LAW GROUP MENLO PARK, CA 94025
A PROFESSIONAL CORPORATION (650) 330-2200
2800 SAND HILL ROAD
MENLO PARK, CA 94025
(650) 854-4488
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
[greenpaw.eps]
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED FEBRUARY 9, 2000
PROSPECTUS
7,500,000 SHARES
LOGO
COMMON STOCK
------------------------
This is Pets.com's initial public offering of common stock. The U.S.
underwriters are offering 6,000,000 shares in the U.S. and Canada and the
international managers are offering 1,500,000 shares outside the U.S. and
Canada.
We expect the public offering price to be between $9.00 and $11.00 per
share. After pricing this offering, we expect that the common stock will be
quoted on the Nasdaq National Market under the symbol "IPET."
INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Pets.com, Inc................. $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 900,000
shares from Pets.com at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional 225,000 shares from Pets.com.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
------------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
WARBURG DILLON READ
------------------------
The date of this prospectus is February , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Financial and Operating Data....................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 28
Management.................................................. 45
Related Party Transactions.................................. 57
Principal Stockholders...................................... 60
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 70
Experts..................................................... 70
Additional Information...................................... 70
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operation and prospects may have changed since that date.
Pets.com(TM), the Pets.com logo, Because Pets Can't Drive(TM), Keep It
Comin'(TM), More Products Than A Superstore Delivers(TM), People Helping
Animals, Animals Helping People(TM), and Pets.commitment(TM) are trademarks of
Pets.com and Pets.com has the right to use Pets.complete(TM). All other brand
names or trademarks appearing in this prospectus are the property of their
respective holders. Use or display by Pets.com of other parties' trademarks,
trade dress or products is not intended to and does not imply a relationship
with, or endorsement or sponsorship of, Pets.com by the trademark or trade dress
owners.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and financial statements appearing elsewhere
in this prospectus.
PETS.COM, INC.
We are a leading online retailer of pet products, integrating product sales
with expert information on pets and their care. We are committed to serving pets
and their owners with the best care possible through a broad product selection,
expert information and superior service. We seek to address the entire pet
products market, transcending the limited product selection of superstores,
specialty stores and grocery stores. Our broad selection of approximately 12,000
SKUs is integrated with extensive pet-related information and resources designed
to help consumers make informed purchasing decisions. We designed our Web store
to provide our customers with a convenient, one-stop shopping experience that is
organized to reflect how consumers think about shopping for their pets. Our Web
store addresses the needs of many of the most popular pets, including dogs,
cats, birds, fish, reptiles, ferrets, and other small pets. We provide quality
customer service through our in-house distribution, fulfillment, customer
service, and technology operations. Furthermore, we encourage participation in
the pet community both through our Web store and through Pets.commitment, our
charitable foundation that supports the role that pets and people play in each
others' lives.
The pet products industry in the United States is a large and growing
market characterized by a loyal and emotion-driven customer base. According to
the Pet Industry Joint Advisory Council, U.S. consumer spending on pet products
and services grew at an annual rate of approximately 9% per year between 1993
and 1997, totaling approximately $23 billion at the end of 1997. More than 60%
of U.S. households owned a pet and 40% of those households owned more than one
pet in 1998, according to a recent American Pet Products Manufacturers
Association study. The pet products market has traditionally been served by a
combination of traditional store-based retailers, including superstores,
independent specialty stores and grocery stores. This market is highly
fragmented, and generally requires consumers to expend considerable time and
effort shopping for pet products in multiple stores to meet all their needs.
We provide consumers with one-stop shopping for their pet care needs. We
seek to attract and retain consumers by emphasizing the following key
attributes:
Extensive Product Selection. With only one distribution center at this
time, our SKU count is currently equivalent to the number available at the
largest pet superstores, and by the middle of 2000 we expect our SKU count will
increase to approximately two times the SKUs available at these stores.
Expert Information and Professional Resources. We provide consumers
extensive pet and pet care information integrated throughout our Web store
through our in-house staff of pet experts and strategic relationships.
Superior Shopping Experience. We believe that we provide an intuitive,
easy-to-use Web store, categorized and organized the way people think about
shopping for their pets. We also offer our customers a highly streamlined
checkout experience and direct delivery to their doors.
Quality Customer Service. We have invested significant resources to create
our own fulfillment, distribution, and both online and in-person help service
functions to enable us to better control all aspects of the customers' shopping
experience.
Community. Visitors to our Web store can participate online in 60 different
pet discussion forums, sign up for our online newsletter and get information on
our Pets.commitment charitable foundation.
1
<PAGE> 5
Our objective is to become one of the world's leading retailers of pet
products. Key elements of our strategy include:
- Building enduring brand equity through an advertising strategy which
includes our Pets.com sock puppet brand icon, relationships with select
online companies, and support for national events and pet-related local
market activities;
- Offering the broadest possible pet product selection available to our
customers at competitive prices;
- Establishing our private label brands for pet products marketed under the
Pets.complete and Pets.com brand names;
- Providing increasingly comprehensive and relevant content in conjunction
with a range of consumer and veterinary care partners;
- Delivering superior customer service and promoting repeat purchases
through investments in people, technology and distribution facilities;
- Continuing to maintain and expand our relationships with Amazon.com,
which is currently our largest stockholder, and GO.com; and
- Expanding internationally in order to capitalize on the global market.
OTHER INFORMATION
Unless otherwise noted, this prospectus assumes:
- the automatic conversion of our outstanding convertible preferred stock
into common stock on a one-for-one basis upon the closing of this
offering;
- the split of our common stock on the basis of 0.8 shares for each share
of common stock;
- our reincorporation in Delaware and the filing of our amended and
restated certificate of incorporation authorizing 150,000,000 shares of
common stock and a class of 5,000,000 shares of undesignated preferred
stock upon the closing of the offering; and
- no exercise by the underwriters of their options to purchase additional
shares of our common stock in the offering.
Our net sales were $5.8 million for the period from February 1999
(inception) through December 31, 1999. Our net losses were $61.8 million for the
same period.
We were formed in February 1999. Our principal executive offices are
located at 435 Brannan Street, Suite 100, San Francisco, California 94107. Our
telephone number is (415) 222-9999. Our Web store address is www.pets.com.
Information contained in our Web store does not constitute part of this
prospectus.
2
<PAGE> 6
THE OFFERINGS
<TABLE>
<S> <C>
Shares offered by Pets.com
U.S. offering........................ 6,000,000 shares
International offering............... 1,500,000 shares
-----------------
Total........................ 7,500,000 shares
</TABLE>
Shares outstanding after the
offering, excluding
unvested shares............ 26,392,410 shares, excluding 3,152,327 shares
issued pursuant to the exercise of unvested stock
options which are subject to our right of
repurchase as of December 31, 1999.
Shares outstanding after the
offering, including
unvested shares............ 29,544,737 shares, including 3,152,327 shares
issued pursuant to the exercise of unvested stock
options which are subject to our right of
repurchase as of December 31, 1999.
Use of proceeds.............. We estimate that our net proceeds from this
offering without exercise of the over-allotment
options will be approximately $68.8 million. We
intend to use these net proceeds for general
corporate purposes, including expansion of our
marketing and brand building efforts, expansion
and building of distribution centers, and working
capital. See "Use of Proceeds."
Risk factors................. See "Risk Factors" and other information included
in this prospectus for a discussion of factors
you should carefully consider before deciding to
invest in shares of the common stock.
Proposed Nasdaq National
Market symbol................ "IPET"
In addition, the information above excludes, as of December 31, 1999,
983,400 shares issuable upon exercise of options granted under our stock plans
at a weighted average exercise price of $1.86 per share, and 2,068,000 shares
available for grant under our stock plans. This number assumes that the
underwriters' over-allotment options are not exercised. If the over-allotment
options are exercised in full, we will issue and sell an additional 1,125,000
shares.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS)
The following table sets forth a summary of our statement of operations
data for the periods presented. The pro forma net loss per share for the period
from February 17, 1999 (inception) through December 31, 1999 reflects the
conversion of our convertible preferred stock upon completion of this offering.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 17, 1999
(INCEPTION)
QUARTER ENDED QUARTER ENDED THROUGH
QUARTER ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
JUNE 30, 1999 1999 1999 1999
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 39 $ 568 $ 5,168 $ 5,787
Gross margin....................... (37) (1,198) (6,402) (7,625)
Total operating expenses........... 3,584 15,231 36,512 55,344
---------- ---------- -------- -----------
Operating loss..................... (3,621) (16,429) (42,914) (62,969)
Net loss........................... $ (3,498) $ (15,852) (42,423) $ (61,778)
========== ========== ======== ===========
Basic and diluted net loss per
share............................ $ (2.41) $ (10.91) $ (28.92) $ (42.42)
Weighted average shares outstanding
used to compute basic and diluted
net loss per share............... 1,453,470 1,453,470 1,466,803 1,456,489
Pro forma basic and diluted net
loss per share................... $ (3.48)
Weighted average shares outstanding
used to compute pro forma basic
and diluted net loss per share... 17,757,028
</TABLE>
The following data sets forth a summary of our balance sheet data as of
December 31, 1999
- On an actual basis;
- On a pro forma basis to give effect to the automatic conversion of all of
the outstanding shares of our convertible preferred stock into shares of
common stock upon the closing of this offering; and
- On a pro forma as adjusted basis to reflect the automatic conversion of
all of the outstanding shares of our convertible preferred stock and our
receipt of the estimated net proceeds from the sale of 7,500,000 shares
of common stock in this offering at an estimated price of $10.00 per
share.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 30,196 $30,196 $ 98,946
Working capital............................................ 36,088 36,088 104,838
Total assets............................................... 60,310 60,310 129,060
Convertible preferred stock and related paid-in capital.... 109,637 -- --
Total stockholders' equity, including convertible preferred
stock.................................................... 51,120 51,120 119,870
</TABLE>
4
<PAGE> 8
RISK FACTORS
You should carefully consider the following risks before making an
investment in our company. You should also refer to the other information set
forth in this prospectus, including the discussions set forth in "Special Note
Regarding Forward-Looking Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as our
financial statements and the related notes. Our business, financial condition,
or results of operations could be harmed as a result of any of the following
risks. In such case, the trading of our common stock could decline, and you
could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE ONLY BEGAN SELLING OUR PRODUCTS IN FEBRUARY 1999 AND WE OPERATE IN A NEW
AND RAPIDLY EVOLVING MARKET, WHICH MAKES IT DIFFICULT FOR INVESTORS TO
DETERMINE WHETHER WE WILL ACCOMPLISH OUR OBJECTIVES.
Because we were formed in February 1999 and we have yet to achieve
meaningful revenues, we have a limited operating history on which investors and
securities analysts can base an evaluation of our business and prospects. We
have limited insight into trends that may emerge and affect our business.
Accordingly, you must consider the risks and difficulties we face as an early
stage company with limited operating history in a new and rapidly evolving
market. We cannot be certain that our business strategy will be successful.
THE SUCCESS OF OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING A LARGE
NUMBER OF POTENTIAL CUSTOMERS. IF WE ARE UNABLE TO DO SO, WE WILL NOT BE
ABLE TO ACHIEVE PROFITABILITY.
Our success depends on attracting a large number of potential customers who
shop in traditional retail stores and persuading them to shop in our Web store.
Our success is also dependent on ensuring that these customers remain loyal
long-term customers of Pets.com. In addition to our dependence on the widespread
customer acceptance of the Internet for purchasing products, we cannot be
certain that our customers will accept our online solution over those offered by
our competitors. If we do not achieve widespread customer acceptance of our
online solution, our revenues will suffer. Furthermore, we may be required to
incur significantly higher and more sustained advertising and promotional
expenditures than we currently anticipate to attract online shoppers to our Web
store and to convert those shoppers to purchasing customers. As a result, we may
not be able to achieve profitability when we expect, or at all.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT SIGNIFICANT INCREASES IN OUR
COSTS AND EXPENSES TO RESULT IN CONTINUING LOSSES FOR AT LEAST THE NEXT
FOUR YEARS.
We incurred net losses of $42.4 million for the three-month period ended
December 31, 1999 and cumulative losses of $61.8 million from our inception
through December 31, 1999. We have not achieved profitability. We only began
selling products in February 1999 and have yet to achieve meaningful revenue,
and cannot be certain that we will obtain enough customer traffic or a high
enough volume of purchases to generate sufficient revenues and achieve
profitability. We believe that we will continue to incur operating and net
losses for at least the next four years, and possibly longer, and that the rate
at which we will incur these losses will increase significantly from current
levels. We intend to increase our costs and expenses substantially as we:
- Increase our sales and marketing activities, such as increasing
advertising expenses and entering into strategic marketing agreements
with third parties;
- Open additional distribution centers and expand our existing
distribution center;
- Provide our customers with shipping below our actual costs to attract
customers;
- Increase our general and administrative functions to support our
growing operations;
- Expand our customer support organization to better serve customer
needs; and
5
<PAGE> 9
- Develop or license from third parties enhanced technologies and
features to improve our Web store.
Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we would
incur if we developed our business more slowly. In addition, we may find that
these efforts are more expensive than we currently anticipate or that these
efforts may not result in proportionate increases in our revenues, which would
further increase our losses. We may also engage in promotional efforts such as
coupons or discounts that would reduce our revenues.
WE MAY NOT SUCCEED IN ESTABLISHING THE PETS.COM BRAND, WHICH WOULD
ADVERSELY AFFECT CUSTOMER ACCEPTANCE AND OUR REVENUES.
Due to the early stage and competitive nature of the online market for pet
products, information and services, if we do not establish our brand quickly, we
may lose the opportunity to build a critical mass of customers. Promoting and
positioning our brand will depend largely on the success of our marketing
efforts and our ability to provide consistent, high quality customer
experiences. To promote our brand, we will incur substantial expense in our
advertising efforts on television, radio, magazines and other forms of
traditional media, along with advertising on Web sites that we believe our
customers are likely to visit. We will also incur substantial expense in our
efforts to enter into strategic alliances with, including making investments in,
online and more traditional companies that we believe will promote our brand and
drive customers to our Web store. To provide a high quality customer experience,
we will also need to spend money to attract and train customer service
personnel. We also will incur substantial expenses to develop content to help
build our brand and attract customers to our Web store. If these brand promotion
activities do not yield increased revenues, we will incur additional losses.
Beginning in the first half of 2000, we intend to introduce a line of
private label pet products. We may not achieve consumer acceptance of these
products. Further, we may be forced to incur higher expenses in order to produce
or market our private label product lines, which could negatively affect our
financial condition or operating results.
INCREASING OUR PRODUCT DISTRIBUTION CAPACITY IS AN IMPORTANT PART OF OUR
BUSINESS STRATEGY AND WILL REQUIRE SIGNIFICANT INVESTMENTS IN CASH AND
MANAGEMENT RESOURCES. IF WE DO NOT SUCCESSFULLY BUILD ADDITIONAL
DISTRIBUTION CENTERS, WE WILL FACE DIFFICULTIES IN INCREASING OUR REVENUES
AND WE MAY LOSE CUSTOMERS TO OUR COMPETITORS.
We currently have one distribution center in Union City, California which
has a satellite operation in Hayward, California. We expect to begin operating a
second distribution center in the first half of 2000, and a third distribution
center within twenty-four months thereafter. Our success depends on our ability
to build additional distribution centers to accommodate increases in customer
demand, reduce our shipping costs, reduce shipping times to customers, provide
for a large product selection and increase our gross margins. If we do not
successfully build additional distribution centers in time to accommodate
increases in customer demand, we may not be able to increase our revenues and we
may lose customers to our competitors.
Opening additional distribution centers will require significant capital
investments in facilities and equipment, will require us to hire and train a
significant number of new employees, and could divert management attention from
other issues. We expect to invest from $7 million to $9 million in facilities
and equipment in connection with opening an additional distribution center
during the first half of 2000. For additional information relating to the risks
we may face in obtaining additional financing, see "We may need to raise
additional funds and these funds may not be available to us when we need them.
If we cannot raise additional funds when we need them, our business could fail."
6
<PAGE> 10
SINCE WE CURRENTLY OPERATE ONLY ONE DISTRIBUTION CENTER LOCATED IN THE SAN
FRANCISCO BAY AREA, WE ARE SUSCEPTIBLE TO THE RISK OF DAMAGE TO OUR
DISTRIBUTION CENTER.
Since we currently only operate one distribution center out of which we
ship products to nearly all of our customers, we are susceptible to power and
equipment failures, disruptions in our order fulfillment and delivery systems,
and fires, floods and other disasters. Furthermore, since our distribution
center is located in the San Francisco Bay Area, which is an
earthquake-sensitive area, we are particularly susceptible to the risk of damage
to, or total destruction of, our distribution center and the surrounding
transportation infrastructure caused by earthquakes. We cannot assure you that
we are 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 losses due to
interruptions in our business due to damage to or destruction of our
distribution center caused by earthquakes or to major transportation
infrastructure disruptions or other events that do not occur on our premises.
WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER, WHICH CAN CAUSE THE TRADING PRICE OF OUR COMMON STOCK
TO FLUCTUATE SIGNIFICANTLY.
We expect that our revenues and operating results will vary significantly
from quarter to quarter due to a number of factors, including:
- Consumer traffic to our Web store may fluctuate depending on the
effectiveness of our sales and marketing campaign, the timing and
level of promotions we engage in with Amazon.com, GO.com and our
other strategic partners, and the effectiveness of content on our Web
store and other factors;
- The level of repeat purchases by customers, average order size and
mix of products sold may fluctuate as a result of the experience
consumers have on our Web store, the availability of products we have
for sale, seasonal factors and other factors;
- Our revenues may decline as a result of promotional offers made by
our competitors, the introduction of products or services offered by
our competitors, or the introduction of new competitors into our
market;
- We may experience consumer dissatisfaction with our Web store as we
add or change features, or as a result of technical difficulties on
our Web store that do not permit a consumer to access our Web store
or to complete a shopping session;
- Our expenses will also fluctuate depending on the timing and nature
of expansion of our distribution center; and our ability to achieve
efficiencies and lower shipping costs as a result of this expansion;
- Changes in government regulation of the Internet, particularly the
imposition of sales tax for online transactions, may discourage
online shopping and result in decreased revenues; and
- We may incur costs related to potential acquisitions of technology or
businesses.
To the extent our revenues and operating results fall below the expectation
of investors and securities analysts, the trading price of our common stock may
fall significantly.
BECAUSE OUR OPERATING EXPENSES ARE GENERALLY FIXED IN THE SHORT TERM, IF WE
FAIL TO ACHIEVE ANTICIPATED REVENUES WE WILL INCUR SUBSTANTIAL ADDITIONAL
OPERATING LOSSES. FURTHERMORE, OUR LIMITED OPERATING HISTORY MAKES IT
DIFFICULT TO PREDICT REVENUES AND PLAN OUR OPERATING EXPENSES.
Because of our limited operating history, we have insufficient financial
data on which to forecast our revenues and operating expenses. Our operating
expenses are largely based on anticipated revenue trends and a high percentage
of our expenses are fixed in the short term. As a result, a delay in generating
or recognizing revenue for any reason could result in substantial additional
operating losses. The volume and timing of orders of pet products on our Web
store are difficult to predict because the online market for
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<PAGE> 11
such products is in its infancy. Due to the limited operating history of our Web
store, we do not have a material amount of repeat business from regular
customers. Because our Web store is designed to encourage repeat business and we
do not yet have sufficient historical data on how successful this strategy will
be, we cannot currently forecast revenue from regular customers or overall
anticipated revenue trends.
Furthermore, as a result of our limited operating history, it is difficult
to predict the volatility associated with the nature and timing of special
promotional offers, such as reducing the price on selected products, providing
redeemable coupons to customers, or offering shipping below our actual costs,
and our advertising efforts. For example, our revenues may decrease
significantly after a promotional offer has expired or prior to an expected
offer. In addition, our advertising expenses may be disproportionately higher
than our anticipated revenues from these advertising efforts.
WE WILL NEED TO RAISE ADDITIONAL FUNDS AND THESE FUNDS MAY NOT BE AVAILABLE
TO US WHEN WE NEED THEM. IF WE CANNOT RAISE ADDITIONAL FUNDS WHEN WE NEED
THEM, OUR BUSINESS COULD FAIL.
Based on our current projections, we will need to raise funds over time
through the issuance of equity, equity-related or debt securities or through
obtaining credit from financial institutions in addition to the funds we are
raising in this offering. We cannot be certain that additional funds will be
available to us on favorable terms when required, or at all. If this additional
financing is not available to us we may need to dramatically change our business
plan, sell or merge our business, or face bankruptcy. In addition, our issuance
of equity or equity-related securities will dilute the ownership interest of
existing stockholders and our issuance of debt securities could increase the
risk or perceived risk of our company. Any of these actions could cause our
stock price to fall.
A PORTION OF OUR REVENUES MAY BE SEASONAL, WHICH COULD CAUSE OUR QUARTERLY
FINANCIAL RESULTS AND OUR COMMON STOCK PRICE TO FLUCTUATE SIGNIFICANTLY.
A portion of our revenues may be seasonal in nature, associated with the
sale of gift products for pets during the holiday season, the sale of outdoor
and activity-related pet products during the Spring season and the sale of flea
and tick products for pets during the Summer season. In addition, consumer fads
and other changes in consumer trends may cause shifts in purchasing patterns,
resulting in significant fluctuations in our operating results from one quarter
to the next and may result in significant fluctuations in our common stock
price. The fact that we have not yet generated revenue for a full year and the
rapid growth in our revenues since our inception make it impossible to assess
the impact of these factors.
WE DEPEND ON OUR ADVERTISING AGREEMENT WITH AMAZON.COM TO ATTRACT CUSTOMERS
TO OUR WEB STORE AND BUILD OUR BRAND. IN THE EVENT OUR ADVERTISING
AGREEMENT WITH AMAZON.COM WERE TO TERMINATE, WE COULD FACE SIGNIFICANTLY
HIGHER COSTS AND SIGNIFICANTLY MORE DIFFICULTY IN ATTRACTING CUSTOMERS.
We have entered into an advertising agreement with Amazon.com whereby
Amazon.com provides us with online promotions mutually agreed upon, such as
emails about Pets.com, and one or more links from different locations on its Web
site to our Web store, consistent with Amazon.com's other marketing
arrangements. Although our current agreement with Amazon.com expires in October
2000, Amazon.com could terminate most of these online promotions at any time. We
cannot be certain that our relationship with Amazon.com will be available to us
in the future on acceptable commercial terms, if at all. If we are unable to
maintain our relationship with Amazon.com or agree upon the terms and conditions
of continuing the agreement beyond October 2000, our customer traffic could fall
and our brand identity could be adversely impacted resulting in decreased
revenues, and our marketing expenses could increase as we are forced to incur
higher costs to attract customers. In addition, our relationship with Amazon.com
is not exclusive. Amazon.com could partner with any of our competitors or offer
competing products, information or services directly from its Web site.
Furthermore, by virtue of the fact that we derive traffic directly from the
Amazon.com Web site, any interruption in service of Amazon.com's Web site or the
distribution of products to its customers could reduce the number of customers
to our Web store and reduce our revenues. Because we depend on the brand
awareness of Amazon.com to help build our brand,
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negative publicity about Amazon.com or a reduction of the effectiveness of its
brand could also have a negative impact on our brand and reduce our revenues.
WE UTILIZE CONSULTING ADVICE AND SUPPORT FROM AMAZON.COM FOR OPERATIONAL
AND STRATEGIC EXPERTISE. AMAZON.COM HAS NO CONTRACTUAL OBLIGATION TO
PROVIDE THIS SUPPORT. IF AMAZON.COM DOES NOT CONTINUE TO PROVIDE THE ADVICE
AND SUPPORT WE NEED, WE COULD INCUR HIGHER OPERATIONAL EXPENSES IN RUNNING
OUR BUSINESS AND DIFFICULTIES IN EXECUTING ON OUR BUSINESS PLAN.
Since our inception, Amazon.com has provided us with free consulting
services relating to the operation of our business. During this time, Amazon.com
has also provided us with assistance in negotiating with vendors who also do
business with Amazon.com. This assistance has allowed us to incur significantly
lower operational expenses than we could otherwise have achieved at our early
stage of development. Amazon.com has provided these services to us because of
Amazon.com's significant equity stake in us. Amazon.com, however, is under no
contractual obligation to continue to provide this advice and support. While
Amazon.com will continue to own approximately 30.4% of our common stock after
this offering, 29.3% if the underwriters' over-allotment options are exercised
in full, we cannot be certain that Amazon.com will continue to provide, or
provide at all, the level of consulting advice and support that Amazon.com has
provided to us in the past. If we are unable to maintain our relationship with
Amazon.com, we would lose access to important operational and strategic
expertise, which could harm our business.
WE DEPEND ON OUR ABILITY TO BUILD AND MAINTAIN RELATIONSHIPS WITH OUR
SUPPLIERS TO OBTAIN SUFFICIENT QUANTITIES OF QUALITY MERCHANDISE ON
ACCEPTABLE COMMERCIAL TERMS. IF WE FAIL TO MAINTAIN OUR SUPPLIER
RELATIONSHIPS, OUR REVENUES WILL DECLINE.
Our business strategy depends on providing a large selection of well-known
and high-quality branded products which in turn depends on our ability to
maintain relationships with a significant number of suppliers. We currently
purchase our products from approximately 200 suppliers. Our contracts or
arrangements with suppliers do not guarantee the availability of merchandise,
establish guaranteed prices or provide for the continuation of particular
pricing practices. Our current suppliers may not continue to sell products to us
on current terms or at all, and we may not be able to establish new suppliers to
ensure delivery of products in a timely manner or on terms acceptable to us.
Furthermore, because many of the products offered on our Web store are
well-known branded products, if suppliers of these products do not supply
products to us, we may lose customers who are unwilling to substitute for other
brands we carry. We are also dependent on suppliers for assuring the quality of
products supplied to us. Because we ship products directly to our customers, if
the quality of products supplied to us fall below our customers' expectations,
we may lose customers. In addition, our supply contracts do not restrict our
suppliers from selling products to our online competitors or to retailers other
than online retailers, which could limit our ability to supply the quantity of
products requested by our customers. We are also subject to the risks our
suppliers face, including employee strikes and inclement weather. Our failure to
deliver a large selection of high-quality and well-known branded products to our
customers in a timely and accurate manner, and at acceptable prices, would harm
our reputation, the Pets.com brand and our results of operations.
WE FACE THE RISK OF SYSTEMS INTERRUPTIONS AND CAPACITY CONSTRAINTS ON OUR
WEB SITE, POSSIBLY RESULTING IN ADVERSE PUBLICITY, REVENUE LOSSES AND
EROSION OF CUSTOMER TRUST.
The satisfactory performance, reliability and availability of our Web
store, transaction processing systems and network infrastructure are critical to
our reputation and our ability to attract and retain customers and to maintain
adequate customer service levels. Any future systems interruption that results
in the unavailability of our Web store or reduced order fulfillment performance
could result in negative publicity and reduce the volume of goods sold and the
attractiveness of our Web store, which could negatively affect our revenues. For
the period from February 17, 1999 to December 31, 1999, there were three periods
of one to three hours and one period of thirteen hours during which users were
able to access our site but unable to complete transactions. There were also
approximately four periods of one to two
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hours during which our site was unavailable to customers due to scheduled
periodic maintenance. Nevertheless, we may experience temporary system
interruptions for a variety of reasons in the future, including power failures,
software bugs and an overwhelming number of visitors trying to reach our Web
store during sales or other promotions. We may not be able to correct a problem
in a timely manner. Because we are dependent in part on outside consultants for
the implementation of certain aspects of our system and because some of the
reasons for a systems interruption may be outside of our control, we also may
not be able to remedy the problem quickly or at all.
We opened our Web store for customers in February 1999 and to the extent
that customer traffic grows substantially, we will need to expand the capacity
of our systems to accommodate a larger number of visitors. Any inability to
scale our systems may cause 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 are
not certain that we will be able to project the rate or timing of increases, if
any, in the use of our Web store accurately or in a timely manner to permit us
to effectively upgrade and expand our transaction-processing systems or to
integrate smoothly any newly developed or purchased modules with our existing
systems.
WE HAVE GROWN VERY RAPIDLY. THIS GROWTH HAS PLACED, AND OUR ANTICIPATED
FUTURE OPERATIONS WILL CONTINUE TO PLACE, A SIGNIFICANT STRAIN ON OUR
MANAGEMENT SYSTEMS AND RESOURCES. WE WILL NOT BE ABLE TO IMPLEMENT OUR
BUSINESS STRATEGY UNLESS WE ARE ABLE TO EFFECTIVELY MANAGE THIS STRAIN ON
OUR SYSTEMS AND RESOURCES.
We have rapidly and significantly expanded our operations, and anticipate
that we will continue to expand. From March 31, 1999 to September 30, 1999 to
December 31, 1999 we grew from 4 to 123 to 270 employees, respectively. We
currently have one distribution center, and expect to begin operating a second
distribution center in the first half of 2000 and a third distribution center
within twenty-four months thereafter. This growth has placed, and our
anticipated future operations will continue to place, a significant strain on
our management systems and resources. We will not be able to implement our
business strategy unless we are able to effectively manage this strain on our
systems and resources. We will not be able to increase revenues unless we
continue to improve our transaction-processing, operational, financial and
managerial controls, reporting systems and procedures, expand, train, supervise
and manage our work force, and manage multiple relationships with third parties.
WE ENTER INTO STRATEGIC RELATIONSHIPS TO HELP PROMOTE OUR WEB STORE. IF WE
FAIL TO MAINTAIN OR ENHANCE THESE RELATIONSHIPS, WE MAY NOT BE ABLE TO
ATTRACT AND RETAIN CUSTOMERS, BUILD OUR PETS.COM BRAND AND ENHANCE OUR
SALES AND MARKETING CAPABILITIES.
We believe that our ability to attract customers, facilitate broad market
acceptance of our products and the Pets.com brand, and enhance our sales and
marketing capabilities depends on our ability to develop and maintain strategic
relationships with:
- Amazon.com, with whom we have entered into an advertising agreement
pursuant to which Amazon.com provides us with online promotions mutually
agreed upon;
- GO.com, with whom we have entered into a distribution agreement which
provides that we will engage in promotions on GO.com's online properties,
and place media advertising with ABC, Inc., which, along with GO.com, is
an affiliate of The Walt Disney Company;
- American Veterinary Medical Foundation, with whom we have entered into an
exclusive marketing agreement pursuant to which our products and services
will receive coverage in the American Veterinary Medical Foundation's
bi-monthly video which is sent to 17,000 veterinarians;
- PetPlace.com, Inc., a provider of online veterinary information in whom
we have made an equity investment and with whom we have entered into an
exclusive marketing agreement which provides for cross promotions and
direct links between our respective Web sites; and
- Other pets-related Web sites and portals, and other Web sites that can
drive customer traffic to our Web store.
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All of these relationships are relatively new and, accordingly, we have no
historical experience on which to evaluate their impact. If these relationships
do not assist us in attracting or retaining customers, it may be difficult for
us to grow our business. In addition, we may need to expend significant
additional resources to form additional strategic relationships if the
relationships set forth above fail to produce the desired results.
COMPETITION FROM BOTH TRADITIONAL AND ONLINE RETAILERS MAY RESULT IN PRICE
REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES.
We compete in a market that is new, rapidly evolving and highly
competitive, and we expect competition to intensify in the future. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share. We currently or potentially compete with
a variety of companies, many of which have significantly greater financial,
technical, marketing and other resources. These competitors can be divided into
several groups:
- online stores that specialize in pet products such as
Petopia.com, Inc.
PetsMart.com, Inc.
PetStore.com, Inc.;
- online stores that offer pet products;
- superstore retailers of pet products such as
Petco Animal Supplies, Inc.
PetsMart, Inc.;
- specialty pet stores;
- mass market retailers such as
Wal Mart Stores, Inc.
Kmart Corporation
Target Stores, Inc.;
- supermarkets;
- warehouse clubs such as Costco Companies, Inc.;
- mail order suppliers of pet products; and
- pet supply departments at major department stores.
Many of these companies, which include national, regional and local chains,
have existed for a longer period, have greater financial resources, have
established marketing relationships with leading manufacturers and advertisers,
and have longer established brand recognition among customers.
We believe we may face a significant competitive challenge from our
competitors forming alliances with each other. For instance, Petopia, Inc. is
owned in part by Petco Animal Supplies, Inc., and PetsMart.com, Inc. is owned in
part by PetsMart, Inc. The combined resources of these alliances could pose a
significant competitive challenge to Pets.com. These relationships may enable
these online stores to achieve greater brand recognition, particularly in the
case of PetsMart.com, Inc., by leveraging the better established brand awareness
of their pet retail store partner. These relationships may also enable these
online stores to negotiate better pricing and other terms from suppliers by
aggregating their demand for products and negotiating volume discounts. Our
inability to partner with a major pet store chain could be a major competitive
disadvantage to us.
We also believe we may face significant competitive challenges from
discount general merchandise stores, mass market retailers and other retailers
that commence or expand their presence on the Internet to include pet products.
Finally, we are aware of numerous other smaller entrepreneurial companies that
are focusing significant resources on developing and marketing products,
information and services that will compete directly with those offered at
Pets.com.
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We believe that there may be a significant advantage in establishing a
large customer base before our competitors do so. If we fail to attract and
retain a large customer base and our competitors establish a more prominent
market position relative to ours, this could inhibit our ability to grow. We
believe the principal factors in our market include brand recognition, product
selection, quality of Web store content, reliability and speed of order
shipment, customer service, speed and accessibility of our Web store,
personalized service, convenience and price. We will have little or no control
over how successful our competitors are in addressing these factors. In
addition, with little difficulty, our online competitors can duplicate many of
the products, services and content offered in our Web store.
EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION
AND RESOURCES AND MAY BE UNSUCCESSFUL WHICH COULD HARM OUR FUTURE BUSINESS
DEVELOPMENT AND EXISTING DOMESTIC OPERATIONS.
To date, we have conducted no international operations but we intend to
make an investment in a UK-based company that intends to sell pet products
online. We plan to build local versions of our Web store for foreign companies
or expand our international operations through acquisitions or alliances with
third parties. Our expansion plans will require management attention and
resources and may be unsuccessful. We have no experience in selling our products
to conform to local cultures, standards and policies. We may have to compete
with local companies which understand the local market better than we do. In
addition, to achieve satisfactory performance for consumers in international
locations it will be necessary to locate physical facilities, such as server
computers and distribution centers in the foreign market. We do not have
experience establishing such facilities overseas. We may not be successful in
expanding into any international markets or in generating revenues from foreign
operations. In addition, different privacy, censorship and liability standards
and regulations and different intellectual property laws in foreign countries
may cause our business to be harmed. Furthermore, once we expand internationally
we expect to incur net losses in developing foreign markets for the foreseeable
future.
OUR SYSTEMS AND OPERATIONS, AND THOSE OF OUR SUPPLIERS AND SHIPPERS, ARE
VULNERABLE TO NATURAL DISASTERS AND OTHER UNEXPECTED PROBLEMS.
Substantially all of our computer and communications hardware is located at
our leased facility in San Francisco, California and our systems infrastructure
is hosted at an Exodus Communications, Inc. facility in Santa Clara, California.
Our systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, earthquakes and similar events.
In addition, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and fulfill customer orders. We
do not currently have fully redundant systems or a formal disaster recovery plan
and do not carry sufficient business interruption insurance to compensate for
losses that may occur. Our suppliers also face these risks.
We also depend on the efficient operation of Internet connections from
customers to our systems. These connections, in turn, depend on the efficient
operation of Web browsers, Internet service providers and Internet backbone
service providers, all of which have had periodic operational problems or
experienced outages. Any system delays, failures or loss of data, whatever the
cause, could reduce customer satisfaction with our applications and services and
harm our sales.
GOVERNMENTAL REGULATION OF OUR BUSINESS COULD REQUIRE SIGNIFICANT EXPENSES,
AND FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD RESULT IN CIVIL AND
CRIMINAL PENALTIES.
Our business is subject to federal, state and local regulations relating to
the shipment of pet food, live animals and pet products, advice relating to
animal care, and other matters. Regulations in this area often require
subjective interpretation, and we cannot be certain that our attempts to comply
with these regulations will be deemed sufficient by the appropriate regulatory
agencies. Violations of any regulations could result in various civil and
criminal penalties, including suspension or revocation of our licenses or
registrations, seizure of our inventory, or monetary fines, which could
adversely effect our operations.
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WE NEED TO HIRE AND RETAIN A NUMBER OF ADDITIONAL TECHNOLOGY, CONTENT AND
PRODUCT ORIENTED PERSONNEL WHO MIGHT BE DIFFICULT TO FIND AND WHO ARE KEY
TO OUR CONTINUED GROWTH AND ULTIMATE SUCCESS IN THE MARKET.
We intend to continue to hire a significant number of additional personnel,
including software engineers, editorial and customer support personnel,
marketing personnel, and warehouse and operational personnel. Competition for
these individuals is intense, and we may not be able to attract, assimilate or
retain additional highly qualified personnel in the future. The failure to
attract, integrate, motivate and retain these additional employees could
seriously harm our business.
WE RELY ON THE SERVICES OF OUR KEY PERSONNEL, WHOSE KNOWLEDGE OF OUR
BUSINESS AND TECHNICAL EXPERTISE ARE IMPORTANT TO OUR CONTINUED GROWTH AND
ULTIMATE SUCCESS IN THE MARKET AND WOULD BE DIFFICULT TO REPLACE.
We rely upon the continued service and performance of a relatively small
number of key technical and senior management personnel. Our future success
depends on our retention of these key employees, such as Julie Wainwright, our
Chief Executive Officer. None of our key technical or senior management
personnel are bound by employment agreements, and as a result, any of these
employees could leave with little or no prior notice. If we lose any of our key
technical and senior management personnel, our business could be seriously
harmed. We do not have "key person" life insurance policies covering any of our
employees.
MANY MEMBERS OF OUR MANAGEMENT TEAM ARE NEW TO THE COMPANY OR TO THE PET
PRODUCTS AND SERVICES INDUSTRY OR ONLINE BUSINESSES, AND EXECUTION OF OUR
BUSINESS PLAN AND DEVELOPMENT STRATEGY COULD BE SERIOUSLY HARMED IF
INTEGRATION OF OUR MANAGEMENT TEAM INTO OUR COMPANY IS NOT SUCCESSFUL.
We have recently experienced significant growth in our management team.
Paul Manca, our Chief Financial Officer, joined us in September 1999 and Ralph
Lewis, our Vice President of Distribution and Logistics, joined us in November
1999. In addition, many of the members of our senior management team do not have
prior experience in the pet products and services industry or in online
businesses or in publicly traded companies. Our business could be seriously
harmed if integration of our management team into our company is not successful.
We expect that it will take time for our new management team to integrate into
our company and it is too early to predict whether this integration will be
successful.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO PROTECT OUR INTELLECTUAL
PROPERTY, AND WE MAY BE FOUND TO INFRINGE PROPRIETARY RIGHTS OF OTHERS,
WHICH COULD NEGATIVELY AFFECT OUR BUSINESS BY DIVERTING OUR MONETARY
RESOURCES AND MANAGEMENT'S ATTENTION TO THESE MATTERS INSTEAD OF ALLOWING
US TO FOCUS ON THE CONTINUING DEVELOPMENT OF OUR MARKET STRATEGY.
We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual property. These afford only
limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our Web store, including the
look and feel of our Web pages, products that we sell, product organization,
product information and sales mechanics or to obtain and use information that we
regard as proprietary, such as the technology used to operate our Web store, our
content and our trademarks.
We have filed applications for the registration of Pets.com(TM), the
Pets.com logo, Because Pets Can't Drive(TM), Keep It Comin'(TM), More Products
Than a Superstore Delivers(TM), People Helping Animals, Animals Helping
People(TM), Pets.commitment(TM) and our sock puppet in the U.S. and in some
other countries, although we have not secured registration of our marks to date.
We have been granted the right to use Pets.complete(TM) from a third party in
exchange for economic consideration. We may be unable to secure these
registrations. It is also possible that our competitors or others will adopt
service names similar to ours, thereby impeding our ability to build brand
identity and possibly leading to customer confusion. In addition, there could be
potential trade name or trademark infringement claims brought by owners of other
registered trademarks or trademarks that incorporate variations of the term
Pets.com or our other
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trademark applications. Any claims or customer confusion related to our
trademarks, or our failure to obtain any trademark registration, would
negatively affect our business.
Litigation or proceedings before the U.S. Patent and Trademark Office may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets and domain names and to determine the validity and
scope of the proprietary rights of others. Any litigation or adverse priority
proceeding could result in substantial costs and diversion of resources and
could seriously harm our business and operating results. Finally, we intend to
sell our products internationally, and the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States.
Third parties may also claim infringement by us with respect to past,
current or future technologies. We expect that participants in our markets will
be increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any claim, whether meritorious or
not, could be time-consuming, result in costly litigation, cause service upgrade
delays or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements might not be available on terms acceptable to us
or at all.
WE MAY NOT BE ABLE TO PROTECT OUR DOMAIN NAMES IN ALL COUNTRIES OR AGAINST
ALL INFRINGERS, WHICH COULD DECREASE THE VALUE OF OUR BRAND NAME AND
PROPRIETARY RIGHTS.
We currently hold the Internet domain name "pets.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 modify the requirements
for holding domain names. As a result, we may not be able to acquire or maintain
the domain names in all of the countries in which we conduct business which
utilize the term "pets" or "pets.com." We are aware that other entities have
already registered domain names utilizing the term "pets" or "pets.com." For
example, other entities have registered in the United States the following
domain names: pets-.com, pet-s.com, p-e-t-s.net and pets.net. If we are unable
to purchase these names from these entities on commercially reasonable terms or
in the event we were to otherwise lose the ability to use a domain name in a
particular country, we would be forced to incur significant additional expenses
to market our products within that country, including the development of a new
brand and the creation of new promotional materials and packaging.
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND MAY FACE LIABILITY FOR
CONTENT ON OUR WEB STORE, ANY OF WHICH COULD HARM OUR FINANCIAL CONDITION
AND LIQUIDITY IF WE ARE NOT ABLE TO SUCCESSFULLY DEFEND AGAINST SUCH
CLAIMS.
Because we sell consumer products we may be subject to product liability
claims resulting from injuries to persons and animals caused by the products we
sell. We maintain limited product liability insurance. To the extent these
claims are not covered by or are in excess of our product liability insurance, a
successful product liability claim could harm our financial condition and
liquidity. In addition, because we post product information and other content on
our Web store and permit our customers to place content on our bulletin board
systems and in other areas of our Web store, we face potential liability for
negligence, copyright, patent, trademark, defamation, indecency and other claims
based on the nature and content of the materials that we post or permit our
customers to post. Claims of this type have been brought, and sometimes
successfully pressed, against Internet content distributors. In addition, we do
not and cannot practically screen all of the content generated by our users and
placed on our Web store. Although we maintain general liability insurance of $3
million, our insurance may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that may be imposed. Any imposition
of liability that is not covered by insurance or is in excess of insurance
coverage could harm our financial condition and liquidity.
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OUR OPERATIONS MAY BE DISRUPTED IF WE OR OUR PRODUCT SUPPLIERS OR OTHER
VENDORS EXPERIENCE SYSTEMS FAILURE OR DATA CORRUPTION FROM THE YEAR 2000
ISSUE.
Any failure of our material systems, our product suppliers or others
vendors' material systems or the Internet to be year 2000 compliant would have
material adverse consequences for us. Consequences of this type would include
difficulties in operating our Web store effectively, taking product orders,
making product deliveries or conducting other fundamental parts of our business.
We may be unable to detect or assess the effect of any failure well into the
year 2000 and beyond. We are currently assessing the year 2000 readiness of the
software, computer technology and other services that we use which may not be
year 2000 compliant. We do not intend to develop a contingency plan to address
situations that may result if our vendors or we experience material difficulties
after January 1, 2000 as a result of the year 2000 problem.
We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our products and
services.
AMAZON.COM AND OUR CURRENT OFFICERS AND DIRECTORS WILL STILL CONTROL THE
MAJORITY OF OUR COMMON STOCK AFTER THIS OFFERING AND THEREFORE BE ABLE TO
DECIDE ALL MATTERS REQUIRING APPROVAL OF OUR STOCKHOLDERS, WHICH COULD
DISCOURAGE AN ACQUISITION OF US OR MAKE REMOVAL OF INCUMBENT MANAGEMENT
MORE DIFFICULT.
After this offering, Amazon.com will beneficially own approximately 30.4%
of our outstanding common stock, 29.3% if the underwriters' over-allotment
options are exercised in full, and Mark Britto, Amazon.com's Vice President of
Strategic Alliances is a member of our Board of Directors. Therefore, Amazon.com
will be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions. Amazon.com's substantial equity stake
in us could also make us a much less attractive acquisition candidate to
potential acquirors, because Amazon.com would be able to block the acquisition
by acting in concert with only a small number of other stockholders. In
addition, Amazon.com would have sufficient votes to prevent the tax-free
treatment of an acquisition. In addition, executive officers, directors and
entities affiliated with them, including Amazon.com, will, in the aggregate,
beneficially own approximately 54.8% of our outstanding common stock following
the completion of this offering, 53.2% if the underwriters' over-allotment
options are exercised in full. These stockholders, if acting together, would be
able to decide all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. See "Principal Stockholders" for a description of Amazon.com's
stock ownership relative to other stockholders, "Executive Officers and
Directors" for background on Mark Britto, and "Related Party Transactions" for a
description of our agreements with Amazon.com.
RISKS RELATED TO INTERNET COMMERCE
WE DEPEND ON CONTINUED USE OF THE INTERNET, AND IF THE USE OF THE INTERNET
DOES NOT DEVELOP AS WE ANTICIPATE, OUR SALES MAY NOT GROW.
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of business
and communication by our target customers. Rapid growth in the use of and
interest in the Internet has occurred only recently. As a result, acceptance and
use may not continue to develop at historical rates, and a sufficiently broad
base of consumers may not adopt, and continue to use, the Internet and other
online services as a medium of commerce.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success will depend, in
large part, upon third parties maintaining the Internet infrastructure to
provide a reliable network backbone with the speed, data capacity, security and
hardware necessary for reliable Internet access and services.
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OUR SUCCESS DEPENDS ON THE WILLINGNESS OF CONSUMERS TO PURCHASE PET
PRODUCTS OVER THE INTERNET INSTEAD OF THROUGH TRADITIONAL RETAILERS. IF
CONSUMERS ARE NOT WILLING TO DO THIS, THE MARKET POTENTIAL FOR OUR PRODUCTS
AND SERVICES WILL BE IMPAIRED.
The online market for pet products, information and services is in its
infancy. The market is significantly less developed than the online market for
books, auctions, music, software and numerous other consumer products. If this
market does not gain widespread acceptance, our business may fail. Demand and
market acceptance for recently introduced services and products on the Internet
are subject to a high level of uncertainty, and there are few proven services
and products. Our success will depend on our ability to engage consumers who
have historically purchased pet products through traditional retailers. In order
for us to be successful, many of these consumers must be willing to utilize new
ways of buying pet products. In addition, a substantial proportion of the
consumers who use our Web store may be using our service because it is new and
different rather than because they believe it is a desirable way to purchase pet
products. Such consumers may use our service only once or twice and then return
to more familiar means of purchasing these products.
OUR SALES COULD BE NEGATIVELY AFFECTED IF WE ARE REQUIRED TO CHARGE TAXES
ON PURCHASES.
We do not collect sales or other similar taxes in respect of goods sold by
Pets.com, except from purchasers located in California. However, one or more
states or the federal government may seek to impose sales tax collection
obligations on out-of-state companies, such as Pets.com, which engage in or
facilitate online commerce, and a number of proposals have been made at the
state and local level that would impose additional taxes on the sale of goods
and services through the Internet. In 1998, the U.S. federal government enacted
legislation prohibiting states or other local authorities from imposing new
taxes on Internet commerce for a three-year period, ending on October 1, 2001.
This tax moratorium does not prohibit states or the Internal Revenue Service
from collecting taxes on our income, if any, or from collecting taxes that are
due under existing tax rules. A successful assertion by one or more states or
any foreign country that we should collect sales or other taxes on the exchange
of merchandise on our Web store could harm our business. In addition, a number
of trade groups and government entities have publicly stated their objections to
this tax moratorium and have argued for its repeal. The Federal Advisory
Commission on Electronic Commerce is in the process of evaluating these issues.
It is expected to make its recommendation to Congress in April 2000. There can
be no assurance that future laws will not impose taxes or other regulations on
Internet commerce, or that the three-year moratorium will not be repealed, or
that it will be renewed when it expires, any of which events could substantially
impair the growth of electronic commerce.
We intend to open distribution centers from time to time in other states
and, regardless of the outcome of this federal tax moratorium, may be required
to collect sales or other similar taxes in respects of goods sold by Pets.com
into these states. A successful assertion by one or more states or the federal
government that we should collect further sales or other taxes on the sales of
products through Pets.com could negatively affect our revenues and business.
WE RELY ON UNITED PARCEL SERVICE FOR PRODUCT SHIPMENTS TO US AND OUR
CUSTOMERS, AND COULD LOSE CUSTOMERS IF IT DOES NOT ADEQUATELY SERVE OUR
NEEDS.
We rely on United Parcel Service, which currently delivers approximately
99% of our product shipments, including shipments to and from our distribution
facility. We are therefore subject to the risks, including employee strikes and
inclement weather, associated with its ability to provide delivery services to
meet our shipping needs. In addition, we do not have a written agreement with
United Parcel Service and have no way of ensuring that it will continue to
deliver our product shipments. The U.S. Postal Service and Federal Express
currently deliver the remaining balance of our product shipments. In the event
of the unsatisfactory performance of United Parcel Service, we may need to shift
shipments to these and other carriers. While we have the ability to switch
carriers, there are only a few national ground-based carriers that we do not
already employ and any change in third-party carriers could increase our
shipping costs or
16
<PAGE> 20
result in a delay in shipment of products to our customers for a period of time.
Failure to deliver products to our customers in a timely manner would damage our
reputation and brand.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD WHICH COULD
REDUCE OUR COLLECTIONS AND HARM OUR BUSINESS BECAUSE WE ARE UNABLE TO
OBTAIN SIGNATURES FROM OUR CUSTOMERS WHEN WE PROCESS ORDERS ONLINE.
A failure to adequately control fraudulent credit card transactions would
harm our net sales and results of operations because we do not carry insurance
against this risk. Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a cardholder's
signature. Although we have experienced almost no losses from credit card fraud,
we face the risk of significant losses from this fraud as our sales increase.
Our failure to adequately control fraudulent credit card transactions could
reduce our collections and harm our business.
OUR REPUTATION COULD BE HARMED IF WE FAIL TO PREVENT ONLINE COMMERCE
SECURITY BREACHES. WE MAY THEREFORE NEED TO EXPEND SIGNIFICANT RESOURCES TO
PROTECT AGAINST SECURITY BREACHES OR TO ADDRESS PROBLEMS CAUSED BY
BREACHES.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks, and our failure
to prevent security breaches could harm our business. Currently, a significant
number of our users authorize us to bill their credit card accounts directly for
all products sold by us. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new discoveries
in the field of cryptography, or other developments may result in a compromise
or breach of the technology used by us to protect customer transaction data. Any
compromise of our security could harm our reputation and expose us to a risk of
loss or litigation and possible liability and, therefore, harm our business. In
addition, a party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
We may need to expend significant resources to protect against security breaches
or to address problems caused by breaches. Security breaches could damage our
reputation. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES TO BETTER SERVICE OUR
CUSTOMERS AND MEET THEIR EXPECTATIONS, OUR SERVICES COULD BECOME OBSOLETE
AND WE COULD LOSE CUSTOMERS.
As the Internet and online commerce industry evolve, we must license
leading technologies useful in our business, enhance our existing services,
develop new services and technology that address the increasingly sophisticated
and varied needs of our prospective customers and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. We may not be able to successfully implement new technologies or
adapt our Web store, proprietary technology and transaction-processing systems
to customer requirements or emerging industry standards. If we are unable to do
so, it could adversely impact our ability to build the Pets.com brand and
attract and retain customers.
GOVERNMENTAL REGULATION OF THE INTERNET AND DATA TRANSMISSION OVER THE
INTERNET MAY NEGATIVELY AFFECT OUR CUSTOMERS AND RESULT IN A DECREASE IN
DEMAND FOR OUR PRODUCTS, WHICH WOULD CAUSE A DECLINE IN OUR SALES.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the U.S.
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
recently enacted its own privacy regulations. 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 privacy, libel and taxation apply to Web stores
17
<PAGE> 21
such as ours. The delays that these governmental processes entail may cause
order cancellations or postponements of product purchases by our customers,
which would seriously harm our business. The rapid growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet business could
result in a decrease in demand for our products, which would cause a decline in
our revenues.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS.
Although the initial public offering price will be determined based on
several factors, the market price for our common stock will vary from the
initial offering price after trading commences. This could result in substantial
losses for investors. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control. These factors include:
- Quarterly variations in operating results;
- Changes in financial estimates by securities analysts;
- Announcements by us or our competitors, of new product and service
offerings, significant contracts, acquisitions or strategic
relationships;
- Publicity about our company, our products and services, our
competitors, or e-commerce in general;
- Additions or departures of key personnel;
- Any future sales of our common stock or other securities; and
- Stock market price and volume fluctuations of publicly-traded
companies in general and Internet-related companies in particular,
especially Amazon.com.
The trading prices of Internet-related companies and e-commerce companies,
including Amazon.com, have been especially volatile and many are at or near
historical highs. Investors may be unable to resell their shares of our common
stock at or above the offering price. In the past, securities class action
litigation has often been brought against a company following periods of
volatility in the market price of its securities. We may be the target of
similar litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
seriously harm our business and operating results.
A TOTAL OF 22,044,737 SHARES, OR 74.6%, OF OUR TOTAL OUTSTANDING SHARES
AFTER THE OFFERING ARE RESTRICTED FROM IMMEDIATE RESALE, BUT MAY BE SOLD
INTO THE MARKET IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock.
18
<PAGE> 22
After this offering, we will have outstanding 29,544,737 shares of common
stock. This includes 7,500,000 shares that we are selling in the offering, which
may be resold immediately in the public market. The remaining 22,044,737 shares
will become eligible for resale in the public market as shown in the table
below.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
SHARES/PERCENT OF
OUTSTANDING AFTER THE
OFFERING DATE OF AVAILABILITY FOR RESALE INTO PUBLIC MARKET
- ---------------------- ------------------------------------------------------------
<C> <S>
13,420,045/45.4% 180 days after the date of the final prospectus due to
agreements these stockholders have with us and the
underwriters. However, the underwriters can waive this
restriction without prior notice and allow these
stockholders to sell their shares at any time.
3,134,557/10.6% At various times after 180 days after the date of the final
prospectus and through November 5, 2000 a total of
approximately 3,134,557 additional shares will be eligible
for sale pursuant to Rules 701 and 144.
2,454,941/8.3% At various times after November 5, 2000 and through December
8, 2000, a total of approximately 2,454,941 additional
shares will be eligible for sale pursuant to Rules 701 and
144.
1,195,097/4.0% At various times after December 8, 2001 and through January
18, 2000, a total of approximately 1,195,097 additional
shares will be eligible for sale pursuant to Rules 701 and
144.
1,840,097/6.2% At various times after January 18, 2001, a total of
approximately 1,840,097 additional shares will be eligible
for sale pursuant to Rules 701 and 144.
</TABLE>
NEW STOCKHOLDERS WILL INCUR SUBSTANTIAL DILUTION OF APPROXIMATELY $5.80 PER
SHARE AS A RESULT OF THIS OFFERING
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate
substantial dilution of approximately $5.80 per share. In addition, we have
issued options to acquire common stock at prices significantly below the initial
public offering price. Assuming that outstanding options are exercised in full,
there would be further dilution to investors in this offering of $1.70 per
share. See "Dilution" for a more detailed description of how new stockholders
will incur dilution.
19
<PAGE> 23
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined in
the Risk Factors section above. These factors may cause our actual results to
differ materially from any forward-looking statement. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements.
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we are
offering hereby are estimated to be $68.8 million, or $79.2 million if the
underwriters' option to purchase additional shares is exercised in full, based
on an initial offering price of $10.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of this offering are to fund our operating losses,
increase our working capital, fund our capital expenditures, create a public
market for our common stock, and facilitate our future access to the public
capital markets. We currently expect to use the net proceeds of this offering
primarily for working capital and general corporate purposes, including
marketing and brand building efforts, capital expenditures associated with the
expansion and building of distribution centers, and technology and system
upgrades. We are in the process of building a second distribution center which
will require capital investments in facilities and equipment of $7 million to $9
million. We have not yet determined the actual expected expenditures and thus
cannot estimate the amounts to be used for each of these purposes. The amounts
and timing of these expenditures will vary depending on a number of factors,
including the amount of cash generated by our operations, competitive and
technological developments and the rate of growth, if any, of our business. In
addition, we may use a portion of the net proceeds for further development of
our product lines through acquisitions of products, technologies and businesses.
Accordingly, although we have no present commitments or agreements with respect
to any such acquisitions, management will have significant discretion in
applying the net proceeds of this offering. Pending such uses, we will invest
the net proceeds in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future.
20
<PAGE> 24
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
Our capitalization is presented:
- On an actual basis;
- On a pro forma basis to give effect to the automatic conversion of all of
the outstanding shares of our convertible preferred stock into shares of
common stock upon the closing of this offering; and
- On a pro forma as adjusted basis to reflect the automatic conversion of
all of the outstanding shares of our convertible preferred stock and our
receipt of the estimated net proceeds from the sale of 7,500,000 shares
of common stock in this offering at an estimated price of $10.00 per
share.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations................................... $ 120 $ 120 $ 120
Stockholders' equity:
Preferred stock, $0.00125 par value, no shares authorized,
issued or outstanding, actual and pro forma; 4,000,000
shares authorized, no shares issued or outstanding, pro
forma as adjusted....................................... -- -- --
Convertible Preferred Stock, $0.00125 par value;
Series A -- 5,781,862 shares authorized; 5,781,862
shares issued and outstanding actual; none authorized,
issued or outstanding, pro forma and pro forma as
adjusted.............................................. 7 -- --
Series B -- 11,120,000 shares authorized; 10,518,678
shares issued and outstanding actual; none authorized,
issued or outstanding, pro forma and pro forma as
adjusted.............................................. 13 -- --
Series B-1 -- 1,040,000 shares authorized; no shares
issued and outstanding actual; none authorized issued
or outstanding pro forma and pro forma as adjusted.... -- -- --
Common Stock $0.00125 par value; 28,800,000 shares
authorized, actual and pro forma; 4,641,797 shares issued
and outstanding, actual; 20,942,337 shares issued and
outstanding, pro forma; 150,000,000 shares authorized,
28,442,337 shares issued and outstanding, pro forma as
adjusted.................................................. 6 26 35
Additional paid-in capital.................................. 128,442 128,442 197,183
Accumulated deficit......................................... (61,778) (61,778) (61,778)
Stockholder note receivable................................. (188) (188) (188)
Deferred stock-based compensation........................... (15,382) (15,382) (15,382)
-------- -------- --------
Total stockholders' equity.............................. 51,120 51,120 119,870
-------- -------- --------
Total capitalization............................... $ 51,240 $ 51,240 $119,870
======== ======== ========
</TABLE>
On January 18, 2000, we issued 1,102,400 shares of Series C preferred stock
to an investment entity of The Walt Disney Company. These shares will
automatically convert into 1,102,400 shares of our common stock upon
consummation of this offering. For additional information relating to this
transaction see "Business -- Relationship with GO.com."
In addition to the shares of common stock to be outstanding after the
offering, we may issue additional shares of common stock under the following
plans and arrangements:
- 983,400 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $1.86 per share as of December 31,
1999; and
- a total of 2,068,000 shares available for future issuance under our
various stock plans at December 31, 1999, excluding the annual increases
in the number of shares authorized under each of our plans beginning
January 1, 2001. See "Management -- Stock Plans" for a description of how
these annual increases are determined.
Please read this capitalization table together with the sections of this
prospectus entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
financial statements and related notes beginning on page F-1.
21
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $50.7 million or $2.42 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities and divided by the total number
of shares of common stock outstanding, after giving effect to the automatic
conversion of our convertible preferred stock. 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 this offering and the pro
forma net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the 7,500,000
shares of common stock offered by Pets.com at an assumed initial public offering
price of $10.00 per share, and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value as of December 31, 1999 would have been approximately $119.5
million or $4.20 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $1.78 per share to existing
stockholders and an immediate dilution of $5.80 per share to new investors of
common stock. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 10.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $2.42
Increase per share attributable to new investors.......... 1.78
-----
Pro forma net tangible book value per share after this
offering.................................................. 4.20
--------
Dilution per share to new investors......................... $ 5.80
========
</TABLE>
Assuming the exercise in full of all outstanding options, our pro forma as
adjusted net tangible book value at December 31, 1999 would be $4.12 per share,
representing an immediate increase in net tangible book value of $1.70 per share
to our existing stockholders, and an immediate decrease in the net tangible book
value per share of $1.70 to the new investors.
The following table summarizes on a pro forma basis after giving effect to
the offering at an initial public offering price of $10.00 per share, as of
January 18, 2000, the differences between the existing stockholders and new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 22,044,737 74.6% $121,804,000 61.9% $ 5.53
New investors.......................... 7,500,000 25.4 75,000,000 38.1 10.00
----------- ----- ------------ ------
Totals............................... 29,544,737 100.0% $196,804,000 100.0%
=========== ===== ============ ======
</TABLE>
The foregoing table is based upon the number of shares actually issued and
outstanding as of January 18, 2000 and assumes no exercise of options
outstanding as of January 18, 2000. As of that date there were 983,400 shares
issuable upon exercise of options outstanding at a weighted average exercise
price of $1.86 per share. Assuming the exercise of these options, the average
price per share paid by existing stockholders would have been $5.37.
22
<PAGE> 26
SELECTED FINANCIAL AND OPERATING DATA
The selected financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", our financial statements and the notes thereto and
the other information contained in this prospectus. The selected balance sheet
data as of December 31, 1999 and the selected statement of operations data for
the period from February 17, 1999 (inception) to December 31, 1999 have been
derived from our audited financial statements appearing elsewhere in this
prospectus. The selected balance sheet data as of September 30, 1999 has been
derived from our audited financial statements not included in this prospectus.
The statement of operations data for the quarters ended June 30, 1999, September
30, 1999 and December 31, 1999 have been derived from our unaudited financial
statements not included in this prospectus. We prepared the unaudited financial
statements on substantially the same basis as the audited financial statements
and, in our opinion, they include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations for the quarters ended June 30, 1999, September 30, 1999 and December
31, 1999. The historical results presented below are not necessarily indicative
of future results.
The calculation of pro forma net loss per share gives effect to the
automatic conversion of all of the outstanding shares of our convertible
preferred stock into shares of common stock upon the completion of this
offering.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 17, 1999
QUARTER ENDED QUARTER ENDED (INCEPTION) TO
QUARTER ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
JUNE 30, 1999 1999 1999 1999
------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Net sales...................................... $ 39 $ 568 $ 5,168 $ 5,787
Cost of goods sold............................. (76) (1,766) 11,570 (13,412)
--------- --------- ----------- -----------
Gross margin................................. (37) (1,198) (6,402) (7,625)
Operating expenses:
Marketing and sales....................... 1,122 10,693 30,676 42,491
Product development....................... 1,624 2,194 2,646 6,481
General and administrative................ 838 1,205 2,211 4,254
Amortization of stock-based
compensation............................ -- 1,139 979 2,118
--------- --------- ----------- -----------
Total operating expenses................ 3,584 15,231 36,512 55,344
--------- --------- ----------- -----------
Operating loss............................... (3,621) (16,429) (42,914) (62,969)
Interest income, net......................... 123 577 491 1,191
--------- --------- ----------- -----------
Net loss..................................... $ (3,498) $ (15,852) $ (42,423) $ (61,778)
========= ========= =========== ===========
Basic and diluted net loss per share........... $ (2.41) $ (10.91) $ (28.92) $ (42.42)
Weighted average shares outstanding used to
compute basic and diluted net loss per
share........................................ 1,453,470 1,453,470 1,466,803 1,456,489
Pro forma basic and diluted net loss per
share........................................ $ (3.48)
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss
per share.................................... 17,757,028
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $36,231 $ 30,196
Working capital........................................... 34,913 36,088
Total assets.............................................. 48,399 60,310
Convertible preferred stock and related paid-in capital... 60,382 109,637
Total stockholders' equity, including convertible
preferred stock........................................ 42,584 51,120
</TABLE>
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related Notes contained elsewhere in
this prospectus.
OVERVIEW
Pets.com is a leading online retailer of pet products, integrating product
sales with expert information and professional resources. Our broad selection of
approximately 12,000 SKUs transcends the limited product selection of
superstores, specialty stores and grocery stores.
We were formed in February 1999. The assets related to the Web store,
including the Pets.com domain name, were sold to Pets.com, Inc. from a third
party concurrent with our first round of venture capital investment. We had a
small amount of revenue during the second quarter of 1999 from a limited number
of products available on our Web store. From inception through the launch of the
second version of our Web store in July 1999, our operations were concentrated
on the development of our Web store, the opening of a distribution center in San
Francisco and establishing supplier and vendor relationships. Since July 1999,
we have continued these operating activities and have also focused on building
sales momentum, expanding our product offerings, building vendor relationships,
promoting our brand name, improving the efficiency of our order fulfillment
processes and improving our customer service operations.
We derive substantially all of our revenues from the online sale of pet
products. We do not currently sell live animals such as fish or reptiles, but we
may do so in the future. Virtually all of our orders are fulfilled from our
distribution center and either billed to the customer's credit card or payment
is received via check. Generally, we collect cash from credit cards in two to
five days from the date ordered. If the pay-by-check method is selected, the
order is shipped once the customer's check is deposited and funds are available.
If a customer is not satisfied with a particular product or service we provide
within 30 days of the date of purchase, we generally refund all or a portion of
the sale. To date, our refunds have averaged less than 3% of net sales.
We have completed business development for our private label dog and cat
food and cat litter products, which we intend to launch in the first half of
2000. We have completed the marketing plan, vendor selection, product
development, consumer research, packaging development, and trademark search and
registration with regard to these products. Remaining steps to be taken during
2000 include the purchase and stocking of the physical products as well as
expenditures for promotional material. We intend to expand the Pets.com brand
product line in the second half of 2000 to include apparel, bowls, rawhide,
chews, toys and other accessories. This expansion will require additional
development expenditures, which amounts will be determined by the range of
additional products offered, and this has not yet been determined.
We have incurred net losses of $61.8 million from inception to December 31,
1999. We believe that we will continue to incur net losses for at least the next
four years, and possibly longer, and that the rate at which we will incur such
losses will increase significantly from current levels. We anticipate our losses
will increase because we expect to incur additional costs and expenses related
to brand development, marketing, and other promotional activities, distribution,
customer service, content development, technology and infrastructure development
and other capital expenditures. However, because we only began selling products
in February 1999, we have yet to achieve meaningful revenues, and we have a
limited operating history on which to base an evaluation of our business and
prospects.
Net Sales. Net sales consist of product sales and charges to customers for
outbound shipping and handling and are net of allowances for product returns,
promotional discounts and coupons. We recognize product and shipping revenues
when the related product is shipped. In the future, the level of our sales will
depend on a number of factors including, but not limited to, the frequency of
our customers' purchases, the quantity and mix of products, pricing of products
and shipping, sales promotions and discounts, seasonality and customer returns.
24
<PAGE> 28
Cost of Sales and Gross Margin. Cost of sales consists primarily of the
costs of products sold to customers and outbound and inbound shipping costs. We
expect cost of sales to increase in absolute dollars to the extent that our
sales volume increases. Promotional tools include rotating discounts on product
segments as well as online and offline coupons to targeted audiences. We may in
the future expand or increase the coupons and discounts we offer to our
customers and may otherwise alter our pricing structures and policies. These
changes may negatively affect our gross margin. Our gross margin will fluctuate
based on a number of factors, including, but not limited to the cost of our
products, our product and shipping pricing strategy, product mix, our
distribution centers and inventory control. Our product margins currently range
from between 20% and 25% in the aggregate. We expect that our product margins
will nearly double if we are able to achieve our objective over time of
broadening our product mix by adding private label food and accessories which
have higher margins. In addition, our shipping costs currently range from
between 100% and 110% of revenues. We expect these costs, as a percentage of
revenues, to decrease to between 20% and 25% after our second distribution
center in Indianapolis has achieved its target shipping level, and to decrease
further thereafter as we add additional distribution centers. We expect that we
will be able to achieve over time operating margins of more than 15% as we
achieve greater efficiencies in our operations and increases in our gross
margins and revenues.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of advertising and promotional expenditures, supplies, payroll and
related expenses for personnel engaged in marketing, merchandising and business
development. We intend to continue to pursue an aggressive branding and
marketing campaign and, therefore, expect marketing and sales expenses to
increase significantly in absolute dollars. Marketing and sales expenses may
also vary considerably as a percentage of net revenues from quarter to quarter,
depending on the timing of our advertising campaigns and our response to
competitive developments in our market.
Product Development Expenses. Product development expenses consist
primarily of payroll and related expenses for our Web store development, systems
personnel, consultants, content and other Web store costs. Over the next several
months, we plan to continue to work on a significant number of development
projects that will result in increased product development expenses. We believe
that continued investment in product development is critical to attaining our
strategic objectives and maintaining our competitive position in our market and,
as a result, we expect product development expenses to increase significantly in
absolute dollars, but to fluctuate as a percentage of net revenue from quarter
to quarter.
General and Administrative Expenses. General and administrative expenses
consist of payroll and related expenses for development, design, production,
finance, human resources, executive and administrative personnel, corporate
facility expenses, professional services expenses, travel and other general
corporate expenses. We expect general and administrative expenses to increase in
absolute dollars as we expand our staff and incur additional costs related to
the anticipated growth of our business and being a public company, but to
fluctuate as a percentage of net revenue from quarter to quarter.
Amortization of Stock-Based Compensation. We recorded total stock-based
compensation of $17.5 million for the period from inception on February 17, 1999
to December 31, 1999 in connection with stock options granted and restricted
stock issued during such periods. In the case of stock options granted, the
stock-based compensation amounts represent the difference between the exercise
price of stock option grants and the deemed fair value of our common stock at
the time of such grants. In the case of restricted stock, the stock-based
compensation represents the difference between the purchase price of the
restricted stock and the deemed fair value of our common stock on the date of
purchase. Such amounts are amortized as an expense over the vesting periods of
the applicable agreements, resulting in amortization of stock-based compensation
totaling $2.1 million for the period from inception on February 17, 1999 to
December 31, 1999. The amortization expense relates to options awarded to
employees in all operating expense categories. Stock-based compensation for
stock options and restricted stock issued through
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December 31, 1999 that will be subsequently recognized as expense for each of
the next four years is estimated to be as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
2000.................................................... $ 4,375
2001.................................................... $ 4,375
2002.................................................... $ 4,375
2003.................................................... $ 2,257
</TABLE>
The amount of stock compensation expense to be recorded in future periods could
decrease if options for which accrued but unvested compensation has been
recorded are forfeited.
Income Taxes. There was no provision or benefit for income taxes for any
period since inception due to our operating losses. As of December 31, 1999, we
had $56.2 million of net operating loss carryforwards for federal income tax
purposes, which expire beginning in 2019. We have not recognized any benefit
from the future use of loss carryforwards for these periods or for any other
period since inception because of uncertainty surrounding their realization. The
amount of net operating losses that we can utilize may be limited under tax
regulations in circumstances including a cumulative stock ownership change of
more than 50% over a three year period. It is possible that such a change may
have already occurred or could occur as a result of this offering. See Note 5 of
Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
We have not provided year-to-year comparative quarterly results because we
only commenced operations in February 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of convertible notes payable and preferred stock, which, through December
31, 1999, yielded net cash proceeds of $109.2 million.
Net cash used in operating activities was $65.3 million from inception on
February 17, 1999 to December 31, 1999. Net cash used in operating activities
for this period primarily consisted of net losses, increases in inventories and
other working capital purposes.
Net cash used in investing activities was $14.5 million from inception on
February 17, 1999 to December 31, 1999. Net cash used in investing activities
primarily consisted of leasehold improvements and purchases of equipment and
systems, including computer equipment and fixtures and furniture.
Net cash provided by financing activities was $110.0 million from inception
on February 17, 1999 to December 31, 1999. Net cash provided by financing
activities during each of those periods primarily consisted of cash proceeds
from the issuances of preferred stock. In April 1999 we issued 5,781,862 shares
of Series A preferred stock in exchange for an aggregate purchase price of $10.0
million. In June 1999 we issued 5,298,014 shares of Series B preferred stock for
an aggregate purchase price of $50.0 million. In November and December 1999, we
issued 5,220,664 shares of Series B preferred stock in exchange for an aggregate
purchase price of $49.2 million.
As of December 31, 1999 we had $30.2 million of cash and cash equivalents.
As of that date, our principal commitments consisted of obligations outstanding
under capital and operating leases aggregating approximately $3.3 million
through December 31, 2000. In November 1999 we invested $2 million for an equity
position in PetPlace.com, Inc. and are committed to invest an additional $1.5
million no later than February 2000. Although we have no material commitments
for capital expenditures, we anticipate a increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. In the first half of 2000, we intend to add a
second distribution center to ensure greater control over the distribution
process and to ensure adequate supplies of products to
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our customers. The second distribution center is in the final planning stages
and will require capital investments in facilities and equipment of $7 million
to $9 million. For 2000, we anticipate our total capital expenditures will be at
least $15 million, which will include substantial expenditures toward technology
and systems upgrades to support the distribution centers and increases in
business volume. In January 2000, we issued 1,102,400 shares of Series C
preferred stock to an affiliate of The Walt Disney Company in exchange for $11.0
million of media advertising on ABC, Inc., an affiliate of The Walt Disney
Company.
We currently anticipate 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 through at least the next 12 months. We
may need to raise additional funds prior to the expiration of such period if,
for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to us
on acceptable terms when required, or at all.
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BUSINESS
OVERVIEW
As a leading online retailer of pet products, we are committed to serving
pets and their owners by combining our product offerings with expert information
on pets and their care. Through our broad selection of products and services we
seek to exceed the more limited selections offered by superstores, specialty
stores and grocery stores in connection with pet product retailing. One of our
primary goals is to help consumers make informed purchasing decisions. For
example, we provide information to help pet owners manage day-to-day needs as
well as the life stages of their pet, and our topical articles and community
bulletin boards focus on these and other pet care issues. Our Web store provides
customers with a convenient, one-stop shopping experience and it is organized to
reflect how consumers think about shopping for their pets. Our Web store
currently focuses on the most popular pets, including dogs, cats, birds, fish,
reptiles, ferrets, and other small pets, and our in-house distribution,
fulfillment, customer service, and technology operations enable us to provide
our customers with rapid turn-around and order fulfillment services. We actively
participate in the pet community both through our Web store and through
Pets.commitment, our charitable foundation that supports the role that pets and
people play in each others' lives, and we also encourage our customers to
participate with us.
INDUSTRY BACKGROUND
THE GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet has become an increasingly significant medium for
communication, information exchange, and commerce. International Data
Corporation estimates that there will be approximately 196 million online users
worldwide at the end of 1999 and that this number will grow to approximately 399
million users by the end of 2002. Forrester Research estimates that online
purchases made by consumers in the United States will grow from $20 billion in
1999 to $184 billion by 2004, representing a compound annual growth rate of 56%,
and estimates that the total number of U.S. online consumers will grow from
approximately 17 million in 1999 to 49 million in 2004, representing a compound
annual growth rate of nearly 24%. We believe this increased usage is due to a
number of factors, including a large installed base of personal computers,
advances in the speed of personal computers and modems, easier and cheaper
access to the Internet, improvements in network security, infrastructure and
bandwidth, a broader range of online offerings, and growing consumer awareness
of the benefits of online shopping.
THE PET PRODUCTS RETAIL INDUSTRY
The pet products industry is a large and growing market characterized by a
loyal and emotion-driven customer base whose needs we believe are not adequately
satisfied by traditional retail stores. According to the Pet Industry Joint
Advisory Council, U.S. consumer spending on pet products and services grew at an
annual rate of approximately 9% per year between 1993 and 1997 totaling
approximately $23 billion at the end of 1997. Pets have become an increasingly
important part of U.S. households, numbering over 235 million at the end of
1998, based on a survey conducted by Sloan Trends & Solutions, Inc. More than
60% of U.S. households owned a pet and 40% of those households owned more than
one pet in 1998, declining from 44% in 1996, according to a recent American Pet
Products Manufacturers Association study. In addition, according to Sloan Trends
& Solutions, Inc., U.S. households spent on average $350 on their pets in 1998.
Pet owners generally exhibit strong emotional connections to their animals.
For example, according to Sloan Trends & Solutions, Inc., over 80% of pet owners
consider their pets to be members of the family, and according to a recent
American Pet Products Manufacturers Association study, 62% of pet owners buy
their pets gifts. In addition, over 80% of pet owners surveyed by the American
Animal Hospital Association stated that in an emergency they would likely risk
their life for their pet. Because of this strong human-animal bond, we believe
pet owners, like parents, represent an attractive base of consumers
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who seek a wide variety of products and information for their pets which promote
their pets' health, well being and happiness.
Store-based pet supply retailers have traditionally served the pet product
market in the United States. These include superstore retailers such as Petco
Animal Supplies, Inc. and PetsMart, Inc., grocery store retailers such as Kroger
Company and Safeway, Inc., mass market retailers such as Wal Mart Stores, Inc.
and Kmart Corporation, and smaller, independent specialty pet products stores.
While in the aggregate these channels provide consumers with a wide
selection of pet related products, we believe traditional store-based retailers
for pet products have the following limitations:
Lack of One-Stop Shopping. The pet products retail market is fragmented,
generally requiring consumers to shop at multiple outlets to find everything
they need for their pets. For example, superstore retailers, grocery stores and
mass market retailers tend to carry a deep selection of well known brand name
pet products from leading vendors, but have fewer specialty products. Specialty
pet stores instead tend to carry a broader selection of specialty products from
smaller vendors, but usually have a limited selection of the more well known
brand name products. On a combined basis, specialty pet stores control the
largest percentage of sales in the U.S. pet product retail market, having 20% of
U.S. sales based on data published by the Pet Industry Joint Advisory Council in
1998. This lack of one-stop shopping also applies to other online retailers who
have chosen to duplicate the traditional retail model in terms of selection and
are offering a subset of a superstore product mix.
Limited Geographic Coverage. The few pet retailers who do tend to offer a
broader selection of products either operate on a regional basis or only in
metropolitan areas. This leaves a significant percentage of the U.S. population
without easy access to all of the products they need for their pets. Opening
additional stores would require substantial investments in real estate and
inventory, as well as in trained personnel, for these chain stores. The high
cost of opening and maintaining additional stores further limits the ability of
retailers to serve geographic areas that are not densely populated.
Inconvenience of Store Design and Layout. We believe consumers value the
opportunity to select items from a broad range of pet products that best fit
their needs. However, the constraints of retail shelf space and store layouts
limit traditional retailers' ability to meet many customers' needs, often
dictating a limited product selection that appeals to the broadest number of
consumers. Products are typically displayed by brand, category or packaging to
maximize stocking efficiencies, especially for bulk products such as dog food,
and to promote fast selling products. Further, because of large investments in
inventory required to keep stores fully stocked, traditional pet retailers often
have limited flexibility to adapt their merchandising strategies to meet
changing consumer demand.
Limited, Inconsistent Information. Consumers buying pet products often seek
information and expert advice to assist them in making purchase decisions.
However, many traditional store-based retailers do not provide consumers with
easy access to useful product information or readily available on-site experts
who can provide assistance. In addition, even where on-site support is
available, the quality of information and expertise may be inconsistent due to
the challenges of hiring, training and maintaining knowledgeable sales staff.
This limits the level of customer service available to consumers.
As a result of these factors, we believe that consumers typically find the
pet product shopping experience to be both inconvenient and unpleasant. Shopping
for pet products in retail stores can involve making trips to multiple stores,
extended searching for desired products, waiting in line to make a purchase and
carrying home heavy bags of pet food, litter or other bulk products.
THE PETS.COM SOLUTION
We are a leading online retailer of pet products integrating product sales
with expert information on pets and their care. Our mission is to serve pets and
their owners with the best care possible through broad product selection, expert
information and superior service. We seek to address the entire pet products
market, transcending the limited product selection of superstores, specialty
stores and grocery stores. Our Web store tightly integrates broad product
selection with highly relevant content, providing consumers with
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the pet-related information they need to make informed purchase decisions.
Additionally, we provide information to help pet owners manage the life stages
of their pet coupled with topical articles that address their pet care needs. We
believe that our Web store provides customers with a superior one-stop shopping
experience, with direct delivery to their doors.
We are distinguished in the online pet retail industry because of our
in-house control over key aspects of our business. Our online design and
editorial team is responsible for the consumer shopping experience, creation and
delivery of pet information, and general usability of our Web store. Our
technology group is responsible for the development and maintenance of our Web
store and back-end transaction processing and fulfillment. Our merchandising
team has more than 90 years of combined buying and merchandising experience and
deep product knowledge which enables them to build and maintain close
relationships with manufacturers and build our private label business. Our
in-house distribution and fulfillment operation enables full control over the
product supply process from product mix to customer shipments. Our customer
service department manages the communication with customers. We believe our
in-house control of these functions is an important strength that enhances our
competitive position in the pet products industry.
We attract and retain consumers by emphasizing the following key
attributes:
Extensive Product Selection Enables One-Stop-Shopping. We provide consumers
with one-stop-shopping for their pet care needs, with direct delivery to their
doors. Our broad selection addresses nearly the entire pet products market,
transcending the limited product selection of superstores, specialty stores and
grocery stores. We cater to the needs and interests of consumers who own dogs,
cats, fish, birds, ferrets, reptiles, and other small pets. As of December 1999,
we had shipped products to approximately 144,000 customers. With only one
distribution center, our SKU count is currently equivalent to the number of SKUs
available at the largest pet superstores, and by the middle of 2000 is projected
to increase to roughly two times the SKUs available at these stores. Our online
business model enables us to aggregate a diverse product selection that is not
generally found in single retail outlets, respond more quickly to new product
introductions than traditional retailers, and dynamically change our mix on a
national basis to meet consumer needs and interests.
Expert Information and Professional Resources. Because of the emotional
attachment consumers have toward their pets, they value extensive information
from experts to give them confidence that they are giving their pets the best
care possible. We offer this information to consumers in several different ways:
- Editorials. Our in-house staff of pet experts, veterinarians, an animal
behavior specialist, and a pet attorney provide consumers with advice on
a wide variety of animal topics. We offer an "Ask the Vet" column hosted
by one of our veterinarians, in which answers are given to customer
questions. In addition, multiple articles are posted weekly spanning
seasonal topics, current events, health, nutrition, and behavior, among
others.
- Periodicals. Our offline print publication, Pets.com, The Magazine For
Pets and Their Humans, is designed to further establish Pets.com in the
lives of consumers and their pets, and to introduce pet owners to the
products and expert information available in our Web store. Our team
contributes high quality, original content spanning lifestyle, health,
behavioral, and product information. The first issue of the magazine was
published in November 1999, the second issue was published in January
2000, and each had a distribution of more than one million copies. We
intend to publish this magazine on a bi-monthly basis.
- Professional Resources. Consumers can use our search tool to find a wide
range of professional pet resources near where they live. These resources
include veterinarians, hospitals and emergency care centers, kennels and
boarding facilities, hotels accepting pets, and pet sitters, among
others.
- Veterinary Relationships. We provide consumers with a comprehensive array
of veterinary information through two exclusive strategic relationships.
We have an exclusive strategic relationship with PetPlace.com which
intends to launch a comprehensive, online educational library
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through its Web site in the first quarter of 2000 for pet owners and
veterinarians covering pet illness and wellness. PetPlace.com will
provide our customers with extensive resources through links to their Web
site to help them increase the quality of healthcare for their pets. We
also have a strategic alliance with the American Veterinary Medical
Foundation which enables us to provide information about our products in
their healthcare information video sent out bi-monthly to approximately
17,000 veterinarians, who can make this information available to
consumers.
Superior Shopping Experience. We believe that we provide an intuitive,
easy-to-use Web store, offering extensive product selection across the most
popular pet types, supported by tightly integrated, relevant editorial and
searchable resource information. We categorize and organize our products to
reflect how consumers shop for their pets, allowing them to browse by pet type,
category, product line and individual product. Our product presentation is
supported by numerous high resolution photographs of products available for sale
in our Web store. We offer search capabilities across all products and editorial
content. Further convenience advantages of our Web store include:
- Continuous replenishment of food and litter through "Keep It Comin' "
which allows customers to schedule ongoing deliveries of products;
- A gift center, allowing consumers to match gifts to pet lifestyles and
personalities; and
- Advanced personalization features, including the use of wish lists and
address books.
Quality Customer Service. The typical online shopping experience begins
with the search for products that meet specific needs, includes the online
ordering process, and extends through product delivery and post-purchase
support. We believe that the ability to accurately fulfill orders, ship products
quickly to a customer's door, or efficiently handle customer inquiries is as
important to customer satisfaction as product selection. We have invested
significant resources to create our own fulfillment, distribution, and customer
service functions rather than outsourcing these functions to a third party. The
decision to build this operation in-house provides us with the ability to carry
differentiated products, buy direct from manufacturers and improve product
margins, reduce shipping and handling costs and provide customer satisfaction
through better service.
Community. We encourage community participation both through our Web store
and offline community efforts. Online consumers can participate in 60 different
discussion groups covering various topics of interest across a range of pet
types, and sign up to receive our online newsletter which is sent to consumers
every two to three weeks. We offer specific forums for dogs, cats, fish, birds,
reptiles, ferrets, horses, and small pets. Our online newsletter provides timely
information, highlighting current articles and new products that are available
at our Web store, and describes upcoming pet events. More than 230,000 consumers
either receive our online newsletter or participate in our discussion groups
each month. At the community level, we encourage participation through
Pets.commitment, our charitable foundation that supports the role that pets and
people play in each other's lives. Pets.commitment provides direct financial
support and encourages volunteerism across animal shelters, animal therapy and
service dog programs, and pet care and wellness organizations. Our intent is to
contribute more than $1 million to these organizations by the end of 2000.
BUSINESS STRATEGY
Our objective is to become one of the world's leading retailers of pet
products. To achieve this objective, we intend to be the one-stop shop for pet
products and the definitive source for pet information. Key elements of our
business strategy include:
Build Enduring Brand Equity. We have marketed our Web store to consumers
through a wide range of advertising and promotional activities. We intend to
continue to leverage our offline and online
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marketing strategies to maximize customer awareness, attract consumers most
likely to make online purchases, and enhance our brand recognition as follows:
- Advertising. We use television, radio, outdoor, and online advertising to
build brand equity and create awareness. At the center of this campaign
is our Pets.com sock puppet brand icon who we believe has already made an
emotional connection with consumers. Media campaigns featuring this
puppet communicate our key benefits of convenience, selection, and
delivery.
- Online Marketing Relationships. We leverage our relationships with select
online content providers and portals to attract consumers most likely to
make online purchases. These include Blue Mountain Arts and some of the
online properties of GO.com, including the GO Internet portal,
Disney.com, Family.com, and mrshowbiz.com.
- National Events and Local Marketing. We use national sponsorships and
local market efforts to build brand awareness and expand our customer
base. This includes participation in national events such as the 1999
Macy's Thanksgiving Day Parade and promotion of "Take Your Dog To Work
Day." Local market activities such as SPCA events, dog walks, and
adoption fairs reach pet owners in a pet-related context.
Offer Broadest Product Mix. We provide consumers with one-stop shopping for
their pet care needs, with direct delivery to their doors. Our broad selection
addresses nearly the entire pet products market, encompassing the selection of a
superstore, specialty store and grocery store. We plan to grow from a SKU count
of approximately 12,000 by year-end to more than 20,000 SKUs during 2000. We
will continue to purchase products directly from manufacturers in order to
optimize our product selection, enable a highly flexible product mix in response
to new or fast moving items, strengthen our vendor relationships, customize
promotions to specific consumer demographics and purchase patterns, easily test
new items, and substantively improve our margins. We are currently working to
broaden and diversify our product selection. For example, we will begin offering
product in other pet-themed categories such as human apparel, calendars, picture
frames and other home accessories by the first quarter of 2000. We also plan to
introduce live fish during the first half of 2000 and equine-related products
thereafter.
Establish Our Private Label Brands. We plan to introduce a full line of
high quality, private label dog and cat food and cat litter in the first half of
2000, marketed under the Pets.complete brand name targeted to the premium buyer.
Our private label business should provide further margin enhancement, continued
growth of our brand, and enhanced consumer loyalty and repeat purchases. We
intend to expand this product line in the second half of 2000 under the Pets.com
brand name to include apparel, bowls, rawhide, chews, toys, and a range of other
accessories. These private label products will only be available at our Web
store and will further distinguish our product selection.
Provide Comprehensive and Relevant Content. We intend to be the definitive
source of pet information. Our content is designed to address the broadest
possible collection of pet types and a wide array of topics. We will
increasingly deliver pet-related information in a variety of online and offline
media forms, and in conjunction with a range of consumer and veterinary care
partners. We will continue to encourage growing participation in a range of
community forums, events, and newsletters.
Deliver Superior Customer Service and Promote Repeat Purchases. We intend
to continue to deliver a superior online shopping experience that encourages
repeat purchases, beginning with the initial order and continuing through
product delivery and post-purchase support. To accomplish this, we intend to
build features which allow greater personalization and targeting of our Web
store to existing customers, and will continue to invest in people, technology
and distribution facilities which will allow us to continuously improve our
customer service. This in-house competency enables us to distinguish our product
selection from traditional and online retailers, realize better economics
through greater margin control and reduced handling and shipping costs, and
allows for better communication with customers.
Continue to Maintain and Expand our Relationship with
Amazon.com. Amazon.com is currently our largest stockholder and is represented
on our board of directors. Although Amazon.com has no contractual obligation to
provide us with consulting advice or engage in joint marketing activities, as a
result of this
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equity ownership in our business Amazon.com has historically provided us with a
number of services that have enabled us to benefit from its extensive online
retailing experience. We have been able to consult with our Amazon.com
counterparts across a range of operational and strategic initiatives. We have
engaged in a number of joint marketing activities including joint e-mails. In
the future, we intend to work to maintain and expand this relationship to grow
our business.
Continue to Maintain and Expand our Relationship with GO.com. We have a
strategic relationship with GO.com, where we engage in promotions involving its
online properties, including Family.com and Disney.com. We have recently
expanded this relationship to include joint content development, distribution of
Pets.com content on several GO.com online properties, and placement of media
advertising with ABC, Inc. which, along with GO.com, is an affiliate of The Walt
Disney Company. We intend to work to maintain and expand this relationship to
grow our business.
Expand Internationally. We intend to expand our business internationally in
order to better serve pet owners and capitalize on a global market. We intend to
complete the first step in this global expansion by taking an equity stake in
Petspark.com, Ltd. a UK based online pet retailer that intends to offer pet
owners a full range of pet-related services including a broad selection of pet
products, expert information from veterinarians and animal behaviorists, and an
online community of pet owners. In addition, Petspark.com, Ltd. will have the
right to use our name in its marketing in the UK. We also intend to expand into
Canada in the first half of 2000.
THE PETS.COM EXPERIENCE
We offer consumers instant online access to a wide array of products,
expert information and professional resources. We believe that we provide a
convenient, easy-to-use Web store, offering extensive product selection across
the most popular pet types, supported by integrated, relevant editorial and
searchable resource information. From our home page, consumers can access the
shopping area, read pet care articles in "Today's Features," search our store
for products or content, view the "Pet of the Day," access our professional
resources, or participate in one of the community discussion groups. Our Web
store is optimized for fast loading at a range of connection speeds. Key
components of the Pets.com experience include:
Shopping at Pets.com. Our broad product selection offers products for many
of the most popular pet types. We categorize and organize our products the way
people shop for their pets, and support a highly visual shopping experience.
Customers can shop at our online store as follows:
- Pet Type. Our product offering spans a wide selection of products for
dogs, cats, fish, birds, reptiles, ferrets, and small pets like hamsters,
rabbits, and guinea pigs. Our home page allows consumers to select pet
type to help them narrow the choices that follow.
- Category. We provide consumers with the ability to browse categories
based on the key attributes of that particular product category. For
example, consumers shopping for dog food can browse by type of food, such
as dry or canned, by the specific dog food brand, or by stage of their
dog's life, such as puppy, adult or senior. These attributes differ by
category and have been customized in our Web store to match these
shopping patterns. This non-duplicative navigational approach helps
eliminate the problem of consumers becoming overwhelmed as they browse
hundreds of items within a category to find the product that they need.
- Product Line. We enable consumers to browse as many as a dozen product
lines from a single Web page. This browsing approach closely maps the
physical retail experience and highly visual nature of shopping for pet
products. In this category, a pet owner might know the color of the
package or the picture on the front of the box, and then recall more
specific information such as the brand name when they see the package.
- Individual Product. Our product pages feature large, high quality photos
of each item, and allow customers to select flavor, color, size and
quantity from a single Web page. This eliminates the need for consumers
to navigate through multiple Web pages to specify the attributes of a
particular
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item that they want to purchase. In addition, as consumers make their
specific product selection, this same Web page displays product
availability in real time.
- Checkout. We offer consumers a highly streamlined checkout experience
requiring a minimal number of steps, only asking them for the information
that is necessary to complete the transaction. The checkout area offers
several convenient features such as the ability to create a personalized
address book and then choose a specific address from the list by
selecting it from a pull down menu.
In addition, we recently opened a gift center, which allows consumers to
match gifts to pet lifestyles and personalities. For example, consumers can find
gifts for "the urban pet," "the dog who has everything," or "the cat in vogue."
This new area also features seasonal baskets, offering consumers gift ideas
tailored to particular holidays and seasons of the year. Overall, the gift
center capitalizes on our belief that consumers consider their pets to be
members of the family, providing consumers with a fun, creative way to shop for
their pets.
Editorial and Resource Information. We provide our customers with expert
information and professional resources, tightly coupled with our product
selection in order to support informed purchase decisions. The information
supports various pet lifestyles from urban to rural, and the full spectrum of
stages from the young pet to the aging pet. The timely, topical, relevant nature
of this editorial information reinforces the emotional connection that pet
owners have with their animals, which we believe will help build loyalty to
Pets.com as consumers return to the store to read the latest news and
information. We offer the following editorial and resource information to our
customers:
- Online Articles. Our current editorial staff of in-house and freelance
experts contributes 15-20 new articles per week which are posted in our
Web store, spanning all pet types and a wide range of topical areas. Our
experts include writers with extensive pet experience, veterinarians, an
animal behaviorist, and a pet attorney. All articles contain a brief
synopsis of the author's credentials in order to help consumers
understand the area of expertise and qualifications of each of our
writers. Our content includes product-specific information, basic pet
information covering topics such as healthcare, nutrition, and behavior,
and information based on seasonal topics and current events. We
supplement the breadth and depth of our original content with licensed
content on topics such as breed profiles and basic pet care information.
Where relevant, our stories contain product references and merchandising
links to support decision-making.
- Resources. Consumers can use the search tool on our Web store to find a
wide range of pet resources specific to the area in which they live. This
resources include veterinarians, hospitals and emergency care clinics,
kennels and boarding facilities, hotels that accept pets, and pet
sitters, among others.
- Pets.com, The Magazine For Pets and Their Humans. We are currently the
only online pet retailer publishing a print magazine, which is designed
to broaden awareness of Pets.com, drive purchase of products sold through
our Web store, and increase current customer loyalty. Many pet owners
will be introduced to our store through this magazine, which was
published for the first time in November 1999 and again in January 2000,
and was distributed to over 760,000 pet owning households. In addition,
over 300,000 copies were distributed to veterinary offices, shelters, pet
sitter organizations, and with our in-box product shipments to customers.
We intend to publish new issues of the magazine bi-monthly.
MERCHANDISING AND PRODUCT SELECTION
Merchandising. We have assembled an in-house merchandising team with pet
industry expertise spanning product design, buying, import sourcing, and retail
experience. This expertise gives us several key advantages. We use our category
knowledge to source a broad assortment of products that encompasses the
selection of a superstore, specialty store and grocery store. We leverage our
vendor relationships to buy direct and realize better pricing, rapidly bring new
products to market, capitalize on promotional
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opportunities, and easily test new items on a national basis. We currently offer
a majority of the well known brands in the pet industry such as Science Diet,
IAMS, Pedigree and Eukanuba, and other well-known brands such as Alpo,
FreshStep, Friskies and Hartz. We also offer our premium private label brand
that includes Pets.complete food and litter and Pets.com supplies and
accessories. Over time, we anticipate that 10-20% of our revenues will come from
our private label products.
Product Offering. Our product offering provides customers with a breadth
and depth of selection across the most popular pet types and product categories
as follows:
<TABLE>
<CAPTION>
DOGS CATS FISH BIRDS
---- ---- ---- -----
<S> <C> <C> <C>
Apparel Beds Aeration & Bubblers Books & Videos
Beds Bells Aquarium & Kits Cage Accessories
Behavior Books Books & Videos Cages & Kits
Modification Bowls Bowls Food
Bones Cages & Accessories Breeding Supplies Hand Feeding
Books Calendars Cleaning Equipment Healthcare & Remedies
Bowls & Supplies Cards Decor Nesting Supplies
Calendars Carriers Filtration Toys
Carriers Catnip & Cat Grass Food & Accessories Treats
Chews Collars Health Care Wild Bird & Wildlife
Collars Doors & Barriers Heaters
Containment Feeders & Waterers Lighting FERRETS
Doors & Barriers Flea & Pest Control Live Plan Supplies Apparel
Ears, Hooves, Etc. Food Nets Food & Treats
Feeders & Waterers Furniture Pond Grooming
Flea & Pest Control Grooming Saltwater Supplies Habitats
Food Hair Lifters & Rollers Thermometers Hammocks & Beds
Food Containers Harnesses Valves & Tubing Health Care
Grooming Health Care & Remedies Water Test Kits Leashes
Hair Lifters & Rollers Holiday Water Treatments Litter
Harnesses I.D. Tags & Belts Litter Pans
Health Care & Remedies Leashes REPTILES Toys
Holiday Litter Books & Videos
Houses & Accessories Litter Box Supplies Bowls & Waterers SMALL PETS
I.D. Tags Litter Boxes Decor Bedding
Leashes New Kitten Food & Treats Books & Videos
New Puppy Repellents Habitats Bowls
Outdoor Clean-Up Scratchers Health Care Cage Accessories
Rawhide Stain & Odor Heating Cage Kits
Repellents Starter Kits Humidifiers Carriers
Safety & First Aid Toys Leashes Collars & Leashes
Stain Odor Training Lighting Exercise
Starter Kits Treats Substrate Feeding Supplies
Tie-Outs Vitamins & Supplements Thermometers Food
Toys Grooming
Training Habitats
Treats & Biscuits Health Care
Videos & CDs Miscellaneous
Vitamins & Supplements Toys
Treats & Chews
</TABLE>
Product Sourcing. As of December 31, 1999, we purchased our products from a
network of approximately 200 manufacturers. For the period from inception
through December 31, 1999, approximately 90% of our total sales were from this
network of manufacturers. In addition, we anticipate adding well over 100 new
direct relationships in the first half of 2000 as we expand our product
selection.
VETERINARY CARE AND SERVICES
The American Pet Products Manufacturers Association cites that
approximately seven out of ten dog and cat owners and approximately two out of
ten owners of birds, reptiles and small animals rely on
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veterinarians when they need information about their pet. Given pet owners'
reliance on veterinary expertise, we provide consumers with access to extensive
veterinary care information. In parallel, we reach veterinarians with the most
up-to-date research and information in order to help them better serve pet
owners. We accomplish these objectives in several ways: by providing a wide
variety of articles written by veterinarians; by allowing consumers to
participate in our "Ask the Vet" column; and, by entering into relationships
with accredited veterinary care organizations that provide consumers with
in-depth information on pet illness and wellness, and that offer veterinarians
access to the most current research and information on pet healthcare. A
description of our strategic veterinary care relationships follows.
PetPlace.com, Inc. We have made an equity investment in PetPlace.com and
entered into a three year exclusive marketing agreement which includes mutual
revenue sharing and new customer bounties which are paid for every new customer
referred from one site to another. PetPlace.com intends to launch an online
comprehensive, interactive, educational library through its Web site in the
first quarter of 2000 for pet owners and veterinarians covering illness and
wellness. Consumers will be able to search for relevant information on the site
before they visit their veterinarian and after the pet's illness is diagnosed.
Consumers will also be able to create a personal history of their pet, which
might include recommendations on food, grooming, worms, or flea control.
PetPlace.com is distinguished by its exclusive relationship with Angell Memorial
Animal Hospital, one of the leading veterinary specialty hospitals, whose
specialists provide content for this site and online consultations for
consumers.
We intend to provide our customers with in-depth veterinary care
information, generate highly qualified customer leads, encourage repeat visits
to our Web store, and build our brand. Our Web store is fully integrated with
PetPlace.com in a number of ways: PetPlace.com consumers will be able to
navigate directly from PetPlace.com articles to relevant products for purchase
at our Web store; consumers who ask our veterinarians questions will be able to
receive answers to the highly specialized healthcare issues from PetPlace.com;
and consumers will be able to have direct access to extensive veterinary
resources available on PetPlace.com.
American Veterinary Medical Foundation. The American Veterinary Medical
Foundation is a renowned professional association of over 60,000 veterinarians.
Our strategic relationship with the American Veterinary Medical Foundation is a
three year exclusive marketing agreement that we believe provides us with
enhanced credibility. We have agreed to provide financial support in an amount
of approximately $1 million to the American Veterinary Medical Foundation for
key activities such as "ClientLink," a video sent out by American Veterinary
Medical Foundation every two months to 17,000 veterinarians that provides
up-to-date news and pet healthcare information. In return for this support, our
Web store will receive bi-monthly coverage of products, services, and key
initiatives, such as the launch of PetPlace.com in "ClientLink" beginning in
January 2000, and we will have the right to use the American Veterinary Medical
Foundation logo on our home page.
MARKETING AND PROMOTIONS
Our marketing strategy is designed to attract customers most likely to shop
online, convert browsers to buyers, meet or exceed customer expectations, drive
loyalty and repeat purchases, build enduring brand equity, and reinforce the
human-animal bond. In order to implement this strategy, we execute an integrated
marketing campaign that includes the following:
- Advertising. Our advertising is designed to build brand equity, create
awareness, and generate initial purchase of products sold through our Web
store. The campaign features the Pets.com sock puppet, who we believe has
become popular with many consumers, and is a strategic icon of our brand.
In this advertising, our sock puppet is a roving advocate for the brand,
and has a playful, enthusiastic, funny, and caring personality. In our
ads, he endears himself to both animals and their owners as he strives to
make sure they get the products that they need. We use a mix of broadcast
media including national network television, local radio in the top
markets with online shoppers, outdoor advertising, online banners, text
links, and e-mail newsletters.
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- Amazon.com Joint Marketing. We have implemented joint marketing programs
with Amazon.com. To date, this includes joint e-mails. In addition, links
to our Web page rotate on Amazon.com's home page and on other book
category pages, consistent with their other marketing arrangements. In
all of these marketing programs, Amazon.com receives a referral fee for
delivering new customers to our Web store.
- GO.com Joint Marketing. As part of our strategic relationship with
GO.com, we plan to implement joint marketing programs with GO.com, which
may include joint promotion of the Pets.com magazine, joint merchandise
development, Pets.com development of exclusive content for Disney.com and
Family.com, and key event sponsorship. In addition we intend to engage in
joint online promotions including newsletters, sweepstakes and product
promotions.
- National Events and Local Marketing. Our national sponsorships are
designed to build brand awareness and expand our customer base. A balloon
float of our Pets.com sock puppet was featured in the 1999 Macy's
Thanksgiving Day Parade. We own the trademark to "Take Your Dog to Work
Day," and will be launching a national publicity campaign in 2000 which
includes a video news release and a "Do It Yourself Kit" that helps
companies structure their own event. We are the presenting sponsor of
"Dog Day Afternoon," an outdoor festival for dogs and their owners
organized by Design Industries Foundation Fighting AIDS. Our local
marketing activities are designed to deliver the Pets.com message in a
pet-related context at the community level. This includes local market
efforts such as SPCA events and dog fashion shows, and grassroots
activities including dog walks and adoption fairs in high Internet
penetration markets.
- Strategic Online Marketing Relationships. We have identified a select
group of online companies who we believe attract buyers more likely to
shop for pet products online. Our strategic relationship with GO.com
allows us to be the exclusive online pet retailer for the Pets & Animals
channel on Disney.com and the Pets category on Family.com. In addition,
we have agreed to purchase online advertising on the GO Internet portal,
and have the right to make placements in online commerce areas within the
GO Network. Our agreement with GO.com expires in January 2003, although
GO.com has the right to terminate the exclusivity provisions of the
agreement at times prior to expiration. We are also the exclusive online
pet retailer for Blue Mountain Arts, and have created special "pet
holiday cards" that are offered to consumers at Bluemountain.com. We are
also the exclusive online pet retailer for PlanetOut. These agreements
expire in September 2000 and April 2000, respectively. We have also
entered a non-exclusive relationship with AOL on their Shopping Channel.
In addition, we have an exclusive relationship with Pet Sitters
International, Inc. until December 2002, under which we list their
approximately 3,000 pet sitters in the resources area of our Web store in
exchange for sales commissions. Furthermore, our Associates Program,
based on Be Free's associate program technology, encourages other Web
sites to link to our store and earn sales commissions. Associates can
earn referral fees on all Pets.com purchases made from the links on their
site, and earn a bounty for each new customer.
- Promotions. We selectively utilize promotional offers to further our
brand building efforts. This includes promotions such as on-site
merchandising of product discounts and pet-themed specials, the "Keep It
Comin' " food subscription program, trial offers at local events such as
organized dog walks, and coupon offers in our online newsletter and in
Pets.com, The Magazine for Pets and Their Humans.
- Philanthropic Marketing. Our philanthropic marketing effort is designed
to deepen our relationship with pet owners and expand our customer base.
Pets.commitment is our charitable foundation, which provides direct
financial support and encourages volunteerism across animal shelters,
animal therapy and service dog programs, and pet care and wellness
organizations. Our intent is to contribute more than $1 million to these
organizations by the end of 2000. We contribute to organizations where
"people help animals," such as SPCAs and humane organizations across the
country including Best Friends Animal Sanctuary in Utah. We also
contribute to organizations
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where "animals help people," including Design Industries Foundation
Fighting Aids, Canine Assistants, and The North American Disabled Riders
Association.
- Public Relations. We utilize public relations to drive coverage across a
wide array of high profile outlets, spanning television, radio,
magazines, and newspapers.
FULFILLMENT AND DISTRIBUTION
We have built an in-house fulfillment and distribution operation which is
used to manage the entire supply chain beginning with placement of the
customer's order, and continuing through order processing, fulfillment, and
shipment of product to the customer. In addition, we can improve our economics
through lower shipping and handling costs, and a higher margin product mix
availability.
We currently fulfill all customer orders from our new 143,232 square foot
distribution center in Union City, California and a 84,000 square foot satellite
facility in Hayward, California. We currently receive goods from our suppliers
at the distribution center into an automated system which assigns bin and
storage locations. The inventory system is linked to the Web store which
automatically updates product availability. A team of individuals using the same
automated system picks products to fill orders which are then packed on location
and loaded onto UPS, United States Postal Service or other shipping trucks for
distribution to consumers in all 50 states. We are committed to shipping a high
volume of accurate orders, efficiently and effectively.
We believe our expertise in fulfillment and distribution, developed as the
result of our experience with the original Union City distribution center,
enables us to expand rapidly to our second distribution center. By adding
regional distribution centers, we can significantly increase our SKU count,
improve ship time to customers, and reduce shipping costs. We are in the process
of establishing a second distribution center in Greenwood, Indiana. This 292,500
square foot warehouse is scheduled to open in the first half of 2000, and is
intended to mirror the SKUs carried in the Union City distribution center. We
believe that two distribution centers can likely support our growth into 2001
based on anticipated levels of demand for our products, and expect to add
additional distribution centers in the future.
CUSTOMER SERVICE
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our in-house customer service team is
available via phone from 6 a.m. to 8 p.m. Pacific time, Monday to Friday, and
can also be reached by e-mail or fax. We have approximately 80 full-time
employees in customer service as of December 31, 1999. This team is central to
our ability to deliver a superior customer experience and strives to make a
personal connection with each consumer.
We view Amazon.com's customer service performance to be the standard in the
industry and we seek to emulate their customer service approach. We seek to
exceed customer expectations. We provide proactive customer service which
includes e-mail order confirmation, e-mail ship confirmation with tracking
numbers, notifying customers of out-of-stock situations, and for those orders,
updating customers on order status on a frequent basis. We increase staff to
handle peak periods and train customer service representatives across
departments to help them better understand the business.
We are dedicated to customer satisfaction. One of the ways that we deliver
on this commitment is through our product, customer service, privacy, and
security guarantees. Our product guarantee offers consumers a 30-day refund if
their shipment is not satisfactory. Our customer service guarantee commits to a
one business day response time for all inquiries. Our privacy guarantee commits
that Pets.com will not sell, trade or rent personal information to other
companies, and communicates that this information is used exclusively to process
orders and to provide a more personalized shopping experience. Our security
guarantee ensures protection of personal information and compensation to
consumers for the amount of their liability, up to $50, in the unlikely event of
unauthorized interception and use of their credit card.
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TECHNOLOGY AND NETWORK OPERATIONS
We have implemented a broad array of services and systems for site
management, searching, customer interaction, transaction processing, and
fulfillment. We designed our system for scalability, reliability, and
performance, using a set of software applications for:
- Displaying merchandise in a logical, customer-friendly way;
- Accepting and verifying orders;
- Processing credit card orders;
- Organizing, placing, and managing customer orders;
- Notifying and updating customers of order status;
- Managing shipment of products; and
- Managing community forums and the communication of pet and pet care
information.
These services and systems use a combination of our own proprietary
technologies and commercially available, licensed technologies. We selected
BroadVision as our e-commerce platform, and have a non-exclusive license to use
their commerce application, which has been customized by our internal engineers
for the Pets.com shopping experience. This robust commerce application is
integrated with our Quality Software Systems, Inc. warehouse management system,
enabling a fully automated order fulfillment process. We realize many benefits
from the integration of these front-end and back-end systems, including:
- the ability to track customer orders through the entire supply chain in
real-time;
- make rapid changes to processes such as a change in shipping policy; or
- efficiently expand our infrastructure to support the addition of a new
distribution center.
It is our policy that our vendors meet the requirement of providing
technical support 24 hours a day, 7 days a week, 365 days a year. Our Sun
Microsystems, Inc. servers are Unix-based, and our software platform and
architecture is integrated with an Oracle Corporation database system. Our
Internet servers use Verisign, Inc. digital certificates to help conduct secure
communications and transactions. Our production system is co-located at Exodus
Communications, Inc. in Santa Clara, California, and provides 24-hour
engineering and monitoring support. We anticipate adding an additional
co-location facility in the eastern United States in stages over the course of
2000 for redundancy and performance purposes.
We address the goals of scalability, reliability and performance in a
number of ways. We have replicated key components of our production system
in-house in order to perform load testing that enables us to simulate our Web
store and better support peak shopping periods. We aim to have fast download
times and make use of caching and load balancing at the Web server and
application level for optimal performance. We are implementing vertical hardware
partitioning in early 2000, enabling us to do significant work on the Web store
without having to take it down for maintenance.
We elected to build an in-house development and operations team augmented
by outside consultants to enable faster response to changing market conditions.
We only outsource development work that is considered to be non-strategic. Our
in-house development team builds out new features, focusing on the software and
functionality that is unique to our business. Our in-house operations team
ensures that our Web store is up and running 24 hours a day, seven days a week.
We incurred $6.5 million in product development expenses in the period from
inception to December 31, 1999. We anticipate that we will continue to devote
significant resources to product development in the future as we add new
features and functionality to our Web store. Long term, we believe our in-house
capability will allow us to manage strategic initiatives such as the creation of
a data warehouse enabling our merchandising team to better understand our
customers, and then use this information to modify our product mix and enhance
our margins.
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COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. In particular,
the pet products, information and services market is intensely competitive and
are also highly fragmented, with no clear dominant leader in any of our market
segments. Our competitors can be divided into several groups, such as:
- online stores that specialize in pet products, such as
Petopia.com, Inc., which is owned in part by Petco Animal Supplies, Inc.
PetsMart.com, Inc., which is owned in part by PetsMart, Inc.
Petstore.com, Inc.;
- superstore retailers of pet products such as
Petco Animal Supplies, Inc.
PetsMart, Inc.;
- specialty pet stores;
- mass market retailers such as
Wal Mart Stores, Inc.
Kmart Corporation
Target Stores, Inc.;
- supermarkets;
- warehouse clubs such as Costco Companies, Inc.;
- mail order suppliers of pet products; and
- pet supply departments at major department stores.
Each of these competitors operates within one or more of the pet products,
information and services segments.
We believe that the following are principal competitive factors in our
market:
- brand recognition;
- product selection;
- streamlined shopping experience;
- reliability and speed of order shipment;
- customer service;
- quality of Web store content;
- speed and accessibility of Web store;
- personalized service;
- convenience; and
- price.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially more resources to Web site and systems development than we
can. In addition, larger, more well-established and financed entities may
acquire, invest in or form joint ventures with online competitors or pet supply
retailers as the use of the Internet and other online services increases.
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Some of our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Some of our competitors such as Petco
Animal Supplies, Inc. and PetsMart, Inc. have significantly greater experience
than we do in selling pet supplies and pet care products.
RELATIONSHIP WITH AMAZON.COM
We have a strategic relationship with Amazon.com whereby Amazon.com has
provided free consulting services relating to the operation of our business and
has promoted our Web store. Amazon.com is our largest stockholder and has
invested a total of approximately $57.8 million to date in Pets.com. Mark
Britto, Amazon.com's Vice President of Strategic Alliances, is a member of our
Board of Directors. See "Executive Officers and Directors", "Related Party
Transactions" and "Principal Stockholders" for a further discussion of
Amazon.com's equity ownership of us. As part of our relationship, in April 1999
we entered into an advertising agreement with Amazon.com whereby Amazon.com
provides us with online promotions mutually agreed upon, such as e-mails about
Pets.com, and one or more links from different locations on its Web site to our
Web store, consistent with Amazon.com's other marketing agreements. Under our
agreement, the content, placement, timing, and even the extent of most of these
online promotions are determined at Amazon.com's discretion and can be
terminated by Amazon.com at any time. Under the agreement, we are obligated to
maintain a link on our home page to Amazon.com's Web site, and pay Amazon.com a
referral fee for each new customer referred from Amazon.com's Web site, reduced
by new customers we refer from our Web store to Amazon.com. Unless terminated
earlier for breach by the non-breaching party, the agreement will expire in
October 2000.
In addition to this formal agreement, Amazon.com has provided free
consulting advice to our management team upon request regarding brand building
efforts, Web store design, product merchandising, fulfillment and distribution,
and a variety of other operational and strategic issues that are important to
our business. The existence of this relationship with Amazon.com, Amazon.com's
stockholder position in Pets.com and our advertising agreement with Amazon.com,
has also enabled us to attract the attention of potential corporate partners and
to enter into alliances with corporate partners on favorable terms. While our
relationship with Amazon.com has received significant media attention,
Amazon.com is not obligated to provide any of this advice and support.
RELATIONSHIP WITH GO.COM
We have a strategic relationship with GO.com, and its related online
properties including Disney.com and Family.com, where we engage in promotions
and have agreed to engage in joint content development, and placement of media
advertising with ABC, Inc. The GO Internet portal is operated by Infoseek
Corporation, and Disney.com, Family.com, mrshowbiz.com, and other GO.com online
properties are operated by Buena Vista Internet Group, both of which are
affiliates of The Walt Disney Company. In particular, we entered into a
distribution agreement with Infoseek Corporation and Buena Vista Internet Group
in January 2000 under which we have agreed to provide pets related content for
display in various areas of the GO Network, including Disney.com and Family.com,
and GO.com has agreed to include links from these areas to the Pets.com Web
store. Under the agreement, we have also agreed to purchase online advertising
on the GO.com Internet portal, and have the right to make placements in online
commerce areas within the GO Network. We are also the exclusive online pet
retailer within the Pets & Animals channel on Disney.com and the Pets category
on Family.com. The agreement further provides that Pets.com and GO.com will
engage in joint online and offline marketing and other promotions to be agreed
upon, which may include joint promotion of the Pets.com magazine, joint
merchandise development, Pets.com development of exclusive content for
Disney.com and Family.com, and key event sponsorship. We cannot be certain
however that joint online and offline marketing and other promotions will be
agreed upon between parties at the levels desired by Pets.com. The agreement
will expire in January 2003, unless terminated earlier for breach by the
non-breaching party. In addition, GO.com has the right to terminate
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the exclusivity provisions of our agreement beginning in April 2000, but no
later than June 2001, if GO.com or its affiliates decide to make a significant
product change or change of strategic or product focus which affects the Pets &
Animal channel on Disney.com and the Pets category on Family.com. As part of the
agreement, we sold shares of Series C preferred stock to Catalyst Investments,
L.L.C., an affiliate of The Walt Disney Company, in exchange for media rights
with ABC, Inc. These shares will be converted to common stock upon completion of
this offering and they represent approximately 3.7% of our outstanding common
stock after this offering, 3.6% if the underwriters' over-allotment options are
exercised in full.
Because we entered into our agreement with GO.com in January 2000, which
expands a prior limited joint marketing relationship, we have little experience
working closely together and cannot be certain that we will be able to
successfully work together in the future. In addition, many of the parties'
obligations under the agreement, including joint marketing and promotional
activities and Pets.com content to be displayed on the GO Internet portal, have
not yet been agreed upon in detail between GO.com and us. We cannot be certain
that we will be able to agree upon these activities in the manner or at the
times we currently expect.
OTHER STRATEGIC RELATIONSHIPS
We continually seek to form strategic relationships to increase our access
to online customers, build brand recognition, and expand our online presence.
Because of our relationship with Amazon.com, we believe that we can execute
fewer, more focused, and less costly ventures to accomplish our objectives over
the long-term. In addition to our relationship with Amazon.com, we have
established the following relationships:
General Internet Portal Sites. These companies provide an aggregated
audience of Internet users to whom we market our products and services. These
marketing activities drive new customers to our Web site and extend our brand.
These companies are America Online, Inc., Lycos, Inc., Xoom.com, Inc., PlanetOut
Corporation and Snap! L.L.C.
Pet Related Internet Sites. To ensure the strength of our brand among pet
owners we have established exclusive relationships with Petplace.com, Inc. and
Pet Sitters International, Inc., whose pet oriented Internet sites attract large
audiences of pet owners. In addition, through our relationship with Be Free, our
Associates Program encourages other Web sites to link to our store and earn
sales commissions.
Content Providers. To ensure that our site attracts and retains a large
audience of pet product consumers we have established relationships with various
content providers relevant to pet owners of all types. These content providers
are Blue Mountain Arts, Dawbert Press, Inc. and IDG Books Worldwide, Inc.
Pets.com Sponsorships. Our relationships with these organizations not only
increases our brand awareness, but also increases the goodwill associated with
our brand among pet owners and the general population. These organizations are
American Veterinary Medical Foundation, Best Friends Animal Sanctuary, Design
Industries Foundation Fighting AIDS and NADRA Productions.
International Relationships. We have entered into a non-binding term sheet
to make an equity investment in Petspark.com, a UK-based online pet retailer
that intends to offer pet owners a full range of pet-related services. This
relationship will include consultation, marketing support, and use of the
Pets.com name. This agreement, if consummated, should allow us to expand our
business internationally in order to better serve pet owners and capitalize on
the global market.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees
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and contractors, and nondisclosure agreements with our suppliers and strategic
partners to limit access to and disclosure of our proprietary information. We
cannot be certain that these contractual arrangements or the other steps taken
by us to protect our intellectual property will prevent misappropriation of our
technology. We have licensed in the past, and expect that we may license in the
future, certain of our proprietary rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of the
Pets.com products brand is maintained by such licensees, we cannot assure that
such licensees will not take actions that might hurt the value of our
proprietary rights or reputation. We also rely on technologies that we license
from third parties, such as BroadVision, Inc., Oracle Corporation, Netscape
Communications Corporation (AOL), Quality Software Systems, Inc., Sun
Microsystems, and Compaq Computer Corporation, the suppliers of key e-commerce
software, database technology, operating system software, and specific hardware
components for our service. We cannot be certain that these third-party
technology licenses will continue to be available to us on commercially
reasonable terms. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could harm our business.
We have filed applications for the registration of Pets.com(TM), the
Pets.com logo, Because Pets Can't Drive(TM), Keep It Comin'(TM), More Products
Than a Superstore Delivers(TM), People Helping Animals, Animals Helping
People(TM), Pets.commitment(TM) and our sock puppet in the U.S. and in some
other countries, although we have not secured registration of any of our marks
to date. We have been granted the right to use Pets.complete(TM) from a third
party. We may be unable to secure these registered marks. It is also possible
that our competitors or others will use marks similar to ours, which could
impede our ability to build brand identity and lead to customer confusion. In
addition, there could be potential trademark or trademark infringement claims
brought by owners of other registered trademarks or trademarks that incorporate
variations of the term "Pets.com." Any claims or customer confusion related to
our trademark, or our failure to obtain trademark registration, would negatively
affect our business. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the U.S.,
and effective copyright, trademark and trade secret protection may not be
available in such jurisdictions. Our efforts to protect our intellectual
property rights may not prevent misappropriation of our content. Our failure or
inability to protect our proprietary rights could substantially harm our
business.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to retailing or electronic commerce. However, as the Internet becomes
increasingly popular, it is possible that a number of laws and regulations may
be adopted with respect to the Internet. These laws may cover issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Furthermore, the growth of electronic commerce may prompt
calls for more stringent consumer protection laws. Several states have proposed
legislation to limit the uses of personal user information gathered online or
require online services to establish privacy policies. The Federal Trade
Commission has also initiated action against at least one online service
regarding the manner in which personal information is collected from users and
provided to third parties and has proposed regulations restricting the
collection and use of information from minors online. We do not currently
provide individual personal information regarding our users to third parties and
we currently do not identify registered users by age. However, the adoption of
additional privacy or consumer protection laws could create uncertainty in Web
usage and reduce the demand for our products and services or require us to
redesign our web site.
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, obscenity,
qualification to do business and export or import matters. The vast majority of
these laws were adopted prior to the advent 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
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<PAGE> 47
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.
In addition to regulations applicable to businesses generally, we are
regulated by federal, state or local governmental agencies with respect to the
shipment of pet food, live animals and pet products, advice relating to animal
care, and other matters. We currently seek to rely upon our suppliers to meet
the various regulatory and other legal requirements applicable to products and
services supplied by them to us. However, we are unable to verify that they have
in the past, or will in the future, always do so, or that their actions are
adequate or sufficient to satisfy all governmental requirements that may be
applicable to these sales. We would be fined or exposed to civil or criminal
liability, and we could receive potential negative publicity, if these
requirements have not been fully met by our suppliers or by us directly.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. On September 21, 1999 Biolink
L.L.C. dba ERI International sued us in Los Angeles County Superior Court for
breach of contract, anticipatory breach of contract, breach of the implied
covenant of good faith and fair dealing, and fraud arising out of a contract
entered into for the shipment of live animals, including fish and reptiles. ERI
International has stated four causes of action, three seeking damages each in an
amount in excess of $2,000,000 and one seeking damages in an amount in excess of
$500,000. We have answered and asserted affirmative defenses to their complaint.
No trial date has been set and discovery has not yet commenced. We believe we
have meritorious defenses against these claims and intend to vigorously defend
against them.
EMPLOYEES
As of December 31, 1999, we had 270 employees. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our employee relations to be good.
FACILITIES
Our principal executive offices are located in San Francisco, California,
where we lease approximately 17,000 square feet under a lease that expires in
June 2002, with an option to extend until 2004. In April 2000, we plan to
relocate to new executive offices in San Francisco, California, where we have
arranged to lease approximately 40,410 square feet under a lease that expires no
earlier than April 2010. For our Northern California distribution center and
satellite facility, we lease approximately 143,232 square feet in Union City,
California under a sublease that expires in August 2004 and 84,000 square feet
in Hayward, California under a lease that expires in November 2004. In addition,
we lease approximately 15,000 square feet in San Francisco, California for
additional warehouse and distribution purposes under a lease that continues on a
month-to-month basis after December 31, 1999. For our second distribution
center, we have entered into a lease for approximately 292,500 square feet in
Greenwood, Indiana, that expires in December 2005.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors as of the date of this offering and
their ages as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Julia L. Wainwright....................... 42 Chairman of the Board of Directors and Chief
Executive Officer
Christopher E. Deyo....................... 40 President
Paul G. Manca............................. 41 Chief Financial Officer
John R. Benjamin.......................... 49 Vice President of Merchandising
John M. Hollon............................ 44 Vice President of Editorial
John A. Hommeyer.......................... 33 Vice President of Marketing
Diane R. Hourany.......................... 45 Vice President of Customer Service
Sue Ann Latterman, V.M.D.................. 42 Vice President of Strategic Alliances
Ralph E. Lewis............................ 53 Vice President of Distribution and Logistics
Paul W. Melmon............................ 38 Vice President of Engineering
Kathryn C. Ringewald...................... 39 Vice President of Human Resources
John B. Balousek(1)....................... 54 Director
Mark J. Britto(2)......................... 35 Director
John R. Hummer(1)(2)...................... 51 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Julia L. Wainwright has served as our Chief Executive Officer and one of
our directors since March 1999 and Chairman of the Board since December 1999.
From March 1998 to February 1999, she served as Chief Executive Officer of
Reel.com, Inc. From May 1997 to February 1998, Ms. Wainwright was independently
researching e-commerce opportunities. From December 1996 to April 1997, she
served as Chief Executive Officer of Berkeley Systems, Incorporated, as
President from August 1995 to November 1996 and as Vice President of Sales and
Marketing from January 1995 to August 1995. From June 1994 to December 1994, she
served as Vice President of Marketing of Mindscape, Inc. From October 1993 to
June 1994, she was a partner in Corporate Development Partners, a private
venture capital firm. From August 1991 to October 1993, she served as Vice
President of International for Spinnaker Software, Inc. From October 1988 to
August 1991, she worked for Power Up Software Corporation in several positions,
finishing as Vice President of International. From January 1982 to October 1988,
she served in various management positions at Software Publishing, Inc. and from
January 1980 to December 1982, she worked in brand management at The Clorox
Company. Ms. Wainwright holds a B.S. from Purdue University.
Christopher E. Deyo has served as our President since April 1999. From July
1998 to March 1999, he served as President of Reel.com, Inc. He served as
General Manager of Berkeley Systems, Incorporated from March 1997 to June 1998
and as Vice President of Marketing from September 1996 to February 1997. From
May 1995 to August 1996, Mr. Deyo served as Vice President of Marketing of
Microprose, Inc. From January 1995 to April 1995, Mr. Deyo was independently
researching technology opportunities. From September 1987 to December 1994, he
worked for Kransco Group Companies in several positions, finishing as Vice
President of Marketing. Mr. Deyo co-founded Video Edge, Inc. where he served in
various capacities from May 1986 to August 1987. From August 1983 to April 1986,
he worked in brand management at The Procter & Gamble Company. Mr. Deyo holds a
B.S. and an M.B.A. from Syracuse University.
Paul G. Manca has served as our Chief Financial Officer since September
1999. From May 1995 to September 1999, he served as Chief Financial Officer of
CellNet Data Systems, Inc. From February 1987
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<PAGE> 49
to May 1995, he worked for BZW/Barclays, an investment bank, finishing as
Managing Director and Group Head of the Communications Group within Corporate
Finance. Mr. Manca holds a B.A. from the University of California at Berkeley
and an M.B.A. from Golden Gate University.
John R. Benjamin has served as our Vice President of Merchandising since
May 1999. From September 1990 to April 1999, Mr. Benjamin worked for Petco
Animal Supplies, Inc. in several positions, finishing as Director of Imports and
Global Sourcing. From December 1989 to August 1990, he served as the National
Sales Manager for Suunto, USA and from September 1984 to December 1989, he
worked as a buyer for Oshman's Sporting Goods, Inc. From September 1971 to July
1984, Mr. Benjamin worked for Fedco Membership Department Stores, Inc., in
several positions finishing as a store manager.
John M. Hollon has served as our Vice President of Editorial since April
1999 and as Editor and Publisher of Pets.com, The Magazine for Pets and Their
Humans since September 1999. From November 1996 to April 1999, he served as
Group Editorial Director of Fancy Publications, Inc. Mr. Hollon also worked as a
newspaper editor for 19 years, most recently with Gannett Co., Inc., as Editor
of The Great Falls Tribune in Montana and as Executive Editor of The Honolulu
Advertiser in Hawaii. Mr. Hollon holds a B.A. from California State University
at Long Beach.
John A. Hommeyer, Jr. has served as our Vice President of Marketing since
May 1999. From August 1988 to April 1999, he worked at The Procter & Gamble
Company in several U.S. and international positions, finishing as Marketing
Director of Global Baby Care. Mr. Hommeyer holds an A.B. from Dartmouth College.
Diane R. Hourany has served as our Vice President of Customer Service since
December 1999 and as Vice President of Operations from April 1999 to November
1999. From June 1998 to April 1999, Ms. Hourany served as Vice President of
Operations of Reel.com, Inc. From February 1994 to May 1998, she served as
General Manager of Catalog Fulfillment for Bullock & Jones, a subsidiary of Saks
Fifth Avenue, Inc. and from September 1987 to January 1994, Ms. Hourany served
as Manager of Telemarketing & Customer Services of Power Up Software
Corporation. Ms. Hourany holds an A.A. from Diablo Valley College.
Sue Ann Latterman, V.M.D. has served as our Vice President of Strategic
Alliances since November 1999 and as Vice President of Business Development from
May 1999 to October 1999. From August 1998 to April 1999, she served as Chief
Operating Officer of CrossCart, Inc. From March 1996 to July 1998, Dr. Latterman
worked as a consultant to the medical device industry and from October 1994 to
March 1996, she served as Vice President of Clinical Affairs of Percusurge, Inc.
From July 1993 to September 1994, she worked as an associate at Mohr Davidow
Ventures, a private venture capital firm, and from January 1993 to June 1993, as
a consultant to the biotechnology industry. From November 1990 to December 1992,
she served as Manager of Market Research of Hybritech Incorporated. From July
1989 to August 1990, Dr. Latterman attended business school and from May 1985 to
June 1989, she practiced veterinary medicine in Pittsburgh, Pennsylvania and
Ringoes, New Jersey. Dr. Latterman holds a B.A. and V.M.D. from the University
of Pennsylvania and an M.B.A. from the University of Pittsburgh.
Ralph E. Lewis has served as our Vice President of Distribution and
Logistics since November 1999. From January 1998 to October 1999, he served as
Vice President of Operations for Office Depot, Inc. From June 1995 to December
1997, he served as Vice President and General Manager of Softworld Services,
Inc. and from June 1992 to May 1995, as General Manager of Neodata Services,
Inc. From January 1992 to May 1992, Mr. Lewis served as a consultant to Egghead
Discount Software, Inc. From August 1986 to May 1992, Mr. Lewis served as Vice
President of Distribution for Egghead Discount Software, Inc., from June 1981 to
July 1986, as Divisional Vice President of Operations for Pay 'N Save
Corporation and from April 1977 to May 1981, as Operations Manager of
Distribution for Save On Drugs, Inc. Mr. Lewis holds a B.S. from the University
of Dayton.
Paul W. Melmon has served as our Vice President of Engineering since April
1999. From August 1998 to April 1999, he served as an Entrepreneur in Residence
at Sutter Hill Ventures, L.L.C., a private venture capital firm. From November
1996 to July 1998, Mr. Melmon served as Vice President of
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<PAGE> 50
Engineering of Wallop Software, Inc. and from July 1994 to October 1996, as
Director of Engineering of Scopus Technology, Inc. From October 1989 to July
1994, he held various technical positions at Sybase, Inc. and from November 1984
to October 1989, he served as a member of the technical staff at Hewlett-
Packard Company. Mr. Melmon holds a B.S. from the University of California at
Davis.
Kathryn C. Ringewald has served as our Vice President of Human Resources
since April 1999. From June 1997 to April 1999, she served as Director of Human
Resources of Form Factor, Inc. From August 1996 to May 1997, she served as
Director of Human Resources of Berkeley Systems, Incorporated and from June 1995
to August 1996, as Vice President of Human Resources of Crystal Dynamics, Inc.
From February 1994 to May 1995, Ms. Ringewald worked as a Director of Talent for
Lucas Arts Entertainment Company and from October 1992 to February 1994, as a
human resources consultant to various industries. From January 1990 to October
1992, she worked as a Human Resources Manager for Symantec Corporation and from
June 1985 to January 1990, she served in various capacities at Apple Computer,
Inc. Ms. Ringewald holds a B.A. from Dominican College.
John B. Balousek has served as one of our directors since October 1999. Mr.
Balousek, a founder of PhotoAlley, Inc., served as its Executive Vice President
from July 1998 to March 1999. He served as Chairman and Chief Executive Officer
of True North Technologies, Inc. from March 1996 to June 1996. From March 1979
to March 1996, Mr. Balousek worked for Foote, Cone & Belding Communications,
Inc. and served as its President and Chief Operating Officer from February 1991
to March 1996. He served as a director of Foote, Cone & Belding from May 1989 to
May 1994, and then served as a director of True North Communications, Inc., a
newly-created holding company of Foote, Cone & Belding, from June 1994 to
February 1997. Mr. Balousek is also a director of Micron Electronics, Inc.,
Geoworks Corporation, FreeShop.com, Inc., Transilluminant Corporation, Worldwide
Magnifi, Inc., and EDBH, Inc. He holds a B.A. from Creighton University and an
M.S. from Northwestern University.
Mark J. Britto has served as one of our directors since January 2000,
replacing Randy Tinsley of Amazon.com who served on our board from April 1999
until January 2000. Mr. Britto serves as Vice President of Strategic Alliances
of Amazon.com and oversees Amazon.com's Business and Corporate Development
Departments as well as its Fraud Management Division. Mr. Britto joined
Amazon.com in June 1999 in connection with the acquisition by Amazon.com of
Accept.com Financial Services Corporation, a company co-founded by Mr. Britto in
October 1998, where he served as Vice President of Risk Management. Prior to
that, from October 1994 through October 1998, Mr. Britto served as Executive
Vice President of Credit Policy at FirstUSA, a subsidiary of Bank One
Corporation; and from October 1991 until October 1994 he served as Senior Vice
President of Risk Management at NationsBank Corp. He holds a BS in Industrial
Engineering and Operations Research and an M.S. from the University of
California at Berkeley
John R. Hummer has served as one of our directors since April 1999. Mr.
Hummer is a general partner of Hummer Winblad Venture Partners, a private
venture capital firm, which he co-founded in September 1989. From 1980 until
1989 he served as partner of Glenwood Management, a private venture capital
firm. Mr. Hummer is also a director of Extensity, Inc., Industrywide Mortgage
Exchange, Inc., The National Transportation Exchange, Inc., Mambo.com, and
Netcontext, Inc. He holds a B.A. from Princeton University and an M.B.A. from
Stanford University.
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of five
directors. Each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his or
her successor is duly elected and qualified. The executive officers serve at the
discretion of the board of directors. There are no family relationships among
any of our directors or executive officers.
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<PAGE> 51
BOARD COMPENSATION
Except for reimbursement for reasonable travel expenses relating to
attendance at board and committee meetings and the grant of stock options,
directors are not compensated for their services as directors. Our directors are
eligible to participate in our 1999 Stock Plan and, upon the closing of this
offering, directors who are employees of Pets.com will also be eligible to
participate in our 2000 Employee Stock Purchase Plan. Julia Wainwright is the
only director who is currently an employee. We have issued and sold to Ms.
Wainwright 925,618 shares of common stock under our 1999 Stock Plan at a price
of $0.01 per share. Ms. Wainwright's shares are subject to our right of
repurchase at the original purchase price in the event that Ms. Wainwright's
employment with Pets.com terminates. Our repurchase right lapses with respect to
25% of the shares purchased by Ms. Wainwright on March 10, 2000 and with respect
to 1/48th of the shares on the 10th day of each month after that date. In
addition, our repurchase right will lapse with respect to 50% of the remaining
unvested shares held by Ms. Wainwright if she is terminated without cause within
twelve months after a merger or sale of Pets.com resulting in a change of
control. We have also granted to Mr. Balousek an option to purchase up to 36,000
shares of common stock at an exercise price of $1.88 per share under our 1999
Stock Plan. Mr. Balousek's stock option vests at the rate of 25% of the shares
subject to this option on October 29, 2000 and 1/48th of the shares subject to
this option on the 29th day of each month after that date. For additional
information, see "Stock Plans."
BOARD COMMITTEES
In May 1999, our board of directors established an audit committee and a
compensation committee. The audit committee reviews our annual audited financial
results and unaudited quarterly results, and meets with our independent auditors
to review our financial statements, internal controls and financial management
practices. Our audit committee currently consists of John Balousek and John
Hummer. Our compensation committee reviews and recommends to the board the
compensation arrangements for our management team and administers our stock
plans. Our compensation committee currently consists of John Hummer and Mark
Britto.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee of our board of directors are
currently John Hummer and Mark Britto. Neither of them has at any time been an
officer or employee of Pets.com or any subsidiary of Pets.com. However, we have
issued and sold in private placement transactions shares of preferred stock to
entities affiliated with Hummer Winblad Venture Partners and to Amazon.com. Mr.
Hummer is a general partner of Hummer Winblad Venture Partners which manages
three investment funds that have purchased shares of our preferred stock, and
Mr. Britto is Vice President of Strategic Alliances of Amazon.com that has
purchased shares of our preferred stock and entered into an advertising
agreement with us. The following is a summary of the stock purchase transactions
between us and entities affiliated with Hummer Winblad Venture Partners, and
between us and Amazon.com.
Entities Affiliated with Hummer Winblad Venture Partners
- March 10, 1999: we issued a convertible promissory note in the principal
amount of $142,500 to Hummer Winblad Venture Partners III, L.P. and a
second convertible promissory note in the principal amount of $7,500 to
Hummer Winblad Technology Fund III, L.P., which notes were canceled and
converted into shares of Series A preferred stock at $1.81 per share on
April 22, 1999.
- March 19, 1999: we issued a convertible promissory note in the principal
amount of $237,500 to Hummer Winblad Venture Partners III, L.P. and a
second convertible promissory note in the principal amount of $12,500 to
Hummer Winblad Technology Fund III, L.P., which notes were canceled and
converted into shares of Series A preferred stock at $1.81 per share on
April 22, 1999.
- April 22, 1999: we issued and sold to Hummer Winblad Venture Partners
III, L.P. 1,911,602 shares of Series A preferred stock and to Hummer
Winblad Technology Fund III, L.P. 100,610 shares of Series A Preferred
Stock, all at $1.81 per share, which included cancellation and
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<PAGE> 52
conversion of the promissory notes issued to each entity respectively on
March 10, 1999 and March 19, 1999 (including conversion of accrued
interest on the promissory notes).
- June 18, 1999: we issued and sold to Hummer Winblad Venture Partners III,
L.P. and Hummer Winblad Technology Fund III, L.P. 719,735 shares and
37,881 shares, respectively, of our Series B preferred stock at $9.44 per
share.
- November 5, 1999: we issued and sold to Hummer Winblad Venture Partners
IV, L.P. 807,040 shares of Series B preferred stock at $9.44 per share
and a convertible promissory note in the principal amount of $2,383,565,
which note was cancelled and converted into shares of Series B Preferred
Stock at $9.44 per share on December 8, 1999.
- December 8, 1999: we issued and sold to Hummer Winblad Venture Partners
IV, L.P. 1,100,246 shares of Series B Preferred Stock at $9.44 per share,
which included cancellation and conversion of the promissory note issued
to this investor on November 5, 1999.
Amazon.com
- April 22, 1999: we issued and sold to Amazon.com 3,521,373 shares of
Series A preferred stock at $1.81 per share.
- June 18, 1999: we issued and sold to Amazon.com 3,782,782 shares of
Series B preferred stock at $9.44 per share.
- November 5, 1999: we issued and sold to Amazon.com 1,353,630 shares of
Series B preferred stock at $9.44 per share and a convertible promissory
note in the principal amount of $2,975,115, which note was canceled and
converted into 315,244 shares of Series B preferred stock on December 8,
1999.
For additional information concerning compensation committee interlocks and
insider participation in compensation decisions, please refer to our discussion
of entities affiliated with Hummer Winblad Venture Partners and Amazon.com under
"Related Party Transactions."
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table provides summary information concerning the
compensation to be received for services rendered to us during the fiscal year
ending December 31, 1999 by each person who served as our chief executive
officer, or who acted in a similar capacity, and each of the other four most
highly compensated executive officers, collectively, the "named officers," each
of whose aggregate compensation during our last fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Julia L. Wainwright.................. $147,568 $ -- $ -- -- $ --
Chief Executive Officer
Christopher E. Deyo.................. 134,009 -- -- 523,175 --
President
Paul W. Melmon....................... 111,009 -- -- 223,160 --
Vice President, Engineering
John A. Hommeyer..................... 103,395 20,000 -- 140,000 25,000
Vice President, Marketing
Diane R. Hourany..................... 99,802 10,000 -- 125,763 320
Vice President, Operations
Gregory McLemore..................... 39,231 -- -- -- --
President
</TABLE>
Mr. McLemore served as President of Pets.com from February 1999 until April
1999. On an annualized basis, Mr. McLemore's salary would have been $150,000.
Paul Manca was hired as our Chief Financial Officer in August 1999. On an
annualized basis, Mr. Manca's salary would have been $175,000.
Ralph Lewis was hired as our Vice President of Distribution and Logistics
in November 1999. On an annualized basis, Mr. Lewis' salary would have been
$200,000.
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OPTION GRANTS
The following table provides summary information regarding stock options
granted to each of the named officers during the fiscal year ended December 31,
1999. The options were granted pursuant to our 1999 Stock Plan. All options are
immediately exercisable; however, the underlying shares are subject to our right
of repurchase at the original purchase price. Our repurchase right will lapse
with respect to 25% of the shares on the one year anniversary of the vesting
commencement date, and with respect to 1/48th of the shares each month
thereafter. Stock price appreciation of 5% and 10% is assumed pursuant to rules
promulgated by the Securities and Exchange Commission and does not represent our
prediction of our stock performance. There is no assurance provided to any
holder of our securities that the actual stock price appreciation over the
ten-year option terms will be at the assumed 5% and 10% levels or at any other
defined level.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Julia L. Wainwright........ -- --% $ -- -- $ -- $ --
Christopher E. Deyo........ 523,175 15.7 0.19 05/12/09 8,422,566 13,470,409
Paul W. Melmon............. 191,160 5.8 0.19 05/12/09 3,077,475 4,921,878
32,000 1.0 0.94 07/29/09 491,166 799,918
John A. Hommeyer........... 120,000 3.6 0.19 05/18/09 1,931,874 3,089,691
20,000 0.6 1.88 11/06/09 288,179 481,148
Diane R. Hourany........... 125,760 3.8 0.19 05/12/09 2,024,652 3,238,073
Gregory McLemore........... -- -- -- -- -- --
</TABLE>
In August 1999, we granted the right to purchase 200,000 shares of our
common stock to Paul Manca, our Chief Financial Officer at an exercise price of
$0.94 per share, which shares are subject to our right of repurchase at the
original purchase price in the event that Mr. Manca's employment with us
terminates. Our repurchase right lapses with respect to 25% of the shares in
August 2000 and with respect to 1/48th of the shares monthly thereafter. In
November 1999, we granted an option exercisable for 140,000 shares of our common
stock to Ralph Lewis, our Vice President of Distribution and Logistics. We
granted options and restricted stock awards for an aggregate of 4,253,128 shares
to our employees and consultants under our 1999 Stock Plan during our fiscal
year ended December 31, 1999. See "Stock Plans." Options were granted at an
exercise price equal to the fair market value of the common stock, as determined
by our board of directors on the date of grant.
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<PAGE> 55
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR OPTION VALUES
The following table provides summary information concerning the shares of
common stock acquired in the year ended December 31, 1999, the value realized
upon exercise of stock options during that period, and the number and value of
unexercised options with respect to each of the named officers as of December
31, 1999. The value was calculated by determining the difference between the
fair market value of underlying common stock and the exercise price. All options
are immediately exercisable; however, the underlying shares are subject to our
right of repurchase at the original purchase price. Our repurchase right will
lapse with respect to 25% of the shares on the one year anniversary of the
vesting commencement date, and with respect to 1/48th of the shares each month
thereafter.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Julia L. Wainwright............. -- $-- -- -- $ -- $--
Christopher E. Deyo............. 523,175 0 -- -- -- --
Paul W. Melmon.................. 191,160 0 32,000 -- 289,920 --
John A. Hommeyer................ 120,000 0 20,000 -- 162,400 --
Diane R. Hourany................ 125,763 0 -- -- -- --
Gregory McLemore................ -- -- -- -- -- --
</TABLE>
STOCK PLANS
1999 Stock Plan. Our 1999 Stock Plan was adopted by our board of directors
in February 1999 and approved by our stockholders in March 1999. The plan was
amended at various times after February 1999 to increase the number of shares
reserved for issuance thereunder. These amendments were approved by our
stockholders. A total of 5,815,327 shares of common stock has been reserved for
issuance under our stock plan. As of December 31, 1999, options to purchase
3,163,927 shares of common stock had been exercised, options to purchase a total
of 983,400 shares at a weighted average exercise price of $1.86 per share were
outstanding and 1,668,000 shares remained available for future grants under the
plan.
In connection with this offering, our board amended the stock plan to
provide for, among other things, an automatic annual increase in the number of
shares of common stock reserved for issuance on the first day of each of our
fiscal years beginning in 2001 and ending in 2009 equal to the lesser of:
- 800,000 shares;
- 3% of the shares outstanding on the last day of the immediately preceding
fiscal year; or
- a lesser number of shares as determined by our board of directors.
The purposes of our stock plan are to attract and retain the best available
personnel, to provide additional incentives to our employees and consultants and
to promote the success of our business. Our stock plan provides for the granting
to employees, including officers and employee directors, of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and for the granting to employees and consultants, including
non-employee directors, of nonstatutory stock options and stock purchase rights.
To the extent an optionee would have the right in any calendar year to exercise
for the first time one or more incentive stock options for shares having an
aggregate fair market value (under all plans of Pets.com and determined for each
share as of the date the option to purchase the shares was granted) in excess of
$100,000, any such excess options will be treated as nonstatutory stock options.
If not terminated earlier, our stock plan will terminate in February 2009.
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<PAGE> 56
Our stock plan may be administered by the board of directors or a committee
of the board. Our stock plan is currently administered by our board of
directors. The administrator determines the terms of options granted under our
stock plan, including the number of shares subject to the option, exercise
price, term and exercisability. In no event, however, may an individual employee
receive option grants for more than 2,000,000 shares under the stock plan in any
fiscal year. The exercise price of all incentive stock options granted under our
stock plan must be at least equal to the fair market value of our common stock
on the date of grant. The exercise price of any incentive stock option granted
to an optionee who owns stock representing more than 10% of the total combined
voting power of all classes of our outstanding capital stock must equal at least
110% of the fair market value of the common stock on the date of grant. The
exercise price of all nonstatutory stock options and stock purchase rights shall
be the price determined by the administrator, provided, however, that the
exercise price of any nonstatutory stock option or stock purchase right granted
to a named officer must equal at least 100% of the fair market value of the
common stock on the date of grant in order for that grant to qualify as
performance-based compensation under applicable tax law. Payment of the exercise
price may be made in cash or other consideration as determined by the
administrator.
The administrator determines the term of options, which may not exceed 10
years (5 years in the case of an incentive stock option granted to an optionee
who owns stock representing more than 10% of the total combined voting power of
all classes of our outstanding capital stock). Options and stock purchase rights
are generally nontransferable. The administrator may grant nonstatutory stock
options and stock purchase rights with limited transferability rights in
circumstances specified in the stock plan. Each option and stock purchase right
may generally be exercised during the lifetime of the optionee only by the
optionee or a permitted transferee. The administrator determines the vesting
terms of options and stock issued pursuant to stock purchase rights. Options
granted under the 1999 Stock Plan generally may be exercised immediately after
the grant date, but to the extent the shares subject to the options are not
vested as of the date of exercise, we retain a right to repurchase any shares
that remain unvested at the time of the optionee's termination of employment by
paying an amount equal to the exercise price times the number of unvested
shares. Options granted under the 1999 Stock Plan generally vest at the rate of
1/4th of the total number of shares subject to the options twelve months after
the date of grant and 1/48th of the total number of shares subject to the
options each month thereafter.
In addition to stock options, the administrator may issue stock purchase
rights under the 1999 Stock Plan to employees, non-employee directors and
consultants. The administrator determines the number of shares, price, terms,
conditions and restrictions related to the grant of stock purchase rights. The
purchase price of a stock purchase right granted under the 1999 Stock Plan will
be determined by the administrator. The period during which the stock purchase
right is held open is determined by the administrator, but in no case shall this
period exceed 30 days. Unless the administrator determines otherwise, the
recipient of a stock purchase right must execute a restricted stock purchase
agreement granting Pets.com an option to repurchase unvested shares at cost upon
termination of recipient's relationship with us.
In the event of a change of control due to the sale of all or substantially
all of our assets or merger of Pets.com with another corporation, then each
option may be assumed or an equivalent option substituted by the successor
corporation. If the successor corporation does not agree to an assumption or
substitution, each outstanding stock option will terminate on the effective date
of the transaction. Some option agreements issued by the administrator provide
for limited acceleration of vesting following a change of control transaction.
The administrator has the authority to amend or terminate our stock plan as
long as this action would not adversely affect any outstanding option or stock
purchase right and provided that stockholder approval is required for some
amendments to the extent required by applicable law.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
was adopted by the board of directors in December 1999 and approved by our
stockholders in December 1999. A total of 400,000 shares of common stock have
been reserved for issuance under our purchase plan, plus an
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<PAGE> 57
automatic annual increase on the first day of each of our fiscal years beginning
in 2001 and ending in 2010 equal to the lesser of:
- 240,000 shares;
- 1% of the shares outstanding on the last day of the immediately preceding
fiscal year; or
- a lesser number of shares as determined by our board.
Our purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by a series of overlapping offering
periods of 24 months' duration, with new offering periods (other than the first
offering period) commencing on February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six months
duration. The initial offering period is expected to commence on the date of
this offering and end on January 31, 2002, and the initial purchase period is
expected to end on July 31, 2000. The purchase plan will be administered by the
board of directors or by a committee appointed by the board. Our employees
(including officers and employee directors), and the employees of any
majority-owned subsidiary designated by the board, are eligible to participate
in the purchase plan if they are employed by us or any such subsidiary for at
least 20 hours per week and more than five months per year. The purchase plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 20% of an employee's compensation, at a price equal to the
lower of 85% of the fair market value of our common stock at the beginning of
each offering period or at the end of each purchase period. In circumstances
described in the purchase plan, the purchase price may be adjusted during an
offering period to avoid our incurring adverse accounting charges. Employees may
end their participation in the offering at any time during the offering period,
and participation ends automatically on termination of employment with us. If
not terminated earlier, the purchase plan will have a term of ten years.
The purchase plan provides that in the event of our merger with or into
another corporation or a sale of all or substantially all of our assets, each
right to purchase stock under the purchase plan will be assumed or an equivalent
right substituted by the successor corporation. If the successor corporation
does not agree to assume or substitute stock purchase rights, our board of
directors will shorten the offering periods then in effect so that employees'
rights to purchase stock under the purchase plan are exercised prior to the
merger or sale of assets. The board of directors has the power to amend or
terminate the purchase plan as long as such action does not adversely affect any
outstanding rights to purchase stock thereunder, provided however, that the
board of directors may amend or terminate the purchase plan or an offering
period even if it would adversely affect outstanding options in order to avoid
our incurring adverse accounting charges.
EMPLOYEE BENEFIT PLANS
401(k) Plan. We maintain a 401(k) tax-qualified employee savings and
retirement plan covering all employees who satisfy eligibility requirements
relating to minimum age and length of service. Pursuant to our 401(k) plan,
eligible employees may elect to contribute up to 20% of their cash compensation
to the 401(k) plan. The 401(k) plan is intended to qualify under applicable law,
so that contributions to the 401(k) plan and income earned on the 401(k) plan
contributions are not taxable until withdrawn. The 401(k) plan is available to
our executive officers on terms not more favorable than those offered to other
employees. We may elect to make contributions to the 401(k) plan at the
discretion of our board of directors. No contributions have been made by us as
of December 31, 1999. All employee contributions are 100% vested.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into the following employment and change of control
arrangements with our current officers. For a description of arrangements with
our former officers, directors and substantial stockholders, see "Related Party
Transactions."
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<PAGE> 58
In March 1999, we entered into a letter agreement with Julia Wainwright,
our Chief Executive Officer. Under the agreement, Ms. Wainwright receives an
annual salary of $185,000 and she was granted the right to purchase 925,618
shares of common stock at a purchase price of $0.01 per share, which shares are
subject to our right of repurchase at the original purchase price in the event
that Ms. Wainwright's employment with us terminates. Our repurchase right lapses
with respect to 25% of the shares on March 10, 2000 and with respect to 1/48th
of the shares monthly thereafter. In the event of a change of control, 50% of
any remaining unvested shares held by Ms. Wainwright will accelerate and vest.
In March 1999, we entered into a letter agreement with Christopher Deyo,
our President. Under the agreement, Mr. Deyo receives an annual salary of
$185,000 and was granted an option to purchase 523,175 shares of common stock at
an exercise price of $0.19 per share, 25% of which vest after one year of
service, and 1/48th of the shares subject to the option vest every month
thereafter. In the event of a change of control, 50% of any remaining unvested
shares will accelerate and vest.
In August 1999, we entered into a letter agreement with Paul Manca, our
Chief Financial Officer. Mr. Manca receives an annual salary of $175,000 and was
granted the right to purchase 200,000 shares of common stock at an exercise
price of $0.94 per share, which shares are subject to our right of repurchase at
the original purchase price in the event that Mr. Manca's employment with us
terminates. Our repurchase right lapses with respect to 25% of the shares in
August 2000 and with respect to 1/48th of the shares monthly thereafter.
In April 1999, we entered into a letter agreement with John Benjamin, our
Vice President of Merchandising. Under the agreement, Mr. Benjamin receives an
annual salary of $125,000, relocation expenses of $25,000 and was granted an
option to purchase 72,000 shares of common stock at an exercise price of $0.19
per share, 25% of which vest after one year of service and 1/48th of the shares
subject to the option vest every month thereafter.
In March 1999, we entered into a letter agreement with John Hollon, our
Vice President of Editorial. Under the agreement, Mr. Hollon receives an annual
salary of $100,000, received a signing of bonus of $10,000 and was granted an
option to purchase 100,000 shares of common stock at an exercise price of $0.19
per share, 25% of which vest after one year of service and 1/48th of the shares
subject to the option vest every month thereafter.
In May 1999, we entered into a letter agreement with John Hommeyer, our
Vice President of Marketing. Under the agreement, Mr. Hommeyer receives an
annual salary of $165,000 and received a bonus of $20,000 and relocation
expenses of $25,000. Mr. Hommeyer also was granted an option to purchase 120,000
shares of common stock at an exercise price of $0.19 per share, 25% of which
vest after one year of service and 1/48th of the shares subject to the option
vest every month thereafter. In the event Mr. Hommeyer is terminated with or
without cause within one year after a change of control in connection with our
merger or sale or if our office is moved more than fifty miles from our current
San Francisco location, Mr. Hommeyer will receive severance equal to three
months of his current monthly salary.
In April 1999, we entered into a letter agreement with Diane Hourany, our
Vice President of Customer Service. Under the agreement, Ms. Hourany receives an
annual salary of $150,000, received a bonus of $10,000 and an option to purchase
125,763 shares of common stock at an exercise price of $0.19 per share, 25% of
which vest after one year of service and 1/48th of the shares subject to the
option vest every month thereafter. In the event of a change in control, 25% of
Ms. Hourany's remaining unvested shares will accelerate and become fully vested.
In the event Ms. Hourany is terminated with or without cause within one year
after a change of control in connection with our merger or sale or if our office
is moved more than fifty miles from our current San Francisco location, Ms.
Hourany will receive severance equal to three months of her current monthly
salary.
In May 1999, we entered into a letter agreement with Sue Ann Latterman, our
Vice President of Strategic Alliances. Under the agreement, Ms. Latterman
receives an annual salary of $150,000, received a bonus of $10,000 and was
granted an option to purchase 120,000 shares of common stock at an exercise
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<PAGE> 59
price of $0.19 per share, 25% of which vest after one year of service and 1/48th
of the shares subject to the option vest every month thereafter. In the event
Ms. Latterman is terminated with or without cause within one year after a change
of control in connection with our merger or sale or if our office is moved more
than fifty miles from our current San Francisco location, Ms. Latterman will
receive severance equal to three months of her current monthly salary.
In November 1999, we entered into a letter agreement with Ralph Lewis, our
Vice President of Distribution and Logistics. Under the agreement, Mr. Lewis
receives an annual salary of $200,000, received a bonus of $20,000, relocation
expenses of $75,000, and was granted an option to purchase 140,000 shares of
common stock at an exercise price of $1.88 per share, 25% of which vest after
one year of service and 1/48th of the shares subject to the option vest every
month thereafter. In the event of a change of control, 50% of any remaining
unvested shares held by Mr. Lewis will accelerate and vest. In the event Mr.
Lewis is terminated with or without cause within one year after a change of
control in connection with our merger or sale or if our office is moved more
than fifty miles from our current San Francisco location, Mr. Lewis will receive
severance equal to three months of his current salary.
In April 1999, we entered into a letter agreement with Paul Melmon, our
Vice President of Engineering. Under the agreement, Mr. Melmon receives an
annual salary of $160,000 and was granted an option to purchase 191,160 shares
of common stock at an exercise price of $0.19 per share, 25% of which vest after
one year of service and 1/48th of the shares subject to the option vest every
month thereafter.
In March 1999, we entered into a letter agreement with Kathryn Ringewald,
our Vice President of Human Resources. Under the agreement, Ms. Ringewald
receives an annual salary of $120,000 and was granted an option to purchase
100,610 shares of common stock at an exercise price of $0.19 per share, 25% of
which vest after one year of service and 1/48th of the shares subject to the
option vest every month thereafter.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We have included in our restated certificate of incorporation a provision
to eliminate the personal liability of our officers and directors for monetary
damages for breach or alleged breach of their fiduciary duties as officers or
directors to the fullest extent permitted by the Delaware General Corporation
Law. In addition, our bylaws provide that we are required to indemnify our
officers and directors against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason of the fact that such person is or was an agent of Pets.com.
We are also required to advance expenses to our officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. We have entered into indemnification agreements with our officers
and directors and those provisions in the indemnification agreements permitting
indemnification for settlement payments in shareholder derivative suits and the
payment of partial indemnification, are broader than the statutory
indemnification specifically provided for in Delaware law. The indemnification
agreements require that we, among other things, indemnify such officers and
directors against liabilities that may arise by reason of their status or
service as officers and directors (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms. We
intend to obtain directors' and officers' liability insurance prior to the
completion of this offering. At present, we are not aware of any pending or
threatened litigation or proceeding involving any of our directors, officers,
employees or agents in which indemnification would be required or permitted. We
are not aware of any threatened litigation or proceeding that might result in a
claim for such indemnification. We believe that our charter provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
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RELATED PARTY TRANSACTIONS
The following describes the significant transactions entered into between
us and our directors, executive officers, stockholders and affiliates of our
stockholders. All future transactions, other than compensation, stock options
pursuant to our plans and other benefits to employees, generally will be
approved by a majority of our board of directors including a majority of our
independent and disinterested directors. If required by law, future transactions
will be approved by a majority of our stockholders.
STOCK ISSUANCES TO OUR DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
Some stock option grants to our directors and executive officers are
described under the caption "Management -- Executive Compensation."
Since our inception, we have issued and sold shares of our common stock and
granted options to purchase common stock to our employees, directors and
consultants from time to time. In addition, we have issued in private placement
transactions, shares of preferred stock as follows: an aggregate of 5,781,862
shares of Series A preferred stock at $1.81 per share in April 1999, an
aggregate of 10,518,678 shares of Series B preferred stock at $9.44 per share in
June, November and December 1999, and an aggregate of 1,102,400 shares of Series
C preferred stock at $10.00 per share in January 2000. The following table
summarizes the shares of common stock and preferred stock purchased by our named
executive officers, directors and 5% stockholders and persons and entities
associated with them:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
STOCKHOLDER STOCK STOCK STOCK STOCK
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Amazon.com, Inc. (Mark J. Britto)........ -- 3,521,373 5,451,656 --
Entities Affiliated with Bowman Capital
Management, L.L.C...................... -- -- 1,382,782 --
Entities Affiliated with Hummer Winblad
Venture Partners (John R. Hummer)...... -- 2,012,213 2,664,902 --
Gregory McLemore......................... 1,288,470 220,690 -- --
Catalyst Investments, L.L.C.............. -- -- -- 1,102,400
</TABLE>
DEBT FINANCINGS
In March 1999 we issued and sold convertible promissory notes to our
following named executive officers, directors and 5% stockholders and persons
and entities associated with them, in the amounts set forth opposite each
party's name. The promissory notes were canceled and converted into shares of
our Series A preferred stock at $1.81 per share on April 22, 1999.
<TABLE>
<CAPTION>
AMOUNT OF
STOCKHOLDER PROMISSORY NOTE(S)
----------- ------------------
<S> <C>
Entities Affiliated with Hummer Winblad Venture Partners
(John R. Hummer).......................................... $450,000.00
</TABLE>
In November 1999 we issued and sold convertible promissory notes to our
following named executive officers, directors and 5% stockholders and persons
and entities associated with them, in the amounts set forth opposite each
party's name. The promissory notes were cancelled and converted into shares of
our Series B preferred stock at $9.44 per share on December 8, 1999.
<TABLE>
<CAPTION>
AMOUNT OF
STOCKHOLDER PROMISSORY NOTE(S)
----------- ------------------
<S> <C>
Amazon.com, Inc............................................. $2,975,115.25
Entities Affiliated with Bowman Capital Management,
L.L.C..................................................... $1,430,136.10
Entities Affiliated with Hummer Winblad Venture Partners.... $2,383,565.20
</TABLE>
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<PAGE> 61
TRANSACTIONS WITH DIRECTORS AND OFFICERS
Affiliate Relationships. The following members of our board of directors
are affiliated with investors that participated in the transactions listed
above: Mark J. Britto (Amazon.com, Inc.) and John Hummer (entities affiliated
with Hummer Winblad Venture Partners).
In April 1999, we entered into an advertising agreement with Amazon.com
pursuant to which we and Amazon.com agreed to display advertising of the other
party on our respective Web sites and to provide other related promotional
services. For more information on this relationship, see
"Business -- Relationship with Amazon.com" and "Risk Factors -- We Depend on Our
Relationship with Amazon.com to Provide Operational Expertise, Attract and
Retain a Significant Number of Our Customers and Build Our Brand."
In connection with our Series A, Series B and Series C preferred stock
financings, we entered into an agreement, as amended, dated January 18, 2000
with our preferred stockholders and a holder of our common stock in which we
agreed, among other things and subject to applicable laws, rules and
regulations, to use reasonable efforts to cause the underwriters in this
offering to offer to Amazon.com that number of shares of our common stock such
that Amazon.com would hold 46% of our outstanding common stock immediately after
this offering and to entities affiliated with Bowman Capital Management, L.L.C.
2.5% of the shares offered in this offering. Both Amazon.com and the Bowman
parties have waived their respective rights to purchase shares of our capital
stock in this offering, and they have thereby extinguished any successive rights
of first refusal to purchase shares of our capital stock after this offering to
which they might otherwise have been entitled. Pursuant to the agreement,
Amazon.com also may not increase its ownership of our stock above the 46%
threshold until the earliest to occur of the second anniversary of the closing
date of our initial public offering, immediately following a change of control
in connection with our merger or sale, or April 22, 2003. Until this occurs, we
are required to provide notice to Amazon.com of any merger or sale that would
result in our change of control. Additional terms of the agreement require that
Amazon.com gives us notice of its purchase of any additional shares of our stock
and complies with restrictions to allow us to qualify for pooling accounting
treatment in the event of our merger or sale. In connection with proxy contests,
tender offers or exchange offers, however, Amazon.com is not subject to the 46%
threshold limit.
For information on employment and change in control arrangements with our
officers, see "-- Employment and Change of Control Arrangements."
OTHER TRANSACTIONS
In February 1999, we issued 1,288,470 shares of our common stock to Greg
McLemore in consideration of the transfer to us of the Pets.com Web store and
certain domain names and software assets pursuant to a bill of sale and
assignment by Mr. McLemore and Koala Computer Products, a sole proprietorship of
which Mr. McLemore is sole proprietor.
In April 1999, we issued 220,690 shares of our Series A preferred stock to
Mr. McLemore in consideration of the transfer to us by Mr. McLemore of domain
names previously registered by Mr. McLemore that are relevant to our business
and agreements concerning domain names pursuant to a bill of sale and
assignment.
We have reimbursed operating expenses of approximately $175,000 that were
paid on our behalf by Koala Computer Products, of which Mr. McLemore is the sole
proprietor, between February 1999 and the relocation of our executive offices to
San Francisco in April 1999.
Mr. McLemore and WebMagic, a corporation of which Mr. McLemore is the sole
shareholder, have agreed to indemnify us for up to $500,000 in connection with a
third-party online promotional agreement entered into by WebMagic and the third
party relating to the Pets.com business conducted by Mr. McLemore and WebMagic
prior to April 1999.
In November 1999, we loaned $187,500 to Paul Manca, our Chief Financial
Officer. Mr. Manca used the loan proceeds to exercise in November 1999 options
held by him to purchase 200,000 shares of our
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<PAGE> 62
common stock at an exercise price of $0.94 per share. These shares are subject
to our right of repurchase at the original purchase price in the event that Mr.
Manca's employment with us terminates. Our repurchase right lapses with respect
to 25% of the shares in August 2000 and with respect to 1/48th of the shares
monthly thereafter. The loan is full recourse, accrues interest at the rate of
6.08% compounded annually, and matures in November 2003 or on Mr. Manca's
termination of employment. The loan is secured by the 200,000 shares of common
stock held by Mr. Manca.
In January 2000, we entered into a distribution agreement with Infoseek
Corporation and Buena Vista Internet Group pursuant to which we engage in
promotions involving GO.com online properties and have agreed to engage in
future joint content development and placement of media advertising with ABC,
Inc. which, along with GO.com, is an affiliate of The Walt Disney Company. As
part of the agreement, we sold 1,102,400 shares of Series C preferred stock to
Catalyst Investments, L.L.C., an affiliate of Disney, in exchange for placement
of media advertising on ABC, Inc.
Each of the related party transactions described in this section was
negotiated at "arms-length" and we believe that each of the foregoing
transactions has been made pursuant to terms that are no less favorable to us
than would have been reasonably available from non-affiliated third parties.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our officers and
directors that contain provisions which may require us, among other things, to
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Limitation of Liability and
Indemnification Matters."
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 18, 2000 and as adjusted to reflect
the sale of the common stock offered by us under this prospectus and upon
conversion of all outstanding shares of preferred stock into common stock by:
- each stockholder known to us to own beneficially more than 5% of our
common stock;
- each of our current directors and the named officers; and
- all current directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Pets.com, Inc., 435 Brannan Street, Suite 100, San Francisco, California
94107. 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 our knowledge, 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 by
each stockholder as of January 18, 2000. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of January 18, 2000 are deemed
outstanding. Those shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. The percent of
beneficial ownership for each stockholder is based on 22,044,737 shares of
common stock outstanding as of January 18, 2000 on an as converted basis, and
29,544,737 shares of common stock outstanding after this offering.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Amazon.com, Inc............................................. 8,973,029 40.7% 30.4%
1200 12th Avenue South, Suite 1200
Seattle, WA 98108-1226
Entities Affiliated with Hummer Winblad Venture Partners.... 4,677,115 21.2% 15.8%
2 South Park, 2nd Floor
San Francisco, CA 94107
Gregory McLemore............................................ 1,499,360 6.8% 5.1%
Entities Affiliated with Bowman Capital Management,
L.L.C..................................................... 1,382,782 6.3% 4.7%
1875 South Grant Street, Suite 600
San Mateo, CA 94402-7013
Catalyst Investments, L.L.C. ............................... 1,102,400 5.0% 3.7%
500 South Buena Vista Street
Burbank, CA 91521
Mark J. Britto.............................................. 8,973,029 40.7% 30.4%
John R. Hummer.............................................. 4,677,115 21.2% 15.8%
John B. Balousek............................................ 51,894 * *
Julia L. Wainwright......................................... 925,618 4.2% 3.1%
Christopher E. Deyo......................................... 523,175 2.4% 1.8%
Paul W. Melmon.............................................. 223,160 1.0% *%
John A. Hommeyer............................................ 120,000 * *
Diane R. Hourany............................................ 125,763 * *
All executive officers and directors as a group (14
persons).................................................. 16,352,364 73.2% 54.8%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
The beneficial ownership for entities affiliated with Hummer Winblad
Venture Partners is comprised of 2,631,338 shares held by Hummer Winblad Venture
Partners III, L.P., 138,491 shares held by Hummer Winblad Technology Fund III,
L.P., and 1,907,286 shares held by Hummer Winblad Venture Partners IV,
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<PAGE> 64
L.P. The general partner of each of the first two funds listed in the first
sentence of this paragraph is Hummer Winblad Equity Partners III, LLC, and the
general partner of the third fund is Hummer Winblad Equity Partners IV, LLC. The
members of each of the foregoing general partners are principals of Hummer
Winblad Venture Partners.
The beneficial ownership for entities affiliated with Bowman Capital
Management, L.L.C. is comprised of 486,346 shares held by Spinnaker Technology
Fund, L.P., 297,411 shares held by Spinnaker Founders Fund, L.P., 19,921 shares
held by Spinnaker Clipper Fund, L.P., 410,158 shares held by Spinnaker
Technology Offshore Fund Limited, and 168,946 shares held by Spinnaker Offshore
Founders Fund Cayman Limited. Bowman Capital Management, L.C.C. is the general
partner of each of the first three entities and investment adviser to the last
two offshore entities listed in the first sentence of this paragraph.
The beneficial ownership for Mark J. Britto is comprised of 8,973,029
shares held by Amazon.com. Mr. Britto is a director of Pets.com and Vice
President of Strategic Alliances of Amazon.com and he disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
these shares.
The beneficial ownership for John R. Hummer is comprised of 2,631,338
shares held by Hummer Winblad Venture Partners III, L.P., 138,491 shares held by
Hummer Winblad Technology Fund III, L.P., and 1,907,286 shares held by Hummer
Winblad Venture Partners IV, L.P. Mr. Hummer is a director of Pets.com and a
member of each of Hummer Winblad Equity Partners III, LLC and Hummer Winblad
Equity Partners IV, LLC, the general partners for the three investment funds
listed in the first two sentences of this paragraph, and he disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
these shares.
The beneficial ownership for John B. Balousek includes 36,000 shares under
outstanding stock options that are currently exercisable or exercisable within
60 days of January 18, 2000.
The beneficial ownership for Paul W. Melmon includes 32,000 shares under
outstanding stock options that are currently exercisable or exercisable within
60 days of January 18, 2000.
The beneficial ownership for our executive officers and directors as a
group includes 280,000 shares under outstanding stock options that are currently
exercisable or exercisable within 60 days of January 18, 2000.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of 150,000,000 shares of common stock, $0.00125 par value per share, and
5,000,000 shares of undesignated preferred stock, $0.00125 par value per share.
COMMON STOCK
As of January 18, 2000, there were 22,044,737 shares of common stock
outstanding held of record by 139 stockholders. Options to purchase an aggregate
of 973,000 shares of common stock were also outstanding. There will be
29,544,737 shares of common stock outstanding, assuming no exercise of the
underwriter's option to purchase additional shares, or exercise of outstanding
options under our stock plans after January 18, 2000, after giving effect to the
sale of the shares of common stock offered to the public in this prospectus.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, 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 Pets.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
outstanding preferred stock. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. 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, the board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock. The board of directors will also have the authority
to designate the rights, preferences, privileges and restrictions of each series
of preferred stock, 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 of control of Pets.com without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
some circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding and we currently have
no plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
As of January 18, 2000, the holders of 18,691,410 shares of common stock or
their transferees are entitled to rights with respect to the registration of
those shares under the Securities Act. These rights are provided under the terms
of an agreement between the holders of these registrable securities and us.
Subject to limitations in the agreement, the holders of at least 33 1/3% of the
then outstanding registrable securities 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 we
register any of our common stock either for our own account or for the account
of other security holders, all 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 at least 30% of the then outstanding registrable
securities may also require that we, not more than twice in any twelve-month
period, register all or a portion of such securities on Form S-3 when the use of
that form becomes available to us, provided, among other limitations, that the
proposed aggregate selling price, net
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<PAGE> 66
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.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CHARTER DOCUMENTS
Provisions of Delaware law and our charter documents could make the
acquisition of Pets.com and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of Pets.com to negotiate with us first. 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
Pets.com outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an improvement
of their terms.
Delaware Law. We are subject to the provisions of Section 203 of the
Delaware law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of the corporation's voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change of control of Pets.com without further action by the stockholders.
Charter Documents. Our amended and restated certificate of incorporation
provides that stockholder action can be taken only at an annual or special
meeting of stockholders and may not be taken by written consent. Our bylaws
provide that special meetings of stockholders can be called only by the board of
directors, the chairman of the board, if any, the president and holders of 50%
of the votes entitled to be cast at a meeting. Moreover, the business permitted
to be conducted at any special meeting of stockholders is limited to the
business brought before the meeting by the board of directors, the chairman of
the board, if any, the president or any 50% holder. Our bylaws set forth an
advance notice procedure with regard to the nomination, other than by or at the
direction of the board of directors, of candidates for election as directors and
with regard to business to be brought before a meeting of stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation. The transfer agent's address and telephone number is 1745
Gardena Avenue, 2nd Floor, Glendale, California 91204, (818) 502-1404.
NASDAQ STOCK MARKET LISTING
We intend to apply for listing for quotation on the Nasdaq National Market
under the trading symbol "IPET."
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<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, only a limited
number of shares will be available for sale shortly after this offering because
of pre-existing 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 29,544,737 outstanding shares
of common stock, based on the number of shares outstanding as of January 18,
2000. Of these shares, the shares sold in the offering, plus any shares issued
upon exercise of the underwriters' option to purchase additional shares, will be
freely tradable without restriction under the Securities Act, unless purchased
by our "affiliates," as that term is defined in Rule 144 under the Securities
Act. In general, affiliates include officers, directors or 10% stockholders.
The remaining 22,044,737 shares of our common stock outstanding are
"restricted securities" within the meaning of Rule 144. These shares may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 of 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
our common stock.
Our directors, officers, employees and other stockholders have entered into
lock-up agreements in connection with this offering generally providing that
they will not, without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, directly or indirectly, offer, pledge, sell,
contract to sell or sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of their shares of our common stock or any securities
exercisable for or convertible into shares of our common stock for a period of
180 days following the effective date of the registration statement filed
pursuant to this offering. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be
saleable until these agreements expire or are waived by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
Taking into account the lock-up agreements, and assuming Merrill Lynch,
Pierce, Fenner & Smith Incorporated does not release stockholders from these
agreements, the following approximate number of additional shares will be
eligible for sale in the public market at the following times:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
DATE OF AVAILABILITY FOR SALE ADDITIONAL SHARES
----------------------------- -----------------
<S> <C>
30 days after the date of the final prospectus............
180 days after the date of the final prospectus........... 13,420,045
At various times after the date 180 days after the date of
the final prospectus and through November 5, 2000...... 3,134,557
At various times after November 5, 2000 and through
December 8, 2000....................................... 2,454,941
At various times after December 8, 2000 and through
January 18, 2001....................................... 1,195,097
At various times after January 18, 2001 upon the
expiration of applicable holding periods............... 1,840,097
</TABLE>
Under Rule 144, the number of shares that may be sold by affiliates of our
stockholders are subject to volume restrictions. In general, under Rule 144, and
beginning after the expiration of the lock-up agreements, a person who has
beneficially owned restricted shares, including shares that are aggregated to
such person or persons, 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:
- one percent of the number of shares of common stock then outstanding
which will equal approximately 295,447 shares immediately after the
offering; or
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<PAGE> 68
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to the
sale.
In order to sell shares under Rule 144, the selling stockholder must comply
with manner of sale provisions and notice requirements and current public
information about us must be available. Under Rule 144(k), a person who is not
deemed to have been our affiliate 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 18,691,410 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 of our common stock.
As part of the lock-up agreements, all of our employees holding common
stock or stock options may not sell shares acquired upon exercise of their
options until 180 days after the effective date. Beginning 180 days after the
effective date, any of our employees, officers, directors of or consultants who
purchased his or her 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 their 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 one or more registration
statements under the Securities Act as promptly as possible after the effective
date to register shares to be issued under our employee benefit plans. As a
result, any options exercised under our stock option plans or any other benefit
plan after the effectiveness of a registration statement will also be freely
tradable in the public market, unless the shares are held by affiliates of ours.
Shares held by our affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
the shares may otherwise be sold under Rule 701. As of January 18, 2000 there
were outstanding options for the purchase of 973,000 shares, of which no shares
subject to those options were vested and exercisable. No shares have been issued
to date under our purchase plan or directors plan. See "Risk Factors -- Shares
Eligible for Future Sale," "Management -- Stock Plans" and "Description of
Capital Stock -- Registration Rights."
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<PAGE> 69
UNDERWRITING
GENERAL
We are offering our shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Thomas Weisel
Partners LLC, and Warburg Dillon Read LLC are acting as U.S. representatives of
the U.S. underwriters named below. Subject to the terms and conditions described
in a U.S. purchase agreement among us and the U.S. underwriters, and
concurrently with the sale of 1,500,000 shares to the international managers, we
have agreed to sell to the U.S. underwriters, and the U.S. underwriters
severally have agreed to purchase from us the number of shares listed opposite
their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Bear, Stearns & Co. Inc.....................................
Thomas Weisel Partners LLC..................................
Warburg Dillon Read LLC.....................................
----------
Total.......................................... 6,000,000
==========
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, Bear, Stearns International Limited, Thomas
Weisel Partners International Limited, and UBS AG, acting through its division
Warburg Dillon Read, are acting as lead managers. Subject to the terms and
conditions in the international purchase agreement, and concurrently with the
sale of 6,000,000 shares to the U.S. underwriters pursuant to the U.S. purchase
agreement, we have agreed to sell to the international managers, and the
international managers severally have agreed to purchase 1,500,000 shares from
us. The initial public offering price per share and the total underwriting
discount per share are identical under the U.S. purchase agreement and the
international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
U.S. underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The U.S. underwriters may allow,
and the dealers may reallow, a discount not in excess of $ per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
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<PAGE> 70
The following table shows the per share and total public offering price,
underwriting discount and proceeds before expenses to Pets.com. The information
assumes either no exercise or full exercise by the U.S. underwriters and the
international managers of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price...................................... $ $ $
Underwriting discount...................................... $ $ $
Proceeds, before expenses, to Pets.com..................... $ $ $
</TABLE>
The total expenses of the offering, not including the underwriting
discount, are estimated at $1,000,000 and are payable by Pets.com.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
OVER-ALLOTMENT OPTION
We have granted an option to the U.S. underwriters to purchase up to
900,000 additional shares at the public offering price less the underwriting
discount. The U.S. underwriters may exercise this option for 30 days from the
date of this prospectus solely to cover any over-allotments. If the U.S.
underwriters exercise this option, each will be obligated, subject to conditions
contained in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted an option to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to 225,000
additional shares to cover any over-allotments on terms similar to those granted
to the U.S. underwriters.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, approximately 5% of the shares offered by this prospectus
for sale to some of our employees and persons having business relationships with
us. If these persons purchase reserved shares, the number of shares available
for sale to the general public will be reduced accordingly. Any reserved shares
that are not orally confirmed for purchase within one business day of the
pricing of this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for 180
days after the date of this prospectus without first
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<PAGE> 71
obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Specifically, we and these other individuals have agreed not to
directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "IPET."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 110
filed public offerings of equity securities, of which 79 have been completed,
and has acted as a syndicate member in an additional 54 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or controlling persons,
except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
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<PAGE> 72
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters from bidding for and purchasing our common stock. However, the U.S.
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
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<PAGE> 73
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Pets.com by Venture Law Group, A Professional Corporation, Menlo Park,
California. John V. Bautista, a director at Venture Law Group, is Secretary of
Pets.com. Legal matters specified by the underwriters in connection with this
offering will be passed upon for the underwriters by Shearman & Sterling, Menlo
Park, California. As of the date of this prospectus, an investment partnership
associated with Venture Law Group owns an aggregate of 45,502 shares of our
common stock, and individual directors and attorneys of Venture Law Group
beneficially own a total of 48,575 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1999 and for the period from February 17, 1999
(inception) to December 31, 1999, as set forth in their report. The financial
statements audited by Ernst & Young LLP have been included in reliance on their
report given on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1, including the exhibits and schedules filed with the
registration statement, under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, we refer you to the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by that reference. A
copy of the registration statement may be inspected by anyone without charge at
the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The SEC maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
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<PAGE> 74
PETS.COM, INC.
FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 17, 1999 (INCEPTION)
TO DECEMBER 31, 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Audited Financial Statements
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Stockholders' Equity........................... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pets.com, Inc.
We have audited the accompanying balance sheet of Pets.com, Inc. as of December
31, 1999, and the related statements of operations, stockholders' equity, and
cash flows for the period from February 17, 1999 (inception) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Pets.com, Inc. at December 31,
1999, and the results of its operations and its cash flows for the period from
February 17, 1999 (inception) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California
January 14, 2000, except for Note 10 as to
which the date is January 19, 2000
F-2
<PAGE> 76
PETS.COM, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,196
Inventories............................................... 6,756
Prepaid advertising expenses.............................. 7,223
Other prepaid expenses and current assets................. 999
--------
Total current assets........................................ 45,174
Certificate of deposit...................................... 845
Fixed assets, net........................................... 11,327
Intangible assets........................................... 399
Other assets................................................ 2,565
--------
Total assets................................................ $ 60,310
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,563
Accrued expenses.......................................... 2,137
Payable to related parties................................ 370
Capital lease obligations................................. 16
--------
Total current liabilities................................... 9,086
Capital lease obligations................................... 104
Stockholders' equity:
Convertible preferred stock, $.00125 par value:
Authorized shares -- 17,941,862
Series A preferred stock, designated 5,781,862 shares
Issued and outstanding shares -- 5,781,862
(aggregate liquidation preference of $10,480)..... 7
Series B preferred stock, designated 11,120,000
shares
Issued and outstanding shares -- 10,518,678
(aggregate liquidation preference of $99,270)..... 13
Series B1 preferred stock, designated 1,040,000
shares
No issued or outstanding shares................... --
Common stock, $.00125 par value:
Authorized shares -- 28,800,000
Issued and outstanding shares -- 4,641,797........... 6
Additional paid-in capital................................ 128,442
Accumulated deficit....................................... (61,778)
Stockholder note receivable............................... (188)
Deferred stock-based compensation......................... (15,382)
--------
Total stockholders' equity.................................. 51,120
--------
Total liabilities and stockholders' equity.................. $ 60,310
========
</TABLE>
See accompanying notes.
F-3
<PAGE> 77
PETS.COM, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
Net sales................................................... $ 5,787
Cost of goods sold.......................................... 13,412
----------
Gross margin................................................ (7,625)
Operating expenses:
Marketing and sales(1).................................... 42,491
Product development(2).................................... 6,481
General and administrative(3)............................. 4,254
Amortization of deferred stock-based compensation......... 2,118
----------
Total operating expenses.................................... 55,344
----------
Operating loss.............................................. (62,969)
Interest income, net........................................ 1,191
----------
Net loss.................................................... $ (61,778)
==========
Basic and diluted net loss per share........................ $ (42.42)
==========
Weighted average shares outstanding used to compute basic
and diluted net loss per share............................ 1,456,489
==========
</TABLE>
- ------------------------
(1) Excluding $764 in amortization of deferred stock-based compensation.
(2) Excluding $479 in amortization of deferred stock-based compensation.
(3) Excluding $875 in amortization of deferred stock-based compensation.
See accompanying notes.
F-4
<PAGE> 78
PETS.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
----------------------------------------
SERIES A SERIES B COMMON STOCK ADDITIONAL
------------------ ------------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------ ---------- ------ --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance of common
shares to founders in
exchange for cash and
intellectual property...... -- $-- -- $-- 1,449,470 $2 $ 16 $ --
Issuance of restricted shares
to employee................ -- -- -- -- 925,618 1 11 --
Issuance of restricted shares
to consultants for
services................... -- -- -- -- 4,000 -- 1 --
Issuance of Series A
preferred stock, net of
offering costs of $59...... 5,781,862 7 -- -- -- -- 10,414 --
Issuance of Series B
preferred stock, net of
offering costs of $53...... -- -- 10,518,678 13 -- -- 99,203 --
Exercise of common stock
options.................... -- -- -- -- 2,222,709 3 973 --
Issuance of restricted shares
for asset purchase......... -- -- -- -- 40,000 -- 324 --
Compensation related to
issuance of stock options
and restricted common
stock...................... -- -- -- -- -- -- 17,500 --
Amortization of deferred
stock-based compensation... -- -- -- -- -- -- -- --
Net loss and comprehensive
loss....................... -- -- -- -- -- -- -- (61,778)
--------- -- ---------- -- --------- -- -------- --------
Balance at December 31,
1999....................... 5,781,862 $7 10,518,678 $13 4,641,797 $6 $128,442 $(61,778)
========= == ========== == ========= == ======== ========
<CAPTION>
STOCKHOLDER DEFERRED TOTAL
NOTE STOCK-BASED STOCKHOLDERS'
RECEIVABLE COMPENSATION EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
Initial issuance of common
shares to founders in
exchange for cash and
intellectual property...... $ -- $ -- $ 18
Issuance of restricted shares
to employee................ -- -- 12
Issuance of restricted shares
to consultants for
services................... -- -- 1
Issuance of Series A
preferred stock, net of
offering costs of $59...... -- -- 10,421
Issuance of Series B
preferred stock, net of
offering costs of $53...... -- -- 99,216
Exercise of common stock
options.................... (188) -- 788
Issuance of restricted shares
for asset purchase......... -- -- 324
Compensation related to
issuance of stock options
and restricted common
stock...................... -- (17,500) --
Amortization of deferred
stock-based compensation... -- 2,118 2,118
Net loss and comprehensive
loss....................... -- -- (61,778)
----- -------- --------
Balance at December 31,
1999....................... $(188) $(15,382) $ 51,120
===== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 79
PETS.COM, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(61,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 997
Amortization of deferred stock-based compensation......... 2,118
Common and preferred stock issued for intellectual
property............................................... 416
Common stock issued for services.......................... 1
Changes in:
Inventories............................................ (6,756)
Prepaid marketing expenses............................. (7,223)
Other prepaid expenses and current assets.............. (999)
Certificate of deposit................................. (845)
Other assets........................................... (330)
Accounts payable, accrued expenses and other........... 8,700
Payable to related parties............................. 370
--------
Net cash used in operating activities....................... (65,329)
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (12,188)
Purchase of preferred stock in PetPlace.com................. (2,085)
Issuance of note receivable................................. (150)
Purchase of intangible software and intangible assets....... (75)
--------
Net cash used in investing activities....................... (14,498)
FINANCING ACTIVITIES
Proceeds from issuances of common stock..................... 14
Proceeds from exercise of stock options..................... 788
Proceeds from issuance of convertible notes payable......... 7,385
Net proceeds from issuances of Series A preferred stock..... 10,021
Net proceeds from issuances of Series B preferred stock..... 91,831
Repayments on capital lease................................. (16)
--------
Net cash provided by financing activities................... 110,023
--------
Net increase in cash and cash equivalents................... 30,196
Cash and equivalents at beginning of period................. --
--------
Cash and equivalents at end of period....................... $ 30,196
========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
Property and equipment acquired under capital lease
obligations............................................... $ 136
========
Common stock issued for notes receivable.................... $ 188
========
Issue of series A preferred stock for rights to certain
internet domain names..................................... $ 400
========
Conversion of convertible notes payable to convertible
preferred stock........................................... $ 7,385
========
Issue of common stock for assets............................ 324
========
</TABLE>
See accompanying notes.
F-6
<PAGE> 80
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pets.com, Inc. (the Company) was incorporated in the state of California on
October 7, 1998 and began its commercial operations on February 17, 1999 with
the acquisition of certain assets and internet domain names. For purposes of
disclosure, the Company has elected to use February 17, 1999 as the inception
date for reporting, as no activities were undertaken and no costs were incurred
prior to that date. The Company is engaged in the sale over the Internet of pet
products, services, and information primarily in the United States.
In December 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 presently anticipated, all of the outstanding shares of preferred
stock will automatically convert into common stock upon the closing of the
initial public offering. The board of directors also authorized the
reincorporation of the Company in Delaware. In conjunction with the
reincorporation, the number of authorized shares will be increased to
155,000,000 shares, of which 150,000,000 will be common stock and 5,000,000 will
be undesignated preferred stock.
FISCAL YEAR
The Company's fiscal year begins on January 1 and ends on December 31 of
each year.
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 of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues on product sales, net of discounts, coupons and allowances, are
recognized upon shipment of the related goods. Outbound shipping and handling
fees are included in net sales upon shipment. The Company provides for an
estimated allowance for sales returns in the period of sale.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for website development, systems personnel, consultants, and other
website costs. As the Company believes that its website is subject to continual
and substantial change, expenditures relating to product development are
expensed as incurred.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
$26,934,000 for the period from February 17, 1999 (inception) to December 31,
1999.
MARKETING AGREEMENTS
The Company enters into various advertising, marketing and co-marketing
agreements which provide for certain advertising, reciprocal advertising,
promotional and customer acquisition activities for terms generally not in
excess of 12 months.
F-7
<PAGE> 81
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. The
Company's cash equivalents consist mainly of money market funds.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
CERTIFICATE OF DEPOSIT
The certificate of deposit is restricted and secures a letter of credit
related to the Company's lease agreement (see Note 4). The carrying amount
approximates fair value.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is provided using the straight-line method over the estimated useful lives of
the related assets, which range from three to seven years.
The Company capitalizes certain internal use software costs in accordance
with Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Capitalized internal use software costs
with an expected useful life in excess of one year are amortized on a
straight-line basis over their estimated useful lives. Internal use software
costs, which are subject to continual and substantial change, are expensed as
incurred.
FULFILLMENT EXPENSES
The Company includes fulfillment expenses in marketing and sales in the
accompanying statement of operations.
INTANGIBLE ASSETS
Intangible assets, consisting primarily of website design and customer
lists acquired, are recorded at cost. Amortization is provided using the
straight-line method over the estimated useful lives of the related intangible
assets of 3 years.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Recoverability of assets is measured by comparison of the carrying amount of the
asset to net future cash flows expected to be generated from the asset. No
impairment has been recognized in the accompanying financial statements.
NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares
of common stock outstanding less the number of shares subject to repurchase.
Shares associated with stock options, warrants and the convertible preferred
stock are not included in the calculation of diluted net loss per share because
they are antidilutive. At December 31, 1999, there were 3,152,327 unvested or
restricted common shares
F-8
<PAGE> 82
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that are subject to repurchase and 983,400 stock options that were excluded from
the computation of diluted net loss per share. If the Company had reported net
income, the calculation of these per share amounts would have included the
dilutive effect of these common stock equivalents using the treasury stock
method.
CONCENTRATION OF CREDIT RISK
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed through monitoring the
stability of the financial institutions utilized and diversification of its
financial resources.
The Company's financial instruments consist of cash and cash equivalents.
The fair value of all financial instruments approximates the carrying amount
based on the current rate offered to the Company for similar instruments.
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 its 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). APB
No. 25 provides that the compensation expense relative to the Company's employee
stock options is measured based on the intrinsic value of the stock option. SFAS
No. 123 requires companies that continue to follow APB No. 25 to provide a pro
forma disclosure of the impact of applying the fair value method of SFAS No. 123
(see Note 6).
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 financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to be recovered. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all items that are 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 items of
other comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. There
were no items of other comprehensive income in 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB 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, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge
F-9
<PAGE> 83
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
transaction. 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. ACQUISITIONS
In November 1999, the Company purchased 2,150,537 shares of Series A
convertible preferred stock of PetPlace.com, Inc., representing a 10% ownership
interest, for consideration of approximately $2.0 million. The Company is
obligated to purchase an additional 1,612,903 shares of Series A convertible
stock for approximately $1.5 million, by February 1, 2000, concurrent with the
launch of PetPlace.com, Inc.'s web site. This investment will be accounted for
on the basis of cost.
In December 1999, the Company acquired the website and certain intangible
assets from Coolpetstuff.com for $399,000, consisting of $75,000 in cash and
40,000 shares of common stock. The common stock issued in the acquisition is
subject to an escrow agreement which allows for the release of 3,334 shares per
quarter for 12 quarters, to the seller.
3. FIXED ASSETS
Fixed assets at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
(In thousands)
Computers and equipment..................................... $ 5,100
Purchased software.......................................... 2,557
Furniture and fixtures...................................... 432
Plant and equipment......................................... 2,365
Leasehold improvements...................................... 1,870
-------
12,324
Less accumulated depreciation and amortization.............. (997)
-------
$11,327
=======
</TABLE>
4. LEASE COMMITMENTS
The Company leases equipment under noncancelable lease agreements that are
accounted for as capital leases. Equipment under capital lease arrangements, and
included in property and equipment aggregated approximately $136,000 at December
31, 1999. Related accumulated amortization was approximately $4,000 at December
31, 1999. The capital leases are secured by the related equipment, and the
Company is required to maintain liability and property damage insurance under
the terms of the agreement.
The Company leases its office and warehouse facilities under various
operating leases, which call for fixed rental payments through 2011. The lease
arrangements require letters of credit totaling $1,520,000 in the event the
Company defaults on any of its lease payments of which $770,000 is secured by a
certificate of deposit. Provided the Company is not in default, the letters of
credit shall be reduced over the terms of the leases. Total rent expense under
operating leases for the period ended December 31, 1999 approximated $482,000.
F-10
<PAGE> 84
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. LEASE COMMITMENTS (CONTINUED)
Future minimum commitments under capital lease and operating leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
(In thousands)
2000...................................................... $ 31 $ 3,231
2001...................................................... 31 3,666
2002...................................................... 31 3,465
2003...................................................... 31 3,523
2004...................................................... 21 3,281
Thereafter................................................ -- 9,395
---- -------
Total minimum lease payments.............................. 145 $26,561
=======
Less amount representing interest......................... 25
----
Present value of minimum lease payments................... 120
Less current obligations.................................. 16
----
Long-term obligations..................................... $104
====
</TABLE>
5. INCOME TAXES
There has been no provision for U.S. federal, U.S. state, or foreign income
taxes for any period as the Company has incurred operating losses in all periods
and for all jurisdictions.
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate:
<TABLE>
<S> <C>
Statutory federal income tax benefit........................ (34)%
State income tax benefit.................................... (6)%
Valuation allowance......................................... 38%
Non-deductible stock-based compensation..................... 2%
---
Income tax provision........................................ --
===
</TABLE>
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 assets are as follows:
<TABLE>
<S> <C>
(In thousands)
Deferred tax assets:
Net operating loss carryforward........................... $ 22,475
Other temporary differences............................... 1,354
--------
Total deferred tax assets................................... 23,829
Less valuation allowance.................................... (23,829)
--------
Net deferred tax assets..................................... $ --
========
</TABLE>
Net deferred tax assets have been fully offset by a valuation allowance due
to a lack of operating history combined with risks and uncertainties surrounding
the Company's ability to generate future taxable income. The valuation allowance
increased by $23,829 for the period from February 17, 1999 (inception) to
December 31, 1999.
F-11
<PAGE> 85
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. INCOME TAXES (CONTINUED)
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $56,187,000, which expire in
the year 2019. The Company also had net operating loss carryforwards for state
income tax purposes of approximately $56,187,000 expiring in the year 2007.
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In April 1999, the Company issued 5,781,862 shares of Series A preferred
stock in a private placement offering in exchange for cash proceeds of
$10,079,624 and rights to certain internet domain names valued at $400,001.
In connection with the issuance of the Series A preferred stock, the
Articles of Incorporation were amended to increase the total authorized number
of common shares from the original 8,000,000 to 20,000,000, and to authorize a
series of preferred stock consisting of 6,000,000 shares.
In June 1999, the Company issued 5,298,014 shares of Series B preferred
stock in a private placement offering in exchange for cash proceeds of
$50,000,003. In connection with the issuance of the Series B preferred stock,
the Articles of Incorporation were amended to increase the total authorized
number of common shares to 24,000,000 and preferred shares to 11,301,862.
In November 1999, the Company issued 2,848,774 additional shares of Series
B convertible preferred stock and notes payable totaling $7,384,705, in a
private placement offering in exchange for cash proceeds of $34,270,000. The
notes payable were conditionally convertible, depending on the structure of the
second closing of the Series B offering.
In connection with the issuance of additional Series B convertible
preferred stock, the Articles of Incorporation were amended to increase the
total authorized number of common shares to 28,800,000, and authorized preferred
stock to 17,941,862 shares, including authorization of 1,040,000 Series B-1
preferred non-voting shares.
In December 1999, the Company completed the second closing of the November
1999 Series B convertible preferred stock private placement offering. In
conjunction with the closing, 1,589,405 shares of Series B convertible preferred
stock were issued in exchange for $15,000,008. An additional 782,486 shares of
Series B convertible preferred stock were issued in connection with the
conversion of the convertible notes payable issued at the initial closing.
Each share of the Company's Series A and B preferred stock is convertible
into one share of common stock at the option of the holder, subject to certain
antidilution adjustments, in accordance with the conversion formula provided in
the Company's Articles (currently on a 1:1 ratio). Outstanding preferred shares
automatically convert into common stock at the option of the holder and upon the
closing of an initial public offering of the Company's common stock. Holders of
each share of preferred stock are entitled to the number of votes per share that
would be equivalent to the number of shares of common stock into which a share
of preferred stock is convertible and are entitled to dividends in preference to
common stock, if and when declared by the Board of Directors. The Company also
granted the preferred stockholders certain registration rights and agreed not to
carry out certain actions without prior approval of
F-12
<PAGE> 86
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
the holders of not less than two-thirds of the outstanding preferred shares,
voting together as a single class. As a condition to the Series A and B
preferred stock agreements, one shareholder agreed to restrict its acquisitions
of Company shares to no more than a 46% interest for a period of up to 4 years.
The Company's Series B1 preferred stock has substantially the same rights
as the Series A and B preferred stock, except that it is non-voting.
COMMON STOCK
Under certain conditions, 40,000 shares of common stock issued to the
Company's founders are subject to repurchase at the greater of the price
originally paid or the fair market value of the stock at the time of repurchase.
The repurchase provisions expire at the earlier of 36 months from the issuance
date of the common stock or an initial public offering of the Company.
On February 17, 1999, the Company issued 1,288,470 common shares, for total
consideration of $16,106 to a founder in exchange for certain tangible and
intangible assets. In connection with subsequent upgrades to the Company's
website, these costs were recorded to general and administrative expense in the
accompanying statement of operations.
1999 STOCK PLAN
Under the terms of the 1999 Stock Plan (the 1999 option plan), the Board of
Directors may grant incentive and nonqualified stock options to employees,
officers, directors, agents, consultants, and independent contractors of the
Company. In connection with the introduction of the 1999 Stock Plan, 2,829,734
shares of common stock were reserved for future issuance. During 1999, the
Company increased the number of shares reserved for issuance under such plan to
5,815,327 shares, plus an evergreen provision which allows for an increase in
the authorized number of shares on the first day of each of the fiscal years
from 2001 to 2009, equal to the lesser of (i) 800,000 shares, (ii) 3% of the
Company's outstanding common stock on the last day of the preceding fiscal year,
or (iii) a lesser number of shares as determined by the board of directors.
Generally, the Company grants stock options with exercise prices equal to
the fair market value of the common stock on the date of grant, as determined by
the Company's Board of Directors. Options generally vest over a four-year period
and expire ten years from the date of grant. The 1999 stock plan also contains a
restricted stock purchase feature which provides the employee the opportunity to
exercise their options immediately and vest over the original vesting period as
set out in their stock option award. If the employee terminates before vesting,
the Company may repurchase the unvested options at the original strike price.
F-13
<PAGE> 87
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------
SHARES WEIGHTED-
AVAILABLE NUMBER AVERAGE
FOR OF EXERCISE
GRANT OPTIONS PRICE
---------- ---------- ---------
<S> <C> <C> <C>
1999 Plan introduction........................... 2,829,734 -- $ --
Restricted stock awards issued................. (929,618) -- .01
Additional authorizations...................... 2,985,594 -- --
Options granted................................ (3,323,509) 3,323,509 .88
Options exercised.............................. -- (2,234,309) .44
Options canceled............................... 105,800 (105,800) .98
---------- ---------- -----
Outstanding at December 31, 1999................. 1,668,001 983,400 $1.86
========== ========== =====
</TABLE>
The following table summarizes information regarding stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL
PRICE OF OPTIONS LIFE
- ------------ ---------- -----------
<S> <C> <C>
$.19 92,000 9.4 years
$.94 164,800 9.6 years
$1.88 568,800 9.8 years
$3.75 157,800 9.9 years
- ------------ ------- ---------
$.19 - $3.75 983,400 9.8 years
============ ======= =========
</TABLE>
Of the total options outstanding at December 31, 1999, 256,800 shares are
exercisable, and 2,234,309 shares previously exercised are subject to
repurchase. At December 31, 1999, none of the above employee option awards had
reached their first vesting tranche.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding results of operations and net loss per
share is required by SFAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the following
weighted average assumptions: a risk-free interest rate of 6.0% for the year
ended December 31, 1999, no dividend yield or volatility factors with respect to
the expected market price of the Company's common stock, and a weighted average
expected life of the options of 8 years.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under the plan
calculated using the minimal value method of SFAS 123, the Company's net loss
and pro forma basic and diluted net loss per share would have been increased to
the pro forma amounts indicated below as of December 31, 1999:
<TABLE>
<S> <C>
Pro forma net loss (in thousands)........................... $(61,862)
========
Pro forma basic and diluted net loss per share.............. $ (42.47)
========
</TABLE>
F-14
<PAGE> 88
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
The per share weighted-average fair value of $4.06 for options granted
through December 31, 1999 was recorded in connection with the accrual of the
deferred stock-based compensation.
2000 EMPLOYEE STOCK PURCHASE PLAN
In December 1999, the Company established the 2000 employee stock purchase
plan, which will become effective upon completion of the Company's initial
offering of its common stock. A total number of 400,000 shares has been reserved
for issuance under the employee stock purchase plan. The plan also contains an
evergreen provision which allows for an annual increase in the authorized number
of shares on the first day of each fiscal year from 2001 to 2010, equal to the
lesser of (i) 240,000 shares, (ii) 1% of the Company's outstanding common stock
on the last day of the preceding fiscal year, or (iii) a lesser number of shares
as determined by the board of directors.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
The following shares of common stock were reserved at December 31, 1999:
<TABLE>
<S> <C>
Stock option plan........................................... 2,651,400
Stock purchase plan......................................... 400,000
Conversion of Series A preferred stock...................... 5,781,862
Conversion of Series B preferred stock...................... 10,518,678
----------
19,351,940
==========
</TABLE>
DEFERRED STOCK-BASED COMPENSATION
During the period from February 17, 1999 to December 31,1999, the Company
recorded a charge for deferred compensation expense of $17,500,000. This charge
is being amortized using the straight-line method over the vesting period, which
is generally four years.
STOCKHOLDER NOTE RECEIVABLE
In September 1999, the Board of Directors approved the issuance of 200,000
shares of common stock to a key officer in exchange for a note receivable in the
amount of $187,500. The note receivable has been recorded as a reduction of
stockholders' equity in the balance sheet at December 31, 1999. The note is full
recourse, bears interest at 6.08% and is due with all accrued interest on
November 22, 2003.
7. DEFINED CONTRIBUTION PLAN
In October 1999, the Company adopted a defined contribution retirement plan
under Section 401(k) of the Internal Revenue Code which covers substantially all
employees. Eligible employees may contribute amounts to the plan, via payroll
withholding, subject to certain limitations. Under the 401(k) plan, employees
may elect to reduce their current compensation by up to the statutorily
prescribed annual limit ($10,000 in 1999) and to have the amount of such
reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not
require, additional matching contributions to the 401(k) plan by the Company on
behalf of all participants in the plan. No contributions were made by the
Company during the period from February 17, 1999 to December 31, 1999.
F-15
<PAGE> 89
PETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. LEGAL PROCEEDINGS
On September 2, 1999 Biolink LLC dba ERI International filed suit against
the Company in Los Angeles County Superior Court for breach of contract, breach
of the implied covenant of good faith and fair dealing, and fraud arising out of
a contract entered into for the shipment of live fish. ERI International has
stated three causes of action, each seeking damages in an amount in excess of
$2,000,000 and one cause of action seeking damages in an amount in excess of
$500,000. The Company has answered and asserted affirmative defenses to their
complaint. No trial date has been set up and discovery has not yet commenced.
Management believes that any liability that may ultimately result from the
resolution of these matters will not have a material adverse effect on the
Company's financial position, operating results, or cash flows.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The Company
currently is not aware of any such legal proceedings or claims that it believes
will have, individually or in the aggregate, a material adverse effect on its
business, prospects, financial condition and operating results.
9. RELATED-PARTY TRANSACTIONS
In conjunction with the sale of its Series A preferred stock, the Company
entered into an agreement with a shareholder, which allows for certain
reciprocal advertising, promotional and customer acquisition activities for an
initial term of 18 months. Under the agreement, both the Company and the
shareholder will reimburse each other in equal amounts for customers acquired as
a result of the marketing agreement. Under this marketing agreement, the Company
incurred customer acquisition expenses of $255,000, all of which are outstanding
as of December 31, 1999. In addition, the contract allows for unspecified
informal consulting and advisory services to be provided to the Company by the
Shareholder.
In connection with the above mentioned sale of Series A preferred stock,
the Company issued 275,863 Series A preferred shares with a total consideration
of $400,001 to a founder in exchange for certain internet domain names.
For the period from February 17, 1999 (inception) to December 31, 1999, a
preferred stockholder provided legal services to the Company totaling
approximately $429,000 of which $115,000 is outstanding as of December 31, 1999.
10. SUBSEQUENT EVENTS
On January 7, 2000 the Company's board of directors amended its articles of
incorporation to increase the total number of authorized preferred stock shares
to 18,101,862, and to designate 1,200,000 shares of preferred stock as Series C.
On January 15, 2000, the Company entered into an agreement with GO.com, an
affiliate of The Walt Disney Company, to perform joint marketing, content
development and other promotional activities. An affiliate of The Walt Disney
Company will also purchase 1,102,400 shares of Series C convertible preferred
stock in exchange for media rights valued at approximately $11 million on ABC,
Inc.
On January 19, 2000 the Company's board of directors authorized, concurrent
with the Company's reincorporation in Delaware, a .8 for 1 reverse stock split.
All share and per share amounts in the accompanying financial statements have
been retroactively adjusted to reflect this split.
F-16
<PAGE> 90
[OUTSIDE OF FRONT GATEFOLD]
The outside page of the front gatefold contains a picture of the Pets.com sock
puppet icon with four of our boxes and the following accompanying text: "Let us
fetch for a change."
<PAGE> 91
[INSIDE OF FRONT GATEFOLD]
The first page of the inside of the front gatefold contains "Pets.com" at the
top of the page, with the sock puppet icon poking through the "O" in "Pets.com."
The following text and pictures are located on the first page:
"Shopping and Selection" followed by a picture of the Pets.com Gift Center
shopping page and a picture of a product category page on the Pets.com Web store
showing dog food bowls available through our Web store. These pictures are
described by the following text: "The Pets.com shopping pages."
The second page of the inside of the front gatefold contains a picture of a
woman and child sitting on a chair looking at a laptop computer screen with a
dog sitting next to them. The following text and pictures are located on the
second page:
A picture of products such as cat litter, pet food and pet toys available
through the Pets.com Web store. The accompanying text describing the picture
says "Some of our Products."
Another picture of Pets.com's distribution center, with two lines of
accompanying text describing the picture that says: "Fulfillment and Service"
and "Our Union City distribution center."
<PAGE> 92
[INSIDE OF BACK COVER OF PROSPECTUS]
The inside of the back cover of the prospectus contains the word "Information"
with a picture of the Pets.com magazine and accompanying text describing the
picture which says "Pets.com, the magazine for pets and their humans."
Below this, the inside of the back cover of the prospectus contains the word
"Community" with two pictures.
The first picture is of a message board on the Pets.com Web store and the second
picture is of the Pets.commitment page on the Pets.com Web store.
<PAGE> 93
[BACK PAGE OF PROSPECTUS]
The outside page of the prospectus contains the Pets.com logo at the bottom of
the page.
<PAGE> 94
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
7,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
WARBURG DILLON READ
FEBRUARY , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Pets.com in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 26,400
NASD filing fee............................................. $ 10,500
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky qualification fees and expenses.................... *
Transfer Agent and Registrar fees........................... *
Miscellaneous fees and expenses............................. *
----------
Total............................................. $1,000,000
==========
</TABLE>
- ---------------
* to be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article XII of our proposed Amended and
Restated Certificate of Incorporation (Exhibit 3.2 hereto) and Article VI of our
proposed Amended and Restated Bylaws (Exhibit 3.4 hereto) provide for
indemnification of our directors, officers, employees and other agents to the
maximum extent permitted by Delaware Law. In addition, we have entered into
Indemnification Agreements (Exhibit 10.1 hereto) with our officers and
directors. The U.S. Purchase Agreement (Exhibit 1.1) also provides for
cross-indemnification among Pets.com and the Underwriters with respect to
certain matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our formation on February 17, 1999, we have issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:
1. On March 10, 1999, we issued two convertible promissory notes in the
principal amounts of $142,500 and $7,500 to two accredited investors. The notes
were canceled and converted into shares of Series A preferred stock on April 22,
1999.
2. On March 19, 1999, we issued two convertible promissory notes in the
principal amounts of $237,500 and $12,500 to two accredited investors. The notes
were canceled and converted into shares of Series A preferred stock on April 22,
1999.
3. On April 22, 1999, we issued 5,781,862 shares of our Series A preferred
stock to eight accredited investors for an aggregate cash consideration of
$10,479,625.60, which included conversion of the
II-1
<PAGE> 96
convertible promissory notes described in items 1 and 2 above into a total of
221,702 shares of our Series A preferred stock (including conversion of accrued
interest on the promissory notes).
4. On June 18, 1999, we issued 5,298,014 shares of our Series B preferred
stock to nine accredited investors for an aggregate cash consideration of
$50,000,003.35.
5. On November 5, 1999, we issued 2,848,774 shares of our Series B
preferred stock for cash consideration of $26,885,300.85 to eight accredited
investors; six convertible promissory notes in the aggregate principal amount of
$4,409,592.60 to six accredited investors, which notes were cancelled and
converted into 467,242 shares of our Series B preferred stock on December 8,
1999; and one convertible promissory note in the principal amount of
$2,975,115.25 to one accredited investor, which note was cancelled and converted
into 315,244 shares of our Series B preferred stock on December 8, 1999.
6. On December 8, 1999, we issued to a total of twenty-five accredited
investors 2,371,890 shares of our Series B preferred stock for cash
consideration of $15,000,007.80 and conversion of outstanding convertible
promissory notes in the aggregate principal amount of $7,384,707.85.
7. On January 18, 2000, we issued 1,102,400 shares of our Series C
preferred stock to one qualified institutional buyer as defined in Rule 144A of
the rules and regulations promulgated under the Securities Act.
8. As of January 18, 2000, an aggregate of approximately 4,641,797 shares
of common stock had been issued upon exercise of options or pursuant to
restricted stock purchase agreement and an aggregate of approximately 973,000
shares of common stock were issuable upon exercise of outstanding options under
the registrant's stock plans.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 8 above were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 under the
Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about Pets.com.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of U.S. Purchase Agreement.
1.2 Form of Intersyndicate Agreement.
3.1* Fifth Amended and Restated Articles of Incorporation of
Pets.com.
3.2* Form of First Amended and Restated Certificate of
Incorporation of Pets.com, to be filed and effective upon
completion of this offering.
3.3* Bylaws of Pets.com, as amended.
3.4* Form of Bylaws of Pets.com, to be effective upon completion
of this offering.
4.1* Form of Pets.com common stock certificate.
5.1 Opinion of Venture Law Group, a Professional Corporation.
10.1* Form of Indemnification Agreement between Pets.com and each
of its officers and directors.
10.2.1* 1999 Stock Plan, as amended.
10.2.2* 2000 Employee Stock Purchase Plan.
10.3* Common Stock Purchase Agreement with Greg McLemore dated
February 17, 1999.
10.4* Restricted Stock Purchase Agreement dated March 10, 1999
with Julia Wainwright.
10.5* Bill of Sale and Assignment with Greg McLemore and Koala
Computer Products dated February 17, 1999.
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.6* Offer Letter dated March 4, 1999 with Julia L. Wainwright.
10.7* Offer Letter dated March 19, 1999 with Kathryn C. Ringewald.
10.8* Offer Letter dated March 24, 1999 with Christopher E. Deyo.
10.9* Offer Letter dated March 26, 1999 with John M. Hollon.
10.10* Offer Letter dated April 7, 1999 with Paul G. Melmon.
10.11* Offer Letter dated April 21, 1999 with John R. Benjamin.
10.12* Offer Letter dated April 22, 1999 with Diane R. Hourany.
10.13* Offer Letter dated May 1, 1999 with Sue Ann Latterman.
10.14* Offer Letter dated May 5, 1999 with John A. Hommeyer.
10.15* Offer Letter dated August 20, 1999 with Paul G. Manca.
10.16* Revised Offer Letter, as amended, dated November 15, 1999
with Ralph E. Lewis.
10.17* Series A Preferred Stock Purchase Agreement dated April 22,
1999.
10.18*+ Advertising Agreement with Amazon.com dated April 22, 1999.
10.19+ Software License and Service Agreement with BroadVision,
Inc. dated May 15, 1999.
10.20* Series B Preferred Stock Purchase Agreement dated June 18,
1999
10.21+ License and Integration Agreement with Quality Software
Systems, Inc. dated June 25, 1999.
10.22* PetPlace.com, Inc. Series A Preferred Stock Purchase
Agreement dated November 12, 1999.
10.23* Series B Preferred Stock and Convertible Note Purchase
Agreement dated November 5, 1999.
10.24* Amended and Restated Investors' Rights Agreement dated
January 18, 2000.
10.25*+ Lease Agreement, as amended, with the Paulsen Family
Partnership dated April 8, 1999 for offices at 435 Brannan
Street, San Francisco, California.
10.26+ Sublease Agreement, as amended, with National Distribution
Agency, Inc. dated July 1, 1999 for a warehouse and
distribution center at 33201 Dowe Avenue, Union City,
California.
10.27*+ Lease Agreement with Bryant Springs L.L.C. dated September
20, 1999 for offices at 945 Bryant Street, San Francisco,
California.
10.28*+ Lease Agreement with Rosenburg SOMA Investments IV, L.L.C.
dated September 27, 1999 for a warehouse and distribution
center at 150-160 King Street, San Francisco, California.
10.29* Lease Agreement with Whipple Properties 1001, L.L.C. dated
November 5, 1999 for a warehouse and distribution center at
1035 Whipple Road, Hayward, California.
10.30*+ Lease Agreement with Precedent Industrial Group L.L.C. dated
December 7, 1999 for a warehouse and distribution center at
Building Number 1, Precedent South Business Center,
Greenwood, Indiana.
10.31* Pledge and Security Agreement with Paul Manca dated November
23 1999.
10.32+ Exclusive Cross Marketing Agreement with PetPlace.com, Inc.
dated September 17, 1999.
10.33*+ Sponsorship Agreement with American Veterinary Medical
Foundation
dated October 21, 1999.
10.34*+ Exclusive Sponsorship Agreement with American Veterinary
Medical Foundation dated October 21, 1999.
10.35*+ Content Partnership/Distribution Agreement with Buena Vista
Internet Group and Infoseek Corporation dated January 15,
2000.
10.36* Series C Preferred Stock Purchase Agreement dated January
18, 2000.
21.1* List of Subsidiaries.
23.1 Consent of Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (see page II-5)
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed by the registrant with the Commission.
+ Material has been omitted pursuant to a request for confidential treatment.
II-3
<PAGE> 98
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San
Francisco, State of California on February 8, 2000.
PETS.COM, INC.
By: /s/ JULIA L. WAINWRIGHT
------------------------------------
Julia L. Wainwright
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that Mark Britto hereby appoints,
jointly and severally, Julia Wainwright and Paul Manca, and each of them, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements,
and amendments to the same, filed pursuant to Rule 462 under the Securities Act
of 1933, as amended, in connection with or related to the offering contemplated
by this Registration Statement and its amendments, if any, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming his
signatures as it may be signed by his said attorney to any and all amendments to
this Registration Statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JULIA L. WAINWRIGHT Chief Executive Officer and February 8, 2000
- ----------------------------------------------------- Director
Julia L. Wainwright
/s/ PAUL G. MANCA Chief Financial Officer February 8, 2000
- ----------------------------------------------------- (Principal Financial and
Paul G. Manca Accounting Officer)
* Director February 8, 2000
- -----------------------------------------------------
John B. Balousek
* Director February 8, 2000
- -----------------------------------------------------
Mark J. Britto
* Director February 8, 2000
- -----------------------------------------------------
John R. Hummer
</TABLE>
*By: /s/ JULIA L. WAINWRIGHT
---------------------------------
Julia L. Wainwright,
Attorney-in-Fact
II-5
<PAGE> 100
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of U.S. Purchase Agreement.
1.2 Form of Intersyndicate Agreement.
3.1* Fifth Amended and Restated Articles of Incorporation of
Pets.com.
3.2* Form of First Amended and Restated Certificate of
Incorporation of Pets.com, to be filed and effective upon
completion of this offering.
3.3* Bylaws of Pets.com, as amended.
3.4* Form of Bylaws of Pets.com, to be effective upon completion
of this offering.
4.1* Form of Pets.com common stock certificate.
5.1 Opinion of Venture Law Group, a Professional Corporation.
10.1* Form of Indemnification Agreement between Pets.com and each
of its officers and directors.
10.2.1* 1999 Stock Plan, as amended.
10.2.2* 2000 Employee Stock Purchase Plan.
10.3* Common Stock Purchase Agreement with Greg McLemore dated
February 17, 1999.
10.4* Restricted Stock Purchase Agreement dated March 10, 1999
with Julia Wainwright.
10.5* Bill of Sale and Assignment with Greg McLemore and Koala
Computer Products dated February 17, 1999.
10.6* Offer Letter dated March 4, 1999 with Julia L. Wainwright.
10.7* Offer Letter dated March 19, 1999 with Kathryn C. Ringewald.
10.8* Offer Letter dated March 24, 1999 with Christopher E. Deyo.
10.9* Offer Letter dated March 26, 1999 with John M. Hollon.
10.10* Offer Letter dated April 7, 1999 with Paul G. Melmon.
10.11* Offer Letter dated April 21, 1999 with John R. Benjamin.
10.12* Offer Letter dated April 22, 1999 with Diane R. Hourany.
10.13* Offer Letter dated May 1, 1999 with Sue Ann Latterman.
10.14* Offer Letter dated May 5, 1999 with John A. Hommeyer.
10.15* Offer Letter dated August 20, 1999 with Paul G. Manca.
10.16* Revised Offer Letter, as amended, dated November 15, 1999
with Ralph E. Lewis.
10.17* Series A Preferred Stock Purchase Agreement dated April 22,
1999.
10.18*+ Advertising Agreement with Amazon.com dated April 22, 1999.
10.19+ Software License and Service Agreement with BroadVision,
Inc. dated May 15, 1999.
10.20* Series B Preferred Stock Purchase Agreement dated June 18,
1999
10.21+ License and Integration Agreement with Quality Software
Systems, Inc. dated June 25, 1999.
10.22* PetPlace.com, Inc. Series A Preferred Stock Purchase
Agreement dated November 12, 1999.
10.23* Series B Preferred Stock and Convertible Note Purchase
Agreement dated November 5, 1999.
10.24* Amended and Restated Investors' Rights Agreement dated
January 18, 2000.
10.25*+ Lease Agreement, as amended, with the Paulsen Family
Partnership dated April 8, 1999 for offices at 435 Brannan
Street, San Francisco, California.
10.26+ Sublease Agreement, as amended, with National Distribution
Agency, Inc. dated July 1, 1999 for a warehouse and
distribution center at 33201 Dowe Avenue, Union City,
California.
10.27*+ Lease Agreement with Bryant Springs L.L.C. dated September
20, 1999 for offices at 945 Bryant Street, San Francisco,
California.
10.28*+ Lease Agreement with Rosenburg SOMA Investments IV, L.L.C.
dated September 27, 1999 for a warehouse and distribution
center at 150-160 King Street, San Francisco, California.
10.29* Lease Agreement with Whipple Properties 1001, L.L.C. dated
November 5, 1999 for a warehouse and distribution center at
1035 Whipple Road, Hayward, California.
10.30*+ Lease Agreement with Precedent Industrial Group L.L.C. dated
December 7, 1999 for a warehouse and distribution center at
Building Number 1, Precedent South Business Center,
Greenwood, Indiana.
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.31* Pledge and Security Agreement with Paul Manca dated November
23 1999.
10.32+ Exclusive Cross Marketing Agreement with PetPlace.com, Inc.
dated September 17, 1999.
10.33*+ Sponsorship Agreement with American Veterinary Medical
Foundation
dated October 21, 1999.
10.34*+ Exclusive Sponsorship Agreement with American Veterinary
Medical Foundation dated October 21, 1999.
10.35*+ Content Partnership/Distribution Agreement with Buena Vista
Internet Group and Infoseek Corporation dated January 15,
2000.
10.36* Series C Preferred Stock Purchase Agreement dated January
18, 2000.
21.1* List of Subsidiaries.
23.1 Consent of Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (see page II-5)
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed by the registrant with the Commission.
+ Material has been omitted pursuant to a request for confidential treatment.
<PAGE> 1
EXHIBIT 1.2
PETS.COM, INC.
(a Delaware corporation)
7,500,000 Shares of Common Stock
INTERSYNDICATE AGREEMENT
_______________, 2000
<PAGE> 2
INTERSYNDICATE AGREEMENT
Agreement dated _____________ among (A) Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill (NY)"), Bear, Stearns & Co. Inc.,
Thomas Weisel Partners LLC and Warburg Dillon Read LLC (together, the "U.S.
Representatives") for the U.S. Underwriters (the "U.S. Underwriters") listed in
Schedule A to the U.S. Purchase Agreement (the "U.S. Purchase Agreement") of
even date herewith with Pets.com, Inc., a Delaware corporation (the "Company")
and (B) Merrill Lynch International ("MLI") for the International Managers (the
"International Managers") listed in Schedule A to the International Purchase
Agreement (the "International Purchase Agreement") of even date herewith with
the Company. The U.S. Purchase Agreement and the International Purchase
Agreement are together referred to herein as the "Purchase Agreements". Terms
not defined herein are used as defined in the Purchase Agreements referred to
above.
The U.S. Underwriters, pursuant to the U.S. Purchase Agreement, have agreed
to purchase the Initial U.S. Securities and have been granted an option by the
Company to purchase the U.S. Option Securities to cover over-allotments
(together, the Initial U.S. Securities and the U.S. Option Securities are
defined as the "U.S. Securities") and the International Managers, pursuant to
the International Purchase Agreement, have agreed to purchase the Initial
International Securities and have been granted an option by the Company to
purchase the International Option Securities to cover over-allotments (together,
the Initial International Securities and the International Option Securities are
defined as the "International Securities"). In connection with the foregoing,
the U.S. Underwriters and the International Managers deem it necessary and
advisable that certain of the activities of the U.S. Underwriters and the
International Managers be coordinated pursuant to this Agreement.
Section 1. The U.S. Underwriters, acting through Merrill (NY) and the
International Managers, acting through MLI agree that they will consult each
other as to the availability for sale of the shares of Common Stock purchased
from the Company pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement from time to time until the termination of the selling
restrictions applicable to the respective offerings involving the U.S.
Underwriters and the International Managers. Based upon information received
from the U.S. Underwriters and the International Managers, respectively, MLI
agrees to advise Merrill (NY) and Merrill (NY) agrees to advise MLI from time to
time upon request during the consultation period contemplated above, of the
respective number of shares of Common Stock purchased pursuant to the
International Purchase Agreement and shares of Common Stock purchased pursuant
to the U.S. Purchase Agreement remaining unsold. From time to time as mutually
agreed upon by Merrill (NY) and MLI: (a) Merrill (NY) will sell for the account
of one or more U.S. Underwriters to MLI, for the account of one or more
International Managers, such number of shares of Common Stock purchased pursuant
to the U.S. Purchase Agreement and remaining
2
<PAGE> 3
unsold and (b) MLI will sell for the account of one or more International
Managers to Merrill (NY), for the account of one or more U.S. Underwriters, such
number of shares of Common Stock purchased pursuant to the International
Purchase Agreement and remaining unsold.
Unless otherwise determined by mutual agreement of Merrill (NY) and MLI,
the price of any share of Common Stock so purchased or sold shall be the initial
public offering price per share less the selling concession per share, as set
forth in the U.S. Prospectus. Settlement between any of Merrill (NY) and MLI
with respect to shares of Common Stock transferred hereunder at least three
business days prior to the Closing Time shall be made at the Closing Time and,
in the case of purchases and sales made thereafter, as promptly as practicable
but in no event later than three business days after the transfer date.
Certificates representing the shares of Common Stock so purchased shall be
delivered on or about the respective settlement dates. The liability for payment
to the Company of the purchase price of the shares of Common Stock being
purchased by the U.S. Underwriters and the International Managers under the
Purchase Agreements shall not be affected by the provisions of this Agreement.
Each U.S. Underwriter, acting through Merrill (NY), agrees that, except for
purchases and sales pursuant to this Agreement and stabilization transactions
contemplated hereunder, it will offer, sell or deliver shares of Common Stock,
directly or indirectly, only to United States Persons or Canadian Persons (as
such terms are defined below) and to persons it believes intend to reoffer,
resell or deliver directly or indirectly the same to a United States Person or a
Canadian Person, and any bank, broker or dealer to which such U.S. Underwriter
may sell shares of Common Stock will agree that it will only offer, resell or
deliver shares of Common Stock, directly or indirectly, to United States Persons
or Canadian Persons or at a reallowance only to other banks, brokers or dealers
who so agree.
Each International Manager, acting through MLI, agrees that, except for
purchases and sales pursuant to this Agreement and stabilization transactions
contemplated hereunder, it will not offer, sell or deliver shares of Common
Stock, directly or indirectly, to any United States Person, Canadian Person or
any person it believes may intend to reoffer, resell or deliver directly or
indirectly the same to any United States Person or Canadian Person, and any
bank, broker or dealer to which such International Manager may sell shares of
Common Stock will agree that it will not offer, resell or deliver any shares of
Common Stock, directly or indirectly, to any United States Person or Canadian
Person nor at a reallowance to any bank, broker or dealer which does not so
agree.
As used herein, "United States or Canadian Person" shall mean any national
or resident of the United States or Canada, or any corporation, pension,
profit-sharing or other trust or other entity organized under the laws of the
United States or Canada or of any political subdivision thereof (other than a
branch located outside the United States and Canada of any United States or
Canadian Person), and shall include any United States or Canadian branch of a
3
<PAGE> 4
person who is otherwise not a United States or Canadian Person. "United States"
shall mean the United States of America, its territories, its possessions and
all areas subject to its jurisdiction and "Canada" shall mean Canada and all
areas subject to its jurisdiction.
Section 2. All stabilization transactions shall be conducted at the
direction and subject to the control of Merrill (NY) as hereinafter provided, so
that stabilization activities worldwide shall be coordinated and conducted in
compliance with any applicable laws and regulations. From time to time upon the
request of MLI, Merrill (NY) will inform MLI of stabilization transactions
effected pursuant to this Section.
(a) MLI undertakes, and agrees to cause all International Managers,
respectively, to undertake, that in connection with the distribution of the
shares of Common Stock they will comply: (i) with the applicable rules and
regulations of the United States National Association of Securities
Dealers, Inc.; (ii) with the prohibitions against trading by persons
interested in a distribution; (iii) with the requirements for the filing of
all notices and reports relating thereto set forth in Rule 17a-2 under the
United States Securities Exchange Act of 1934, as amended (the "1934 Act");
and (iv) with the requirements of the Agreement Among International
Managers entered into by the International Managers (the "AAIM"). MLI will
cause each bank, broker or dealer which has agreed to participate or is
participating in the distribution to give a similar undertaking.
(b) Merrill (NY) shall have sole responsibility with respect to any
action which it may take to make over-allotments in arranging for sales of
U.S. Option Securities, International Option Securities and shall have
direction and control of any action taken for stabilizing the market price
of the shares of Common Stock, whether in the United States, or otherwise.
All stabilization transactions shall be for the respective accounts of the
several U.S. Underwriters and International Managers in the proportions set
forth in Section 4 hereof. The net commitment for long or short accounts of
the U.S. Underwriters and the International Managers pursuant to such
over-allotment and stabilization transactions shall not exceed 20% of the
number of Initial U.S. Securities or Initial International Securities, as
the case may be, to be purchased by the U.S. Underwriters or the
International Managers, respectively, as set forth in the U.S. Purchase
Agreement or the International Purchase Agreement, respectively. The
exercise by the U.S. Underwriters and the International Managers of their
respective options to purchase U.S. Option Securities and International
Option Securities shall be at the direction of Merrill (NY).
Section 3. Merrill (NY) shall consult with MLI as to the reservations for
sale of the shares of Common Stock made under the AAIM, and upon reaching
agreement with respect thereto, MLI shall reserve for sale and sell to the U.S.
Underwriters, dealers, banks, brokers and others indicated by Merrill (NY), for
the account of the respective International Managers,
4
<PAGE> 5
International Securities to be purchased by such International Managers, in the
manner and at the price contemplated by Section 1 hereof.
Section 4. Merrill (NY) and MLI shall agree as to the expenses that will
constitute expenses of the underwriting and distribution of the shares of Common
Stock common to the U.S. Underwriters and the International Managers, which
expenses, as well as any stabilizing profits or losses, shall be allocated among
the U.S. Underwriters and the International Managers in the same proportion as
the number of shares of Common Stock purchased under the U.S. Purchase Agreement
and the number of shares of Common Stock purchased under the International
Purchase Agreement bear to the aggregate number of shares of Common Stock
purchased under the Purchase Agreements. Except with respect to such common
expenses, the U.S. Underwriters will pay the aggregate expenses incurred in
connection with the purchase, carrying or sale of the shares of Common Stock
purchased by the U.S. Underwriters from the Company and the International
Managers will pay the aggregate expenses incurred in connection with the
purchase, carrying or sale of the shares of Common Stock purchased by the
International Managers from the Company.
Section 5. Merrill (NY) and MLI agree that:
(a) if the Closing Time is not on the day provided in the Purchase
Agreements, Merrill (NY) and MLI will mutually agree on a postponed date
within the time permitted by the Purchase Agreements and the settlement
dates herein provided shall be adjusted accordingly;
(b) changes in the public offering price or in the concession and
reallowance to banks, brokers or dealers will be made only after
consultation, but in accordance with the directions of Merrill (NY), during
the consultation period specified in the first sentence of Section 1
hereof;
(c) Merrill (NY) and MLI will each keep the others fully informed of
the progress of the offering and distribution of the ADSs and shares of
Common Stock, as the case may be;
(d) MLI agrees that it will cause the termination of the AAIM at such
time as Merrill (NY) shall determine; and
(e) advertising with respect to the offering shall be as mutually
agreed upon by Merrill (NY) and MLI.
Section 6. This Agreement may be amended prior to the Closing Time by
mutual written consent of the parties hereto.
5
<PAGE> 6
Section 7. This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
Section 8. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAW OF THE STATE OF NEW YORK.
Section 9. Any legal suit, action or proceeding arising out of or relating
to this Agreement, any of the transactions contemplated hereby or any document
referred to herein may be instituted in any state or federal court of competent
jurisdiction located in the Borough of Manhattan of The City of New York, New
York, and by execution and delivery of this Agreement, each of the U.S.
Underwriters and each of the International Managers accepts for itself and in
connection with its properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any
final judgment rendered thereby in connection with this Agreement from which no
appeal has been taken or is available. Each of the U.S. Underwriters and each of
the International Managers irrevocably waives, to the fullest extent permitted
by applicable law, any objection, including, without limitation, any objection
of the laying of venue or based upon the grounds of forum non conveniens, which
it may now or hereafter have to the bringing of any such action or proceeding in
any jurisdiction set forth above. Nothing herein shall limit the right of
Merrill (NY) or MLI to bring proceedings against any U.S. Underwriter or any
International Manager in the courts of any other competent jurisdiction.
6
<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
Acting on behalf of themselves and the other U.S. Underwriters:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
By Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By
--------------------------------------
Name:
Title:
Acting on behalf of itself and the other International Managers:
MERRILL LYNCH INTERNATIONAL
By Merrill Lynch International
By
--------------------------------------
Name:
Title:
7
<PAGE> 1
EXHIBIT 5.1
FEBRUARY 9, 2000
PETS.COM, INC.
435 BRANNAN STREET
SAN FRANCISCO, CA 94107
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-92433)
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-92433) (the "Registration Statement") filed by you, Pets.com, Inc., with the
Securities and Exchange Commission on December 9, 1999, and as amended by
Amendment No. 1 filed on January 21, 2000 and Amendment No. 2 filed on February
9, 2000, in connection with the registration under the Securities Act of 1933,
as amended, of shares of your Common Stock (the "Shares"). As your legal counsel
in connection with this transaction, we have examined the proceedings taken and
we are familiar with the proceedings proposed to be taken by you in connection
with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by you prior to the issuance of the Shares and upon effectiveness
of the Registration Statement, the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable. We are admitted to practice law only in the State
of California and accordingly, we express no opinion as to any matter relating
to the laws of any jurisdiction other than the laws of the State of California,
the General Corporation Law of the State of Delaware, and the federal securities
law of the United States.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting apart thereof, and
in any amendment thereto.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE> 1
EXHIBIT 10.19
SOFTWARE LICENSE AND SERVICES AGREEMENT
This Software License and Services Agreement ("Agreement") is made and entered
into as of this 21st day of May, 1999, between BroadVision, Inc.
("BroadVision") and
Company Pets.com
-------------------------------------
("Customer")
Address 5903 Christie Ave.
-------------------------------------
Emeryville, CA 94608
-------------------------------------
In consideration of the mutual covenants and conditions contained in this
Agreement, the parties agree as stated herein. The following attachments,
required when applicable, are also part of this Agreement:
A. Current Licensing Practices
B. Required Provisions of Sublicenses
C. Professional Services Terms & Conditions
1. LICENSE.
A. BroadVision hereby grants to Customer a perpetual (unless terminated as
set forth herein), [*] , subject to the terms and conditions of this
Agreement, to use the object code for the Software. For the purpose of
this Agreement, "Software" shall mean all versions, including current,
previous, and subsequent versions, of all software products, together with
operating instructions, user manuals, training material, and other
documentation as may, in BroadVision's sole discretion, be supplied to
Customer.
B. Customer may use the Software in accordance with [*] in force at the time
of delivery of the applicable Software products. BroadVision's current
licensing practices are [*] A.
C. Customer [*] (a) [*] the Software; (b) electronically transmit the
Software over a network except as necessary for Customer's licensed use of
the Software; (c) use run-time versions of third-party products embedded
in the Software, if any, for any use other than the intended use of the
Software, (d) modify, disassemble, decompile, or reverse engineer the
Software; (e) transfer possession of any copy of the Software to another
party, except as expressly permitted herein; or (f) use the Software in
any way not expressly provided for in this Agreement. There are no implied
licenses. Customer agrees not to exceed the scope of the licenses granted
herein.
D. BroadVision also grants to Customer the right to grant nontransferable
sublicenses to portions of the Software, where such grants are explicitly
permitted by BroadVision's licensing practices. Customer shall require
each such sublicensee, before it may use or install the sublicensed
Software, to execute a written license agreement containing, at a minimum,
the required provisions specified in Attachment B. Customer shall
indemnify BroadVision for all losses, costs, damages, expenses, and
liabilities caused by Customer's failure to include required terms in its
sublicense agreements with its sublicensees.
2. PAYMENT, PRICES.
A. Invoices shall be issued upon delivery of the products or services, unless
specified herein to the contrary, and shall be due and payable in United
States currency upon receipt by Customer. Payment shall be overdue thirty
(30) days after the delivery date specified on the invoice. Overdue
payments shall be subject to a finance charge of one and one-half percent
(1 1/2%) for each month or fraction thereof that the invoice is overdue,
or the highest interest rate permitted by applicable law, whichever is
lower. BroadVision shall also be reimbursed for its collection costs in
the event of late payments, including reasonable attorney's fees.
B. Software will be shipped FOB BroadVision's facility in Redwood City,
California, U.S.A., by commercial surface transportation. Transportation
charges in excess of such rates will be billed to Customer. Software shall
be deemed accepted upon delivery.
C. The prices stated in BroadVision quotations are exclusive of any federal,
state, municipal, value-added, foreign withholding or other governmental
taxes, duties, fees, excises, or tariffs now or hereafter imposed on the
production, storage, licensing, sale, transportation, import, export, or
use of the Software or any improvements, alterations, or amendments to the
Software. Customer shall be responsible for, and if necessary reimburse,
BroadVision for all such taxes, duties, fees, excises, or tariffs, except
for governmental or local taxes imposed on BroadVision's corporate net
income.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
SLSA 1/98 BroadVision, Inc. Page 1 of 5
<PAGE> 2
3. SOFTWARE MAINTENANCE.
A. BroadVision agrees to provide Customer with software maintenance subject
to the following provisions and conditions:
i. At Customer's request, BroadVision shall provide software maintenance
at prices to be quoted to Customer. Software maintenance shall include
(i) telephone and electronic mail support provided during BroadVision's
normal working hours, and (ii) standard releases containing
improvements or modifications to the Software, where such improvements
or modifications are not priced as separate new products or options
("Standard Release").
ii. BroadVision shall provide software maintenance for any Standard
Release until 180 days after shipment of the subsequent Standard
Release.
iii. Customer shall designate one or, with BroadVision's prior written
approval, more than one Support Contact Person, who shall be
responsible for communicating support issues to BroadVision. Customer
agrees to provide BroadVision with timely written notification
containing all details of software problems necessary for BroadVision
to diagnose such problems. Customer agrees to cooperate fully in
providing BroadVision with Customer's source code, in machine-readable
form, and other materials necessary to reproduce a reported software
problem. Subject to Customer's security requirements, Customer agrees
to provide BroadVision reasonable direct or remote access and test time
on Customer's BroadVision system, for the purpose of diagnosing
reported software problems. If BroadVision provides on-site services at
Customer's request in connection with software maintenance, Customer
shall reimburse BroadVision for all travel and other reasonable
out-of-pocket expenses incurred with respect to such services.
iv. Software maintenance may also include any patch releases ("Patch
Releases") that BroadVision, in its sole discretion, makes available.
Patch Releases are intended to address material deviations between the
Software and its published specifications until a Standard Release can
be made available. Customer may install Patch Releases at its option.
v. BroadVision shall not be responsible for maintaining Software that
fails to comply with its published specifications if such
non-compliance is the result of modification of the Software by
Customer or third parties. If BroadVision expends its time on a
noncompliance found to be the result of any of the preceding, Customer
shall pay BroadVision for such time at BroadVision's then-current
hourly consulting rate.
B. Unless terminated by either party with at least ninety days notice,
software maintenance will automatically be renewed for successive one-year
periods at BroadVision's then-current prices for software maintenance. In
the event of termination for Customer's breach or Customer's convenience,
all maintenance fees shall be immediately due and payable without notice;
in the event of termination for any other reason, Customer shall be
entitled to a refund of maintenance fees already paid, prorated for the
unused portion of such fees.
C. Annual software maintenance fees are due and payable in advance; in all
other respects payments are subject to the terms and conditions of the
Agreement.
D. If Customer initially declines software maintenance and then subsequently
elects to commence maintenance, or if maintenance for an item of Software
is discontinued at Customer's request and then subsequently renewed,
Customer shall pay the maintenance fees that would have been due for the
period during which maintenance was not provided.
4. TITLE TO SOFTWARE.
A. Customer shall include BroadVision's copyright or proprietary rights
notice on any copies of the Software or associated documentation,
including copyright or proprietary rights notices of third parties that
are included on media or in documentation provided by BroadVision.
Customer acknowledges that the Software is the property of BroadVision or
its licensors.
B. Unless otherwise requested by BroadVision, Customer shall ensure that the
phrase, "Personalized by BroadVision One-To-One" shall appear prominently
on the logon screen, splash screen, or other first view of the Customer's
application seen by consumers or other end-users when they enter such
application. The above phrase shall be a hypertext link to a URL specified
by BroadVision. Customer's use of the phrase
SLSA 1/98 BroadVision, Inc. Page 2 of 5
<PAGE> 3
shall be in accordance with BroadVision's guidelines for use of the mark.
5. WARRANTY.
BroadVision warrants that the Software will conform in all material respects
to its written specifications when installed and for 90 days thereafter. For
purposes of this Agreement, the sole source of such specifications shall be
BroadVision's written user documentation. Customer will notify BroadVision
within 10 days after the expiration of the warranty period of any
nonconformity. Where a material nonconformity exists within the warranty
period, and proper notice has been given to BroadVision, BroadVision will, as
its sole and exclusive liability to Customer, use due diligence to correct
the nonconformity and provide Customer with one copy of any such corrected
version of the Software, or, if BroadVision is unable to correct such
nonconformances within a reasonable period of time, refund all license fees
paid to it for the Software, or the most recent software maintenance fee paid
for the Software, if the nonconformity relates to a Standard Release
delivered pursuant to Section 3 herein. THIS WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES AND CONDITIONS, EXPRESSED OR IMPLIED, AND BROADVISION EXPRESSLY
DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, TITLE, OR NONINFRINGEMENT.
6. LIMITATION OF LIABILITY.
BroadVision's liability to Customer under this Agreement or for any other
reason relating to the products and services provided under this Agreement,
including claims for contribution or indemnity, shall be limited to the
amount paid to BroadVision under this Agreement. NOTWITHSTANDING THE FAILURE
OF ESSENTIAL PURPOSE OF ANY REMEDY UNDER THIS AGREEMENT, THE PARTIES AGREE
THAT IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS OR LOSS OF USE, PROVIDED THAT
FOR PURPOSES OF THIS SECTION 6 LOST REVENUES RELATED TO UNAUTHORIZED USE OR
DISCLOSURE OF THE SOFTWARE SHALL BE DEEMED A DIRECT DAMAGE.
7. INTELLECTUAL PROPERTY RIGHTS INDEMNITY.
BroadVision will defend and hold harmless Customer against any claim that the
Software constitutes infringement of a patent, copyright, trademark, or trade
secret. BroadVision shall also indemnify Customer for any reasonable expense
incurred by Customer in connection with the foregoing. BroadVision's
obligations under this section are conditioned upon BroadVision having sole
control of any such action, and upon Customer notifying BroadVision
immediately in writing of the claim and giving authority, information, and
assistance necessary to settle or defend such claim. If the use of the
Software infringes or is enjoined, or BroadVision believes it is likely to
infringe or be enjoined, BroadVision may, at its sole option, (i) procure for
Customer the right to continue use of the licensed Software as furnished;
(ii) replace the licensed Software; (iii) modify the licensed Software to
make it non-infringing, provided that the Software still substantially
conforms to the applicable specifications; or (iv) if BroadVision, after
using all commercially reasonable efforts, is unable to accomplish the
foregoing remedies, terminate the license and refund the license fee for the
Software, less a proportional adjustment for the time the Software was used
by Customer, equal to the ratio of the time elapsed since the delivery date
to five (5) years. The indemnity provided herein shall not apply if the
alleged infringement arises from: (a) the use of other than a currently
supported, unaltered release of the licensed Software; (b) the use of
Software that has been modified or merged with other programs by Customer; or
(c) the use of the licensed Software in combination with software or hardware
not provided under this Agreement. The foregoing states BroadVision's sole
and exclusive liability for patent, copyright, or other proprietary rights
infringement.
8. CONFIDENTIALITY OF SOFTWARE AND DOCUMENTS.
A. Customer shall not reproduce, duplicate, copy, sell, or otherwise
disclose, or disseminate the Software, including operating instructions,
user manuals, and training materials, in any medium except as authorized
herein. Customer may make copies of the Software, in machine readable
form, only as is reasonably necessary for archival and backup purposes.
B. Customer expressly undertakes, using reasonable efforts not less than it
exercises for its own confidential materials, to retain in confidence, and
to require its employees or consultants to retain the Software in
confidence, and will make no use of such information, except under the
terms and during the existence of this Agreement, and only to the extent
that such use is necessary to Customer's employees or consultants in the
course of their employment.
SLSA 1/98 BroadVision, Inc. Page 3 of 5
<PAGE> 4
C. The provisions of this section shall survive the termination of this
Agreement for a period of five (5) years.
D. Customer shall not release the results of any benchmark of the Software,
or of any third party products embedded in the Software, without
BroadVision's prior written approval.
9. AUDIT RIGHTS.
At BroadVision's request, but in no event more than twice annually, Customer
shall provide BroadVision with a report detailing its use of the Software. No
more than once annually, BroadVision may audit Customer's records to ensure
that license and other fees have been properly paid in compliance with this
Agreement. Any such audit will be conducted during regular business hours at
Customer's offices and shall not interfere unreasonably with Customer's
business activities. If an audit reveals that Customer has underpaid its
total fees by more than five percent (5%), then Customer shall pay
BroadVision's reasonable costs of conducting the audit, in addition to the
underpaid amount.
10. TERM/TERMINATION.
This Agreement is effective on the earlier of (i) the date of shipment of the
Software or (ii) the date set forth above, and continues until terminated as
provided herein, or by agreement of both parties. BroadVision may terminate
this Agreement upon: (a) any material breach of this Agreement by Customer
that is not cured within 30 days following written notice thereof; or (b)
failure by Customer to pay license fees for Software under the payment terms
specified in this Agreement or as stated on BroadVision's invoice for such
Software, which failure remains uncured after thirty (30) days written notice
thereof. Upon termination of this Agreement for any of the above reasons, all
licenses granted hereunder terminate and Customer will immediately destroy
the Software and all copies in any form. Upon termination for any other
reason, Customer may continue to use the Software, provided that Sections 1,
2 (to the extent that any amounts are owed to BroadVision as of the
termination date), 4, 6, 7, 8, 9, and 11 shall survive the termination of
this Agreement, and BroadVision may terminate Customer's use of the Software
upon a material breach of any of the surviving sections.
11. GENERAL.
A. WAIVER/AMENDMENT. No waiver, amendment, or modification of any provision
of this Agreement shall be effective unless in writing and signed by the
party against whom such waiver, amendment, or modification is sought to be
enforced. No failure or delay by either party in exercising any right,
power or remedy under this Agreement, except as specifically provided
herein, shall be deemed as a waiver of any such right, power, or remedy.
B. ASSIGNMENT. Either party may assign this Agreement to an entity acquiring
substantially all of its assets or merging with it, provided that such
assignee agree in writing to assume all obligations under this Agreement.
Except as set forth above, neither party may assign any of its rights or
delegate any of its obligations under this Agreement to any third party
without the express written consent of the other. Any attempted assignment
in violation of the foregoing shall be void and of no effect. Subject to
the above, this Agreement shall be binding upon and inure to the benefit
of the successors and assigns of the parties hereto.
C. DISPUTES. The rights of the parties hereunder shall be governed by the
laws of the State of California without giving effect to principles of
conflicts of laws. Any suits brought hereunder may be brought in the
federal or state courts in Santa Clara County, California, and Customer
submits to the jurisdiction thereof. The parties expressly exclude the
application of the 1980 United Nations Convention on Contracts for the
International Sale of Goods, if applicable.
Customer acknowledges that the Software contains trade secrets, the
disclosure of which would cause substantial harm to BroadVision that could
not be remedied by the payment of damages alone. Accordingly, BroadVision
will be entitled to preliminary and permanent injunctive relief and other
equitable relief for any breach of BroadVision's intellectual property
rights in the Software.
D. SEVERABILITY. If any provision of this Agreement shall be held by a court
of competent jurisdiction to be contrary to law, the remaining provisions
of this Agreement shall remain in full force and effect.
E. EXPORT. Customer acknowledges that the laws and regulations of the United
States restrict the export of the Software. Customer agrees that it will
not export or re-export the Software in any form without first obtaining
the appropriate United States and foreign government approvals.
SLSA 1/98 BroadVision, Inc. Page 4 of 5
<PAGE> 5
F. NOTICE. Any notice, consent, or other communication hereunder shall be in
writing, and shall be given personally, by confirmed fax or express
delivery to either party at their respective addresses:
(i) to BroadVision at:
BroadVision, Inc.
585 Broadway
Redwood City, CA 94063, USA
Attn: Chief Financial Officer
(ii) to Customer at:
Pets.com
435 Brannan St.
San Francisco, CA
Attn: Julie Wainwright
or such other address as may be designated by written notice of either
party. Notices shall be deemed given when delivered or transmitted, or
seven days after deposit in the mail.
G. INDEPENDENT CONTRACTORS. The parties' relationship shall be solely that of
independent contractor and nothing contained in this Agreement shall be
construed to make either party an agent, partner, joint venturer, or
representative of the other for any purpose.
H. FORCE MAJEURE. If the performance of this Agreement, or any obligation
hereunder, except the making of payments, is prevented, restricted, or
interfered with by reason of any act or condition beyond the reasonable
control of the affected party, the party so affected will be excused from
performance to the extent of such prevention, restriction, or
interference.
I. ENTIRE AGREEMENT. This Agreement, including all Attachments hereto,
constitutes the complete and exclusive agreement between the parties with
respect to the subject matter hereof and supersedes all proposals, oral,
or written, all previous negotiations, and all other communications
between the parties with respect to the subject matter hereof. The terms
of this Agreement shall prevail notwithstanding any different,
conflicting, or additional terms that may appear in any purchase order or
other Customer document. All products and services delivered by
BroadVision to Customer are subject to the terms of this Agreement, unless
specifically addressed in a separate agreement.
AGREED TO BY: BROADVISION, INC.
/s/ Randall Bolten
--------------------------------
Signature
Randall Bolten
--------------------------------
Printed Name
CFO
--------------------------------
Title
CUSTOMER: Pets.com
--------------------------------
Company Name
/s/ Paul Melmon
--------------------------------
Signature
Paul Melmon
--------------------------------
Printed Name
Vice President, Engineering
--------------------------------
Title
SLSA 1/98 BroadVision, Inc. Page 5 of 5
<PAGE> 6
Attachments A, B and C do not exist.
<PAGE> 1
EXHIBIT 10.21
QUALITY SOFTWARE SYSTEMS, INC.
LICENSE AND INTEGRATION AGREEMENT
This AGREEMENT is made and entered into as of the 25th day of June 1999 by and
between Quality Software Systems Inc., a New Jersey corporation with offices at
200 Centennial Avenue, Piscataway, New Jersey 08854 ("QSSI") and the Client
identified below ("Client").
- ------------------------------------------- ------------------------------------
Client: Pets.com Inc. City: San Francisco
- ------------------------------------------- ------------------------------------
Address: 435 Brannan St., Suite 100 State, Zip: CA 94107
- ------------------------------------------- ------------------------------------
TERMS AND CONDITIONS
1. DEFINITIONS
1.1 ACCEPTANCE "Acceptance" of a deliverable means completion of the process set
forth in Paragraph 7.1 for Developed Software and Paragraph 7.2 for other
deliverables.
1.2 ACCEPTANCE TEST "Acceptance Test" means the procedure set forth in Paragraph
7.1 hereto.
1.3 BASE SYSTEM Unmodified version of the current release of PowerHouse/WMS as
identified by the documentation provided with each release.
1.4 CLIENT "Client" means the entity identified on the cover page to this
Agreement, including any permitted successor or assignee of Client.
1.5 CONFIGURATION The use of tables and other user executable program options,
by the Client or QSSI, in order to customize the Developed Software.
1.6 QSSI SERVICES "QSSI Services" means all of the professional services
rendered to Client by QSSI pursuant to this Agreement.
1.7 DEVELOPED SOFTWARE "Developed Software" shall mean all software written by
(i) QSSI hereunder, or (ii) by Client under the direction and direct supervision
of QSSI and as to which QSSI has certified in writing that it meets QSSI's
programming standards. Developed Software shall also include QSSI proprietary
software which has previously been developed by QSSI and which is delivered to
Client.
1.8 IMPLEMENTATION SCHEDULE "Implementation Schedule" means the schedule set
forth on Schedule A, or any subsequently prepared schedules superseding Schedule
A.
1.9 MAINTENANCE "Maintenance" consists of the ongoing Developed Software support
services set forth in Schedule C. The Maintenance set forth in Schedule C will
be provided pursuant to a separate executed Maintenance and/or Software Support
agreement between the Parties.
<PAGE> 2
1.10 MODIFICATIONS All software revisions made to the Base System written by (i)
QSSI hereunder, or (ii) by Client under the direction and direct supervision of
QSSI and as to which QSSI has certified in writing that it meets QSSI's
programming standards.
1.11 PARTY The term "Party" shall mean Pets.com or QSSI, and the term "Parties"
shall mean Pets.com and QSSI.
1.12 PHASE "Phase" means each summarized section of Schedule A. Any additional
modifications requested after the initial design will each be treated as a
separate Phase.
1.13 REQUIREMENTS DEFINITION STUDY "Requirements Definition Study" or "RDS"
means the mutually agreed system design changes to the Base System, as such the
RDS may be revised pursuant to Paragraph 6.1. Upon Acceptance of the RDS by
Client, the RDS will supersede all other requirements and functionality
documentation for all purposes hereunder.
1.14 SHELF VERSION "Shelf Version" means the version of each Phase of the
Developed Software which is Accepted by Client pursuant to Paragraph 7.1.
1.15 SOFTWARE SYSTEM "Software System" means the set of computer programs and
documentation developed by QSSI, the Client, and/or third parties in connection
with the entire warehouse management implementation project. This system can
include the Developed Software, Third Party Software, interfaces, and
integration.
1.16 THIRD PARTY SOFTWARE "Third Party Software" is all software which is
incorporated in, makes up or is to be accessed by the Software System which is
not Developed Software and is identified on Schedule B.
2. SOFTWARE SYSTEM
2.1 Subject to the terms and conditions of this Agreement, QSSI agrees to
implement the Software System in accordance with the Implementation Schedule and
RDS, with the reasonable assistance of Client personnel and resources.
3. CONSULTING SERVICES
3.1 QSSI shall supply Client with any supporting documentation which QSSI has
developed for the software system.
4. LICENSE AND PROPRIETARY RIGHTS
4.1 GRANT OF LICENSE Subject to the terms and conditions of the Agreement, QSSI
hereby grants to Client a perpetual, irrevocable, non-exclusive and
non-transferable (except as set forth in Paragraph 12.5) license (the "License")
to use and modify the Developed Software and other QSSI developed deliverables
which License Client hereby accepts. Any additional restrictions or limitations
are set forth in Schedule D.
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<PAGE> 3
4.1B EXCLUSIVITY For a period of three (3) years from the effective date of this
Agreement, (i) QSSI shall not grant to any Competitor of Client any right to use
any modification or integration software developed by QSSI for Client hereunder,
or any portion thereof, without prior written consent of Client, (ii) QSSI shall
not access or refer to any modification or integration software developed by
QSSI for Client hereunder, or any portion thereof, when working with any
competitor of Client and (iii) QSSI shall not provide to any Competitor of
Client a more favorable price or delivery for similar modifications of the Base
System than QSSI provides to Client hereunder. As used, herein, "Competitor of
Client" means any web site or other Online service or entity that markets,
sells, or allows end users to purchase pet care products, including without
limitation food, health care products, toys, cages, and leashes for dogs, cats,
fish, birds, ferrets, reptiles and other animals.
4.2 PROPRIETARY RIGHTS All financial data and all information related to
Client's organizational structure ("Client Data") are and shall remain the
exclusive property of client, and shall be kept confidential by QSSI pursuant to
the provisions of Paragraphs 4.3 and 4.4. QSSI retains title to the Developed
Software and related documentation and other deliverables developed hereunder,
including all copies thereof and all rights to patents, copyrights, trademarks,
trade secrets and other intellectual property rights inherent therein and
appurtenant thereto. Except as set forth herein, Client shall not, by virtue of
this Agreement or otherwise, acquire any proprietary rights whatsoever in the
Developed Software or any other deliverables developed hereunder, which shall be
the sole and exclusive property of QSSI. No identifying marks, copyright or
proprietary right notices may be deleted from any copy of the Developed Software
provided to or made by Client.
4.3 CONFIDENTIALITY Client shall only permit access to the Developed Software by
its employees who have a need to know in connection with the license rights
granted under this Agreement. Client shall not transfer, publish, disclose,
display or otherwise make available any portion of the Developed Software to
others. The Parties acknowledge that in the course of performing their
responsibilities under this Agreement, they each may be exposed to or acquire
information that is clearly identified as proprietary to or confidential to the
other Party. The Parties agree to hold such information in strict confidence and
not to copy, reproduce, sell, assign, license, market, transfer, give or
otherwise disclose such information to third parties or to use such information
for any purposes whatsoever, without the express written permission of the other
Party, other than for the performance of obligations, or exercise of rights
hereunder, and to advise each of their employees, agents and representatives of
their obligations to keep such information confidential. All such confidential
and proprietary information, Client data, finances, business plans and computer
software are hereinafter collectively referred to as "Confidential Information."
The Parties shall use their reasonable efforts to assist each other in
identifying and preventing any unauthorized use or disclosure of any
Confidential Information. Without limitations of the foregoing, the Parties
shall advise each other immediately in the event that either learns or has
reason to believe that any person who has had access to Confidential Information
has violated or intends to violate the terms of this Agreement, and will
reasonably cooperate in seeking injunctive relief against any such person. Each
party shall be entitled to disclose the existence of this Agreement but agrees
that the terms and conditions of this Agreement shall be treated as confidential
information and shall not be disclosed to any third
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<PAGE> 4
party; provided, however, that each party may disclose the terms and conditions
of this Agreement; (i) as required by any court or other government body; (ii)
as otherwise required by law; (iii) to legal counsel of the parties; (iv) to
accountants, banks and financing sources and their advisors that are subject to
confidentiality provisions at least as protective of the disclosing party's
confidential information as those set forth herein; or (v) in connection with
the enforcement of this Agreement or rights under the Agreement.
4.4 NON-CONFIDENTIAL INFORMATION Notwithstanding the obligations set forth in
Paragraph 4.3, the confidentiality obligations of the Parties shall not extend
to information that:
a. is, as of the time of its disclosure, or thereafter becomes part
of the public domain through a source other than the receiving
Party;
b. was known to the receiving Party as of the time of its
disclosure;
c. is independently developed by the receiving Party;
d. is subsequently learned from a third party not under a
confidentiality obligation to the providing party; or,
e. is required to be disclosed pursuant to court order or
government authority, whereupon the receiving Party shall
provide notice to the other Party prior to such disclosure.
5.5 FEES AND PAYMENT
5.1 FEES The fees for QSSI Services are set forth in Schedule E. In the event
the project is successfully launched according to the requirements set forth in
the RDS on or before August 5, 1999, Client [*] to the greater of [*] of the [*]
provided, however, [*] shall not exceed [*]. In the event the project is not
successfully launched according to the requirements set forth in the RDS until
after August 5, 1999, QSSI shall [*] and the [*] QSSI shall be [*] by an [*] of
the [*] that would have [*] the project were [*], for each day the project
launch is late up to a maximum of 7 days provided, however, that the penalty
does not exceed [*]. QSSI shall not incur [*] or any reduced payment if delays
are caused by Client, any third party vendor contracted by Client or act of God
that befalls on Client. QSSI shall not receive the bonus but also shall not
incur any reduced payments if the project launch is delayed by an act of God
that befalls on QSSI.
5.2 PAYMENT Client shall pay QSSI in accordance with the Fee and Payment
Schedule set forth in Schedule E. All invoices issued by QSSI hereunder are due
upon receipt of invoice. Payments not received within thirty (30) days or their
due date shall be subject to late charges of one and one-half percent (1-1/2%)
per month, and having remained outstanding for sixty (60) days, shall give rise
to a material breach of this Agreement justifying the suspension of the
performance of services and/or immediate termination of this Agreement by QSSI.
Client also agrees to pay all reasonable expenses incurred by QSSI in enforcing
he provisions of this Agreement. No failure by QSSI to request any such payment
or to demand any such performance shall be deemed a waiver by QSSI of Client's
obligations hereunder or a waiver of QSSI's right to terminate this Agreement.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 5
5.3 PROPOSALS FOR SERVICE Proposals for services to be rendered under this
Agreement may be in writing. No estimates are guaranteed in any way or to any
extent by QSSI and do not change this Agreement to a fixed price contract. This
section is not intended to include proposals for hardware or license fees.
6. REVISIONS
6.1 DURING PREPARATION OF REQUIREMENTS DEFINITION STUDY ("RDS") During the
preparation of the RDS, QSSI and Client shall review in greater detail Client's
requirements for the Software System. Where client requests system functions or
performance which vary from that set forth in the Base System, QSSI shall
provide a written estimate of the impact on resources, time duration and costs
which would be caused by implementation of any Modifications. QSSI and Client
will review all such estimates during the preparation and presentation of the
RDS. It is understood that such Modifications may increase or decrease required
resources, time duration and costs. If Client fails to approve the RDS, QSSI or
Client may terminate this Agreement upon thirty (30) days prior written notice
and Client shall pay QSSI services to the date of termination at QSSI's standard
time and materials rates, and the parties shall have no further performance
obligations hereunder.
6.2 AFTER APPROVAL OF RDS After approval of the RDS and before Acceptance, any
system functions or performance which vary in scope from those set forth in the
RDS and which are requested by Client shall be reviewed by QSSI. Within twenty
(5) days of receipt of such request, QSSI, with the cooperation of Client where
reasonably required, shall provide a written estimate of the impact on
resources, time duration and costs, which would be caused by the implementation
of the revision. If the Client accepts the revision, then the resources, time
duration and costs shall be modified as set forth in QSSI's estimate. If the
client fails to Accept the revision, the scope of work as set forth in the RDS
shall remain unchanged and QSSI shall have no further responsibility with
respect to the proposed change.
7. ACCEPTANCE AND ACCEPTANCE TESTING
7.1 ACCEPTANCE OF DEVELOPED SOFTWARE Acceptance of each Phase of the Developed
Software identified in Schedule A may occur upon the completion of the
Acceptance Test performed by the Client. The Acceptance Test shall be to
determine whether the Developed Software operates in accordance with the
specifications as described in the RDS, and shall be conducted as follows: (a)
upon receipt of notice from QSSI that the applicable Phase of the Developed
Software has been developed and installed and is available for Acceptance
Testing, Client shall conduct the Acceptance Test within four (4) calendar
weeks; (b) upon the expiration of such test period, Client shall either certify
that the Phase is accepted or deliver to QSSI a written description of specific
claimed defects in the Developed Software which defects shall be limited to
material failures to conform to the RDS; (c) upon receipt of such written
description. QSSI shall use all reasonable efforts to promptly remedy those
defects that are bona fide, whereupon the Acceptance Test shall be run as is
necessary for determining whether all such identified defects have been
remedied. The Parties shall repeat this cycle until all material defects are
corrected. Certification by Client that the Phase of the Developed Software is
accepted, or in the absence of
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<PAGE> 6
such certification, the failure of Client to provide QSSI with a written
description of defects during the review period shall constitute completion of
the Acceptance Test and Acceptance of the Phase of the Developed Software.
Acceptance, whether or not notice has been given shall also be deemed to have
occurred if Client places in productive use, any portion of the Phase of
Developed Software for a period of 14 days. In the event first productive use of
the Developed Software occurs when it is not yet integrated with the Client's
web site system, an additional 14 days of productive use will be extended for
purposes of testing that portion of the system pertaining to the integration
interfaces with the Client's web site system. Acceptance shall be deemed to have
occurred within 60 days after the Developed Software is first placed in
productive use regardless if, through no fault of QSSI, integration with the web
site software has not been accomplished. The formal date of acceptance for
purposes of the warranty as set forth in section 8, shall be retroactive to when
the Developed Software was either certified as accepted by the Client or first
placed in productive use. The version of the Phase so Accepted shall be deemed
the Shelf version of the accepted Phase. Client and QSSI shall each maintain
copies of the Shelf Version in addition to any modified versions that may occur
over time and the Shelf Version shall not be accessed, altered, modified or
otherwise used. In the event that a Phase is not Accepted Pursuant to his
Paragraph, Client's sole remedy shall be to return the Phase to QSSI, along with
the applicable documentation and all copies thereof, and receive a refund of
fees paid to QSSI, for that Phase. This procedure is the exclusive means by
which Client shall be entitled to reject the Developed Software or any Phase
thereof, and the exclusive remedy for any such failure.
7.2 ACCEPTANCE OF OTHER DELIVERABLES For other work product deliverables
requiring Acceptance by Client, Client shall, within twenty (20) days of receipt
of QSSI's statement that the deliverable is complete, review the deliverable and
Accept it or notify QSSI in writing of non-Acceptance, documenting in reasonable
detail any and all material defects in the deliverable. QSSI shall, upon receipt
of such notice, use all reasonable efforts to promptly correct any such material
failures and shall notify Client of its completion of the correction. Client
shall, after receipt of said notice, review the corrected deliverable and report
to QSSI. Client shall do so promptly using diligent efforts, but in no event
shall such process exceed ten (10) days. This cycle shall be repeated only as is
reasonably necessary. A deliverable shall be deemed Accepted by Client if
either: (a) Client notifies QSSI in writing of its Acceptance, in which event
the Acceptance date shall then be the date of such notice; (b) Client fails to
notify QSSI in writing within the applicable time period of any material defect
in the deliverable, in which event the Acceptance date shall be the last day of
said period; (c) client places in productive use under the terms defined in
Paragraph 7.1, any portion of the deliverable.
8. WARRANTIES AND DISCLAIMER
8.1 QSSI WARRANTIES QSSI represents and warrants, subject to Paragraph 8.2, that
the Base System shall conform in all material respects to the documentation,
provided, and only to the extent, that Client notifies QSSI in writing within
one year after the date of productive use of any portion of the Base System
("Base System Warranty Period") of any such material non-conformity. QSSI
further represents and warrants, subject to Paragraph 8.2, that the
modifications of each Phase of the Developed Software shall conform in all
material respects to
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<PAGE> 7
the documentation, provided, and only to the extent, that Client notifies QSSI
in writing within one hundred and eighty (180) days after the date of Acceptance
of the Phase of the Developed Software ("Modification Warranty Period") of any
such material non-conformity. In the event that the Shelf Version of the Phase
of the Developed Software is found to be defective in such respects, and that
notice with respect to such defect has been given as provided above, QSSI's sole
obligation under this warranty is to respond promptly and to use all reasonable
efforts to promptly remedy such defect within a reasonable time. The Parties
acknowledge that changes to the production version of the Developed Software are
likely to be initiated by Client. Accordingly QSSI has no obligation under
warranty or otherwise to support the changes made by Client to the Developed
Software. QSSI's obligation under this warranty is solely with respect to the
Shelf Version.
8.2 QSSI WARRANTY PROCEDURE If changes have been made to the Shelf Version
resulting in variation between the shelf version and the production version,
upon receipt of Client's notice under Paragraph 8.1, client shall duplicate the
problem on the Shelf Version of the applicable Phase of the Developed Software
stored at Client's site for such purpose. If the problem cannot be duplicated,
QSSI's warranty shall not apply and QSSI shall have no obligation to remedy the
cited defect. If the problem duplicated on the Shelf Version, QSSI shall use all
reasonable efforts to promptly repair or correct the Shelf version in accordance
with the terms of this agreement. This warranty does not apply to corrections or
remedies for difficulties or defects arising from system changes, improper
configuration or use of the Developed Software, the hardware or software
environment, Third Party Software, or other causes external to the Developed
Software. If Client requests QSSI assistance with any non-warranty problem, QSSI
will provide assistance, subject to QSSI personnel availability, at its then
standard time and material charges.
8.3 THIRD PARTY SOFTWARE The Parties understand that the Software System may
include certain Third Party Software products which may or may not be listed in
Schedule B hereto. It is acknowledged by Client that Client shall be solely
responsible for obtaining licenses to such Third Party Software, if such
software is not already in Client's possession, including the right to
incorporate such software into the Software System. QSSI MAKES NO WARRANTIES OR
REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO THE QUALITY, CAPABILITIES,
OPERATIONS, PERFORMANCE OR SUITABILITY OF THIRD PARTY SOFTWARE, INCLUDING THE
ABILITY TO INTEGRATE WITH MODIFICATIONS TO THE SOFTWARE SYSTEM OR OF NEW
RELEASES TO INTEGRATE WITH THE DEVELOPED SOFTWARE. The quality, capabilities,
operations, performance and suitability of such Third Party Software lies solely
with Client and the vendor or supplier of such Third Party Software.
8.4 Disclaimer of Warranty THE WARRANTY SET FORTH IN PARAGRAPHS 8.1 AND 8.2 IS A
LIMITED WARRANTY AND IS IN LIEU OF ALL OTHER WARRANTIES EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. QSSI DOES NOT WARRANT THAT THE SOFTWARE SYSTEM WILL MEET
CLIENT'S FUTURE OR UNDISCLOSED REQUIREMENTS.
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<PAGE> 8
9. LIMITATION OF LIABILITY
9.1 NEITHER PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER
THIS AGREEMENT OR OTHERWISE FOR CONSEQUENTIAL, EXEMPLARY, SPECIAL, INDIRECT,
INCIDENTAL OR PUNITIVE DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. IN ANY EVENT, THE LIABILITY OF QSSI TO CLIENT FOR
ANY REASON AND UPON ANY CAUSE OF ACTION OR CLAIM SHALL BE LIMITED TO THE AMOUNT
PAID TO QSSI BY CLIENT HEREUNDER WITH RESPECT TO THE PHASE WHICH IS THE SUBJECT
OF THE ACTION OR CLAIM. THIS LIMITATION APPLIES TO ALL CAUSES OF ACTION OR
CLAIMS IN THE AGGREGATE, INCLUDING WITHOUT LIMITATION TO BREACH OF CONTRACT,
BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATIONS, CLAIMS FOR
FAILURE TO EXERCISE DUE CARE IN THE PERFORMANCE OF QSSI SERVICES HEREUNDER AND
OTHER TORTS. BOTH PARTIES UNDERSTAND AND AGREE THAT THE REMEDIES, EXCLUSIONS AND
LIMITATIONS HEREIN ALLOCATE THE RISKS OF PRODUCT AND SERVICE NONCONFORMITY
BETWEEN THE PARTIES AS AUTHORIZED BY THE UNIFORM COMMERCIAL CODE AND/OR OTHER
APPLICABLE LAWS. THE FEES HEREIN REFLECT, AND ARE SET IN RELIANCE UPON, THIS
ALLOCATION OF RISK AND THE EXCLUSION OF CONSEQUENTIAL DAMAGES AND LIMITATIONS OF
LIABILITY SET FORTH IN THIS AGREEMENT.
9.2 PATENT AND COPYRIGHT INDEMNIFICATION If an action is brought against Client
claiming that the Developed Software infringes a patent, copyright or
misappropriated trade secret, QSSI will defend Client and pay any damages
awarded against Client, but only if (a) Client notifies QSSI promptly upon
learning of the claim, (b) QSSI has sole control over the defense of the claim
and any negotiation for its settlement or compromise, (c) Client takes no
action, that in QSSI's judgment, is contrary to QSSI's interest and (d) provides
QSSI with full cooperation at QSSI's expense to investigate and defend against
the claim. If a claim may be or has been asserted, Client will permit QSSI, at
QSSI's option and expense, to procure the right to continue using the Developed
Software, or replace or modify the Developed Software to eliminate the
infringement while providing functionally equivalent performance.
Notwithstanding the above, QSSI will have no duty to indemnify Client if the
patent or copyright infringement results from (a) a correction or modification
of the Developed Software not provided by QSSI, (b) the failure to promptly
install any update which QSSI may have provided to Client, or (c) the
combination of the Developed Software with other software or hardware not
provided by QSSI.
10. OTHER RIGHTS AND OBLIGATIONS
10.1 STATUS REPORTS Client and QSSI shall periodically communicate to the
other's Project Leader the current status of the Party's activities, progress of
the work being performed, and resources expended since the last report (and
cumulative totals to date), identification and impact of actual and anticipated
problem areas, and action being taken or alternative actions to be contemplated
and taken to address such problems. Also, if requested by the other Party,
Client
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<PAGE> 9
and QSSI shall attend a status meeting, no more frequently than once per month,
to review the status of Client and QSSI activities.
10.2 COOPERATION The Parties acknowledge and agree that successful installation
of the Software System in Client's processing environment shall require their
full and mutual good faith cooperation.
10.3 EMPLOYEE SOLICITATION Both Parties agree not to engage in any attempt to
hire, or to engage as independent contractors, the other's employees or
independent contractors for the two years after termination of this contract,
except as may be otherwise agreed to in writing by both Parties.
10.4 CHARGES Client shall pay QSSI or reimburse QSSI for any out-of-pocket
expenses incurred by QSSI in the fulfillment of its obligations under this
Agreement, which include but are not limited to phone calls, one-way billable
travel time, round trip airfare, lodging, meals, local transportation and
communications, round trip travel expense to QSSI's principal place of business
every two (2) weeks and incidentals incurred in connection with work performed
at Client's place of business. QSSI estimates such expenses for this project
will be less than [*]. If the expenses are expected to exceed that amount, QSSI
will provide advance notice to Client.
10.5 TAXES Client shall pay for, or reimburse QSSI for all sales, use, transfer
or other taxes and all duties, whether international, national, state, or local
however designated, which are levied or imposed by reason of the transaction
contemplated hereby; excluding, however, income taxes on QSSI's net income of
profits.
10.6 INDEPENDENT CONTRACTOR QSSI and its personnel, in performance of this
Agreement, are acting as independent contractors and not employees or agents of
Client. QSSI shall be solely responsible for the payment of compensation of QSSI
personnel assigned to perform services hereunder and such personnel are not
entitled to the provisions of any Client employee benefits. QSSI and not Client,
shall be responsible for payment of worker's compensation, disability benefits
and unemployment insurance or for withholding and paying employment taxes for
all QSSI personnel.
11. TERM This Agreement is effective from the date first set forth above and
shall continue in effect until terminated by either party. Completion of any
specific services or Customer's failure to order additional services hereunder
shall not terminate this Agreement. This agreement can be terminated by either
party upon one month's prior written notice to the other party. Any work order
between the parties still in effect upon termination shall survive until
completed according to its terms.
12. MISCELLANEOUS
12.1 DISPUTE RESOLUTION In the event of any dispute with regard to the
interpretation of this Agreement or the respective rights and obligations of the
Parties, other than those for which injunctive relief is appropriate, and as a
condition precedent to any legal action being
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 10
commenced by either Party, Gerry Goldschein of QSSI and Lloyd Wallsten of
Client, shall in good faith attempt to resolve the Parties' differences, the
dispute shall be elevated to Ed Troianelo of QSSI and Diane Hourany of Client
who shall meet in person and, in good faith, attempt to resolve the dispute. If
the dispute is then not resolved within five (5) business days either party may
pursue any remedies then available to it.
12.2 ENTIRE AGREEMENT This Agreement sets forth the entire and exclusive
understanding and agreement of the Parties with respect to its subject matter
and supersedes and merges any prior understanding or agreements, oral or
written. This Agreement may not be modified except by a writing subscribed by
both Client and QSSI.
12.3 FORCE MAJEURE Neither client or QSSI shall be liable to the other for any
delay or failure to perform any of the services or obligations set forth in this
Agreement due to any act of God, fire, flood, casualty, earthquake or other
causes beyond its reasonable control provided that such party shall have used
its best efforts to mitigate its effects.
12.4 NEW JERSEY LAW This Agreement and performance hereunder shall be governed
by the laws of the State of New Jersey without regards to its conflict of laws
provisions. QSSI and Client hereby agree on behalf of themselves and any person
claiming by or through them that the sole jurisdiction and venue for any
litigation rising from or relating to this Agreement shall be an appropriate
federal or state court located in New Jersey. No action, regardless of form,
arising out of this Agreement shall be brought by Client more than one year
after such cause of action shall have accrued.
12.5 ASSIGNMENT Unless in connection with the sale of all or substantially all
of its assets or a merger, neither party may assign this Agreement or any right,
interest or benefit under this Agreement without the prior written consent of
the other party. Subject to the foregoing, this Agreement shall be fully binding
upon, inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns.
12.6 NOTICE Any communication provided or permitted under this Agreement, unless
otherwise specifically provided otherwise herein, shall be in writing and shall
be deemed given (i) if by hand deliver, upon receipt thereof; (ii) if mailed,
four (4) business days after deposit in the U.S. mails, postage paid, certified
mail, return receipt requested and received. All notices shall be addressed to
Client and QSSI at their respective addresses set forth on the cover of this
Agreement.
12.7 SURVIVAL The following Paragraphs or Sections of this Agreement shall
survive its cancellation, termination or expiration: 4.2, 4.3, 4.4, 8.3, 8.4, 9,
10.3, 10.5, 10.6, and 11.
12.8 CLIENT IDENTIFICATION Upon the written consent of Client, which shall not
be unreasonably withheld, QSSI may use the name of and identify Client as a
Client, in press releases and similar materials distributed to prospective
Clients. Client may from time to time as requested by QSSI but within Client's
sole discretion, allow QSSI to perform site visits to Client's site provided
however that Client is given adequate notice and would not provide proprietary
information to a competitor.
-10-
<PAGE> 11
12.9 NO WAIVER The waiver or failure of either Client or QSSI to exercise any
right in any instance shall be deemed a waiver neither of any other right
hereunder not of its right to withhold other waivers of the same rights.
12.10 ENFORCEABILITY If any provision of this Agreement is determined to be
invalid under any applicable statute or rule of law, it is to that extent to be
deemed omitted, and the balance of the Agreement shall remain enforceable.
CLIENT AND QSSI HAVE READ AND AGREES TO ALL OF THE ATTACHED AND INCORPORATED
TERMS AND CONDITIONS. THIS AGREEMENT SHALL BE EFFECTIVE WHEN EXECUTED BY QSSI.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties have caused this agreement to be executed by
their duly authorized representatives as of the date first written above.
Client: Pets.com QUALITY SOFTWARE SYSTEMS, INC.
By: /s/ Diane Hourany By: /s/ H E Dybuahl
------------------------------ ---------------------------------
(Signature) (Signature)
Name: Diane Hourany Name: H. E. Dybuahl
---------------------------- -------------------------------
Title: VP OPS Title: Director, Sales & Marketing
--------------------------- ------------------------------
Date: July 16, 1999 Date: July 16, 1999
---------------------------- -------------------------------
-12-
<PAGE> 13
SCHEDULE A
IMPLEMENTATION SCHEDULE
Pets.com
Power House Project Plan
<TABLE>
<CAPTION>
Task Name Work Duration Depend Start Finish
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Project Schedule 39.4d 32d 6/23/99 8/4/99
Project Management 5d 6d 4,5 6/30/99 7/8/99
Requirements Definition Study 20d 13d 6/23/99 7/12/99
Requirements Gathering 6d 2d 6/23/99 6/24/99
Solution Fit Matrix 3d 3d 4 6/25/99 6/29/99
RDS Review 4d 8d 5 6/30/99 7/12/99
Solution Design 7d 7d 4FS+1d 6/28/99 7/7/99
Application Services 39.4d 20d 6/25/99 7/23/99
Order Server Hardware 0d 0d 6/28/99 6/28/99
Order RF Hardware 0d 0d 7/1/99 7/1/99
Receive Server Hardware 0d 0d 9FS+2.4 wks 7/12/99 7/12/99
Receive RF Hardware 0d 0d 10FS+2.4 wks 7/19/99 7/19/99
System Setup 6d 4d 11,12FF+2d 7/16/99 7/21/99
Install System at Site 2d 2d 13 7/22/99 7/23/99
System Adaptation 31.4d 19.63d 6/25/99 7/23/99
Warehouse Design Completed 0d 0d 7/8/99 7/8/99
Table Configuration 10d 10d 7,16 7/8/99 7/21/99
Interfaces 10.63d 14.63d 6/30/99 7/21/99
11-order download 2d 4d 4 6/30/99 7/6/99
13-subscriptions download 1d 2d 19 7/7/99 7/8/99
14-order kill download 1d 2d 20 7/9/99 7/12/99
15-expected receipt download 2d 2d 21 7/13/99 7/14/99
16-expected receipt dld-items .5d .5d 22 7/15/99 7/15/99
17-inventory transaction upld 2d 2d 23 7/15/99 7/19/99
18-shipment upload 2d 2d 24 7/19/99 7/21/99
19-shipment upload-order type .13d .13d 25 7/21/99 7/21/99
Label, Screen & Report Custom 3d 3d 6/25/99 6/29/99
Enhancements 3.77d 3.77d 7/6/99 7/9/99
R3-no stock mod on RF recvg .38d .38d 4 7/6/99 7/6/99
R6-custom returns report .38d .38d 29 7/6/99 7/6/99
O6-total lines as limit
criteria wv .13d .13d 30 7/6/99 7/6/99
O8-picking allocation report .25d .25 31 7/6/99 7/7/99
O10-packing slip mods 1d 1d 32 7/7/99 7/8/99
O17-carton verify screen mods .38d .38d 33 7/8/99 7/8/99
O20-repack screen mods .25d .25d 34 7/8/99 7/8/99
O22-recalc info on repack
screen .5d .5d 35 7/8/99 7/9/99
O24-new divert screen .5d .5d 36 7/9/99 7/9/99
String Testing 4d 2d 18,28 7/21/99 7/23/99
Implementation 25d 15d 7/19/99 8/4/99
User Acceptance Testing Suppt 5d 5d 18,28 7/26/99 7/30/99
User Training 10d 10d 40FF 7/19/99 7/30/99
Production Cutover 10d 5d 7/31/99 8/4/99
</TABLE>
<PAGE> 14
SCHEDULE B
THIRD PARTY SOFTWARE
1. Sybase System 11.9
2. Windows NT Workstation 4.0
3. Windows NT Server 4.0
4. PowerBuilder 7.0
5. pcANYWERE
6. DBArtisan
7. Seagate Backup Exec for NT
8. CodeSoft THT 3.50
<PAGE> 15
SCHEDULE C
MAINTENANCE AND SOFTWARE SUPPORT
For a period of six months following acceptance of the Developed
Software, client shall be entitled to any newly released software upgrades at no
additional license fee charge. All services associated with upgrades are
billable on a time and material basis. Maintenance can be purchased after the
expiration of this six month period at an annual charge of 13% of the license
fee shown on Schedule E plus 13% of any subsequent upgrade license fee charged
for the purpose of increasing the current license fee restrictions thresholds.
Software Support is covered under a separate yearly agreement.
<PAGE> 16
SCHEDULE D
LICENSE RESTRICTIONS
1. Scope of License (check one)
CPU specify
------ -----------------------
X Users specify 20 13 RF and 7 CRT Users
------ -----------------------
Site specify
------ -----------------------
Company-wide specify
------ -----------------------
Other specify
------ -----------------------
2. Right to Copy (check one)
One backup copy only
------
X Unrestricted right to copy
------
Other specify
------ -----------------------
3. Client is entitled to object code only.
Client shall cause to be reproduced on all copies of licensed materials
hereunder, all notices of QSSI proprietary rights as are contained in the
original materials.
<PAGE> 17
SCHEDULE E
FEE AND PAYMENT SCHEDULE
<TABLE>
<S> <C>
License Fee
PowerHouse/WMS 20 users* $60,000
Database License** $3,046
TOTAL $63,046
</TABLE>
* Payable at contract signing.
** Estimate based on current MS SOL Server pricing which is subject to change.
Services
Billing rates are as follows:
<TABLE>
<CAPTION>
Hourly Rate Daily Rate
<S> <C> <C>
Partner $220.00 $1,760
Manager $192.50 $1,540
Leader $165.00 $1,320
Lead Analysts $152.25 $1,218
Analysts $123.75 $990
Programmer $87.50 $700
</TABLE>
Estimates of the total services required will be further refined
following completion of the RDS. Services will be billed twice per month and are
payable within 15 days of invoice or postmark date whichever is later. Rates are
for normal business days. Weekend rates are billed at time and one half.
Holidays are billed at double time. Rates are subject to change on the first of
each year, or from time to time upon 30 days notice to the client.
Expenses
All reasonable expenses as set forth under Paragraph 10.4 will be billed
as incurred and payable within 5 days of the invoice or postmark date whichever
is later.
<PAGE> 1
EXHIBIT 10.26
INDUSTRIAL REAL ESTATE SUBLEASE
(MULTI-TENANT FACILITY)
This Agreement constitutes a sublease of a portion of the premises at
33201 Dowe Avenue, Union City, California (the "Property"), between National
Distribution Agency, Inc., a Delaware corporation ("Landlord or Sublessor"), and
Pets.com, Inc., a California corporation ("Tenant" or "Sublessee"), for (the
"Lease" or the "Sublease"). This Lease is subject to that certain lease between
Landlord as Lessee and Chino Pacific Warehouse Corporation as Lessor, dated
September 25, 1997, (the "Master Lease").
Landlord warrants and represents to Tenant that the Master Lease has
not been amended or modified except as expressly set forth herein, that Landlord
is not now, and as of the commencement of the Term hereof will not be, in
default or breach of any of the provisions of the Master Lease, and the Landlord
has no knowledge of any claim by the Master Lessor that Landlord is in default
or breach of any of the provisions of the Master Lease.
Tenant shall not commit or suffer any act or omission that will violate
any of the provisions of the Master Lease. Landlord shall exercise due diligence
in attempting to cause the Master Lessor to perform its obligations under the
Master Lease for the benefit of Tenant. If the Master Lease terminates this
Sublease shall terminate and the parties shall be relieved of any further
liability or obligation under this Sublease provided however, that if the Master
Lease terminates as a result of a default or breach by Landlord or Tenant under
this Sublease and/or the Master Lease, then the defaulting party shall be liable
to the non-defaulting party for the damage suffered as a result of such
termination. Notwithstanding the foregoing, if the Master Lease gives Landlord
any right to terminate the Master Lease in the event of the partial or total
damage, destruction, or condemnation of the Master Premises or the building or
project of which the Master Premises are a part, the exercise of such right by
Landlord shall not constitute a default or breach hereunder, provided that
Tenant receives a pro rata portion of any proceeds, or other remuneration, if
any, which Landlord receives as a result of such termination.
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: July 1, 1999.
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): National Distribution
Agency, Inc., a Delaware corporation, herein also known and sometimes described
as Sublessor. Address of Landlord: c/o 528 Arizona Avenue, Suite 206, Santa
Monica, CA 90401-1437.
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Pets.com, a California
corporation, herein also known and sometimes described as Sublessee herein.
-1-
<PAGE> 2
Address of Tenant:
Section 1.04 PROPERTY: The Property leased hereunder is part of a
multi-tenant real property leased to Landlord under the Master Lease, and
described or depicted in Exhibit "A". The premises comprise the total property
and includes the land, the buildings and all other improvements located on the
land, and the common areas described in Paragraph 4.05(a), (the "Project"). The
leased Property is located at 33201 Dowe Avenue, Union City, California, and
includes 73,920 square feet of warehouse space, and 4,800 square feet of office
space in the Southeastern portion of the Project, as more fully reflected in
Exhibit "A", and outlined in red.
Section 1.05. LEASE TERM: Five (5) years and one and one-half (1 1/2)
months BEGINNING ON July 1, 1999, or such other date as specified in this Lease,
and ENDING ON August 14, 2004. Tenant shall pay no Base Rent for the period July
1, 1999 to August 14, 1999. During this free rent period, Tenant shall be
obligated to pay its pro rata share of taxes, insurance, maintenance and
utilities. In addition, Tenant shall have one Option to Renew, as more fully
provided in Rider No. 3, attached and incorporated herein by reference.
Section 1.06. PERMITTED USES: (See Article Five)
Warehousing and storage of Pets.com, or its affiliates, products, and
for no other purpose, without the prior or concurrent written consent of
Landlord.
Section 1.07. TENANT'S GUARANTOR: Not applicable.
Section 1.08. BROKERS: (See Article Fourteen)
Landlord's Broker: Colliers International
Tenant's Broker: GVA Beitler.
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) Per separate agreement with Landlord.
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) [*].
LETTER-OF-CREDIT: [*]. Provided the Sublessee is not in
default of the Sublease, the Letter-of-Credit shall be reduced to [*], as of
August 14, 2000. As of August 14, 2001, the Letter-of-Credit shall no longer be
on deposit with the Landlord.
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) Thirty (30) unassigned parking spaces.
-2-
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 3
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT:
<TABLE>
<CAPTION>
RATE PER SQ. FT. AMOUNT
MONTHS PER MO. PER MO.
------ ------- -------
<S> <C> <C>
July 1 - Aug. 14, 1999 Free rent
Aug. 15, 1999 - April 14, 2001 [*] psf/mth/nnn
April 15, 2001 - Dec. 14, 2002 Annual minimum CPI (All Consumers
S.F. Bay Area) increase of [*];
annual maximum CPI (All Consumers
S.F. Bay Area) of [*] over base
rental rate in months 1 - 20.
Dec. 15, 2002 - Aug. 14, 2004 Annual Minimum CPI (All Consumers
S.F. Bay Area) increase of [*];
annual maximum CPI (All Consumers
S.F. Bay Area) of [*] over base
rental rate in months 21 - 40.
</TABLE>
The rents payable hereunder are more fully set forth in Lease
Rider No. 1 attached and incorporated herein by reference, and
as referred to in Lease Rider No. 2, also attached and
incorporated herein by reference.
In the event that Landlord is in default under the Master Lease and either
Landlord or Tenant receive notice of such default from the Master Lessor under
the Master Lease, Tenant shall have the right (without any obligation to do so),
to pay rent provided in this section, and all other sums due Landlord hereunder,
which Landlord is obligated to pay directly to the Master Lessor.
(a) OTHER PERIODIC PAYMENTS INCLUDED AS RENT : (i) Real Property
Taxes (See Section 4.02); (ii) Utilities (See Section 4.03);
(iii) Insurance Premiums (See Section 4.04); (iv) Tenant's
Initial Pro Rata Share of Common Area Expenses (25.67%) (See
Section 4.05); (v) Impounds for Insurance Premiums and
Property Taxes (See Section 4.08); (vi) Maintenance, Repairs
and Alterations (See Article Six).
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE:
(See Section 9.05) seventy percent (70%) of the Profit (the "Landlord's Share").
Section 1.14. RIDERS: The following Riders are attached to and made a
part of this Lease:
Rider No. 1 - Base Rent Schedule
Rider No. 2 - Tenant Improvement Allowance
Rider No. 3 - Options to Renew
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is
-3-
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 4
for the period stated in Section 1.05 above and shall begin and end on the dates
specified in Section 1.05 above, unless the beginning or end of the Lease Term
is changed under any provision of this Lease. The "Commencement Date" shall be
the date specified in Section 1.05 above for the beginning of the Lease Term,
unless advanced or delayed under any provision of this Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-deliver of the Property to Tenant on that date
shall not affect this Lease or the obligations of Tenant under this Lease except
that the Commencement Date shall be delayed until Landlord delivers possession
of the Property to Tenant and the Lease Term shall be extended for a period
equal to the delay in delivery of possession of the Property to Tenant, plus the
number of days necessary to end the Lease Term on the last day of a month. If
Landlord does not deliver possession of the Property to Tenant within sixty (60)
days after the Commencement Date, Tenant may elect to cancel this Lease by
giving written notice to Landlord within ten (10) days after the sixty (60) day
period ends. If Tenant gives such notice, the Lease shall be cancelled and
neither Landlord nor Tenant shall have any further obligations to the other. If
Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rent and all
other charges specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance within five (5) business days after the
commencement of each month, without offset, deduction or prior demand. The
-4-
<PAGE> 5
Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. COST OF LIVING INCREASE. The Base Rent shall be increased
on each date (the "Rental Adjustment Date") subject to Paragraph 1.12(a) above
in accordance with the increase in the United States Department of Labor, Bureau
of Labor Statistics, Consumer Price Index for All Urban Consumer (all items for
the geographical Statistical Area in which the Property is located on the basis
of 1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect
immediately before each Rental Adjustment Date shall be
increased by the percentage that the Index has increased from
the date (the "Comparison Date') on which payment of the
Comparison Base Rent began through the month in which the
applicable Rental Adjustment Date occurs. The Base Rent began
through the month in which the applicable Rental Adjustment
Date occurs. The Base Rent shall not be reduced by reason of
such computation. Landlord shall notify Tenant of each
increase by a written statement which shall include the Index
for the applicable Comparison Date, the Index for the increase
in the Base Rent provided for in this Section 3.02 shall be
subject to any minimum or maximum increase, if provided for in
Paragraph 1.12(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date.
Landlord's notice may be given after the applicable Rental
Adjustment Date of the increase, and Tenant shall pay Landlord
the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of
such increase within ten (10) days after Landlord's notice. If
the format or components of the Index are materially changed
after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of labor Statistics or
similar agency and which is most nearly equivalent to the
Index in effect on the Commencement Date. The substitute index
shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen
(15) days after receipt of Landlord's notice. If Tenant
objects, Landlord and Tenant shall submit the selection of the
substitute index for binding arbitration in accordance with
the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs
of arbitration shall be borne equally by Landlord and Tenant.
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in
Section 1.10 above. Landlord may apply all or part of the
Security Deposit to any unpaid rent or other charges due from
Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore
the Security Deposit to its fully amount within ten (10) days
after Landlord's written request. Tenant's failure to do so
shall be a material default under this Lease. No interest
shall be paid on the
-5-
<PAGE> 6
Security Deposit. Landlord shall not be required to keep the
Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
Section 3.04. TERMINATION; ADVANCE PAYMENT. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes
on the Property (including any fees, taxes or assessments
against, or as a result of, any tenant improvements installed
on the Property by or for the benefit of Tenant) during the
Lease Term. Subject to Paragraph 4.02(c) and Section 4.08
below, such payment shall be made at lease ten (10) days prior
to the delinquency date of the taxes. Within such ten (10) day
period, Tenant shall furnish Landlord with satisfactory
evidence that the real property taxes have been paid. Landlord
shall reimburse Tenant for any real property taxes paid by
Tenant covering any period prior to or after the Lease Term.
If Tenant fails to pay the real property taxes when due,
Landlord may pay the taxes and Tenant shall reimburse Landlord
for the amount of such tax payments as Additional rent.
(b) DEFINITION OF "REAL PROPERTY TAX". "Real property tax" means:
(i) any fee, license fee, license tax, business license fee,
commercial rental tax, levy, charge, assessment, penalty or
tax imposed by any taxing authority against the Property; (ii)
any tax on the Landlord's right to receive, or the receipt of,
rent or income from the Property or against Landlord's
business of leasing the Property; (iii) any tax or charge for
fire protection, streets, sidewalks, road maintenance, refuse
or other services provided to the Property by any governmental
agency; (iv) any tax imposed upon this transaction or based
upon a re-assessment of the Property due to a change of
ownership, as defined by applicable law, or other transfer of
all or part of Landlord's interest in the Property; and (v)
any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does
not, however, include Landlord's federal or state income,
franchise, transfer, inheritance or estate taxes.
-6-
<PAGE> 7
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real
property tax payable by Tenant under Paragraph 4.02(a) from
the assessor's worksheets or other reasonably available
information. Tenant shall pay such share to Landlord within
fifteen (15) days after receipt of Landlord's written
statement. Tenant's share of such real property tax shall be
25.67% of the total amount assessed on the Project, based on
the total square footage occupied at the time of the execution
of this Sublease, divided by the total square footage of the
premises (78,720 square feet / 306,650 square feet = 25.67%).
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade
fixtures, furnishings, equipment or any other
personal property belonging to Tenant. Tenant shall
try to have personal property taxed separately from
the Property.
(ii) If any of Tenant's personal property is taxed with
the Property, Tenant shall pay Landlord the taxes for
the personal property within fifteen (15) days after
Tenant receives a written statement from Landlord for
such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay its share to Landlord within fifteen (15) days after receipt of Landlord's
written statement. Tenant's share of such non-jointly metered costs shall be
25.67% of the total charged to the Project, based on the square footage occupied
by Tenant at the time of the execution of this Sublease.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall
maintain a policy of commercial general liability insurance
(sometimes known as broad form comprehensive general liability
insurance) insuring Tenant against liability for bodily
injury, property damage (including loss of use of property)
and personal injury arising out of the operation, use or
occupancy of the Property. Tenant shall name Landlord as an
additional insured under such policy. The initial amount of
such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based
upon inflation, increased liability awards, recommendation of
Landlord's professional insurance advisers and other relevant
factors. The liability insurance obtained by Tenant under this
Paragraph 4.04(a) shall be (i) primary and non-contributing;
(ii) contain cross-liability endorsements; and (iii) insure
Landlord against Tenant's performance under Section 5.05, if
the matters giving rise to the indemnity under Section 5.05
result from the negligence
-7-
<PAGE> 8
of Tenant. The amount and coverage of such insurance shall not
limit Tenant's liability nor relieve Tenant of any other
obligation under this Lease. Landlord may also obtain
comprehensive public liability insurance in an amount and with
coverage determined by Landlord insuring Landlord against
liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord
shall not be contributory and shall not provide primary
insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of
or damage to the Property in the full amount of its
replacement value. Such policy shall contain an Inflation
Guard Endorsement and shall provide protection against all
perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended
perils (all risk), sprinkler leakage and any other perils
which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required
by any lender holding a security interest in the Property.
Landlord shall not obtain insurance for Tenant's fixtures or
equipment or building improvements installed by Tenant on the
Property. During the Lease Term, Landlord shall also maintain
a rental income insurance policy, with loss payable to
Landlord, in an amount equal to one year's Base Rent, plus
estimated real property taxes and insurance premiums. Tenant
shall be liable for the payment of any deductible amount under
Landlord's or Tenant's insurance policies maintained pursuant
to this Section 4.04, in an amount not to exceed Five Thousand
Dollars ($5,000). Tenant shall not do or permit anything to be
done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay
all premiums for the insurance policies described in
Paragraphs 4.04(a) and (b) (whether obtained by Landlord or
Tenant) within fifteen (15) days after Tenant's receipt of a
copy of the premium statement or other evidence of the amount
due, except Landlord shall pay all premiums for non-primary
comprehensive public liability insurance which Landlord elects
to obtain as provided in Paragraph 4.04(a). For insurance
policies maintained by Landlord which cover improvements on
the entire Project, Tenant shall pay Tenant's pro rata share
of the premiums, in accordance with the formula in Paragraph
4.05(e) for determining Tenant's share of Common Area costs.
If insurance policies maintained by Landlord cover
improvements on real property other than the Project, Landlord
shall deliver to Tenant a statement of the premium applicable
to the Property showing in reasonable detail how Tenant's
share of the premium was computed. If the Lease Term expires
before the expiration of an insurance policy maintained by
Landlord, Tenant shall be liable for Tenant's pro rata share
of the insurance premiums. Before the Commencement Date,
Tenant shall deliver to Landlord a copy of any policy of
insurance which Tenant is required to maintain under this
Section 4.04. At least thirty (30) days prior to the
expiration of any such policy, Tenant shall deliver to
Landlord a renewal of such policy. As an alternative to
providing a policy of insurance, Tenant shall have the right
to provide Landlord a certificate of insurance, executed by an
authorized officer of the insurance company, showing
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that the insurance which Tenant is required to maintain under
this Section 4.04 is in full force and effect and containing
such other information which Landlord reasonably requires.
(d) GENERAL PROVISIONS.
(i) Any insurance which Tenant is required to maintain
under this Lease shall include a provision which
requires the insurance carrier to give Landlord not
less than thirty (30) days' written notice prior to
any cancellation or decrease of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or
renewal to Landlord required under this Lease within
the prescribed time period of if any such policy is
cancelled or modified during the Lease Term without
Landlord's consent, landlord may obtain such
insurance, in which case Tenant shall reimburse
Landlord for the cost of such insurance within twenty
(20) days after receipt of a statement that indicates
the cost of such insurance.
(iii) Tenant shall maintain all insurance required under
this Lease with companies holding a "General
Policyholders Rating of at least B+, V, or such other
rating as may be required by a Lender having a lien
on the Premises, as set forth in the most current
issue of "Best's Insurance Guide." Landlord and
Tenant acknowledge the insurance markets are rapidly
changing and that insurance in the form and amounts
described in this Section 4.04 may not be available
in the future. Tenant acknowledges that the insurance
described in this Section 4.04 is for the primary
benefit of Landlord. If at any time during the Lease
Term, Tenant is unable to maintain the insurance
required under the Lease, Tenant shall nevertheless
maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for
Tenant's type of business, as that coverage may
change from time to time. Landlord makes no
representation as to the adequacy of such insurance
to protect Landlord's or Tenant's interests.
Therefore, Tenant shall obtain any such additional
property or liability insurance which Tenant deems
necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance
policies maintained, Landlord and Tenant each hereby
waive any and all rights of recovery against the
other, or against the officers, employees, agents or
representatives of the other, for loss of or damage
to its property or the property of others under its
control, if such loss or damage is covered by any
insurance policy in force (whether or not described
in this Lease) at the time of such loss or damage.
Upon obtaining the required policies of insurance,
Landlord and Tenant shall give notice to the
insurance carriers of this mutual waiver of
subrogation.
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Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean
all areas within the Project which are available for the
common use of tenants of the Project and which are not leased
or held for the exclusive use of Tenant or other tenants,
including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping
and planted areas. Landlord, from time to time, may change the
size, location, nature and use of any of the Common Areas into
leaseable areas, construct additional parking facilities
(including parking structures) in the Common Areas, and
increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activity may result in
inconvenience to Tenant. Such activities and changes are
permitted if they do not materially affect Tenant's use of the
Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right
(in common with other tenants and all others to whom Landlord
has granted or may grant such rights) to use the Common Areas
for the purposes intended, subject to such reasonable rules
and regulations as Landlord may establish from time to time.
Tenant shall abide by such rules and regulations and shall use
its best effort to cause others who use the Common Areas with
Tenant's express or implied permission to abide by Landlord's
rules and regulations. At any time, Landlord may close any
Common Areas to perform any acts in the Common Area as, in
Landlord's judgment, are desirable to improve the Project.
Tenant shall not interfere with the rights of Landlord, other
tenants or any other person entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be
entitled to use the number of vehicle parking spaces in the
Project allocated to Tenant in Section 1.11 of the Lease
without paying any additional rent. Tenant's parking shall not
be reserved and shall be limited to vehicles no larger than
the standard size automobiles or pickup utility vehicles.
Tenant shall not cause large trucks or other large vehicles to
be parked within the Project or on the adjacent public
streets. Temporary parking of large delivery vehicles in the
Project may be permitted by the rules and regulations
established by the Landlord. Vehicles shall be parked only in
striped parking spaces and not in driveways, loading areas or
other locations not specifically designated for parking.
Handicapped spaces shall only be used by those legally
permitted to use them. If Tenant parks more vehicles in the
parking area than the number set forth in Section 1.11 of this
Lease, such conduct shall be a material breach of this Lease.
In addition to Landlord's other remedies under the Lease,
Tenant shall pay a daily charge determined by Landlord for
each additional vehicle.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain Common
Areas in good order, condition and repair and shall operate
the Project, in Landlord's sole discretion, as a first-class
industrial/commercial real property development. Tenant shall
pay Tenant's pro rata share (as determined below) of all costs
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incurred by Landlord for the operation and maintenance of the
Common Areas. Common Area costs include, but are not limited
to, costs and expenses for the following: gardening and
landscaping; utilities, water and sewage charges; maintenance
of signs (other than tenants' signs); premiums for liability,
property damage, fire and other types of casualty insurance on
the Common Areas and worker's compensation insurance; all
property taxes and assessments levied on or attributable to
the Common Area and all Common Area improvements; all personal
property taxes levied on or attributable to personal property
used in connection with the Common Areas; straight-line
depreciation on personal property owned by Landlord which is
consumed in the operation or maintenance of the Common Areas;
rental or lease payments paid by Landlord for rented or leased
personal property used in the operation or maintenance of the
Common Areas; fees for required licenses and permits;
repairing, resurfacing, repaving, maintaining, painting,
lighting, cleaning, refuse removal, security, underground
piping, fire sprinkler repair, and similar items; reserves for
roof replacement and exterior painting and other appropriate
reserves; and a reasonable allowance to Landlord for
Landlord's supervision of the Common Areas (not to exceed ten
percent (10%) of the common area costs, property tax and
insurance pass-through for the Project for the calendar year).
Landlord may cause any or all of such services to be provided
by third parties and the cost of such services shall be
included in Common Area costs. Common Area costs shall not
include depreciation of real property which forms part of the
Common Areas.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual
pro rata share of all Common Area costs (prorated for any
fractional month) upon notice from Landlord that such costs
are due and payable, and in any event prior to delinquency.
Tenant's pro rata share shall be calculated by dividing the
square footage area of the Property, as set forth in Section
1.04 of the Lease, by the aggregate square foot area of the
Project which is leased or held for lease by tenants, as of
the date on which the computation is made. Tenant's initial
pro rata share is set out in Paragraph 4.03. Any changes in
the Common Area costs and/or the aggregate area of the
Project, leased or held for lease during the Lease Term shall
be effective on the first day of the month after such change
occurs. Landlord may, at Landlord's election, estimate in
advance and charge to Tenant as Common Area costs, all
maintenance and repair costs for which Tenant is liable under
Section 6.04 of the Lease, and all other Common Area costs
payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Area costs shall be delivered
monthly, quarterly or at any other periodic intervals to be
designated by Landlord. Landlord may adjust such estimates at
any time based upon Landlord's experience and reasonable
anticipation of costs. Such adjustments shall be effective as
of the next rent payment date after notice to Tenant. Within
sixty (60) days after the end of each calendar year of the
Lease Term, Landlord shall deliver to Tenant a statement
prepared in accordance with generally accepted accounting
principles setting forth, in reasonable detail, the Common
Area costs paid or incurred by Landlord during the preceding
calendar year and Tenant's pro rata share. Upon receipt of
such statement, there shall be an
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adjustment between Landlord and Tenant, with payment to or
credit given by Landlord (as the case may be) so that Landlord
shall receive the entire amount of Tenant's share of such
costs and expenses for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within five
(5) days after it becomes due, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
If requested by any ground lessor or lender to whom landlord has granted or may
hereafter grant a security interest in the Property, or if Tenant is more than
ten (10) days late in the payment of rent more than once in any consecutive
twelve (12) month period, Tenant shall pay Landlord a sum equal to one-twelfth
(1/12) of the annual real property taxes and insurance premiums payable by
Tenant under this Lease, together with each payment of Base Rent. Landlord shall
hold such payments in a non-interest bearing impound account. If unknown,
Landlord shall reasonably estimate the amount of real property taxes and
insurance premiums when due. Tenant shall pay any deficiency of funds in the
impound account to Landlord upon written request. If Tenant defaults under this
Lease, Landlord may apply any funds in the impound account to any obligation
then due under this lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the Project, or which constitutes a nuisance or waste.
Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statues, ordinances,
rules, regulations,
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orders and requirements regulating the use by Tenant of the Property, including
the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property;
(b) The conduct of Tenant's business or anything else done or
permitted by Tenant to be done in or about the property,
including any contamination of the Property or any other
property resulting from the presence or use of Hazardous
Material caused or permitted by Tenant;
(c) Any breach or default in the performance of Tenant's
obligations under this Lease;
(d) Any misrepresentation or breach of warranty by Tenant under
this Lease; or
(e) Other acts or omissions of Tenant.
Tenant shall defend Landlord against any such cost, claim or liability at
Tenant's expense with counsel reasonably acceptable to Landlord, or at
Landlord's election, Tenant shall reimburse Landlord for any reasonable legal
fees or costs incurred by Landlord in connection with any such claim. As a
material part of the consideration to Landlord, Tenant assumes all risk of
damage to property or injury to persons in or about the Property arising from
any cause, and Tenant hereby waives all claims in respect thereof against
Landlord, except for any claim arising out of
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Landlord's gross negligence or willful misconduct. As used in this Section, the
term "Tenant" shall include Tenant's employees, agents, contractors, and
invitees, if applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS.
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and order. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from:
(a) Fire, steam, electricity, water, gas or rain;
(b) The breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause;
(c) Conditions arising in or about the Property or upon other
portions of the Project, or from other sources or places; or
(d) Any act or omission of any other tenant of the Project.
Landlord shall not be liable for any such damage or injury
even though the cause of or the means of repairing such damage
or injury are not accessible to Tenant.
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The provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's gross negligence or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATION.
(a) Except as provided in Article Seven (Damage or Destruction)
and Article Eight (Condemnation), Landlord shall keep the
following in good order, condition and repair: the
foundations, exterior walls and roof of the Property
(including painting the exterior surface of the exterior walls
of the property not more often than once every five (5) years,
if necessary) and all components of electrical, mechanical,
plumbing, heating and air conditioning systems and facilities
located in the Property which are concealed or used in common
by tenants of the Project. However, Landlord shall not be
obligated to maintain or repair window, doors, plate glass or
the interior surfaces of exterior walls. Landlord shall make
repairs under this Section 6.03 within a reasonable time after
receipt of written notice from Tenant of the need for such
repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord
incurs under Paragraph 6.03(a) above as Common Area costs as
provided for in Section 4.05 of the Lease. Tenant waives the
benefit of any statute in effect now or in the future which
might give Tenant the right to make repairs at Landlord's
expense or to terminate this Lease due to Landlord's failure
to keep the Property in good order, condition and repair.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall
keep all portions of the Property (including nonstructural,
interior, systems and equipment installed by Tenant) in good
order, condition and repair (including interior repainting and
refinishing, as needed). If any portion of the Property or any
system or equipment in the Property which Tenant is obligated
to repair cannot be fully repaired or restored, Tenant shall
promptly replace such portion of the Property or system or
equipment in the Property, regardless of whether the benefit
of such replacement extends beyond the Lease Term; but if the
benefit or useful life of such replacement extends beyond the
Lease Term (as such term may be extended by exercise of any
options), the useful life of such replacement shall be
prorated over the remaining portion of the Lease Term (as
extended), and Tenant shall be liable only for that portion of
the cost which is applicable to the Lease Term (as extended).
Tenant shall maintain a preventive maintenance contract
providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and
air conditioning contractor, unless Landlord maintains such
equipment under Section 6.03 above. If any part of the
Property or the Project is damaged by any act or omission of
Tenant, Tenant shall pay Landlord the cost of repairing or
replacing such damaged property, whether or not Landlord would
otherwise be obligated to pay the cost of maintaining or
repairing such property. It is the
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intention of Landlord and Tenant that at all times Tenant
shall maintain the portions of the Property which Tenant is
obligated to maintain in an attractive, first-class and full
operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this
Section 6.04 at Tenant's sole expense. If Tenant fails to
maintain, repair or replace the Property as required by this
Section 6.04, Landlord may, upon ten (10) days' prior notice
to Tenant (except that no notice shall be required in the case
of an emergency), enter the Property and perform such
maintenance or repair (including replacement, as needed) on
behalf of Tenant. In such case, Tenant shall reimburse
Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or
improvements to the Property without Landlord's prior written
consent, except for non-structural alterations which do not
exceed Ten Thousand Dollars ($10,000) in cost cumulatively
over the Lease Term and which are not visible from the outside
of the building of which the Property is part. Landlord may
require Tenant to provide demolition and/or lien and
completion bonds in form and amount satisfactory to Landlord.
Tenant shall promptly remove any alterations, additions, or
improvements constructed in violation of this Paragraph
6.05(a) upon Landlord's written request. All alterations,
additions, and improvements shall be done in a good and
workmanlike manner, in conformity with all applicable laws and
regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord
with "as built" plans, copies of all construction contracts,
and proof of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least
twenty (20) days' prior written notice of the commencement of
any work on the Property, regardless of whether Landlord's
consent to such work is required. Landlord may elect to record
and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination fo the Lease, except Tenant may
remove any of Tenant's machinery or equipment which can be
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removed without material damage to the Property. Tenant shall repair, at
Tenant's expense, any damage to the Property caused by the removal of any such
equipment. In no event, however, shall Tenant remove any of the following
materials or equipment (which shall be deemed Landlord's property) without
Landlord's prior written consent: any power wiring or power panels; lighting or
lighting fixtures; wall coverings; drapes, blinds or other window coverings;
carpets or other floor coverings; heaters, air conditioners or any other heating
or air conditioning equipment; fencing or security gates; or other similar
building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is
only partially damaged (i.e., less than fifty percent (50%) of
the Property is untenantable as a result of such damage or
less than fifty percent (50%) of Tenant's operations are
materially impaired) and if the proceeds received by Landlord
from the insurance policies described in Paragraph 4.04(b) are
sufficient to pay for the necessary repairs, this Lease shall
remain in effect and Landlord shall repair the damage as soon
as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures,
equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not
sufficient to pay the entire cost of repair, of if the cause
of damage is not covered by the insurance policies which
Landlord maintains under Paragraph 4.04(b), Landlord may elect
either to (i) repair the damage as soon as reasonably
possibly, in which case this Lease shall remain in full force
and effect, or (ii) terminate this Lease as of the date the
damage occurred. Landlord shall notify Tenant within thirty
(30) days after receipt of notice of the occurrence of the
damage whether Landlord elects to repair the damage or
terminate the Lease. If Landlord elects to repair the damage,
Tenant shall pay Landlord Tenant's pro rata share of the
"deductible amount" (if any) under Landlord's insurance
policies and, if the damage was due to an act or omission of
Tenant, or Tenant's employees, agents, contractors or
invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord
elects to terminate this Lease, Tenant may elect to continue
this Lease in full force and effect, in which case Tenant
shall repair any damage to the Property and any building in
which Property is located. Tenant shall pay the cost of such
repairs, except that upon satisfactory completion of such
repairs, Landlord shall deliver to Tenant any insurance
proceeds received by Landlord for the damage repaired by
Tenant. Tenant shall give Landlord written notice of such
election within ten (10) days after receiving Landlord's
termination notice.
(c) If the damage to the Property occurs during the last six (6)
months of the Lease Term and such damage will require more
than thirty (30) days to repair, either
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Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any
insurance proceeds. The party electing to terminate this Lease
shall give written notification to the other party of such
election within thirty (30) days after Tenant's notice to
Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base rent, insurance premiums
and real property taxes. Except for such possible reduction in Base rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
other compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction of the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice ten (10) days
after the condemning authority takes title or possession). If neither Landlord
nor Tenant terminates this Lease, this Lease shall remain in effect as to the
portion of the Property not taken, except that the Base Rent and Additional
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Rent shall be reduced in proportion to the reduction in the floor area of the
Property. Any Condemnation award or payment shall be distributed in the
following order:
(a) First, to any ground lessor, mortgagee or beneficiary under a
deed of trust encumbering the Property, the amount of its
interest in the Property;
(b) Second, to Tenant, only the amount of any award specifically
designated for loss of or damage to Tenant's trade fixtures or
removable personal property; and
(c) Third to Landlord, the remainder of such award, whether as
compensation for reduction in the value of the leasehold, the
taking of the fee, or otherwise.
If this Lease is not terminated, Landlord shall repair any damage for which
Tenant has been reimbursed by the condemning authority. If the severance damages
received by Landlord are not sufficient to pay for such repair, Landlord shall
have the right to either terminate this Lease or make such repair at Landlord's
expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent, unless the
change is due to a public offering of Tenant's capital stock.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or
sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee, without
notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
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Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all terms and
provisions of the Lease governing termination shall apply. If Landlord does not
so elect, the Lease shall continue in effect until otherwise terminated and the
provisions of Section 9.05 with respect to any proposed transfer shall continue
to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in
Section 9.02 shall set forth in writing the details of the
proposed transfer, including the name, business and financial
condition of the prospective transferee, financial details of
the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or
sublease), and any other information Landlord deems relevant.
Landlord shall have the right to withhold consent, if
reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or
subtenant and the proposed use of the Property; (ii) the net
worth and financial reputation of the proposed assignee or
subtenant; (iii) Tenant's compliance with all of its
obligations under the Lease; and (iv) such other factors as
Landlord may reasonably deem relevant. If Landlord objects to
a proposed assignment solely because of the net worth and/or
financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign), all or a portion of the
Property to the proposed transferee, but only on the terms of
the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under
the Lease the Landlord's Share (stated in Section
1.13) of the Profit (defined below) on such
transaction as and when received by Tenant, unless
Landlord gives written notice to Tenant and the
assignee or subtenant that Landlord's Share shall be
paid by the assignee or subtenant to Landlord
directly. The "Profit" means (A) all amounts paid to
Tenant for such assignment or sublease, including
"key" money, monthly rent in excess of the monthly
rent payable under the Lease, and all fees and other
consideration paid for the assignment or sublease,
including fees under any collateral agreements, less
(B) costs and expenses directly incurred by Tenant in
connection with the execution and performance of such
assignment or sublease for real estate broker's
commissions, reasonable attorney's fees and costs of
renovation or construction of tenant improvements
required under such assignment or sublease. Tenant is
entitled to recover such costs and expenses before
Tenant is obligated to pay Landlord's Share to
Landlord. The Profit in the case of a sublease of
less than all the Property is the rent allocable to
the subleased space as a percentage on a square
footage basis.
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(ii) Tenant shall provide Landlord a written statement
certifying all amounts to be paid from any assignment
or sublease of the Property within thirty (30) days
after the transaction documentation is signed, and
landlord may inspect Tenant's books and records to
verify the accuracy of such statement. On written
request, Tenant shall promptly furnish to Landlord
copies of all transaction documentation, all of which
shall be certified by Tenant to be complete, true and
correct. Landlord's receipt of Landlord's Share shall
not be a consent to any further assignment or
subletting. The breach of Tenant's obligation under
this Paragraph 9.05(b) shall be a material default of
the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each
of Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance
described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge within three
(3) business days from the date when due, and after written
notice from Landlord.
(c) If Tenant fails to perform any of Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days
after written notice from Landlord; provided that if more than
thirty (30) days are required to complete such performance,
Tenant shall not be in default if Tenant commences such
performance within the thirty (30) day period and thereafter
diligently pursues its completion. However, Landlord shall not
be required to give such notice if Tenant's failure to perform
constitutes a non-curable breach of this Lease. The notice
required by this Paragraph is intended to satisfy any and all
notice requirements imposed by law on Landlord and is not in
addition to any such requirement.
(d) (i) If Tenant makes a general assignment or general
arrangement for the benefit of creditors; (ii) if a petition
for adjudication of bankruptcy or for reorganization or
rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or
receiver is appointed to take possession of substantially all
of Tenant's assets located at the Property or of Tenant's
interest
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in this Lease and possession is not restored to Tenant within
thirty (30) days; or (iv) if substantially all of Tenant's
assets located at the Property or of Tenant's interest in this
Lease is subjected to attachment, execution or other judicial
seizure which is not discharged within thirty (30) days. If a
court of competent jurisdiction determines that any of the
acts described in this subparagraph (d) is not a default under
this Lease, and a trustee is appointed to take possession (or
if Tenant remains a debtor in possession) and such trustee or
Tenant transfers Tenant's interest hereunder, then Landlord
shall receive, as Additional Rent, the excess, if any, of the
rent (or any consideration) paid in connection with such
assignment or sublease over the rent payable by Tenant under
this Lease.
(e) If any guarantor of this Lease revokes or otherwise
terminates, or purports to revoke or otherwise terminate, any
guaranty of all or any portion of Tenant's obligations under
this Lease. Unless otherwise expressly provided, no guaranty
of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Property
to Landlord. In such event, Landlord shall be entitled to
recover from Tenant all damages incurred by Landlord by reason
of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other
charges which Landlord had earned at the time of the
termination; (ii) the worth at the time of the award of the
amount by which the unpaid Base rent, Additional Rent and
other charges which Landlord would have earned after
termination until the time of the award exceeds the amount of
such rental loss that Tenant proves Landlord could have
reasonably avoided; (iii) the worth at the time of the award
of the amount by which the unpaid Base Rent, Additional Rent
and other charges which Tenant would have paid for the balance
of the Lease term after the time of award exceeds the amount
of such rental loss that Tenant proves Landlord could have
reasonably avoided; and (iv) any other amount necessary to
compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under the Lease
or which in the ordinary course of things would be likely to
result therefrom, including, but not limited to, any costs or
expenses Landlord incurs in maintaining or preserving the
Property after such default, the cost of recovering possession
of the Property, expenses of reletting, including necessary
renovation or alteration of th Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real
estate commission paid or payable. As used in subparts (i) and
(ii) above, the "worth at the time of the award" is computed
by allowing interest on unpaid amounts at the rate of fifteen
percent (15%) per annum, or such lesser amount as may then be
the maximum lawful rate. As used in subpart (iii) the "worth
at the time of the award" is computed by discounting such
amount at the discount rate of
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the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%). If Tenant has abandoned the
Property, Landlord shall have the option of (i) retaking
possession of the Property and recovering from Tenant the
amount specified in this Paragraph 10.03(a), or (ii)
proceeding under Paragraph 10.03(b);
(b) Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant has
abandoned the Property. In such event, Landlord shall be
entitled to enforce all of Landlord's rights and remedies
under this Lease, including the right to recover the rent as
it becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state in which the
Property is located.
Section 10.04. REPAYMENT OF "FREE" RENT. (INTENTIONALLY DELETED).
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defaulting
of any action in any bankruptcy court or other court with respect to the Lease;
the obtaining of relief from any stay in bankruptcy restraining any action to
evict Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust, mortgage encumbering
the Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Tenant shall cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease. Tenant shall execute
such further documents and assurances as such lender may require, provided that
Tenant's obligations under this Lese shall not be increased in any material way
(the performance of ministerial acts shall not be deemed material), and Tenant
shall not be deprived of its rights under this Lease Tenant's right to quiet
possession of the Property during the Lease Term shall not be disturbed if
Tenant pays the rent and performs all of Tenant's obligations under this Lease
and is not otherwise in default. If any ground lessor, beneficiary or mortgagee
elects to have this Lease prior to the lien on its ground lease, deed of trust
or mortgage and gives written notice
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thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed
of trust or mortgage whether this Lease is dated prior or subsequent to the date
of said ground lease, deed of trust or mortgage or the date of recording
thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, or purchaser
at a foreclosure sale, Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Property and recognize such transferee or successor
as Landlord under this Lease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Lease or surrender possession of the Property upon the transfer of Landlord's
interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
business days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to Landlord a written statement
certifying: (i) that none of the terms or provisions of this
Lease have been changed (or if they have been changed, stating
how they have been changed; (ii) that this Lease has not been
cancelled or terminated; (iii) the last date of payment of the
Base Rent and other charges and the time period covered by
such payment; (iv) that Landlord is not in default under this
Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or information with
respect to Tenant or the Lease as Landlord may reasonably
request or which any prospective purchaser or encumbrancer of
the Property may require. Tenant shall deliver such statement
to Landlord within ten (10) business days after Landlord's
request. Landlord may give any such statement by Tenant to any
prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbrancer may rely conclusively upon such
statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within
such ten (10) business day period, Landlord and any
prospective purchaser or encumbrancer, may conclusively
presume and rely upon the following facts: (i) that the terms
and provisions of this Lease have not been changed except as
otherwise represented by Landlord; (ii) that this Lease has
not been cancelled or terminated except as otherwise
represented by Landlord; (iii) that not more than one month's
Base Rent or other charges have been paid in advance; and (iv)
that Landlord is not in default under the Lease. In such
event, Tenant shall be estopped from denying the truth of such
facts.
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Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) business
days after written request from Landlord, Tenant shall deliver to Landlord such
financial statements as Landlord reasonably requires to verify the net worth of
Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant
shall deliver to any lender designated by Landlord any financial statements
required by such lender to facilitate the financing or refinancing of the
Property. Tenant represents and warrants to Landlord that each such financial
statement is a true and accurate statement as of the date of such statement. All
financial statements shall be confidential and shall be used only for the
purposes set forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claims or action:
(a) Instituted by Tenant against any third party, or by any third
party against Tenant, or by or against any person holding any
interest under or using the Property by license of or
agreement with Tenant;
(b) For any foreclosure of any lien for labor or material
furnished to or for Tenant or such other person;
(c) Otherwise arising out of or resulting from any act or
transaction of tenant or such other person; or
(d) Necessary to protect Landlord's interest under this Lease in a
bankruptcy proceeding of Tenant, or other proceeding of Tenant
under Title 11 of the United States Code, as amended.
Tenant shall defend Landlord against any such claim or action at Tenant's
expense with counsel reasonably acceptable to Landlord or, at Landlord's
election, Tenant shall reimburse Landlord for any legal fees or costs Landlord
incurs in any such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
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ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the
current owner or owners of the fee title to the Property or
Project or the leasehold estate under a ground lease of the
Property or Project at the time in question. Each Landlord is
obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or
title. Any Landlord who transfers its title or interest is
relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date
of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds
have not yet been applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lese to Landlord and
to any ground lessor, mortgagee or beneficiary under any deed
of trust encumbering the Property whose name and address have
been furnished to Tenant in writing. Landlord shall not be in
default under this Lease unless Landlord (or such ground
lessor, mortgagee or beneficiary) fails to cure such
non-performance within thirty (30) days after receipt of
Tenant's notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall
not be in default if such cure is commenced within such thirty
(30) day period and thereafter diligently pursued to
completion.
(c) Notwithstanding any term or provision herein to the contrary,
the liability of Landlord for the performance of its duties
and obligations under this Lease is limited to Landlord's
interest in the Property and the Project, and neither the
Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles of Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of
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this Lease. Whenever required by the context of this Lease, the singular shall
include the plural and the plural shall include the singular. The masculine,
feminine and neuter genders shall each include the other. In any provision
related to the conduct, acts or omissions of Tenant, the term "Tenant" shall
include Tenant's agents, employees, contractors, invitees, successors or others
using the Property with Tenant's expressed or implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by
the waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any
party who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any
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general partner's withdrawal or addition. Within thirty (30) days after this
Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded
statement of partnership or certificate of limited partners.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterpart
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker. Landlord shall pay
Landlord's Broker a commission if Tenant exercises any option to extend the
Lease Term or to buy the Property, or any similar option or right which Landlord
may grant to Tenant, or if Landlord's Broker is the procuring cause of any other
lease or sale entered into between Landlord and Tenant covering the Property.
Such commission shall be the amount set forth in Landlord's Broker's commission
schedule in effect as of the execution of this Lease. If a Tenant's Broker is
named in Section 1.08 above, Landlord's Broker shall pay an appropriate portion
of its commission to Tenant's Broker if so provided in any agreement between
Landlord's Broker and Tenant's Broker. Nothing contained in this Lease shall
impose any obligation on Landlord to pay a commission or fee to any party other
than Landlord's Broker.
Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property,
or assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action.
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<PAGE> 29
This Paragraph is included in this Lease for the benefit of Landlord's Broker.
Section 14.03. BROKER'S DISCLOSURE OF AGENCY. Landlord's Broker hereby
discloses to Landlord and Tenant and Landlord and Tenant hereby consent to
Landlord's Broker acting in this transaction as the agent of (check one):
[ ] Landlord exclusively, or
[ ] both Landlord and Tenant.
Section 14.04. NO OTHER BROKERS. Tenant represents and warrants to
Landlord that the brokers named in Section 1.08 above are the only agents,
brokers, finders or other parties with whom Tenant has dealt who are or may be
entitled to any commission or fee with respect to this Lease or the Property.
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<PAGE> 30
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders which
are attached to or incorporated by reference to this Lease.
"LANDLORD"
Signed on July 23, 1999. NATIONAL DISTRIBUTION AGENCY, INC.,
a Delaware corporation
at Santa Monica, CA By: /s/ John N. Alphson
-------------------------------------
JOHN N. ALPHSON
Its: CORPORATE SECRETARY
By: /s/ Robert Bernardo
-------------------------------------
ROBERT BERNARDO
Its GENERAL MANAGER
"TENANT"
Signed on July 26, 1999. PETS.COM, INC., a California corporation
at San Francisco, CA
By: /s/ Julie Wainwright
-------------------------------------
JULIE WAINWRIGHT
Its: CHIEF EXECUTIVE OFFICER
By: /s/ Chris Deyo
-------------------------------------
Its: President
------------------------------------
SECRETARY
IN ANY SUCH REAL ESTATE ACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST, OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
-30-
<PAGE> 31
FIRST AMENDMENT TO
INDUSTRIAL REAL ESTATE SUBLEASE
(MULTI-TENANT FACILITY)
This First Amendment is made for the purpose of amending that certain
Agreement dated July 1, 1999, constituting a sublease of a portion of the
premises at 33201 Dowe Avenue, Union City, California (the "Property"), between
National Distribution Agency, Inc., a Delaware corporation ("Landlord or
Sublessor"), and Pets.com, Inc., a California corporation ("Tenant" or
"Sublessee"), for (the "Lease" or the "Sublease"). Said Sublease dated July 1,
1999, is herein referred to as the "Primary Sublease". This First Amendment to
Lease is subject to that certain lease between Landlord as Lessee and Chino
Pacific Warehouse Corporation as Lessor, dated September 25, 1997, (the "Master
Lease").
In connection with the execution of this First Amendment to Sublease,
the following provisions and representations of the Primary Sublease are
incorporated herein:
Landlord warrants and represents to Tenant that the Master Lease has
not been amended or modified except as expressly set forth herein, that Landlord
is not now, and as of the commencement of the Term hereof will not be, in
default or breach of any of the provisions of the Master Lease, and the Landlord
has no knowledge of any claim by the Master Lessor that Landlord is in default
or breach of any of the provisions of the Master Lease.
Tenant shall not commit or suffer any act or omission that will violate
any of the provisions of the Master Lease. Landlord shall exercise due diligence
in attempting to cause the Master Lessor to perform its obligations under the
Master Lease for the benefit of Tenant. If the Master Lease terminates this
Sublease shall terminate and the parties shall be relieved of any further
liability or obligation under this Sublease provided however, that if the Master
Lease terminates as a result of a default or breach by Landlord or Tenant under
this Sublease and/or the Master Lease, then the defaulting party shall be liable
to the non-defaulting party for the damage suffered as a result of such
termination. Notwithstanding the foregoing, if the Master Lease gives Landlord
any right to terminate the Master Lease in the event of the partial or total
damage, destruction, or condemnation of the Master Premises or the building or
project of which the Master Premises are a part, the exercise of such right by
Landlord shall not constitute a default or breach hereunder, provided that
Tenant receives a pro rata portion of any proceeds, or other remuneration, if
any, which Landlord receives as a result of such termination.
The provisions of this First Amendment to Sublease are made to reflect
the desire of Tenant to increase its Primary leased space of approximately
73,920 square feet of warehouse space and 4,800 square feet of office space
under the Primary Sublease, in two separate phases described as First Expansion
Space of approximately 32,256 square feet of warehouse space, and Second
Expansion Space of approximately 32,256 square feet of office space, as more
specifically reflected in amended Exhibit "A" attached.
The provisions and terms of the Primary Sublease are amended,
supplemented and/or
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<PAGE> 32
modified as hereafter set forth. If not amended, supplemented or modified, the
terms are identified as "no change". To the extent not amended, superseded, or
modified herein, the terms of the Primary Sublease shall constitute a part of
this amendment and are hereby incorporated by reference.
ARTICLE ONE: BASIC TERMS - ADDED AND MODIFIED AS FOLLOWS:
Section 1.01. DATE OF LEASE.
THE FOLLOWING PROVISIONS SPECIFIED BELOW ARE ADDED:
FIRST EXPANSION SPACE: October 15, 1999.
SECOND EXPANSION SPACE: November 15, 1999
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): NO CHANGE.
Section 1.03. TENANT (INCLUDED LEGAL ENTITY): NO CHANGE.
Section 1.04. PROPERTY.
THE FOLLOWING PROVISIONS ARE ADDED:
The First Expansion space includes approximately 32,256 square feet of
warehouse space; the Second Expansion Space includes approximately 32,256 square
feet of warehouse space, both of which areas are more fully reflected in Exhibit
"A", as amended and outlined in red.
Section 1.05. LEASE TERM:
THE FOLLOWING PROVISIONS ARE ADDED:
The Lease Term for the First Expansion Space shall become effective
beginning October 15, 1999, and ending on August 14, 2004, a period of Fifty-six
and one-half (56.5) months. Tenant shall pay no Base Rent for the period October
15, 1999 to November 30, 1999. During the period of free rent, Tenant shall be
obligated to pay its pro rata share of taxes, insurance, maintenance and
utilities, effective commencing November 1, 1999, and as provided in Section
1.12(b) herein.
The Lease Term for the Second Expansion Space shall become effective
beginning November 15, 1999, and ending on August 14, 2004, a period of
Fifty-five and one-half (55.5) months. Tenant shall pay no base rent for the
period November 15, 1999 to December 31, 1999. During the period of free rent,
Tenant shall be obligated to pay its pro rata share of taxes, insurance,
maintenance and utilities, effective commencing November 1, 1999, and as
provided in Section 1.12(b) herein.
In the event Lessor fails to deliver the First Expansion Space on or before
October 15, 1999,
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<PAGE> 33
Lessor shall compensate Lessee for the delay in possession as
follows:
- Beginning October 15, 1999, one (1) day free rent for each day
possession is delayed.
In the event Lessor fails to deliver the Second Expansion Space on or before
November 15, 1999, Lessor shall compensate Lessee for the delay in possession as
follows:
- Beginning November 15, 1999, one (1) day free rent for each
day possession is delayed.
Notwithstanding the above, should Lessor deliver either Expansion space at any
time prior to the original commencement date of the Term of the particular
Expansion Space, Lessee agrees to begin the Lease term for the particular
Expansion Space, upon receipt of the space.
The Option to Renew referenced herein, shall include both Expansion
Spaces.
Section 1.06. PERMITTED USES: (See Article Five) NO CHANGE.
Section 1.07. TENANT'S GUARANTOR: NO CHANGE.
Section 1.08. BROKERS: (See Article Fourteen) NO CHANGE.
Section 1.09. NO CHANGE. COMMISSION PAYABLE TO LANDLORD'S BROKER:
Section 1.10. INITIAL SECURITY DEPOSIT: These provisions are MODIFIED
AND/OR ADDED TO as set forth below:
The existing initial security deposit of [*] shall be increased by [*],
by November 15, 1999, for a total Security Deposit of [*].
The Letter-of-Credit for [*] shall be increased by [*] by November 15,
1999, for a total Letter-of-Credit of [*]. Provided the Tenant is not in
default of the Sublease, the Letter-of-Credit in the sum of [*], shall be
reduced to [*] as of August 14, 2000. As of August 14, 2001, no
Letter-of-Credit shall be required to be on deposit.
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT. THE FOLLOWING
PROVISIONS ARE ADDED:
Upon occupancy of the Second Expansion Space, Tenant shall be entitled
to an additional
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* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 34
35 unassigned parking spaces.
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: MODIFIED AS SET
FORTH BELOW.
(a) BASE RENT: MODIFIED AS FOLLOWS:
(i) EXISTING SPACE:
<TABLE>
<CAPTION>
BASE RENTAL
RATE PER SQ. FT. AMOUNT
MONTHS PER MO. PER MO.
------ ------- -------
<S> <C> <C>
July 1 - Aug. 14, 1999 Free rent
Aug. 15, 1999 - April 14, 2001 [*] psf/mth/nnn [*]
April 15, 2001 - Dec. 14, 2002 Annual minimum CPI (All
Consumers S.F. Bay Area)
increase of [*]; annual
maximum CPI (All Consumers
S.F. Bay Area) of [*] over
base rental rate in months
1 - 20.
Dec. 15, 2002 - Aug. 14, 2004 Annual Minimum CPI (All
Consumers S.F. Bay Area)
increase of [*]; annual
maximum CPI (All Consumers
S.F. Bay Area) of [*] over
base rental rate in months
21 - 40.
</TABLE>
(ii) FIRST EXPANSION SPACE:
<TABLE>
<CAPTION>
BASE RENTAL
RATE PER SQ. FT. AMOUNT
MONTHS PER MO. PER MO.
------ ------- -------
<S> <C> <C>
Oct. 15, 1999 - Nov. 30, 1999 Free rent.
Dec. 1, 1999 - April 14, 2001 [*] psf/mth/nnn [*]
April 15, 2001 - Dec. 14, 2002 Increase concurrently per
subsection (i) above
Dec. 15, 2002 - Aug. 14, 2004 Increase concurrently per
subsection (i) above
</TABLE>
(iii) SECOND EXPANSION SPACE:
<TABLE>
<CAPTION>
BASE RENTAL
RATE PER SQ. FT. AMOUNT
MONTHS PER MO. PER MO.
<S> <C> <C>
Nov. 15, 1999 - Dec. 31, 1999 Free rent.
Jan. 1, 2000 - April 14, 2001 [*] psf/mtn/nnn [*]
April 15, 2001 - Dec. 14, 2002 Increase concurrently per
subsection (i) above
Dec. 15, 2002 - Aug. 14, 2004 Increase concurrently per
subsection (i) above
</TABLE>
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* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 35
The Base Rents payable hereunder are more fully set forth in REVISED Lease Rider
No. 1 attached and incorporated herein by reference, and as referred to in
REVISED Lease Rider No. 3, also attached and incorporated herein by reference.
In the event that Landlord is in default under the Master Lease and either
Landlord or Tenant receive notice of such default from the Master Lessor under
the Master Lease, Tenant shall have the right (without any obligation to do so),
to pay rent provided in this section, and all other sums due Landlord hereunder,
which Landlord is obligated to pay directly to the Master Lessor.
(b) OTHER PERIODIC PAYMENTS INCLUDED AS RENT - REVISED TO READ IN
FULL AS FOLLOWS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums
(See Section 4.04); (iv) Tenant's Initial Pro Rata Share of
Common Area Expenses presently at 25.67% shall be increased to
(46.7%) effective November 1, 1999. (See Section 4.05); (v)
Impounds for Insurance Premiums and Property Taxes (See
Section 4.08); (vi) Maintenance, Repairs and Alterations (See
Article Six).
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: NO
CHANGE.
Section 1.14. RIDERS: The following Riders ARE REVISED as indicated and
are attached and made a part of this Lease:
Rider No. 1 - Base Rent Schedule - REVISED TO READ IN FULL AS ATTACHED.
Rider No. 2 - Tenant Improvement Allowance - NO CHANGE. All Tenant
Improvements to Expansion Spaces are to be made at Tenant's sole cost and
expense and in accordance with Section 6.05 (a) and (b) of the Primary Lease.
Rider No. 3 - Options to Renew and to Expand Space - REVISED TO READ IN
FULL AS ATTACHED.
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. REVISED AS FOLLOWS:
Landlord leases the Property to Tenant and Tenant leases the Property from
Landlord for the Lease Term, as amended. The Lease term is for the period stated
in Section 1.05, as amended, and shall begin and end on the dates specified in
Section 1.05, as amended, unless the beginning or end of the Lease Term is
changed under any provision of this Lease. The "Commencement Date" shall be the
dates specified in Section 1.05, as amended, for the beginning of the Lease
Term, unless advanced or delayed under any provision of this Lease. The Lease
Term for all space shall end on August 14, 2004, unless extended by exercise of
any option provided, or under any applicable provision of the Lease.
Section 2.02. DELAY IN COMMENCEMENT. NO CHANGE.
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<PAGE> 36
Section 2.03. EARLY OCCUPANCY. NO CHANGE.
Section 2.04. HOLDING OVER. NO CHANGE.
ARTICLE THREE: BASE RENT - MODIFIED AS SET FORTH BELOW.
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this First
Amendment to Lease, Tenant shall continue to pay Landlord the Base Rent for the
existing space in the amount stated in Paragraph 1.12(a)(i) above, on the first
day of the each month of the Lease Term. On December 1, 1999, Tenant shall pay,
in addition to such rent, the Base Rent for the First Expansion Space for the
first month and each month thereafter as provided in Section 1.12(a)(ii). On
January 1, 2000, Tenant shall pay additional Base Rent for the Second Expansion
Space for first month and each month thereafter, as provided in Section
1.12(a)(iii). Tenant shall pay Landlord the Base Rent, in advance within five
(5) business days after the commencement of each month, without offset,
deduction or prior demand. The Base Rent shall be payable at Landlord's address
or at such other place as Landlord may designate in writing. If the Term of
either the First Expansion Space or the Second Expansion Space commences other
than on the first day of a month, then the Base Rent provided for such partial
month shall be prorated based upon a thirty (30) day month and the prorated
installment shall be paid on the first day of the calendar month next succeeding
the Term Commencement Date together with the other amounts payable on that day.
If such Term terminates on other than the last day of a calendar month, then the
Rent provided for such partial month shall be prorated based upon a thirty (30)
day month and the prorated installment shall be paid on the first day of the
calendar month in which the date of termination occurs.
Section 3.02. COST OF LIVING INCREASE. The Base Rent for all space
shall be increased on each date (the "Rental Adjustment Date") as provided in
Paragraph 1.12(a) above in accordance with the increase in the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All
Urban Consumer (all items for the geographical Statistical Area in which the
Property is located on the basis of 1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect
immediately before each Rental Adjustment Date shall be
increased by the percentage that the Index has increased from
the date (the "Comparison Date') on which payment of the
Comparison Base Rent began through the month in which the
applicable Rental Adjustment Date occurs. The Base Rent shall
not be reduced by reason of such computation. Landlord shall
notify Tenant of each increase by a written statement which
shall include the Index for the applicable Comparison Date,
the Index for the increase in the Base Rent provided for in
this Section 3.02 shall be subject to any minimum or maximum
increase, if provided for in Paragraph 1.12(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date
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<PAGE> 37
until the next Rental Adjustment Date. Landlord's notice may
be given after the applicable Rental Adjustment Date of the
increase, and Tenant shall pay Landlord the accrued rental
adjustment for the months elapsed between the effective date
of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or
components of the Index are materially changed after the
Commencement Date, Landlord shall substitute an index which is
published by the Bureau of labor Statistics or similar agency
and which is most nearly equivalent to the Index in effect on
the Commencement Date. The substitute index shall be used to
calculate the increase in the Base Rent unless Tenant objects
to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and
Tenant shall submit the selection of the substitute index for
binding arbitration in accordance with the rules and
regulations of the American Arbitration Association at its
office closest to the Property. The costs of arbitration shall
be borne equally by Landlord and Tenant.
Section 3.03. SECURITY DEPOSIT; INCREASES. NO CHANGE.
Section 3.04. TERMINATION; ADVANCE PAYMENT. NO CHANGE.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT - NO CHANGE, EXCEPT FOR REVISIONS
IN SUBPARAGRAPH 4.02(c) AND 4.03.
Section 4.01. ADDITIONAL RENT. NO CHANGE.
Section 4.02. PROPERTY TAXES. NO CHANGE, EXCEPT FOR SUBSECTIONS (c)
JOINT ASSESSMENT.
(a) REAL PROPERTY TAXES. NO CHANGE.
(b) DEFINITION OF "REAL PROPERTY TAX". NO CHANGE.
(c) JOINT ASSESSMENT. REVISED AS SHOWN: If the Property is not
separately assessed, Landlord shall reasonably determine
Tenant's share of the real property tax payable by Tenant
under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such
share to Landlord within fifteen (15) days after receipt of
Landlord's written statement. Until November 1, 1999, Tenant's
share of such real property tax shall be 25.67% of the total
amount assessed on the Project, based on the total square
footage occupied at the time of the execution of this
Sublease, divided by the total square footage of the premises
(78,720 square feet / 306,650 square feet = 25.67%). Effective
November 1, 1999, the Tenant's share shall be 46.7% based upon
the total square footage, including Expansion Spaces, covered
by the Lease, as amended, divided by the total square footage
of the premises. (143,232 / 306,650 = 46.7%).
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<PAGE> 38
(d) PERSONAL PROPERTY TAXES. NO CHANGE.
Section 4.03. UTILITIES - REVISED AS FOLLOWS: Tenant shall pay,
directly to the appropriate supplier, the cost of all natural gas, heat, light,
power, sewer service, telephone, water, refuse disposal and other utilities and
services supplied to the Property. However, if any services or utilities are
jointly metered with other property, Landlord shall make a reasonable
determination of Tenant's proportionate share of the cost of such utilities and
services and Tenant shall pay its share to Landlord within fifteen (15) days
after receipt of Landlord's written statement. Tenant's share of such
non-jointly metered costs shall be 25.67% of the total charged to the Project,
based on the square footage occupied by Tenant at the time prior to and at the
execution of this Sublease, and 46.7% as of November 1, 1999.
Section 4.04. INSURANCE POLICIES. NO CHANGE.
(a) LIABILITY INSURANCE. NO CHANGE.
(b) PROPERTY AND RENTAL INCOME INSURANCE. NO CHANGE.
(c) PAYMENT OF PREMIUMS. NO CHANGE.
(d) GENERAL PROVISIONS. NO CHANGE.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS. REVISED PER
SUBSECTION (e) AS FOLLOWS:
(a) COMMON AREAS. NO CHANGE.
(b) USE OF COMMON AREAS. NO CHANGE.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. NO CHANGE.
(d) MAINTENANCE OF COMMON AREAS. NO CHANGE.
(e) TENANT'S SHARE AND PAYMENT. REVISED TO READ IN FULL AS
FOLLOWS: Tenant shall pay Tenant's annual pro rata share of
all Common Area costs (prorated for any fractional month) upon
notice from Landlord that such costs are due and payable, and
in any event prior to delinquency. Tenant's pro rata share
shall be calculated by dividing the square footage area of the
Property, as set forth in Section 1.04 of the Lease, by the
aggregate square foot area of the Project which is leased or
held for lease by tenants, as of the date on which the
computation is made. Tenant's initial and subsequent pro rata
share is set out in Section 1.12(b), AS AMENDED. Any changes
in the Common Area costs and/or the aggregate area of the
Project, leased or held for lease during the Lease Term shall
be effective on the first day of the month after such change
occurs. Landlord may, at Landlord's election,
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<PAGE> 39
estimate in advance and charge to Tenant as Common Area costs,
all maintenance and repair costs for which Tenant is liable
under Section 6.04 of the Lease, and all other Common Area
costs payable by Tenant hereunder. At Landlord's election,
such statements of estimated Common Area costs shall be
delivered monthly, quarterly or at any other periodic
intervals to be designated by Landlord. Landlord may adjust
such estimates at any time based upon Landlord's experience
and reasonable anticipation of costs. Such adjustments shall
be effective as of the next rent payment date after notice to
Tenant. Within sixty (60) days after the end of each calendar
year of the Lease Term, Landlord shall deliver to Tenant a
statement prepared in accordance with generally accepted
accounting principles setting forth, in reasonable detail, the
Common Area costs paid or incurred by Landlord during the
preceding calendar year and Tenant's pro rata share. Upon
receipt of such statement, there shall be an adjustment
between Landlord and Tenant, with payment to or credit given
by Landlord (as the case may be) so that Landlord shall
receive the entire amount of Tenant's share of such costs and
expenses for such period.
Section 4.06. LATE CHARGES. NO CHANGE.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. NO CHANGE.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
NO CHANGE.
ARTICLE FIVE: USE OF PROPERTY - NO CHANGE.
Section 5.01. PERMITTED USES. NO CHANGE.
Section 5.02. MANNER OF USE. NO CHANGE.
Section 5.03. HAZARDOUS MATERIALS. NO CHANGE.
Section 5.04. SIGNS AND AUCTIONS. NO CHANGE.
Section 5.05. INDEMNITY. NO CHANGE.
Section 5.06. LANDLORD'S ACCESS. NO CHANGE.
Section 5.07. QUIET POSSESSION. NO CHANGE.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS. NO
CHANGE.
Section 6.01. EXISTING CONDITIONS. NO CHANGE.
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<PAGE> 40
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. NO CHANGE.
Section 6.03. LANDLORD'S OBLIGATION. NO CHANGE.
Section 6.04. TENANT'S OBLIGATIONS. NO CHANGE.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. NO CHANGE.
Section 6.06. CONDITION UPON TERMINATION. NO CHANGE.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION - NO CHANGE.
ARTICLE EIGHT: CONDEMNATION - NO CHANGE.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING - NO CHANGE.
ARTICLE TEN: DEFAULTS; REMEDIES - NO CHANGE.
ARTICLE ELEVEN: PROTECTION OF LENDERS - NO CHANGE.
ARTICLE TWELVE: LEGAL COSTS - NO CHANGE.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS - THE PROVISIONS OF SECTIONS 13.15
AND 13.16 ARE ADDED:
Section 13.01. NON-DISCRIMINATION. NO CHANGE.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. NO CHANGE.
Section 13.03. SEVERABILITY. NO CHANGE.
Section 13.04. INTERPRETATION. NO CHANGE.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. NO
CHANGE.
Section 13.06. NOTICES. NO CHANGE.
Section 13.07. WAIVERS. NO CHANGE.
Section 13.08. NO RECORDATION. NO CHANGE.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. NO CHANGE.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. NO CHANGE.
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<PAGE> 41
Section 13.11. JOINT AND SEVERAL LIABILITY. NO CHANGE.
Section 13.12. FORCE MAJEURE. NO CHANGE.
Section 13.13. EXECUTION OF LEASE. NO CHANGE.
Section 13.14. SURVIVAL. NO CHANGE.
Section 13.15. TENANT'S RESTROOM FACILITY.
JOINT RESTROOM USE. The parties agree that during the term of this
Sublease, they shall be jointly entitled to use the restroom facility marked as
"JOINT RESTROOM" on Exhibit "A", and Landlord agrees to provide for Tenant's
access as indicated in solid Green lines on Exhibit "A" at Tenant's sole cost
for alterations for access, security and other requirements to permit joint use
but retaining security for the respective operation of Landlord and Tenant.
TENANT'S SEPARATE RESTROOM. Alternatively, the parties agree that
during the term of this Sublease, Tenant at its election, may be exclusively
entitled to construct and use the restroom facility marked as "RESTROOM" on
Exhibit "A", as indicated in Green. Tenant shall install such facility at its
sole cost and expense at the approximate location indicated in dotted Green
lines on Exhibit "A", and according to plans and specifications approved by
Landlord.
Section 13.16. TENANT'S CONTRIBUTION TO LANDLORD'S RELOCATION EXPENSE.
Tenant agrees, in further consideration, for this Sublease, to pay Landlord the
sum of $43,947 to defray, to that extent, Landlords cost of relocating its
existing customers and facility in the Expansion Spaces. Said payment shall be
made by Tenant concurrently with execution by Tenant of this Sublease. Tenant
further agrees to disassemble, remove, transport, and reinstall, Landlord's
existing racking in the Expansion Spaces to Landlord's facilities at 1345
Doolittle Rd., San Leandro, California, at Tenant's sole cost and expense.
Tenant shall accomplish such relocation of racking on occupation of the First
Expansion Space and in coordination with Landlord's on-site management.
ARTICLE FOURTEEN: BROKERS - NO CHANGE.
Landlord and Tenant have signed this Amendment to Lease at the place and on the
dates specified adjacent to their signatures below and have initialed all Riders
which are attached to or incorporated by reference to this Lease.
"LANDLORD"
Signed on October 20, 1999. NATIONAL DISTRIBUTION AGENCY, INC.,
a Delaware corporation
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<PAGE> 42
at Santa Monica, CA By: /s/ John N. Alphson
-------------------------------------
JOHN N. ALPHSON
Its: CORPORATE SECRETARY
By:
--------------------------------------
ROBERT BERNARDO
Its GENERAL MANAGER
"TENANT"
Signed on October 22, 1999. PETS.COM, INC., a California corporation
at San Francisco, CA
-----------------------------------------
By: /s/ Julie Wainwright
-------------------------------------
JULIE WAINWRIGHT
Its: CHIEF EXECUTIVE OFFICER
By:
--------------------------------------
Its:
-------------------------------------
SECRETARY
IN ANY SUCH REAL ESTATE ACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST, OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
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<PAGE> 43
BASE RENT SCHEDULE
REVISED
LEASE RIDER
RIDER NO. 1
This Rider is attached to and made a part of that certain Lease (the
"Lease") dated July 1, 1999, between National Distribution Agency, Inc. a
Delaware corporation, as Landlord, and Pets.com, Inc., a California corporation,
as Tenant, covering the premises constituting a portion of the Project located
at 33201 Dowe Avenue, Union City, California, (the "Property"). The terms used
herein shall have the same definitions as set forth in the Lease. The provisions
of this Rider shall supersede any inconsistent or conflicting provisions of the
Lease, with the exception of additional free rent for delay in delivery of
possession or early delivery, as provided in Section 1.05 hereof.
SECTION 1.12 RENT AND OTHER CHARGES PAYABLE BY TENANT
This Rider sets forth the Base Rental payable under the Lease for the
first and subsequent years as to the Existing Space (i), and each of the two
Expansion Spaces (ii) and (iii).
(i) INITIAL TERM OF BASE SUBLEASE - JULY 1, 1999 TO AUGUST 14, 2004
<TABLE>
<CAPTION>
Rental Period Monthly Base Rent*
------------- -----------------
<S> <C>
July 1, 1999 through August 14, 1999 - 1-1/2 mo. Free
August 15, 1999 through April 14, 2001 - 20 mo. $27,552.00
April 15, 2001 through December 14, 2002 - 20 mo. $28,930.00
December 15, 2002 through August, 14, 2004 - 20 mo. $30,376.00
</TABLE>
(ii) FIRST EXPANSION SPACE - OCTOBER 15, 1999 - AUGUST 14, 2004
<TABLE>
<CAPTION>
Rental Period Monthly Base Rent*
------------- ------------------
<S> <C>
October 15, 1999 - November 30, 1999 - 1-1/2 mo. Free
December 1, 1999 - April 14, 2001 $11,290.00
</TABLE>
April 15, 2001 - December 14, 2002 - Increase per formula for Subsection
(i).
December 15, 2002 - August, 14, 2004 - Increase per formula for
Subsection (i).
<PAGE> 44
(iii) SECOND EXPANSION SPACE - NOVEMBER 15, 1999 - AUGUST 14, 2004
<TABLE>
<CAPTION>
Rental Period Monthly Base Rent*
------------- ------------------
<S> <C>
November 15, 1999 - December 31, 1999 Free
January 1, 2000 - April 14, 2001 $11,290.00
</TABLE>
April 15, 2001 - December 14, 2002 - Increase per formula for Subsection
(i).
December 15, 2002 - August, 14, 2004 - Increase per formula for
Subsection (i).
OPTION TERM OF AMENDED SUBLEASE - AUGUST 15, 2004 TO AUGUST 14, 2009
<TABLE>
<S> <C>
August 15, 2004 through April 14, 2006 - 20 mo. $58,033.00
April 15, 2006 through December 14, 2007 - 20 mo. $60,935.00
December 15, 2007 through August 14, 2008 - 20 mo. $63,982.00
</TABLE>
*Minimum rental which would be due based on assumed CPI increase of
three percent (3%) per annum.
Notwithstanding the foregoing, the increased rental for the periods
indicated are subject to the effective CPI increase for such periods as set
forth in Section 1.12(a) of the Amended Sublease.
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<PAGE> 45
TENANT IMPROVEMENT ALLOWANCE
LEASE RIDER
RIDER NO.2
This Rider is attached to and made a part of that certain lease (the
"Lease") dated July 1,1999, between National Distribution Agency, Inc., a
Delaware corporation, as Landlord and Pets.com, Inc., a California corporation,
as Tenant, covering the premises constituting a portion of the property located
at 33201 Dowe Avenue, Union City, California, (the "Property"). The terms used
herein shall have the same definitions as set forth in the Lease. The provisions
of this Rider shall supersede any inconsistency or conflicting provisions of the
Lease.
The Tenant Improvement Allowance paid for by Landlord shall not exceed
Seventy-eight Thousand Seven Hundred Twenty Dollars ($78,720.00). Any excess
costs over the amount of $78,720.00 shall be paid by, and at the sole cost, of
Tenant. The type and character of Tenant Improvements, whether paid for by
Landlord or those at Tenant's option, shall be subject to approval of plans and
specifications by the Building Department of the City of Union City, as accepted
by Sublessor and submitted to said Building Department.
The parties agree and understand that the exact scope of work has not
yet been finally determined but that the tentative scope of work is set forth in
the "Work Letter" and layout, Appendix 1, attached thereto and made a part
hereof by this reference.
It is further understood that said Scope of Work is subject to mutually
agreed modifications consistent with Tenant's use of the premises; provided
that, all work is subject to all necessary permits from all governmental
agencies having jurisdiction over the work. Further, any costs of the work as
finally specified, including architectural plans, permits and related
construction costs, shall be paid first by Landlord to the extent of the sum of
$78,720, and that all costs of such work in excess thereof shall be paid through
Landlord by Tenant upon five (5) business days written notice. Landlord's
payment shall be paid to the respective construction creditor within ten (10)
business days from submission of invoice to Landlord, accompanied by appropriate
labor and material lien releases.
<PAGE> 46
WORK LETTER
APPENDIX 1 TO LEASE RIDER NO. 2
Attached to and made a part of that certain Lease (the "Lease") dated
July 1, 1999, between National Distribution Agency, Inc., a Delaware
corporation, as Landlord, and Pets.com, Inc., a California corporation, as
Tenant, covering the premises constituting a portion of the property located at
33201 Dowe Avenue, Union City, California, (the "Property"). The Terms used
herein shall have the same definitions as set forth in the Lease. The provisions
of this Work Letter shall supersede any inconsistency or conflicting provisions
of the Lease.
Other than funding the Tenant Improvement Allowance (as defined in Lease
Rider No.2), as provided herein, Landlord shall not have any obligation
whatsoever with respect to the finishing of the Premises for Tenant's use and
occupancy. The Tenant Improvements have been specified by the Tenant as follows:
1. Install approximately 3,000 square feet of office space with code
compliant restrooms.
2. Reconfigure lighting system (as required by code).
3. Install draft curtains (if required by Tenant and by code).
4. Install smoke vents (as required by code).
5. Cut new opening through the concrete demising wall and install a roll-up
door.
<PAGE> 47
OPTIONS TO RENEW AND TO EXPAND SPACE
LEASE RIDER
RIDER NO. 3
This Rider is attached to and made a part of that certain Lease (the
"Lease") dated July 1, 1999, between National Distribution Agency, Inc., a
Delaware corporation, as Landlord or Sublessor, and Pets.com, Inc., a California
corporation, as Tenant or Sublessee, amended by First Amendment thereto,
covering the premises constituting a portion of the Project located at 33201
Dowe Avenue, Union City, California (the "Property"). The terms used herein
shall have the same definitions as set forth in the Lease, as amended. The
provisions of this Rider shall supersede any inconsistent or conflicting
provisions of the Lease, as amended.
A. OPTION TO RENEW TERM.
Provided Sublessee shall not be in material default of any terms of
conditions of this Sublease, as amended, at the time of exercise of the
particular Option to Extend as provided herein, Sublessee shall have the right
and option to extend the existing Term covering 143,232 square feet and ending
August 14, 2004, for one (1) five year period, such five year period is herein
referred to as the "Extended Term." The Extended Term shall commence on the day
next following the Term Expiration Date for the preceding term unless sooner
terminated as herein provided and shall terminate on the fifth anniversary of
such Extended Term Commencement Date. Sublessee may exercise its right and
option to extend the existing Term only by giving Sublessor written notice of
intention to do so at least one hundred and twenty (120) days prior to the end
of the existing Term. The Sublease as extended shall be upon and subject to the
terms and conditions set forth in the Primary Lease, as amended, except for
exclusion of any free rent and, further, that the Rent (defined in Article
Three), shall be adjusted as specified in Section C hereof. Sublessor agrees and
covenants that:
(a) Except for defaults committed by Sublessee, it will not commit or
allow to be committed (and if committed, it will timely cure within the periods
set forth in the Master Lease), any event which would constitute an event of
default under the Master Lease, including complying with an order or judgment of
any court having jurisdiction, pursuant to a declaratory relief, or similar
action whereby the obligation of a matter of performance under the Master Lease,
involving, but not limited to, compliance with any subsequently enacted
ordinances or laws concerning seismic retrofitting and/or repair to the Leased
Premises, or any portion thereof, is disputed between Master Lessor and
Sublessor, and such a court order or judgement determines that the performance
in dispute is the obligation of Sublessor under the Master Lease.
(b) That it will timely exercise its rights to extend the term of the
Master Lease so that at all times the remaining term of the Master Lease is at
least as long as the remaining term of the Sublease, as the same may be extended
by Sublessee from time to time.
<PAGE> 48
B. PERSONAL OPTIONS.
The Options are personal to the Tenant named in Section 1.03 of the
Lease or any Tenant's Affiliated described in Section 9.02 of the Lease. If
Tenant subleases any portion of the Property or assigns or otherwise transfers
any interest under the Lease to an entity other than a Tenant Affiliate prior to
the exercise of the Option (whether with or without Landlord's consent), such
Option shall lapse. If Tenant subleases any portion of the Property or assigns
or otherwise transfers any interest of Tenant under the Lease to an entity other
than a Tenant Affiliate after the exercise of the Option, such Option shall
lapse and the lease terms shall expire as if such Option was not exercised. If
Tenant subleases any portion of the Property, or assigns or otherwise transfers
any interest of the Tenant under the Lease in accordance with Article 9 of the
Lease, after the exercise of the Option and after commencement of the Extension
related to such Option, then the term of the Lease shall expire upon the
expiration of the Extension during which sublease or transfer occurred.
C. CALCULATION OF RENT ON EXTENSION.
The Base Rent during the Extended Term shall be determined by the
following method:
1. COST OF LIVING ADJUSTMENT.
Rental Adjustment Dates: The following dates of the Extended
Terms.
The Rent during the Extended Term shall be increased on the
following date(s) (the "Rental Adjustment Date(s)"), August 15, 2004, April 15,
2006, and December 15, 2007, by reference to the index described in Paragraph
1.12(a) of the Sublease, as follows:
The Base Rent in effect for the month immediately prior to the
applicable Rental Adjustment Date (the "Comparison Base Rent"), shall be
increased by the percentage that the index has increased from the month in which
the payment of the comparison base rent commenced through the month in which the
applicable Rental Adjustment Date occurs. In no event shall the base rent be
reduced by reason of such computation.
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<PAGE> 1
EXHIBIT 10.32
EXCLUSIVE CROSS MARKETING AGREEMENT BETWEEN
PETS.COM AND PETPLACE.COM
This Exclusive Cross Marketing Agreement (this "Agreement") is made as
of September, 17 1999 (the "Effective Date") by and between Pets.com, Inc., a
California corporation with offices at 435 Brannan Street, Suite 100, San
Francisco, CA 94107 ("Pets.com") and PetPlace.com, Inc., a Delaware corporation
with offices at 71 Broadway, Suite 22A, New York, New York 10006
("PetPlace.com") (each a "party" and collectively the "parties").
BACKGROUND
Whereas, Pets.com owns and operates the Pets.com Site (as defined below) which
markets and sells pet related goods to consumers;
Whereas, PetPlace.com owns and operates the PetPlace.com Site (as defined below)
which provides on-line veterinary service; and
Whereas, the parties wish to enter into an exclusive relationship on the terms
and conditions set forth herein. In consideration of the mutual promises
contained herein, the parties hereby agree as follows:
AGREEMENT
1. DEFINITIONS.
"Above the Fold" means the placement of an icon, Link or other content
on a Page such that it is viewable on a computer screen at an 800 x 600 pixels
resolution by a user without having to scroll down to view more of the Page.
"Animal Main Pages" mean Pages within the Pets.com Site which are the
entry point for products and information on an individual or group of animal
species.
"Content/Resource Area" means an area within the Pets.com Site which
shall contain content and resources for animals and which shall not be more than
two (2) clicks away from the Pets.com Home Page.
"Home Page" means that Page of the web site which is designated as the
initial end user interface for the web site.
"Intellectual Property Rights" means all rights in and to trade
secrets, patents, copyrights, trademarks, know-how, as well as moral rights and
similar rights of any type under the laws of any governmental authority,
domestic or foreign, including rights in and to all applications and
registrations relating to any of the foregoing.
"Launch Date" means the date on which the PetPlace.com Site shall be
made available and accessible via the World Wide Web. The parties estimate that
the Launch Date will occur on
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<PAGE> 2
December 1, 1999. PetPlace.com shall provide Pets.com with regular monthly
updates regarding the status of the Launch Date.
"Link" means a URL hidden behind a formatting option that may take the
form of a colored item of text (such as a URL description), logo or image,
"button" or graphic box, and which allows a user to access Pages, web sites or
other text within a Page. The technical implementation of the Links shall be
mutually agreed by the parties.
"Marks" of a party means such party's trademarks, trade names, service
marks, service names, logos and other distinct brand elements that appear from
time to time in such party's properties, ventures and services worldwide,
together with any modifications to the foregoing made by such party during the
term of this Agreement.
"Online" means on the Internet or other online service or network.
"Page" means a document on the Internet which may be viewed in its
entirety without leaving the applicable distinct URL address.
"Partners Page" means that Page on the web site which is designated to
contain information about the strategic partners of that web site.
"Pet Retail Company" means any web site, Online service, traditional
retail store or other physical or virtual entity listed on Exhibit A, and any
subsidiary or holding company of such entity. The parties will meet quarterly to
discuss in good faith modifications or additions of this Exhibit A.
"PetPlace.com Site" means the web site owned and operated by
PetPlace.com, and currently having a URL at http://www.petplace.com, and any
successor site thereof.
"Pets.com Site" means the web site owned and operated by Pets.com, and
currently having a URL at http://www.pets.com, and any successor site thereof.
"Revenue" means the purchase price of any product of service (excluding
sales or similar taxes and shipping, if applicable) less any returns of products
previously sold.
2. PETS.COM SITE PLACEMENT. After the Launch Date and during the term, Pets.com
shall provide the following placements on the Pets.com Site:
2.1 HOME PAGE. Pets.com shall provide an Above the Fold Link (to be
approved by both parties) on the Pets.com Home Page which links to the
PetPlace.com Home Page.
2.2 CONTENT/RESOURCE AREA. Pets.com shall provide the following
placements in the Content/Resource Area:
(a) Links on either a "Navigation Bar" or through a Link entitled
"Learn more about medical care" (or similar language) to the PetPlace.com Site;
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<PAGE> 3
(b) Excerpted medical articles to be provided by Petplace.com which
shall link to the full text of the article at the Petplace.com Site; and
(c) Medical terms which contain a Link to the PetPlace.com Site.
2.3 ANIMAL MAIN PAGES. Pets.com shall feature articles to be provided by
PetPlace.com on its Animal Main Pages which shall contain a Link to the full
text of the article at the PetPlace.com Site.
2.4 PARTNERS PAGE. Pets.com shall provide a Link on its Partners Page
which shall link to the PetPlace.com Home Page.
3. PETPLACE.COM SITE PLACEMENT. After the Launch Date and during the term,
PetPlace.com shall provide the following placements on the PetPlace.com Site:
3.1 HOME PAGE. PetPlace.com shall provide an Above the Fold Link (to be
approved by both parties) on the Petplace.com Home Page which links to the
Pets.com Home Page.
3.2 BUY BUTTONS. Petplace.com shall provide "Buy Button" Links after
every pet product recommendation on the PetPlace.com Site and a "Buy All" Link
at the end of each article which shall link to either a Pets.com Page which
describes the product or a Pets.com Page where the user can purchase the
product.
3.3 PARTNER PAGE. PetPlace.com shall develop a Page similar to
Pets.com's Partner Page and shall include a Link on such Page which links to the
Pets.com Home Page.
4. BANNER ADVERTISEMENTS. Pets.com shall have the right to purchase from
PetPlace.com banner advertisements. The price, terms and placement of such
banner advertisements to Pets.com [*]. In the event Pets.com were to sell banner
advertisements on the Pets.com Site in the future, Pets.com agrees that the
price, terms and placement of such banner advertisements to Petplace.com [*].
5. REVENUE SHARING.
5.1 PETS.COM. Beginning with the conclusion of the first calendar
quarter after the Launch Date and for each quarter thereafter, Pets.com will,
within thirty (30) days after the end of each quarter, [*] from the Pets.com
Site by a user who "clicked through" from the PetPlace.com Site and made a
purchase before leaving the Pets.com Site by any means. In addition, [*]
"clicked through" from the Petplace.com Site and made a purchase from the
Pets.com Site before leaving the Pets.com Site by any means [*].
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 4
5.2 PETPLACE.COM. Beginning with the conclusion of the calendar quarter
after the Launch Date and for each quarter thereafter, Petplace.com will, within
thirty (30) days after the end of each quarter, [*] from the Petplace.com Site
by a user who "clicked through" from the Pets.com Site and made a purchase
before leaving the PetPlace.com Site by any means. In addition, [*] "clicked
through" from the Pets.com Site and made a purchase from the PetPlace.com Site
before leaving the Petplace.com Site by any means [*].
5.3 AUDIT RIGHTS. During the term of this Agreement and for one (1) year
thereafter, either party, at its own expense, may cause an audit to be made of
the other party's applicable records in order to verify the payments made
pursuant to this Section 5 and prompt adjustment shall be made to compensate for
any errors or omissions disclosed by such audit, provided that: i) such audit be
made by an independent Certified Public Accountant of national standing
reasonably acceptable to the audited party; ii) the auditor agrees to keep the
results of the audit confidential; iii) the audit will be conducted at the other
party's place of business during normal business hours and with reasonable prior
written notice; and iv) the audit is not conducted more than once per calendar
year.
6. EXCLUSIVITY.
6.1 Pets.com shall be the exclusive Pet Retail Company associated with
the PetPlace.com Site in that no banner advertisements, sponsorships, promotions
or any other advertising, promotional or editorial content of any Pet Retail
Company other than Pets.com shall appear on the PetPlace.com Site during the
term of this Agreement. In addition, PetPlace.com shall not promote any Pet
Retail Company other than Pets.com in any advertising, promotional or public
relations materials in any form or medium. Petplace.com further agrees not to
market or sell pet related products to consumers in competition with Pets.com.
Notwithstanding the previous sentence, [*] chooses not [*].
6.2 PetPlace.com shall be the exclusive Online veterinary service
provider associated with the Pets.com Site in that no banner advertisements,
sponsorships, promotions or any other advertising or promotional content of any
Online veterinary service provider other than PetPlace.com shall appear on the
Pets.com Site during the term of this Agreement. In addition, Pets.com shall not
promote any Online veterinary service provider other than Petplace.com in any
advertising, promotional or public relations materials in any form or medium.
Pets.com further agrees [*]. Notwithstanding the foregoing, Petplace.com
acknowledges that Pets.com currently provides and shall continue to provide pet
care information content supplied by veterinarians at no cost to users on the
Pets.com Site, provided such content is not directly competitive with
PetPlace.com. PetPlace.com acknowledges, however, that the pet care information
offered at the Pets.com Site as of the Effective Date, and any information
offered
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 5
thereafter at the same or a lesser level of service or content, shall not be
considered directly competitive with PetPlace.com within the meaning of this
Section 6.2.
7. JOINT MARKETING AND PROMOTION.
7.1 PETS.COM OBLIGATIONS.
(a) PUBLIC RELATIONS. Pets.com will develop and execute against a
public relations plan during the first twelve (12) months of this Agreement
which includes but is not limited to: (i) a specific press release announcing
the relationship pursuant to this Agreement; (ii) a press tour for Julie
Wainwright and Jon Rappaport targeting key Internet, consumer and business press
such as for example CNN, MSNBC, Wall Street Journal, NY Times and ZDTV and other
consumer magazines; and (iii) continued mention of Petplace.com as part of
Pets.com's ongoing press materials. [*] that it will deliver [*] as a result of
these efforts.
(b) TELEVISION. Pets.com will develop a specific television
advertisement highlighting PetPlace.com and [*] as [*] during the [*] Agreement.
[*] that it will [*] from such [*].
(c) EMAIL NEWSLETTER. Pets.com will feature PetPlace.com in its
regular newsletter to its installed base [*]. Pets.com estimates that it will
deliver to PetPlace.com [*] from its newsletter during the first twelve (12)
months of this Agreement.
(d) MAGAZINE. To the extent that Pets.com publishes a magazine, it
will include a full page advertisement of PetPlace.com in the first quarter Year
2000 edition of the magazine. PetPlace.com shall provide the print advertising
to Pets.com which shall meet the magazine's technical specifications by the
required insertion date. Pets.com [*].
(e) PETS.COM IN-BOX SHIPMENTS. Pets.com will periodically insert
PetPlace.com information into the shipments to its customers. The content of
such PetPlace.com information will be mutually agreed by the parties. Pets.com
estimates that it will insert Petplace.com information into shipments delivering
[*] impressions during the first [*] of this Agreement.
(f) [*]PROMOTIONS. Pets.com will [*] in its [*]. Pets.com estimates
that it will [*] that will deliver [*] during the [*] of this Agreement.
(g) EDITORIAL CONTENT VENUE. Pets.com will create a credited venue
for editorial content to be supplied by PetPlace.com that will allow consumers
to see PetPlace.com as an authority on pet medical issues. Pets.com estimates
that it will deliver to
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 6
PetPlace.com between [*] impressions through the editorial content venue during
the first [*] of this Agreement.
7.2 MINIMUM IMPRESSIONS. Pets.com agrees to make commercially reasonable
efforts to deliver to PetPlace.com the [*], where applicable, as set forth in
Section 7.1.
7.3 PETPLACE.COM OBLIGATIONS. PetPlace.com agrees to make commercially
reasonable efforts develop a mutually acceptable marketing and promotional plan
within [*] of the Effective Date which shall be attached hereto as Exhibit B.
7.4 QUARTERLY MEETINGS. The parties agree to have quarterly meetings to
review and, if necessary, revise each party's respective marketing and
promotional efforts to ensure that the mutual interests and objectives of both
parties are met.
8. EQUITY INVESTMENT. The effective execution of this Agreement is
conditioned upon the execution and delivery of a separate stock purchase
agreement by the parties being entered into on or around the Effective Date.
Notwithstanding the preceding sentence, Section 12.1 regarding confidentiality
shall be effective immediately.
9. ADDITIONAL OBLIGATIONS.
9.1 USER DATA AND INFORMATION. Both parties agree to share with the
other party at no cost any user data or information collected through their
respective Sites which have been affirmatively opted in by the user (with the
opt-in occurring at either the Pets.com or PetPlace.com Site), subject to any
applicable privacy or other laws.
9.2 ANGELL MEMORIAL ENDORSEMENT. Petplace.com agrees to consider the
endorsement of a private label food product supplied and distributed by
Pets.com. PetPlace.com will also use its commercially reasonable efforts to gain
endorsement from Angell Memorial.
9.3 CONSUMER MEDICAL QUESTIONS. Pets.com agrees to forward all email
medical questions from users to Petplace.com and provided that PetPlace.com
responds within [*] to such questions. PetPlace.com agrees to provide [*]
consultations to any such users as a special offer to Pets.com users.
9.4 PRODUCT SUPPLY CATALOG. Pets.com shall provide (or make available)
to PetPlace.com current electronic versions of its product supply catalog data.
The format, technical specifications and process for providing such catalog
shall be mutually agreed to by the parties.
9.5 IMPLEMENTATION/COOPERATION. During the term, the parties will
cooperate in good faith and use commercially reasonable efforts to establish and
implement procedures and processes for proposing, creating, approving and
performing the obligations under this Agreement.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 7
10. TERM AND TERMINATION.
10.1 TERM. This Agreement will become effective as of the Effective Date
and. unless sooner terminated as otherwise provided herein, or as otherwise
mutually agreed, shall remain effective for a period of [*] years from the
Launch Date.
10.2 LAUNCH DATE. Pets.com shall have the right to terminate this
Agreement upon written notice to PetPlace.com in the event that the Launch Date
has not occurred by [*].
10.3 TERMINATION FOR INSOLVENCY AND CAUSE. This Agreement may be
terminated at any time by a party, effective immediately upon notice, if the
other party: (a) undergoes an insolvency proceeding that is not dismissed within
ninety (90) days; (b) files a petition in bankruptcy, (c) makes an assignment
for the benefit of its creditors, or (d) breaches any of its material
responsibilities or obligations under this Agreement, which breach is not
remedied within thirty (30) days from receipt of written notice of such breach.
10.4 EFFECT OF TERMINATION. Upon expiration or termination of this
Agreement: (a) each party shall return or, at the disclosing party's request
destroy, the Confidential Information of the other party, (b) all licenses
granted herein shall terminate and (c) Sections 10.4, 12, 13, 14, 15 and 17
shall survive.
11. LICENSES.
11.1 GRANT OF LICENSE BY PETPLACE.COM. Subject to the terms and
conditions of this Agreement, PetPlace.com hereby grant Pets.com a nonexclusive,
royalty-free, worldwide license to use, reproduce, publicly display, publicly
perform, distribute and transmit the PetPlace.com Marks on the Pets.com Site and
in other promotional materials solely to the extent necessary to perform its
obligations under this Agreement, and provided that any such use will comply
with any brand usage guidelines communicated by PetPlace.com to Pets.com in
writing.
11.2 GRANT OF LICENSE BY PETS.COM. Subject to the terms and conditions
of this Agreement, Pets.com hereby grants PetPlace.com a non-exclusive,
royalty-free, worldwide license to use, reproduce, publicly display, publicly
perform, distribute and transmit Pets.com Marks on the PetPlace.com Site and in
other promotional materials solely to the extent necessary to perform its
obligations under this Agreement, and. provided that any such use of will comply
with any brand usage guidelines communicated by Pets.com to Petplace.com in
writing.
11.3 RESERVED RIGHTS. Without limiting the foregoing, each party
reserves all rights other than those expressly granted in this Agreement, and no
licenses are granted except as expressly set forth herein.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 8
12. PROPRIETARY INFORMATION.
12.1 CONFIDENTIALITY. PetPlace.com and Pets.com each agree to retain in
confidence the non- public terms in this Agreement and all other non-public
information and know-how disclosed pursuant to this Agreement which is either
designated as proprietary and/or confidential, or by the nature of the
circumstances surrounding disclosure, should reasonably be understood to be
confidential ("Confidential Information"). Each party agrees to: (a) preserve
and protect the confidentiality of the other party's Confidential Information;
(b) refrain from using the other party's Confidential Information except as
contemplated herein; and (c) not disclose such Confidential Information to any
third party except to employees as is reasonably required under this Agreement
(and only subject to binding use and disclosure restrictions at least as
protective as those set forth herein executed in writing by such employees).
Notwithstanding the foregoing, either party may disclose Confidential
Information of the other party which is: (i) already publicly known; (ii)
discovered or created by the receiving party without reference to the
Confidential Information of the disclosing party, as shown in records of
receiving party; (iii) otherwise known to the receiving party through no
wrongful conduct of the receiving party, or (iv) required to be disclosed by law
or court order. Moreover, either party hereto may disclose any Confidential
Information hereunder to such party's agents, attorneys and other
representatives or any court of competent jurisdiction or any other party
empowered hereunder as reasonably required to resolve any dispute between the
parties hereto.
12.2 OWNERSHIP.
(a) BY PETS.COM. As between Pets.com and PetPlace.com, Pets.com
will have and retain full and exclusive right, title and ownership interest in
and to Pets.com's Marks, together with any Intellectual Property Rights thereto.
(b) BY PETPLACE.COM. As between Petplace.com and Pets.com,
PetP1ace.com will have and retain full and exclusive right, title and ownership
interest in and to PetPlace.com's Marks, together with any Intellectual Property
Rights thereto.
13. REPRESENTATION AND WARRANTIES.
13.1 BY EACH PARTY. Each party represents and warrants to the other
that: (a) such party has the full right. power and authority to enter into this
Agreement and to perform the acts required of it hereunder; (b) the execution of
this Agreement by such party, and the performance by such party of its
obligations and duties hereunder, do not and will not violate any agreement to
which such party is a party or by which it is otherwise bound; and (c) when
executed and delivered by such party, this Agreement will constitute the legal,
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
13.2 NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE ACTIVITIES AND
SERVICES CONTEMPLATED BY
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<PAGE> 9
THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR NON-INFRINGEMENT AND ANY IMPLIED WARRANTIES ARISING FROM
COURSE OF DEALING OR COURSE OF PERFORMANCE.
14. INDEMNIFICATION
14.1 INDEMNIFICATION BY PETS.COM. Pets.com agrees, at its own expense,
to defend or at its option to settle any claim or action brought against
PetPlace.com arising out of or relating to a claim that: (a) use of Pets.com's
Marks in accordance with the terms of this Agreement infringes a third party
copyright or trademark, (b) any content on the Pets.com Site infringes the
Intellectual Property Rights of a third party, is obscene or defamatory,
violates any law or regulation, or breaches the rights of any person or entity,
including, without limitation, rights of publicity, privacy or personality,
and/or (c) results from a breach or alleged breach by Pets.com of any
representation or warranty contained in Section 13.1; and Pets.com will
indemnify PetPlace.com against any and all losses, damages, suits, judgments,
costs and expenses (including litigation costs and reasonable attorneys' fees)
arising under any such claim or action; provided that Petplace.com provides
Pets.com with: (i) prompt written notice of such claim or action, (ii) sole
control and authority over the defense or settlement of such claim or action
(provided that Pets.com shall not enter into any settlement which materially
affects PetPlace.com's rights without PetPlace.com's prior written consent), and
(iii) proper and full information and reasonable assistance to defend and/or
settle any such claim or action.
14.2 INDEMNIFICATION BY PETPLACE.COM. Petplace.com agrees, at its own
expense, to defend or at its option to settle any claim or action brought
against Pets.com arising out of or relating to a claim that: (a) use of
PetPlace.com's Marks in accordance with the terms of this Agreement infringes a
third party copyright or trademark, (b) any content on the Petplace.com Site
infringes the Intellectual Property Rights of a third party, is obscene or
defamatory, violates any law or regulation, or breaches the rights of any person
or entity, including, without limitation, rights of publicity, privacy or
personality, and/or (c) results from a breach or alleged. breach by Petplace.com
of any representation or warranty contained in Sections 13.1; and Petplace.com
will indemnify Pets.com against any and all losses, damages, suits, judgments,
costs and expenses (including litigation costs and reasonable attorneys' fees)
arising under any such claim or action, provided that Pets.com provides
PetPlace.com with: (i) prompt written notice of such claim or action, (ii) sole
control and authority over the defense or settlement of such claim or action
(provided that PetPlace.com shall not enter into any settlement which materially
affects Pets.com's rights without Pets.com's prior written consent), and (iii)
proper and full information and reasonable assistance to defend and/or settle
any such claim or action.
15. LIMITATION OF LIABILITY. EXCEPT FOR LIABILITY ARISING UNDER SECTION 14,
UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF THE
THEORY OF
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<PAGE> 10
LIABILITY), ARISING FROM ANY PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT
LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
REMEDY.
16. RESTRICTION ON [*]. PetPlace.com [*] or otherwise [*] any of its [*],
related to [*] or related to its [*] directly [*], or (ii) effect any [*] or
otherwise) with a [*] in which the [*] of the [*], without the [*]; provided
that the foregoing [*] shall terminate on the earlier of (x) [*] of the
Effective Date, or (y) the closing of [*] resulting in aggregate [*], or (z) [*]
(i) or (ii) above, except that [*] that arise from the [*] under this Agreement
shall not [*].
17. MISCELLANEOUS.
17.1 ARBITRATION. Any dispute, claim or controversy of any kind arising
in connection with, or relating to, this Agreement, except for a dispute, claim
or controversy arising under Sections 11 or 12, shall be resolved exclusively by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, by three (3) arbitrators
appointed in accordance with said rules. Judgment on the award rendered by the
arbitrators may be entered into any court of competent jurisdiction.
17.2 NOTICES. Any notice required or permitted by this Agreement shall
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed facsimile, or
forty-eight (48) hours after being deposited in the regular mail as certified or
registered mail (airmail if sent internationally) with postage prepaid, if such
notice is addressed to the party to be notified at such party's address or
facsimile number as set forth below, or as subsequently modified by written
notice. Either party may change its address for notice purposes hereof on
written notice to the other party in accordance with this Section 17.2.
To Pets.com, Inc. To PetPlace.com, Inc.
Pets.com, Inc. PetPlace.com, Inc.
435 Brannan Street, Suite 100 71 Broadway, Suite 22A
San Francisco, CA 94107 New York. New York 10006
Attention: Julie Wainwright Attention: Jon Rappaport
Phone: 415.222.9999 Phone: 212.
Fax:415.222.9998 Fax: 212.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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<PAGE> 11
17.3 COSTS AND EXPENSES. Except as express provided in this Agreement
elsewhere, each party will be responsible for all costs and expenses incurred by
such party in performing its obligations under this Agreement.
17.4 NO JOINT VENTURE OR AGENCY. Nothing in this Agreement shall
constitute or create a joint venture, partnership, or any other similar
arrangement between Pets.com and PetPlace.com. Neither party is authorized to
act as agent or bind the other party except as expressly stated in this
Agreement.
17.5 ASSIGNMENT. Neither party may transfer or assign any rights or
delegate any obligations hereunder, in whole or in part, whether voluntarily or
by operation of law, without the prior written consent of the other party except
to an acquirer of all or substantially all of that party's business or assets
(but PetPlace.com's right to transfer or assign to such an acquirer shall be
subject to Section 16 hereof). Any purported transfer, assignment or delegation
in violation of the foregoing will be null and void and of no force or effect.
17.6 HEADINGS. Sections, titles or captions in no way define, limit,
extend or describe the scope of this Agreement nor the intent of any of its
provisions.
17.7 SEVERABILITY. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
17.8 ENTIRE AGREEMENT. This Agreement together with any Exhibits
contains the entire agreement of the parties with respect to the subject matter
hereof, and supersedes all prior and/or contemporaneous agreements or
understandings, written or oral, between the parties with respect to the subject
matter hereof.
17.9 GOVERNING LAW. This Agreement will be governed by and interpreted
under the laws of the State of California, without giving effect to applicable
conflicts of law principles.
17.10 AMENDMENT. This Agreement may not be amended or modified by the
parties in any manner, except by an instrument in writing signed on behalf of
each of the parties to which such amendment or modification applies by a duly
authorized officer or representative.
17.11 WAIVER. Any of the provisions of this Agreement may be waived by
the party entitled to the benefit thereof. Neither party will be deemed, by any
act or omission, to have waived any of its rights or remedies hereunder unless
such waiver is in writing and signed by the waiving party, and then only to the
extent specifically set forth in such writing. A waiver with reference to one
event will not be construed as continuing or as a bar to or waiver of any right
or remedy as to a subsequent event.
17.12 RECOVERY OF COSTS AND EXPENSES. If either party brings an action
against the other party to enforce its rights under this Agreement, the
prevailing party will be
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<PAGE> 12
entitled to recover its costs and expenses, including, without limitation,
attorneys' fees and costs incurred in connection with such action, including any
appeal of such action.
17.13 COUNTERPARTS. This Agreement may be executed in any number of
counterparts with the same effect as if both parties hereto had signed the same
document. All counterparts will be construed together and will constitute one
agreement.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers or representatives as of
the Effective Date.
PETS.COM, INC.
By: /s/ Julie Wainwright
------------------------------------
Title: CEO
----------------------------------
Date: 9.17.99
-----------------------------------
PETPLACE.COM, INC.
By: /s/ Jon J. Rappaport
------------------------------------
Title: CEO
----------------------------------
Date: 9.17.99
-----------------------------------
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<PAGE> 14
EXHIBIT A
PET RETAIL COMPANIES
(INCLUDES BOTH ONLINE AND OTHER RETAIL BUSINESS)
<TABLE>
<S> <C>
Aardvark Pet Supplies PetFood Direct.com
Acme Pet Petland
AllPets PetMarket.com
Animal Krackers Petopia
Animal Mall Petpetspets.com
Animals Mall Pets 4 Your Home
Arcata Pet Online Pet Supplies Pets Warehouse
Coolpetstuff.com PetsForum Group Electronic Mall
DogToys.com Petsmart
Fosters and Smith Petsmart.com
Healthypets.com Petstore.com
Home Grocer RC Steele
K-Mart Sammy's
KV Pet Supply Streamline
Noah's Pet Supplies Target
Paws-itive Choice Vet Mall
Peapod Vin.com
Pet Corral WalMart
Pet Expo WebVan
Pet Expo Discount Wholesale Pet Shop
Pet Express
Pet Haven
Pet Med Express
Pet Planet
Pet Quarters
Pet Vet Discount Pet Supplies
Pet World Online
Petco
PetCrazy.com
Petfinder.org
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 14, 2000, except for note 10 as to which the
date is January 19, 2000, in the Registration Statement (Form S-1) and related
Prospectus of Pets.com, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
San Francisco, California
February 8, 2000
