<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 2000
REGISTRATION NO. 333-92433
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
7
<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,
8
<PAGE> 12
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
9
<PAGE> 13
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.
10
<PAGE> 14
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.
11
<PAGE> 15
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.
12
<PAGE> 16
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
13
<PAGE> 17
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.
14
<PAGE> 18
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.
15
<PAGE> 19
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
25
<PAGE> 29
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
26
<PAGE> 30
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.
27
<PAGE> 31
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
28
<PAGE> 32
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
29
<PAGE> 33
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
30
<PAGE> 34
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
31
<PAGE> 35
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
32
<PAGE> 36
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
33
<PAGE> 37
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
34
<PAGE> 38
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
35
<PAGE> 39
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.
36
<PAGE> 40
- 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
37
<PAGE> 41
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.
38
<PAGE> 42
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.
39
<PAGE> 43
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.
40
<PAGE> 44
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 in an amount of at least $9 million during the
term of agreement, 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
41
<PAGE> 45
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
42
<PAGE> 46
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
43
<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.
44
<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
45
<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
46
<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.
47
<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
48
<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."
49
<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.
50
<PAGE> 54
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.
51
<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.
52
<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
53
<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."
54
<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
55
<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.
56
<PAGE> 60
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>
57
<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
58
<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."
59
<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,
60
<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.
61
<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
62
<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."
63
<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
64
<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."
65
<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.
66
<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
67
<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.
68
<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.
69
<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.
70
<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.......................... 95,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 343,100
Accounting fees and expenses................................ 350,000
Blue Sky qualification fees and expenses.................... 5,000
Transfer Agent and Registrar fees........................... 15,000
Miscellaneous fees and expenses............................. 5,000
----------
Total............................................. $1,000,000
==========
</TABLE>
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 9, 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 9, 2000
- ----------------------------------------------------- Director
Julia L. Wainwright
/s/ PAUL G. MANCA Chief Financial Officer February 9, 2000
- ----------------------------------------------------- (Principal Financial and
Paul G. Manca Accounting Officer)
* Director February 9, 2000
- -----------------------------------------------------
John B. Balousek
* Director February 9, 2000
- -----------------------------------------------------
Mark J. Britto
* Director February 9, 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 10.18
ADVERTISING AGREEMENT
This Agreement, dated as of April 22, 1999, is made and entered into by
and between Amazon.com. Inc. ("Amazon.com"), and Pets.com. Inc. ("Company"),
Amazon.com and Company sometimes are referred to collectively as the "Parties"
and individually as a "Party." Amazon.com and Company agree as follows:
SECTION 1. DEFINITIONS
"ADVERTISING PLACEMENT" means any link, advertisement or other
advertising placement provided for in Section 2 or Section 3.
"AFFILIATE" means, with respect to either Party, any individual or
entity that directly or indirectly controls, is controlled by or is under common
control with that Party, or which Party beneficially owns at least fifty percent
(50%) of the equity interests therein.
"AMAZON.COM SITE" means the Web Site identified by the URL
www.amazon.com (and any successors or replacements).
"COMPANY SITE" means the Web Site identified by the URL www.Pets.com
(and any successors or replacements).
"CONFIDENTIAL INFORMATION" means non-public information and know-how of
the Disclosing Party which, by the nature of the circumstances surrounding
disclosure, ought in good faith to be treated as proprietary and/or
confidential, or which has been or is designated as proprietary and/or
confidential, including without limitation any information exchanged between the
Parties under Sections 5.2 and 5.3 of this Agreement. Confidential Information
does not include information that the Receiving Party can show: (a) was known by
the Receiving Party prior to disclosure thereof by the Disclosing Party; (b) was
in or entered the public domain through no fault of the Receiving Party; (c) is
disclosed to the Receiving Party by a third party legally entitled to make such
disclosure without violation of any obligation of confidentiality; or (d) is
independently developed by the Receiving Party without reference to any
Confidential Information of the Disclosing Party.
"DISCLOSING PARTY" means a Party that discloses Confidential Information
to the other Party in connection with this Agreement.
"HOME PAGE" means, with respect to a Web Site, the Web page designated
by the operator of the Web Site as the initial and primary end user interface
for the Web Site.
"INTELLECTUAL PROPERTY RIGHT" means any patent, copyright, trademark,
trade dress, trade name or trade secret right and any other intellectual
property or proprietary right.
<PAGE> 2
"JUMP PAGE" means the Web page maintained on the Amazon.com Site, by or
for Amazon.com. in accordance with Section 2.1.1.
"NEW COMPANY CUSTOMER" means any individual or entity that accesses the
Company site via a hypertext link embedded in any Advertisement Placement on the
Amazon.com Site and that either (a) purchases a product or service from Company
or any or its Affiliates before leaving the Company Site by any means, or (b)
places at least one product or service in a shopping basket or on a shopping
list (or similar data construct) or otherwise identifies, selects or takes other
affirmative steps to order a product or service in a manner that is recorded and
maintained on the Company Site, then leaves the Company Site by any means, and
subsequently returns to the Company Site and purchases any such identified
product or service.
"NEW AMAZON.COM CUSTOMER" means any individual or entity that accesses
the Amazon.com Site via a hypertext link embedded in any Advertising Placement
on the Company Site and that either (a) purchases a product service from
Amazon.com or any of its Affiliates before leaving the Amazon.com Site by any
means, or (b) places at least one product or service in a shopping basket or on
a shopping list (or similar data construct) or otherwise identifies, selects or
takes other affirmative steps to order a product or service in a manner that is
recorded and maintained on the Company Site, then leaves the Amazon.com Site by
any means, and subsequently returns to the Amazon.com Site and purchases any
such identified product or service.
"RECEIVING PARTY" means a Party that receives Confidential Information
from the other Party in connection with this Agreement.
"TERM" means the term of this Agreement as defined in Section 9.
"WEB SITE" means any point of presence maintained on the Internet or on
any other public data network. With respect to any Web Site maintained on the
World Wide Web or any successor public data network, such Web Site includes all
HTML pages (or similar unit of information presented in any relevant data
protocol) that either (a) are identified by the same second-level domain (such
as http://www.amazon.com) or by the same equivalent level identifier in any
relevant address scheme, or (b) contain branding, graphics, navigation or other
characteristics such that a user reasonably would conclude that the pages are
part of an integrated information or service offering.
SECTION 2. OBLIGATIONS OF AMAZON
2.1 ONLINE PROMOTIONS
2.1.1 During the Term, Amazon.com will create and maintain a Web
page within the Amazon.com Site that contains (a) advertising text and/or
graphics introducing Amazon.com users to the Company Site, and (b) a hypertext
link that permits Amazon.com users to navigate directly to the Home Page of the
Company Site. The content,
<PAGE> 3
functionality, placement and appearance of the Jump Page and the Company-related
text and/or graphics contained in the Jump Page will be solely determined by
Amazon.com after consulting with Company, subject to the implementation process
outlined in Section 4 and the requirements of Section 6.3.
2.1.2 During the Term, Amazon.com will place and maintain on the
Amazon.com Site one or more hypertext links from selected areas of the
Amazon.com Site to the Jump Page, in accordance with and subject to the terms
and conditions of this Agreement. The quantity, location, timing, content,
appearance, functionality and similar characteristics of such hypertext links
will be determined by Amazon.com after consulting with Company, subject to the
implementation process outlined in Section 4, and will be limited by, among
other things, the impact on user experience, availability of space and other
business considerations. Notwithstanding anything to the contrary contained in
this Agreement, Amazon.com will have no obligation to place a Company-related
hypertext link on the Home Page of the Amazon.com Site.
2.1.3 Subject to Amazon.com's specific approval, and by way of
example only, Amazon.com may provide hypertext links to the Jump Page from (a)
certain order confirmation Web pages within the Amazon.com Site, and (b)
relevant Amazon.com Delivers e-mails.
2.1.4 If, during the Term, Amazon.com creates and maintains an
area within the Amazon.com Site that aggregates advertising placements for the
Web Sites of companies in which Amazon.com has equity investments. Amazon.com
will include a hypertext link to the Jump Page in such area of the Amazon.com
Site. The size and prominence of such link will be determined by Amazon.com in
its discretion.
2.2 LAUNCH-RELATED PROMOTIONS
2.2.1 Promptly after the execution of this Agreement, Amazon.com
and Company will (a) prepare and distribute a press release announcing the
transaction, and (b) organize related media events and/or media interviews. If
mutually agreed, the Parties may undertake additional public relations
activities. The contents and timing of the release (or releases) and additional
activities, if any, will be mutually agreed by the Parties. Neither Party will
issue any further press releases, make any other disclosures regarding this
Agreement or its terms or use the other Party's trademarks, trade names or other
proprietary marks without the other Party's prior written consent.
2.2.2 For a period of sixty (60) days following the date of this
Agreement, Amazon.com will be available to provide a reasonable amount of
marketing advice to Company (as established by the Parties based on their
reasonable determination as to the required level of support and subject to
Amazon.com's marketing capacity and other business constraints) to assist
Company in the planning for the launch of the activities contemplated herein and
the Company Site.
SECTION 3. OBLIGATIONS OF COMPANY
<PAGE> 4
During the Term, Company will place and maintain on the Home Page of the
Company Site such Amazon.com advertising message as Amazon.com may develop and
provide to Company, in accordance with and subject to the implementation process
outlined in Section 4 and the other terms and conditions of this Agreement. The
advertising message will include a link to such Web page on the Amazon.com Site
as is designated by Amazon.com. The placement and size of such advertising
message will be determined by Company after consulting with Amazon.com, subject
to the implementation process outlined in Section 4, and will be limited by,
among other things, the impact on user experience, availability of space and
other business considerations.
SECTION 4. IMPLEMENTATION
4.1 ACCOUNT MANAGERS. Each Party will assign an account manager (which
manager shall be subject to change from time to time by the assigning Party upon
written notice to the other Party) to facilitate coordination of the Parties'
performance of their obligations hereunder (including, without limitation, in
the creation and monitoring of the Advertising Placements).
4.2 COOPERATION. During the Term, the Parties will cooperate in good
faith and use commercially reasonable efforts to (a) establish and implement
procedures and processes for proposing, creating, approving and implementing the
Advertising Placements under this Agreement, and (b) develop, test and implement
the Advertising Placements in accordance with such procedures and processes and
the terms and conditions of this Agreement.
4.3 APPROVAL. All Advertising Placements placed on a Party's Web Site
will be subject to such Party's written approval prior to the time the same go
live on the Web Site. No such approval will be unreasonably withheld or delayed.
SECTION 5. COMPENSATION
5.1 GENERAL. Except as expressly provided for elsewhere in this
Agreement, each Party will be responsible for all costs and expenses incurred by
such Party in performing its obligations under this Agreement, and the
Advertising Placements, license rights and other activities under this Agreement
will be provided and undertaken by the Parties free of charge.
5.2 REFERRAL FEES. Beginning with the seventh month of the Term and for
each three month period of the Term thereafter ("Quarter"), Company will, within
fifteen (15) days after the end of such Quarter, pay to Amazon.com a referral
fee of [*] dollars ([*]) for each New Company Customer acquired by the Company
during the Quarter. Each such payment will be accompanied by a written statement
setting forth the number of New Company Customers and the Company's calculation
of the referral fees for such Quarter. Any payment owing by Company to
Amazon.com under this Section 5.2 will be reduced by an amount equal to [*]
dollars ([*]) for each New Amazon.com Customer that Amazon.com acquires during
the Quarter covered by such payment. Any amounts not paid when due will be
subject to a finance charge equal to one and one-half percent (1.5%) per month
or the
[*] CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE> 5
highest rate allowable by law, whichever is less, determined and compounded
daily from the date due until the date paid. Payment of such finance charges
will not excuse or cure any breach or default for late payment. In no event will
the Company be required to make more than one payment to Amazon.com, nor
Amazon.com be required to reduce a payment made by the Company, during the Term
with respect to any individual or entity that constitutes a New Company Customer
or a New Amazon.com Customer, respectively.
5.3 RECORDS AND AUDIT. Company will maintain complete and accurate
records of all New Company Customers. Amazon.com will maintain complete and
accurate records of all New Amazon.com Customers. Each Party may, at its
expense, examine or audit such records no more than once every twelve months in
order to verify the referral fees payable under this Agreement. Any such audit
will be conducted, to the extent possible, in a manner that does not
unreasonably interfere with the audited Party's business operations. To the
extent a Party uses an independent auditor to conduct such audit, the
independent auditor shall agree in writing to maintain the confidentiality of
information obtained during such audit. If any audit reveals an underpayment of
more than ten percent (10%) of the amounts due to Amazon.com for any month,
Company will reimburse Amazon.com for the costs of such audit.
SECTION 6. PROPRIETARY RIGHTS
6.1 OWNERSHIP. Subject to the license granted to Company under Section
6.2, Amazon.com hereby reserves all of its right, title and interest in its
Intellectual Property Rights including, without limitation, all right, title and
interest in and to all trademarks, trade dress, logos, insignia and
copyrightable materials supplied by Amazon.com to Company hereunder. Subject to
the foregoing and the license granted to Amazon.com under Section 6.3. Company
reserves all of its right, title and interest in its Intellectual Property
Rights, including, without limitation, all right, title and interest in and to
all trademarks, trade dress, logos, insignia and copyrightable materials
supplied by the Company to Amazon.com.
6.2 AMAZON.COM LICENSE. Amazon.com hereby grants to Company, during the
Term, a non-exclusive, non-transferable license to use the trade names,
trademarks, service names and other proprietary marks supplied by Amazon.com as
is reasonably necessary to perform its obligations under this Agreement;
provided, however, that any advertising and/or other materials containing any of
Amazon.com's marks will be subject to Amazon.com's prior written approval. All
goodwill arising out of any use of any of Amazon.com's marks by, through or
under Company will inure solely to the benefit of Amazon.com.
6.3 COMPANY LICENSE. Company hereby grants to Amazon.com during the
Term, a non-exclusive, non-transferable license to use the trade names,
trademarks, service names and other proprietary marks and/or copyrightable
materials supplied by Company as is reasonably necessary to perform its
obligations under this Agreement; provided, however, that any advertising and/or
other materials containing any of Company's marks will be subject to Company's
prior written approval. All goodwill arising out of any use of any of Company's
marks by, through or under Amazon.com will inure solely to the benefit of
Company.
<PAGE> 6
6.4 NON-DISPARAGEMENT. Neither Company nor Amazon.com will use the other
Party's proprietary marks in a manner that disparages the other Party or its
products or services, and/or portrays the other Party or its products or
services in a false, competitively adverse or poor light. Each of Company and
Amazon.com will comply with the other Party's requests as to the use of the
other Party's proprietary marks and will avoid knowingly taking any action that
diminishes the value of such marks. Either Party's use of the other Party's
proprietary marks except as expressly permitted by this Agreement is strictly
prohibited.
6.5 NONEXCLUSIVELY. Each Party expressly acknowledges and agrees that
the rights granted to the other Party in this Agreement are non-exclusive, and
that, without limiting the generality of the foregoing, nothing in this
Agreement shall be deemed to prohibit either Party from soliciting third party
content, links, banner ads or other material, serving content, links, banner ads
or other materials to third parties' Web Sites, or hosting or permitting third
parties to place links, content, banner ads or other material on such Party's
Web Site, whether or not, in each such case, such content, links, banner ads or
other materials are competitive with the products, services, content or banner
ads of the other Party.
SECTION 7. INDEMNITY
7.1 AMAZON.COM. Amazon.com will defend and indemnify Company and its
Affiliates against any claim or action brought by a third party, to the extent
it is based on (a) the operation of the Amazon.com Site or (b) infringement of
such third-party's Intellectual Property Rights by any materials provided by
Amazon.com for display on the Company Site. Subject to Section 7.3, Amazon.com
will pay any award against Company and its Affiliates, or their respective
employees, directors or representatives and any costs and attorneys' fees
reasonably incurred by them resulting from any such claim or action.
7.2 COMPANY. Company will defend and indemnify Amazon.com and its
Affiliates (and their respective employees, directors and representatives)
against any claim or action brought by a third party, to the extent it is based
on (a) the operation of the Company Site or (b) infringement of such
third-party's Intellectual Property Rights by any materials provided by Company
for display on any the Amazon.com Site. Subject to Section 7.3, Company will pay
any award against Amazon.com or its Affiliates (or their respective employees,
directors or representatives) and any costs and attorneys' fees reasonably
incurred by Amazon.com and its Affiliates resulting from any such claim or
action.
7.3 PROCEDURE. In connection with any claim or action described in this
Section 7, the Party seeking indemnification will (a) give the indemnifying
Party prompt written notice of the claim, (b) cooperate with the indemnifying
Party (at the indemnifying Party's expense) in connection with the defense and
settlement of the claim, and (c) permit the indemnifying Party to control the
defense and settlement of the claim, provided that the indemnifying Party may
not settle the claim without the indemnified Party's prior written consent
(which will not be unreasonably withheld). Further, the indemnified Party (at
its cost) may participate in the defense and settlement of the claim.
SECTION 8. DISCLAIMERS, LIMITATIONS AND RESERVATIONS
<PAGE> 7
8.1 COMPANY. COMPANY DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY
REPRESENTATIONS OR WARRANTIES REGARDING THE COMPANY SITE OR ANY PORTION THEREOF,
INCLUDING (WITHOUT LIMITATION) IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
COMPANY SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING (A) THE
AMOUNT OF SALES REVENUE THAT AMAZON.COM MAY RECEIVE DURING THE TERM, AND (B) ANY
ECONOMIC OR OTHER BENEFIT THAT AMAZON.COM MIGHT OBTAIN THROUGH ITS PARTICIPATION
IN THIS AGREEMENT.
8.2 AMAZON.COM. AMAZON.COM DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY
REPRESENTATIONS OR WARRANTIES REGARDING THE AMAZON.COM SITE OR ANY PORTION
THEREOF, INCLUDING (WITHOUT LIMITATION) IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, AMAZON.COM SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY
REGARDING (A) THE AMOUNT OF SALES REVENUES THAT MAY OCCUR DURING THE TERM, AND
(B) ANY ECONOMIC OR OTHER BENEFIT THAT COMPANY MIGHT OBTAIN THROUGH ITS
PARTICIPATION IN THIS AGREEMENT.
8.3 NO CONSEQUENTIAL DAMAGES. NEITHER PARTY WILL BE LIABLE TO THE OTHER
PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING,
WITHOUT LIMITATION, LOST PROFITS OR LOST DATA) ARISING OUT OF THIS AGREEMENT.
EACH PARTY'S ENTIRE LIABILITY ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT (EXCEPT FOR LIABILITIES ARISING UNDER SECTION 6, RESULTING FROM THE
PARTY'S WILLFUL MISCONDUCT OR GROSS NEGLIGENCE, OR CONCERNING LIABILITY FOR
DEATH OR PERSONAL INJURY), WHETHER IN CONTRACT OR TORT (INCLUDING NEGLIGENCE),
WILL NOT EXCEED THE AMOUNTS TO BE PAID TO AMAZON.COM UNDER SECTION 5, EVEN IF
SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND
NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY REMEDY.
8.4 RESPONSIBILITY FOR WEB SITES. Amazon.com will remain solely
responsible for the operation of the Amazon.com Site, and Company will remain
solely responsible for the operation of the Company Site. Each Party (a)
acknowledges that the Amazon.com Site and the Company Site may be subject to
temporary shutdowns due to causes beyond the operating Party's reasonable
control, and (b) subject to the specific terms of this Agreement, retains sole
right and control over the programming, content and conduct of transactions over
its respective site or service.
SECTION 9. TERM AND TERMINATION
<PAGE> 8
9.1 TERM. The Term of this Agreement will begin as of the date of this
Agreement and, unless earlier terminated as provided elsewhere in this
Agreement, will end automatically upon the eighteen (18) month anniversary of
the date of this Agreement; provided that, not less than thirty (30) days prior
to the end of the Term, the Parties will negotiate in good faith in an attempt
to agree on the terms and conditions of an extension of the Term (including,
without limitation, the compensation payable to Amazon.com for Advertising
Placements provided during such extension period). If, after using reasonable
efforts, the Parties are unable to agree upon such terms and conditions, neither
Party will have any obligation to continue its participation in the
negotiations.
9.2 TERMINATION FOR BREACH. Without limiting any other rights or
remedies (including, without limitation, any right to seek damages and other
monetary relief) that either Party may have in law or otherwise, either Party
may terminate this Agreement if the other Party materially breaches its
obligations hereunder, provided that (a) the non-breaching Party sends written
notice to the breaching Party describing the breach, and (b) the breaching Party
does not cure the breach within thirty (30) days following its receipt of such
notice.
9.3 OTHER TERMINATION RIGHTS. Either Party may terminate this Agreement
if the other Party (a) has a receiver or administrative receiver appointed for
it or over its undertakings or assets, (b) passes a resolution for winding up or
a court of competent jurisdiction makes an order to that effect and such order
is not discharged within ninety (90) days, (c) enters into any voluntary
arrangement with its creditors for the benefit of its creditors, (d) becomes
subject to an administration order, or (e) ceases to carry on business.
9.4 EFFECT OF TERMINATION. On termination of this Agreement: (a) each
Party in receipt, possession or control of the other Party's intellectual or
proprietary property, information and materials pursuant to this Agreement must
return to the other Party (or at the other Party's written request, destroy)
such property, information and materials, (b) each Party must, subject to
receiving written consent to the contrary from the other Party, immediately
remove all links to the other Party's Web Site from its own Web Site, and (c)
each Party must cease use of, and remove from its Web Site, all of the
trademarks, trade dress, logos, insignia and copyrightable materials supplied by
the other Party hereunder. Sections 5, 6, 7, 8, 9 and 10 (together with all
other provisions that reasonably may be interpreted as surviving termination or
expiration of this Agreement) will survive the termination or expiration of this
Agreement.
SECTION 10. MISCELLANEOUS
10.1 INDEPENDENT CONTRACTORS. The Parties are entering this Agreement as
independent contractors, and this Agreement will not be construed to create a
partnership, joint venture or employment relationship between them. Neither
Party will represent itself to be an employee or agent of the other or enter
into any agreement or legally binding commitment or statement on the other's
behalf of or in the other's name.
10.2 NONDISCLOSURE. Each Party will protect the Confidential Information
of the other Party from misappropriation and unauthorized use or disclosure, and
at a minimum, will take precautions at least as great as those taken to protect
its own confidential information of a
<PAGE> 9
similar nature. Without limiting the foregoing, the Receiving Party will: (a)
use such Confidential Information solely for the purposes for which it has been
disclosed; and (b) disclose such Confidential Information only to those of its
employees, agents, consultants, and others who have a need to know the same for
the purpose of performing this Agreement and who are informed of and agree to a
duty of nondisclosure. The Receiving Party may also disclose Confidential
Information of the Disclosing Party to the extent necessary to comply with
applicable law or legal process, provided that the Receiving Party uses
reasonable efforts to give the Disclosing Party prompt advance notice thereof.
Upon request of the other Party, or in any event upon any termination or
expiration of the Term, each Party shall return to the other all-materials, in
any medium, which contain, embody, reflect or reference all or any part of any
Confidential Information of the other Party.
10.3 COMPLIANCE WITH LAWS. In its performance of this Agreement, each
Party will comply with all applicable laws, regulations, orders and other
requirements, now or hereafter in effect, of governmental authorities having
jurisdiction. Without limiting the generality of the foregoing, each Party will
pay, collect, remit and otherwise be responsible such taxes as may be imposed
upon such Party in the first instance with respect to any compensation,
royalties or transactions under this Agreement. Except as expressly provided
herein, each Party will be responsible for all costs and expenses incurred by it
in connection with the negotiation, execution and performance of this Agreement.
10.4 NOTICES. Any notice or other communication under this Agreement
given by either Party to the other Party will be in writing and will be deemed
properly given when sent to the intended recipient by registered letter,
receipted commercial courier, or electronically receipted facsimile transmission
(acknowledged in like manner by the intended recipient) at its address specified
below its signature at the end of this Agreement, and in the case of Amazon.com.
with a copy to Amazon.com. Inc., 1516 Second Avenue, Seattle, WA 98101, USA,
Facsimile: 206-834-7010, Attn: General Counsel; provided, that no notice of
termination of this Agreement shall be deemed properly given unless sent by
registered mail to such address(es) and to the attention of such officer(s).
Either Party may from time to time change such address or individual by giving
the other Party notice of such change in accordance with this Section 10.4.
10.5 ASSIGNMENT. Neither Amazon.com nor Company may assign this
Agreement, in whole or in part, without the other Party's prior written consent
(which will not be withheld unreasonably), except to (a) any corporation
resulting from any merger, consolidation, or other reorganization involving the
assigning Party, (b) any of its Affiliates, or (c) any person or entity to which
the assigning Party may transfer substantially all of its assets; provided that
the assignee agrees in writing to be bound by all the terms and conditions of
this Agreement. Subject to the foregoing, this Agreement will be binding on and
enforceable by the Parties and their respective successors and permitted
assigns.
10.6 NONWAIVER. The failure of either Party to enforce any provision of
this Agreement will not constitute a waiver of the Party's rights to
subsequently enforce the
<PAGE> 10
provision. The remedies specified in this Agreement are in addition to any other
remedies that may be available in law.
10.7 ENTIRE AGREEMENT. This Agreement (a) represents the entire
agreement between the Parties with respect to the subject matter hereof and
supersedes any previous or contemporaneous oral or written agreements regarding
such subject matter, (b) may be amended or modified only by a written instrument
signed by a duly authorized agent of each Party, and (c) will be interpreted,
construed and enforced in all respects in accordance with the laws of the laws
of the State of Washington, without reference to its choice of law rules. If any
provision of this Agreement is held to be invalid, such invalidity will not
effect the remaining provisions. No breach of this Agreement by either Party
shall affect the rights or obligations of either Party under any other Agreement
between the Parties; rather, the same will remain in full force and effect.
<PAGE> 11
amended or modified only by a written instrument signed by a duly authorized
agent of each Party, and (c) will be interpreted, construed and enforced in all
respects in accordance with the laws of the laws of the State of Washington,
without reference to its choice of law rules. If any provision of this Agreement
is held to be invalid, such invalidity will not effect the remaining provisions.
No breach of this Agreement by either Party shall affect the rights or
obligations of either Party under any other Agreement between the Parties;
rather, the same will remain in full force and effect.
Amazon: Company:
AMAZON.COM, INC. PETS.COM, INC.
By: /s/ Ram Shriram By: /s/ Julie Wainwright
------------------------------- -------------------------------
Title: V.P. Business Development Title: CEO
----------------------------- -----------------------------
Date: April 20, 1999 Date: 4/22/99
---------------------------- ------------------------------
Notice Address: Notice Address:
Amazon.com Incorporated Pets.com, Inc.
1516 Second Ave., Floor 2 87 N. Raymond Avenue, Suite 850
Seattle, WA 98101 Pasadena, CA 91103
Facsimile: 206.834.7010 Facsimile: 626.794.8500
-10-
<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), nonexclusive, and nontransferable license, 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 BroadVision's published
licensing practices in force at the time of delivery of the applicable
Software products. BroadVision's current licensing practices are as set
forth in Attachment A.
C. Customer may not (a) rent, lease, or loan 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.
-1-
<PAGE> 2
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.
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
-2-
<PAGE> 3
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 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
-3-
<PAGE> 4
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.
-4-
<PAGE> 5
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.
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
-5-
<PAGE> 6
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.
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:
-6-
<PAGE> 7
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
-7-
<PAGE> 8
CUSTOMER: Pets.com
-------------------------------
Company Name
/s/ Paul Melmon
-------------------------------
Signature
Paul Melmon
-------------------------------
Printed Name
Vice President, Engineering
-------------------------------
Title
-8-
<PAGE> 9
ATTACHMENT A
CURRENT LICENSING PRACTICES
Not Yet Applicable.
-9-
<PAGE> 10
ATTACHMENT B
REQUIRED PROVISIONS OF SUBLICENSES
Not Yet Applicable.
-10-
<PAGE> 11
ATTACHMENT C
PROFESSIONAL SERVICES TERMS & CONDITIONS
Not Yet Applicable.
-11-
<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").
<TABLE>
<S> <C>
Client: Pets.com Inc. City: San Francisco
Address: 435 Brannan St., Suite 100 State, Zip: CA 94107
</TABLE>
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.
-1-
<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.
-2-
<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
-3-
<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 shall pay QSSI a bonus
equal to the greater of $22,000 or 28% of the cost of the implementation
services provided, however, that the bonus shall not exceed $28,000. 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 not receive such bonus
and the amount due to QSSI shall be reduced by an amount equal to 1/7 of the
bonus that would have been paid if the project were launched on time, for each
day the project launch is late up to a maximum of 7 days provided, however, that
the penalty does not exceed $28,000. QSSI shall not incur loss of bonus 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.
-4-
<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
-5-
<PAGE> 6
accepted, or in the absence of 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
-6-
<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.
-7-
<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
-8-
<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 $15,000 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
-9-
<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>
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.
-17-
<PAGE> 1
EXHIBIT 10.28
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
September 27, 1999, is made by and between Rosenberg SOMA Investments IV, LLC, a
Delaware Limited Liability Co. ("LESSOR") and Pets.com, Inc., a California
Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 150-160 King Street, a portion of the
ground floor, located in the City of San Francisco, County of San Francisco,
State of California, with zip code 94107, as outlined on Exhibit A attached
hereto ("PREMISES"). The "BUILDING" is that certain building containing the
Premises and generally described as (describe briefly the nature of the
Building): 150-160 King Street / 151-165 Townsend Street. In addition to
Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee
shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "INDUSTRIAL CENTER." (Also
see Paragraph 2.)
1.2(b) PARKING: 0 unreserved vehicle parking spaces ("UNRESERVED PARKING
SPACES"); and 0 reserved vehicle parking spaces ("RESERVED PARKING SPACES").
(Also see Paragraph 2.6.)
1.3 TERM: 0 years and 3 months ("ORIGINAL TERM") commencing 0ctober 1,
1999 ("COMMENCEMENT DATE") and ending December 31, 1999 ("EXPIRATION DATE").
(Also see Paragraph 3.) Month-to-month thereafter with 30 (thirty) days prior
written notice by either Landlord or Tenant.
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (Also see
Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $10,000.00 per month ("BASE RENT"), payable on the
_______ day of each month commencing _______. (Also see Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be adjusted
per Addendum _____, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $10,000.00 as Base Rent for the
period October 1, 1999 - October 31, 1999.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: N/A percent
(_____%) ("Lessee's Share") as determined by [ ] prorata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum ___.
1.7 SECURITY DEPOSIT: $10,000.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Warehouse/Storage/Light Industrial ("PERMITTED USE").
(Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph
8.)
-1-
<PAGE> 2
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] _________________ represents Lessor exclusively ("LESSOR'S BROKER");
[X] ROK Properties, Inc. represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] ____________________ represents both Lessor and Lessee ("Dual Agency").
(Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $900)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs _____ through _____, and Exhibits A through _____, all
of which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that is has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.3 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
2.4 COMMON AREAS--DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of
-2-
<PAGE> 3
the Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways
and landscaped areas.
2.5 COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.6 COMMON AREAS--RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.7 COMMON AREAS--CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgement, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no
-3-
<PAGE> 4
Early Possession Date is specified, by the Commencement Date, Lessor shall not
be subject to any liability therefor, nor shall such failure affect the validity
of this Lease, or the obligations of Lessee hereunder, or extend the term
hereof, but in such case, Lessee shall not, except as otherwise provided herein,
be obligated to pay rent or perform any other obligation of Lessee under the
terms of this Lease until Lessor delivers possession of the Premises to Lessee.
If possession of the Premises is not delivered to Lessee within sixty (60) days
after the Commencement Date, Lessee may, at its option, by notice in writing to
Lessor within ten (10) days after the end of said sixty (60) day period, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee is
not received by Lessor within said ten (10) day period, Lessee's right to cancel
this Lease hereunder shall terminate and be of no further force or effect.
Except as may be otherwise provided, and regardless of when the Original Term
actually commences, if possession is not tendered to Lessee when required by
this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, that Lessee would otherwise
have enjoyed shall run from the date of delivery of possession and continue for
a period equal to the period during which the Lessee would have otherwise
enjoyed under the terms hereof, but minus any days of delay caused by the acts,
changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1). Lessor may use, apply or retain
all or any portion of said Security Deposits for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessors uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the Initial Security Deposit bears to the
Initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be
-4-
<PAGE> 5
considered to be held in trust, to bear interest or other increment for its use,
or to be prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessees shall use and occupy the Premises only for the
Permitted use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay
its consents to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same will
not impair the structural integrity of the improvements on the Premises or in
the Building or the mechanical or electrical systems therein, does not conflict
with uses by other Lessees, is not significantly more burdensome to the Premises
or the Building and the improvements thereon, and is otherwise permissible
pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor
shall within five (5) business days after such request give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable objections the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registrations or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to
-5-
<PAGE> 6
any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including but
not limited to the installation (and, at Lessor's option, removal on or before
Lease expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing with copies of any documents involved) of any threatened or actual
claim, notice,
-6-
<PAGE> 7
citation, warning, complaint or report pertaining to or involving failure by
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERNATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this Paragraph
7.1, Lessor may enter upon the Premises after ten (10) days' prior written
notice to Lessee (except in the case of an emergency, in which case no notice
shall be required), perform such obligations on
-7-
<PAGE> 8
Lessee's behalf, and put the Premises in good order, condition and repair, in
accordance with Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Building, Industrial Center or
Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the Improvements on the Premises which are provided by Lessor
under the terms of this Lease other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alternations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the Interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and
-8-
<PAGE> 9
workmanlike manner, with good and sufficient materials, and be in compliance
with all Applicable Requirements. Lessee shall promptly upon completion thereof
furnish Lessor with as-built plans and specifications therefor. Lessor may, (but
without obligation to do so) condition its consent to any requested Alteration
or Utility Installation that costs $2,500.00 or more upon Lessee's providing
Lessor with a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor as surety bond satisfactory to Lessor in an
amount equal to one and one-half times the amount of such contested lien claim
or demand, indemnifying Lessor against liability of the same, as required by law
for the holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed
per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the
-9-
<PAGE> 10
removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water contaminated
by Lessee, all as may then be required by Applicable Requirements and/or good
practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall
be moved by Lessee subject to its obligation to repair and restore the Premises
per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "Insurance Cost Increase" is
defined as any increase in the actual cost of the insurance applicable to the
Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "INSURANCE COST INCREASE"
shall include, but not be limited to, requirements of the holder of a mortgage
or deed of trust covering the Premises, increased valuation of the Premises,
and/or a general premium rate increase. The term "INSURANCE COST INCREASE" shall
not, however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "BASE PREMIUM." If
a dollar amount has not been inserted in Paragraph 1.9 and if the Building has
been previously occupied during the twelve (12) month period immediately
preceding the Commencement Date, the "BASE PREMIUM" shall be the annual premium
applicable to such twelve (12) month period. If the Building was not fully
occupied during such twelve (12) month period, the "Base Premium" shall be the
lowest annual premium reasonably obtainable for the Required Insurance as of the
Commencement Date, assuming the most nominal use possible of the Building. In no
event, however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor
pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessees, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostel fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be
-10-
<PAGE> 11
primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any lenders), insuring against loss or damage
to the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessees-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender or included in the Base Premium),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or polices shall also
contain an agreed valuation provisioning in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
of the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the nature of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the rejected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
act, omissions, use or occupancy of the Premises.
-11-
<PAGE> 12
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4. LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such Insurance shall be full replacement cost coverage with a deductible not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property and the restoration of Trade
Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case
-12-
<PAGE> 13
of claims made against Lessor) litigated and/or reduced to judgment. In case any
action or proceeding be brought against Lessor by reason of any of the foregoing
matters, Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate
with Lessee in such defense. Lessor need not have first paid any such claim in
order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
Lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent (50%)
of the Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws and without deduction for depreciation.
-13-
<PAGE> 14
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE-INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefore. If Lessor receives said funds or adequate assurance thereof
within said (10) day period, Lessor shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If Lessor does
not receive such funds or assurance within said period, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect. If Lessor does not receive such funds or assurance within such ten (10)
day period, and if Lessor does not so elect to restore and repair, then this
Lease shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE-UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect). Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority),
-14-
<PAGE> 15
this Lease shall terminate sixty (60) days following the date of such Premises
Total Destruction, whether or not the damage or destruction is an Insured Loss
or was caused by a negligent or willful act of Lessee. In the event, however,
that the damage or destruction was caused by Lessee, Lessor shall have the right
to recover Lessor's damages from Lessee except as released and waived in
Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor' expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
-15-
<PAGE> 16
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall include
any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent
-16-
<PAGE> 17
or other income therefrom, and/or Lessor's business of leasing the Premises. The
term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES" shall be
the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of
-17-
<PAGE> 18
Lessee's interest in this Lease or in the Premises without Lessor's prior
written consent given under and subject to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buyout or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent
for the Premises to the greater of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten percent (110%)
of the Base Rent then in effect. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installments(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor
-18-
<PAGE> 19
(iii) alter the primary liability of Lessee for the payment of Base Rent and
other sums due Lessor hereunder or for the performance of any other obligations
to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment of subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 or ten percent (10%) of the
monthly Base Rent applicable to the portion of the Premises which is the subject
of the proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph
12.2(c) shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease by adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
-19-
<PAGE> 20
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of the
foregoing provision or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such Sublease. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence
-20-
<PAGE> 21
of any one or more of the following Defaults, and, where a grace period for cure
after notice is specified herein, the failure by Lessee to cure such Default
prior to the expiration of the applicable grace period, and shall entitle Lessor
to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surely bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this lease, where any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
-21-
<PAGE> 22
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurances of security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a
-22-
<PAGE> 23
notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such
case, the applicable grace period under the unlawful detainer statute shall run
concurrently after the one such statutory notice, and the failure of Lessee to
cure the Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right to
sublet or assign, subject only to reasonable limitations. Lessor and Lessee
agree that the limitations on assignment and subletting in this Lease are
reasonable. Acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a late charge equal
-23-
<PAGE> 24
to six percent (6%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of late payment by Lessee. Acceptance of such late charge by
Lessor shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three(3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
-24-
<PAGE> 25
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed
in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined
in Paragraph 39.1) granted under this Lease or any Option subsequently granted,
or (b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within
ten (10) days after written notice after written notice from the other Party
(the "REQUESTING PART") execute, acknowledge and deliver to the Requesting Party
a statement in writing in a form similar to the then most current "TENANCY
STATEMENT" form published by the American Industrial Real Estate Association,
plus such additional information, confirmation and/or statements as may be
reasonably requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
-25-
<PAGE> 26
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate charged by the largest state chartered bank in the state in which the
Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written notice to
the other specify a different address for notice purposes except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for the purpose of mailing or delivering notices to Lessee. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile
-26-
<PAGE> 27
transmission or similar means, the same shall be deemed served or delivered upon
telephone or facsimile confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Subject to the provisions of Paragraph 1.3 above,
Lessee has no right to retain possession of the Premises or any part thereof
beyond the expiration or earlier termination of this Lease. In the event that
Lessee holds over in violation to this Paragraph 26 then the Base Rent payable
from and after the time of the expiration or earlier termination of this Lease
shall be increased to two hundred percent (200%) of the Base Rent applicable
during the month immediately preceding such expiration or earlier termination.
Nothing contained herein shall be construed as a consent by Lessor to any
holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of
-27-
<PAGE> 28
Lessor's default with respect to any such obligation, Lessee will give any
Lender whose name and address have been furnished Lessee in writing for such
purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender
shall elect to have this Lease and/or any Option granted hereby superior to the
lien of its Security Device and shall give written notice thereof to Lessee,
this Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing or Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any
-28-
<PAGE> 29
ordinary "For Lease" signs. All such activities of Lessor shall be without
abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one of all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the impositions
by Lessor at the time of consent of such further or
-29-
<PAGE> 30
other conditions as are then reasonable with reference to the particular matter
for which consent is being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
40. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
41. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part
-30-
<PAGE> 31
thereof, said Party shall be entitled to recover such sum or so much thereof as
it was not legally required to pay under the provisions of this Lease.
43. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
44. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
45. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
46. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
47. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL
ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS,
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE
LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN
A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
-31-
<PAGE> 32
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Executed at:
San Francisco, California San Francisco, California
on: on:
-------------------------------- ---------------------------------
BY LESSOR: BY LESSEE:
Rosenberg SOMA Investments IV, LLC, Pets.Com, Inc.,
A Delaware Limited Liability Co. A California corporation
By: /s/ Douglas Rosenberg By: /s/ J.L. Wainwright
Name Printed: Douglas Rosenberg Name Printed: J.L. Wainwright
Title: Manager Title: CEO
Telephone: (415) 835-9808 Telephone: (415) 222-9999
Facsimile: (415) 835-9896 Facsimile: (415) 222-9998
-32-
<PAGE> 33
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form:
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los
Angeles, CA 90071. (213) 687-8777.
-33-
<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
-1-
<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;
-2-
<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 [shall
be no less favorable than that offered by Pets.com to any other third party].
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, pay PetPlace.com [*]
percent ([*]%) of any Revenue received from the purchase of any goods or
services (including any subscription of the same) 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, Pets.com shall pay
PetPlace.com a new customer bounty of $10 for any person who "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 and who was not a previous customer of
Pets.com.
[*] CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SEC.
-3-
<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, pay Pets.com [*]
percent ([*]%) of any Revenue received from the purchase of any services or
goods (including any subscription of the same) 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, PetPlace.com shall pay
Pets.com a new customer bounty of $[*] for any person who "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 and who was not a previous customer of
Petplace.com.
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, if Petplace.com recommends a pet related
product to Pets.com and Pets.com chooses not to sell that product at the
Pets.com Site, then PetPlace.com may sell that product at the Petplace.com Site.
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 not to provide a revenue generating Online veterinary
service in competition with PetPlace.com. 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 SEC.
-4-
<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. Pets.com estimates that it will deliver to
Petplace.com 200 million impressions as a result of these efforts.
(b) TELEVISION. Pets.com will develop a specific television
advertisement highlighting PetPlace.com and will run this advertisement as part
of Pets.com normal media buy during the first twelve (12) months of this
Agreement. Pets.com estimates that it will deliver to Petplace.com 100 million
impressions from such a television advertisement.
(c) EMAIL NEWSLETTER. Pets.com will feature PetPlace.com in its
regular newsletter to its installed base once per month. Pets.com estimates
that it will deliver to PetPlace.com 10 million impressions 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 estimates its circulation to be at
least 500,000 copies for this edition.
(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
one (1) million impressions during the first twelve (12) months of this
Agreement.
(f) AMAZON PROMOTIONS. Pets.com will include references to
PetPlace.com in its periodic Amazon in-box inserts and/or Amazon email
newsletters. Pets.com estimates that it will include references in Amazon
promotions that will deliver to PetPlace.com 11 million impressions during
the first twelve (12) months 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
-5-
<PAGE> 6
PetPlace.com between five (5) and ten (10) million impressions through the
editorial content venue during the first twelve (12) months of this Agreement.
7.2 MINIMUM IMPRESSIONS. Pets.com agrees to make commercially
reasonable efforts to deliver to PetPlace.com the [estimated number of
impressions], 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 three (3) months 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 twenty-four (24) hours to such questions. PetPlace.com agrees to
provide two (2) free 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.
-6-
<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 three (3) 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 June 1, 2000.
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.
-7-
<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
-8-
<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
-9-
<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 CHANGE OF CONTROL OF PETPLACE.COM. PetPlace.com shall not
(i) sell, license or otherwise transfer or make available for distribution or
resale any of its assets, including services, content or products, related to
Online veterinary services or related to its obligations under this Agreement
directly to a Pet Retail Company, or (ii) effect any transaction or series of
related transactions (by means of a merger, consolidation, issuance of stock or
otherwise) with a Pet Retail Company in which the Pet Retail Company holds or
has the right to hold more than thirty percent (30%) of the voting power of
PetPlace.com's outstanding equity, without the prior written consent of
Pets.com; provided that the foregoing consent requirement shall terminate on the
earlier of (x) the second anniversary of the Effective Date, or (y) the closing
of PetPlace.com's initial public offering of its capital stock resulting in
aggregate proceeds of at least ten million dollars ($10,000,000), or (z) sixty
(60) days after Pets.com shall make a bona fide written offer to PetPlace.com to
effect any of the transactions specified in clauses (i) or (ii) above, except
that written offers that arise from the transactions between the parties under
this Agreement shall not effect a transaction under clause (i) above.
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.
<TABLE>
<S> <C>
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.
</TABLE>
-10-
<PAGE> 11
<TABLE>
<S> <C>
Fax:415.222.9998 Fax: 212.
</TABLE>
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
-11-
<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]
-12-
<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
-----------------------------
-13-
<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>
-14-
<PAGE> 1
EXHIBIT 10.33
AMERICAN VETERINARY MEDICAL FOUNDATION
SPONSORSHIP AGREEMENT
This Sponsorship Agreement (this "Agreement") is executed effective as of
10/21/99 (the "Effective Date") by and between the American Veterinary Medical
Foundation (AVMF), a non-profit corporation located at 1931 N. Meacham Road,
Suite 100, Schaumburg, Illinois 60173, and Pets.com ("Sponsor"), located at 435
Brannan Street, Suite 100, San Francisco, CA 94107.
WHEREAS, AVMF is producing a fundraising campaign consisting of various
video-taped programs for the education of veterinary professionals and related
public relations materials for a national consumer education and information
program (the "Program"); and
WHEREAS, Sponsor wishes to support the campaign and have their company
and product(s) featured in the Program; and
WHEREAS, in consideration for the Sponsor's participation in the
Program, AVMF is willing to provide Sponsor with promotional messages to be
included within video, the consumer public relations materials and other parts
of the Program;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed by the parties
hereto, it is agreed as follows:
1. AVMF will produce a series of video programs, each approximately
one-half hour in length, to be entitled "Veterinary ClientLink" and containing
current industry news, topical veterinary features, and educational and
promotional materials targeted to practicing veterinarians and their staff
members. The series will consist of a minimum of four (4) video programs to be
distributed in each twelve (12) month period during the term of this Agreement.
The series is to be distributed, as each program is completed, to selected
members of the profession on VHS tapes for their information and continuing
education.
2. AVMF will distribute not less than ten thousand (10,000) tapes
of each Veterinary ClientLink video program (40,000 total minimum per year) to a
selected group of veterinary hospitals and other key industry professionals.
This distribution group shall be comprised of veterinarians and other AVMF
supporters contributing five hundred dollars ($500) or more per year to the AVMF
and participating in its Memorial program, as well as additional hospitals,
veterinarians or others as determined by AVMF.
-1-
<PAGE> 2
3. AVMF shall provide Sponsor with commercial placements and other
sponsorship benefits in Veterinary ClientLink videos produced and distributed
during the term of this Agreement as follows:
a. Sponsor's logo on the video jacket or packaging.
b. Recognition in the video's opening or closing credits,
such as "Produced through a grant from (Sponsor)"
c. A thirty (30) second commercial (or 2 fifteen (15)
second commercials) in each program, to be provided by
Sponsor on Beta SP tape and inserted by AVMF. The
commercial(s) may either feature a product related to
Sponsor's exclusive topic or another product of
Sponsor's choosing provided it has not been selected as
an exclusive topic by another sponsor.
d. Collaboration on one (1) feature story topic per year
related to Sponsor's specialty or product issue. This
topic shall be exclusive to Sponsor and may be renewed
annually.
e. Insertion of one (1) piece of Sponsor's literature in
the packaging of each video. Such material must conform
to AVMF's packaging specifications.
4. Sponsor may contribute detailed information, scientific studies,
video taped materials and other guidance to assist in the scripting of the video
feature related to Sponsor's specialty or product category. AVMF agrees to work
with Sponsor to develop a mutually acceptable video feature. Sponsor shall be
granted the right of approval for its video feature script and related media
releases to insure their accuracy and conformance with any regulatory
requirements. However, to maintain the Program's editorial integrity, all other
video content shall be determined solely by AVMF.
5. To assure timely delivery of all Program elements, Sponsor
agrees to provide all information and materials required in the production of
Sponsor's Veterinary ClientLink feature story and/or other public relations
materials in the time and manner as may be prescribed by AVMF and agreed to by
Sponsor. AVMF shall not be liable for delays or non-performance of this
Agreement as a result of Sponsor's failure to provide the required information
and materials as agreed upon.
6. Sponsor has sole responsibility for the content of the materials
and information it submits to AVMF for inclusion in the Program, and warrants to
AVMF that: (i) it is authorized to sell the products or services advertised and
to use any information or depiction submitted to AVMF; (ii) it has the right to
use any trademarks, service marks, trade names, images, logos and slogans
submitted; and (iii) to the best of its knowledge the information and materials
submitted to AVMF will be true and accurate and in compliance with all
applicable laws and regulations.
-2-
<PAGE> 3
7. AVMF warrants to Sponsor that it has obtained all necessary
approvals and authorizations to provide the information and materials contained
in the Program and that the Program, its contents and distribution are in
compliance with all applicable laws and regulations.
8. Each party shall indemnify and hold harmless the other party,
its officers, directors, employees, agents and subcontractors from and against
all third party claims, demands, actions and costs to which the other party is
or may become subject insofar as they arise out of or are alleged or claimed to
arise out of (i) any breach by a party of any of its obligations under this
Agreement, or (ii) any negligent or willful act or omission by a party or its
employees, agents or subcontractors.
9. For public education and promotional purposes, AVMF will also
prepare and distribute to the media the following news releases based on
Sponsor's Veterinary ClientLink feature story:
a. Production and distribution of a Video News Release
(VNR) package which will be offered to approximately
twelve hundred (1,200) broadcast news points and
distributed to television stations and networks by
satellite uplink.
b. Use of Sponsor's expert spokesperson in a one (1) to two
(2) hour Satellite Media Tour (SMT) and a similar Radio
Media Tour (RMT) providing television and radio news
interview opportunities on the same topic.
c. Production and distribution of a sixty (60) second
national Radio News Release (RNR) on the topic.
d. Production and distribution of a television Public
Service Announcement (PSA) on the topic.
e. Print releases delivering the story to major newspapers,
consumer and special interest magazines and the
veterinary trade press.
f. Publication of the feature story on the Veterinary
ClientLink's Internet web site and other specialty sites
used for media and veterinary access.
g. Hyper-linking the feature story on Veterinary
ClientLink's Internet web site to Sponsor's Internet
site, upon Sponsor's request.
AVMF will provide a non-binding written schedule of the proposed
dates and times of the above news releases, media tours and publications to
Sponsor no later than thirty (30) days prior to the scheduled news release media
tour or publication. AVMF will provide Sponsor with weekly updates to the
schedule. In addition, within sixty (60) days after the end of a program run,
AVMF will provide to Sponsor a listing of the media entities that picked up the
piece and the number of media impressions made for each piece.
-3-
<PAGE> 4
10. AVMF agrees that Sponsor may publicize and otherwise promote its
relationship with AVMF as an underwriter and Sponsor of the Program, provided,
however, that Sponsor shall have furnished advance copies of such materials
prior to their use. AVMF shall have a period of five (5) business days after
receipt of such materials (by overnight courier or by facsimile transmission) to
review them and to notify Sponsor of any objection to such use, stating with
reasonable specificity the nature of the objection and the reasons therefor.
Such objection shall be based only on a reasonable conclusion that the proposed
use is materially misleading to the proposed recipient or would imply to a
reasonable recipient thereof an endorsement by AVMF of specific Sponsor
product(s) in comparison to the product(s) of any other vendor. If Sponsor does
not receive a response within the five (5) business day period set forth above,
it will be presumed that there are no objections to the materials and Sponsor
will be free to make use of such materials. If, within such five (5) business
day period, Sponsor receives AVMF's objections, Sponsor will thereafter
cooperate in good faith with AVMF to respond to and resolve and such objections.
Sponsor may reproduce and use Sponsor's featured topic in the Veterinary
ClientLink video and all AVMF-associated media releases in its marketing and
public relations activities.
11. AVMF hereby acknowledges that it does not now have and shall not
hereafter acquire, any interest in any of Sponsor's trademarks, trade names,
service marks or logos.
12. Except for the usage provided herein for Sponsor's feature
story, AVMF and its assigns retain all copyrights to and control over use of the
Veterinary ClientLink materials and other Program materials. Any other
duplication or use, other than as has been specifically granted herein to
Sponsor, may be made only with AVM F's prior written approval. Upon request by
Sponsor, AVMF agrees to provide Sponsor with copies of Veterinary ClientLink
videos for Sponsor's use in connection with Sponsor's business, and not for
resale, at AVMF's cost (such cost may include a handling fee of up to 10% of the
cost of the video).
13. To produce and promote the Veterinary ClientLink and its
national consumer media campaign, AVMF has contracted with media specialists
experienced in video production and media relations for the veterinary
profession. Within the scope of this Agreement, these agents may act as a
representative of AVMF in communicating with the Sponsor and in the production
of Sponsor's features. Notwithstanding the foregoing, AVMF shall remain liable
for performance of its obligations under this Agreement.
14. This Agreement shall commence on the Effective Date and, unless
terminated earlier as provided for in herein, shall continue for a period of
three (3) years from the release date of the first Veterinary ClientLink video.
In the event that AVMF determines to continue the Program beyond three (3)
years, Sponsor shall be granted the option and right of first refusal to
-4-
<PAGE> 5
continue sponsorship, with exclusivity for the category of online or offline pet
retail companies which sell consumer pet products for the Internet, under the
terms and conditions then in effect.
15. AVMF agrees to feature Sponsor's exclusive category and
Sponsor's products in one (1) issue during the each year of this Agreement.
Sponsor shall pay AVMF the sum of one hundred sixty nine thousand seven hundred
and seventy dollars ($169,770) per issue sponsored during the (3) year term of
this Agreement as full and final consideration for its annual participation in
the Program and all related sponsorship benefits as described above. An initial
payment (the "Initial Payment") of eighty thousand dollars ($80,000) shall be
due upon execution of the Agreement to allow immediate production scheduling of
the Veterinary ClientLink video and other promotional materials. Additional
payments (the "Additional Payments") of eighty nine thousand seven hundred and
seventy dollars ($89,770) per issue shall be due upon notification of the
scheduling of Sponsor's feature story for production, anticipated to be November
15, in 1999. Sponsor will be notified by AVMF of the scheduling of the feature
date no later than sixty (60) days prior to production. In each subsequent year
during the term of this Agreement, the Initial Payments shall be due and payable
on the first day in June, and the Additional Payments shall be due upon
notification of the scheduling of Sponsor's feature story for production.
16. Sponsor shall be granted category exclusivity for its Veterinary
ClientLink feature story and related media releases for each year of this
Agreement. AVMF agrees not to produce, broadcast or otherwise publish within the
scope of this Program other feature stories on this same category in
collaboration with or promoting any other Sponsor. Sponsor's category issue of
exclusivity shall be online or offline pet retail companies.
17. In the event that either party defaults or breaches any of the
material provisions of this Agreement, the other party shall have the right to
terminate this Agreement by giving written notice to the defaulting party,
provided, however, that if said defaulting party cures said default or breach
within thirty (30) days after said notice shall have been given, this Agreement
shall continue in full force and effect. The failure on the part of either of
the parties to exercise or enforce any right conferred upon it hereunder shall
not be deemed to be a waiver of any such right nor operate to bar the exercise
or enforcement thereof at any time thereafter.
18. If either party shall go into liquidation, or if a receiver or
trustee shall be appointed for its property, or if a party makes an assignment
for the benefit of creditors, the other party may terminate this Agreement
forthwith by giving written notice to such effect. Termination of this Agreement
for any cause shall not release either party from any obligation theretofore
accrued.
-5-
<PAGE> 6
19. Neither party hereto shall be liable to the other for any
failure to perform or delay in performance of its obligations hereunder (other
than an obligation to pay monies) caused by (i) act of God, (ii) outbreak of
hostilities, riot, civil disturbance, acts of terrorism, (iii) the act of any
government or authority (including revocation or suspension of any license or
consent), (iv) fire, explosion, flood, fog or bad weather, (v) theft, malicious
damage, strike, lock out or industrial action of any kind (vi) any cause or
circumstance whatsoever beyond its reasonable control provided the party so
affected shall give prompt written notice to the other party. The party so
affected shall promptly notify the other party when the cause or causes
preventing restricting or interfering with its performance hereunder have been
eliminated. If the failure or delay occasioned by force majeure exists for more
than six months, either party can terminate this Agreement immediately by notice
in writing to the other party, and, save in respect of any payment due, neither
party shall have any liability to the other in respect of the termination of
this Agreement as a result of an event of force majeure.
20. This Agreement represents the entire understanding between the
parties with respect to the subject matter of this Agreement and supersedes all
prior agreements. No waiver, modification or additions shall be valid unless in
writing and signed by the parties hereto. If any provision of this Agreement
shall be declared invalid or unenforceable, the remaining provisions shall
remain in full force and effect.
21. This Agreement shall be construed in accordance with the laws of
the State of Illinois, without regard to its conflicts of law principles.
22. This Agreement and the rights and obligations hereunder shall
not be assignable by either of the parties without the previous written consent
of the other party, except that either party may assign this Agreement to an
affiliate or to any entity with which it may merge or consolidate, or which it
may transfer all or substantially all of its assets to which this Agreement
relates, without obtaining the consent of the other party.
23. Notices under this Agreement shall be in writing and shall be
deemed delivered when delivered in person or deposited in the United States
mail, postage prepaid, addressed to the applicable party at the address shown at
the beginning of this Agreement. Such address may be changed from time to time
by either party by providing written notice to the other in the manner
described.
24. Any dispute, claim or controversy of any kind arising in
connection with, or relating to, this Agreement shall be resolved exclusively by
binding arbitration in accordance with the rules of the American Arbitration
Association.
-6-
<PAGE> 7
IN WITNESS THEREOF, each of the parties has duly executed and delivered this
Agreement as of the Effective Date.
AMERICAN VETERINARY MEDICAL FOUNDATION:
By: /s/ R. L. Collinson, DVM Date: 10-15-99
------------------------------- -------------
Name: R.L. Collinson, DVM
Title: Chairman
Pets.com:
By: /s/ Chris Deyo Date: 10/21/99
------------------------------- -------------
Name: Chris Deyo
Title: President
-7-
<PAGE> 1
EXHIBIT 10.34
EXCLUSIVE SPONSORSHIP AGREEMENT
BETWEEN PETS.COM AND AVMF
This Exclusive Sponsorship Agreement (this "Agreement") is made as of
October 21, 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 American Veterinary Medical Foundation, an
Illinois corporation with offices at 1931 N. Meacham Road, Suite 100,
Schaumburg, IL 60173 ("AVMF") (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, AVMF promotes the health and well-being of animals through the
enhancement of veterinary medical education and science; and
Whereas, the parties wish to enter into an exclusive sponsorship 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.
"AVMF Site" means the web site owned and operated by AVMF, and currently
having a URL at http://www.avma.org/avmf, and any successor site thereof.
"Content" means the data, text, audio, video, graphics, photographs,
artwork and other technology and materials of either party.
"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.
"Link" means a URL hidden behind a formatting option that may take the
form of a colored item
-1-
<PAGE> 2
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.
"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.
"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 that markets, sells, or allows
customers to purchase pet care or pet related products. Without limiting the
foregoing, the definition of Pet Retail Company includes any retailer of
consumer goods which also sells pet care products.
"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.
2. Pets.com's Obligations.
2.1 Video Sponsorship. The parties acknowledge that Pets.com has
sponsored the AVMF Vet Link Video pursuant to a separate sponsorship agreement
dated October __, 1999.
2.2 "Add-A-Buck" Campaign. Pets.com agrees to develop and implement
an "Add-A-Buck" (or similar name) fund raising campaign on the Pets.com Site in
which the shopping cart check-out process would provide an opportunity for a
user to click on a button which stated "Please join us in supporting the AVMF.
Click here to add-a-buck to your bill for a non-profit, worthy cause" or similar
wording. Such campaign shall be made available on the Pets.com Site once or
twice a year for a 3 to 4 week period to be determined by Pets.com. In the event
that such campaign does not generate a minimum of $100,000 ("Guaranteed
Contributions") of revenue to AVMF per year for the term of this Agreement,
Pets.com will compensate AVMF for the difference pursuant to Section 4.
2.3 E-mail Newsletter. Pets.com will mention its sponsorship of AVMF
at least once a month in its biweekly email newsletter to its customer base who
have "opted-in" to receive such newsletters, the content of which shall be
mutually agreed by the parties.
2.4 Public Relations and Press Tour. Pets.com shall include AVMF in
its public relations campaign such as, for example, by including AVMF in all
press releases and participation in at least one
-2-
<PAGE> 3
press tour per year.
2.5 Partners Page. Pets.com shall provide a Link on its Partners
Page which shall link to the AVMF Home Page.
2.6 Pets.com Magazine. Pets.com shall place a full-page
advertisement in two (2) issues of the "Pets.com" magazine at no cost to AVMF.
Such magazine is currently planned to be published six (6) times in the year
2000 and expected to have a circulation of 500,000 per issue.
2.7 Convention Space. Pets.com shall provide AVMF booth space at the
Pets.com Dog Day Afternoon events at no cost to AVMF, which includes a national
tour of eight (8) cities in the year 2000.
2.8 TYDTWD. Pets.com shall provide AVMF the opportunity to
participate in Pets.com's "Take Your Dog to Work Day" annual event sponsored by
Pets.com.
3. AVMF's Obligations.
3.1 Scholarship Support. AVMF agrees to administer a Veterinary
Scholarship Program in which a portion of the payments made under this Agreement
shall be used for the financial support of student scholarships. AVMF shall
allocate thirty-one thousand dollars ($31,000) per year to be distributed as
thirty-one (31) one thousand dollar ($1,000) scholarships to each veterinary
school in the United States and Canada. AVMF shall acknowledge Pets.com as the
provider of such scholarship monies.
3.2 Human-Animal Bonding Research. AVMF agrees to allocate $30,000
per year from the payments made under this Agreement for the support of
human-animal bonding research programs, the selection of which shall be made by
both parties.
3.3 Veterinary Associate Program. Subject to AVMF Board approval and
compliance with the American Veterinary Medical Association guidelines, AVMF
agrees to consider sponsorship of Pets.com's "Veterinary Associate Program."
3.4 Public Relations. AVMF agrees to include Pets.com in AVMF's
public relations efforts on at least an equal level as other similar sponsors.
3.5 Other Promotions. AVMF agrees to send a letter of introduction
to all veterinarians and/or clinics receiving the Client Link Video announcing
Pets.com as a new AVMF sponsor. AVMF further agrees to provide Pets.com a list
of all AVMF contacts, including without limitation members and individuals who
have donated money to AVMF and who have expressed no objections to AVMF so that
Pets.com may communicate with them. Any such communications shall be subject to
the review and reasonable approval by AVMF.
-3-
<PAGE> 4
3.6 Endorsement. AVMF agrees to help Pets.com to develop and present
within six (6) months of the Effective Date a proposal for endorsement of
Pets.com to the AVMF Board of Directors.
4. Payments and Schedule. Pets.com shall pay AVMF a total of one million
dollars (US $1,000,000) for the term of this Agreement less $509,310 for
sponsorship of the Vet Link Video in accordance with the following schedule:
beginning on the Effective Date and for each ninety (90) days ("Quarter")
thereafter, Pets.com will pay AVMF $40,891 within thirty (30) days after the end
of such Quarter. At the fourth Quarter prior to each anniversary of this
Agreement, Pets.com shall adjust the fourth Quarter payment to AVMF to
compensate for any amount collected from the "Add-a-buck" campaign exceeding the
Guaranteed Contributions.
5. Exclusivity. Pets.com shall be the exclusive sponsor and Pet Retail
Company associated with the AVMF in that AVMF shall not promote any Pet Retail
Company other than Pets.com in any advertising, promotional or public relations
materials in any form or medium, including without limitation the placement of
banner advertisements, sponsorships, promotions or editorial content of any Pet
Retail Company other than Pets.com on the AVMF Site during the term of this
Agreement. Both parties acknowledge that AVMF is a non-profit foundation and can
accept contributions from other Pet Retail Companies provided that such Pet
Retail Companies do not receive any online or offline promotional acknowledgment
other than as a line listing along with other donors.
6. Term and Termination.
6.1 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 three (3) years from the
Effective Date. This Agreement may be renewed by mutual consent of the parties.
6.2 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
thirty (30) 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 cured
within thirty (30) days from receipt of written notice of such breach.
6.3 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 6.3, 8, 9, 10 and 11 shall
survive.
-4-
<PAGE> 5
7. Licenses.
7.1 Grant of License by AVMF. Subject to the terms and conditions of
this Agreement, AVMF hereby grant Pets.com an exclusive royalty-free, worldwide
license to use, reproduce, publicly display, publicly perform, distribute and
transmit the AVMF Marks and AVMF Content on the Pets.com Site and in other
promotional materials solely to the extent necessary to perform its obligations
under this Agreement and limited to the exclusivity provisions set forth in
Section 5, and provided that any such use will comply with any brand usage
guidelines communicated by AVMF to Pets.com in writing.
7.2 Grant of License by Pets.com. Subject to the terms and
conditions of this Agreement, Pets.com hereby grants AVMF a non-exclusive,
royalty-free, worldwide license to use, reproduce, publicly display, publicly
perform, distribute and transmit the Pets.com Marks and Pets.com Content in
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 Pets.com to AVMF in writing.
7.3 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.
8. Proprietary Information.
8.1 Confidentiality. AVMF 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.
-5-
<PAGE> 6
8.2 Ownership.
(a) By Pets.com. As between Pets.com and AVMF, Pets.com will have
and retain full and exclusive right, title and ownership interest in and to the
Pets.com Marks and Pets.com Content, together with any Intellectual Property
Rights thereto.
(b) By AVMF. As between AVMF and Pets.com, AVMF will have and
retain full and exclusive right, title and ownership interest in and to the AVMF
Marks and AVMF Content, together with any Intellectual Property Rights thereto.
9. Representation and Warranties.
9.1 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.
9.2 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 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.
10. Indemnification.
10.1 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 AVMF arising out of or relating to a claim that: (a) use of the Pets.com
Marks or the Pets.com Content 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 9.1; and Pets.com will
indemnify AVMF 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 AVMF 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
-6-
<PAGE> 7
or action (provided that Pets.com shall not enter into any settlement which
materially affects AVMF's rights without AVMF's prior written consent), and
(iii) proper and full information and reasonable assistance to defend and/or
settle any such claim or action.
10.2 Indemnification by AVMF. AVMF 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 the AVMF Marks or AVMF
Content in accordance with the terms of this Agreement infringes a third party
copyright or trademark, (b) any Content on the AVMF 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 AVMF of any representation
or warranty contained in Sections 9.1; and AVMF 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 AVMF 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 AVMF 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.
11. Limitation of Liability. EXCEPT FOR LIABILITY ARISING UNDER SECTION 10,
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 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.
12. Miscellaneous.
12.1 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 Section 8, 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.
12.2 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
-7-
<PAGE> 8
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.
<TABLE>
<S> <C>
To Pets.com To AVMF
Pets.com, Inc. American Veterinary Medical Foundation
435 Brannan Street, Suite 100 1931 N. Meacham Road, Suite 100
San Francisco, CA 94107 Schaumburg, IL 60173-4360
Attention: Julie Wainwright Attention: Executive Director and Chairman
Phone: 415.222.9999 Tel: 847.925.8070
Fax: 415.222.9998 Fax: 847.925.1329
</TABLE>
12.3 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.
12.4 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 AVMF. Neither party is authorized to act as
agent or bind the other party except as expressly stated in this Agreement.
12.5 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.
Any purported transfer, assignment or delegation in violation of the foregoing
will be null and void and of no force or effect.
12.6 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.
12.7 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.
12.8 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.
12.9 Governing Law. This Agreement will be governed by and
interpreted under the laws of the State of Illinois, without giving effect to
applicable conflicts of law principles.
12.10 Amendment. This Agreement may not be amended or modified by the
parties in any
-8-
<PAGE> 9
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.
12.11 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.
12.12 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
-9-
<PAGE> 10
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
-------------------------------
Name: Julie Wainwright
-------------------------------
Title: CEO
------------------------------
Date: 1/5/00
-------------------------------
AMERICAN VETERINARY MEDICAL FOUNDATION
By: /s/ R. L. Collinson
-------------------------------
Name: R. L. Collinson
-------------------------------
Title: Board Chair
-------------------------------
Date: 12-22-99
-------------------------------
-10-
<PAGE> 1
EXHIBIT 10.35
CONTENT PARTNER/DISTRIBUTION AGREEMENT
This Content Partner/Distribution Agreement ("Agreement") is entered into by and
among Pets.com, Inc., a corporation duly organized under the laws of the State
of Delaware, with its principal place of business at 435 Brannan Street, San
Francisco, California 94107 ("Content Partner"), Buena Vista Internet Group, a
corporation duly organized under the laws of the State of California, with its
principal place of business at 500 South Buena Vista Street, Burbank, CA
91521-0607 ("BVIG"), and Infoseek Corporation, a corporation duly organized
under the laws of the State of California, with its principal place of business
at 1399 Moffett Park Drive, Sunnyvale, California 94089-1134 ("Infoseek") (BVIG
and Infoseek collectively referred to herein as the "GO Entities"). The
effective date of this Agreement is January 15, 2000 (the "Effective Date").
WITNESSETH:
WHEREAS, BVIG hosts and maintains the U.S. versions of certain Internet sites,
including Family.com and Disney.com, which sites are part of GO Network.
WHEREAS, Infoseek hosts and maintains the U.S. version of the Internet portal
service which is part of GO Network.
WHEREAS, Catalyst Investments, L.L.C. ("Catalyst") is a limited liability
corporation which makes and holds certain investments for The Walt Disney
Company.
WHEREAS, ABC, Inc. ("ABC") owns and/or operates certain broadcast properties.
WHEREAS, BVIG, Infoseek, Catalyst and ABC are subsidiaries and Affiliates of The
Walt Disney Company.
WHEREAS, Content Partner is an online retailer of pet products, information and
resources.
WHEREAS, the GO Entities wish to enter into a relationship with Content Partner
for, among other things, the distribution and placement of certain Content
Partner content and advertising on GO Network, advertising by Content Partner on
the ABC broadcast properties, Catalyst's equity investment in Content Partner
and joint on-line and offline promotion opportunities.
NOW, THEREFORE, for good and valuable consideration, and in consideration of the
mutual covenants and conditions herein set forth, and with the intent to be
legally bound thereby, BVIG, Infoseek and Content Partner hereby agree as
follows:
ARTICLE 1 DEFINITIONS
1.1 AFFILIATE means with respect to a party to this Agreement, any
entity that directly or indirectly controls, or is under common
control with, or is controlled by, such party or in which such
party beneficially owns at least fifty percent (50%) of the
equity interests; "control" (including, with its correlative
meanings, "controlled by" and "under common control with") means
possession, directly or indirectly, of the power to direct or
cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership
interests, by contract or otherwise).
1.2 CONTENT means editorial content, products, services, tools,
applications and commerce provided by Content Partner to the GO
Entities or distributed by Content Partner to GO
-1-
<PAGE> 2
Network Users through the GO Network-Wrapped Pages relating to
pets and animals and as further described in Appendix A,
including, without limitation, advertisements for Content
Partner or its services and/or products.
1.3 CONTENT PARTNER COMPETITORS mean the following pet supply
retailers: PETCO Animal Supplies, Inc., PETsMart, Inc. and its
affiliate PETsMART.com, Inc., Petopia.com, Petstore.com,
PetQuarters, Inc., Drs. Foster & Smith, Inc., Petland,
PetPlanet.com, Inc., PogoPet.com, Inc. and their subsidiaries
and direct successors. Upon written notice to the GO Entities,
Content Partner may from time to time substitute other companies
or entities engaged primarily in the business of pet supplies
and accessories retail for the entities listed herein or,
subject to the limit described herein, add other companies or
entities to the definition of "Content Partner Competitors"
subject to the approval of the GO Entities which will not be
unreasonably withheld. In no event shall the total number of
companies or entities designated by Content Partner as "Content
Partner Competitors" exceed ten (10) at any one time.
1.4 CONTENT PARTNER SERVICE means the U.S. version of the web site
located at www.pets.com and/or such other successor, extension
or replacement site(s) as may be designated by Content Partner.
1.5 DISNEY.COM is the U.S. version of the Internet service for The
Walt Disney Company currently located at disney.go.com.
1.6 EFFECTIVE DATE shall have the meaning set forth in the Preamble
to this Agreement.
1.7 FAMILY.COM is the U.S. version of the Internet service related
to family issues currently located at family.go.com.
1.8 GO.COM (THE ENTITY) refers to the online properties of The Walt
Disney Company, including the following subsidiaries and
organizations of The Walt Disney Company: BVIG (which operates
Disney.com, Family.com, mrshowbiz.com and certain other sites),
Infoseek (which operates the GO Portal), ABC News/Starwave
Partners d/b/a AIV Ventures and ESPN/Starwave Partners d/b/a EIV
Ventures, which respectively operate ABCNews.com and ESPN.com.
1.9 GO.COM COMPETITORS mean the following Internet portal companies:
AOL, Yahoo, Lycos, Excite, MSN and Snap; and the following media
companies: Time Warner and Viacom; and their subsidiaries and
direct successors. Upon written notice to Content Partner, the
GO Entities may from time to time substitute other companies or
entities engaged primarily in the business of providing Internet
portal services or in the media business for the entities listed
here subject to the approval of Content Partner which will not
be unreasonably withheld. In no event shall the total number of
companies or entities designated by the GO Entities as "GO.com
Competitors" exceed eight (8) at any one time.
1.10 GO ENTITIES has the meaning set forth in the Preamble to this
Agreement and specifically excludes AIV Ventures and EIV
Ventures, which respectively operate ABCNews.com and ESPN.com.
1.11 GO NETWORK is the U.S. version of the Internet service currently
located at go.com and certain subdomains of go.com which service
includes the GO Portal and certain vertical Internet sites such
as Family.com, Disney.com, ABCNews.com and ESPN.com.
1.12 GO NETWORK-WRAPPED PAGES means co-branded pages with the GO
Wrapper that display the Content, as further described herein.
-2-
<PAGE> 3
1.13 GO PORTAL means the U.S. version of the Internet portal service
located at www.go.com and/or such other successor, extension or
replacement site(s) as may be designated by the GO Entities.
1.14 GO WRAPPER means a page with the GO Network Trademarks and
includes the GO Network header, footer, tabs, breadcrumb and
other navigational elements and copyright notice as provided by
the GO Entities.
1.15 INITIAL TERM has the meaning set forth in Section 12.1.
1.16 LINK means a so-called "hot link" in graphical and/or textual
format located on the applicable areas of the Service which
takes a User directly to another web site or area within the
site.
1.17 PETSMART AGREEMENT has the meaning set forth in Section 3.4.
1.18 STANDARD DISTRIBUTION DEAL means an advertising and/or shopping
opportunity that is available to multiple parties in a party's
same space. For example, "Standard Distribution Deal" includes
key word buys, advertising banner and button buys, and merchant
slotting buys.
1.19 TDSO means The Disney Store online currently located at
Store.Disney.go.com.
1.20 TRADEMARKS means trade names, logos and trademarks, and
representations of the foregoing.
1.21 USERS means individuals or entities that access GO Network.
ARTICLE 2 EQUITY INVESTMENT AND ABC TV ADVERTISING
2.1 Equity Investment. Content Partner will issue to Catalyst
1,378,000 shares of Content Partner's Series C Preferred Stock
(the "Shares") which represent no less than five percent (5%) of
the total number of outstanding shares of Content Partner's
capital stock (assuming exercise of all outstanding options and
warrants) as of the Effective Date in exchange for
$11,024,000.00 of Promotion as described below. Terms and
conditions regarding the Shares will be as set forth in executed
definitive equity documents substantially in the form attached
hereto as Appendix B (the "Equity Documents"). In the event and
to the extent there is a conflict between the terms and
conditions set forth in the Equity Documents and the terms and
conditions set forth in this Agreement, the terms and conditions
in the Equity Documents shall govern.
2.2 Consideration For Shares. Content Partner and the GO Entities
agree that in consideration for the Shares, "Promotion" shall
consist of the ABC Media Rights as described on Appendix C
attached hereto, rights to which will not vest until, but will
become irrevocable upon, the transfer of the Shares to Catalyst.
In the event the GO Entities are unable to provide Promotion as
described herein with an aggregate market value of
$11,024,000.00 by the date three (3) years from the Effective
Date, the GO Entities shall pay Content Partner cash in the
amount for which it was unable to provide Promotion. Such
make-good cash payment shall be Content Partner's sole and
exclusive remedy for the GO Entities' failure to provide such
Promotion.
-3-
<PAGE> 4
ARTICLE 3 PURCHASE OF ONLINE MEDIA PLACEMENT
3.1 Purchase of Online Advertising and Sponsorship. Content Partner
hereby agrees to purchase online media placement on GO Network
("Online Advertising") in an aggregate amount of at least Nine
Million Dollars ($9,000,000) during the Initial Term of the
Agreement. Online Advertising may be placed on GO Network
properties operated by BVIG or Infoseek and on properties such
as ABCNews.com and ESPN.com operated by GO.com entities which
are not parties to this Agreement.
3.2 Terms and Conditions of Advertising Purchase. Such purchase of
online media placement shall be on substantially the terms and
conditions set forth in the forms of Advertising Agreement and
Advertising Insertion Order attached hereto as Appendices D-1
and D-2, respectively (the "Advertising Agreements").
3.3 Placement of Advertising. Content Partner, BVIG and Infoseek
will determine an initial placement schedule and will meet no
less than once every quarter during the Initial Term to review
media placements and actual performance against projected
impressions and to determine future placement schedules to
optimize performance within the projected impression ranges. The
initial placement schedule is attached hereto as Appendix E.
Placements and impression levels on the initial placement
schedule are projections only and are subject to change. Content
Partner's Online Advertising will Link to a page in the Content
Partner Service. Content Partner may determine the page in the
Content Partner Service to which such Online Advertising Links;
provided however that no Link shall take a User directly to a
registration page in the Content Partner Service. All Online
Advertising, including Links from such Online Advertising, shall
comply with the then current GO.com Advertising Guidelines, the
current form of which is attached hereto as Appendix F-2, and
the terms and conditions of the relevant Advertising Agreement.
3.4 Petsmart Agreement. Content Partner acknowledges that Infoseek
is a party to an agreement with Petsmart.com, Inc. (the
"Petsmart Agreement") which agreement contains certain
advertising and other restrictions. During the term of the
Petsmart Agreement, Infoseek will be restricted from accepting
certain placements of Content Partner Content, including
advertising. Content Partner acknowledges and agrees that
nothing in this Agreement is intended to put Infoseek in breach
of its obligations under the Petsmart Agreement and any actions
taken by Infoseek which Infoseek deems necessary or advisable to
comply with the Petsmart Agreement shall not be deemed a breach
of this Agreement. In the event the advertising purchase portion
of the Petsmart Agreement becomes available during the term of
this Agreement, Infoseek will grant Content Partner a right of
first refusal to purchase such advertising placement.
3.5 Fees and Payments. Content Partner will pay advertising fees in
accordance with the schedule set forth on Appendix D-3 and the
provisions in Article 8.
ARTICLE 4 DISPLAY OF CONTENT ON GO NETWORK
4.1 General. Subject to the license set forth in Section 6.1, the GO
Entities and Content Partner plan to integrate Content into
certain areas of GO Network and may display Content on GO
Network-Wrapped Pages as described below during the term of this
Agreement. In addition, the GO Entities and Content Partner plan
to enter into certain joint marketing activities as described
herein and as mutually agreed.
-4-
<PAGE> 5
4.2 Display of Content on GO Network.
a. Content Placement. Subject to the license set forth in
Section 6.1, the GO Entities will place Content on GO
Network as follows:
- Disney.com will integrate Content on its
Animal/Pets Channel
- Disney.com may include a Link to the Content
Partner Service from a fixed position on its
Animals/Pets Channel
It is intended that Content will be integrated into the
GO Network so as to retain the "look and feel" of the
site/page where the Content is being integrated. The GO
Entities will host such Content and shall prepare such
Content for display on GO Network by editing and making
such other technical alterations conforming such Content
to GO Network format provided that the GO Entities shall
not alter the substantive meaning of Content. The
frequency and actual placement of Content shall be at
the sole discretion of the GO Entities. The GO Entities
will retain ultimate creative approval over any and all
Content displayed on GO Network.
a. Exclusive Content. Content Partner will provide certain
exclusive content to the GO Entities for use on GO
Network. Such exclusive Content will not be provided to
third parties; provided however, that Content Partner
may use such exclusive Content on the Content Partner
Service or in its magazine, newsletters or other online
and off-line marketing communications. The parties will
mutually agree upon the exclusive content to be
provided. The GO Entities' use of such exclusive content
shall be subject to the license set forth in Section
6.1.
b. Attribution. Content Partner will generally receive
static textual attribution at the top-level page where
its Content is distributed on GO Network (other than on
the GO Network-Wrapped Pages) and dynamic Link textual
attribution at the lowest-level page or end of the
Content. For example, a Content Partner article will
have a static textual attribution at the beginning of
the article and a dynamic "Find Out More" Link at the
end. Such Link will Link to the Content Partner Service.
c. Other Distribution of Content. In addition to
distribution of the Content as described above, Content
Partner agrees that the GO Entities may distribute such
of Content Partner's Content elsewhere on GO Network as
the GO Entities deem appropriate. Content displayed on
other areas of GO Network will be subject to the terms
and conditions stated herein.
d. Hosting; GO Network Attributes. Disney.com, Family.com
and the GO Portal will be hosted by the GO Entities.
Notwithstanding anything herein, the GO Entities retain
the right to adapt or otherwise alter the design, look
and any other attributes of Disney.com, Family.com, the
GO Portal and any other pages in GO Network.
4.3 GO Network-Wrapped Pages.
a. General; Hosting. The GO Entities may request that
Content Partner create GO Network-Wrapped Pages. GO
Network-Wrapped Pages are co-branded pages which will
contain the GO Wrapper and display Content from Content
Partner. It is intended that the GO Network-Wrapped
Pages contain substantially the content and features of
the Content Partner Service and other content and
features as the parties mutually agree. The GO
Network-Wrapped Pages may include an opportunity for
Users to
-5-
<PAGE> 6
register with GO Network and Content Partner as
described in Article 7 below. Content Partner will host
the GO Network-Wrapped Pages and will serve such pages
out of a dynamic virtual domain to be located at
http://virtual domain name.go.com (the "Virtual
Domain"); provided however, that Users in the Virtual
Domain who are accessing product/commerce pages (as
opposed to pages with editorial content) may be served
from the Content Partner Service as follows: (i) a User
in the Virtual Domain who has been reviewing editorial
content who then clicks on a product/commerce page may
be served from a page in the Content Partner Service
upon clicking on to a product/commerce image or Link and
(ii) a User who comes to the Virtual Domain by clicking
on to a product/commerce page, e.g., through a search
for pet supplies, will be served from a GO
Network-Wrapped Page in the Virtual Domain until such
time as such User puts a product into a Content Partner
shopping cart at which time such User maybe served from
the Content Partner Service. Content Partner shall own
all revenues generated from commerce on the Content
Partner Service. The parties anticipate that, excluding
virtual domains which may be created for promotions,
Content Partner will not be required to maintain more
than one Virtual Domain to host the GO Network-Wrapped
Pages. All GO Network-Wrapped Pages will include the GO
Wrapper but the GO Wrapper will not displace Content
Partner's "look and feel," including placement of the
Content Partner name and logo. Content Partner will
offer its services and products to Users through the GO
Network-Wrapped Pages on substantially the same terms
and conditions as it offers such services and products
to visitors to the Content Partner Service.
b. Advertising. The GO Entities will be responsible for
selling and serving all advertising on the GO
Network-Wrapped Pages. The GO Entities will not place
advertisements from Content Partner Competitors on the
pages in the Virtual Domain; provided however that such
restriction shall not apply to run-of-site (ROS) banner
advertisements. Any advertising placements in the GO
Wrapper will be of a size consistent with other
advertising placements across GO Network. In addition,
Content Partner acknowledges and agrees that the
following shall not constitute a breach of this Section
4.3.b: (a) the GO.com search technology may search the
sites of the Content Partner Competitors and (b) the GO
Entities may provide search-related products that may
include results from the Content Partner Competitors on
the Virtual Domain pages.
c. Counting Page Views. The GO Entities will count all page
views on the Virtual Domain.
d. Distribution of Content Displayed on GO Network-Wrapped
Pages. The GO Entities shall not have any rights
pursuant to Section 4.2 to integrate, display or
otherwise distribute Content which has been distributed
by Content Partner to GO Network Users through the GO
Network-Wrapped Pages simply as a result of Content
Partner's distribution of such Content through the GO
Network-Wrapped Pages.
4.4 Content Guidelines; Delivery of Content; Error Correction.
a. Content Guidelines. All Content will comply with the
then current Content Guidelines and Advertising
Guidelines for GO Network. The current forms of Content
Guidelines and Advertising Guidelines are set forth in
Appendices F-1 and F-2. The GO Entities shall have the
right, but not the obligation, to remove, or direct
Content Partner to remove, any Content, or any
information or other material from any Content, which
the GO Entities determine to be offensive, in poor
taste, or otherwise objectionable or which would cause
one of the GO Entities to be in violation of any
agreements existing at the Effective Date with third
parties (for example, exclusivity
-6-
<PAGE> 7
agreements prohibiting the provision of credit card
services), and Content Partner shall immediately comply
with such request.
b. Delivery of Content. Content Partner will deliver to the
GO Entities the Content to be included on GO Network in
a digital format (such as HTML) or in another mutually
agreeable electronic format, via modem or Internet
access (e.g. Internet ftp or Internet e-mail). Content
Partner agrees to certify that all deliveries hereunder
were made electronically. The initial delivery of
Content shall include all items listed on Appendix A and
shall be made no later than March 31, 2000. Content
Partner will provide additional Content elements and
make updates to the Content available to the GO
Entities, and the GO Entities will update the Content on
GO Network, on a mutually agreed upon schedule and
basis.
c. Error Correction. Content Partner shall promptly remedy
and/or correct any material limitations or errors in the
Content. Content Partner shall cooperate and assist the
GO Entities by promptly answering questions and
complaints regarding the Content. Each party shall
promptly inform the other parties of any event or
circumstance, and provide all information pertaining to
such event or circumstance, related or arising from this
Agreement which could reasonably lead to a claim or
demand against the other parties by any third party.
4.5 Marketing Agreements.
a. Inclusion of Promotional Materials. Content Partner will
permit the GO Entities, The Walt Disney Company or any
of The Walt Disney Company's Affiliates to place
promotional materials in at least 150,000 Content
Partner customer packages per year. The GO Entities, The
Walt Disney Company or The Walt Disney Company's
Affiliates, as applicable, shall be responsible for
providing such promotional materials. Content Partner
will be responsible only for labor-related costs
associated with including and shipping such promotional
materials with the Content Partner customer packages.
The content of such promotional materials and timing of
inclusion shall be subjection to approval by Content
Partner, which approval will not be unreasonably
withheld.
b. Online Promotions. Content Partner and the Go Entities
agree to create six online promotions, such as contests,
sweepstakes or games, during the Initial Term. The
details of the online promotions will be determined as
part of the joint marketing plan described in Section
4.5.c below.
c. Marketing Plan. Within 75 days of the Effective Date,
the GO Entities and Content Partner will jointly draft
and agree upon a marketing and promotions program which
may include, among other things:
i. Special Content Partner offers targeted to GO.com
Users (other than TDSO customers) interested in pets.
ii. Special Content Partner offers targeted at TDSO
customers.
iii. An opportunity for Content Partner to be an online
distribution source for the purchase of pet-related
Disney products, other than through The Disney Store
(online or off-line).
iv. Opportunity for The Walt Disney Company to send
pets.com: The Magazine to its customers. v. Web casts
and web chats.
a. Coordination of Marketing Efforts. The GO Entities and
Content Partner will coordinate and communicate direct
marketing (e.g. email) efforts aimed at Content
-7-
<PAGE> 8
Partner Users in order to avoid duplicate and spam
communications; provided however that the foregoing
excludes a party's direct marketing efforts to a User
who has opted to receive direct communications from such
party.
e. Other Marketing Discussions. The GO Entities and Content
Partner agree to discuss the following additional
promotional ideas:
[*]
f. Marketing and Promotions. All joint marketing and
promotional activities shall be subject to final
approval and mutual agreement of all parties involved,
including, where applicable, TDSO and other GO.com
entities or Affiliates. No party shall have any
obligation to enter into joint marketing and promotional
activities except on terms and conditions expressly
agreed to in writing by such party.
4.6 Exclusivity.
a. Restriction on Content Partner. Content Partner agrees
not to enter into an agreement with any GO.com
Competitor during the term of this Agreement except for
Standard Distribution Deals unless mutually agreed to by
the parties. Notwithstanding the foregoing; the GO
Entities acknowledge that Content Partner has entered
into an agreement with Blue Mountain Arts/Excite which
will expire on September 30, 2000 which agreement will
be deemed exempted from the restriction set forth in
this Section 4.6.a. In addition, Content Partner may
pursue an extension of such agreement on terms and
conditions substantially similar to those of the current
deal and excluding any provision which requires Content
Partner to provide exclusive content to Blue Mountain
Arts/Excite.
b. Restriction on the GO Entities.
The GO Entities agree not to enter into any strategic
equity relationship (i.e., of a similar nature to the
relationship among the parties described in this
Agreement) with any Content Partner Competitor during
the term of this Agreement. Notwithstanding the
foregoing, the GO Entities may make open market
purchases or other investments of any kind strictly for
financial investment purposes (i.e., unrelated to a
strategic relationship).
[*] CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SEC.
-8-
<PAGE> 9
ii. The GO Entities will not include advertisements
or branded (i.e. including attribution) content
from Content Partner Competitors on the pages
within the Animals/Pets Channel on Disney.com
and the Pets Category on Family.com, or
successor channels/online properties designated
by the GO Entities; provided however that the
foregoing exclusivity will not apply to: (i)
run-of site advertisements from Content Partner
Competitors or (ii) Content Partner Competitors
to the extent related to sales of pet supplies
or accessories with licensed animated
characters, such as a Lion King cat bowl or a
101 Dalmatians dog bed. In addition, the
following shall not constitute a breach of this
Section 4.6.b.ii: (a) the GO.com search
technology may search the sites of the Content
Partner Competitors, (b) the GO Entities may
provide search-related products that may include
results from the Content Partner Competitors on
pages within the Animal/Pets Channel on
Disney.com and the Pets Category on Family.com,
and (c) the Content Partner Competitors may be
included in the Search Directory. As used
herein, "Search Directory" means the general
directory on the GO Portal which is currently
accessed through the tab "Search."
iii In the event the GO Entities or their Affiliates
determine to make a significant product change
or change of strategic or product focus, for
example merging two or more of its online
properties, which affects the Animals/Pets
Channel on Disney.com and/or the Pets Category
on Family.com, then the GO Entities' obligations
under Section 4.6.b.ii above shall terminate
with respect to the affected online property.
The GO Entities and Content Partner will work
together to make appropriate substitutions of
online media placements and Content Partner will
be entitled to receive a twenty-five percent
(25%) discount on such substitutions of affected
online media placements. The GO Entities will
not be entitled to exercise its rights hereunder
prior to three (3) months from the Effective
Date nor later than June 1, 2001.
4.7 Technical Resources; Key Contacts; Reports.
a. Technical Resources. Content Partner will provide
sufficient resources in order to implement Content and
advertising placements by March 31, 2000.
b. Key Contacts. The GO Entities, on the one hand, and
Content Partner, on the other hand, will each appoint a
single point of contact to manage the relationship among
the GO Entities and Content Partner and will identify
key contacts in product development, merchandising,
customer service and technical support to ensure that
the GO Network-Wrapped Pages are working effectively.
Content Partner shall further provide the GO Entities
with a support contact to provide 24-hour emergency
technical support. Until a party provides notice
otherwise to the other parties in accordance with
Section 16.6, the contacts shall be as follows:
<TABLE>
<S> <C>
GO Entities: Content Partner:
Relationship Manager: Kari Allen Relationship Manager: Jennifer Olsen
Telephone No.: (818) 623-3471 Telephone No.: (415) 343-1525
Email address: [email protected] Email address: [email protected]
Product Development Contact: name Product Development Contact: Sheila Albright
Telephone No.: Telephone No.: (415) 343-1537
Email address: Email address: [email protected]
Merchandising: name Merchandising: John Benjamin
Telephone No.: Telephone No.: (415) 343-1540
Email address: Email address: [email protected]
</TABLE>
-9-
<PAGE> 10
<TABLE>
<S> <C>
Customer Service: name Customer Service: Diane Hourany
Telephone No.: Telephone No.: (415) 343-1538
Email address: Email address: [email protected]
Technical Support: name Technical Support: Paul Melmon
Telephone No.: Telephone No.: (415) 343-1549
Email address: Email address: [email protected]
Emergency Technical Support Contact Emergency Technical Support Contact
(24) hours): (24 hours): Bayard Carlin
Telephone No.: Telephone No.: (415) 519-7610
(40 character limit)
Email address: Email address: [email protected]
</TABLE>
c. Reports. Content Partner will provide monthly traffic
reports to the GO Entities containing the number of
visitors to the GO Network-Wrapped Pages, the number of
Content Partner Users and such other information as the
GO Entities reasonably request related to Users and
usage of the GO Network-Wrapped Pages. Reports hereunder
will be due within ten (10) business days after the end
of the month to which such report relates.
4.8 Ownership of Intellectual Property. For content or promotions
developed by Content Partner solely for distribution, display or
other use on GO Network or by the GO Entities, which has not
been already incorporated into the Content Partner Service, the
GO Entities shall own all design, technology, code and other
materials produced in relation to this Agreement. Except as set
forth herein, for all content or promotions not created by
Content Partner solely for distribution, display or other use on
GO Network or by the GO Entities, the party creating such
content or promotion shall own such content or promotion,
including all related intellectual property rights. If content
or promotions are jointly created by Content Partner and one or
more of the GO Entities, then the GO Entities will own such
content or promotion, including all related intellectual
property right; provided however that the GO Entities may not
license or otherwise provide such content or promotions to
Content Partner Competitors during the term of this Agreement.
In clarification and not in modification of the foregoing, each
party shall retain all rights for copyrighted material and
Trademarks and the GO Entities shall not have any ownership
rights to the Pets.com, Inc. Sock Puppet and Content Partner
will not have any ownership rights to any character owned or
controlled by The Walt Disney Company during or after the term
of this Agreement.
4.9 Linking. Content Partner agrees not to override browser back
button functionality to prevent Users who link to the Content
Partner Service from GO Network from returning to GO Network.
4.10 Costs. Each party will be responsible for its respective
telecommunications charges with respect to the provision of
respective portions of the Content to Infoseek and to Users.
ARTICLE 5 SHOPPING/E-COMMERCE
5.1 GO Network Commerce Areas. The following shopping areas
currently exist on the GO Network Portal, Family.com and
Disney.com: GO Shopping (currently at shop.go.com), FamilySHOP,
and TDSO.
-10-
<PAGE> 11
5.2 Content Partner Placement in GO Network Commerce Areas. Content
Partner will have placement in TDSO (if and as agreed as part of
the marketing agreements described in Section 4.5) and
FamilySHOP, and, following the expiration or termination of the
Petsmart Agreement, on GO Shopping. Content Partner Content will
be included in the rotation for the
"Deal of the Week" feature of the FamilySHOP area on the
Family.com home page or other comparable feature. Except as
expressly set forth herein, placement of promotions on GO
Network shall be at the discretion of the GO Entities. Any
placements of Content in GO Network Commerce Areas will be
subject to the standard terms and conditions, if any, governing
content placement in such Commerce Areas.
5.3 Commerce Transactions/ Content. Content Partner placement of
Content on GO Network commerce areas, including placement on
FamilySHOP and other BVIG commerce areas, will be on terms and
conditions mutually agreed; provided however that the following
provision shall govern Content Placement on FamilySHOP and other
BVIG commerce areas:
a. Order Fulfillment. Content Partner shall be solely
responsible for (i) processing and fulfilling all orders
made through the Content Partner Service or the GO
Network-Wrapped Pages, (ii) all accounting with respect
to such orders, and (c) all customer service and support
with respect to such orders, purchases and returns.
Content Partner shall provide all of the foregoing
services at the highest levels of quality consistent
with the BVIG name and the Walt Disney Company
reputation. Content Partner acknowledges and agrees that
it is solely responsible for the security of any
transactions initiated within the Content Partner
Service.
ARTICLE 6 LICENSE
6.1 Grant of License by Content Partner. Subject to the terms and
conditions of this Agreement, Content Partner hereby grants to
the GO Entities and their respective Affiliates, a fully-paid,
worldwide (to the extent necessary to implement this Agreement),
limited, non-exclusive, non-transferable right and license,
without right to sub-license, to use, reproduce, incorporate,
integrate and distribute the Content on GO Network and a license
and right to use Content Partner's trade names, trade dress, and
trademarks as reasonably necessary with respect to the display
and use of the Content on GO Network in accordance with the
terms of this Agreement during the term of this Agreement.
6.2 Grant of License by Infoseek. Subject to the terms and
conditions of this Agreement, Infoseek hereby grants to Content
Partner a fully-paid, worldwide (to the extent necessary to
implement this Agreement) limited, non-exclusive,
non-transferable right and license, without right to
sub-license, to use, reproduce, incorporate, integrate and
distribute the GO Wrapper and related GO Network Trademarks
solely on the GO Network Wrapped Pages in accordance with the
terms of this Agreement or as otherwise expressly approved in
writing by Infoseek during the term of this Agreement.
6.3 Acknowledgment by GO Entities. The GO Entities acknowledge that
except as expressly set forth in Section 6.1 above, they may not
use the Content Partner name or other Trademarks owned by
Content Partner without Content Partner's prior written
permission.
6.4 Acknowledgment by Content Partner. Content Partner acknowledges
that, except as expressly set forth in Appendix G, it may not
use The Walt Disney Company name or, except as expressly set
forth in Section 6.2 above or Appendix G, Trademarks owned by
-11-
<PAGE> 12
The Walt Disney Company or the GO Entities, without the prior
written permission of The Walt Disney Company or the GO
Entities, as applicable.
ARTICLE 7 USER DATA
7.1 User Registration.
a. Privacy Policy. Content Partner shall ensure that its
privacy policy applicable to the Content Partner
Service, to the extent applicable to its performance
under this Agreement, is substantially consistent with
the privacy policy of GO Network, as may be changed from
time to time, including, without limitation, including a
mechanism that allows Users to opt out of sharing of
User data with third parties.
b. User Registration Experience. The User registration
experience that shall be implemented pursuant to this
Agreement shall be as follows:
i. "Global Registration". An unregistered User on
GO Network or on a GO Network-Wrapped Page
hosted by Content Partner who encounters Content
Partner functionality or Content that provides
the User with an opportunity to register will be
presented with a standard series of GO Network
user registration screens, the first of which
explains that this is a simultaneous
registration for Content Partner and GO Network.
The User then has the option to continue to
register or to click back to his/her original
starting point. If the User responds "yes", then
the User's data will go simultaneously to
Content Partner and the GO Entities. If the User
elects to opt-in to simultaneous registration,
the User shall only be required to execute "one
click" to transfer the registration data to
Content Partner ("Global Registration"). It is
anticipated that Global Registration will be
required only for certain joint promotions.
ii. "GO-Tagged Users". A User originating from GO
Network and Linking to the Content Partner
Service shall be identified in the Content
Partner User database as originating from GO
Network and will be tagged as a "GO-Tagged
User." Content Partner represents that it has
the technology to identify GO-Tagged Users.
7.2 Ownership of User Data
a. Content Partner and the GO Entities shall jointly own
all right, title and interest in all User data generated
on GO Network-Wrapped Pages hosted by Content Partner
and User data for GO-Tagged Users ("Content Partner
Users") who register on the Content Partner Service. In
clarification of the foregoing, the parties will not
jointly own User data for GO-Tagged Users which data is
generated on pages in GO Network not hosted by Content
Partner. Content Partner shall make available to the GO
Entities, via a method and timing to be mutually agreed
upon, all first and last names and email addresses from
each such Content Partner User provided that such User
has not opted out of sharing his/her data with third
parties and provided such disclosure is not prohibited
by law or regulation. In addition, except as prohibited
by law and provided the User has not opted out of
sharing his/her data, Content Partner may, to the extent
not in violation of Content Partner's privacy policy,
provide to the GO Entities all available data concerning
Users who access the Content Partner Service and/or the
Content from GO Network, concerning products and/or
services purchased by such Users, survey and promotion
responses, and other demographic information concerning
such Users. The
-12-
<PAGE> 13
parties agree that they will not sell or share Content
Partner User data during the term of the Agreement or
thereafter; provided however that a party may disclose
such aggregate information to third parties as it deems
appropriate in connection with its operations. Aggregate
information described hereunder will include only such
statistical information which relates to a broad
category of Content Partner Users such as gender, age
range or level of education and which is generic enough
so as not to identify particular Users.
b. The GO Entities shall own all right, title and interest
in and to and the exclusive right to use all data
concerning Users which data is generated on all pages of
GO Network hosted by the GO Entities.
c. Content Partner shall own all right, title and interest
in and to and the exclusive right to use all data
concerning Users which data is generated on all pages of
the Content Partner Service, except for jointly-owned
User data as specifically described in Section 7.2.a
above.
7.3 Use of User Data.
a. Content Partner shall not specifically target or invite
Users co-owned with the GO Entities to visit a GO.com
Competitor at any time during the term of this
Agreement.
b. Disney.com, mrshowbiz.com and Family.com will not
specifically target or invite individual Users co-owned
with Content Partner via email to visit a Content
Partner Competitor at any time during the term of this
Agreement; provided however, that Infoseek may take such
actions as it reasonably deems necessary or appropriate
to comply with its obligations under the Petsmart
Agreement.
ARTICLE 8 FEES AND PAYMENTS
8.1 Payments. Content Partner will make payments to Infoseek in the
amounts and at the times specified in Appendix D-3. Content
Partner will be responsible for the proper payment of all taxes,
including sales, excise and value added taxes, which may be
levied in connection therewith, exclusive of taxes based upon
Infoseek's net income.
8.2 Wire Transfers. All payments made to Infoseek hereunder shall be
made via wire transfer in accordance with the following
instructions, or such other instructions as may be provided to
Content Partner in writing by an authorized representative of
Infoseek:
Wire transfer, EFT/ACH Payment remittance instructions:
Bank of America
San Francisco, California
ABA Number: 121000358
Account Name: Infoseek Corporation
Account Number: 12335-30390
Swift ID: BOFAUS6S
ARTICLE 9 CONFIDENTIAL INFORMATION
9.1 Disclosures. The GO Entities, on the one hand, or Content
Partner, on the other hand, may disclose to the other (the
"Receiving Party") certain information that the disclosing party
deems to be confidential and proprietary, including technical
and other business information of the disclosing party that is
not generally available to the public ("Confidential
Information"). Confidential Information shall include the terms
and conditions of this Agreement.
-13-
<PAGE> 14
9.2 Obligations of Receiving Party. The Receiving Party agrees to
use Confidential Information solely in conjunction with its
performance under this Agreement and not to disclose or
otherwise use such information in any fashion. The Receiving
Party, however, will not be required to keep confidential such
Confidential Information that becomes generally available
without fault on its part; is already rightfully in the
Receiving Party's possession without restriction prior to its
receipt from the disclosing party; is independently developed by
the Receiving Party; is rightfully obtained by the Receiving
Party from third parties without restriction; or is otherwise
required to be disclosed by law or judicial process. In the
event disclosure of Confidential Information, including the
terms and conditions of this Agreement, is required by law or
judicial process, the Receiving Party shall promptly notify the
disclosing party of such requirement and provide the disclosing
party with a timely and reasonable opportunity to review the
proposed disclosure in advance and will cooperate with the
disclosing party to limit the scope of disclosure or seek
confidential treatment of material required to be disclosed, if
confidential treatment is available.
9.3 Limitations. Unless required by law or to assert its rights
under this Agreement, and except for disclosure on a "need to
know basis" to its own employees, and its legal, investment,
financial and other professional advisers on a confidential
basis, each party agrees not to disclose the terms of this
Agreement or matters related thereto without the prior written
consent of the other party.
ARTICLE 10 REPRESENTATIONS AND WARRANTIES
10.1 Content Partner. Content Partner represents, warrants and
covenants to the GO Entities and their respective Affiliates
that it is the owner of the Content and/or has the right to
grant the rights hereunder. Content Partner represents, warrants
and covenants to the GO Entities and their respective Affiliates
that it holds the necessary rights to permit the use of the
Content by the GO Entities and their respective Affiliates for
the purpose of this Agreement; that its entry into this
Agreement does not violate any agreement with any other party;
that its performance under this Agreement will conform to
applicable laws and government rules and regulations; and that,
to the best of its knowledge after reasonable inquiry, the
Content is true, accurate and does not contain material
omissions. Content Partner further represents, warrants, and
covenants to the GO Entities and their respective Affiliates
that the use, reproduction, distribution, transmission, or
display of the Content and Content Partner's Trademarks, Content
Partner's collection and use of Content Partner User Data and
the sale of products and services by Content Partner as
contemplated in this Agreement will not (a) violate any laws or
any rights of any third parties, including, but not limited to,
such violations as infringement or misappropriation of any
copyright, patent, trademark, trade dress, trade secret, music,
image, or other proprietary or property right, false
advertising, unfair competition, defamation, invasion of privacy
or publicity rights, moral or otherwise, or rights of celebrity,
violation of any antidiscrimination law or regulation, or any
other right of any person or entity; or (b) contain any material
that is: unlawful, harmful, fraudulent, threatening, abusive,
harassing, defamatory, vulgar, obscene, profane, hateful,
racially, or ethnically objectionable, including, without
limitation, any material that supports, promotes or otherwise
encourages wrongful conduct that would constitute a criminal
offense, give rise to civil liability, or otherwise violate any
applicable local, state, national or international laws.
10.2 Year 2000 - Content Partner. Content Partner represents,
warrants and covenants that, to the best of its knowledge after
reasonable inquiry, the systems and technology utilized to
operate the Content Partner Service (including, without
limitation, order fulfillment systems relating to products sold
by Content Partner, if any) are compliant with the following
Year 2000 requirements: (a) the occurrence in or use by such
systems of dates before, on or after
-14-
<PAGE> 15
January 1, 2000 will not adversely affect the performance of
such systems with respect to date-dependent data, computations,
output, or other functions (including, without limitations,
calculating, comparing and sequencing); and (b) such systems
will not abnormally end or provide invalid or incorrect results
as a result of date dependent data.
10.3 BVIG. BVIG represents, warrants and covenants to Content Partner
that its entry into this Agreement does not violate any
agreement with any other party, that it has the full right,
power and authority to enter into this Agreement and to perform
the acts required of it hereunder, and that BVIG Content will
not (a) violate any laws or any rights of any third parties,
including, but not limited to, such violations as infringement
or misappropriation of any copyright, patent, trademark, trade
dress, trade secret, music, image, or other proprietary or
property right, false advertising, unfair competition,
defamation, invasion of privacy or publicity rights, moral or
otherwise, or rights of celebrity, violation of any
antidiscrimination law or regulation, or any other right of any
person or entity; or (b) contain any material that is: unlawful,
harmful, fraudulent, threatening, abusive, harassing,
defamatory, vulgar, obscene, profane, hateful, racially, or
ethnically objectionable, including, without limitation, any
material that supports, promotes or otherwise encourages
wrongful conduct that would constitute a criminal offense, give
rise to civil liability, or otherwise violate any applicable
local, state, national or international laws. As used herein,
"BVIG Content" means any content on the Disney.com and
Family.com pages where Content is distributed that has been
authored and created solely by BVIG.
10.4 Infoseek. Except with respect to the litigation involving
Goto.com which has previously been disclosed to Content Partner,
Infoseek represents, warrants and covenants to Content Partner
that its entry into this Agreement does not violate any
agreement with any other party, that it has the full right,
power and authority to enter into this Agreement and to perform
the acts required of it hereunder, and that Infoseek Content
will not (a) violate any laws or any rights of any third
parties, including, but not limited to, such violations as
infringement or misappropriation of any copyright, patent,
trademark, trade dress, trade secret, music, image, or other
proprietary or property right, false advertising, unfair
competition, defamation, invasion of privacy or publicity
rights, moral or otherwise, or rights of celebrity, violation of
any antidiscrimination law or regulation, or any other right of
any person or entity; or (b) contain any material that is:
unlawful, harmful, fraudulent, threatening, abusive, harassing,
defamatory, vulgar, obscene, profane, hateful, racially, or
ethnically objectionable, including, without limitation, any
material that supports, promotes or otherwise encourages
wrongful conduct that would constitute a criminal offense, give
rise to civil liability, or otherwise violate any applicable
local, state, national or international laws. As used herein,
"Infoseek Content" means any content on the GO Wrapper that has
been authored and created solely by Infoseek.
ARTICLE 11 LIMITATION OF LIABILITY; DISCLAIMER
11.1 NO CONSEQUENTIAL DAMAGES. EXCEPT FOR A PARTY'S LIABILITY FOR
THIRD PARTY CLAIMS AS SPECIFIED IN ARTICLE 15 BELOW, OR A
PARTY'S BREACH OF ARTICLE 9, OR DAMAGES ARISING FROM PERSONAL
INJURY, IN NO EVENT SHALL A PARTY HERETO OR ITS AFFILIATES BE
LIABLE TO ANOTHER PARTY HERETO OR ITS AFFILIATES FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR EXEMPLARY DAMAGES OF ANY
NATURE, EVEN IF SUCH PARTY SHALL HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. THE FOREGOING SHALL APPLY
REGARDLESS OF THE NEGLIGENCE OR OTHER FAULT OF A PARTY HERETO
AND REGARDLESS OF WHETHER SUCH LIABILITY SOUNDS IN CONTRACT,
NEGLIGENCE, TORT, STRICT LIABILITY OR ANY OTHER THEORY OF
LIABILITY.
-15-
<PAGE> 16
11.2 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN ARTICLE 10, NO
PARTY HERETO MAKES ANY, AND EACH PARTY ACKNOWLEDGES THAT EACH
OTHER PARTY HAS NOT MADE ANY, AND HEREBY SPECIFICALLY DISCLAIMS
ANY, REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
REGARDING GO NETWORK, THE CONTENT PARTNER SERVICE, THE CONTENT,
OR THE OPERATION OF THE CONTENT ON GO NETWORK, INCLUDING, BUT
NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
ARTICLE 12 TERM AND TERMINATION
12.1 Term. This Agreement shall be effective on the Effective Date
and shall continue in force for an initial term ending three (3)
years from the Effective Date (the "Initial Term"). Upon prior
mutual written agreement, the term of this Agreement may be
renewed at the end of the Initial Term and each anniversary date
thereafter for one (1) year renewal terms.
12.2 Termination. This Agreement may be terminated as follows:
a. For Breach. Content Partner, on the one hand, and the GO
Entities, on the other hand, will have the right to
terminate this Agreement upon thirty (30) days prior
written notice if a GO Entity, on one hand, or Content
Partner, on the other hand, is in default of any
obligation herein, including failure of Content Partner
to provide the Content, and such breach is incapable of
being cured within thirty (30) days, or if such breach
is capable of cure within thirty (30) days, such breach
is not cured within thirty (30) days (or fourteen (14)
days with respect to any default in any payment
obligation) after receipt of written notice of such
default from the non-defaulting party/parties. The
non-defaulting party/parties may authorize an additional
cure period in its/their sole discretion.
b. Performance.
i. By Content Partner. If the Content Partner
Service or GO Network-Wrapped Pages hosted by
Content Partner do not meet the following
performance standards (which shall be measured
by the GO Entities), and such failure is not due
to force majeure events or the failure of any
third party services, hardware, software or
telecommunications systems not controlled by
Content Partner, one or both of the GO Entities
shall notify the Content Partner in writing and
Content Partner shall cure the breach within 24
hours. In the event of more than 3 performance
failures pursuant to this Section 12.2.b.i in
any 30 day period, the GO Entities shall have
the right to terminate, without providing an
opportunity to cure. Termination of this
Agreement shall be the GO Entities' sole remedy
for such performance failures. The performance
standards are as follows:
A. Uptime/Downtime. Excluding maintenance
downtime, the Content Partner Service
and GO Network-Wrapped Pages hosted by
Content Partner will have a minimum
uptime operation of 99.4 percent
(downtime of 0.6 percent) measured
quarterly. Downtime shall mean any 30
second interval in which the Content
Partner Service is not able to process
queries.
B. Unscheduled Downtime Limits. The Content
Partner Service and GO Network-Wrapped
Pages hosted by Content Partner will not
have aggregate unscheduled downtime
exceeding 15 hours per quarter.
-16-
<PAGE> 17
C. Maintenance Downtime. The Content
Partner Service and GO Network-Wrapped
Pages hosted by Content Partner may be
disabled for up to 3 hours per month for
maintenance. All maintenance downtimes
will occur between 9:00 p.m. and 6:00
a.m. Pacific time (Standard or Daylight
as applicable).
ii. By the GO Entities. If the pages in the GO
Network hosted by Infoseek or BVIG which
prominently display Content (the "GO-Hosted
Pages") do not meet the following performance
standards and such failure is not due to force
majeure events or the failure of any third party
services, hardware, software or
telecommunications systems not controlled by the
GO Entity hosting the GO-Hosted Pages, Content
Partner notify the GO Entity hosting the
GO-Hosted Pages in writing and such GO Entity
shall cure the breach within 24 hours. In the
event of more than 3 performance failures
pursuant to this Section 12.2.b.ii in any 30 day
period, Content Partner shall have the right to
terminate, without providing an opportunity to
cure. Termination of this Agreement shall be
Content Partner's sole remedy for such
performance failures. The performance standards
are as follows:
A. Uptime/Downtime. Excluding maintenance
downtime, the GO-Hosted Pages will have
a minimum uptime operation of 99.4
percent (downtime of 0.6 percent)
measured quarterly. Downtime shall mean
any 30 second interval in which the
GO-Hosted Pages are not able to process
queries.
B. Unscheduled Downtime Limits. The
GO-Hosted Pages will not have any
aggregate unscheduled downtime exceeding
15 hours per quarter.
C. Maintenance Downtime. The GO-Hosted
Pages may be disabled for up to 3 hours
per month for maintenance.
12.3 Effect of Termination.
a. Transition Period. At least ninety (90) days prior to
termination, the parties will effect the following
transition process:
i. The parties will inventory all material online
Content being exchanged and will jointly draft a
Content transition plan for material Content
Partner Content that will not remain on the GO
Network beyond the termination of the Agreement.
ii. The parties will inventory any products and
promotions that have been jointly developed and
(A) agree upon a termination date by which such
products can no longer be sold and promotions
can no longer run, respectively.
iii. Either party holding any surplus product or
promotional inventory bearing Trademarks, or
other copyrighted material of the other parties
will destroy such product or promotional
inventory within 30 days of termination of this
Agreement unless mutually agreed.
iv. Content Partner will make one final transfer of
all the names and email addresses of Content
Partner Users (in accordance with and as
described in Section 7.2).
a. Survival. The following provisions of this Agreement
shall survive the termination or expiration of this
Agreement: Article 1, Article 2, Section 4.8, Section
7.2.a
-17-
<PAGE> 18
(first sentence and last two sentences) and Section
7.2.b, Article 8: Fees and Payments (as to fees accrued
prior to termination or expiration), Article 9:
Confidential Information, Article 10: Representations
and Warranties (as to claims arising prior to
termination or expiration or claims based on events
arising prior to termination or expiration), Article 11:
Limitation of Liability; Disclaimer, Section 12.3: Term
and Termination - Effect of Termination, Article 14:
Publicity (other than first two sentences), Article 15:
Indemnification and Article 16: General Terms and
Conditions.
b. Return of Materials. Upon the termination or expiration
of this Agreement, each party shall (i) promptly return
all Confidential Information, and other information,
documents, manuals and other materials belonging to the
other parties, except as may be otherwise provided in
this Agreement; and (ii) promptly remove the other
parties' content, branding, links, and any other
material provided under this Agreement.
ARTICLE 13 FORCE MAJEURE
No party hereto will be liable for delay or default in the performance
of its obligations under this Agreement (other than for non-payment) if
such delay or default is caused by conditions beyond its reasonable
control, including, but not limited to, fire, flood, accident,
earthquakes, telecommunications line failures, storm, acts of war, riot,
government interference, strikes and/or walk-outs. In the event of a
force majeure event which lasts longer than thirty (30) days, a party
not experiencing the force majeure event may terminate this Agreement
upon prior written notice to the other parties.
ARTICLE 14 PUBLICITY
The parties will draft a joint press release to announce the execution
of this Agreement to be issued at a mutually agreed upon time. The GO
Entities will use commercially reasonable efforts to approve such joint
press release for issuance within one week of the Effective Date. Except
as expressly set forth herein or as described on Appendix G, Content
Partner shall not issue or permit the issuance of any press release or
publicity regarding or grant any interview, or make any public
statements whatsoever concerning, this Agreement, GO Network or the GO
Entities (or their respective Affiliates) without prior coordination
with and written approval from the GO Entities, which approval may be
granted or withheld in such GO Entity's sole discretion. Except as
expressly set forth herein, the GO Entities shall not issue or permit
the issuance of any press releases or publicity regarding, or grant any
interview, or make any public statements whatsoever concerning this
Agreement or Content Partner without prior coordination with and written
approval from Content Partner, which approval may be granted or withheld
in Content Partner's sole discretion. All Content Partner endorsements
and public statements concerning this Agreement must receive the GO
Entities' prior review and approval; provided however that all items
attached hereto as Appendix G shall be deemed approved. Notwithstanding
the foregoing, Content Partner shall not state or imply, in
advertisements, writings, or otherwise, that a GO Entity or its
respective Affiliates endorse Content Partner's products or services or
any other product or service.
ARTICLE 15 INDEMNIFICATION
-18-
<PAGE> 19
15.1 Content Partner. Content Partner agrees to defend, indemnify and
hold the GO Entities and their respective officers, directors,
agents, employees, and Affiliates harmless from and against any
and all claims, demands, liabilities, actions, judgments, and
expenses, including reasonable fees and expenses of attorneys,
paralegals and other professionals, arising out of or related to
(i) any breach or alleged breach of any of Content Partner's
representations and warranties set forth in Section 10.1; (ii)
any injury to person or property caused by any products or
services sold by Content Partner, or any User's use of or
reliance on the Content; (iii) any injury to person or property
caused by any products or services sold through the Content;
(iv) any other claim with respect to Content Partner, the
Content, or products or services sold by or through Content
Partner or its agents, or (v) Content Partner's sales or
marketing practices. Content Partner shall bear full
responsibility for the defense (including any settlements) of
any such claim; provided, however, that (a) Content Partner
shall keep the GO Entities (as applicable) informed of, and
consult with the GO Entities (as applicable) in connection with,
the progress of such litigation or settlement; and (b) Content
Partner shall not have any right, without the written consent of
the Go Entities (as applicable), to settle any such claim if
such settlement arises from or is part of any criminal action,
suit or proceeding or contains a stipulation to or admission or
acknowledgment of, any liability or wrongdoing (whether in
contract, tort or otherwise) on the part of the GO Entities (as
applicable) or their respective Affiliates or otherwise requires
the GO Entities (as applicable) or their respective Affiliates
to take or refrain from taking any material action (such as the
payment of fees).
15.2 BVIG. BVIG agrees to defend, indemnify and hold Content Partner
and its officers, directors, agents and employees harmless from
and against any and all claims, demands, liabilities, actions,
judgments, and expenses, including reasonable fees and expenses
of attorneys, paralegals and other professionals, arising out of
or related to any breach or alleged breach of any of BVIG's
representations and warranties set forth in Section 10.3. BVIG
shall bear full responsibility for the defense (including any
settlements) of any such claim; provided, however, that (a) BVIG
shall keep Content Partner informed of, and consult with Content
Partner in connection with, the progress of such litigation or
settlement; and (b) BVIG shall not have any right, without
Content Partner's written consent, to settle any such claim if
such settlement arises from or is part of any criminal action,
suit or proceeding or contains a stipulation to or admission or
acknowledgment of, any liability or wrongdoing (whether in
contract, tort or otherwise) on the part of Content Provider or
otherwise requires Content Partner to take or refrain from
taking any material action (such as the payment of fees).
15.3 Infoseek. Infoseek agrees to defend, indemnify and hold Content
Partner and its officers, directors, agents and employees
harmless from and against any and all claims, demands,
liabilities, actions, judgments, and expenses, including
reasonable fees and expenses of attorneys, paralegals and other
professionals, arising out of or related to any breach or
alleged breach of any of Infoseek's representations and
warranties set forth in Section 10.4. Infoseek shall bear full
responsibility for the defense (including any settlements) of
any such claim; provided, however, that (a) Infoseek shall keep
Content Partner informed of, and consult with Content Partner in
connection with, the progress of such litigation or settlement;
and (b) Infoseek shall not have any right, without Content
Partner's written consent, to settle any such claim if such
settlement arises from or is part of any criminal action, suit
or proceeding or contains a stipulation to or admission or
acknowledgment of, any liability or wrongdoing (whether in
contract, tort or otherwise) on the part of Content Provider or
otherwise requires Content Partner to take or refrain from
taking any material action (such as the payment of fees).
ARTICLE 16 GENERAL TERMS AND CONDITIONS
-19-
<PAGE> 20
16.1 Independent Contractors. The parties to this Agreement are
independent contractors. No party hereto is an agent,
representative or partner of the other parties hereto. No party
hereto shall have any right, power or authority to enter into
any agreement for or on behalf of, or to incur any obligation or
liability for, or to otherwise bind, the other parties hereto.
This Agreement shall not be interpreted or construed to create
an association, joint venture, co-ownership, co-authorship, or
partnership among the parties or to impose any partnership
obligation or liability upon any other party hereto.
16.2 No Assignment. No party hereto shall assign, sublicense or
otherwise transfer (voluntarily, by operation of law, through a
change of control or otherwise) this Agreement or any right,
interest or benefit under this Agreement, without the prior
written consent of the other parties hereto; provided, however,
that a party hereto may assign this Agreement to any entity that
acquires all or substantially all of the assets or shares of
such party; provided that the acquiring entity is not (i) a
GO.com Competitor in the case of the acquisition of Content
Partner or (ii) a Content Partner Competitor in the case of the
acquisition of one or both of the GO Entities. Any attempted
assignment, sublicense or transfer by a party in derogation
hereof shall be null and void. 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.
16.3 No Modifications. No change, amendment or modification of any
provision of this Agreement or waiver of any of its terms will
be valid unless set forth in writing and signed by the party to
be bound thereby.
16.4 Governing Law. This Agreement shall be interpreted, construed
and enforced in all respects in accordance with the laws of the
State of California. Each party hereto irrevocably consents to
the exclusive jurisdiction of any state or federal court for or
within Santa Clara County, California over any action or
proceeding arising out of or related to this Agreement, and
waives any objection to venue or inconvenience of the forum in
any such court.
16.5 No Waiver. The failure of a party to insist upon or enforce
strict performance by another party of any provision of this
Agreement or to exercise any right under this Agreement shall
not be construed as a waiver or relinquishment to any extent of
such party's right to assert or rely upon any such provision or
right in that or any other instance; rather the same shall be
and remain in full force and effect.
16.6 Notices. Any notice, approval, request, authorization, direction
or other communication under this Agreement shall be given in
writing, will reference this Agreement, and shall be deemed to
have been delivered and given (a) when delivered personally; (b)
three (3) business days after having been sent by registered or
certified U.S. mail, return receipt requested, postage and
charges prepaid; or (c) one (1) business day after deposit with
a commercial overnight courier, with written verification of
receipt. All communications will be sent to the addresses set
forth below or to such other address as may be designated by a
party by giving written notice to the other parties pursuant to
this Section 16.6.
If to BVIG: If to Content Partner:
Buena Vista Internet Group Pets.com, Inc.
500 South Buena Vista Street 435 Brannan Street
Burbank, CA 91521-0607 San Francisco, CA 94107
Attention: Legal Department Attention: President
Tel: (818) 553-6006 Tel: (415) 222-9999
If to Infoseek:
Infoseek Corporation
-20-
<PAGE> 21
1399 Moffett Park Drive
Sunnyvale, CA 94089-1134
Attention: Legal Department
Tel: (408) 543-6000
16.7 Entire Agreement. This Agreement and the Appendices attached
hereto and incorporated herein by reference constitutes the
entire agreement between the parties and supersede any and all
prior agreements or understandings between the parties with
respect to the subject matter hereof. No party hereto shall be
bound by, and each party specifically objects to, any term,
condition or other provision or other condition which is
different from or in addition to the provisions of this
Agreement (whether or not it would materially alter this
Agreement) and which is proffered by another party hereto in any
purchase order, correspondence or other document, unless the
party to be bound thereby specifically agrees to such provision
in writing.
16.8 Headings/Construction. The headings used in this Agreement are
for convenience only and are not to be construed to have legal
significance. In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be
construed or if any such provision is held invalid by a court
with jurisdiction over the parties to this Agreement, such
provision shall be deemed to be restated to reflect as nearly as
possible the original intentions of the parties in accordance
with applicable law, and the remainder of this Agreement shall
remain in full force and effect.
16.9 Counterparts; Facsimile Signatures. This Agreement may be
executed in counterparts which taken together shall be regarded
as one and the same Agreement. A party's facsimile signature
will be deemed a binding acceptance of this Agreement by such
party.
BUENA VISTA INTERNET GROUP PETS.COM, INC.
By: /s/ Mort Marcus By: /s/ Paul Manca
------------------------------- --------------------------------
Authorized Signature Authorized Signature
Print Name: Mort Marcus Print Name: Paul Manca
----------------------- ------------------------
Title: Title: CFO
---------------------------- -----------------------------
Date: Date: 1/17/00
----------------------------- ------------------------------
INFOSEEK CORPORATION
By: /s/ Mort Marcus
-------------------------------
Authorized Signature
-21-
<PAGE> 22
Print Name: Mort Marcus
-----------------------
Title:
----------------------------
Date:
-----------------------------
-22-
<PAGE> 23
APPENDIX A
CONTENT
"Content" shall include but not be limited to:
- Dog and cat related articles mutually agreed upon by Content
Partner and Disney.com
- Content Partner searchable database of articles mutually agreed
upon by Content Partner and Disney.com
- Content Partner community message boards (moderated prior to
delivery to Disney.com)
As mutually agreed, the GO Entities and Content Partner may also share
other Content and tools, including but not limited to: chat, e-mail,
user reviews, live broadcasts and web casts.
Content Partner will grant the GO Entities with access to a significant
portion of the content from the Content Partner Service in a mutually
agreeable delivery format and timeframe. Use of such content by the GO
Entities will be subject to Section 6.1.
<PAGE> 24
APPENDIX C
ABC MEDIA RIGHTS
Terms of ABC Media Rights. For purposes of this Agreement, "ABC Media Rights"
shall mean the right to place advertising on ABC, Inc. broadcast properties in
an aggregate amount of Twelve Million Three Hundred Forty Thousand Two Hundred
Six Dollars and Forty-Five Cents ($12,340,206.45) over the period which begins
on the Effective Date and ends three (3) years later, subject to the terms and
conditions set forth in this Agreement and the Standard Terms and Conditions for
ABC Television Network Sponsorship Contracts and any other standard advertising
terms and conditions used by a particular broadcast property ("ABC Standard
Terms").
a. Content Partner acknowledges that there are standard integration
charges on the ABC network for every unit that airs regardless
of commercial length. Standard integration charges are currently
$470/spot during prime time and $235/spot in other day parts.
ABC affiliates may have similar charges. Integration charges are
subject to change.
b. The GO Entities will use commercially reasonable efforts to work
with Content Partner and ABC to optimize Content Partner's reach
and frequency to [*] ages [*] with [*] ages [*].
c. Content Partner acknowledges that the GO Entities may not
purchase media for Content Partner further out than one year in
advance. Content Partner acknowledges and understands that most
ABC, Inc. properties sell their product on a broadcast year or a
calendar year basis so Content Partner may be limited in the
time frames within which it may obtain advertising. For example,
Content Partner may not be able to obtain advertising from most
divisions for January 2001 in March 2000 even though such dates
are less than one year apart.
d. Content Partner's use of the ABC Media Rights shall be subject
to availability of inventory. In addition, Content Partner may
not exercise such rights for greater than $5 million worth of
media value in any given quarter nor less than $2 million worth
of media value in any given year during the Initial Term.
e. Content Partner will be charged marketplace rates when
exercising its ABC Media Rights. The GO Entities will use
reasonable best efforts to obtain marketplace rates at least as
favorable as those given to third parties making similar media
purchases.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE> 25
APPENDIX D
FORMS OF ADVERTISING AGREEMENT AND
ADVERTISING INSERTION ORDER AND
SCHEDULE OF ADVERTISING FEES
D-1: FORM OF ADVERTISING AGREEMENT
Advertising Placement Standards
- - All ad content must comply with Buena Vista Internet Group's (BVIG)
"Guidelines for Advertising". Copies may be obtained from your sales
representative.
- - BVIG must review all ad content prior to acceptance and may accept or reject
such content at its sole discretion.
Submission of Advertising Insertion Orders and Ad Content
- - All requests for ad and sponsorship placements must be submitted to BVIG by
fax.
- - All orders must be received no later than five (5) working days prior to the
first date in the requested ad flight.
- - Any Insertion Order involving third-party ad serving and/or custom technology
must be received by BVIG no later than ten (10) working days prior to the first
date in the requested ad flight.
- - All ad content must be received by BVIG no later than the due date in the
Insertion Order or, if no date is specified, five (5) working days prior to the
start of the ad flight.
- - All Insertion Orders and ad content are to be properly labeled and submitted
to:
Ad Sales Operations Manager
Buena Vista Internet Group
19 East 34th Street, 6th Floor
New York, NY 10016
[email protected]
Ph: (212) 448-4815
Fax: (212) 448-4848
- - IN THE EVENT THAT NEW AND/OR UPDATED AD CONTENT IS NOT RECEIVED BY BVIG PRIOR
TO THE DUE DATE IN THE APPLICABLE INSERTION ORDER, BVIG MAY RUN PREVIOUS AD
MATERIAL IN ORDER TO MEET ITS IMPRESSION DELIVERY OBLIGATIONS. ALL NEW AND/OR
UPDATED AD CONTENT IS SUBJECT TO THE SAME TERMS AND CONDITIONS AS THE PREVIOUS
AD CONTENT.
Order Confirmation/Acceptance
- - Insertion Order acceptance is subject to ad space availability at the time of
receipt.
- - BVIG cannot guarantee an on-time start for an ad flight where the Insertion
Order was received past the Insertion Order closing date for the desired ad
flight period or where the ad content is received past its due date. If the
Insertion Order or ad content is late, BVIG may, at its sole discretion, reduce
the size of the impression buy, shorten or extend the term of the ad flight,
and/or postpone or cancel the Insertion Order without liability.
- - Insertion Order acceptance is subject to credit approval. In the event that
Advertiser lacks an adequate credit history, there may be a delay in the order
acceptance process and the start of the ad flight.
- - BVIG will issue Advertiser a fax confirmation of each Insertion Order (which
shall be a copy of the Insertion Order initialed by BVIG authorized personnel)
no later than one (1) working day after receipt of the order. Advertiser shall
initial and date the confirmation notice. Regardless, if Advertiser does not
object to the confirmation notice within two (2) working days after receipt, the
confirmation notice shall be deemed to have been accepted as the final Insertion
Order of record. The confirmation notice shall be sent to both Advertiser and
its designated agency, if any.
- - BVIG will use commercially reasonable best efforts to deliver the requested
number of ad impressions in the agreed- upon date range. BVIG shall determine
actual ad placements and rotations in its sole discretion but shall use
commercially reasonable best efforts to spread ad buy impression volumes evenly
across the course of the ordered ad flights.
- - There will be no refund for undelivered ad impressions at the end of an ad
flight. If the requested number of ad impressions has not been delivered in the
agreed-upon date range (as modified for late ad content delivery), BVIG shall
deliver the balance beyond the end of the ad flight until the ordered total is
delivered. There will be no additional charge to Advertiser for such delivery.
PRODUCTION REQUIREMENTS
- - All ad content must comply with BVIG's Advertising Technical Specifications,
if ad banners, or with the technical requirements described in the Sponsorship
Production Request and Sponsorship Terms, if a sponsorship. Copies are available
from your sales representative.
- - Any costs incurred by BVIG to bring Advertiser's ad content into compliance
will be billed to Advertiser as a non-commissionable production cost.
FULL DISCLOSURE OF AD CONTENT AND HOW IT WILL BE SERVED
<PAGE> 26
- - Advertiser shall provide to BVIG a complete and accurate representation of how
all ad content will be served to BVIG site visitors. Advertiser shall also
disclose any content or technology outside of the ad content itself that may be
served to a BVIG site visitor, such as server "cookies" or other methods for
tagging or labeling a BVIG site visitor.
- - Advertiser shall disclose to BVIG any error messages that a BVIG site visitor
may see, such as browser notices requesting user acceptance of a server "cookie"
or any copy that may appear if an image is not successfully downloaded.
- - Advertiser shall respond to all BVIG questions in a timely manner. BVIG may
delay or suspend delivery of ad content until all BVIG technical and
non-technical issues are resolved.
FULL DISCLOSURE OF HOW VISITOR DATA WILL BE COLLECTED, REPORTED, AND DISTRIBUTED
- - Advertiser will submit to BVIG in writing a clear and accurate description of
what specific data will be collected by Advertiser or any third-party server
from BVIG Site visitors who view or click on Advertiser's ad content, how and
when such data will be collected, and how such data will be used or distributed.
- - Advertiser shall respond to all BVIG questions regarding Visitor Data
collection and use in a timely manner. BVIG may delay or suspend delivery of ad
content until all BVIG data issues are resolved.
- - Advertiser acknowledges that if Advertiser's proposed or actual use of visitor
data conflicts with BVIG's data policies, BVIG may reject or cancel the
Insertion Order in its sole discretion.
QUALITY ASSURANCE (QA)
- - Advertiser is responsible for checking the ad content when it is first posted
on the BVIG sites and must notify BVIG of any problems or concerns within
seventy-two (72) hours after such posting. Failure to notify BVIG within that
time period will be deemed Advertiser's approval of the ad content as posted.
- - BVIG is not responsible for ensuring that ad content is served as intended by
Advertiser and matters such as color corrections, proper animation, and degree
of sound quality are strictly Advertiser's responsibility.
- - BVIG is not responsible for any incorrect click-through URLs or ad banner
referring URLs submitted by Advertiser or for broken text links where a
click-through URL leads to an error message for the user.
ADVERTISER RESPONSIBILITY FOR AD CONTENT
- - Advertiser shall own or have all proper authorizations, permissions, and
licenses for the use of the ad content and any trademarks and logos therein, as
contemplated under the Insertion Order and BVIG Advertising Policies. Advertiser
shall be solely responsible for and pay all rights, public performance, and
other fees associated therewith.
- - Advertiser shall indemnify, defend, and hold BVIG and its affiliates harmless
from any and all claims, judgments, damages, losses, expenses (including
reasonable attorneys' fees and expenses), and other liabilities related in any
way to, directly or indirectly, (1) any ad content provided by Advertiser and
posted on the BVIG sites, (2) Advertiser's failure to pay any rights, public
performance, or other fees associated with the ad content, (3) the delivery to
BVIG Site visitors by Advertiser or on its behalf of any content or technology
outside the ad content itself, (4) the pages and sites to which the ad content
links, or (5) any products sold through the ad content or the Web pages or sites
to which it links. Advertiser shall bear full responsibility for the defense
(including any settlements) of any such claim; provided, however, that (a)
Advertiser shall keep BVIG informed of and consult with BVIG in connection with
the progress of such litigation or settlement; and (b) Advertiser shall not have
any right, without BVIG's written consent, to settle any such claim if such
settlement arises from or is part of any criminal action, suit, or proceeding or
contains a stipulation to or admission or acknowledgment of any liability or
wrongdoing (whether in contract, tort or otherwise) on the part of BVIG or any
BVIG affiliate.
MULTIPLE AD CREATIVES
- - Advertiser may rotate up to four (4) different ad creatives over the course of
a given ad flight.
- - BVIG may in its sole discretion permit Advertiser to run more than four (4)
different creative versions over the course of an ad flight. In such event,
Advertiser shall pay to BVIG BVIG's then-current non-commissionable ad
management fee for each additional ad creative.
INVOICING AND PAYMENT TERMS
- - BVIG shall issue written invoices to Advertiser (or its designated agency) for
all amounts due. Payment in full in US dollars is due to BVIG no later than
thirty (30) days from the date of the invoice. An interest charge equal to one
and one-half percent (1.5%) per month or the highest legal rate, whichever is
less, will be applied to unpaid amounts past due.
- - In a case where the ad flight exceeds one calendar month in length, BVIG may
issue multiple invoices. For example, a six-month ad flight may result in six
invoices, each for a one-month span.
- - Advertiser's payment is due and payable within the period described above,
regardless of any change in Advertiser's designated agency.
- - Insertion Orders for additional ad or sponsorship buys will not be accepted
when Advertiser has a balance due that has been outstanding for ninety (90)
days. BVIG may also delay the start of a confirmed Insertion Order or suspend or
cancel delivery of any Insertion Order in progress until full payment is
received against such outstanding balance.
- - In the event of nonpayment, Advertiser and its designated agency shall be
jointly and severally liable for any unpaid amounts. BVIG's rendering an invoice
to Advertiser's agency shall not release Advertiser in the event the agency does
not pay the invoice. Advertiser's payment to its agency shall not constitute
payment to BVIG unless BVIG actually receives the payment. In the event of
nonpayment, BVIG may set off any amounts due BVIG against any amounts due from
BVIG to Advertiser or its agency, or may set off such amounts against any ad
impressions to be delivered by BVIG.
AD REPORTING
- - BVIG will report ad impressions delivered and related click yield to
Advertiser in a timely manner. The information to be tracked by BVIG and/or
reported to Advertiser shall be determined by BVIG at its sole discretion. All
such information shall be deemed BVIG Confidential Information and, except for
Advertiser's internal research purposes, such information may not be used by
Advertiser for
<PAGE> 27
any purpose. Advertiser shall not disclose such information to any third party
without BVIG's prior written consent, which may be granted or withheld at BVIG's
sole discretion.
- - Advertiser agrees BVIG's internal reporting is the official basis for
measuring the delivery of ad impressions and related click yields and shall be
deemed conclusive.
- - BVIG owns and shall retain all rights, title and interest in all traffic data
and customer data collected by BVIG and Advertiser shall have no right to obtain
or use such data.
- - All reporting queries should be addressed to:
Helen Brennan
Ad Sales Operations Manager
Buena Vista Internet Group
19 East 34th Street, 6th Floor
New York, NY 10016
Ph: (212) 448-4815
Fax: (212) 448-4848
[email protected]
- - E-mail messages should be followed up with a telephone call.
ADS DELIVERED BY THIRD-PARTY SERVERS
- - Advertiser may request that ad impressions be delivered via third-party
servers in place of BVIG servers. Advertiser (not its agency) must make the
request in writing to BVIG's Vice President of Advertising no later than ten
(10) working days prior to the first date of the ad flight. The request must be
accompanied by all relevant supporting documentation. All requests will be
reviewed on a case-by-case basis, with approval granted or withheld in BVIG's
sole discretion.
- - Third-party ad servers must comply with all BVIG Advertising Policies and all
deadlines and terms within the Insertion Orders for the applicable ad content.
All ad content must be approved by BVIG before going live and may not be changed
without prior BVIG approval. Proposed changes must be submitted to BVIG for
review no less than five (5) working days in advance.
- - The third-party, or whomever Advertiser designates, shall provide BVIG with
impression and click-through reports in a timely fashion; provided however, that
BVIG internal reporting shall remain the official basis for measuring the
delivery of ad impressions and related click yields and shall be deemed
conclusive. All third-party reports shall conform to industry standards.
- - Advertiser shall provide BVIG with a default ad unit(s) that BVIG may serve
directly in the event of technical difficulties with the third-party server in
order to meet the terms of the Insertion Order.
- - BVIG reserves the right to disapprove or withdraw its approval of any
third-party ad server at any time for any reason, in BVIG's sole discretion.
- - Advertiser agrees and will, if BVIG requests, acknowledge in a separate
writing, that neither it, its ad agencies, its agent for operating the
third-party server, nor any other party known or unknown, will take data from
the third party server and use it in conjunction with any other data source or
sources to identify and/or label any BVIG site visitor as an individual entity.
THIRD-PARTY AD SERVER COMPLIANCE WITH TECHNICAL REQUIREMENTS
- - Advertiser assumes all responsibility for its third-party servers' technical
service levels during the ad flight. Advertiser will pay for all impressions
allocated by BVIG's servers, whether or not the third party server actually
delivers them. BVIG is the final arbiter regarding the number of ad impressions
allocated by the BVIG servers.
- - All ads served by third-party servers must completely load within seven (7)
seconds at a 28.8 kbps connection. BVIG will advise Advertiser of any additional
third-party server technical standards, such as speed and volume requirements.
- - If BVIG determines that the speed of any third-party server's ad delivery
fails to meet BVIG's quality assurance standards, BVIG may stop serving the
applicable ad content.
<PAGE> 28
D-2: FORM OF ADVERTISING SALES INSERTION ORDER FORM
PACKAGES: (PLEASE CHECK APPROPRIATE BOX(es)
<TABLE>
<CAPTION>
BUSINESS ENTITY WEB SITE PACKAGE
<S> <C> <C> <C>
DOL Disney.com Disney ROS ATF [ ]
Disney ROS BTF [ ]
Disney ROS 120x60 [ ]
Disney ROS ATF and BTF [ ]
Disney ROS ATF and 120x60 [ ]
Disney ROS ATF and BTF and 120x60 [ ]
Disney Family ATF [ ]
Disney Family BTF [ ]
Disney Family 120x60 [ ]
Disney Family ATF and BTF [ ]
Disney Family ATF and 120x60 [ ]
Disney Family ATF and BTF and 120x60 [ ]
Disney Women ATF [ ]
Disney Women BTF [ ]
Disney Women 120x60 [ ]
Disney Women ATF and BTF [ ]
Disney Women ATF and 120x60 [ ]
Disney Women ATF and BTF and 120x60 [ ]
Disney Kids ATF [ ]
Disney Kids BTF [ ]
Disney Kids 120x60 [ ]
Disney Kids ATF and BTF [ ]
Disney Kids ATF and 120x60 [ ]
Disney Kids ATF and BTF and 120x60 [ ]
Disney Teens ATF Disney Teens BTF [ ]
Disney Teens 120x60 [ ]
Disney Teens ATF and BTF [ ]
Disney Teens ATF and 120x60 [ ]
Disney Teens ATF and BTF and 120x60 [ ]
</TABLE>
CUSTOM PACKAGE DESCRIPTION:
<PAGE> 29
PACKAGES CONTINUED: (PLEASE CHECK APPROPRIATE BOX(es)
<TABLE>
<CAPTION>
BUSINESS ENTITY WEB SITE PACKAGE
<S> <C> <C> <C>
ABC ABC.com ABC Primetime Group [ ]
ABC Primetime Portal Group [ ]
ABC ROS Group [ ]
ABC ROS Portal Group [ ]
ABC ROS w/o TGIF [ ]
ABC ROS w/o Talk Shows [ ]
ABC Shopping [ ]
ABC Shopping Portal [ ]
ABC Soaps [ ]
ABC TGIF Group [ ]
ABC Talk Shows [ ]
ABC Test Group [ ]
ABC The View [ ]
ABC Women's Group (w/HP) [ ]
ABC Women's Group w/o HP [ ]
</TABLE>
CUSTOM PACKAGE DESCRIPTION:
<TABLE>
<S> <C> <C> <C>
DOL Family.com Family ATF [ ]
Family BTF [ ]
Family 120x60 [ ]
Family ATF and BTF [ ]
Family ATF and 120x60 [ ]
Family ATF and BTF and 120x60 [ ]
Family Shop [ ]
Family 234x60 National [ ]
Family 234x60 Local [ ]
</TABLE>
CUSTOM PACKAGE DESCRIPTION:
<PAGE> 30
PACKAGES CONTINUED: (PLEASE CHECK APPROPRIATE BOX(es)
<TABLE>
<S> <C> <C>
GoRadio WABC-AM [ ]
WPLJ-FM [ ]
KABC-AM [ ]
KLOS-FM [ ]
WLS-AM [ ]
WXCD-FM [ ]
KGO-AM [ ]
KSFO-AM [ ]
WMAL-AM [ ]
WRQX-FM [ ]
WJZW-FM [ ]
WBAP-AM [ ]
KSCS-FM [ ]
WJR-AM [ ]
WPLT-FM [ ]
WDRQ-FM [ ]
WKHX-FM [ ]
WYAY-FM [ ]
KQRS-FM [ ]
KXXR-FM [ ]
KZNT-FM [ ]
KZNZ-FM [ ]
KZNR-FM [ ]
ABC Network Radio Tom Joyner [ ]
Shows
Doug Banks [ ]
Paul Harvey [ ]
Radio Disney.com [ ]
ABC Local Net [ ]
</TABLE>
CUSTOM PACKAGE DESCRIPTION:
<PAGE> 31
D-3: FEES AND PAYMENTS
Content Partner will purchase Online Advertising in accordance with Article 3 of
the Agreement at a rate of $2 million during the first year in the Initial Term,
$3 million during the second year in the Initial Term and $4 million during the
third year in the Initial Term. The fees for such Online Advertising are payable
as follows unless otherwise mutually agreed:
- - for the first twelve months during the Initial Term, One Hundred
Sixty-Six Thousand Six Hundred Sixty-Seven Dollars ($166,667) per month;
- - for months 13 through 24, Two Hundred Fifty Thousand Dollars ($250,000)
per month; and
- - for months 25 through 36, Three Hundred Thirty-Three Thousand Three
Hundred Thirty-Three Dollars ($333,333) per month.
Online Advertising fees shall be due and payable within thirty (30) days after
receipt of invoice sent to Content Partner at its address as set forth in
Section 16.6, Attention: Accounts Payable. The first invoice sent pursuant to
this Agreement shall be delivered no earlier than February 29, 2000.
Failure to pay the Online Fees as they become due shall result in a late fee of
one percent (1%) per month of the total monthly amount due until such payment is
made.
Content Partner will receive a fifteen percent (15%) discount off of the then
current rate card for any additional online advertising buys above the $2
million during the first year of the Initial Term, the $3 million during the
second year of the Initial Term and the $4 million during the third year of the
Initial Term described above.
<PAGE> 32
APPENDIX E
PROJECTED IMPRESSIONS
[This Appendix has not been finalized by the parties]
<PAGE> 33
APPENDIX F
CONTENT GUIDELINES AND ADVERTISING GUIDELINES FOR GO NETWORK
F-1: CONTENT GUIDELINES FOR GO NETWORK
All editorial and creative content, design and overall appearance and user
experience ("the Content") of the GO Network must be appropriate to the intended
user experience and to the content of The Walt Disney Company Sites, ESPN sites,
and ABC Sites that will have prominent positioning within GO Network.
Infoseek, at its discretion, may offer search results or directory listings that
may include links to content outside GO Network that might otherwise not be
appropriate.
What is clearly not appropriate
The following types of Content are clearly not appropriate to be on GO Network
or presented in any context that may create a direct or implied association with
The Walt Disney Company Sites:
- - Pornographic or obscene material;
- - Content whose primary purpose is to encourage gambling or betting (i.e.,
poker or 21 card games, roulette, slot machines, etc.) other than sports
fantasy games, or approved sweepstakes or games of skill or chance
(certain card games are appropriate and may be included on Infoseek,
i.e., solitaire, go fish, matching games, etc.);
- - Threatening (i.e., harassment, hate speech) material or content that
promotes, encourages, describes, or provides instruction in conduct that
would constitute a criminal offense or otherwise violates any law in
jurisdictions where the products is marketed.
- - Content that is defamatory, illegal or infringes upon the privacy rights
of any person or entity.
What may also be considered by Infoseek as inappropriate
Certain types of Content, unless offered in the format of an independent
observer providing objective, fair, accurate and impartial information (as may
be provided by a news site such as ABCNews.com), may be considered inappropriate
for GO Network if it involves, without limitation:
- - unauthorized copies, use or parodies of current or past Infoseek
products or the products of its affiliates,
- - a direct or implied endorsement, affiliation or favored status with
Infoseek, GO Network, ESPN, ABC or The Walt Disney Company;
- - inaccurate or misleading information;
- - unreasonable or highly unlikely claims;
- - highly controversial issues (politics, social issues, etc.);
- - death, crime, drugs or violence in an inappropriate context; or
- - involves an advertiser or content provider in a category where the
privilege of exclusivity has previously been sold by Infoseek to a third
party (for example, MBNA is the exclusive provider/advertiser for credit
card products for GO Network).
Guidelines for Requests for User Information
Any solicitation or request for personal information from a user of GO Network
must be accompanied by the following:
- - a clear request that children below the age of 13 years seek parental
permission before providing any information
- - a clear explanation to the user of how the information collected will be
utilized
- - only certain functionality or premium content areas will require the
user to submit personal information
<PAGE> 34
IMMEDIATELY UPON DETERMINING THAT CONTENT ON GO NETWORK DOES NOT MEET THESE
GUIDELINES, SUCH CONTENT WILL BE REMOVED FROM GO NETWORK.
These guidelines are subject to change by Infoseek.
F-2: ADVERTISING GUIDELINES FOR GO NETWORK
THE ADVERTISING ENVIRONMENT MUST BE APPROPRIATE IN THE CONTEXT OF THE GO
NETWORK. This "advertising environment" includes the ad unit itself, the
advertiser's web site and direct links off of it, the specific destination URL,
interstitial or buffer pages, and all other elements that define the guest's
online experience.
An advertising environment or advertising materials of the types enumerated in
the first grouping below will not be accepted and materials may also be
rejected, at the discretion of Infoseek
WHAT IS CLEARLY NOT APPROPRIATE?
- - HARD LIQUOR-RELATED (BROWN GOODS, WHITE GOODS, ETC)
- - TOBACCO-RELATED (CIGARETTES, CIGARS, PIPES, CHEWING TOBACCO, ETC)
- - GUNS/WEAPONS-RELATED (FIREARMS, BULLETS, ETC)
- - DRUGS-RELATED (MARIJUANA, ETC)
- - GAMBLING-RELATED (CASINOS, LOTTERIES, ETC)
- - PORNOGRAPHIC-RELATED (SEX SITES)
- - CRIME-RELATED (DEALING WITH THE NOTORIOUS)
- - DEATH-RELATED (FUNERAL HOMES, MORTUARIES)
- - GRAPHIC VIOLENCE (INCLUDING CERTAIN TYPES OF GAME SITES)
WHAT MAY ALSO BE CONSIDERED BY INFOSEEK AS INAPPROPRIATE?
- - INVOLVES WHAT INFOSEEK CONSIDERS TO BE A DIRECT BUSINESS COMPETITOR OF
GO NETWORK.
- - INVOLVES UNAUTHORIZED OR UNAPPROVED USE OF GO NETWORK CREATIVE ASSETS
(INCLUDING ESPN TALENT, ABC LOGOS, DISNEY CHARACTERS, MOVIE LOGOS, THEME
PARK IMAGERY, NAMES AND MARKS USED IN GO NETWORK).
- - INVOLVES AN ADVERTISER IN A CATEGORY WHERE THE PRIVILEGE OF EXCLUSIVITY
HAS PREVIOUSLY BEEN SOLD TO ANOTHER ADVERTISER.
- - INVOLVES A COPY OR PARODY OF CURRENT OR PAST GO NETWORK PRODUCT.
- - POLITICS-RELATED (LOBBYISTS, PAC SITES, POLITICAL CAMPAIGNS)
- - NON-HARD LIQUOR RELATED (BEER, NON-ALCHOHOLIC BEER, WINE, CHAMPAGNE,
ETC.)
- - OTHER "CONTROVERSIAL TOPICS" (POLITICS, SOCIAL ISSUES, ETC.) AS
DETERMINED BY INFOSEEK IN ITS DISCRETION
- - INVOLVES AN IMPLIED AFFILIATION OR FAVORED STATUS WITH GO NETWORK.
- - INVOLVES UNREASONABLE OR HIGHLY UNLIKELY PRODUCT OR SERVICE CLAIMS.
SOLICITATION OF PERSONAL INFORMATION: The advertiser's web site should not
require guest registration prior to site access when linking to such site
through the banner. The destination URL should not be a registration screen,
sweepstakes entry screen or other screen that immediately solicits personal
information from a site guest.
WHERE INFORMATION IS REQUESTED:
- - Any solicitation of personal information must include a clear request
that children below the age of 13 years seek parental permission before
providing any such information.
- - The advertiser must clearly explain to the guest how the advertiser will
utilize the personal information collected.
<PAGE> 35
- - Only certain functionality or premium content areas will require the
user to submit personal information.
Infoseek welcomes the opportunity to work closely with advertisers and agencies,
to insure that ad content and web sites meet standards for advertising
applicable to GO Network.
Immediately upon determining that an advertisement does not meet these ad
guidelines, that ad will be removed from GO Network.
All advertisers, agents or representatives placing ads on behalf of or with GO
Networks must adhere to these advertising guidelines. Infoseek reserves the
right of refusal for any advertising placement for any reason, whether due
to content, technological, legal, privacy or other considerations.
<PAGE> 36
APPENDIX G
PRE-APPROVED STATEMENTS
THERE ARE CURRENTLY NO PRE-APPROVED STATEMENTS
<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
